SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934 for the twelve months ended
December 31, 1994
Commission File No. 0-13829
PRECISION STANDARD, INC.
Exact name of Company as specified in its Charter
Colorado 84-0985295
State of other jurisdiction of I.R.S. Employer Identification No.
incorporation or organization
One Pemco Plaza
1943 50th Street
Birmingham, Alabama 35212
Address of principal executive offices Zip Code
Company's telephone number, including area code: (205) 591-3009
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 par value
(Title of Class)
Indicate by check mark whether the Company (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 Company was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
The aggregate market value of the Common Stock held by non-
affiliates on February 28, 1995 was approximately $7,891,999.
The number of shares of the Company's Common Stock out-
standing as of February 28, 1995 was 12,344,291.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive proxy statement to be
filed pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year (December 31, 1994) are incorporated by
reference in Part III.
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of Company'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. X Yes No
<TABLE>
FORM 10-K ANNUAL REPORT
TWELVE MONTHS ENDED DECEMBER 31, 1994
PRECISION STANDARD. INC.
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PART I
Item 1. Business..............................
Item 2. Properties............................
Item 3. Legal Proceedings.....................
Item 4. Submission of Matters to a Vote of
Security Holders......................
PART II
Item 5. Market for Company's Common
Equity and Related Stockholder
Matters...............................
Item 6. Selected Financial Data...............
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations.........................
Item 8. Financial Statements and
Supplemental Data.....................
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure..................
PART III
Item 10. Directors and Executive
Officers of the Company...............
Item 11. Executive Compensation................
Item 12. Security Ownership of
Certain Beneficial Owners
and Management........................
Item 13. Certain Relationships and
Related Transactions..................
PART IV
Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K.....
SIGNATURES ......................................
</TABLE>
PART I
Item 1. Business.
GENERAL
Precision Standard, Inc. ("the Company") is a diversified
company composed of the following wholly-owned subsidiaries and
divisions: (a) The Aeroplex Group of Pemco Aeroplex, Inc. (the
"Aeroplex") which maintains and modifies large transport aircraft
for the U.S. Government and foreign and commercial customers, (b)
Pemco World Air Services, A/S which maintains and modifies large
transport aircraft for foreign and commercial customers, (c) Hayes
Targets Division of Pemco Aeroplex, Inc. (the "Targets Division")
which designs and manufactures aerial target systems for domestic
and foreign military customers, (d) Space Vector Corporation
("Space Vector" or "SVC") which develops and manufactures rocket
launch vehicles and guidance systems for the U.S. Government and
foreign and commercial customers, (e) Pemco Engineers Aircraft
Cargo Systems Division (the "Aircraft Cargo Systems Division")
which designs and manufactures aircraft cargo handling systems, (f)
Pemco Engineers Springs and Components Division which designs and
manufactures precision springs and components, (g) Pemco Air
Support Services, Inc. ("PASS") which sells parts for large
transport aircraft and provides support of aircraft which have been
converted or modified by its affiliates and (h) Pemco Nacelle
Services, Inc. ("Nacelle") which maintains and overhauls engine
nacelles and thrust-reversers for large jet transport aircraft.
SIGNIFICANT DEVELOPMENTS
Award of KC-135 Aircraft Contract
The United States Air Force awarded a contract in August of
1994 to the Aeroplex for the Programmed Depot Maintenance (PDM) of
the KC-135 aircraft. The contract is expected to run for seven
years and involve the maintenance of as many as 406 aircraft. The
amount funded as of March, 1995 under the first year of the
contract was $41.6 million. The total value of the contract over
a seven year period, if fully funded, is expected to be over $254.0
million. The Company has performed Programmed Depot Maintenance on
KC-135 aircraft since 1968 and has processed over 2,050 of the KC-
135 aircraft.
Pemco World Air Services, A/S
The Company contracted with Sterling Airways of Copenhagen,
Denmark in May of 1994 for the lease of Sterling's 180,000 square
foot aircraft maintenance center at Copenhagen Airport. The
Company's Copenhagen operation is registered as a Danish limited
company and operates under the name Pemco World Air Services, A/S
("PWAS"). The agreement with Sterling entitles PWAS to use of
existing tools and equipment and appoints PWAS as Sterling's
consignment distributor for all rotables, spares, consumables and
raw materials. Additionally, the agreement grants PWAS an option
to purchase the hangars which are situated on ground leased from
the airport and entitles PWAS to use of all of Sterling's service
data, manuals, technical materials and related information.
The wide-body facility in Copenhagen, which is approved by the
Joint Aviation Authority of the European Community ("JAA") and the
Federal Aviation Administration ("FAA") as a Part 145 repair
station, offers the full range of quality products and services
available at the Company's North American facilities. These
products and services include maintenance checks, aging aircraft
inspections and repairs, the repair and overhaul of aircraft
components, passenger-to-Quick Change conversions and passenger-to-
freighter conversions.
Realignment of Operating Units
In September of 1994, the Company reallocated its management
resources and realigned its operating units into four groupings:
(a) the Commercial Aircraft Maintenance and Modification Group,
which began operating under the name Pemco World Air Services in
August of 1994 and includes the Dothan Division of the Aeroplex and
Pemco World Air Services, A/S; (b) the Government and Military
Aircraft Services Group which operates as the Birmingham Division
of the Aeroplex; (c) the Manufacturing and Overhaul Group which
includes the Aircraft Cargo Systems and Springs and Components
Divisions of Pemco Engineers, Pemco Nacelle Services, Inc., the
Targets Division and Space Vector Corporation; and (d) the Aviation
Support Services Group which operates as PASS.
Joint Aviation Authority Approvals
In 1994 the Joint Aviation Authority of the European Community
granted authority to the Aeroplex for the performance of
maintenance and modification work on aircraft which are registered
under JAA authority and operated throughout the world. JAA
approval was also granted to the Company's Aircraft Cargo Systems
Division for the manufacture of all aircraft cargo handling
systems, laminated panels and related spares and to the Company's
Pemco Nacelle Services subsidiary for the maintenance and overhaul
of engine nacelles and thrust reversers for European-operated
aircraft. The JAA approvals enhance the Company's expansion in the
global marketplace allowing the Company to utilize full U.S. and
European authority on all of the Company's aircraft maintenance,
modification and manufacturing products and services.
Relocation of Pemco Nacelle Services, Inc.
The Company anticipates relocating Pemco Nacelle Services,
Inc. to its Clearwater facility in the second quarter of 1995 in
order to accommodate the current and anticipated needs of Pemco
Nacelle. The Clearwater facility also houses the PASS aircraft
parts distribution center. Earlier, the Company suspended its
aircraft maintenance operations at the facility to adjust its
staffing to current work levels.
PRINCIPAL PRODUCTS AND SERVICES
Aircraft Maintenance and Modification
General
The Aircraft Maintenance and Modification services offered by
the Company provide a skilled work force and a large, permanent
engineering, design and analysis staff. This comprehensive staff
performs custom airframe design and modification functions and
offers complete airframe maintenance and repair services together
with technical publication and reprographic capabilities. The
Company's work force and engineering staff are capable in all
aspects of aerodynamics, propulsion, fluid mechanics, flight
operations, fuel and induction systems, controls, communications,
radar, instrumentation and support research and development
functions. The Company's reprographic capability includes
photographic enlargement, negative, mylar photomural and film
positive products, xerographic reproduction, and such other support
functions as fomecore mounting, binding, microfilming and video
inventorying of aircraft input for production.
The principal services performed under contract are Programmed
Depot Maintenance, commercial "C" and "D" checks, overhaul and
modification of fixed and rotary wing aircraft, passenger-to-
freighter conversions, passenger-to-Quick Change conversions,
aircraft strip and paint, component overhaul, rewiring, military
landing gear overhaul, parts fabrication and engineering support.
The Company maintains its own hydraulic and sheet metal machine
shops to satisfy all of its hydraulic test and assembly needs and
to fabricate, repair and restore parts and components for aircraft
structural modification. The Company also performs in-house,
heat-treatment work on alloys used in aircraft modifications and
repairs and has complete non-destructive testing capabilities and
test laboratories.
The Company has produced quality maintenance and modification
work on a wide variety of aircraft over the past 43 years,
including C-130, KC-135, B-757, B-747, B-737, B-727, B-707, DC-8,
DC-9, C-9, P-3, T-34, A-300, BAE-146 and U.S. Navy H-2 helicopters.
C-130
The Company has performed Programmed Depot Maintenance on the
U.S. Air Force C-130 Hercules aircraft continuously since 1965.
The C-130 is a four engine, turboprop military cargo aircraft built
by Lockheed since the mid 1950's. There are more that 700 C-130
aircraft in the U.S. military fleet and this aircraft is expected
to remain an integral part of the U.S. Air Force transport fleet
through the mid 2010's. In addition to the C-130 PDM contract, the
Company has performed modification work for the U.S. Air Force
under a C-130 wing retrofit contract. In total, the Company has
processed over 3,100 C-130 aircraft.
The U.S. Air Force awarded a five year contract to the Company
for the maintenance of C-130 aircraft in 1991. The contract
expires in 1996 at which time the Company intends to vigorously
pursue its re-award.
KC-135
The Company first performed Programmed Depot Maintenance on
the U.S. Air Force KC-135 aircraft in 1968, and has since processed
over 2,050 of the aircraft. There are approximately 740 KC-135
aircraft in the U.S. military fleet, and this aircraft is expected
to remain operational beyond the year 2020. In addition to the
KC-135 PDM contract, the Company has performed major KC-135
aircraft modifications including wing re-skin, major rewire,
corrosion prevention control, flight director, auto pilot, and fuel
savings advisory system modifications.
In August of 1994, the United States Air Force awarded the
Company a new contract for Programmed Depot Maintenance of KC-135
aircraft. The contract is expected to run for seven years and
involve the maintenance of as many as 406 aircraft. In October of
1994, the Air Force awarded approximately $38.0 million of work for
the first fiscal year under the contract. This annual award does
not include amounts for "drop-in" aircraft or additional work of a
non-routine nature which is funded on a case-by-case basis. The
amount funded as of March, 1995 under the first year of the
contract had increased to $41.6 million. The total value of the
contract over a seven year period, if fully funded, is expected to
be over $254.0 million.
The current contract follows a five year contract awarded in
1990. The total funding on the prior five year contract was
approximately $261.0 million.
Most major government aircraft maintenance and modification
programs are awarded for a one year term with optional follow-on
years. The awards are generally fixed price contracts which also
provide the opportunity for additional work to be done on a time
and materials cost basis. The Company aggressively pursues this
market by remaining in close contact with the various planning and
procurement agencies of the U.S. Government and foreign services
and following new and revised programs from the early program
definition stage through the final contract award. Potential
commercial programs are followed in a similar manner through close
and continued contact with airlines, cargo carriers and leasing
companies.
The Aircraft Maintenance and Modification service is performed
at the Birmingham and Dothan Divisions of the Aeroplex and at Pemco
World Air Services, A/S in Copenhagen, Denmark. Each of these
facilities is an FAA and JAA approved Repair Station which employs
Designated Engineering Representatives ("DERs"). DERs are design
and engineering personnel certified by the FAA, thus permitting the
Company to design certain systems without individual FAA approval.
The Company's principal customers for its Aircraft Maintenance
and Modification service are the United States and foreign armed
services, commercial air carriers (both domestic and foreign,
passenger and cargo) and aircraft leasing companies. The Company
markets its products and services in the United States, Europe,
Scandinavia, Africa, the Middle East and the Commonwealth of
Independent States (CIS).
The Company's competition in the United States consists mainly
of other independent, unlimited repair stations and modifications
centers. There are approximately 10-15 such facilities in the
United States, ranging from $1 million to $150 million in revenue,
which compete with the Company for business in this approximately
$2.0 billion industry. However, most of the Company's domestic
competitors tend to specialize in particular portions of the
aircraft while the Company focuses on total airframe repair,
maintenance and conversion. Outside of the United States, the
majority of the Company's competitors are affiliated with an
airline. The Company's competition for its conversion products
resides in the United States and in Israel.
