UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549










Form
10-K





(Mark
  One)R
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of
      1934For
      the fiscal year ended December 31, 2008£
            TRANSITION
      REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period
      from          to





Commission
File Number 001-33604









LIMCO-PIEDMONT
INC.


(Exact
name of registrant as specified in its charter)





Delaware
            73-1160278(State
      of incorporation)
            (IRS
      Employer Identification No.)5304
      South Lawton Ave., Tulsa, Oklahoma
            74107(Address
      of principal executive offices)
            (Zip
      Code)





(918)
445-4300


(Registrant’s
telephone number, including area code)





SECURITIES
REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:





Title
      of each class:
            Name
      of each exchange on which registered:Common
      Stock, par value $0.01 per share
            NASDAQ
      Global Market





SECURITIES
REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:


None


Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes £     No
R





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.  Yes £     No
R





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes R     No
£





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) 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.  £





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




Large
      accelerated filer   ̈
                  
                  Accelerated
      filer   ̈Non-accelerated
      filer  ̈
      (Do not check if a smaller reporting company)
                  
                  Smaller
      reporting company  þ





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes £     No  R





The
aggregate market value of the shares of common stock and non-voting common
stock held by non-affiliates of the registrant as of June 30, 2008 (the last
business day of the registrant’s most recently completed second fiscal quarter)
was approximately $22,000,000 million computed by reference to the last reported
sale price on the NASDAQ Global Select Market on that date. For purposes of this
calculation, affiliates are considered to be officers, directors and holders of
10% or more of the outstanding common stock of the registrant on that
date.





At March
05, 2009, the aggregate number of shares of the registrant’s common stock and
non-voting common stock outstanding was 13,205,000.





DOCUMENTS
INCORPORATED BY REFERENCE


Portions
of the registrant’s definitive proxy statement for the 2009 Annual Meeting of
Stockholders are incorporated by reference into Items 10, 11, 12, 13 and 14 of
Part III of this Form 10-K.







LIMCO-PIEDMONT
INC. AND SUBSIDIARIES




TABLE
      OF CONTENTSPagePart
      IItem 1.
                Business
                2Item 1A.
                Risk
      Factors
                13Item 1B.
                Unresolved
      Staff Comments
                23Item 2.
                Properties
                23Item 3.
                Legal
      Proceedings
                24Item 4.
                Submission
      of Matters to a Vote of Security Holders
                24Part
      IIItem 5.
                Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                24Item 6.
                Selected
      Financial DataItem 7.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                26Item 7A.
                Quantitative
      and Qualitative Disclosures about Market Risk
                37Item 8.
                Financial
      Statements and Supplementary Data
                37Item 9.
                Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                38Item 9A.
                Controls
      and Procedures
                38Item 9B.
                Other
      Information
                38Part
      IIIItem 10.
                Directors,
      Executive Officers and Corporate Governance
                38Item 11.
                Executive
      Compensation
                38Item 12.
                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                39Item 13.
                Certain
      Relationships and Related Transactions, and Director
      Independence
                39Item 14.
                Principal
      Accounting Fees and Services
                39Part
      IVItem 15.
                Exhibits,
      Financial Statement Schedules, and Reports on Form 8-K
                39




1




Forward-Looking
Statements




In
addition to historical information, this Annual Report on Form 10-K contains
statements relating to our future results (including certain projections and
business trends) that are “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933, as amended (the “Securities Act”),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), and are subject to the “safe harbor” created by those sections.
Words such as “anticipate,” “expect,” “intend,” “plan,” “believe,” “seek,”
“outlook” and “estimate” as well as similar words and phrases signify
forward-looking statements. Our forward-looking statements are not guarantees of
future results and conditions and important factors, risks and uncertainties may
cause our actual results to differ materially from those expressed in our
forward-looking statements. Factors that might cause such differences include,
but are not limited to, those discussed in the section entitled “Risk Factors”
set forth in Item 1A in this Annual Report on Form 10-K, and those detailed from
time to time in our other filings with the Securities and Exchange
Commission.  We undertake no obligation to update publicly any
forward-looking statements for any reason, even if new information becomes
available or other events occur in the future .




Part
I




Item
1.                      Business




General




We were
incorporated in Delaware on February 28, 2007 as a successor to Limco-Airepair,
Inc., which was incorporated as an Oklahoma corporation in
1995.  Prior to the consolidation of Limco-Airepair, Inc. into our
company, it transferred all of its assets and liabilities associated with its
Oklahoma operations to our wholly-owned subsidiary, Limco-Airepair Inc., a newly
formed Delaware corporation (“Limco”).  In
July 2005, we acquired Piedmont Aviation Component Services, Inc. (“Piedmont”), a company
certified by the FAA to perform maintenance, repair and overhaul services on
APUs, propellers and landing gear.  Our principal executive offices
are located at 5304 S. Lawton Ave., Tulsa, Oklahoma, 74107, and our telephone
number is (918) 445-4300.  Our web address is
www.limcopiedmont.com.  The information contained on our website is
not a part of this Annual Report on Form 10-K.




We
provide MRO services and parts supply services to the aerospace industry. Our
Federal Aviation Administration, or FAA, certified repair stations provide
aircraft component MRO services for airlines, air cargo carriers, maintenance
service centers and the military. Two of these repair stations are located in
Tulsa, Oklahoma, and the other two are located at our Kernersville and
Winston-Salem, North Carolina facilities. On February 9, 2009 we announced that
we will relocate our Tulsa, Oklahoma operations to the location of our Piedmont
operations in Kernersville, North Carolina.  We anticipate closing our
Tulsa operations by the end of June 2009.  In conjunction with our MRO
services we are also an original equipment manufacturer, or OEM, of heat
transfer equipment for airplane manufacturers and other selected related
products. Our parts services division offers inventory management and parts
services for commercial, regional and charter airlines and business aircraft
owners. These represent our two business segments.




2




Business
Strategy




Our
strategy is to:




·
            Expand the scope of our MRO
      services.Our goal is to use our technical expertise, engineering
      resources and facilities to provide MRO services for additional types of
      aircraft and additional aircraft systems, subsystems and components and
      intend to devote additional financial resources to develop the required
      technical expertise to provide these additional MRO
    services.




·
            Increase our international
      sales.As part of our efforts to achieve greater penetration in the
      international markets, our goal is to expand our marketing presence in
      Western Europe, which is our second largest market, and we are searching
      for opportunities to increase our presence in China and other East Asian
      nations, where we have had limited sales to
  date.




·
            Selectively pursue acquisition
      opportunities.We believe that acquisition opportunities exist that
      will complement our MRO business. We will continue to pursue targeted
      complementary business acquisitions which will broaden the scope and depth
      of our MRO operations and increase our market share, although we have no
      present plans, proposals or arrangements with respect to any such
      acquisition.




·
            Increase our cross-selling
      efforts.With our acquisition of Piedmont, we expanded our MRO
      services capabilities to include auxiliary power units or APUs,
      propellers and landing gear. The expansion of our MRO service offerings
      allows us to offer a more complete MRO service solution to our existing
      customer base. Consequently, our goal is to increase our cross-selling
      efforts and offer the full range of our services to the historical
      customers of Limco and the new customers we obtained with the acquisition
      of Piedmont.




Overview




We
provide MRO, services and parts supply services to the aerospace industry. Our
FAA certified repair stations provide aircraft component MRO services for
airlines, air cargo carriers, maintenance service centers and the military. We
specialize in MRO services for components of aircraft, such as heat transfer
components, APUs, propellers, landing gear and pneumatic ducting. In conjunction
with our MRO services we are also an OEM, of heat transfer equipment for
airplane manufacturers and other selected related products. Our parts services
division offers inventory management and parts services for commercial, regional
and charter airlines and business aircraft owners.




MRO
Services




We
provide services for the components segment of the MRO services market. Our MRO
services segment includes the repair and overhaul of heat transfer components,
APUs, propellers, landing gear and pneumatic ducting, among other components.
Generally, manufacturer specifications, government regulations and military
maintenance regimens require that aircraft components undergo MRO servicing at
regular intervals or as necessary. Aircraft components typically require MRO
services, including repairs and installation of replacement units, after three
to five years of service or sooner if required. Aircraft manufacturers typically
provide warranties on new aircraft and their components and subsystems, which
may range from one to five years depending on the bargaining power of the
purchaser. Warranty claims are generally the responsibility of the OEM during
the warranty period. Our business opportunity usually begins upon the conclusion
of the warranty period for these components and subsystems.




3




We are
licensed by Hamilton Sundstrand, a leading provider of aerospace products, to
provide MRO services for all of its air-to-air heat transfer products and by
Honeywell, a leading manufacturer of aerospace products and an aerospace
services provider, to provide MRO services for three of its APU models. Our
repair stations are certified by the FAA and the European Aviation Safety
Agency, or EASA. In conjunction with our MRO services, we also manufacture heat
transfer equipment used in commercial, regional, business and military aircraft,
complete environmental control systems and cooling systems for
electronics.  We are currently engaged in a contract dispute with one
of our suppliers.  We believe that the dispute will be resolved on a
commercial basis.  However, the inability to amicably resolve such
dispute could result in litigation, which could have a material effect on our
business and financial condition.




Parts Services




Our parts
services division provides a number of services for commercial, regional, and
charter airlines and business aircraft owners, including inventory management
and parts services. We presently assist several of these customers with their
parts procurement needs by using our knowledge of the aircraft component
industry to quickly acquire necessary aircraft components in a cost-effective
manner. We have a knowledgeable and experienced staff of 10 customer service
representatives and offer our customers 24 hour service and same day shipping.
We currently supply parts to approximately 600 commercial, regional and
charter airlines and business aircraft owners.




Demand
for MRO Services




The
demand for MRO services is driven by size and age of the aircraft fleet,
aircraft utilization and regulations by the FAA and other government
authorities.




Due to
the increased maintenance costs of their aging fleets many carriers are seeking
ways to reduce costs, minimize down-time, increase aircraft reliability and
extend time between overhauls. One of the ways they are accomplishing these
goals is through the outsourcing of more of their maintenance and support
functions to reliable third parties. Based upon our experience in the industry,
we also believe that commercial carriers who have made the decision to outsource
their MRO requirements are searching for MRO service providers with a wide-range
of service capabilities. These MRO service providers allow the carriers to
concentrate their outsourcing of MRO services to a select group of third
party providers.




The
global military aircraft fleet also presents similar opportunities for MRO
service providers. Recent military operations around the world has significantly
increased usage of the global military aircraft fleet and, in correlation,
resulted in a higher rate of maintenance activity. We believe that an aging
military fleet and the increased use of upgrade programs aimed at extending the
useful life of an aircraft will provide continued MRO growth
opportunities.




4




Parts
Aftermarket




The
aftermarket for aerospace parts primarily relates to those parts needed for the
scheduled and unscheduled maintenance, repair and modification of aircraft
already in service. Aircraft operators generally keep an inventory of those
parts needed for the scheduled and unscheduled maintenance, repair and
modification of aircraft already in service. We believe that as part of their
cost cutting measures, air carriers are attempting to reduce their inventory of
spare parts, consolidate their purchasing activity and reduce the number of
suppliers with whom they do business.




Our
Competitive Strengths




We
believe our key competitive advantages and strengths are:




·
            We have long-standing
      relationships with our customers.We have developed long-standing
      relationships with major airlines, air cargo carriers, maintenance service
      centers, the U.S. military and aircraft manufacturers. Our MRO customers
      include Bell Helicopter, Fokker, Hamilton Sundstrand, KLM Royal Dutch
      Airlines NV, Lufthansa Technik AG, PACE Airlines, Piedmont Airlines and
      the U.S. Government. We are also an OEM supplier to major aerospace
      companies such as Bell Helicopter, Boeing McDonnell Douglas Aerospace, or
      Boeing, and Bombardier Inc.




·
            We have a broad range of MRO
      capabilities and repair licenses from OEMs within ourspecialties.We believe
      that our ability to provide a broad range of MRO services for multiple
      components is attractive to customers who are seeking to outsource their
      MRO requirements and concentrate their work among a small number of MRO
      providers. We also believe that our various OEM licenses to provide MRO
      services from such companies as Hamilton Sundstrand and Honeywell also
      provide us with a competitive advantage. We are a Hamilton Sundstrand
      licensed MRO service provider in North America for air-to-air heat
      transfer components and a licensed MRO service providers in the United
      States for three Honeywell APU models. Our repair stations are AS
      9001 certified, which means that they comply with the standard for quality
      management systems maintained by the International Standards Organization
      for manufacturing.




·
            We have extensive engineering
      capabilities.We believe that our multi-disciplinary engineering
      capabilities and technical expertise in heat transfer components provides
      us with the resources to provide quick and efficient responses to our
      customers. In addition, our engineering team includes a Designated
      Engineer Representative, or DER, designated by the FAA to certify MRO
      services that differ from processes previously approved by the FAA. This
      allows us to shorten the long and complex FAA approval process, streamline
      the design and certification process and reduce costs. We believe that our
      OEM manufacturing capabilities benefit from the knowledge and experience
      we have gained from our MRO
services.




5




MRO
Services




We
specialize in the repair and overhaul of heat transfer components, APUs,
propellers, landing gear and pneumatic ducting. Heat transfer components are
devices that efficiently transfer heat from one fluid to another or from hot air
to colder air in various cooling systems and are essential components of an
aircraft. These components include heat exchangers, oil coolers, pre-coolers,
re-heaters, condensers, water separators and evaporators. APUs are relatively
small, self-contained generators used to start jet engines, usually with
compressed air, and to provide electricity, hydraulic pressure and air
conditioning while an aircraft is on the ground. In many aircraft, an APU can
also provide electrical power during in-flight emergency
situations.




We are
continually increasing our MRO capabilities based upon market need or customer
request. Our capabilities include, although are not limited to, components used
in aircraft manufactured by the following aircraft manufacturers:




·
            Airbus




·
            ATR




·
            Boeing




·
            Bombardier




·
            British
      Aerospace




·
            Cessna




·
            Embraer




·
            Fairchild




·
            Fokker




·
            General
      Dynamics




·
            Gulfstream




·
            Lockheed
      Martin




·
            Raytheon




·
            SAAB




·
            Shorts




During
2008 we performed our MRO services at our four repair stations in Oklahoma and
North Carolina, all of which are AS9001 certified and licensed by the FAA and
EASA to provide MRO services. Our Oklahoma facility provided MRO services for
heat transfer components and pneumatic air-handling ducting. On February 9, 2009
we announced that we will relocate our Oklahoma facility to our North Carolina
operations.  We anticipate closing our Oklahoma facility by the end of
June 2009.  Our North Carolina facilities, which were recently ISO
9001 certified, provide MRO services for APUs, propellers and landing
gear.




We offer
MRO services for heat transfer components to our customers on multiple levels.
If the damage is significant, we will remanufacture the unit, which generally
entails replacing the core matrix of the damaged or old heat transfer product in
lieu of replacing the entire unit with a new one. We design and develop
these customized remanufactured units as a cost effective alternative to new
part replacement. In the event of less severe damage, we will either overhaul or
repair the unit as necessary. Re-manufactured units carry warranties identical
to those provided to new units.




6




We
specialize in providing fast and efficient quality repair and overhaul of
pneumatic air-handling ducting that is used in airframes, air conditioning
systems, anti-icing systems, APUs, engines and exhaust systems.We also specialize in
providing MRO services for four APU models manufactured by Honeywell, in
providing MRO services for propellers manufactured by Hartzell Propeller Inc.
and McCauley Propeller Systems, including their fixed pitch aluminum and
composite material blades, and propellers manufactured by Hamilton Sundstrand
and Dowty Rotol, and in providing MRO services for landing gear for regional
aircraft manufactured by Bombardier Canadair Regional Jet, ATR, British
Aerospace Jet Stream and Bombardier Dash 8.




In
conjunction with our MRO services, we also act as an OEM manufacturer of
precision parts for the aircraft, electronics, industrial, government and
commercial markets. We manufacture heat transfer components used in commercial,
regional, business and military aircraft, air conditioning systems, complete
environmental control systems and cooling systems for electronics. We currently
offer approximately 80 OEM parts to the aerospace industry. These parts are
manufactured in compliance with the stringent quality assurance standards that
apply to the manufacture of aircraft parts. Our quality systems are ISO 9001
certified and we have both Boeing quality systems approval D6-82479 and FAR
21.303 (the FAA standard for Parts Manufacturer Approval).




We
specialize in the design and manufacturing of highly efficient heat transfer
components, which are designed to meet stringent constraints such as size,
weight and applicable environmental conditions. These units include heat
exchangers, oil coolers, pre-coolers, re-heaters, condensers, fuel heaters and
evaporators.




OEM
Authorizations and Licenses




We
believe that establishing and maintaining relationships with OEMs is an
important factor in achieving sustainable success as an independent MRO service
provider. OEMs grant participants in the overhaul and repair services market
authorizations or licenses to perform repair and overhaul services on the
equipment they manufacture. OEMs generally maintain tight controls in order to
maintain high quality of service to their customers, and in certain cases, grant
very few authorizations or licenses. Obtaining OEM authorizations requires
sophisticated technological capabilities, experience-based industry knowledge
and substantial capital investment. We believe that service providers that have
received OEM authorizations and licenses gain a competitive advantage because
they typically receive discounts on parts, technical information, OEM warranty
support and use of the OEM name in marketing. We are an independent MRO service
provider that is licensed by Hamilton Sundstrand, the largest heat transfer
equipment manufacturer, for its air-to-air heat transfer equipment in North
America and are also licensed by Honeywell, the largest manufacturer of APUs,
for three of its APU models. We are also the only licensed MRO service provider
for heat transfer equipment manufactured by TAT Technologies Ltd. (“TAT”), and are a
licensed MRO service provider for propellers manufactured by Hartzell Propeller
Inc. and McCauley Propeller Systems.




7




Each of
the authorizations or licenses that we have with OEMs is in the form of a
contractual arrangement. Some of these contracts require us to pay an
authorization fee to the OEM and, in some cases, we are also required to pay
annual authorization fees and royalties, or to fulfill other conditions set by
the OEM. None of our material authorizations or licenses expires prior to 2010
except that our OEM licenses from Hamilton Sundstrand will expire in May 2009
but may be extended through May 2013.  Our OEM license from Honeywell
will expire in June 2011.