The Company considers its competitive strengths to be its
engineering capability, trained labor force, substantial capacity
and strong customer base. Additionally, the Company believes
itself to be the first U.S. independent operator to have
established a base in Europe. This will allow the Company to
expand its relationships with aircraft leasing companies and to
offer its conversion products and support capabilities to leasing
companies' fleets on two continents simultaneously.
Supersonic and Subsonic Aerial Tow Targets and Wing Tip Infrared
Pods
The Company designs and manufactures supersonic and subsonic
aerial tow targets and wing tip infrared pods. The family of low
cost, high speed targets is known as the Hayes Universal Tow Target
System (HUTTS). The targets can be flown from any commercial or
military aircraft capable of carrying external stores as well as
from most drone aircraft. The targets are available in various
detection configurations: 1) visual smoke 2) visual light 3)
infrared (simulates a jet aircraft engine) 4) radar and 5)
visual fiber streamer. A maneuvering tow target and a low altitude
sea-skimming target are also available in each of the above
configurations. The various targets and equipment associated with
the HUTTS are fully-developed and operational in the U.S. military
services and in the services of many foreign countries.
The infrared wing tip pods are utilized on sub and full scale
drones or droned excess military aircraft. Hayes Targets has
supplied 100% of infrared augmentation for the U.S. Air Force for
the last 20 years. Hayes Targets is presently designated as an Air
Force "Blue Ribbon Contractor".
The targets and pods are produced by the Company's Targets
Division at Leeds, Alabama. The principal markets for the targets
are the U.S. armed forces as well as markets in Europe, the Middle
East, Australia and South America. The Company's competition
consists of one competitor on the west coast of the United States
and two foreign entities. The Company considers its competitive
strength in this market to be its innovative engineering
capabilities and superior product performance.
Space Vehicles and Support Systems
The Company maintains a large research, development and
engineering staff dedicated to the design and manufacture of space
related systems such as sounding rockets, launch vehicles, guidance
and control subsystems, vehicle structures and recovery systems.
The staff serves in the capacity of a subcontractor in most large
U.S. Government Department of Defense programs. The staff has
prime contracts with NASA in support of space science and does a
limited amount of commercial space work.
The Company's largest contract in this arena is the HERA
program which will provide realistic ballistic targets for Theater
Missile Defense (TMD) interceptor deployment. The HERA program,
initiated in 1992, provides for twenty-five target vehicles to be
utilized during interceptor testing of various TMD systems through
the year 1997. Options to provide an additional fifty target
vehicles to continue Army testing and to accommodate Air Force and
Navy TMD missions through the year 2000 are part of the long-range
HERA program. The initial demonstration flight test vehicle is
scheduled for launch in April 1995 with the first target mission
scheduled for July 1995. The HERA program is sponsored by the U.S.
Army Space and Strategic Defense Command. Its contractor team is
comprised of Coleman Research Corporation as the system prime
contractor, Space Vector Corporation as the booster subcontractor,
and Aerotherm Corporation as the ballistic reentry target
subcontractor.
This product line is produced by the Company's Space Vector
subsidiary, which is located at Chatsworth, California with a
satellite office at Fountain Valley, California. The Company's
principal markets for its space and missile products are the U.S.
Government, prime contractors to the U.S. Government, and the
scientific community in general. The Company's competition ranges
from very small organizations for the component subsystems to major
corporations for the design and manufacture of spacecraft and
launch vehicles. The Company considers its competitive strength to
be its technical and managerial competence. The Company's
contracts are awarded in accordance with the government's
competitive bidding practices.
Cargo Handling Systems
The Company designs and manufactures on-board cargo-handling
systems for all types of large transport aircraft, including B-747,
B-727, B-737, DC-8, DC-9/C-9B, DC-10/KC-10, L-1011, L-100 and
L-188, and certain other military aircraft. Robotics and
fully-computerized machinery are used to produce a wide variety of
aircraft cargo handling systems as well as individual parts used in
the Company's proprietary systems and in other systems. These
cargo systems represent state-of-the-art technology in their
design, efficient use of floor space and maximum strength, with a
minimum of added weight. The systems meet all of the FAA and JAA
Quality Assurance Standards, MIL-I and MIL-Q qualifications as
required.
This product line is produced by the Company's Pemco Engineers
Aircraft Cargo Systems Division located at Corona, California. The
Company's principal markets for the cargo handling system are all
major United States and foreign airlines and aircraft
manufacturers. The Company has approximately eight competitors and
considers its strength in this industry to be its innovation,
quality and response time.
Precision Springs and Components
The Company manufactures precision springs and components and
employs custom design, tooling and precision stamping in the
production of these high tolerance parts. The springs and
components are used in a variety of industrial, commercial and
residential applications.
This product line is produced by the Company's Pemco Engineers
Springs and Components Division. This division is also located at
Corona, California and shares state-of-the-art equipment with Pemco
Engineers Aircraft Cargo System Division. The Company markets its
precision springs and components to a wide range of manufacturers
in numerous industries. There are approximately 500 manufacturers
of springs and components in the United States making it a $1
billion industry. The Company's competitors range in size from
"single-machine" shops to companies with revenues exceeding $20
million. Most of the competitors, however, produce a broader mix
of products while the Company focuses on the manufacture of
precision springs and components.
Parts Support and Component Overhauls
The Company's Parts Support and Component Overhaul service
provides a comprehensive source for aircraft spares and component
overhauls. The Company uses its inventory and on-line tracking and
sales system to provide support to the cargo conversion customers
of Pemco World Air Services as well as to users and owners of a
wide range of commercial and military aircraft. This service
provides the Company's customers with the capability of locating
spare parts virtually anywhere in the world, an inventory of
critical spare parts for the Company's conversion programs and 24
hour "Aircraft on Ground" service.
This service is provided by Pemco Air Support Services, Inc.
("PASS"). PASS has three locations. PASS facilities at
Birmingham, Alabama and Clearwater, Florida serve North and South
America as well as the Pacific Rim. The PASS facility in
Copenhagen, Denmark serves Europe, Africa, and the Middle East.
The Company markets its parts support and component overhaul
service to commercial carriers worldwide as well as to foreign
armed services.
In the area of supporting and selling the Company's designed
and manufactured parts, the Company often benefits from a captive
market situation. In the second area of competition, which is the
brokerage of non-proprietary parts, the industry is comprised of
several large companies and as many as a thousand smaller
companies. While the Company is still a small player in this
market segment, its goal is to market quality products that
interest the users of the Company's products, thus creating a sales
synergy. To this end, the Company has obtained several European
distributorships for U.S. based companies and expects to increase
the number of distributorships to 15-20 over the next few years.
Its future market strength will depend on the Company's ability to
create innovative pricing structures, provide higher quality
service and the acquisition of parts inventories or teaming
arrangements upon beneficial terms.
Nacelle Overhaul and Repair
The Nacelle Overhaul and Repair service provides a
comprehensive source for the overhaul, repair and modification to
nacelles and thrust reversers for engines supplied by General
Electric, Pratt & Whitney and Rolls-Royce.
This service is provided by Pemco Nacelle Services, Inc. which
is located at Leeds, Alabama. The Company markets its nacelle
overhaul and repair service to commercial carriers worldwide and
supports turbofan-powered aircraft manufactured by Airbus, Boeing
and McDonnell Douglas. There are approximately five competitors in
the United States and abroad. The Company entered this line of
business in March of 1993 and plans to build its competitive
strength on turnaround time, the convenience of customer exchange
in lieu of repair, quality, and price.
STATUS OF NEW PRODUCTS OR SERVICES
B-737 Conversion Program
In June of 1991, the Company completed and received a
Supplementary Type Certificate (STC) for the first after-market
conversion of a factory-delivered Boeing 737-300 aircraft from
passenger-to-freighter or passenger-to-Quick Change configurations.
(Quick Change aircraft can be used to carry either passengers or
freight, thus increasing aircraft utilization and revenues.) The
Company had converted twenty-nine 737-300 aircraft as of December
31, 1994.
The Company also developed an amendment to the above STC in
order to accomplish the conversion of a Boeing 737-200 aircraft
from passenger-to-freighter or passenger-to-Quick Change
configurations. The Company converted two 737-200 aircraft in 1994
and has eight option ships in its backlog.
B-757 Conversion Program
In September of 1992, the Company entered into a data
licensing agreement with Boeing to facilitate development by the
Company of a STC for the after market conversion of Boeing B-757
aircraft from passenger-to-freighter or passenger-to-Quick Change
configurations. The Company is continuing to seek a launch
customer for this program.
Formation of Joint Stock Company with British Russian Aviation
Corporation (BRAVIA)
The Company agreed in June of 1993 to form a joint stock
company in cooperation with British Russian Aviation Corporation
(BRAVIA) for the conversion of TU-204 passenger aircraft to
freighter, Quick Change (QC) and "combi" configurations and for
stripping, cleaning and painting of the aircraft. The joint stock
company is to include BRAVIA shareholders, Tupolev, Aviastar and
Aviation Ventures, a subsidiary of Fleming Russian Investment
Corporation. No constructive progress concerning the joint stock
company was made in 1994 and the Company does not foresee the
venture progressing substantially in 1995.
RESEARCH AND DEVELOPMENT
The Company charged the cost it incurred for company sponsored
research and development costs, which totalled $0.8 million in
1994, $0.4 million in 1993 and $0.8 million in 1992 directly to
earnings. The research and development activities in 1994 were
principally in support of the Targets and Aircraft programs. In
1995, research and development costs are expected to be in the $0.5
to $1.0 million range, again principally in support of the Targets
and Aircraft programs. The Company is not engaged in any customer
sponsored research and development efforts.
SALES
Foreign and Domestic Operations and Export Sales
The majority of the Company's revenues were generated in the
United States and the majority of the Company's assets are located
in the United States. The Company has two foreign operations,
Pemco World Air Services, A/S which is registered as a Danish
limited company and Pemco Air Support Services which is registered
as a Danish branch of a U.S. company. These foreign operations
contributed less than four percent of the Company's consolidated
revenue in 1994 and own less than four percent of the Company's
identifiable consolidated assets. The Company does not expect the
growth rate of its foreign operations to substantially exceed the
growth rate of the Company as a whole.
The Company provides maintenance and modification services to
foreign-based aircraft owners and operators at its U.S. facilities
and its Copenhagen, Denmark facility. The Company's Targets, Space
Vector and Aircraft Cargo Systems Divisions also sell in export
markets. The services and products sold at the Company's U.S.
locations are payable only in U.S. dollars. The Company's
Copenhagen locations accept payments in Danish kroner and U.S.
dollars, as well as other foreign currencies.
The following table presents the percentages of total sales
for each principal product and service rendered for the last three
fiscal years and the percentage of export sales for the last three
fiscal years. (See also footnote number 13 to the accompanying
financial statements of the Company which are included under Item
8 hereof):
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Product and Service Rendered 1994 1993 1992
Aircraft Maintenance 81% 86% 85%
and Modification
Supersonic and Subsonic 3% 2% 4%
Aerial Tow Targets and
Wing Tip Pods
Space Vehicles and 8% 6% 6%
Support Systems
Cargo Handling Systems 6% 5% 5%
Precision Springs <1% <1% <1%
and Components
Parts Support and Component 2% 1% <1%
Overhauls
Nacelle Overhaul and Repair <1% <1% 0%
100% 100% 100%
Export sales 7% 10% 15%
-principally Europe
</TABLE>
Major Customers
<TABLE>
The following table presents the percentages of total sales
for the Company's largest customers for the last three fiscal
years:
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1994 1993 1992
U. S. Government 66% 69% 59%
-principally the Air
Force, Army, Navy, and NASA
</TABLE>
Backlog
<TABLE>
The following table presents the backlog (in thousands of
dollars) at December 31, 1994 and 1993:
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1994 1993
U. S. Government $113,488 $121,968
Commercial 59,882 52,062
Total $173,370 $174,030
</TABLE>
For the year ending December 31, 1994, 65% of the Company's
backlog was for the U.S. Government versus 70% for the year ending
December 31, 1993. The backlog for the U.S. Government decreased
$8.5 million from 1993 to 1994, primarily due to performance of
work in 1994 under the Company's HERA contract. The HERA contract
is the Company's largest contract for its Space Vehicles and
Support Systems. The HERA contract backlog at December 31, 1993
was approximately $17.4 million versus $12.7 million at December
31, 1994. The Company's U.S. Government backlog also decreased due
to the completion of the Company's contract at the government-
owned, company-operated facility at Bergstrom U.S. Air Force Base
and due to a $4.6 million reduction in C-130 orders. Partially
offsetting the reduction in U.S. Government backlog is an increase
of $3.5 million in KC-135 orders. Commercial backlog increased
$7.8 million primarily due to the additional scheduling of 727
cargo conversion aircraft.