Engineering
Capabilities




Our
engineering department supports our OEM activity and also enhances our ability
to provide our customers with high-end top quality MRO services. Our engineering
department employs seven certified mechanical and aerospace engineers, including
a Designated Engineering Representative, or DER, certified by the FAA. Our
multi-disciplinary team of engineers specializes in heat transfer components and
supports all processes of thermal and structural analysis, mechanical and
metallurgical research and development for manufacturing design. All of our
engineers have direct experience with aerospace component repair and have
experience with the process of obtaining supplemental type certificates from the
FAA and in obtaining FAA product manufacturing authorizations. Our onsite DER is
certified by the FAA to approve the repair of engines, APUs, and mechanical
systems and equipment, which enables us to respond quickly to our customers’
needs. Having a DER on staff allows us to enter the market for a particular type
of service more quickly that those of our competitors who do not employ a DER.
We work directly with the FAA Aircraft Certification Office in obtaining
approvals on projects that are outside our DER’s authority.




Parts
Services




Our parts
services division provides a number of services for commercial, regional and
charter airlines and business aircraft owners, including inventory management
and parts services. We assist these customers with their parts procurement needs
by using our knowledge of the aircraft component industry to quickly acquire
necessary aircraft components in a cost-effective manner. We have a
knowledgeable and experienced staff of 10 customer service representatives and
offer our customers 24 hour service and same day shipping.




We
currently supply parts to approximately 600 commercial, regional and charter
airlines and business aircraft owners. For these customers, we purchase parts
against orders and resell at a margin. We also maintain a small inventory of
commonly-replaced parts to improve our response time on orders. As our
customers’ aircraft fleets go through their repair cycles, their parts
requirements change from one year to the other.




Our parts
services division specializes in Honeywell’s 85 and 36 series APU models,
Honeywell line replacement units, Hartzell propellers, McCauley propellers, APPH
landing gear, and Embraer, Raytheon, Purolator-Facet, Messier Dowty, Boeing, PM
Research and BP Oil parts.




We
believe that the results of our parts services division is attributable to our
access to the large inventory of component parts we maintain for our MRO
services, our favorable pricing for parts purchased pursuant to licenses with
OEMs and from our reputation for good and prompt service. We also benefit from
the purchasing power we have gained as a result of the large number of parts we
purchase for our MRO services. We are continuing our efforts to increase our
recognition in the market by attendance at tradeshows, industry advertising and
promoting our website.




8




Customers




MRO Customers.We currently
service approximately 600 MRO customers, including major domestic and
international airlines, air cargo carriers, maintenance service centers and the
military. Our aerospace OEM customers include over 30 commercial and military
aircraft manufacturers and defense contractors and the U.S. government. Our
customers include, Boeing, Bell, Bombardier and Raytheon. We are not a party to
any OEM manufacturing contracts, and act solely upon orders received from our
customers.




PartsParts Services Customers.We
currently provide parts for a large scale of overhaul program based on one
signed contract. Other than it, we are not a party to any parts services
contracts, and purchase parts against orders received from our
customers.




Military
Contracts




Many of
our contracts are competitively bid and awarded on the basis of technical merit,
personnel qualifications, experience and price. We also receive some contract
awards involving special technical capabilities on a negotiated, noncompetitive
basis due to our technical capabilities.




We
provide products under U.S. government contracts that usually require
performance over a period of several months to five years. Long-term contracts
may be conditioned upon continued availability of congressional appropriations.
Variances between anticipated budget and congressional appropriations may result
in a delay, reduction or termination of these contracts. Contractors often
experience revenue uncertainties with respect to available contract funding
during the first quarter of the U.S. government’s fiscal year beginning October
1, until differences between budget requests and appropriations are
resolved.




The vast
majority of our federal government contracts are fixed-price contracts. Under
these contracts we agree to perform specific work for a fixed price and,
accordingly, realize the benefit or detriment to the extent that the actual cost
of performing the work differs from the contract price. Our allowable federal
government contract costs and fees are subject to audit by the Defense Contract
Audit Agency. Audits may result in non-reimbursement of some contract costs and
fees. While the government reserves the right to conduct further audits, audits
conducted for periods through fiscal year 2008 have resulted in no material cost
recovery disallowances for us.




Some of
our federal government contracts contain options that are exercisable at the
discretion of the customer. An option may extend the period of performance for
one or more years for additional consideration on terms and conditions similar
to those contained in the original contract. An option may also increase the
level of effort and assign new tasks to us.




Our
eligibility to perform under our federal government contracts requires us to
maintain adequate security measures. We have implemented security procedures
that we believe adequately satisfy the requirements of our federal government
contracts.




9




Sales
and Marketing




We market
our MRO services through our ten person marketing and customer service staff and
a network of ten independent representatives who are compensated solely by
commissions. Our representatives are strategically located near key customer
sites in Europe, Asia, the Middle East and South America. Our marketing
activities also include attending exhibitions, trade shows and professional
conferences, organizing seminars, direct mailing of advertisements and technical
brochures to current and potential customers, and advertising in technical
publications which target heat transfer products and related markets. We are in
regular contact with engineering and procurement personnel and program managers
of existing and target customers to identify new programs and needs for our
products, obtain requests for quotations and identify new product
opportunities.




Our parts
services division employs ten persons in its customer service staff. These
individuals are responsible for handling orders and contacting target customers
and are available to our clients 24 hours a day, seven days a week.




Competitive
Environment




MRO
Services




The
market for MRO services is highly competitive. Competition in this market is
based on quality, price, and the ability to provide a broad range of services
and to perform repairs and overhauls rapidly. Our primary MRO services
competitors are the service divisions of OEMs, the in-house maintenance services
of a number of commercial airlines and other independent service providers. For
heat transfer component MRO services our major competitors are the LORI Heat
Transfer Center of Honeywell and SECAN-Honeywell (France). For APU, propeller
and landing gear MRO services our major competitors are Standard Aero Group
Inc., Aerotech International Inc., Honeywell, Alameda Aerospace, JetSet
Aerospace LLC, Messier-Dowty Aerospace (MD), AAR Corp., Hawker Pacific, APRO,
Aircraft Propeller Service Inc., Pacific Propeller International LLC and H&H
Propeller. For our OEM heat transfer equipment, our major competitors are
other OEMs who manufacture heat transfer equipment, including the
Hughes-Treitler division of Ametek Inc., Lytron Inc., Hamilton Sundstrand and
Honeywell.




A number
of our competitors have inherent competitive advantages. For example, we compete
with the service divisions of large OEMs who in some cases have design authority
with respect to their OEM products and are able to derive significant brand
recognition from their OEM manufacturing activities. We also compete with the
in-house service divisions of large commercial airlines and there is a strong
incentive for an airline to fully utilize the services of its maintenance
employees and facilities. Further, our competitors may have additional
competitive advantages, such as:




·
            the
      ability to adapt more quickly to changes in customer requirements and
      industry conditions or trends;




·
            greater
      access to capital;




·
            stronger
      relationships with customers and
suppliers;




·
            better
      name recognition; and




10




·
            access
      to superior technology and marketing
resources.




Parts
Services




The parts
services industry is highly competitive and fragmented. Competition in this
markets is based on price, quality and service. Competitors in this segment
include OEMs, the service divisions of large commercial airlines and other
independent suppliers and distributors of parts.




Spare
Parts and Raw Materials




We depend
on a number of OEMs for spare parts for our MRO operations and our parts
services business. Our authorizations from OEMs often require that we purchase
component parts that are needed for our MRO services from them or their
designated distributors. We have an agreement with Honeywell under which
Honeywell has agreed to sell us certain parts at a discount for a period of five
years, ending May 31, 2011. In addition we have entered into an agreement with
TAT pursuant to which it has agreed to sell us its heat transfer equipment for a
period of ten years, ending March 2017.




In the
year ended December 31, 2008, we purchased $6.5 million of parts from
Honeywell, $1.2 million of parts from Hamilton Sundstrand and $5.7 million
of parts from TAT. The loss of any of these key suppliers or an unfavorable
modification of any of our agreements with such suppliers could have a material
adverse effect on our business. We have at times experienced contractual
disputes with and delays in receiving parts from our key suppliers, and any
significant future disputes or delays could have a material adverse effect on
our business and results of operations. If we had to develop alternative sources
of supply, our ability to supply parts to our customers when needed could be
impaired, business could be lost and margins could be reduced in both our MRO
services and parts services segments.




We select
our suppliers primarily based on their ability to ensure that their parts are
serviceable and traceable to OEM-approved sources, their delivery performance
and their ability to help us reduce our total cost of procuring those parts. For
quality control, cost and efficiency reasons, we generally purchase supplies
only from vendors with whom we have ongoing relationships or who our customers
have previously approved. We have qualified second sources or have identified
alternate sources for many of our parts services needs.




The raw
materials used in our manufacturing programs are generally readily available
metals and alloys. We have not had any difficulty in obtaining such materials in
the past.




Government
Regulations




Aerospace
and Safety Regulations




The
commercial aerospace industry is highly regulated by the FAA in the United
States, EASA in Europe, the Civil Aviation Authority in England and other
governmental authorities elsewhere in the world, while the military aerospace
industry is governed by military quality specifications established by the U.S.
Department of Defense for the manufacturing and repair industries and ISO-9001.
We are required to be certified by one or more of these entities and, in some
cases, by individual OEMs. We must also satisfy the requirements of our
customers, including OEMs and airlines, that are subject to FAA regulations, and
provide these customers with products that comply with the government
regulations applicable to commercial flight operations. We believe we currently
satisfy or exceed these FAA maintenance standards in our repair and overhaul
activities. Each of our repair stations is approved by the FAA.




11




Our
operations are also subject to a variety of worker and community safety laws
including The Occupational Safety and Health Act of 1970, known as OSHA, which
mandates general requirements for safe workplaces for all employees. In
addition, OSHA provides special procedures and measures for the handling of
certain hazardous and toxic substances. We believe that our operations are in
material compliance with OSHA’s health and safety requirements.




We
believe that we are in material compliance with the governmental regulations
affecting the aerospace and defense industry.




Environmental Matters




Our
operations are subject to a number of federal, state and local environmental
laws in the United States, and to regulation by government agencies, including
the U.S. Environmental Protection Agency. Among other matters, these regulatory
authorities impose requirements that regulate the emission, discharge,
generation, management, transportation and disposal of pollutants and
hazardous substances. These authorities may require us to initiate actions to
remediate the effects of hazardous substances which may be or have been released
into the environment, and require us to obtain and maintain permits in
connection with our operations. This extensive regulatory framework imposes
significant compliance burdens and risks.




Although
we seek to maintain our operations and facilities in compliance with applicable
environmental laws, there can be no assurance that we have no violations, or
that changes in such laws, regulations or interpretations of such laws or in the
nature of our operations will not require us to make significant additional
expenditures to ensure compliance in the future. Currently, we do not believe
that we will have to make material capital expenditures for our operations to
comply with environmental laws or regulations, or to incur material costs for
environmental remediation during the 2009 fiscal year.




We have
received no material third party environmental claims relating to the our
facilities, and we believe that we have all material licenses and certifications
that are required in the jurisdictions in which we operate.




Employees




As of
December 31, 2008, we had a total of 284 full-time employees, of which 221 were
employed in MRO services and OEM manufacturing, 22 were employed in parts
services and the remaining 41 were employed in administrative, sales and
marketing positions. We have no collective bargaining agreements with our
employees and believe that our relationship with our employees is
good.  It is currently anticipated that the relocation of our Oklahoma
operations to our North Carolina facilities, which is anticipated to occur by
the end of June 2009, will reduce our workforce by approximately
12%.




12




Where
You Can Find More Information




The
Company’s Annual Report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended,
which we refer to as the Exchange Act, are available free of charge through the
investor information pages of our website, located atwww.limcopiedmont.com..  Our
internet website and the information contained therein are not intended to be
incorporated into this Annual Report on Form
10K.   Alternatively, the public may read or copy the Company’s
filings with the Securities and Exchange Commission (SEC) at the SEC’s Public
Reference Room at 100 F Street, N.E., Room 1580, Washington, DC
20549.  The public may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also
maintains an internet site that contains reports, proxy and information
statements, and other information regarding issuers (including the Company) that
file electronically with the SEC www.sec.gov ).




Item
1A.            Risk
Factors




Risks
Related to Our Business and Operations




Our
revenues and earnings depend substantially upon conditions in the airline
industry, and a significant or prolonged downturn in the airline industry could
decrease demand for our services and products.




Our
revenues are principally derived from the provision of MRO services to airlines,
air cargo carriers, MRO service centers and the military; and the provision of
parts services for commercial, regional and charter airlines and business
aircraft owners. Any further downturn in the commercial aircraft industry
could materially decrease demand for our services and products and negatively
impact our financial condition. The commercial airline industry is cyclical and
has historically been subject to fluctuations due to general economic and
political conditions, such as fuel and labor costs, price competition, downturns
in the global economy and national and international events.




In the
aftermath of the September 11, 2001 terrorist attacks, passenger traffic on
commercial flights was significantly lower than prior to the attacks. Most
commercial airlines reduced their operating schedules, lowered fares and
implemented cost reduction initiatives. In addition, war or armed hostilities or
the fear of such events, could further exacerbate many of the problems
experienced as a result of terrorist attacks. Future terrorist attacks, war or
armed hostilities, the outbreak of SARS or other epidemic diseases such as avian
influenza, or the fear of such events, could further negatively impact the
airline industry. These factors, as well as last year’s increases in fuel costs,
have resulted in large and, in some cases, continuing financial losses in the
airline industry. Major carriers around the world have recently emerged from
bankruptcy protection or are in the process of doing so. Financial losses and
reduced schedules in the airline industry have resulted, and will continue to
result, in reduced orders and delivery delays of new commercial aircraft,
parking and retirement of older aircraft (eliminating those aircraft from
maintenance needs) and delays in airlines’ purchases of aftermarket parts and
service as maintenance is deferred. During periods of reduced airline
profitability, some airlines may delay purchases of spare parts, preferring
instead to deplete existing inventories. If demand for new aircraft and spare
parts decreases, there would be a decrease in demand for certain of our
products.




13




The
aerospace industry is subject to significant government regulation and
oversight, and we may have to incur significant additional costs to comply with
these regulations.




The
aerospace industry is highly regulated in the United States and in other
countries. We must be certified or accepted by the FAA, the United States
Department of Defense, the European Aviation Safety Agency, or EASA, and similar
agencies in foreign countries and by individual OEMs in order to manufacture,
sell and service parts used in aircraft. If any of our material certifications,
authorizations or approvals are revoked or suspended, our operations will be
significantly curtailed and we could be subjected to significant fines and
penalties. In the future, new and more demanding government regulations may be
adopted or industry oversight may be increased. We may have to incur significant
additional costs to achieve compliance with new regulations or to reacquire a
revoked or suspended license or approval, which could reduce our
profitability.




We
compete with a number of established companies in all
aspects of our business, many of which have significantly greater resources or
capabilities than we do.




The
market for MRO services and parts services is highly competitive. Competition in
the MRO market is based on price, quality, engineered solutions, ability to
provide a broad range of services, turn-around time, and the ability to perform
repairs and overhauls rapidly. Our primary MRO services competitors are the
service divisions of OEMs, the in-house maintenance services of a number of
commercial airlines and other independent service providers. For heat transfer
component MRO services, our major competitors are the LORI Heat Transfer Center
of Honeywell (Tulsa, Oklahoma) and SECAN-Honeywell (France). For APU, propeller
and landing gear MRO services, our major competitors are Standard Aero Group
Inc., Aerotech International Inc., Honeywell, Alameda Aerospace, Chromalloy,
Messier-Dowty Aerospace (MD), AAR Corp., Hawker Pacific, APPH Ltd., Aero
Precision Repair and Overhaul Company Inc, or APRO, Aircraft Propeller Service
Inc, Pacific Propeller International LLC and H&H Propeller. For our OEM heat
transfer equipment, our major competitors are other OEMs who manufacture heat
transfer equipment, including the Hughes-Treitler division of Ametek Inc.,
Lytron Inc., Hamilton Sundstrand and Honeywell.




The parts
services industry is highly competitive and fragmented. Competition in this
market is based on price, quality, prompt delivery and service. Competitors in
this segment include original equipment manufacturers, the service divisions of
large commercial airlines and other independent suppliers and distributors of
parts.




A number
of our competitors have inherent competitive advantages. For example, we compete
with the service divisions of large OEMs who in some cases have design authority
with respect to their OEM products and are able to derive significant brand
recognition from their OEM manufacturing activities. We also compete with the
in-house service divisions of large commercial airlines and there is a strong
incentive for an airline to fully-utilize the services of its maintenance
employees and facilities.




Further,
our competitors may have additional competitive advantages, such
as:




·
            the
      ability to adapt more quickly to changes in customer requirements and
      industry conditions or trends;




14




·
            greater
      access to capital;




·
            stronger
      relationships with customers and
suppliers;




·
            greater
      name recognition; and




·
            access
      to superior technology and marketing
resources.




If we are
unable to overcome these competitive disadvantages, our business, financial
condition and results of operations would be adversely affected.




The
loss of a significant MRO services customer would reduce demand for our services
and our sales.




Because
of the high degree of concentration in the airline industry, and the importance
of a few large customers for our MRO services, our MRO business is exposed to a
high degree of risk related to customer concentration. In the years ended
December 31, 2008 and 2007, our five largest MRO customers accounted for
approximately 30% and 28%, respectively, of our MRO revenues. A loss of
significant business from any of these customers would be harmful to our
profitability.




Our
revenue is subject to a high degree of volatility and a reduction in demand will
have an adverse affect on our operative results.




The
profitability of our parts services business is driven by the needs of our
customers whose demand for replacement parts is constantly fluctuating. Some of
our customers may, from time to time, place single orders for a large amount of
parts in conjunction with the overhaul of a significant portion of their active
fleet. This segment of our business is subject to a high degree of
volatility due to the potential impact of large one-time parts
purchases  A reduction in demand for parts by one or more of our
significant clients would have an adverse affect on our operating
results.




We
may be unable to identify attractive
acquisition candidates, successfully integrate our acquired operations or
realize the intended benefits of our acquisitions.




One of
our business strategies is to pursue targeted complementary business acquisition
opportunities. Our business may be adversely affected if we cannot consummate
acquisitions on satisfactory terms, or if we cannot effectively integrate
acquired operations.




Any
growth through acquisitions will be dependent upon the availability of suitable
acquisition candidates at favorable prices, the availability of financing for
all or some portion of the acquisition cost, and upon advantageous terms and
conditions. We intend to pursue acquisitions that we believe will present
opportunities consistent with our overall business strategy. However, we may not
be able to find suitable acquisition candidates to purchase or may be unable to
acquire desired businesses or assets on economically acceptable terms. We may
not be able to raise the money necessary to complete future acquisitions. In
addition, acquisitions involve risks that the businesses acquired will not
perform in accordance with expectations and that business judgments concerning
the value, strengths and weaknesses of businesses acquired will prove incorrect.
Further, we cannot assure you that our acquisition strategies will be
successfully received by customers or investors or achieve their intended
benefits.