Approximately $27.2 million of 1994 commercial backlog,
(compared to $25.4 million at December 31, 1993) included above may
not be considered firm as it includes maintenance and modification
work to be performed on optional aircraft. Approximately $28.9
million of 1994 U.S. Government backlog (compared to $27.0 million
at December 31, 1993) included above are firm orders that have not
yet been funded. Additionally, the Company has approximately
$200.0 million of firm but unfunded backlog associated with the six
follow-on years of the KC-135 contract and $6.5 million associated
with the final year of the C-130 contract which is not included in
the figures cited above. Approximately $115.7 million of the
December 31, 1994 backlog is expected to be filled in 1995.
RAW MATERIALS
The Company purchases a variety of raw materials including
aluminum sheets and plates, extrusion, alloy steel and forgings.
The Company experienced no significant shortages of raw material
essential to its business during 1994 and does not anticipate any
shortages of critical commodities over the longer term; although,
this is difficult to assess because many factors causing such
possible shortages are outside its control. The Company has
experienced a noticeable increase in lead times from its vendors,
particularly on aluminum and extrusion orders. This could
culminate in an increase in the cost of the Company's raw material
purchases in 1995.
The Company procures many components, parts and equipment
items from various domestic companies. The Company faces some
dependence on suppliers for certain types of parts involving highly
technical processes; however, this risk has lessened in the past
few years as additional high technology suppliers have entered the
market. The Company does not believe this dependence has
significance for its business as a whole; rather, any adverse
consequence that might result from the failure of a sole supplier
to provide a particular part would be felt on an individual
contract basis.
A significant portion of the equipment and components used by
the Company in the fulfillment of its services under United States
Government contracts is furnished without charge to the Company by
the U.S. Government. The Company is dependent upon U.S. Government
furnished material to meet delivery schedules, and untimely receipt
of such material would adversely affect production schedules and
contract profitability. The Company has encountered late delivery
of Government-furnished material (GFM) in 1993 and 1994 and as a
result, has experienced a disruption in scheduled work flow. The
Company has submitted a request for Equitable Adjustment to the
U.S. Government for the increased costs it has incurred
attributable to untimely receipt of GFM. The Company has recorded
a long-term receivable and revenue equal to $3.5 million associated
with this request. The Company anticipates the late delivery of
GFM by the U.S. Government to continue in 1995.
PATENTS, TRADEMARKS, COPYRIGHTS AND STC'S
The Company holds 36 FAA-issued Supplementary Type
Certificates (STCs) which authorize it to perform certain
modifications to aircraft. These modifications include air-stair
installation and the conversion of commercial aircraft from
passenger-to-freighter or passenger-to-Quick Change configurations.
The STCs are applicable to Boeing 707, 727, 737, Douglas DC-6,
DC-8, DC-9, and Convair 580 Series Aircraft. The Company also
holds 13 STCs related to its cargo handling systems for various
types of large transport aircraft. STCs are not patentable but
instead indicate an FAA acceptable procedure to perform a given
air-worthiness modification.
The Company holds 24 FAA-issued Parts Manufacturing Approvals
(PMAs) which give it authorization to manufacture parts of its own
design or that of other manufacturers related to its cargo handling
system. The Company holds numerous other PMAs which give the
Company authority to manufacture certain parts used in the
conversion of aircraft from passenger-to-freighter and passenger-
to-Quick Change configurations. The Company has an intangible
asset of approximately $0.2 million at December 31, 1994 related to
the STCs and PMAs and will fully amortize this intangible asset
over the next ten years.
The Company holds two active utility patents and three active
design patents related to the target product line. Three of the
patents (one utility expiring in 2001 and two designs expiring in
1998) concern infrared augmentation. The second utility patent is
a British patent (expiring in 1997) and concerns visual
augmentation. The remaining design patent (expiring in 1998)
concerns a portable ground scoring unit developed for the purpose
of scoring ground-based target emplacements on ground-to-air
gunnery ranges. All of the patents except the British patent are
U.S. patents. The Company does not believe that the expiration or
invalidation of any or all of these patents would have a material
adverse impact upon its financial condition.
The Company holds copyrights to the computer software
developed in-house for the operation of the Power Drive Unit System
and Cargo Door Electro-Mechanical System used in the conversion of
commercial aircraft, as well as copyrights to the software for the
development of the control computer codes for the TLX-1
sea-skimming, height-keeping tow target, and the TMX class
maneuvering target. These copyrights are not registered and will
begin to expire after the year 2028.
ENVIRONMENTAL COMPLIANCE
The Company has requirements to comply with environmental
regulations at the federal, state and local levels. These
requirements apply especially to the stripping, cleaning and
painting of aircraft. The requirements to comply with
environmental regulations have not had, and are not expected to
have, a material effect on the Company's capital expenditures,
earnings and competitive position.
The Company has been designated as a potentially responsible
party under the Comprehensive Environmental Response, Compensation
and Liability Act for contamination associated with a site near its
Clearwater facility. It is difficult to estimate the total cleanup
costs and to predict the method that will be used to allocate such
costs among the responsible parties. However, based upon presently
known facts, the Company does not believe that the resolution of
this matter will have a material adverse effect on the Company's
financial position, results of operations or cash flows.
EMPLOYEES
At March 15, 1995, the Company employed approximately 2,414
persons, of whom approximately 1,686 were covered by collective
bargaining agreements. Twenty-eight of the employees are employed
on a part-time basis.
The two primary collective bargaining agreements are with the
International Association of Machinists at the Company's Dothan,
Alabama location and the United Auto Workers at the Company's
Birmingham, Alabama and Leeds, Alabama locations.
The collective bargaining agreement with the International
Association of Machinists was successfully negotiated without a
work stoppage in August of 1992 and was extended for five years to
August 1997. The collective bargaining agreement with the United
Auto Workers was successfully negotiated without a work stoppage in
July of 1993 and was extended for three years to July of 1996.
Good relations continue between labor and management at each of the
facilities.
Item 2. Properties.
All of the Company's properties are generally well maintained
and in good operating condition. All facilities were adequately
utilized during 1994 except the Company's Clearwater, Florida
facility. The Company suspended aircraft maintenance operations in
Clearwater during the second quarter of 1994 in order to adjust its
overall staffing to anticipated work levels. The Company
continued, however, to operate the PASS aircraft parts distribution
center at the Clearwater facility. In the second quarter of 1995,
the Company anticipates relocating Pemco Nacelle Services to the
Clearwater facility in an effort to accommodate the current and
anticipated needs of Nacelle. The relocation of Nacelle to
Clearwater is expected to increase the utilization of the
Clearwater facility but not to bring it to a level of full utility
in 1995. Pemco Nacelle Services is currently located in Leeds,
Alabama and is subleasing an 8,700 square foot building from the
Targets Division. This building will be utilized by the Targets
Division subsequent to the relocation of Nacelle to Clearwater,
Florida.
Pemco Aeroplex, Inc. - Birmingham, Alabama
The Birmingham Division of the Aeroplex is located at the
Birmingham International Airport, at Birmingham, Alabama. The
facility is located on 208 acres of land with approximately
1,935,000 square feet of production and administrative floor space.
The facility includes ten flow-through bays, each 40 feet high, 160
feet wide and 725 feet long, permitting continual production line
operation. The facility also includes a number of ancillary
buildings such as a paint hangar, a shipping and receiving
warehouse, a wing rehabilitation shop, a sheet metal shop and a
54,904 square foot general office building which houses Aeroplex
administrative staff as well as PASS and the Precision Standard
headquarters. Available ramp area exceeding 3,000,000 square feet
is adjacent to the municipal airport runways. Additionally, the
facility operates a control tower which supplements the FAA-managed
municipal air control tower and a fire fighting unit which
supplements fire fighting equipment operated by both the City of
Birmingham and the Alabama Air National Guard.
The Birmingham facility is in every material respect a
complete aircraft modification and maintenance center. The
facility is an approved FAA and JAA Repair Station and maintains
Department of Defense "SECRET" security clearance.
The facility is leased from the Birmingham Airport Authority
under a lease agreement which expires on September 30, 1999.
Pemco Aeroplex, Inc. - Dothan, Alabama
The Dothan Division of the Aeroplex is located at the Dothan
Municipal Airport, at Dothan, Alabama. The facility is located on
91.5 acres of land with approximately 521,000 square feet of
production and administrative floor space. The facility includes
352,000 square feet of aircraft hangar space which is comprised of
13 bays and one wide-body aircraft hangar. The facility also
includes four warehouses, two paint hangars, support shops and
26,000 square feet of administrative offices. The facility has
850,000 square feet of aircraft flight line and parking ramp space
and is served by an airport consisting of two runways of 5,600 and
8,500 feet, a FAA Flight Service Station and a control tower.
The facility is leased from the Dothan/Houston County Airport
Authority under a lease agreement which, inclusive of a five year
option period, expires in June of 2015.
Pemco World Air Services A/S - Copenhagen, Denmark
Pemco World Air Services, A/S is located at the Copenhagen
Airport. The facility is located on 87 acres of land with
approximately 252,000 square feet of production and administrative
floor space. The facility was built in 1988 and has two large,
modern hangars comprised of four bays. The hangars can accommodate
DC10/MD11-sized aircraft and are equipped with overhead work
platforms. Each hangar also includes stockroom, backshop and
office space. The JAA and FAA approved facility has 103,300 square
feet of ramp space and is served by an airport consisting of three
runways.
The facility is leased from the bankruptcy estate of Sterling
Airways under a five year lease agreement that includes a purchase
option at the end of the lease term. The five year lease expires
in May of 1999.
The Clearwater Facility
The Company's Clearwater facility is located at the St.
Petersburg/Clearwater International Airport at Clearwater, Florida.
The facility is located on 22 acres of land with approximately
133,000 square feet of production and administrative floor space.
The facility includes 2 bays of approximately 92,000 square feet as
well as supply and support shops and administrative offices. The
facility has 782,000 square feet of ramp space and is served by
airport facilities consisting of five runways (from 4,000 to 8,500
feet), a FAA Flight Service Station and a control tower.
The facility is leased from Pinellas County, a political
subdivision of the State of Florida, under a lease agreement that
expires in September of 1995, exclusive of five optional renewal
periods of five years each which would extend the lease until 2029.
The Targets Division
The Targets Division is located at Leeds, Alabama. The
facility is located on 4 acres of land and consists of one metal
building with approximately 32,000 square feet of manufacturing and
office floor space. The Targets Division occupies this building
under a lease agreement which, inclusive of a twelve year option
period, expires in December of 2006.
Pemco Nacelle Services, Inc.
Pemco Nacelle Services is currently located at Leeds, Alabama,
adjacent to the Targets Division. The facility consists of one
metal building of approximately 8,700 square feet. This facility
is subleased from the Targets Division.
Space Vector Corporation
Space Vector Corporation is located at Chatsworth, California.
The Company relocated its operations in February, 1994 due to
irreparable earthquake damage to the buildings it had been leasing
previously. The new location is in close proximity of its former
Chatsworth location and consists of two industrial buildings of
approximately 67,000 square feet. Space Vector Corporation
occupies these buildings under a lease agreement which expires in
April, 1999.
Space Vector also leases a 3,400 square foot research and
development and administrative office in Fountain Valley,
California. This lease expires in October of 1997.
Pemco Engineers Aircraft Cargo Systems and Springs and Components
Divisions
Pemco Engineers is located at Corona, California. The
facility consists of 28,000 square feet of production and
administrative floor space. The facility is under a lease
agreement which, inclusive of a five year option period, expires in
December of 2001.
Pemco Air Support Services (PASS)
PASS has three locations: administrative offices at the
Birmingham facility, a warehouse at the Clearwater facility, and
approximately 5,000 square feet of office and warehouse space at
Copenhagen, Denmark. The Denmark facility is five kilometers from
the Copenhagen Airport and is leased with the lease expiring,
inclusive of a five year option period, in November of 2002.
Item 3. Legal Proceedings.
Various claims of employment discrimination, including race,
sex, age and disability, have been made against the Company's
subsidiary, Pemco Aeroplex, Inc., in proceedings before the Equal
Employment Opportunity Commission and, in some cases, in U.S.
District Court in Alabama by several current and former employees
at its Birmingham, Alabama and Dothan, Alabama facilities. The
Company is also defending several workers compensation claims
brought by employees in Alabama state court. The Company believes
that these claims, no one of which is material to the Company as a
whole, are more reflective of the general increase in employment
related litigation in the U.S. and in Alabama than of any actual
discriminatory employment practices by the Company. The Company
believes that these claims have no merit and intends to vigorously
defend itself in all litigation arising therefrom.
The Company has been designated as a potentially responsible
party under The Comprehensive Environmental Response, Compensation
and Liability Act for contamination associated with a site near its
Clearwater facility. See Item 1. Business, Environmental
Compliance, for further disclosure.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted for a vote of the Company's
shareholders in the fourth quarter of fiscal 1994.
Item 5. Market for Company's Common Equity and Related Stockholder
Matters.
The Company's common stock trades on The NASDAQ National
Market System under the symbol "PCSN." Approximately 67% of the
outstanding shares of the Company's common stock is held by Matthew
L. Gold, the Company's Chairman, President and Chief Executive
Officer.
The following table sets forth what the Company believes to be
the range of high and low bid quotations for its common stock on a
quarterly basis for each of the Company's last two fiscal years.
Quotations represent prices between dealers, do not include retail
mark-ups, mark-downs or commissions, and do not necessarily
represent actual transactions.
<TABLE>
<S> <C> <C>
Bid Quotations
High Low
1993
March 31, 1993 1-7/16 25/32
June 30, 1993 3-1/2 1-1/4
September 30, 1993 4-5/8 3
December 31, 1993 6-1/8 4
1994
March 31, 1994 3-5/8 2-3/4
June 30, 1994 3-1/2 2-1/2
September 30, 1994 3-1/8 2-5/8
December 31, 1994 2-1/8 1-5/8
</TABLE>
On December 31, 1994, there were 12,787,208 shares of common
stock issued of which 105,657 shares are restricted shares that
were issued in December of 1994. There are 12,344,291 shares
outstanding held by 232 owners of record, which the Company
believes were held by more than 500 beneficial owners.
The Company has never paid cash dividends on its common stock
and currently intends to continue its policy of retaining all of
its earnings for use in its business.
Item 6. Selected Financial Data.
<TABLE>
Consolidated operating data for the Company is as follows
(in thousands of dollars):
<S> <C> <C> <C> <C> <C>
Year Year Year Year Year
Ended Ended Ended Ended Ended
12/31/94 12/31/93 12/31/92 12/31/91 12/31/90
Net Sales $148,495 $169,868 $146,229 $137,248 $133,648
Income 6,812 14,184 7,053 2,299 9,801
from
operations
Income (loss) 11,227 7,271 1,169 (2,865) 2,869
before extra-
ordinary item
Earnings before .67 .58 .10 (.23) .23
extraordinary
item (loss) per
share of
common stock
(primary and
fully diluted)
Net Income 11,227 5,997 2,046 (1,764) 2,907
(loss)
Net Income .67 .47 .16 (.16) .23
(loss) per
share of
common stock
(primary and
fully diluted)
</TABLE>
<TABLE>
Consolidated balance sheet data for the Company is as
follows (in thousands of dollars):
<S> <C> <C> <C> <C> <C>
Year Year Year Year Year
Ended Ended Ended Ended Ended
12/31/94 12/31/93 12/31/92 12/31/91 12/31/90
Working $14,277 $23,127 $14,615 $ 17,500 $ 18,089
Capital
Total 80,776 70,905 71,803 72,757 75,572
Assets
Long-Term
Obliga-
tions:
Debt 14,925 28,567 33,792 43,212 43,287
Other 15,671 10,708 4,218 3,196 3,927
Stockholders
equity 12,515 4,287 3,019 974 2,738
</TABLE>
Item 7. Management's Discussion and Analysis of Financial
Conditions and Results of Operations.
INTRODUCTION
The following discussion should be read in conjunction with
the Company's consolidated financial statements and notes thereto
included herein as Item 8.
RESULTS OF OPERATIONS
Twelve Months Ended December 31, 1994
Versus Twelve Months Ended December 31, 1993
Revenues for the year ended 1994 decreased 13%, from $169.9
million in 1993 to $148.5 million in 1994. Government sales
decreased 17% in 1994, from $117.8 million in 1993 to $98.1
million in 1994. Commercial sales decreased 3% in 1994, from $52.1
million in 1993 to $50.4 million in 1994. The Company's mix of
business between government and commercial customers remained
relatively constant in 1994 as compared to 1993 (66% government in
1994 versus 69% in 1993; 34% commercial in 1994 versus 31% in
1993.)
The decrease in government sales was due primarily to a
decrease in the redelivery of KC-135 and C-130 aircraft. There
were seventy KC-135 Programmed Depot Maintenance (PDM) redeliveries
in 1993 versus fifty-two redeliveries in 1994. Sixteen C-130 PDM
aircraft and thirty-six drop-in aircraft were redelivered in 1993
versus eight PDM and thirty-two drop-in redeliveries in 1994.
Additionally, government sales declined due to reduced volumes
under the KC-135 boom contract and the cessation of the Bergstrom
AFB GO-CO contract in June of 1994. An increase in sales of the
Company's Space Vehicles and Support Systems and Target products
partially offset the aforementioned decreases in sales.
The decrease in government revenues was also partially offset
by $3.5 million of revenue recorded in 1994 in anticipation of
settlement of a Request for Equitable Adjustment (REA). The REA,
which has been certified by the Company and submitted to the U.S.
Government, is for the equitable adjustment of the cost effect of
late delivery of government furnished materials on the KC-135 PDM
program. The Company has obtained an opinion from outside legal
counsel specializing in government procurement law and from
independent management consultants that there is a reasonable basis
to support the REA. The Company feels strongly that the evidence
in support of the REA is objective and verifiable, and the costs
associated with the REA are reasonable in view of the work
performed and are not the result of any deficiencies in the
Company's performance. The Company has considered the cost impact
of ships re-delivered to the government through December 31, 1994
and has recorded the REA net of reserves. The Company has recorded
reserves due to uncertainties inherent in the process of receiving
the full amount of equitable adjustments submitted. At this time,
the Company cannot reasonably estimate the length of time before
realization of the REA. Should the Company not ultimately receive
an equitable adjustment from the U.S. Government, which event the
Company deems unlikely, the Company would realize a pre-tax
reduction of revenue of $3.5 million.
The decline in commercial sales in 1994 as compared to 1993
was partially due to a reduction in the number of 737 cargo
conversion redeliveries (ten redeliveries in 1993 versus six
redeliveries in 1994). Conversely, and partially offsetting this
decrease in sales, was an increase in the number of 727 cargo
conversion redeliveries (thirteen redeliveries in 1994 versus nine
redeliveries in 1993). Revenue from maintenance and modification
aircraft services, other than commercial cargo conversions, also
declined in 1994.
The Company expects to redeliver approximately fifty-five KC-
135 PDM aircraft, nine C-130 PDM aircraft and twenty-three C-130
Drop-in aircraft in the year 1995. The Company expects to have
completed or have in process three 737 conversion aircraft and four
727 conversion aircraft at the end of the first quarter of 1995.
The ratio of cost of sales ($125.8 million in 1994; 138.9
million in 1993) to net sales ($148.5 million in 1994; $169.9
million in 1993) increased from 82% in 1993 to 85% in 1994. The
resultant decrease in gross profit is attributable primarily to the
aforementioned reduction in government sales and also to decreased
efficiency on the KC-135 contract due principally to the disruption
of scheduled work flow which occurred as a result of the lack of
government furnished material. Also, the Company recorded losses
on its 727 conversion contracts and increased its provision for
warranty claims related primarily to the Company's 737 cargo
conversion program. The Company also recorded losses associated
with the aircraft maintenance facility in Copenhagen, Denmark which
began operations in May of 1994. The negative impact of these
events was partially offset by the aforementioned $3.5 million of
revenue recorded as a result of the Request for Equitable
Adjustment to the U.S. Government and by an increase in efficiency
and profits on the Company's 737 cargo conversion program.
Selling, general and administrative expense decreased from
$16.3 million in 1993 to $14.4 million in 1994 but increased
slightly as a percentage of sales from 9.6% in 1993 to 9.7% in
1994.
Bad debt expense increased approximately $0.6 million,
primarily due to uncertainty of the realization of accounts
receivable from two commercial customers for whom aircraft
maintenance and modification services were performed in 1994.
Research and development expense increased approximately $0.4
million from 1993 to 1994 as efforts were increased on both
aircraft modification and aerial tow targets programs.
Interest expense decreased $3.0 million from $6.3 million in
1993 to $3.3 million in 1994. In 1993, the value of the common
stock purchase warrant held by Bank of America was deemed to have
increased $2.3 million which resulted in a $2.3 million increase in
interest expense. Aside from the effect of the warrant's
valuation, other interest expense declined $0.7 million as a result
of the pay down of outstanding debt, offset by an increase in
interest rates. The Company paid $8.0 million in principal against
its Term Credit facility in 1994. The effective interest rate in
1994 on the Term Credit facility was 6.99% versus 6.22% in 1993,
and the effective interest rate in 1994 on the Revolving Credit
facility was 6.97% versus 6.08% in 1993.
The Company records its income taxes in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes," which provides for recognition of
deferred tax assets if realization of such assets is more likely
than not. In 1994, the Company recognized an $8.3 million income
tax benefit and increased its net deferred tax asset to $13.1
million. The Company recognized gross deferred assets of $19.8
million, offset by deferred tax liabilities of $4.6 million and a
valuation allowance of $2.1 million, in anticipation of a reduction
in taxes payable in future years. This compares with gross
deferred tax assets of $20.2 million, deferred tax liabilities of
$4.8 million and a valuation allowance of $12.6 million in 1993.
The recognition of $8.3 million of income tax benefit is
related primarily to the change in the Company's valuation
allowance. In assessing the change in its valuation allowance and
the likelihood of realization of its deferred tax assets, the
Company considered the increase in its firm but unfunded backlog
associated with the follow-on years of its government contracts
($206.5 million at December 31, 1994; $25.0 million at December 31,
1993). The Company believes that future levels of taxable income
will be sufficient to realize its deferred tax assets.
Approximately $1.9 million of the Company's deferred tax asset
is recorded in conjunction with SFAS No. 87, "Employers' Accounting
for Pensions". The Company increased its additional minimum
pension liability $4.6 million in 1994, from $9.8 million at
December 31, 1993 to $14.4 million for the year ended December 31,
1994, representing the excess of the accumulated benefit obligation
(ABO) over plan assets plus prepaid pension costs. An intangible
asset of $4.7 million was recorded in 1994 versus $5.1 million in
1993, in order to reflect previously unrecognized prior service
cost. Also, the Company recorded an additional charge to equity of
$4.9 million, bringing its reduction to stockholder's equity from
$4.7 million at December 31, 1993 to $9.6 million at December 31,
1994, for the amount that the additional minimum liability exceeded
previously unrecognized service cost. The Company partially offset
the $9.6 million charge to equity, in accordance with SFAS Nos. 87
and 109, with $1.9 million of deferred tax assets. The deferred
tax asset is based on an effective tax rate of 39.31%.