15




If we
consummate an acquisition, our capitalization and results of operations may
change significantly. Future acquisitions could result in the incurrence of
additional debt and contingent liabilities and an increase in interest and
amortization expenses or periodic impairment charges related to goodwill and
other intangible assets as well as significant charges relating to integration
costs.




In
addition, we may not be able to successfully integrate any business we acquire
into our existing business. The successful integration of new businesses depends
on our ability to manage these new businesses and cut excess costs. The
successful integration of future acquisitions may also require substantial
attention from our senior management and the management of the acquired
business, which could decrease the time that they have to service and attract
customers and develop new products and services.




We
have fixed-price contracts with some of our
customers and we bear the risk of costs in excess of our estimates.




We have
entered into multi-year, fixed-price contracts with some of our MRO and OEM
customers. Pursuant to these contracts, we realize all the benefits or costs
resulting from any increases or decreases in the cost of providing services to
these customers. Most of our contracts do not permit us to recover for increases
in raw material prices, taxes or labor costs. Any increase in these costs could
increase the cost of operating our business and reduce our profitability.
Factors such as inaccurate pricing and increases in the cost of labor, materials
or overhead may result in cost over-runs and losses on those agreements. We may
not succeed in obtaining an agreement of a customer to reprice a particular
product, and we may not be able to recoup previous losses resulting from
incomplete or inaccurate engineering data.




Our
U.S. government contracts contain requirements to implement security measures,
unfavorable termination provisions and are subject to modification and audit.
Consequently, we are subject to certain business risks as a result of supplying equipment
and services to the U.S. government.




Approximately
16.0% and 7.3% of our revenues were related to MRO services provided to the
U.S. government for the years ended December 31, 2008 and 2007, respectively. We
are subject to risks particular to contracts with governmental authorities.
These risks include the ability of the governmental authorities to
unilaterally:




·
            suspend
      us from receiving new contracts pending resolution of alleged violations
      of procurement laws or regulations;




·
            terminate
      existing contracts, with or without cause, at any
  time;




·
            reduce
      the value of existing contracts;




·
            audit
      our contract-related costs and fees, including allocated indirect costs;
      and




·
            control
      or potentially prohibit the export of our
  products.




A
decision by a governmental authority to take any or all of the actions listed
above could materially reduce our sales and profitability. Most of our U.S.
Government contracts can be terminated by the U.S. Government either for its
convenience or if we default by failing to perform under the contract.
Termination for convenience provisions provide only for our recovery of costs
incurred or committed, settlement expenses and profit on the work completed
prior to termination. In addition, under certain of our U.S. Government
contracts, we are required to implement a number of security measures that must
be maintained and if we are unable to maintain certain measures these contracts
may be terminated and the U.S. Government may impose fines upon us.




16


A
decline in U.S. military spending could result in a
reduction of the amount of products and services we sell to the U.S.
Government.




Future
U.S. Department of Defense, or DOD, budgets could be negatively impacted by
several factors, including but not limited to the U.S. Government’s budget
deficits and spending priorities and the cost of sustaining the U.S. military
presence and rebuilding operations in Iraq and Afghanistan, which could cause
the DOD budget to remain unchanged or to decline. A prompt withdrawal from Iraq
or Afghanistan may result in a significant decline in U.S. military
expenditures, which could result in a reduction in the amount of our
products and services provided to the various agencies and buying organizations
of the U.S. Government.




A
portion of our revenue is derived from international sources, which exposes us
to additional uncertainty.




In the
years ended December 31, 2008 and 2007, approximately 30.9%  and
30.3%, respectively were derived from providing services to clients located
outside of North America. This source of revenue is subject to various risks,
including:




·
            governmental
      embargoes or foreign trade
restrictions;




·
            changes
      in U.S. and foreign governmental
regulations;




·
            changes
      in foreign exchange rates;




·
            tariffs;




·
            other
      trade barriers;




·
            political,
      economic and social instability;
and




·
            difficulties
      in accounts receivable collections.




We
depend on our key executives, and may not be able to hire and retain additional
key employees or successfully integrate new members of our team and the loss of
a key employee could have a material adverse effect on our
business.




Our
success will depend largely on our reliance on the experience and expertise of
our senior management. Although we have entered into employment agreements with
most members of our senior management, any of our senior managers may terminate
their employment with us and seek employment with others who may seek their
expertise. The loss of the expertise of any of our senior management through
death, disability or termination of employment would have a material and adverse
effect on our business, financial condition and results of operations. We are
not the beneficiary of life or disability insurance covering any of our
executives, key employees or other personnel.




17




Our
ability to implement our business strategy will depend on our success in
recruiting, retaining and successfully integrating our management team and other
personnel. If we are unable to retain employees and to attract and integrate new
members of our management team, key employees or other personnel, we may be
unable to successfully implement our business strategy in a timely manner. If we
are unable to do so or if we were to lose the services of our senior
executives or key employees, it could have a material adverse effect on our
business, financial condition and results of operations.




Any
interruption in the work force at our facilities could have a material adverse
impact on our ability to keep our customers’ aircraft in service.




We derive
the majority of our sales from overhaul services for components delivered to us
from time to time by our customers. Because we maintain a relatively small
inventory of loaner replacement parts for our MRO services business which we
allow our customers to use while their parts are being repaired, an interruption
of our work force due to strikes, work stoppages, shortages of appropriately
skilled production and professional workers or other interruption could have a
material adverse impact on both our ability to keep our customers’ aircraft in
service while we perform overhaul services and to maintain our customers’
satisfaction with our services.




Our
business and profitability are affected by the price and continuity of supply of
certain component parts.




We rely
on Honeywell, Hamilton Sundstrand and TAT for parts for our MRO services and
parts services business segments. If we were unable to obtain adequate
supplies of parts from Honeywell, Hamilton Sundstrand, TAT or other OEMs at
commercially reasonable prices, our operations could be interrupted. We have at
times experienced contractual disputes with and delays in receiving parts from
our key suppliers and any significant disputes or delays could have a material
adverse effect on our business and results of operations.  Increased
costs associated with supplied materials or components could increase our costs
and reduce our profitability if we are unable to pass these cost increases on to
our customers. We maintain a relatively small inventory of component parts for
resale and our parts services business would suffer if the supply of replacement
parts were reduced or terminated by our suppliers. There are other companies
that may be able to supply us with necessary component parts. However, these
potential suppliers would be required to undergo FAA, EASA and OEM
certification, and this would make it difficult for us to change suppliers in a
timely and cost-effective manner.




TheRelocationof our Oklahoma operations could
have a material adverse impact on our
business.




We have
decided to relocate the operations of our Oklahoma subsidiary to the location of
our Piedmont subsidiary in North Carolina.  We anticipate closing the
Oklahoma operations by the end of June 2009.  The goal of this
relocation is to achieve significant annual cost savings.  There can
be no assurances that these savings will be achieved.  We
anticipate incurring approximately $2.4 million in pre-tax
costs (substantially all of which will result in cash
expenditures).  While we anticipate that these costs will be offset by
the sale of our Oklahoma land and building and the sale of certain assets, there
can be no assurances that the actual costs won’t materially exceed our estimate
or that we will be able to sell the Oklahoma land and other assets at the
anticipated price.  In addition, there can be no assurances that we
can complete the relocation on a timely basis and without material disruption of
our business.  Any of such events could have a material impact on our
financial condition.




18




We
depend on our facilities, and any damage to these facilities would adversely
impact our operations.




We
believe that our success to date has been, and future results of operations will
be, dependent in large part upon our ability to provide MRO services and to
manufacture and deliver OEM products promptly upon receipt of orders and to
provide prompt and efficient service to our customers. As a result, any
disruption of our day-today operations could have a material adverse effect on
our business, customer relations and profitability. We rely on our facilities
for the provision of our MRO services, the production of our OEM products and
the provision of our parts services. A fire, flood, earthquake or other disaster
or condition that significantly damaged or destroyed any of these facilities or
a delay in the relocation of our Oklahoma operations would have a material
adverse effect on our operations.




We
have potential exposure to liabilities arising under environmental laws and
regulations.




Our
business operations and facilities are subject to a number of federal, state,
and local laws and regulations that govern the discharge of pollutants and
hazardous substances into the air and water as well as the handling, storage and
disposal of such materials and other environmental matters. Compliance with such
laws as they relate to the handling, storage and disposal of hazardous
substances is a significant obligation for us at each of our facilities. We
would be subject to serious consequences, including fines and other sanctions,
and limitations on our operations due to changes to, or revocations of, the
environmental permits applicable to our facilities if we fail to comply. The
adoption of new laws and regulations, stricter enforcement of existing laws and
regulations, the discovery of previously unknown contamination or the imposition
of new cleanup requirements could require us to incur costs and become subject
to new or increased liabilities that could increase our operating costs and
adversely affect the manner in which we conduct our business.




Under
certain environmental laws, liability associated with investigation or
remediation of hazardous substances can arise at a broad range of properties,
including properties currently or formerly operated by us or our predecessors,
as well as properties to which we sent hazardous substances or wastes for
treatment, storage, or disposal. Costs and other obligations can arise from
claims for toxic torts, natural resource and other damages, as well as the
investigation and clean up of contamination at such properties. Under certain
environmental laws, such liability may be imposed jointly and severally, so we
may be responsible for more than our proportionate share and may even be
responsible for the entire liability at issue. The extent of any such liability
can be difficult to predict.




We
are exposed to potential liabilities arising from product liability and warranty
claims.




Our
operations expose us to potential liabilities for personal injury or death as a
result of the failure of an aircraft component that has been designed,
manufactured, serviced or supplied by us. Based upon our experience in the
industry, we believe that, in an effort to improve operating margins, some
customers may, from time to time delay replacement of parts beyond their
recommended lifetime, which could undermine aircraft safety and increase our
risk of liability.




19




We cannot
assure you that we will not experience any material product liability losses in
the future, that we will not incur significant costs to defend such claims, that
our insurance coverage will be adequate if claims were to arise or that we would
be able to maintain insurance coverage in the future at an acceptable cost. A
successful claim brought against us in excess of our available insurance
coverage may have a material adverse effect on our business.




In
addition, in the ordinary course of our business contractual disputes over
warranties can arise. We may be subject to requests for cost sharing or pricing
adjustments from our customers as a part of our commercial relationships with
them, even though they have agreed to bear these risks.




We
use equipment that is not easily repaired or replaced, and therefore equipment
failures could cause us to be unable to meet quality or delivery expectations of
our customers.




Many of
our service and manufacturing processes are dependent on equipment that is not
easily repaired or replaced. As a result, unexpected failures of this equipment
could result in production delays or the manufacturing of defective products.
Our ability to meet the expectations of our customers with respect to on-time
delivery of repaired components or quality OEM products is critical. Our failure
to meet the quality or delivery expectations of our customers could lead to the
loss of one or more of our significant customers.




Risks
Related to Relationship with TAT




TAT
and its parent control the majority of the voting power of our shares of common
stock and as a result can control the outcome of any shareholder vote. This
concentration of ownership could adversely affect the trading price of our
stock.




TAT owns
approximately 61.7% of our outstanding shares of common stock.  As a
result, TAT and its ultimate controlling stockholder, KMN Holdings
Ltd. (“KMN”) are able to exercise considerable influence over our
operations and business strategy and control the outcome of all matters
involving shareholder approval.




For so
long as TAT owns more than 50% of our shares of common stock, it, and
KMN indirectly, will have the power to approve all matters requiring
approval of common shareholders, including the election of all members of our
board of directors, and appointing management. TAT will also exercise a
controlling influence over our business and affairs, any determinations with
respect to mergers or other business combinations involving us, including our
acquisition or disposition of assets, and other aspects of our business and
affairs. The directors nominated by TAT will have the ability to control
decisions affecting our capital structure, including issuing additional capital
stock, establishing stock purchase programs and declaring dividends. So long as
TAT remains a significant shareholder, this concentration of stock ownership may
have the effect of delaying, preventing or deterring a change in control of our
company, which could deprive other shareholders of an opportunity to receive a
premium over the then-prevailing market price for their common stock as part of
a transaction such as a proxy contest, tender offer, merger or other purchase of
common stock. In addition, this concentration of stock ownership may adversely
affect the trading price of our common stock because investors may perceive
disadvantages in owning stock in a company with a significant
shareholder.




20




The
interests of TAT may differ from the interests of our other shareholders. For
example, TAT could oppose a third party offer to acquire us that you might
consider attractive, and the third party may not be able or willing to proceed
unless TAT supports the offer. In addition, if our board of directors supports a
transaction requiring an amendment to our certificate of incorporation, TAT will
continue to be in a position to defeat any required shareholder approval of the
proposed amendment. If our board of directors supports an acquisition of us by
means of a merger or a similar transaction, the vote of TAT alone will be
sufficient to approve or block the transaction under Delaware law. In each of
these cases and in similar situations, our other shareholders may disagree with
TAT as to whether the action opposed or supported by TAT is in the best
interests of our shareholders.




We have
entered into a number of agreements with TAT setting forth various matters
governing our relationship with TAT. These agreements govern our ongoing
relationship with TAT. We will not be able to unilaterally terminate these
agreements or amend them in a manner we deem more favorable to us so long as TAT
continues to control the voting power of our shares of common
stock.




Our
historical financial information may not be representative of the results we
would have achieved as a separate stand-alone company and may not be a reliable
indicator of our future results.




The
historical financial information included in this annual report reflects our
operation as a wholly-owned subsidiary of TAT prior to our initial public
offering in July 2007 and the consolidation of the operations of Piedmont since
its acquisition in July 2005. Therefore, our historical financial information
may not reflect what our financial condition, results of operations or cash
flows would have been had we been an independent company during the periods
presented or what our results will be in the future. This is primarily a result
of the following factors:




·
            we
      cannot expect TAT to provide financial support in the
    future;




·
            our
      historical financial results do not reflect any of the costs and expenses
      associated with our being a public company;
and




·
            our
      historical financial results do not reflect the operations of Piedmont
      prior to July 1, 2005.




Conflicts
of interest may arise
between TAT and us that could be resolved in a manner unfavorable to
us.




Conflicts
of interest may arise between TAT and us in a number of areas relating to our
ongoing relationships. At present three of TAT’s directors serve as
directors of our company.  Areas in which conflicts of interest between TAT
and us could arise include, but are not limited to, the following:




·
            Crossdirectorships, employment and
      share ownership.The ongoing relationships of certain of our
      directors and executive officers with TAT and/or their interests in the
      ordinary shares of TAT could create, or appear to create, conflicts of
      interest when directors and executive officers are faced with decisions
      that could have different implications for the two companies. For example,
      these decisions could relate to disagreements over the desirability of a
      potential acquisition opportunity, or a change in dividend
      policy.




21




·
            Intercompany transactions.We expect to continue to enter into transactions with TAT as part
      of our day-to-day business activities. Although the terms of any such
      transactions will be established based upon negotiations between employees
      of TAT and us, subject to the approval of the independent directors on our
      board or a committee of disinterested directors, there can be no assurance
      that the terms of any such transactions will be as favorable to us as may
      otherwise be obtained in arm’slength negotiations with unaffiliated third
      parties.




·
            Intercompany agreements.We have entered into agreements with TAT pursuant to which it
      provides us with heat transfer components and engineering support for our
      MRO operations with respect to such components. We have also agreed with
      TAT that we will not, except in certain limited circumstances, compete
      with each other in the sale of OEM heat transfer components and the
      provision of MRO services for heat transfer components. The terms of these
      agreements were established while we were a wholly-owned subsidiary of TAT
      and were approved by the independent directors of our board. We have also
      entered into a registration rights agreement with TAT concerning the
      registration for resale of our common stock by them. Conflicts could arise
      in the interpretation or any extension or renegotiation of these existing
      agreements.




Future
sales or distributions of our shares of common stock by TAT could depress the
market price for shares of our common stock.




TAT may
sell all or some of the shares of our common stock that it owns or distribute
those shares to its shareholders. We have entered into a registration rights
agreement with TAT granting it the right to require us to register for resale
its shares of common stock under the Securities Act of 1933, as amended. Sales
or distributions by TAT of substantial amounts of our shares of common stock in
the public market or to its shareholders could adversely affect prevailing
market prices for our shares of common stock. TAT is not subject to any
contractual obligation that would prohibit it from selling, spinning off,
splitting off or otherwise disposing of any of our shares of common
stock.




Risks
Related to Our Common Stock




If
we are unable to satisfy the requirements of Section 404 of the Sarbanes-Oxley
Act, or our internal controls over financial reporting are not effective, the
reliability of our financial statements may be questioned and our stock price
may suffer.




Section
404 of the Sarbanes-Oxley Act requires us to comprehensively
evaluate  our internal controls over financial reporting. To comply
with this statute, we are required to document and test our internal control
procedures annually; our management is required to assess and issue a report
concerning our internal controls over financial reporting
annually.  In the future, our independent auditors will be required to
issue an opinion on our internal controls over financial reporting. As a public
company, we are required to report, among other things, control deficiencies
that constitute a “material weakness” or changes in internal controls that
materially affect, or are reasonably likely to materially affect, internal
controls over financial reporting. A “material weakness” is a significant
deficiency, or combination of significant deficiencies, that results in more
than a remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected.




22




If we
fail to achieve and maintain the adequacy of our internal controls in accordance
with applicable standards as then in effect and as supplemented or amended from
time to time, we may be unable to conclude on an ongoing basis that we have
effective internal controls over financial reporting in accordance with Section
404. As a result we might be subject to sanctions or investigation by regulatory
agencies such as the SEC and we may become involved in securities class action
litigation that could divert management’s attention and harm our business.
Moreover, effective internal controls are necessary for us to produce reliable
financial reports. If we cannot produce reliable financial reports or otherwise
maintain appropriate internal controls, our business, financial condition and
results of operations could be harmed, investors could lose confidence in our
reported financial information, the market price for our stock could decline
significantly and we may be unable to obtain additional financing to operate and
expand our business.




We
do not anticipate paying dividends on shares of our common stock.




We do not
expect to pay cash dividends on our shares of common stock in the foreseeable
future. The declaration of dividends is subject to the discretion of our board
of directors and will depend on various factors, including our operating
results, future earnings, capital requirements, financial condition, future
prospects and any other factors deemed relevant by our board of directors. You
should not rely on an investment in our company if you require dividend income
from your investment in our company.




Item
1B.            Unresolved
Staff Comments




None.