Twelve Months Ended December 31, 1993
Versus Twelve Months Ended December 31, 1992
Revenues for the year ended 1993 increased 16%, from $146.2
million for 1992 to $169.9 million for 1993. Government sales
increased 37% in 1993, from $85.8 million in 1992 to $117.8 million
in 1993. Commercial sales decreased 14% in 1993, from $60.4
million in 1992 to $52.1 million in 1993.
The increase in government sales of approximately $32.0
million was due primarily to an increase in the number of KC-135
aircraft worked and redelivered, as well as an increase in the work
scope on these aircraft. There were seventy redeliveries in 1993
versus thirty-five redeliveries in 1992.
Conversely, and partially offsetting this increase in sales,
the Company had no C-9 cargo conversion aircraft redeliveries in
1993 versus two in 1992. The Company also had significant
reductions in 1993 in the scheduling of U.S. Navy H-2 helicopters.
The decrease in commercial sales of approximately $8.3 million
was due primarily to a reduction in the number of aircraft
redeliveries on the Federal Express contract (six redeliveries in
1992 versus no redeliveries in 1993). Commercial sales also
decreased due to a reduction in sales of aerial tow targets to
foreign governments and due to a slight reduction in 737 cargo
conversion redeliveries (eleven redeliveries in 1992 versus ten
redeliveries in 1993). Conversely, and partially offsetting this
decrease in sales, the Company redelivered nine 727 cargo
conversions in 1993 versus one such conversion in 1992.
The ratio of cost of sales ($138.9 million in 1993; $122.9
million in 1992) to net sales ($169.9 million in 1993; $146.2
million in 1992) declined from 84% in 1992 to 82% in 1993. The
resultant increase in gross profit is attributable primarily to a
change in the Company's mix of business. Approximately 69% of the
revenues generated in 1993 were from the U.S. Government, compared
to 59% in 1992. U.S. Government sales increased in 1993 primarily
due to increased activity under the KC-135 contract. The KC-135
contract is a highly labor intensive contract and involves mainly
government furnished material. As a result of the change in the
mix of business, material and other direct costs declined
approximately $5.0 million. Partially offsetting this increase in
gross profits were losses on certain commercial contracts due to
engineering design changes, subsequent delayed redeliveries and
labor and material cost overruns.
In the third quarter of 1993, the Company made a provision for
future losses of $1.4 million on a commercial contract involving
aircraft in work at December 31, 1993 and subsequent option ships.
This provision was reduced in the fourth quarter of 1993 by $0.9
million due to better than expected performance on the aircraft in
work. In addition, the Company recorded an increase of
approximately $3.0 million in its 737 and 727 cargo conversion
related finished goods in the fourth quarter of 1993, reduced work
in process by approximately $1.2 million and recorded a $1.8
million reduction to cost of sales. The positive impact of these
fourth quarter adjustments was partially offset by reduced margins
on the KC-135 program due to labor overruns and by an increase in
the accrual for incurred but unreported workman's compensation
claims of approximately $0.5 million. The narrowing of the profit
margin on the KC-135 contract can be attributed to both production
breaks due to the lack of government furnished material and labor
overruns.
Selling, general and administrative expense increased
approximately $1.6 million from 1992 to 1993 but remained a
constant 10.0% of sales in both 1992 and 1993. The increase of
$1.6 million is due primarily to the hiring of additional staff and
increased legal expenses.
Research and development expense declined $0.4 million due
primarily to lower sales of low altitude tow targets. Other
expense increased $0.4 million due primarily to an increase of
approximately $.13 million in payroll tax penalties in 1993 and a
$0.14 million favorable settlement recorded in 1992.
Interest expense increased $1.4 million from $4.9 million in
1992 to $6.3 million in 1993. The value of the common stock
purchase warrant held by Bank of America was deemed to have
increased $2.3 million in 1993 which resulted in a $2.3 million
increase in interest expense. Aside from the valuation of the
stock warrant, other interest expense declined $0.9 million as a
result of both the pay down of outstanding debt and lower average
interest rates. The Company has paid $6.0 million in principal in
1993 against its Term Credit facility. The effective interest rate
in 1993 on the Term Credit facility was 6.22% versus 7.25% in 1992,
and the effective interest rate in 1993 on the Revolving Credit
facility was 6.08% versus 7.64% in 1992.
Income tax expense in 1993 was $0.3 million versus $1.1
million in 1992. The Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes",
effective January 1, 1993, which changed the Company's method of
accounting for income taxes from the deferred method required under
Accounting Principles Board Opinion No. 11 to the liability method.
Under SFAS No. 109, income tax expense is reported net of the tax
benefit of net operating loss (NOL) carryforwards. Gross income
tax expense in 1993 was $3.7 million and the tax benefit of NOL
carryforwards was $3.3 million. Gross income tax expense in 1992
was $1.1 million and the NOL reported as an extraordinary item was
$0.9 million. In 1993, the Company utilized approximately $10.0
million of its NOL and in compliance with SFAS No. 109, allocated
$2.76 million of its 1993 NOL to the elimination of its intangibles
associated with the Company's 1988 acquisition of Hayes
International Corporation. The remaining NOL utilized in 1993 was
used to reduce tax expense.
The Company reduced its deferred tax asset valuation allowance
$2.8 million in 1993 and established a net deferred tax asset of
$2.8 million relating to the benefits arising from its remaining
NOLs. The Company had approximately $11.3 million of federal
operating loss carryforwards available to offset taxable income in
1994, and various state operating loss carryforwards as disclosed
in footnote number 8 to the accompanying financial statements of
the Company which are included under Item 8 hereof.
The Company booked an extraordinary loss of $1.3 million
related to the settlement of litigation in 1993.
The effects of inflation have not been significant to the
Company in 1994, 1993 or 1992 because inflation rates have been
relatively low. Additionally, contracts for both government and
commercial products generally include either estimates or
adjustments for inflation effects.
LIQUIDITY AND CAPITAL RESOURCES
The Company has three primary bank credit facilities: a
Revolving Credit facility, a Term Credit facility and Senior
Subordinated Credit facility. The Company reached an agreement in
March, 1994 with its primary lender to extend the maturity date of
both the Revolving Credit facility and Term Credit facility. Both
of these facilities previously were due in September, 1994. The
amended credit agreement provides that the maturity date of the
Revolving Credit facility is September 30, 1995. The agreement
provides that the maturity date of the Revolving Credit facility
can be extended to March 31, 1996 by the payment of an extension
fee as specified in the agreement. The amended Term Credit
facility provides for six equal quarterly installments of $2.0
million beginning on March 31, 1994 and continuing through June 30,
1995. The final payment of $7.0 million is due on September 30,
1995. Like the Revolving Credit facility, the maturity date of the
Term Credit facility can be extended by the payment of an extension
fee as specified in the agreement. Such an extension would allow
the Company to repay the Term Credit facility balance by an
installment of $2.0 million due on September 30, 1995 and December
31, 1995 and a final payment equal to the remaining unpaid balance
due on March 31, 1996. The Company has assumed an extension of
both the Term Credit facility and the Revolving Credit facility in
its classification of the maturity of its debt at December 31,
1994. The Senior Subordinated Credit facility provides for a
principal payment of $5.0 million, due in September, 1995 and 1996.
In connection with the Senior Subordinated Credit facility,
the Company granted a warrant to its lender, Bank of America (the
"Bank") to purchase 4,215,753 shares of the Company's common stock
at an exercise price of approximately $.24 per share. The warrant
provided for mandatory repurchase periods between June 15 and
December 14 during 1991, 1992 and 1993, at which time the Bank
could have required the Company to repurchase the warrant for the
per share difference between the then current appraised value of
the Company's common stock and the exercise price of the warrant
(the "put price"). The warrant was neither put nor exercised by
the Bank as of December 31, 1993. During the periods January 15,
1993 through April 14, 1993 and January 15, 1994 through September
14, 1994, the Company had the option to call the warrants for
repurchase. The Company exercised this right to call the warrant
on April 1, 1993. At December 31, 1994, the Company was in
violation of certain restrictive financial tests required by its
bank credit agreements. As one of the conditions to the granting
of waivers and amendments necessary to cure these violations and
preclude their recurrence, the Bank required rescission of the
Company's call of the warrant. The warrant remains otherwise
unchanged. The Company intends to continue to negotiate the
purchase of the warrant, and any purchase or change in the
Company's intent may have an impact on the Company's financial
position, earnings and cash flows depending upon the action taken.
The Company anticipates the restructuring or refinancing of its
existing credit facilities during 1995.
Following is a discussion of the significant items on the
Company's Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1993 and 1992.
Depreciation and amortization expense decreased in 1994 as
compared to 1993 and 1992 as a result of the elimination of $2.8
million of the Company's intangible assets at December 31, 1993.
The Company's intangible assets were eliminated in accordance in
SFAS No. 109 which required the utilization of loss carryforwards
to first offset intangible assets related to the Company's 1988
acquisition of Hayes International Corporation.
The valuation allowance associated with the Company's deferred
tax assets was reduced $10.5 million and $6.3 million in 1994 and
1993, respectively, and deferred tax assets were reduced by $2.1
million and $6.3 million in 1994 and 1993, respectively. In
assessing the change in the valuation allowance and likelihood of
realization of its deferred tax assets, the Company considered the
increase in its firm but unfunded backlog associated with the
follow-on years of its government contracts ($206.5 million at
December 31, 1994; $25.0 million at December 31, 1993). The
Company's deferred tax assets decreased in 1994 and 1993 primarily
due to the utilization of its federal and state loss carryforwards.
Pension cost in excess of funding decreased from 1992 to 1994
as the Company increased the funding of its pension obligation in
each of the three years. The Company funded $1.3 million, $0.9
million and $0.1 million and recorded pension expense of $1.4
million, $1.9 million and $1.9 million in 1994, 1993 and 1992,
respectively. As previously discussed, the Company recognized an
additional minimum pension liability of $14.4 million and $9.8
million in 1994 and 1993 respectively, an intangible asset of $4.7
million and $5.1 million in 1994 and 1993, respectively, and a
reduction to stockholder's equity of $7.7 million (net of tax) and
$4.7 (net of tax) million in 1994 and 1993, respectively. In 1993,
an additional minimum liability was recognized primarily due to the
decline in the discount rate from 8.5 percent in December 31, 1992
to 7.5 percent at December 31, 1993. At December 31, 1994, the
Company increased the discount rate to 8.75 percent, which reduced
the accumulated benefit obligation by $9.3 million, but was
required to increase its additional minimum liability primarily due
to lower than anticipated returns on plan assets attributable to
rising interests rates. The Company anticipates funding its
pension approximately $1.3 million in 1995 and intends to continue
to fund it in subsequent years to the extent feasible, in an effort
to eliminate its minimum pension liability.
The provision for warranty expense increased in 1994 resulting
in a charge to earnings of $1.3 million compared to $0.2 million in
1993 and $0.3 million in 1992. The Company's provision for warranty
claims relates primarily to its 737 commercial aircraft conversion
program. The Company provides for future warranty expenses based on
its warranty claim history and the warranty terms of each specific
contract.
The Company recorded a $1.5 million, $0.9 million and $0.5
million provision for reductions in the valuation of its inventory
in 1994, 1993 and 1992, respectively. The Company recorded the
provision in order to state its inventory at the lower of cost or
market and to account for obsolescence in its commercial aircraft
finished goods due to engineering and design changes.
The Company recorded a $0.9 million and $0.6 million provision
for losses on contracts in progress in 1994 and 1993, respectively.
The Company records a provision for losses in the period in which
it is determined that the estimated total contract costs will
exceed the total estimated contract revenues. The provision in 1994
is related to two specific commercial contracts. The Company has
agreed to perform additional work under one of the contracts. The
provision for the other contract is dependent upon the number of
aircraft delivered to the Company prior to December 31, 1995, as
specified in the contract, and represents management's best
estimate of the anticipated losses on the ultimate number of
deliveries.
Interest expense was recorded in 1993 and 1992 for $2.3
million and $0.2 million respectively, for increases in the
Company's valuation of its common stock purchase warrant. The
Company did not change its valuation of the warrant during 1994.
The Company called the warrant on April 1, 1993, pursuant to the
provisions of the warrant agreement. As one of the conditions to
the granting of waivers and amendments required by the Company at
December 31, 1994, the Bank required rescission of the Company's
call of the warrant. The warrant remains otherwise unchanged and
is included in the mezzanine section of the balance sheet in the
amount of $4.2 million. The Company intends to continue to
negotiate the purchase of the warrant, and any purchase or change
in the Company's intent may have an impact on the Company's
financial position, earnings and cash flows, depending upon the
action taken.
Over the three year period 1994-1992, changes in accounts
receivable and accounts payable and accrued expenses required $3.6
million of cash flows in the aggregate. Negative cash flow factors
over the three year period include reductions in customer advances
on commercial aircraft orders of $1.4 million, reductions in
accounts payable of $1.5 million, and an increase in U. S.
Government unbilled receivables of $1.1 million.
The Company recorded revenue and a long-term unbilled
receivable of approximately $3.5 million in anticipation of
settlement of a request for equitable adjustment (REA) involving
the KC-135 Programmed Depot Maintenance contract. The REA is for
the cost effect of late delivery of government furnished materials.
Inventories increased by $2.0 million and $3.4 million in 1994
and 1993, respectively, and decreased $0.1 million in 1992.
Progress payment billings on U. S. Government contracts and
commercial customer advances were $6.2 million, $3.0 million and
$13.9 million and work in process was $26.0 million, $20.4 million
and $32.2 million for 1994, 1993 and 1992, respectively. Progress
payment billings and customer advances as a percent of gross work
in process for each of the three years were 24%, 15% and 43%,
respectively. The fluctuation in the percentages relates mainly to
the Company's U.S. Government aircraft maintenance contracts.
These contracts are financed by the government based on the
percentage of costs incurred, and thus the level of financing is
inversely related to the profitability of the Company's contracts.
The level of U.S. Government financing is also dependent on
progress payment rates determined by Congress. The progress
payment rate on the seven year KC-135 contract awarded to the
Company in August of 1994 was 75%, versus 80% for the concluding
five year KC-135 contract that was awarded to the Company in 1990.
This reduction in the progress payment rate will result in reduced
cash flows in 1995 and subsequent years of the contract. Aside
from the previously discussed fluctuations in inventory, raw
materials and finished goods decreased $0.5 million in 1994 and
increased $3.8 million in 1993.
The Company increased the long term portion of its reserve for
self-insured workers' compensation $0.5 million in 1994, $1.5
million in 1993 and $1.0 million in 1992. The Company incurred
workers' compensation expense of $1.4 million, $3.3 million and
$2.7 million in 1994, 1993 and 1992, respectively. The Company
anticipates the favorable trends in workers' compensation expense
in 1994 to continue as the Company continues to enhance its
administration of workers' compensation claims and its safety
programs.
The Company received $0.2 million of insurance proceeds and
recorded an insurance receivable at December 31, 1994 of $0.1
million, based on an estimate of the remaining payment due the
Company for earthquake damages incurred in January 1994 by Space
Vector in Chatsworth, California. In 1993 and 1992, respectively,
the Company collected $0.2 million and $1.9 million in insurance
proceeds related to a fire at the Dothan, Alabama facility. The
proceeds included both property losses and business interruption
coverage.
Cash provided from operating activities funded capital
improvements of $2.1 million, $2.7 million and $3.2 million in
1994, 1993 and 1992, respectively. Additionally, the Company
funded principal payments of $8.0 million, $6.0 million and $3.0
million on its Term Credit facility in 1994, 1993 and 1992,
respectively, as well as $0.4 million, $0.5 million, and $0.4
million on various capital leases. The Company reduced its
Revolving Credit facility in 1994 by $0.6 million, while in 1993
and 1992 the Company utilized $2.8 million and $4.0 million of
Revolving Credit to supplement its cash requirements. The Company
had $1.8 million available in its Revolving Credit facility at
December 31, 1994 to cover its $0.2 million cash overdraft.
Net working capital decreased $8.8 million in 1994, from $23.1
million at December 31, 1993 to $14.3 million at December 31, 1994,
principally due to the pending maturity of the first installment of
principal due on the Company's Senior Subordinated Loan equal to
$5.0 million, a decrease of $4.5 million in accounts receivable, an
increase of $4.1 million in accounts payable and accrued expenses
and an increase of $0.9 million in accrued warranty expenses,
offset by an increase in deferred tax assets of $5.3 million. As a
result, the current ratio decreased from 1.85 at December 31, 1993
to 1.38 at December 31, 1994.
Consolidated indebtedness at December 31, 1994 was $28.8
million versus $37.4 million and $40.7 million at December 31, 1993
and December 31, 1992, respectively. Although the Company remains
highly-leveraged, management believes that, due to its positive
long-term business outlook and expected cash flows, it will
continue to have sufficient internal and external resources to meet
its current and future obligations and to accommodate growth in its
business.
BUSINESS OUTLOOK
Management believes that recent trends of declining air
passenger and cargo traffic volume have bottomed out and that the
industry is poised for positive growth in both passenger and cargo
volume. As cargo volume rises, and excess capacity is utilized,
cargo carriers will look for additional capacity which should have
positive implications for the Company's primary commercial
businesses. Recent negative financial results by commercial
carriers in the air passenger market are causing many carriers to
re-evaluate their in-house maintenance philosophy. Accordingly,
management believes that an opportunity exists to increase the
Company's share of this business.
The decline in defense spending by the U.S. Government is
expected to have mixed implications for the Company. Reduced fleet
size and new aircraft development projects will be offset by the
need to keep older aircraft in operation. Nevertheless, the
competitive nature of the Company's industry requires constant
evaluation of production efficiency and pricing in both the
government and commercial markets. The Company knows of no current
or foreseeable trend which will diminish its market share for any
of its principal products or services.
CONTINGENCIES
As previously discussed above, a denial of the Company's
request for equitable adjustment from the U.S. Government for the
cost impact of late delivery of government furnished material on
its KC-135 PDM contract, which event the Company deems unlikely,
would cause a pre-tax reduction of revenue of $3.5 million.
The Company, as a U.S. Government contractor, is routinely
subject to audits, reviews and investigations by the government
related to its negotiation and performance of government contracts
and its accounting for such contracts. Under certain
circumstances, a contractor can be suspended or debarred from
eligibility for government contract awards. The government may, in
certain cases, also terminate existing contracts, recover damages
and impose other sanctions and penalties. The Company believes,
based on all available information, that the outcome of the U.S.
Government's audits, reviews and investigations will not have a
materially adverse effect on the Company's consolidated results of
operation, financial position or cash flows.
Item 8. Financial Statements and Supplemental Data.
The following financial statements and financial statement
schedules are submitted herewith:
Financial Statements:
Reports of Independent Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholder's Equity
Consolidated Statements of Cash Flow
Notes to Consolidated Financial Statements
Financial Statement Schedules:
Report of Independent Accountants
Schedule II - Amounts Receivable From Related
Parties, and Underwriters, Promoters and
Employees Other Than Related Parties
Schedule II - Valuation and Qualifying
Accounts
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Precision Standard, Inc.
We have audited the accompanying consolidated balance sheets of
Precision Standard, Inc. and Subsidiaries as of December 31, 1994
and 1993, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1994. These financial statements are
the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial
position of Precision Standard, Inc. and Subsidiaries as of
December 31, 1994 and 1993, and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended December 31, 1994 in conformity with generally
accepted accounting principles.
As discussed in Notes 1, 8, and 10 to the consolidated financial
statements, in 1993 the Company changed its methods of accounting
for income taxes and for certain postretirement benefits.
Birmingham, Alabama
March 31, 1995, except for
Note 6 as to which the date
is April 14, 1995
<TABLE>
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1994 and 1993
1994 1993
ASSETS
<S> <C> <C>
Current assets:
Accounts receivable, net $15,266,539 $19,751,858
Inventories 27,713,937 27,344,833
Prepaid expenses and other 814,548 568,117
Deferred tax 8,147,544 2,804,104
Total current assets 51,942,568 50,468,912
Property, plant, and equipment,
at cost:
Leasehold improvements 9,784,364 9,266,839
Machinery and equipment 14,992,089 12,930,976
24,776,453 22,197,815
Less accumulated depreciation (10,837,428) (8,360,674)
Net property and equipment 13,939,025 13,837,141
Other assets:
Intangible assets, net of
accumulated amortization 5,053,837 5,358,364
Related party receivable 269,824 269,824
Deposits and other 1,004,501 970,510
Insurance proceeds receivable 129,930
U.S. Government request for
equitable adjustment, net 3,510,271
Deferred tax 4,926,250
14,894,613 6,598,698
Total assets $80,776,206 $70,904,751
</TABLE>
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Bank overdrafts $ 176,120 $ 798,185
Current maturities of
long-term debt 13,889,790 8,789,142
Accounts payable and
accrued expenses 20,736,232 16,596,177
Accrued warranty expenses 1,518,679 575,000
Estimated losses on contracts
in progress 1,345,176 583,122
Total current liabilities 37,665,997 27,341,626
Long-term debt, net of current
maturities 14,924,602 28,567,327
Long-term portion of self-insured
workers' compensation reserve 3,642,384 3,404,684
Unfunded accumulated benefit
obligation 7,828,431 3,103,701
Total liabilities 64,061,414 62,417,338
Commitments and contingencies
(Notes 7, 10, and 11)
Common stock purchase warrant 4,200,000 4,200,000
Stockholders' equity:
Common stock, $.0001 par value,
300,000,000 shares authorized,
12,787,208 and 12,677,380
shares issued, 12,344,291 and
12,340,120 outstanding at
December 31, 1994 and 1993,
respectively 1,279 1,268
Additional paid-in capital 937,784 759,723
Deferred compensation on
restricted shares (175,000)
Retained earnings 20,058,166 8,830,671
Minimum pension liability
adjustment (see Note 10) (7,748,850) (4,745,662)
13,073,379 4,846,000
Less cost of treasury shares
(337,260 shares) (558,587) (558,587)
Total stockholders' equity 12,514,792 4,287,413
Total liabilities and
stockholders' equity $80,776,206 $70,904,751
<FN>
The accompanying notes are an integral part of these
consolidated financial statements.
</FN>
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
for the years ended December 31, 1994, 1993 and 1992
1994 1993 1992
<S> <C> <C> <C>
Net sales $148,495,141 $169,867,796 $146,228,624
Cost of sales 125,844,149 138,867,188 122,887,599
Gross profit 22,650,992 31,000,608 23,341,025
Selling, general, and
administrative expenses (14,376,741) (16,329,020) (14,730,804)
Bad debt expense (636,541) (72,667) (749,685)
Research and development
expense (825,634) (415,035) (807,430)
Income from operations 6,812,076 14,183,886 7,053,106
Other income (expense):
Interest expense (see
Note 6) (3,308,617) (6,293,378) (4,904,803)
Other, net (490,318) (299,517) 112,775
Income before
income tax and
extraordinary items 3,013,141 7,590,991 2,261,078
Benefit (provision) for
income taxes 8,214,354 (320,174) (1,092,075)
Income before
extraordinary items 11,227,495 7,270,817 1,169,003
Extraordinary items:
Extraordinary loss from
litigation settlement,
net of applicable
income taxes of
$26,000 (see Note 15) (1,274,000)
Tax benefit from
utilization of net
operating loss
carryforward 876,534
Net income $ 11,227,495 $ 5,996,817 $ 2,045,537
Earnings (loss) per common
share: *
Primary:
Before extraordinary
item $ .67 $ .58 $ .10
Extraordinary item (.11) .06
Total $ .67 $ .47 $ .16
Fully diluted:
Before extraordinary
item $ .67 $ .57 $ .10
Extraordinary item (.10) .06
Total $ .67 $ .47 $ .16
<FN>
<F1> *See basis of computation in Note 1 to the consolidated financial
statements.