Item
2.               Properties




We own
and operate a 55,000 square foot manufacturing plant in Tulsa, Oklahoma which
has historically supported both our OEM business and our aftermarket heat
transfer component repair station. This facility also has housed our
administration, engineering, quality control and support services. We also lease
an additional 9,000 square foot repair station adjacent to our Tulsa
manufacturing plant which has supported our heat transfer component and
pneumatic ducting MRO services.  These facilities are being closed in
connection with the relocation of our Oklahoma operations to North
Carolina.  Such closing is expected to occur prior to the end of June
2009.




We lease
approximately 56,000 square feet space for our facility in Kernersville, North
Carolina. In 2008, the annual rental expense for this property was $69,000. The
lease, which expires on November 1, 2011, provides for two renewal options, each
for a five year term. In addition, we also lease approximately 31,000 square
feet space for our facility in Winston Salem, North Carolina. The lease, which
provides for an annual rental expense of $48,000, expires on January 1,
2013.




23




We have
also entered into a lease for a new facility in Kernersville, North
Carolina of approximately 56,000 square feet, which will house our
operations being relocated from Oklahoma.  The lease, which expires on
November 1, 2011, provides for 2 renewal options, each for a five year
term.  The lease provides for an annual rental of
$86,182.


Item
3.              
Legal Proceedings




We are
not presently involved in any material legal proceedings. However, during the
ordinary course of business, we are, from time to time, threatened with, or may
become a party to, legal actions and other proceedings.




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




None.


Part
II




Item
5. Market
for Registrant’s Common Equity and Related Stockholder Matters and Issuer
Purchases of Equity Securities.




Our shares of the Common Stock
began  trading on the NASDAQ Global Market under the symbol “LIMC” on
July 19, 2007.  The
following table presents the quarterly high and low sales prices of the common
stock for our two most recent fiscal years as reported for the NASDAQ Global
Market:





2008High
                  
                  
                  LowFirst
      quarter
                  
                  $
                  12.61
                  
                  
                  $
                  5.15Second
      quarter
                  
                  
                  6.90
                  
                  
                  
                  4.25Third
      quarter
                  
                  
                  5.09
                  
                  
                  
                  3.72Fourth
      quarter
                  
                  
                  4.50
                  
                  
                  
                  2.50





2007High
                    
                    
                    LowThird
      quarter (commencing July 19, 2007)
                    
                    $
                    13.88
                    
                    
                    $
                    11.10Fourth
      quarter
                    
                    $
                    15.90
                    
                    
                    $
                    11.50





At
February 2, 2009, the number of record holders of common stock of the Company
was approximately 2.




Dividend
Policy




We have
not declared or paid any cash dividends on our capital stock since our inception
and do not anticipate paying any cash dividends in the foreseeable
future.




In the
event we decide to declare dividends on our common stock in the future, such
declaration will be subject to the discretion of our Board of
Directors.  Our Board may take into account such matters as general
business conditions, our financial results, capital requirements, contractual,
legal, and regulatory restrictions on the payment of dividends by us to our
stockholders or by our subsidiaries to us and any such other factors as our
Board may deem relevant.




24




Use
of Proceeds




We sold
4,205,000 of our shares of common stock in our initial public offering on July
19, 2007.  The aggregate offering price of the shares sold was $46.3
million.  The total expenses of the offering were approximately $4.8
million.  None of such expenses were paid directly or indirectly to
directors, officers, persons owning 10% or more of any class of equity
securities or our company or to our affiliates.  The net public
offering proceeds to us, after deducting the total expenses were approximately
$41.5 million.  Such proceeds have been used to repay approximately
$4.0 million in debt owed to TAT and $4.0 million in debt owed to Bank Leumi
USA, and $2.9 million was used for the purchase of capital
equipment.  The remaining proceeds have been invested in cash, cash
equivalents and short term investments.  As of December 31, 2008, we
had $21.3 million in cash and cash equivalents and $11.3 million in short term
investments.




Recent
Sales of Unregistered Securities




None.




Securities
Authorized for Issuance Under Equity Compensation Plans




Plan Category
                              
                              Number of
                                Securities to be
                                issued upon
                                Exercise of
                                Outstanding
                                Options, Warrants
                                and Rights
                              
                              
                              Weighted-
                                average
                                Exercise
                                Price of
                                Outstanding
                                Options,
                                Warrants
                                and Rights
                              
                              Number of Securities
                                Remaining Available
                                for Future Issuance
                                Under Equity
                                Compensation Plans
                                (excluding securities
                                reflected in column (a))(a)
                              
                              
                              (b)
                              
                              (c )Equity
      Compensation Plans Approved by Security Holders
                              
                              
                              311,000
                              
                              
                              $
                              10.01
                              
                              289,000Total
                              
                              
                              311,000
                              
                              
                              $
                              10.01
                              
                              289,000




Issuer
Purchases of Equity Securities




None.




Item
6.               Selected
Financial Data










25




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




Background




Prior to
our initial public offering on July 18, 2007, we operated as a wholly-owned
subsidiary of TAT. We were incorporated in Delaware on February 28, 2007 as a
successor to Limco-Airepair, Inc., which was incorporated as an Oklahoma
corporation in 1995 upon the merger of three aerospace companies that had been
acquired by TAT from 1992 through 1995. Prior to the consolidation of
Limco-Airepair, Inc. into our company, the Company transferred all of its assets
and liabilities associated with its Oklahoma operations to our wholly-owned
subsidiary, Limco-Airepair Inc., a newly formed Delaware
corporation.




Prior to
our acquisition of Piedmont in July 2005, our business was focused on providing
MRO services for heat transfer components. With the acquisition of Piedmont, we
expanded the scope of our MRO services to also include APUs, propellers and
landing gear and added our parts services business.




Our
consolidated financial statements have been prepared on the historical cost
basis and present our financial position, results of operations and cash flows
as derived from TAT historical financial statements. TAT had historically
provided us with certain services including general and administrative services
for employee benefit programs, insurance, legal, treasury and tax compliance.
Currently, TAT provides only certain insurance coverages that are then
reimbursed by the Company.  The financial information included in our
financial statements does not necessarily reflect what our financial position
and results of operations would have been had we operated as a stand-alone
entity during the periods covered, and may not be indicative of our future
operations or financial position.




Overview




We
provide maintenance, repair and overhaul, or MRO, services and parts supply
services to the aerospace industry. Our four FAA certified repair stations
provide aircraft component MRO services for airlines, air cargo carriers,
maintenance service centers and the military. We specialize in MRO services for
components of aircraft, such as heat transfer components, auxiliary power units,
or APUs, propellers, landing gear and pneumatic ducting. In conjunction with our
MRO services we are also an original equipment manufacturer, or OEM, of heat
transfer equipment for airplane manufacturers and other selected related
products. Our parts services division offers inventory management and parts
services for commercial, regional and charter airlines and business aircraft
owners.




MRO
Services




We
provide services for the components segment of the MRO services market. Our MRO
services segment includes the repair and overhaul of heat transfer components,
APUs, propellers, landing gear and pneumatic ducting, among other components.
Generally, manufacturer specifications, government regulations and military
maintenance regimens require that aircraft components undergo MRO servicing at
regular intervals or as necessary. Aircraft components typically require MRO
services, including repairs and installation of replacement units, after three
to five years of service or sooner if required. Aircraft manufacturers typically
provide warranties on new aircraft and their components and subsystems, which
may range from one to five years depending on the bargaining power of the
purchaser. Warranty claims are generally the responsibility of the OEM during
the warranty period. Our business opportunity usually begins upon the conclusion
of the warranty period for these components and subsystems.




26




We are
licensed by Hamilton Sundstrand, a leading provider of aerospace products, to
provide MRO services for all of its air-to-air heat transfer products and by
Honeywell Aerospace, or Honeywell, a leading manufacturer of aerospace products
and an aerospace services provider, to provide MRO services for three of its APU
models. Our repair stations are certified by the FAA and the European Aviation
Safety Agency, or EASA. In conjunction with our MRO services, we also
manufacture heat transfer equipment used in commercial, regional, business and
military aircraft, complete environmental control systems and cooling systems
for electronics.




Parts Services




Our parts
services division provides a number of services for commercial, regional and
charter airlines and business aircraft owners, including inventory management
and parts services. We presently assist several of these customers with their
parts procurement needs by using our knowledge of the aircraft component
industry to quickly acquire necessary aircraft components in a cost-effective
manner. We have a knowledgeable and experienced staff of customer service
representatives and offer our customers 24 hour service and same day shipping.
We currently supply parts to approximately 600 commercial, regional and charter
airlines and business aircraft owners.




Our
management believes that our revenues and sources of revenues are among the key
performance indicators for our business. Our revenues from our two principal
lines of business for the two years ended December 31, 2008 were as
follows:




2008
                                                                                    
                                                                                    2007Revenues
                                                                                    
                                                                                    
                                                                                    %
      of
                                                                                      Total
                                                                                      Revenues
                                                                                    
                                                                                    
                                                                                    Revenues
                                                                                    
                                                                                    
                                                                                    %
      of
                                                                                      Total
                                                                                      RevenuesRevenues:MRO
      Services
                                                                                    
                                                                                    $
                                                                                    54,276
                                                                                    
                                                                                    
                                                                                    
                                                                                    75.8
                                                                                    %
                                                                                    
                                                                                    $
                                                                                    49,392
                                                                                    
                                                                                    
                                                                                    
                                                                                    70.8
                                                                                    %Parts
      services
                                                                                    
                                                                                    
                                                                                    17,289
                                                                                    
                                                                                    
                                                                                    
                                                                                    24.2
                                                                                    %
                                                                                    
                                                                                    
                                                                                    20,384
                                                                                    
                                                                                    
                                                                                    
                                                                                    29.2
                                                                                    %Total
      revenues
                                                                                    
                                                                                    $
                                                                                    71,565
                                                                                    
                                                                                    
                                                                                    
                                                                                    100.0
                                                                                    %
                                                                                    
                                                                                    $
                                                                                    69,776
                                                                                    
                                                                                    
                                                                                    
                                                                                    100.0
                                                                                    %




27




The
following table reflects the geographic breakdown of our revenues for two years
ended December 31, 2008:




2008
                                                                      
                                                                      2007Revenues
                                                                      
                                                                      
                                                                      %
      of
                                                                        Total
                                                                        Revenues
                                                                      
                                                                      
                                                                      Revenues
                                                                      
                                                                      
                                                                      %
      of
                                                                        Total
                                                                        RevenuesNorth
      America
                                                                      
                                                                      $
                                                                      49,448
                                                                      
                                                                      
                                                                      
                                                                      69.1
                                                                      %
                                                                      
                                                                      $
                                                                      48,632
                                                                      
                                                                      
                                                                      
                                                                      69.7
                                                                      %Europe
                                                                      
                                                                      
                                                                      13,980
                                                                      
                                                                      
                                                                      
                                                                      19.5
                                                                      %
                                                                      
                                                                      
                                                                      14,895
                                                                      
                                                                      
                                                                      
                                                                      21.3
                                                                      %Asia
                                                                      
                                                                      
                                                                      3,324
                                                                      
                                                                      
                                                                      
                                                                      4.6
                                                                      %
                                                                      
                                                                      
                                                                      3,805
                                                                      
                                                                      
                                                                      
                                                                      5.5
                                                                      %Other
                                                                      
                                                                      
                                                                      4,813
                                                                      
                                                                      
                                                                      
                                                                      6.7
                                                                      %
                                                                      
                                                                      
                                                                      2,444
                                                                      
                                                                      
                                                                      
                                                                      3.5
                                                                      %$
                                                                      71,565
                                                                      
                                                                      
                                                                      
                                                                      100.0
                                                                      %
                                                                      
                                                                      $
                                                                      69,776
                                                                      
                                                                      
                                                                      
                                                                      100.0
                                                                      %





Our cost
of revenues for MRO services consists of component and material costs, direct
labor costs, shipping expenses, overhead related to manufacturing and
depreciation of manufacturing equipment. Our cost of revenues for parts services
consists primarily of the cost of the parts and shipping expenses. Our gross
margin is affected by the proportion of our revenues generated from MRO services
(including the sale of OEM products) and parts services.




Selling
and marketing expenses consist primarily of commission payments, compensation
and related expenses of our sales teams, attendance at trade shows and
advertising expenses and related costs.




General
and administrative expenses consist of compensation and related expenses for
executive, finance, legal, and administrative personnel; professional fees; and
other general corporate expenses and related costs for facilities and
equipment.




Critical
Accounting Policies




The
preparation of the financial statements in accordance with generally accepted
accounting principles in the United States, or GAAP, requires us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, sales, costs and expenses and related disclosures. Though we
evaluate our estimates and assumptions on an ongoing basis, our actual results
may differ from these estimates.




Certain
of our accounting policies that we believe are the most important to the
portrayal of our financial condition and results of operations and that require
management’s subjective judgments are described below to facilitate better
understanding of our business activities. We base our judgments on our
experience and assumptions that we believe are reasonable and applicable under
the circumstances.
  28
  Revenue
recognition
  Revenues
from the sale of our services and products are recognized when persuasive
evidence of an arrangement exists, delivery of the product has occurred,
provided the collection of the resulting receivable is probable, the price is
fixed or determinable and we no longer have any significant obligation with
respect to such sale. We do not grant a right of return.
  Revenues
from MRO services are recognized when customer-owned material is shipped back to
the customer. Revenues from parts sales are recognized when the part is shipped
to the customer and title passes to the customer.
  Revenues
from maintenance contracts are recognized over the contract period in proportion
to the costs expected to be incurred in performing services under the contract.
We estimate the costs that are expected to be incurred based on our experience
with the aggregate costs incurred and to be incurred on contracts of this
nature. The costs incurred related to our maintenance contracts are not incurred
on a straight-line basis, as the timing to provide our maintenance services
is dependent on when parts under these contracts require
maintenance.
  Goodwill,
Other Intangible Assets and Long-Lived Assets
  Goodwill
represents the excess of the purchase price over the fair value of identifiable
net assets acquired in business combinations. Of the $4.8 million of goodwill on
our balance sheet as of December 31, 2008, approximately $4.3 million was a
result of our acquisition of Piedmont. The identifiable intangible assets
relating to the Piedmont acquisition, other than goodwill, included in our
balance sheet are customer relationships and other intangible assets. The value
we assigned to these intangible assets, using the income approach based on the
present value of the cash flows attributable to each asset, was approximately
$2.9 million. The amounts allocated to these intangible assets are being
amortized on a straight-line basis over periods ranging from 3 to 10
years.
  We review
goodwill and other intangible assets for potential impairment annually and when
events or changes in circumstances indicate the carrying value of the goodwill
or the other intangible assets may be impaired, in which case we may obtain an
appraisal from an independent valuation firm to determine the amount of
impairment, if any. In addition to the possible use of an independent valuation
firm, we perform internal valuation analyses and consider other publicly
available market information. We determine fair value using widely accepted
valuation techniques, including discounted cash flow and market multiple
analyses. These types of analyses require us to make assumptions and estimates
regarding industry economic factors and the profitability of future business
strategies. It is our policy to conduct impairment testing based on our current
business strategy in light of present industry and economic conditions, as well
as future expectations. In the fourth quarter of fiscal 2008, we completed our
annual impairment testing of goodwill using the methodology described in the
notes to our consolidated financial statements, and determined there was no
impairment of our goodwill. If actual results are not consistent with our
assumptions and estimates, we may be exposed to a goodwill impairment
charge.
  29
  Income
Taxes
  We
account for income taxes in accordance with Statement of Financial Accounting
Standards No. 109, “Accounting for Income Taxes,” (“SFAS No. 109”). We use the
liability method of accounting for income taxes. Under this method, deferred tax
assets and liabilities are determined based on temporary differences between the
financial statement and tax bases of assets and liabilities and net operating
loss and credit carryforwards using enacted tax rates in effect for the year in
which the differences are expected to reverse. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. Valuation allowances are established when it
is more likely than not that some portion of the deferred tax assets will not be
realized. To the extent that our decisions and assumptions and
historical reporting are determined not to be compliant with applicable tax
laws we may be subject to adjustments in our reported income for tax purposes as
well as interest and penalties.
  Allowances
for Doubtful Accounts
  We
perform ongoing credit evaluations of our customers’ financial condition and we
require collateral as deemed necessary. We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of our customers to
make payments. In judging the adequacy of the allowance for doubtful accounts,
we consider multiple factors including the aging of our receivables, historical
bad debt experience and the general economic environment. Management applies
considerable judgment in assessing the realization of receivables, including
assessing the probability of collection and the current credit worthiness of
each customer. If the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.
  Inventories
  Inventories
are stated at the lower of cost or market. Cost is determined by the average
cost and first-in, first-out (FIFO) methods. We write down obsolete or slow
moving inventory in an amount equal to the difference between the cost of
inventory and the estimated market value based upon assumptions about future
demand, market conditions and sale forecasts. If actual market conditions are
less favorable than we anticipate, additional inventory write-downs may be
required.
  Warranty
Costs
  We
provide warranties for our products and services ranging from one to five years,
which vary with respect to each contract and in accordance with the nature of
each specific product. We estimate the costs that may be incurred under our
warranty and record a liability in the amount of such costs at the time the
product is shipped. We periodically assess the adequacy of our recorded warranty
liabilities and adjust the amounts as necessary. As of December 31, 2008 and
2007 , the aggregate amount of our warranty costs was not
material.