<F2> The accompanying notes are an integral part of these
consolidated financial statements.
</FN>
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended December 31, 1994, 1993 and 1992
(In thousands of dollars)
Deferred
Minimum Compensa- Total
Add'l Pension tion on Stock
Common Stock Paid-in Ret. Liability Treas. Stock Restrict. holders
Shares Amount Capital Earn. Adjust. Shares Amount Shares Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December
31, 1991 12,647 $1 $743 $ 788 337 $(559) $ 973
Net income 2,046 2,046
Balance,
December
31, 1992 12,647 1 743 2,834 337 (559) 3,019
Exercise
of stock
options 30 17 17
Minimum
pension
liability
adjustment ($4,746) (4,746)
Net income 5,997 5,997
Balance,
December
31, 1993 12,677 1 760 8,831 (4,746) 337 (559) 4,287
Exercise
of stock
options 4 3 3
Minimum
pension
liability
adjustment (3,003) (3,003)
Issuance of
restricted
common
shares 106 175 (175)
Net income 11,227 11,227
Balance,
December
31, 1994 12,787 $1 $938 $20,058 ($7,749) 337 ($559) ($175) $12,515
<FN>
The accompanying notes are an integral part of these
consolidated financial statements.
</FN>
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1994, 1993 and 1992
1994 1993 1992
<S> <C> <C> <C>
Cash flows from operating
activities:
Net income $ 11,227,495 $ 5,996,817 $ 2,045,537
Adjustments to reconcile net
income to net cash
provided from operating
activities:
Depreciation and amortization 2,704,116 3,620,060 3,766,414
Provision for deferred taxes (8,324,470) (47,349)
Pension cost in excess of
funding 118,517 969,714 1,834,814
Provision for losses on
receivables 636,541 72,667 749,685
Provision for warranty expense 1,268,236 250,000 325,000
Provision for reduction in
inventory valuation 1,465,202 875,301 487,947
Provision for losses on
work in process 161,153 321,827 1,337,587
Provision for losses on contracts
in progress 849,843 583,122
Insurance proceeds received (200,000)
Loss (gain) on sale of equipment (11,815) 919 (2,700)
Increase in interest expense due
to increase in common stock
purchase warrant value 2,300,000 200,000
Changes in assets and liabilities:
Accounts receivable, trade 3,848,778 (585,299) (5,363,619)
Insurance proceeds receivable 150,000 (150,000)
U.S. Government request for
equitable adjustment, net (3,510,271)
Inventories (1,995,459) (3,368,580) 125,156
Prepaid expenses and other (246,431) 51,767 (219,469)
Intangible assets (248,876) (9,369) (11,346)
Deposits and other (33,991) 78,622 (70,581)
Accounts payable and accrued
expenses 3,919,691 (6,081,178) 649,603
Accrued warranty expenses (324,557)
Estimated losses on
contracts in progress (87,789)
Self-insured workers'
compensation reserve 458,064 1,504,968 1,010,067
Total adjustments 446,482 687,192 4,668,558
Net cash provided from
operating activities 11,673,977 6,684,009 6,714,095
Cash flows from investing
activities:
Insurance proceeds receivable (129,930) 204,600 1,905,400
Insurance proceeds received 200,000
Proceeds from sale of equipment 12,150 5,050
Capital expenditures (2,140,019) (2,705,299) (3,234,004)
Related party payments 17,099
Net cash applied to
investing activities (2,057,799) (2,500,699) (1,306,455)
Cash flows from financing
activities:
Proceeds from issuance of
common stock 3,072 17,024
Borrowings under revolving
credit facility 57,200,000 48,600,000 36,100,000
Repayments of revolving
credit facility (57,800,000) (45,800,000) (40,100,000)
Principal payments under
long-term borrowings (8,397,185) (6,496,848) (3,367,596)
Change in cash overdraft (622,065) (503,486) 1,301,671
Net cash applied to
financing activities (9,616,178) (4,183,310) (6,065,925)
Net increase (decrease)
in cash and cash
equivalents -0- -0- (658,285)
Cash and cash equivalents,
beginning of year -0- -0- 658,285
Cash and cash equivalents,
end of year $ -0- $ -0- $ -0-
Supplemental disclosure of
cash flow information:
Cash paid during the year
for:
Interest $ 2,897,302 $ 3,399,943 $ 4,550,781
Income taxes $ 422,768 $ 552,502 $ 211,724
Supplemental disclosure of
noncash investing and
financing activities:
Capital lease obligations
incurred $ 456,148 $ 373,700 $ 881,750
Minimum pension liability
charge to equity - Note 10
<FN>
The accompanying notes are an integral part of
these consolidated financial statements.
</FN>
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, OPERATIONS, AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Organization and Operations - Precision Standard, Inc. (the
Company) is primarily engaged in the maintenance and
modification of large transport aircraft; the design,
development, and manufacture of aerial target systems; the
development and manufacture of rocket launch vehicles and
guidance systems; the design and manufacture of cargo handling
systems; and the manufacture of precision springs and
components.
Principles of Consolidation - The consolidated financial
statements include the accounts of the Company and its
subsidiaries, all of which are wholly owned. All significant
intercompany accounts and transactions have been eliminated.
Contract Accounting - The Company recognizes revenue on
aircraft and aerial target system programs principally under
the percentage-of-completion method of accounting, using an
output measure of progress, units of delivery for contracts
with provisions for multiple deliveries, and an input measure
by which the extent of progress is measured by the ratio of
cost incurred to date to the estimated total cost of the
contract (cost to cost) for contracts which the units of
delivery method is not appropriate. The Company's contracts
for its rocket launch vehicles and guidance systems are
primarily cost reimbursement contracts. As such, revenues are
recorded as costs are incurred and as fees are earned.
Provision is made to recognize estimated losses in the period
in which it is determined that the estimated total contract
costs will exceed the estimated total contract revenues.
Inventories - Materials and supplies are stated at the lower
of average cost or market (replacement cost). Work in process
includes materials, direct labor, manufacturing overhead, and
other indirect costs incurred under each contract, less
progress payments, amounts in excess of estimated realizable
value, and amounts charged to cost of goods sold on units
delivered or progress completed. Inventoried costs on long-
term commercial programs and U.S. Government fixed price
contracts include direct engineering, production and tooling
costs, and applicable overhead. In addition, inventoried
costs on U.S. Government fixed price contracts include
research and development and general and administrative
expenses estimated to be recoverable. In accordance with
industry practice, inventoried costs are classified as current
assets and include amounts related to contracts having
production cycles longer than one year.
Property, Plant, And Equipment - Depreciation and amortization
are computed using the straight-line method over the following
estimated useful lives:
<TABLE>
Classification Useful Life In Years
<S> <C>
Leasehold improvements 5 - 20
Machinery and equipment 3 - 12
</TABLE>
Maintenance and repairs are charged to expense as incurred,
while major renewals and improvements are capitalized.
The cost and related accumulated depreciation of assets sold
or otherwise disposed of are deducted from the related
accounts and resulting gains or losses are reflected in
operations.
Depreciation charged to operations was $2,493,948, $2,336,694,
and $2,159,919 for the years ended December 31, 1994, 1993,
and 1992, respectively.
Intangible Assets - Intangible assets are being amortized
using the following methods and estimated useful lives:
<TABLE>
Useful Life
Description Method In Years
<S> <C> <C>
Leasehold interest Straight-line 10
Supplemental type
certificate Straight-line 20
Computer software Straight-line 5
Debt issuance costs Interest 1
</TABLE>
Leasehold interest costs represent below market rental rates
on the leases obtained in the acquisition of a subsidiary.
Supplemental type certificates are granted by the Federal
Aviation Administration in order to allow certain
modifications to be made to a particular model of aircraft for
commercial use. All intangible assets associated with the
acquisition of Hayes International Corporation have been
reduced to zero in conjunction with the adoption of SFAS No.
109.
Income Taxes - In the first quarter of 1993, the Company
adopted Statement of Financial Accounting Standards (SFAS) No.
109, ACCOUNTING FOR INCOME TAXES, which changed the Company's
method of accounting for income taxes from the deferred method
required under Accounting Principles Board Opinion No. 11 to
the liability method. The principal difference between the
liability method and the deferred method is that, under the
liability method, deferred tax assets and liabilities are
adjusted to reflect changes in the statutory tax rates
resulting in income adjustments in the period such changes are
enacted. Prior years' financial statements have not been
restated for the accounting change (see Note 8).
Nonpension Postretirement Benefits - In the first quarter of
1993, the Company adopted SFAS No. 106, EMPLOYERS' ACCOUNTING
FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. SFAS No. 106
requires the Company to accrue the estimated cost of retiree
benefit payments, other than pensions, during employees'
active service period. The Company previously expensed the
cost of retiree health care benefits as claims were incurred.
Prior years' financial statements have not been restated for
the accounting change (see Note 10).
Provision For Warranty Expenses - The Company warranties
certain work performed for a given time period, in accordance
with the terms of each specific contract. The Company
provides for future warranty expenses based on actual warranty
history, company practice and specific warranty terms. In
1994, the Company increased its warranty reserve by $1,268,236
to $1,518,679 in order to provide for future warranty
expenses. This reserve is management's best estimate of
anticipated costs related to aircraft that were under warranty
at December 31, 1994.
Cash Equivalents - For purposes of the statements of cash
flows, the Company considers all highly liquid debt
instruments purchased with an original maturity of three
months or less to be cash equivalents.
Earnings Per Common Share - In 1994, the computation of
primary and fully diluted earnings per share is based on the
weighted average number of outstanding common shares including
restricted shares and assuming the exercise of stock options.
Stock warrants were treated as equity rather than debt, as
this presentation was the most dilutive. The 1993 primary and
fully diluted earnings per share is based on weighted average
number of outstanding common shares assuming the exercise of
certain stock options. Stock warrants were treated as debt
rather than equity, as this presentation was the most
dilutive. The 1992 earnings per share reflects the dilutive
effect of the warrants, with both primary and fully diluted
earnings per share being based on the weighted average number
of common shares outstanding assuming the exercise of stock
warrants; the inclusion of stock options would have been
antidilutive. The shares used in the computations for the
three years were as follows (in thousands):
<TABLE>
1994 1993 1992
<S> <C> <C> <C>
Primary 16,659 12,641 14,699
Fully diluted 16,659 12,667 14,930
</TABLE>
Reclassifications - Certain prior year amounts have been
reclassified to conform with the presentation used in 1994.
2. TRADE ACCOUNTS RECEIVABLE
<TABLE>
Trade accounts receivable as of December 31, 1994 and 1993
consist of the following:
1994 1993
<S> <C> <C>
U.S. Government:
Amounts billed $ 4,954,727 $ 4,618,969
Recoverable costs and accrued
profit on progress
completed - not billed 4,316,359 7,899,071
Commercial customers:
Amounts billed 6,194,636 4,381,582
Recoverable costs and
accrued profit on
progress completed -
not billed 668,023 3,060,193
16,133,745 19,959,815
Less allowance for doubtful
accounts (867,206) (207,957)
Trade accounts receivable,
net $15,266,539 $19,751,858
</TABLE>
Recoverable costs and accrued profit not billed consist
principally of amounts of revenue recognized on contracts, for
which billings had not been presented to the contract owners
because the amounts were not billable at December 31, 1994 and
1993.