30
  Results
of Operations
  The
following table sets forth our statements of operations as a percentage of
revenues for the periods indicated:
  YearsendedDecember31,2008
                                                          
                                                          
                                                          2007Revenue:MRO
      services
                                                          
                                                          
                                                          75.8
                                                          %
                                                          
                                                          
                                                          70.8
                                                          %Parts
      services
                                                          
                                                          
                                                          24.2
                                                          %
                                                          
                                                          
                                                          29.2
                                                          %Total
      revenue
                                                          
                                                          
                                                          100.0
                                                          %
                                                          
                                                          
                                                          100.0
                                                          %Costs
      and operating expenses:MRO
      services
                                                          
                                                          
                                                          60.6
                                                          %
                                                          
                                                          
                                                          50.5
                                                          %Parts
      services
                                                          
                                                          
                                                          19.5
                                                          %
                                                          
                                                          
                                                          23.8
                                                          %Selling
      and marketing
                                                          
                                                          
                                                          3.8
                                                          %
                                                          
                                                          
                                                          3.7
                                                          %General
      and administrative
                                                          
                                                          
                                                          9.9
                                                          %
                                                          
                                                          
                                                          10.0
                                                          %Amortization
      of intangibles
                                                          
                                                          
                                                          0.5
                                                          %
                                                          
                                                          
                                                          0.7
                                                          %Operating
      income
                                                          
                                                          
                                                          5.7
                                                          %
                                                          
                                                          
                                                          11.3
                                                          %Interest
      income
                                                          
                                                          
                                                          1.8
                                                          %
                                                          
                                                          
                                                          1.3
                                                          %Loss
      on sale of investments
                                                          
                                                          
                                                          -.3
                                                          %
                                                          
                                                          
                                                          0
                                                          %Other
      expense
                                                          
                                                          
                                                          -.6
                                                          %
                                                          
                                                          
                                                          0
                                                          %Interest expense
                                                          
                                                          
                                                          0
                                                          %
                                                          
                                                          
                                                          -1.0
                                                          %Income
      taxes
                                                          
                                                          
                                                          2.7
                                                          %
                                                          
                                                          
                                                          4.1
                                                          %Net
      income
                                                          
                                                          
                                                          3.8
                                                          %
                                                          
                                                          
                                                          7.4
                                                          %
  In
addition to revenues and the sources of our revenues, our management team views
our gross profit margin and the level of inventory compared to revenues as the
key performance indicators in assessing our company’s financial condition and
results of operations. Our management team believes that the upward trend in our
MRO revenues is reflective of an industry-wide increase in demand for MRO
services, and we currently expect that this trend will continue for the
foreseeable future. While our management team believes that demand for parts
services will grow, this segment is subject to a high degree of volatility
because of the potential impact of large one time parts sales.
  Revenues
                                    
                                    2008
                                    
                                    
                                    2007(in
      thousands)MRO
      services
                                    
                                    $
                                    54,276
                                    
                                    
                                    $
                                    49,392Parts  services
                                    
                                    
                                    17,289
                                    
                                    
                                    
                                    20,384Total
      revenue
                                    
                                    $
                                    71,565
                                    
                                    
                                    $
                                    69,776
  31
  2008
vs. 2007
  Revenues.   Total
revenues increased by $1.8 million, to $71.6 million for the year ended December
31, 2008 from $69.8 million for the same period. The increase in revenues was
primarily attributable to steady MRO growth and offset by a decline
in parts sales for the year.
  MRO
Revenues.  Revenues from MRO services increased by $4.9
million, to $54.3 million for the year ended December 31, 2008 from $49.4
million for the year ended December 31, 2007. The organic growth in MRO services
revenues is a result of increased sales to historical customers and, to a lesser
degree, sales to new customers.
  Parts
Services.  Parts services revenues decreased by $3.1 million,
to $17.3 million for the year December 31, 2008 from $20.4 million for the year
ended December 31, 2007. This decrease in sales is attributable to the one-time
parts sale during 2007 to Viva Mexico for $2.7 million and a general
decline in parts sales.
  Costsofrevenuesandoperatingexpenses
                                  
                                  2008
                                  
                                  
                                  2007MRO
      services
                                  
                                  $
                                  43,664
                                  
                                  
                                  $
                                  35,205Parts  services
                                  
                                  
                                  13,922
                                  
                                  
                                  
                                  16,603Total
      cost of revenues
                                  
                                  
                                  57,586
                                  
                                  
                                  
                                  51,808Selling
      and marketing
                                  
                                  
                                  2,755
                                  
                                  
                                  
                                  2,613General
      and Administrative
                                  
                                  
                                  7,118
                                  
                                  
                                  
                                  6,981Amortization
      of intangibles
                                  
                                  
                                  326
                                  
                                  
                                  
                                  474Total
      operating costs
                                  
                                  
                                  10,199
                                  
                                  
                                  
                                  10,068Operating
      income
                                  
                                  
                                  3,780
                                  
                                  
                                  
                                  7,900
  32
  2008
vs. 2007
  Cost of revenues.
  Cost of revenues for MRO services increased by $8.5 million, to
$43.7 million for the year ended December 31, 2008 from $35.2 million for the
year ended December 31, 2007. Contributing to the increase in cost of revenues
for MRO services was a $4.9 million increase in revenue, $1.4 million increase
in raw material costs, $1.3 million increase in labor costs related to
additional employees and general salary and wage increases and a $1.4 million
increase in scrap expense.  Materials costs are related to the general
increase in raw material costs year over year.  Scrap costs relate to
new program start-up in the OEM division and we believe should not be recurring.
Cost of revenues for parts services decreased by $2.7 million to $13.9 million
for the year ended December 31, 2008 from $16.6 million for the year ended
December 31, 2007, principally as a result of lower volumes during the year
ended December 31, 2008.
  Selling and marketing
expenses.  Selling and marketing expenses increased by $142,000
to $2.8 million for the year ended December 31, 2008 from $2.6 million for the
year ended December 31, 2007. The increase in selling and marketing expenses is
primarily attributable to higher commissions resulting from increased sales
volumes on MRO as well as heightened sales and marketing efforts.
  General and administrative
expenses.   General and administrative expenses increased by
$137,000 to $7.1 million for the year ended December 31, 2008 from $7.0 million
for the year ended December 31, 2007. The increase in general and administrative
expenses is primarily attributable to approximately $837,000 in one-time SOX and
public company costs, $110,000 in severance pay, $60,000 in tax audit expenses,
and acquisition expenses of $357,000.  These expenses were offset by
the lack of phantom stock expense of $325,000, IPO bonus expense of $400,000 and
increased public company costs and administrative costs during the year ended
December 31, 2007.  Non-cash compensation expense was $175,000 and
included in general and administrative expenses during the year ended December
31, of 2008 compared to $390,000 in the during the year ended December 31,
2007
  Operating
income.  Our operating income decreased by $4.1 million, to
$3.8 million for the year ended December 31, 2008 from $7.9 million for the year
ended December 31, 2007. The decrease is attributable primarily to higher cost
of sales and increased general and administrative costs for the
year.
  33
 
  Other
      income and expense
                                    
                                    2008
                                    
                                    
                                    2007Interest
      income
                                    
                                    $
                                    1,259
                                    
                                    
                                    $
                                    897Loss
      on sale of investments
                                    
                                    
                                    (236
                                    )
                                    
                                    
                                    -Interest  and
      other expense
                                    
                                    
                                    (167
                                    )
                                    
                                    
                                    (732
                                    )Provision
      for income taxes
                                    
                                    
                                    1,923
                                    
                                    
                                    
                                    2,871Net
      Income
                                    
                                    $
                                    2,713
                                    
                                    
                                    $
                                    5,194
  2008
vs. 2007
  Interest income.
  Interest income increased by $362,000 to $1.3 million for the year
ended December 31, 2008 from $897,000 for the year ended December 31, 2007,
principally as a result of an increase in the amount of funds held in interest
bearing accounts and short-term investments following our initial public
offering.
  Loss on sale of
investments.  Loss on sale of investments was $236,000 for the
year ended December 31, 2008.  This compared to no loss for the year
ended December 31, 2007.  This loss relates to the sale of corporate
and government bonds during the later part of 2008.
  Income and other
expense.  Interest and other expense was $167,000 for the year
ended December 31, 2008 compared to $732,000 for the year ended December 31,
2007. The decrease in interest expense reflects our repayment of our outstanding
indebtedness with a portion of the proceeds of our initial public offering
during 2007.
  Income taxes.
 Income taxes decreased by $948,000 to $1.9 million for the year ended
December 31, 2008 from $2.9 million for the year ended December 31, 2007. The
decrease in income tax expense is primarily attributable to decreased pretax
income offset by additional tax owed for tax positions taken in previous years
and recognized as tax expense in the current year in the amount of
$189,000.
  34
  Liquidity
and Capital Resources
  As of
December 31, 2008, we had cash and cash equivalents of $21.3 million, and
short-term investments of $11.3 million, consisting primarily of government and
corporate bonds and auction rate tax exempt securities.  Our total
working capital was approximately $55.4 million. Our liquidity position resulted
from the July 23, 2007, sale of 4,205,000 shares of common stock in our initial
public offering from which we received net proceeds of approximately $42
million.
  Cash
Flows
  The
following table summarizes our cash flows for the periods
presented:
  Years ended December 31,2008
                                          
                                          
                                          2007(in
      thousands)Net
      cash provided by (used in) operating activities
                                          
                                          $
                                          953
                                          
                                          
                                          $
                                          (1,069
                                          )Net
      cash provided by (used in) investing activities
                                          
                                          
                                          15,344
                                          
                                          
                                          
                                          (31,705
                                          )Net
      cash provided by (used in) financing activities
                                          
                                          
                                          —
                                          
                                          
                                          
                                          33,504Net
      increase (decrease) in cash and cash equivalents
                                          
                                          
                                          16,297
                                          
                                          
                                          
                                          730Cash
      and cash equivalents at beginning of year
                                          
                                          
                                          5,039
                                          
                                          
                                          
                                          4,309Cash
      and cash equivalents at end of year
                                          
                                          
                                          21,336
                                          
                                          
                                          
                                          5,039
 
 Net cash
provided by operating activities was $953,000 for the year ended December 31,
2008. This amount was primarily attributable to $2.9 million in net income, a
$564,000 increase in amounts payable TAT for the purchase of heat transfer
components a $168,000 increase in accounts payable and $1.2 million of
depreciation and amortization expense offset by to a $2.6 million increase in
inventories required to support the increase in MRO revenues and the ramp up for
a new parts contract, and a $2.3 million increase in accounts
receivable.
  35
  Net cash
provided by investing activities was $15.3 million for the year ended December
31, 2008. We sold $26.4 million in corporate and municipal bonds and
we purchased approximately $9.3 million in corporate and municipal bonds
and auction rate securities that were reinvested in money markets.  We
invested $1.7 for the purchase of property and equipment, including test
facilities for our APU’s.
 Net cash
provided by financing activities was zero for the year ended December 31,
2008.
  The
following table summarizes our minimum contractual obligations and commercial
commitments as of December 31, 2008 and the effect we expect them to have on our
liquidity and cash flow in future periods:
  Payments Due by PeriodTotal
                        
                        
                        Less
                          than
                          1
      Year
                        
                        
                        1-3
                          Years
                        
                        
                        3-5
                          Years
                        
                        
                        More
                          than 5
                          Years(in
      thousands)Operating
      lease obligations
                        
                        $
                        613
                        
                        
                        $
                        186
                        
                        
                        $
                        413
                        
                        
                        $
                        83
                        
                        
                        $
                        —Deferred
      tax liability
                        
                        
                        835
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        835Total
                        
                        $
                        1,448
                        
                        
                        $
                        186
                        
                        
                        $
                        413
                        
                        
                        $
                        83
                        
                        
                        $
                        835
 
 As of
December 31, 2008, our principal commitments consisted of obligations
outstanding under operating leases and our deferred tax liability. All of our
long-term debt was repaid during 2007 with a portion of the proceeds of our
initial public offering. We currently do not have significant capital spending
or purchase commitments. In the last three years, we have experienced
substantial increases in our expenditures as a result of the growth in our
operations and personnel.
  Over the
next 12 months, we expect cash flows from our operating activities, along with
our existing cash and cash equivalents and marketable securities, to be
sufficient to fund our operations including our relocation of our Limco-Airepair
facility to North Carolina. We intend to assess the need for a long-term line of
credit, but do not believe that the current lack of an external source of
long-term liquidity will have a material adverse effect on our business or
results of operations.
  Our
future capital requirements will depend on many factors, including our rate of
revenue growth, the expansion of our selling and marketing activities, costs
associated with expansion into new markets, and the timing of the introduction
of new products and services.
  36
  Seasonality
  We
believe that the growth of our business over the last two years has masked a
historical seasonal trend in the MRO services sector. Historically, we have seen
many airlines decrease their maintenance requirements in the peak air travel
summer months and increase their maintenance requirements in the winter months
when air travel is not as great.
  Off-balance
sheet arrangements
  As of
December 31, 2008, we had no off-balance sheet arrangements as defined in Item
303(a)(4) of the SEC’s Regulation S-K.
  Recent
Accounting Pronouncements
  For a
discussion of applicable new accounting pronouncements see Note 1 to our audited
Consolidated Financial Statements.
  Item
7A.        Quantitative and Qualitative
Disclosure About Market Risk
  Interest
Rate Risk
  At
December 31, 2008, our investment portfolio included $2.3 million of auction
rate tax-exempt securities. During 2008, the Company determined to liquidate its
holdings of variable rate debt securities and in January, February and October
2008 it sold approximately 91% if its auction rate tax-exempt securities
portfolio and reinvested the proceeds in high-grade corporate debt, governmental
debt instruments and money market funds. These securities are subject to limited
interest rate risk. We believe that an immediate 10% change in interest rates
would have no material impact on our financial condition, operating results or
cash flows. Declines in interest rates over time will, however, reduce our
interest income. As of December 31, 2008, and as of the date of this report, we
did not have any outstanding borrowings.
  Foreign
Exchange Risk
  Our
exposure to foreign exchange risk primarily relates to our sales to offshore
clients. We do not believe that we currently have any significant direct foreign
exchange risk since such sales are denominated in dollars.
  Item
8.           Financial
Statements and Supplementary Data
  Our
consolidated financial statements, together with the report thereon of Virchow,
Krause & Company, LLP dated March  6, 2009, are set forth on
pages 42 through 64 hereof. See Item 15 for an index to our
consolidated financial statements.
  37
  Item
9.           Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure.
  None.
  Item
9A.        Controls and
Procedures.
  Not
applicable.
  Item
9A(T).   Controls and Procedures.
  In
connection with the preparation of this annual report, our management has
performed an evaluation pursuant to Rule 13a-15(b) under the Securities Exchange
Act of 1934 (the “Exchange Act”), with the participation of our Co-Chief
Executive Officers and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Exchange Act) as of December 31, 2008.  Disclosure controls and
procedures are designed to ensure that information required to be disclosed in
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified by SEC rules and forms
and that such information is accumulated and communicated to management,
including our Co-Chief Executive Officer and Chief Financial Officer, to allow
for timely decisions regarding required disclosures. Based on their evaluation,
our Co-Chief Executive Officer and Chief Financial Officer concluded that, as of
December 31, 2008, the Company's disclosure controls and procedures were
effective.
  Item
9B.        Other
Information.
  None.
 
 Part
III
  Item
10.         Directors, Executive
Officers and Corporate Governance
  The
information required by this item is incorporated by reference from a definitive
proxy statement (the “Proxy Statement”) that will be filed with the SEC not
later than 120 days after the close of the fiscal year ended December 31, 2008
pursuant to Regulation 14A.
  We have
adopted a Code of Business Practices for the Company's principal executive,
financial and accounting officers. This documents is published on the Company's
website, www.Limco-Piedmont.com,and will be
provided upon written request to the Company's Chief Financial Officer at its
executive offices, 5304 S. Lawton Ave., Tulsa Oklahoma, 74100.  We
intend to disclose any amendments to this Code by posting such information on
our website
  Item
11.         Executive
Compensation
  The
information required by this item is incorporated by reference in the Proxy
Statement that will be filed with the SEC not later than 120 days after the
close of the fiscal year ended December 31, 2008 pursuant to Regulation
14A.
  38
  Item
12.         Security Ownership of
Certain Beneficial Owners, Management and Related Stockholder
Matters
  The
information required by this item is incorporated by reference in the Proxy
Statement that will be filed with the SEC not later than 120 days after the
close of the fiscal year ended December 31, 2008 pursuant to Regulation
14A.
  Item
13.         Certain Relationships
and Related Transactions and Director Independence
  The
information required by this item is incorporated by reference in the Proxy
Statement that will be filed with the SEC not later than 120 days after the
close of the fiscal year ended December 31, 2008 pursuant to Regulation
14A.
 
 Item
14.         Principal Accountant
Fees and Services
  The
information required by this item is incorporated by reference in the Proxy
Statement that will be filed with the SEC not later than 120 days after the
close of the fiscal year ended December 31, 2008 pursuant to Regulation
14A.
  PART
I
  PART
IIV.
  Item
15.         Exhibits and Financial
Statement Schedules
 
 (a)          The
following documents are included as part of this Annual Report on Form
10-K.
  (1)          Financial
Statements
  INDEX
 
 PageReport
      of Independent Registered Public Accounting Firm
                  42Consolidated
      Balance Sheets as of December 31, 2008 and 2007
                  43Consolidated
      Statements of Income for the Years Ended December 31, 2008 and
      2007
                  44Consolidated
      Statements of Changes in Shareholders’ Equity for the Years Ended December
      31, 2008 and 2007
                  45Consolidated
      Statements of Changes in Cash Flows for the Years Ended December 31, 2008
      and 2007
                  46Notes
      to Consolidated Financial Statements
                  47
  (2)          Financial
Statement Schedules
  All
schedules and other statements for which provision is made in the applicable
regulations of the SEC have been omitted because they are not required under the
relevant instructions or are inapplicable.
 
 (3)          List
of exhibits required by Item 601 of Regulation S-K.
  39
  ExhibitNo.
                  
                  DescriptionofExhibit3.1*
                  
                  Certificate
      of Incorporation of the Registrant (incorporated herein by reference to
      Exhibit 4.1 to the Registration Statement on Form S-1 (File No.
      333-142157) (the "Registration Statement"))3.2*
                  
                  Amended
      and Restated By-Laws of the Registrant (incorporated herein by reference
      to Exhibit 4.4 to the Registration Statement)4.1*
                  
                  Specimen
      of Common Stock Certificate (incorporated herein by reference to Exhibit
      4.3 to the Registration Statement)10.1
                  
                  Form
      of Registration Rights Agreement between the Registrant and TAT Ltd.
      (incorporate herein by reference to Exhibit 10.1 to the Registration
      Statement)10.2*
                  
                  Limco
      Piedmont Inc. 2007 Incentive Compensation Plan (incorporated herein by
      reference to Exhibit 10.2 to the Registration
Statement)10.3*
                  
                  Separation
      Agreement dated as of March 26, 2007 between Registrant and TAT
      Technologies Ltd. (incorporated herein by reference to Exhibit 10.3 to the
      Registration Statement)10.4*
                  
                  Allocation
      of Activity Agreement dated as of March 26, 2007 between Registrant and
      TAT Technologies Ltd. (incorporated herein by reference to Exhibit 10.4 to
      the Registration Statement)10.5*
                  
                  Manufacturing
      License Agreement dated January 30, 2007 between Registrant and TAT
      Technologies Ltd. (incorporated herein by reference to Exhibit 10.5 to the
      Registration Statement)10.6*
                  
                  Intentionally
      omitted10.7*
                  
                  Intentionally
      omitted10.8*
                  
                  Membership
      Interest Purchase Agreement dated May 24, 2005 between Limco-Airepair,
      Inc. and Claude L. Buller, Thomas W. Ferrell, Paul R. Hilliard and Jim
      Taylor and Piedmont Aviation Component Services, LLC (incorporated herein
      by reference to Exhibit 10.13 to the Registration
    Statement)10.9*
                  
                  Amendment
      to Membership Interest Purchase Agreement dated July 6, 2005 by and
      between Limco-Airepair, Inc. and Claude L. Buller, Thomas W. Ferrell, Paul
      R. Hilliard and Jim Taylor and Piedmont Aviation Component Services, LLC
      (incorporated herein by reference to Exhibit 10.14 to the Registration
      Statement)21
                  
                  Subsidiaries
      of RegistrantLimco-Airepair,
      Inc.Piedmont
      Aviation Component Services, LLC23.1
                  
                  Consent
      of Virchow, Krause & Company LLP31.1
                  
                  Certification
      of Co-Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-149a)
      under the Securities Exchange Act of 1934, as Adopted Pursuant to Section
      302 of the Sarbanes-Oxley Act of 2002.31.2
                  
                  Certification
      of Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-149a) under
      the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002.32.1
                  
                  Certification
      of Co-Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as
      Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.32.2
                  
                  Certification
      of Chief Financial Officer Pursuant to 18 U.S.C Section 1350, as Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.
 
 *Incorporated
by Reference
  40
  SIGNATURES
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on March 6, 2009.
 LIMCO-PIEDMONT
      INC./s/ Robert KochCo-Chief
      Executive Officer/s/ Udi NetiviCo-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 Company and in the
capacities and on the dates indicated.
  Name
                      
                      Capacity
                      
                      Date/s/ Dr. Shmuel Fledel
                      
                      Chairman
      and Director
                      
                      March
      6, 2009Dr.
      Shmuel Fledel/s/ Robert Koch
                      
                      Co-Chief
      Executive Officer
                      
                      March
      6, 2009Robert
      Koch/s/ Udi Netivi
                      
                      Co-Chief
      Executive Officer
                      
                      March
      6, 2009Udi
      Netivi/s/ Carla Covey
                      
                      Chief Financial Officer (Principal Financial and
                        Accounting
      Officer
                      
                      March
      6, 2009Carla
      Covey/s/ Lawrence W. Findeiss
                      
                      Director
                      
                      March
      6, 2009Lawrence W.
      Findeiss/s/ Jacob Gesthalter
                      
                      Director
                      
                      March
      6, 2009Dr. Jacob
      Gesthalter/s/ Michael Gorin
                      
                      Director
                      
                      March
      6, 2009Michael
      Gorin/s/ Giora Inbar
                      
                      Director
                      
                      March
      6, 2009Giora
    Inbar/s/ Avi Ortal
                      
                      Director
                      
                      March
      6, 2009Avi
Ortal
  41
  REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  To the Shareholders, Audit Committee and
Board of Directors
 Limco-Piedmont Inc.
 Tulsa, Oklahoma
 
  We have audited the accompanying
consolidated balance sheets of Limco-Piedmont Inc. as of December 31, 2008 and
2007, and the related consolidated statements of of income, shareholders' equity
and cash flows for the years then ended.  These consolidated financial
statements are the responsibility of the company's management.  Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
 
 We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United
States).  Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement.  The company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of its
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the company’s internal control
over financial reporting.  Accordingly, we express no such
opinion.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements.  An audit also includes assessing the accounting
principles used and significant estimates made by management as well as
evaluating the overall consolidated 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 financial position of Limco-Piedmont Inc. as of December 31, 2008 and 2007
and the results of their  operations and cash flows for the years then
ended, in conformity with U.S. generally accepted accounting
principles.
   
 Minneapolis,
Minnesota


March 6,
2009





42





LIMCO-PIEDMONT
INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE
SHEETS


(in
thousands, except per share data)


December 31,
                
                
                December 31,2008
                
                
                2007ASSETSCurrent
      Assets:Cash
      and cash equivalents
                
                $
                21,336
                
                
                $
                5,039Marketable
      Securities
                
                
                11,300
                
                
                
                28,806Accounts
      receivable (net of allowance for doubtful accounts of $79 and  $140
      at December 31, 2008 and 2007, respectively)
                
                
                11,820
                
                
                
                9,328Inventories
                
                
                18,978
                
                
                
                16,391Other
      accounts receivable and prepaid expenses
                
                
                1,326
                
                
                
                1,481Total
      current assets
                
                
                64,760
                
                
                
                61,045Property,
      plant and equipment, net
                
                
                6,023
                
                
                
                5,169Intangible
      assets, net
                
                
                1,383
                
                
                
                1,709Goodwill
                
                
                4,780
                
                
                
                4,780Total
      assets
                
                $
                76,946
                
                
                $
                72,703LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      Liabilities:Accounts
      payables
                
                $
                5,378
                
                
                $
                5,084Parent
      company payables
                
                
                2,341
                
                
                
                1,762Other
      accounts payable and accrued expenses
                
                
                1,764
                
                
                
                1,568Total
      current liabilities
                
                
                9,483
                
                
                
                8,414Long-Term
      Liabilities:Deferred
      income tax liabilities
                
                
                835
                
                
                
                404Total
      liabilities
                
                
                10,318
                
                
                
                8,818Commitments
      and contingenciesShareholders'
      Equity:Common
      stock, $0.01 par value; 25,000 shares  authorized, 13,205 shares
      issued and outstanding at both December 31, 2008 and 2007
                
                
                132
                
                
                
                132Additional
      paid-in capital
                
                
                49,179
                
                
                
                49,004Retained
      earnings
                
                
                17,462
                
                
                
                14,749Accumulated
      other comprehensive loss, net of tax
                
                
                (145
                )
                
                
                —Total
      shareholders' equity
                
                
                66,628
                
                
                
                63,885Total
      liabilities and shareholders' equity
                
                $
                76,946
                
                
                $
                72,703





See notes
to consolidated financial statements.





43





LIMCO-PIEDMONT
INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF
INCOME


(in
thousands, except per share data)


Years ended
                                                                    December 31,2008
                                                                  
                                                                  
                                                                  2007RevenueMRO
      services
                                                                  
                                                                  $
                                                                  54,276
                                                                  
                                                                  
                                                                  $
                                                                  49,392Parts
      services
                                                                  
                                                                  
                                                                  17,289
                                                                  
                                                                  
                                                                  
                                                                  20,384Total
      revenue
                                                                  
                                                                  
                                                                  71,565
                                                                  
                                                                  
                                                                  
                                                                  69,776Cost
      and operating expensesMRO
      services
                                                                  
                                                                  
                                                                  43,664
                                                                  
                                                                  
                                                                  
                                                                  35,205Parts
      services
                                                                  
                                                                  
                                                                  13,922
                                                                  
                                                                  
                                                                  
                                                                  16,603Selling
      and marketing
                                                                  
                                                                  
                                                                  2,755
                                                                  
                                                                  
                                                                  
                                                                  2,613General
      and administrative
                                                                  
                                                                  
                                                                  7,118
                                                                  
                                                                  
                                                                  
                                                                  6,981Amortization
      of intangibles
                                                                  
                                                                  
                                                                  326
                                                                  
                                                                  
                                                                  
                                                                  474Operating
      income
                                                                  
                                                                  
                                                                  3,780
                                                                  
                                                                  
                                                                  
                                                                  7,900Other
      income (expense)Interest
      income
                                                                  
                                                                  
                                                                  1,259
                                                                  
                                                                  
                                                                  
                                                                  897Loss
      on sale of investments
                                                                  
                                                                  
                                                                  (236
                                                                  )
                                                                  
                                                                  
                                                                  -Other
      expense
                                                                  
                                                                  
                                                                  (167
                                                                  )
                                                                  
                                                                  
                                                                  -Interest
      expense
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  (732
                                                                  )Total
      other income (expense)
                                                                  
                                                                  
                                                                  856
                                                                  
                                                                  
                                                                  
                                                                  165Income
      before taxes
                                                                  
                                                                  
                                                                  4,636
                                                                  
                                                                  
                                                                  
                                                                  8,065Provision
      for income taxes
                                                                  
                                                                  
                                                                  1,923
                                                                  
                                                                  
                                                                  
                                                                  2,871Net
      income
                                                                  
                                                                  $
                                                                  2,713
                                                                  
                                                                  
                                                                  $
                                                                  5,194Basic
      net income per share
                                                                  
                                                                  $
                                                                  0.21
                                                                  
                                                                  
                                                                  $
                                                                  0.48Diluted
      net income per share
                                                                  
                                                                  $
                                                                  0.21
                                                                  
                                                                  
                                                                  $
                                                                  0.47Basic
      shares outstanding
                                                                  
                                                                  
                                                                  13,205
                                                                  
                                                                  
                                                                  
                                                                  10,934Diluted
      shares outstanding
                                                                  
                                                                  
                                                                  13,205
                                                                  
                                                                  
                                                                  
                                                                  10,962





See notes
to consolidated financial statements.





44





LIMCO-PIEDMONT
INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY


(in
thousands, except per share data)




Additional
                            
                            
                            
                            
                            
                            Accumulated
                              Other
                            
                            
                            TotalCommon Stock
                            
                            
                            Paid-in
                            
                            
                            Retained
                            
                            
                            Comprehensive
                            
                            
                            Shareholders’Shares
                            
                            
                            Amount
                            
                            
                            Capital
                            
                            
                            Earnings
                            
                            
                            Loss
                            
                            
                            EquityBalance
      at December 31, 2006
                            
                            
                            9,000
                            
                            
                            $
                            90
                            
                            
                            $
                            7,446
                            
                            
                            $
                            9,555
                            
                            
                            $
                            -
                            
                            
                            $
                            17,091Net
      income for the year
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            5,194
                            
                            
                            
                            -
                            
                            
                            
                            5,194Issuance
      of common stock- initial public offering
                            
                            
                            4,205
                            
                            
                            
                            42
                            
                            
                            
                            41,168
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            41,210Share
      based compensation
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            390
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            390Balance
      at December 31, 2007
                            
                            
                            13,205
                            
                            
                            
                            132
                            
                            
                            
                            49,004
                            
                            
                            
                            14,749
                            
                            
                            
                            -
                            
                            
                            
                            63,885Net
      income for the year
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            2,713
                            
                            
                            
                            -
                            
                            
                            
                            2,713Other
      comprehensive loss, net of tax
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (145
                            )
                            
                            
                            (145
                            )Total
      comprehensive income
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            2,568Share
      based compensation
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            175
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            175Balance
      at December 31, 2008
                            
                            
                            13,205
                            
                            
                            $
                            132
                            
                            
                            $
                            49,179
                            
                            
                            $
                            17,462
                            
                            
                            $
                            (145
                            )
                            
                            $
                            66,628




See notes
to consolidated financial statements.





45





LIMCO-PIEDMONT INC. AND
SUBSIDIARIES


CONSOLIDATED STATEMENTS OF
CASH FLOWS


(in
thousands)


Twelve months ended December 31,2008
                                                            
                                                            
                                                            2007Cash
      flow from operating activities:Net
      income
                                                            
                                                            $
                                                            2,713
                                                            
                                                            
                                                            $
                                                            5,194Adjustment
      to reconcile net income to net cash provided by (used in)  operating
      activities:Depreciation
      and amortization
                                                            
                                                            
                                                            1,168
                                                            
                                                            
                                                            
                                                            1,125Share
      based compensation expenses
                                                            
                                                            
                                                            175
                                                            
                                                            
                                                            
                                                            390Change
      in unrealized loss on investments
                                                            
                                                            
                                                            236
                                                            
                                                            
                                                            
                                                            -Change
      in deferred income taxes, net
                                                            
                                                            
                                                            78
                                                            
                                                            
                                                            
                                                            (10
                                                            )Changes
      in allowance for doubtful accounts
                                                            
                                                            
                                                            (61
                                                            )
                                                            
                                                            
                                                            (105
                                                            )Changes
      in certain operating assets and liabilities:Increase
      in accounts receivable
                                                            
                                                            
                                                            (2,431
                                                            )
                                                            
                                                            
                                                            (796
                                                            )Decrease
      in other accounts receivable and prepaid expenses
                                                            
                                                            
                                                            593
                                                            
                                                            
                                                            
                                                            (1,016
                                                            )Increase
      in inventories
                                                            
                                                            
                                                            (2,587
                                                            )
                                                            
                                                            
                                                            (1,779
                                                            )Accounts
      payable and other accrued expenses
                                                            
                                                            
                                                            490
                                                            
                                                            
                                                            
                                                            (2,712
                                                            )Decrease
      in Parent company account
                                                            
                                                            
                                                            579
                                                            
                                                            
                                                            
                                                            (1,360
                                                            )Net
      cash provided by (used in) operating activities
                                                            
                                                            
                                                            953
                                                            
                                                            
                                                            
                                                            (1,069
                                                            )Cash
      flows from investing activities:Sale
      of investments and other assets
                                                            
                                                            
                                                            26,358
                                                            
                                                            
                                                            
                                                            -Purchase
      of investments and other assets
                                                            
                                                            
                                                            (9,318
                                                            )
                                                            
                                                            
                                                            (28,806
                                                            )Purchases
      of property and equipment
                                                            
                                                            
                                                            (1,696
                                                            )
                                                            
                                                            
                                                            (2,899
                                                            )Net
      cash provided by (used in) investing activities
                                                            
                                                            
                                                            15,344
                                                            
                                                            
                                                            
                                                            (31,705
                                                            )Cash
      flows from financing activities:Proceeds
      from issuance of common stock, initial public offering, net of  $294
      capitalized IPO costs
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            41,504Repayment
      of short-term bank credit
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            (4,000
                                                            )Repayment
      of long-term loan
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            (4,000
                                                            )Net
      cash provided by financing activities
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            33,504Increase
      in cash and cash equivalents
                                                            
                                                            
                                                            16,297
                                                            
                                                            
                                                            
                                                            730Cash
      and cash equivalents at the beginning of year
                                                            
                                                            
                                                            5,039
                                                            
                                                            
                                                            
                                                            4,309Cash
      and cash equivalents at the end of the year
                                                            
                                                            $
                                                            21,336
                                                            
                                                            
                                                            $
                                                            5,039Cash
      paid during the year for :Income
      taxes
                                                            
                                                            $
                                                            2,163
                                                            
                                                            
                                                            $
                                                            2,811Interest
      expense
                                                            
                                                            $
                                                            -
                                                            
                                                            
                                                            $
                                                            800





See notes
to consolidated financial statements.





46





Note
1 – General




Limco-Piedmont
Inc. ("the Company"), a Delaware corporation, is a majority-owned subsidiary,
62%, of TAT Technologies Ltd. (“the Parent").  The Company is
principally engaged in:





·          The
repair and overhaul of heat transfer components, auxiliary power units ("APUs"),
propellers, landing gear and pneumatic ducting.




·          Inventory
management and parts services for commercial, regional, and charter airlines and
business aircraft owners.




The
Company's primary operations are located in Tulsa, Oklahoma and Kernersville,
North Carolina.  The principal markets of the Company are North
America, Europe and Asia.  The Company sells its products mainly to
the aircraft industry.





Recapitalization





On
February 27, 2007, the Company incorporated as a Delaware corporation. On
February 27, 2007, Limco Airepair Inc. (Limco Delaware), a Delaware
corporation, was incorporated as a wholly-owned subsidiary of Limco-Airepair,
Inc. (Limco Oklahoma), an Oklahoma corporation. On March 2, 2007, all assets,
except Limco Oklahoma's membership interest in Piedmont Aviation Component
Services, LLC, and all liabilities were assumed by Limco Delaware.  On
March 5, 2007 the Company merged with Limco-Airepair, Inc., an Oklahoma
corporation.  As part of the merger, the Parent received 9,000,000
shares of the Company for its 37,500 shares of Limco-Airepair, Inc.





All share
and per share amounts have been updated to reflect the
recapitalization.





Principles
of Consolidation





The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries, Limco-Airepair, Inc. and Piedmont Aviation Component
Services LLC ("Piedmont"). All significant intercompany transactions and
balances have been eliminated.





Cash
Equivalents





Cash equivalents are short-term highly
liquid investments that are readily convertible to cash with original maturities
of three months or less from the date of purchase.





Marketable
Securities





Short-term
investments are accounted for in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investment in
Debt and Equity Securities." Management determines the classification of its
investments in marketable debt and equity securities at the time of purchase and
reevaluates such determinations as of each balance sheet date. As of December
31, 2008, all marketable securities covered by SFAS No. 115, were designated as
available-for-sale. Securities available-for-sale are carried at fair value,
with the unrealized gains and losses, net of income taxes, reported as a
separate component of shareholders’ equity classified as other comprehensive
income. Realized gains and losses and declines in market value judged to be
other than temporary are included in other income. The unrealized loss of
$145,000 relates to short-term investments deemed to be temporary and the
unrealized loss position is less than twelve months.  Interest and
dividends are also included in other income. Our short-term investments consist
of auction rate tax-exempt securities and corporate and government bonds with
maturities of one to four years.




The fair
value of short-term investments is determined by quoted market prices of the
underlying securities (other than auction rate tax exempt securities – see
below). For purposes of determining gross realized gains or losses, the cost of
the security is determined based on specific identification.





47





Auction
rate securities are variable rate debt securities. While the underlying security
has a long-term nominal maturity, the interest rate is reset through auctions
that are typically held every 7, 28, or 35 days. The securities trade at par and
are callable at par on any interest payment date at the option of the issuer.
Interest is paid at the end of each auction period. We classify these securities
as short-term available-for-sale because we intend to liquidate them as the need
for working capital arises in the ordinary course of business and we are able to
liquidate them or roll them over to the next reset period. During the first
three months of the year the Company determined to liquidate its holdings of
variable rate debt securities and in January, February and October 2008 it sold
approximately 91% of its auction rate tax-exempt securities portfolio at par and
reinvested the proceeds in high-grade corporate debt, governmental debt
instruments and money market funds.  The remaining balance of $2.25
million at December 31, 2008 will be sold as the market
allows.  Should management determine that these securities were to be
held longer than one year then they would be classified as long-term
securities.





In September 2007, the FASB issued SFAS
No. 157, "Fair Value Measurements," or SFAS 157. Among other requirements, SFAS
157 defines fair value and establishes a framework for measuring fair value and
also expands disclosure about the use of fair value to measure assets and
liabilities. SFAS 157 is effective beginning the first fiscal year that begins
after November 15, 2007. The Company adopted SFAS 157 during the first
quarter of 2008.   Although the adoption of SFAS 157 did not
materially impact our financial condition, results of operations, or cash flows,
we are now required to provide additional disclosures as part of our financial
statements.




SFAS 157
establishes a three-tier fair value hierarchy, which prioritizes the inputs used
in measuring fair value. These tiers include: Level 1, defined as
observable inputs such as quoted prices in active markets; Level 2, defined as
inputs other than quoted prices in active markets that are either directly or
indirectly observable; and Level 3, defined as unobservable inputs in which
little or no market data exists, therefore requiring an entity to develop its
own assumptions.




As of
December 31, 2008, the Company held certain assets that are required to be
measured at fair value on a recurring basis, including money market funds and
available-for-sale securities. The Company’s available-for-sale securities
include auction-rate securities which consist of municipal bonds with an auction
reset feature whose underlying assets are state municipal bonds which are
substantially backed by the federal government. As a result of failed auctions,
these securities are currently illiquid through the normal auction process and
quoted market prices and other observable market data are not available or
diminished. Accordingly, these investments were valued using pricing models
based on the net present value of estimated future cash flows as of December 31,
2008. These securities were also compared, when possible, to other observable
market data with similar characteristics to the securities held by the
Company.




The
Company’s financial assets measured at fair value on a recurring basis subject
to the disclosure requirements of SFAS 157 at December 31, 2008, were as follows
(in thousands):





48





Fair Value Measurements at Reporting Date UsingQuoted Prices in
                    Active Markets
                    for Identical
                    Assets (Level 1)
                  
                  
                  Significant Other
                    Observable
                    Inputs (Level 2)
                  
                  
                  Significant
                    Unobservable
                    Inputs (Level 3)
                  
                  
                  Total(in
      thousands)Assets:Money
      Market funds
                  
                  $
                  18,807
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  18,807Auction-rate
      securities
                  
                  
                  -
                  
                  
                  
                  2,250
                  
                  
                  
                  -
                  
                  
                  
                  2,250Municipal
      bonds
                  
                  
                  9,050
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  9,050Total
                  
                  $
                  27,857
                  
                  
                  $
                  2,250
                  
                  
                  $
                  -
                  
                  
                  $
                  30,107




Accounts
Receivable





The
Company’s accounts receivable balances are due from companies primarily in the
airline and defense industries. Credit is extended based on evaluation of a
customer’s financial condition and, generally, collateral is not required.
Accounts receivable from sales of services are typically due from customers
within 30 days and accounts receivable from sales of licenses are due over terms
ranging from 30 days to twelve months. Accounts receivable balances are stated
at amounts due from customer net of an allowance for doubtful accounts. Accounts
outstanding longer than the contractual payments terms are considered past due.
The Company determines its allowance by considering a number of factors,
including the length of time trade receivables are past due, the Company’s
previous loss history, the customer’s current ability to pay its obligation to
the Company, and the condition of the general economy and the industry as a
whole. The Company writes-off accounts receivable when they become
uncollectible, and payments subsequently received on such receivables are
credited to the allowance for doubtful accounts.





The
Company had one customer that accounted for 12% of the Company’s revenues during
2008 ’




Inventories





Inventories
are stated at the lower of cost or market value.  Cost of inventory is
determined by the average cost and the first-in, first-out (FIFO) methods.
Because the Company sells products and services related to airplane accessories
(heat transfer equipment, APU’s, propellers, and landing gear) for airplanes
that can be in service for 20 to 50 years, it must keep a supply of such
products and parts on hand while the airframes are in use.  The
Company writes down its inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and estimated
market value based upon assumptions about future demand and market conditions.
If actual market conditions are less favorable than those anticipated, inventory
adjustments may be required.  The Company believes that these
estimates are reasonable and historically have not resulted in material
adjustments in subsequent periods when the estimates are adjusted to actual
amounts.





49





Property,
Plant and Equipment





Property,
plant, and equipment are stated at cost, net of accumulated depreciation.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the assets.  Leasehold improvements are amortized over
the estimated useful life of the improvements, or the term of the lease,
whichever is shorter.




The
useful life for property, plant and equipment is as follows:





Useful LifeBuildings
      and building improvements
                          
                          
                          39Leasehold
      improvements
                          
                          
                          5-10Machinery
      and equipment
                          
                          
                          3-10Motor
      vehicles
                          
                          
                          5-7Office
      furniture, fixtures and equipment
                          
                          
                          3-7





Intangible
Assets





Intangible
assets subject to amortization are being amortized over their useful life, using
a method of amortization that reflects the pattern in which the economic
benefits of the intangible assets are consumed or otherwise used up, in
accordance with SFAS No. 142.





Goodwill
and Other Intangible Assets





Goodwill
represents the excess of the purchase price over the fair value of net assets of
businesses acquired and accounted for by the purchase method of accounting. SFAS
No. 142, "Goodwill and Other Intangible Assets," requires that goodwill and
certain other intangible assets having indefinite lives no longer be amortized,
but instead be tested annually for impairment or more frequently if events
suggest the remaining value may not be recoverable.  An impairment
test was performed by management as of December 31, 2008, indicating goodwill
was not impaired and as such no expense has been recorded.  The
Company determined the fair value using the discounted cash flow analysis. The
results of the assessment indicated that no impairment existed in the value of
recorded goodwill. There were no changes in the balance of goodwill for the
years ended December 31, 2008 and 2007.





Impairment
of Long-Lived Assets





The
Company reviews long-lived assets, including intangible assets and goodwill, for
impairment annually or more frequently if changes in circumstances or the
occurrence of events suggest the remaining value may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to the future undiscounted cash flows expected to be
generated by the assets. If such assets are considered to be impaired, “the
amount of impairment to be recognized is equal to the difference between the
carrying amount of an asset and the fair value of that asset.” As of
December 31, 2008 and 2007 no impairment losses have been
identified.





50





Revenue
Recognition





Revenues
from the sale of products and services are recognized in accordance with Staff
Accounting Bulletin No. 104, "Revenue Recognition in Financial Statements" or
SAB No. 104".  Recognition occurs when persuasive evidence of an
arrangement exists, delivery of the product has occurred, provided the
collection of the resulting receivable is probable, the price is fixed or
determinable and no significant obligation exists.  The Company does
not grant a right of return.





Revenues
from MRO services are recognized when customer-owned material is shipped back to
the customer.





Revenues
from product sales are recognized when the product is shipped to the customer
and title passes to the customer.





Revenues
from maintenance contracts are accounted under FASB Technical Bulletin No. 90-1
(Amended), "Accounting for Separately Priced Extended Warranty and Product
Maintenance Contracts."  Revenue is recognized over the contract
period in proportion to the costs expected to be incurred in performing services
under the contract as costs incurred to perform the services are not incurred on
a straight-line basis.





Shipping
and Handling Costs





Shipping
and handling costs billed to customers are included in revenues.  The
cost of shipping and handling products and sales tax is included in costs of MRO
and part services.





Research
and Development





Research
and development costs net of grants and participations received for each period
are charged to expenses as incurred.





Warranty
Cost





The
Company provides warranties for its products and services ranging from one to
five years, which vary with respect to each contract and in accordance with the
nature of each specific product.





The
Company estimates the costs that may be incurred under its warranty and records
a liability in the amount of such costs at the time the product is shipped. The
Company periodically assesses the adequacy of its recorded warranty liabilities
and adjusts the amounts as necessary.





As of
December 31, 2008 and 2007 the aggregate amount of the warranty provision is
immaterial.





Income
Taxes





Income
taxes are accounted for in accordance with SFAS No. 109, "Accounting for Income
Taxes" ("SFAS No. 109"). This statement prescribes the use of the liability
method, whereby deferred tax assets and liability account balances are
determined based on temporary differences between financial reporting and tax
bases of assets and liabilities and for tax loss carryforwards. Deferred taxes
are measured using the enacted laws and tax rates that will be in effect when
the differences are expected to reverse. The Company provides a valuation
allowance, if necessary, to reduce deferred tax assets to their estimated
realizable value.





51





Net
Income Per Share





The
consolidated statements of income present basic and diluted net income per
share. Basic net income per share is computed by dividing net income by the
weighted-average number of common shares outstanding during the period. Diluted
earning per share considers the potential effect of dilution on basic earning
per share assuming potentially dilutive securities that meet certain criteria,
such as stock options, were outstanding since issuance. The treasury stock
method is used to determine the dilutive effect of potentially dilutive
securities. There are 311,250 options outstanding that were anti-dilutive at
December 31, 2008 and there are no warrants outstanding as of December 31,
2008.





The
following table reconciles basic shares outstanding to diluted shares
outstanding:





Year ended
                        December 31,2008
                    
                    
                    2007(in
      thousands)Basic
      shares outstanding
                    
                    
                    13,205
                    
                    
                    
                    10,934Add:
      effect of dilutive stock options
                    
                    
                    —
                    
                    
                    
                    28Diluted
      shares outstanding
                    
                    
                    13,205
                    
                    
                    
                    10,962





Concentrations
of Credit Risk





Financial
instruments that potentially subject the Company to concentrations of credit
risk consist principally of cash and cash equivalents and accounts
receivables.  The Company has one customer that represents 20% of
the accounts receivable balance at December 31, 2008.  This customer
is under a long-term parts supply contract.





Cash and
cash equivalents and short-term bank deposits are deposited with major banks in
the United States. Such deposits in the United States may be in excess of
insured limits and are not insured in other jurisdictions.





The
Company has no off-balance-sheet concentration of credit risk such as foreign
exchange contracts, option contracts or other foreign hedging
arrangements.





The
Company depends on a limited number of suppliers for some standard and custom
designed components for its systems. If such suppliers fail to deliver the
necessary components, the Company may be required to seek alternative sources of
supply. A change in suppliers could result in manufacturing delays, which could
cause a possible loss of sales and, consequently, could adversely affect the
Company’s results of operations and cash position.





52




Use
of Estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts in the financial
statements and accompanying notes. Actual results could differ from those
estimates.





Financial
Statements in U.S. dollars





The U.S.
dollar is the currency of the primary economic environment in which the Company
operates and the functional and reporting currency of the Company is the U.S.
dollar.  Accordingly, monetary accounts maintained in currencies other
than the U.S. dollar are remeasured into U.S. dollars in accordance with SFAS
No. 52 "Foreign Currency Translation" ("SFAS No. 52"). All translation gains and
losses from the remeasurement of monetary balance sheet items are reflected in
the statements of income as appropriate.





Fair
Value of Financial Instruments





SFAS No. 107
"Disclosures about Fair Value of Financial Instruments" requires disclosure of
the estimated fair value of an entity’s financial instruments. Such disclosures,
which pertain to the Company’s financial instruments, do not purport to
represent the aggregate net fair value of the Company. The carrying value of
cash and cash equivalents, accounts receivable and accounts payable approximated
fair value because of the short maturity of those instruments.





Historical
Cost Basis





The
Company’s financial statements have been prepared on the historical cost basis
and present the Company's financial position, results of operations and cash
flows as derived from the Parent's historical financial statements. Prior to
December 31, 2006, our parent provided certain services to our Company including
general management and administrative services for employee benefit programs,
insurance, legal, treasury and tax compliance.  Since January 1, 2007,
our Parent has, pursuant to a Separation Agreement entered into in March 2007,
provided us with coverage under certain of their insurance
policies.  We have reimbursed our Parent for the cost of such
coverage.
 
 The
financial information included herein does not necessarily reflect what the
financial position and results of operations of the Company would have been had
it operated as a stand-alone entity during the periods covered, and may not be
indicative of future operations or financial position.
 
 Registration
Rights Agreement
 
 The
Company has registration statements with the Parent, granting it the right to
require registration for resale of its shares of common stock under the
Securities Act of 1933, as amended.  The Parent company may sell all
or some of the shares of the Company’s common stock that it owns or distribute
shares to its shareholders.  Pursuant to FSP EITF 00-19-2, “Accounting
for Registration Payment Arrangements” (“FSP”), which addresses an issuer’s
accounting for registration payment arrangements, the Company concluded that no
obligation should be recorded related to the registration
rights.





Impact
of Recently Issued Accounting Standards





In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities – Including an Amendment of FASB
Statement No. 115" (SFAS No. 159).  SFAS No. 159 establishes a fair
value option permitting entities to elect the option to measure eligible
financial instruments and certain other items at fair value on specified
election dates.  Unrealized gains and losses on items for which the
fair value option has been elected will be reported in earnings.  The
fair value option may be applied on an instrument-by-instrument basis, with a
few exceptions, is irrevocable and is applied only to entire instruments and not
to portions of instruments.  SFAS No. 159 is effective for annual
periods beginning after November 15, 2007 and for certain provisions for annual
periods beginning after November 15, 2008, and should not be applied
retrospectively to fiscal years beginning prior to the effective
date.  On the adoption date, an entity may elect the fair value option
for eligible items existing at that date and the adjustment for the initial
remeasurement of those items to fair value should be reported as a cumulative
effect adjustment to the opening balance of retained earnings.  We are
currently assessing whether to apply the provisions of SFAS No. 159 to eligible
financial instruments in place on the adoption date and the related impact on
our financial statements.  This statement became applicable to the
Company as of the year beginning January 1, 2008, and the Company did not elect
to apply SFAS 159 to its financial assets and liabilities.  Therefore
the adoption of SFAS 159 has had no impact on the Company’s financial
position or results of operations.





53





In
December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" (SFAS
141(R).  SFAS 141(R) expands the definition of transactions and events
that qualify as business combinations; requires that the acquired assets and
liabilities, including contingencies, be recorded at the fair value determined
on the acquisition date and changes thereafter reflected in revenue, not
goodwill; changes the recognition timing for restructuring costs; and requires
acquisition costs to be expensed as incurred.  Adoption of SFAS 141(R)
is required for annual periods beginning after December 15,
2008.  Early adoption and retroactive application of SFAS 141(R) to
fiscal years preceding the effective date are not permitted.  The
adoption of SFAS 141(R) is not expected to have a material impact on our
Consolidated Financial Statements.





In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interest in
Consolidated Financial Statements"(SFAS
160).  SFAS 160 re-characterizes minority interests in consolidated
subsidiaries as non-controlling interests and requires the classification of
minority interests as a component of equity.  Under SFAS 160, a change
in control will be measured at fair value, with any gain or loss recognized in
earnings.  The effective date for SFAS 160 is for annual periods
beginning on or after December 15, 2008.  Early
adoption  and retroactive application of SFAS 160 to fiscal years
preceding the effective date are not permitted.  The adoption of
SFAS 160 is not expected to have a material impact on our Consolidated
Financial Statements.





In March
2008, the FASB issued SFAS No. 161 (SFAS 161), “Disclosures about Derivative
Instruments and Hedging Activities”, as an amendment to SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities.” SFAS 161
requires that objectives for using derivative instruments be disclosed in terms
of underlying risk and accounting designation. The fair value of derivative
instruments and their gains and losses will need to be presented in tabular
format in order to present a more complete picture of the effects of using
derivative instruments. SFAS 161 is effective for financial statements issued
for fiscal years beginning after November 15, 2008. The adoption of
SFAS 161 is not expected to have a material impact on our Consolidated
Financial Statements.




54




Note
2 – Inventories




Inventories
are composed of the following:





December
      31,2008
                      
                      
                      2007(
      in thousands)Raw
      material
                      
                      $
                      6,304
                      
                      
                      $
                      4,733Work
      in process
                      
                      
                      5,423
                      
                      
                      
                      4,796Spare
      parts assemblies
                      
                      
                      7,251
                      
                      
                      
                      6,862$
                      18,978
                      
                      
                      $
                      16,391





Inventories
are shown net of allowances for obsolescence of $548,000, and $299,000 at
December 31, 2008, and December 31, 2007, respectively.




Note 3 – Property, Plant and
Equipment




Composition
of assets, grouped by major classifications, is as follows:




December
      31,2008
                  
                  
                  2007(in
      thousands)Cost:Land,
      buildings, and leasehold improvements
                  
                  $
                  1,976
                  
                  
                  $
                  1,842Machinery
      and equipment
                  
                  
                  7,586
                  
                  
                  
                  5,980Motor
      vehicles
                  
                  
                  146
                  
                  
                  
                  156Office
      furniture, fixtures and equipment
                  
                  
                  812
                  
                  
                  
                  84610,520
                  
                  
                  
                  8,824Accumulated
      depreciation and amortization
                  
                  
                  4,497
                  
                  
                  
                  3,655$
                  6,023
                  
                  
                  $
                  5,169




Depreciation
expense for the years ended December 31, 2008 and 2007 was $843,000 and
$651,000, respectively.




Note
4 – Intangible Assets, Net




a.  Intangible
assets:





December
      31,2008
                      
                      
                      2007
                      
                      
                      Life(in
      thousands)Cost:Customer
      relationships
                      
                      $
                      1,937
                      
                      
                      $
                      1,937
                      
                      
                      
                      10Lease
      at below market rates
                      
                      
                      97
                      
                      
                      
                      97
                      
                      
                      
                      2.5Consulting
      service agreement
                      
                      
                      6
                      
                      
                      
                      6
                      
                      
                      
                      0.3Non-compete
      agreement
                      
                      
                      653
                      
                      
                      
                      653
                      
                      
                      
                      3Trade
      name
                      
                      
                      128
                      
                      
                      
                      128
                      
                      
                      
                      10Certificates
                      
                      
                      76
                      
                      
                      
                      76
                      
                      
                      
                      72,897
                      
                      
                      
                      2,897Accumulated
      amortization
                      
                      
                      1,514
                      
                      
                      
                      1,188$
                      1,383
                      
                      
                      $
                      1,709




Amortization
expense related to intangible assets totaled $326,000 and $474,000 for the years
ended December 31, 2008 and 2007, respectively.




55




b.
Estimated amortization expenses for the year ending:




AmortizationExpenseYear ending December 31,
              
              (in
      thousands)2009
              
              $
              2172010
              
              
              2172011
              
              
              2172012
              
              
              2122013
              
              
              207Thereafter
              
              
              313$
              1,383




Note
5 – Other Accounts Payable and Accrued Expenses




December
      31,2008
                    
                    
                    2007(in
      thousands)Employees
      and payroll accruals
                    
                    $
                    997
                    
                    
                    $
                    938Advances
      and other accrued expenses
                    
                    
                    411
                    
                    
                    
                    119Liability
      with respect to non-compete agreement
                    
                    
                    -
                    
                    
                    
                    145Rebate
      on sales
                    
                    
                    290
                    
                    
                    
                    142Accrued
      income taxes
                    
                    
                    66
                    
                    
                    
                    177$
                    1,764
                    
                    
                    $
                    1,521




56




Note
6 – Related Parties




a.
            Transactions
      with related parties:




Years ended
                          December
      31,2008
                        
                        
                        2007(in
      thousands)Purchases
                        
                        $
                        5,659
                        
                        
                        $
                        4,830





Historically,
the Company has purchased a majority of its cores for heat exchangers from its
Parent. In January 2007, the Company entered into a manufacturing agreement in
which it is required to purchase all cores required for its heat exchangers from
its Parent through January 31, 2017.  Heat exchangers not manufactured
by the Parent may be purchased from other vendors, including Hamilton
Sundstrand.





Parent
company payables as of December 31, 2008 and December 31, 2007 were $2,341,000
and $1,762,000, respectively. Purchases from the Parent include cores and
related products and insurance costs.   Parent company payables
are unsecured and provide for no interest payments and are generally paid within
60 days.




In
addition the Parent owes the Company $155,000 at December 31, 2008 related
to withholdings paid by the Company on deemed dividends related to interest
expense from 2005 and 2006, and for intercompany parts purchases.
  Subsequent
to December 31, 2008, the Company approved a payment of $200,000 per year in
management fees to the parent company for management and administrative
support.





Note 7
– Employee Share Based Compensation




The
Company entered into a share based compensation agreement with its former CEO
during August 2005.  The compensation agreement was made up of 45,000
Phantom Stock options and other stock options to be issued upon the completion
of an IPO by the Company.





The
Phantom Stock options had an exercise price of $6.37.  At the date of
exercise, the former CEO received a cash payment for the difference between the
exercise price and the average price of the Parent’s stock price for the 60 days
preceding the exercise date.  At December 31, 2007, the Company
recorded compensation expense of $324,700 related to the Phantom Stock
Options.  All of the Phantom Stock Options were exercised by December
31, 2007.




Effective
as of July 19, 2007, the date of our initial public offering, the Company
established an incentive compensation plan, or “the 2007 plan”, under which it
may issue options to purchase up to 600,000 shares of its common stock. The
options vest in three equal annual installments, except for 66,000 options that
vest in four equal semi-annual installments.  Options generally expire
five to ten years from date of grant.




Compensation
expense attributable to outstanding stock options was $175,000 and $390,000 for
the years ended December 31, 2008 and December 31, 2007,
respectively. Compensation
expense is recognized in the statement of income as an operating expense based
on the fair value of the option over the requisite service period.As of
December 31, 2008, the total unrecognized compensation cost related to
non-vested stock awards was $781,000 million and the weighted average period
over which the cost is expected to be recognized is approximately 1.6
years.




A summary
of our stock option activity for the years ended December 31, 2008 and 2007, is
presented below:




57




Options
                                                                    
                                                                    
                                                                    Weighted
                                                                      average
                                                                      exercise
      price
                                                                    
                                                                    
                                                                    Weighted
                                                                      average
                                                                      contractual
                                                                      life
                                                                      remaining
                                                                      in
      years
                                                                    
                                                                    
                                                                    Aggregate
                                                                      intrinsic
                                                                      value
      (1)(in
      thousands)
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    (in
      thousands)Outstanding
      at December 31, 2006
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -Granted
                                                                    
                                                                    
                                                                    404
                                                                    
                                                                    
                                                                    $
                                                                    11.00
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -Cancelled
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    $
                                                                    0.00
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -Outstanding
      at December 31, 2007
                                                                    
                                                                    
                                                                    404
                                                                    
                                                                    
                                                                    $
                                                                    11.00
                                                                    
                                                                    
                                                                    
                                                                    4.50
                                                                    
                                                                    
                                                                    
                                                                    570Granted
                                                                    
                                                                    
                                                                    60
                                                                    
                                                                    
                                                                    $
                                                                    5.88
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -Cancelled
                                                                    
                                                                    
                                                                    153
                                                                    
                                                                    
                                                                    $
                                                                    11.00
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -Outstanding
      at December 31, 2008
                                                                    
                                                                    
                                                                    311
                                                                    
                                                                    
                                                                    $
                                                                    10.01
                                                                    
                                                                    
                                                                    
                                                                    4.37
                                                                    
                                                                    
                                                                    $
                                                                    -Exercisable
      at December 31, 2008
                                                                    
                                                                    
                                                                    127
                                                                    
                                                                    
                                                                    $
                                                                    10.09
                                                                    
                                                                    
                                                                    
                                                                    4.25
                                                                    
                                                                    
                                                                    $
                                                                    -Options
      expected to vest at December 31, 2008
                                                                    
                                                                    
                                                                    184





(1)
              The
      intrinsic value of a stock option is the amount by which the market value
      of the underlying stock on December 31, 2008 exceeds the strike price of
      the option.  There was no aggregate intrinsic value at December
      31, 2008 as our stock price of $3.03 on December 31, 2008 was below all of
      the outstanding stock options’ exercise price.  The aggregate
      intrinsic value at December 31, 2007 was
  $570,000.




The
weighted average grant date fair value of the stock options granted during the
years ended December 31, 2008 and 2007 was $2.63 and $5.31
respectively.  There were 60,000 options granted during the year ended
December 31, 2008.  The following table summarizes our weighted
average assumptions used in the valuation of options for the years ended
December 31, 2008 and 2007:




2008
                      
                      
                      2007Weighted
      average expected stock price volatility
                      
                      
                      56
                      %
                      
                      
                      62
                      %Weighted
      average expected option life (in years)
                      
                      
                      3.5
                      
                      
                      
                      3.5Average
      risk free interest rate
                      
                      
                      2.87
                      %
                      
                      
                      4.96
                      %Dividend
      yield
                      
                      
                      -
                      
                      
                      
                      -Discount
      for post-vesting restriction
                      
                      
                      n/a
                      
                      
                      
                      n/a


The
Company uses the Black-Scholes option pricing model to determine the weighted
average fair value of options. The volatility factor used in the Black-Scholes
option pricing model is based on historical stock price fluctuations. Due to the
relative short period of the time the Company has been public the Company has
estimated a 0% forfeiture rate. Expected dividend yield is based upon the
Company’s historical and projected dividend activity and the risk free interest
rate is based upon US Treasury rates appropriate for the expected term of the
options.


Note 8 – Defined Contribution
Plan




The
Company sponsors a 401(K) profit sharing plan covering substantially all
employees.  The plan permits the employer to contribute a
discretionary amount for a plan year, which the employer designates as qualified
non-elective contribution. Contributions to the plan by the Company were
$215,735 and $175,735 for the years ended December 31, 2008 and 2007,
respectively.





58





Note
9 – Income Taxes





a.
            Income
      tax expense for the years ended December 2008 and 2007, consists of the
      following:




Year
      ended December 31,2008
                                  
                                  
                                  2007(in
      thousands)Current
      income tax provision
                                  
                                  $
                                  1,845
                                  
                                  
                                  $
                                  2,862Deferred
      income tax provision
                                  
                                  
                                  78
                                  
                                  
                                  
                                  9Total
      provision for income taxes
                                  
                                  $
                                  1,923
                                  
                                  
                                  $
                                  2,871


b.
            A
      reconciliation of the statutory federal income tax rate to the effective
      tax rate is as follows:




Year
      ended December 31,2008
                    
                    
                    2007Statutory
      federal income tax rate
                    
                    
                    34.00
                    %
                    
                    
                    34.00
                    %State
      taxes (net of federal benefit)
                    
                    
                    3.80
                    %
                    
                    
                    3.80
                    %Tax-exempt
      interest
                    
                    
                    -0.88
                    %
                    
                    
                    -2.00
                    %Indian
      employment credit
                    
                    
                    -0.33
                    %
                    
                    
                    -0.30
                    %Manufacturers'
      deduction
                    
                    
                    -0.44
                    %
                    
                    
                    -0.10
                    %Stock-based
      compensation
                    
                    
                    -0.20
                    %
                    
                    
                    0.50
                    %Other
      – net
                    
                    
                    5.54
                    %
                    
                    
                    -0.30
                    %Effective
      income tax rate
                    
                    
                    41.48
                    %
                    
                    
                    35.60
                    %





59




c.
            The
      deferred tax assets and liabilities are as follow at December
      31:





December
      31,2008
                  
                  
                  2007(in
      thousands)Assets:Employee
      compensation
                  
                  $
                  325
                  
                  
                  $
                  204Allowance
      for doubtful accounts
                  
                  
                  53
                  
                  
                  
                  50Inventory
                  
                  
                  255
                  
                  
                  
                  232Other
                  
                  
                  297
                  
                  
                  
                  16Total
      assets
                  
                  
                  930
                  
                  
                  
                  502Liabilities:Intangible
      assets including goodwill
                  
                  
                  (137
                  )
                  
                  
                  (102
                  )Property,
      plant and equipment
                  
                  
                  (698
                  )
                  
                  
                  (302
                  )Prepaid
      assets
                  
                  
                  (87
                  )
                  
                  
                  (97
                  )Total
      liabilities
                  
                  
                  (922
                  )
                  
                  
                  (501
                  )Deferred
      tax, net
                  
                  $
                  8
                  
                  
                  $
                  1





d. The
Company adopted provisions of FASB Interpretation 48, “Accounting for
Uncertainty in Income Taxes: an interpretation of FASB Statement 109, Accounting
for Income Taxes” (“FIN 48”) on January 1, 2007. As a result of the
implementation of FIN 48, the Company recognized a cumulative increase in its
provision for tax expenses of $248,000.





Unrecognized
tax benefits are the difference between a tax positions that is taken, or
expected to be taken in a tax return, and the benefit recognized for accounting
purposes pursuant to FIN 48.


A
reconciliation of the beginning and ending amount of recognized provision is as
follow:





Amount(in
      thousands)Balance
      at January 1, 2007
                                  
                                  $
                                  147Additions
      for tax positions of prior years
                                  
                                  
                                  101Reduction
      for tax positions of prior years
                                  
                                  
                                  -Settlements
      with taxing authorities
                                  
                                  
                                  -Balance
      at January 1, 2008
                                  
                                  
                                  248Additions
      for tax positions of prior years
                                  
                                  
                                  189Reduction
      for tax positions of prior years
                                  
                                  
                                  -Settlements with taxing authorities
                                  
                                  
                                  (437
                                  )Balance
      at December 31, 2008
                                  
                                  $
                                  -




During
2008, the Company was audited by the Internal Revenue Service for the tax year
ended December 31, 2006.   It was the determination of the
Internal Revenue Service that the Company had deemed dividend distributions to
its parent company related to interest expense charged during 2005, 2006 and
2007.  Interest and penalties totaling $43,000 have been charged to
income tax expense during the year ended December 31, 2008.  The audit
is now closed and the Company believes that the only tax years open
for audit is the year ended December 31, 2008.


Note
10 – Commitments and Contingencies




The
Company leases various office equipment and facilities under non-cancelable
operating leases with expiration dates through January 2013. The monthly
rental expense ranges from approximately $100 to $9,000. Certain leases contain
renewal options as defined in the agreements.




60




Total
operating lease rentals charged to expense during the years ended December 2008
and 2007  were approximately $214,008 and 330,610, respectively. Net
minimum annual future rental under non-cancelable operating leases as of
December 31, 2008, are as follow:





Year
                            
                            Amount(in
      thousands)2009
                            
                            $
                            1862010
                            
                            
                            1872011
                            
                            
                            1572012
                            
                            
                            692013
                            
                            
                            14Total
                            
                            $
                            613




The
Company is currently engaged in a contract dispute with one of its
suppliers. The Company believes that the dispute will be resolved on a
commercial basis.  However, the inability to amicably resolve such
dispute could result in litigation, could have a material effect on the
Company’s
business and financial condition.




Note
11 – Segment
Reporting




a.
              The Company
      manages its business on a basis of two reportable segments since the
      acquisition of Piedmont on July 6, 2005.  The Company's
      reportable segments are as
follows:





·
            The
      maintenance, repair and overhaul (MRO) segment focuses on remanufacture,
      overhaul and repair of heat transfer equipment and other aircraft
      components and of repair of APUs, propellers and landing
      gears.





·
            Parts
      segment (part of Piedmont's business) focuses on sales of parts of APUs,
      propellers and landing gears.





The
Company evaluates segment performance based on revenue and operating
income.  The operating income reported in our segments excludes
corporate and other unallocated amounts.  Although such amounts are
excluded from the business segment results, they are included in reported
consolidated earnings.  Corporate and unallocated amounts include
executive level expenses and expenses related to our accounting and finance,
human resources and information technology departments.





b.
            Operational
      segments:





The
following financial information is the information that management uses for
analyzing the results.  The figures are presented in consolidated
method as presented to management. Cost related to selling and marketing and
general and administrative are allocated based on revenues. This was a change
made in 2008. The segment results for 2007 have been restated to conform with
this allocation method.




The
following financial information is a summary of the operating income of each
operational segment:




61




Twelve
      months ended December 31, 2008MRO
                  
                  
                  Parts
                  
                  
                  Corporate
                  
                  
                  Consolidated(in
      thousands)Revenue
                  
                  $
                  54,276
                  
                  
                  $
                  17,289
                  
                  
                  
                  -
                  
                  
                  $
                  71,565MRO
      services cost
                  
                  
                  43,664
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  43,664Part
      services cost
                  
                  
                  -
                  
                  
                  
                  13,922
                  
                  
                  
                  -
                  
                  
                  
                  13,922Selling
      and marketing
                  
                  
                  2,094
                  
                  
                  
                  661
                  
                  
                  
                  -
                  
                  
                  
                  2,755General
      and administrative
                  
                  
                  3,232
                  
                  
                  
                  1,024
                  
                  
                  
                  2,862
                  
                  
                  
                  7,118Amortization
      of intangibles
                  
                  
                  326
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  326Operating
      income (expense)
                  
                  $
                  4,960
                  
                  
                  $
                  1,682
                  
                  
                  $
                  (2,862
                  )
                  
                  $
                  3,780





Twelve
      months ended December 31, 2007MRO
                  
                  
                  Parts
                  
                  
                  Corporate
                  
                  
                  Consolidated(in
      thousands)Revenue
                  
                  $
                  49,392
                  
                  
                  $
                  20,384
                  
                  
                  $
                  -
                  
                  
                  $
                  69,776MRO
      services cost
                  
                  
                  35,205
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  35,205Part
      services cost
                  
                  
                  -
                  
                  
                  
                  16,603
                  
                  
                  
                  -
                  
                  
                  
                  16,603Selling
      and marketing
                  
                  1,829
                  
                  
                  
                  784
                  
                  
                  
                  -
                  
                  
                  
                  2,613General
      and administrative
                  
                  
                  1,378
                  
                  
                  
                  591
                  
                  
                  
                  5,012
                  
                  
                  
                  6,981Amortization
      of intangibles
                  
                  
                  474
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  474Operating
      income (expense)
                  
                  $
                  10,506
                  
                  
                  $
                  2,406
                  
                  
                  $
                  (5,012
                  )
                  
                  $
                  7,900





The
following presents total revenue, based on the location of the end customers,
for the years ended December 31, 2008 and 2007:




Year
      ended December 31,2008
                              
                              
                              2007(in
      thousands)North
      America
                              
                              $
                              49,448
                              
                              
                              $
                              48,632Europe
                              
                              
                              13,980
                              
                              
                              
                              14,895Asia
                              
                              
                              3,324
                              
                              
                              
                              2,444Other
                              
                              
                              4,813
                              
                              
                              
                              3,805$
                              71,565
                              
                              
                              $
                              69,776


62




The
following presents long-lived assets as of:




December
      31, 2008MRO
                  
                  
                  Parts
                  
                  
                  Corporate
                  
                  
                  Consolidated(in
      thousands)Total
      assets
                  
                  $
                  39,480
                  
                  
                  $
                  7,118
                  
                  
                  $
                  30,340
                  
                  
                  $
                  76,946Capital
      investments
                  
                  
                  1,697
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,697Depreciation
      and amortization
                  
                  
                  1,169
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,169Goodwill
                  
                  
                  4,780
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  4,780




December
      31, 2007MRO
                    
                    
                    Parts
                    
                    
                    Corporate
                    
                    
                    Consolidated(in
      thousands)Total
      assets
                    
                    $
                    33,299
                    
                    
                    $
                    3,522
                    
                    
                    $
                    35,882
                    
                    
                    $
                    72,703Capital
      investments
                    
                    
                    2,884
                    
                    
                    
                    15
                    
                    
                    
                    -
                    
                    
                    
                    2,899Depreciation
      and amortization
                    
                    
                    1,123
                    
                    
                    
                    2
                    
                    
                    
                    -
                    
                    
                    
                    1,125Goodwill
                    
                    
                    4,780
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,780




63




Note  12
– Quarterly Financial Information (Unaudited)




2008March
      31
                    
                    
                    June
      30
                    
                    
                    Sept.
      30
                    
                    
                    Dec.
      31(in
      thousands)Net
      sales
                    
                    $
                    17,120
                    
                    
                    $
                    17,677
                    
                    
                    $
                    18,827
                    
                    
                    $
                    17,941Operating
      income
                    
                    
                    1,405
                    
                    
                    
                    722
                    
                    
                    
                    1,374
                    
                    
                    
                    469Net
      income
                    
                    
                    1,003
                    
                    
                    
                    608
                    
                    
                    
                    957
                    
                    
                    
                    354EPS
                    
                    
                    0.08
                    
                    
                    
                    0.05
                    
                    
                    
                    0.07
                    
                    
                    
                    0.03





2007March
      31
                    
                    
                    June
      30
                    
                    
                    Sept.
      30
                    
                    
                    Dec.
      31(in
      thousands)Net
      sales
                    
                    $
                    20,214
                    
                    
                    $
                    18,042
                    
                    
                    $
                    16,644
                    
                    
                    $
                    14,876Operating
      income
                    
                    
                    2,366
                    
                    
                    
                    2,821
                    
                    
                    
                    1,875
                    
                    
                    
                    838Net
      income
                    
                    
                    1,410
                    
                    
                    
                    1,565
                    
                    
                    
                    1,430
                    
                    
                    
                    789EPS
                    
                    
                    0.16
                    
                    
                    
                    0.17
                    
                    
                    
                    0.12
                    
                    
                    
                    0.06





Note  13
– Subsequent Event





Subsequent
to December 31, 2008, the Company announced that it would relocate the
operations of its Oklahoma subsidiary to the location of its Piedmont subsidiary
in North Carolina. The Company anticipates closing the Oklahoma operations
by the end of June 2009.  The goal of this relocation is to achieve
significant annual cost savings. The
Company entered into a lease for a new facility in Kernersville, North Carolina
of approximately 56,000 square feet, which will house its operations being
relocated from Oklahoma. The lease, which expires on November 1, 2011, provides
for 2 renewal options, each for a five year term. The lease provides for an
annual rental fee of $86,182.




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