3. INVENTORIES
<TABLE>
Inventories as of December 31, 1994 and 1993 consist of the
following:
1994 1993
<S> <C> <C>
Work in process $26,018,727 $20,361,218
Finished goods 3,012,119 3,259,872
Raw materials and supplies 5,038,428 7,083,837
Total 34,069,274 30,704,927
Less progress payments (6,194,184) (3,038,267)
Less allowance for estimated
losses on contracts in
progress (Note 7) (161,153) (321,827)
$27,713,937 $27,344,833
</TABLE>
A portion of the above inventory balances relates to U.S.
Government contracts. The Company receives progress payments
on the majority of its government contracts. The title to all
inventory on which the Company receives these payments is
vested in the government to the extent of the progress payment
balance.
Included in work in process are unrecovered costs at the
estimated recoverable value of $516,439 and $663,521 at
December 31, 1994 and 1993, respectively. These costs relate
primarily to certain over-and-above type work performed on
government contracts. Recoverability of these costs is
subject to future determination through negotiation or other
procedures not complete at the balance sheet dates. These
unrecovered costs relate to contracts under which all goods
have been delivered at December 31, 1994 and 1993,
respectively. All of the unrecovered costs at December 31,
1993 were settled during 1994. Management expects to recover
the 1994 costs in accordance with past experience.
Also included in work in process is $3,160,586 and $4,047,575
of deferred production, initial tooling, and related
nonrecurring costs (collectively referred to as deferred
costs) at December 31, 1994 and 1993, respectively. The
recovery of a significant portion of these deferred costs is
dependent on the number of conversions performed and actual
contract prices. Sales significantly under estimates or costs
significantly over estimates could result in the realization
of substantial losses. Realization of approximately
$1,352,082 and $1,753,630 of deferred costs at December 31,
1994 and 1993, respectively, is dependent on the profitability
of firm contracts. Recoverability of the remaining $1,808,504
and $2,293,945 of deferred costs at December 31, 1994 and
1993, respectively, is dependent upon the profitability of
anticipated contracts. Based on studies by the Company,
management believes there exists a sufficient market to enable
the Company to recover these costs.
During 1992, the Company reassessed the potential market for
aircraft conversions under one of its current programs. This
reassessment reduced cost of sales by approximately $477,000
in 1992.
The aggregate amounts of general and administrative costs
incurred during 1994, 1993, and 1992 were $14,560,608,
$15,684,055, and $14,606,944, respectively. The amounts of
general and administrative costs remaining in inventories at
December 31, 1994 and 1993 were $1,508,537 and $1,324,670,
respectively, and are associated with government contracts.
4. INTANGIBLE ASSETS
<TABLE>
Intangible assets as of December 31, 1994 and 1993 consist of
the following:
1994 1993
<S> <C> <C>
Debt issuance costs, net of
accumulated amortization of
$5,075,450 and $4,883,823,
respectively $ 126,069 $ 68,821
Supplemental type certificates,
net of accumulated amortization
of $1,529,571 and $1,511,031,
respectively. 176,992 195,532
Pension (see Note 10) 4,750,776 5,094,011
$5,053,837 $5,358,364
</TABLE>
Amortization charged to operations was $210,168, $1,283,366,
and $1,606,495 for the years ended December 31, 1994, 1993,
and 1992, respectively.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
Accounts payable and accrued expenses as of December 31, 1994
and 1993 consist of the following:
1994 1993
<S> <C> <C>
Accounts payable $ 7,208,759 $ 5,678,660
Salaries, wages, and related
costs 7,136,286 6,203,762
Customer deposits 2,093,068 996,389
Self-insured health and
dental claims reserve 1,964,176 1,380,790
Accrued interest 262,639 44,385
Current portion of self-insured
workers' compensation reserve 1,245,002 1,024,638
Accrued rent 213,197 137,434
Accrued income taxes 1,462 3,180
Litigation settlement
(see Note 15) 800,000
Accrued postretirement
benefits (see Note 10) 122,000 120,000
Other 489,643 206,939
$20,736,232 $16,596,177
</TABLE>
6. LONG-TERM DEBT
<TABLE>
Long-term debt as of December 31, 1994 and 1993 consists of
the following:
1994 1993
<S> <C> <C>
Bank credit facility
described below $27,200,000 $35,800,000
Note due to individual,
bears interest at 10%,
due in 1995, collateralized
by a security interest in
certain equipment 447,173 447,173
Other obligations, 7.3% to
13.48%, collateralized by
security interests in
certain equipment 1,167,219 1,109,296
Total long-term debt 28,814,392 37,356,469
Less current maturities 13,889,790 8,789,142
Long-term debt, net of
current maturities $14,924,602 $28,567,327
</TABLE>
<TABLE>
Aggregate maturities of long-term debt at December 31, 1994
are as follows:
<S> <C>
Year ending December 31:
1995 $13,889,790
1996 14,622,444
1997 262,646
1998 21,734
Thereafter 17,778
Total $28,814,392
</TABLE>
<TABLE>
The bank credit facility consists of the following at December
31, 1994 and 1993:
1994 1993
<S> <C> <C>
Revolving Credit facility
pursuant to $8 million
commitment $ 6,200,000 $ 6,800,000
Term Credit facility 11,000,000 19,000,000
Senior Subordinated Loan 10,000,000 10,000,000
$27,200,000 $35,800,000
</TABLE>
The rates of interest applicable under the Revolving and Term
Credit facilities are variable, depending upon the general
level of interest rates and the timing and nature of elections
which the Company is entitled to make in respect to renewals
of outstanding debt or increments of additional debt.
<TABLE>
The interest rates for the Revolving and Term Credit
facilities were as follows at December 31, 1994 and 1993:
1994 1993
Interest Interest
Amount Rate Amount Rate
<S> <C> <C> <C> <C>
Revolving Credit
facility $ 4,000,000 8.19% $ 4,000,000 5.69%
2,200,000 10.00% $ 2,800,000 7.50%
$ 6,200,000 $ 6,800,000
Term Credit
facility $11,000,000 8.44% $19,000,000 5.94%
</TABLE>
For the years ended December 31, 1994 and 1993, the effective
interest rate for the Revolving Credit facility was 6.97
percent and 6.08 percent, respectively. For the years ended
December 31, 1994 and 1993, the effective interest rate for
the Term Credit facility was 6.99 percent and 6.22 percent,
respectively.
The Company reached an agreement in March 1994 with its
primary lender to extend the maturity date of both the
Revolving Credit facility and Term Credit facility. Both of
these instruments were previously due in September 1994. The
restated credit agreement provides that the maturity date of
the Revolving Credit facility is September 30, 1995. The
agreement also provides that the maturity date of the
Revolving Credit facility can be extended to March 31, 1996
pursuant to the payment of the extension fee specified in the
agreement. The provisions of the Revolving Credit facility
agreement require a commitment fee of one-half of one percent
per annum on the unused portion. The restated Term Credit
facility provides for six equal quarterly installments of $2.0
million beginning on March 31, 1994 and continuing through
June 30, 1995 and a final payment of $7.0 million on September
30, 1995. The agreement provides that the maturity date of
the Term Credit facility can be extended pursuant to the
payment of the extension fee specified in the agreement. This
extension would allow the Company to repay the balance in two
installments of $2.0 million each on September 30 and December
31, 1995 and a final payment equal to the remaining unpaid
balance on March 31, 1996. The Company has assumed this
extension and, accordingly, the debt has been classified as
long term in accordance with the agreement.
The Senior Subordinated Loan payable bears interest at 13.5
percent, with payments of interest only, due monthly. A
$5,000,000 principal payment is due in September 1995 and
1996.
The above loans are collateralized by substantially all of the
assets of the Company and have various covenants which limit
the Company to incur or prohibit the Company from incurring
additional indebtedness, dispose of assets, merge with other
entities, declare dividends, or make capital expenditures in
excess of certain amounts in any fiscal year. Additionally,
the Company is required to maintain various financial ratios
and minimum net worth amounts. At December 31, 1994, the
Company was in violation of both of its leverage ratio and
fixed charge coverage ratio requirements for the third and
fourth quarter of 1994. In addition, the Company was in
violation of certain nonfinancial covenants in the fourth
quarter of 1994. On April 14, 1995 the Company's primary
lender issued waivers regarding these covenants and modified
certain financial covenants for the first six months of 1995.
In addition, the primary lender issued a Sixth Amendment to
the Amended and Restated Credit Agreement (the Amendment).
The Amendment states that eighty percent of any proceeds
received from the Request for Equitable Adjustment (Note 11)
must first be applied to the noncurrent portion of the Senior
and Term loans and upon liquidation of those loans, be applied
to the Revolving Credit Facility.
At December 31, 1993, the Company had failed to assign certain
leasehold interests to the bank. In addition, the Company was
in violation of both of its tangible net worth requirements at
December 31, 1993. Subsequently, the bank issued waivers
regarding these covenants.
In connection with the Senior Subordinated Loan, the Company
granted a warrant to the bank to purchase 4,215,753 shares of
the Company's common stock at an exercise price of
approximately $.24 per share. The warrant provides for
mandatory repurchase periods between June 15 and December 14
during 1991, 1992, and 1993. Upon written notice from the
warrant holder during the mandatory repurchase periods, the
Company is required to repurchase the warrant for the per
share difference between the then current appraised value of
the Company's common stock and the exercise price of the
warrant (put price). At December 31, 1994 and 1993, the
estimated aggregate put price for all shares, pursuant to the
warrant, of $4,200,000, is included in the mezzanine section
of the Company's financial statements. The financial
statements also included an intangible asset of $2,500,000 at
December 31, 1992. This asset was being amortized to interest
expense over the term of the bank credit facilities. The
asset was reduced to $0 along with other noncurrent
intangibles as a result of the utilization of purchased
operating loss carryforwards (see Note 8).
Changes in the estimated put price prior to the first put date
(June 15, 1991) were accreted; changes in the estimated put
price after the first put date were recorded directly to
interest expense. The $2,300,000 and $200,000 accretion in
1993 and 1992, respectively, were recorded as increases to
interest expense.
During the periods January 15, 1993 through April 14, 1993 and
January 15, 1994 through September 14, 1994, the Company had
the option to repurchase the warrants for the then current put
price, if the warrants had not been previously exercised or
repurchased. Additionally, the warrant holders had rights to
demand registration of the warrants under certain
circumstances. The warrants expire in September 1998.
The warrant was neither put nor exercised by the lender as of
December 31, 1993. On April 1, 1993, pursuant to the
provisions of the warrant agreement, the Company called the
warrant for repurchase. The call was rescindable and subject
to negotiation pursuant to the terms of the warrant agreement.
The amount included in the mezzanine section of the balance
sheet represents management's estimate of the amount to be
paid to the lender.
As one of the conditions to the granting of the 1994 waivers
and the Amendment necessary to cure the debt covenant
violations at September 30, 1994 and December 31, 1994, the
primary lender required rescission of the Company's call of
the warrant. The warrant otherwise remains as a binding and
enforceable agreement between the Company and its primary
lender. The Company intends to continue to negotiate the
purchase of the warrant, and any purchase or change in the
Company's intent may have an impact on the Company's financial
position, earnings, and cash flows depending upon the action
taken.
7. ESTIMATED LOSSES ON CONTRACTS IN PROGRESS
The Company provides for losses on uncompleted contracts in
the period in which it is determined that the estimated total
contract costs will exceed the estimated total contract
revenues. These estimates are reviewed periodically and any
revisions are charged or credited to operations in the period
in which the change is determined.
<TABLE>
The allowance for estimated losses on contracts in progress as
of December 31, 1994 and 1993 is as follows:
1994 1993
<S> <C> <C>
Inventory allowance (see Note 3) $ 161,153 $321,827
Allowance for future losses on
uncompleted contracts in
progress 1,345,176 583,122
$1,506,329 $904,949
</TABLE>
<TABLE>
Management expects that the losses provided for in the
allowance for future losses on uncompleted contracts at
December 31, 1994 will be incurred as follows:
<S> <C>
Year ending December 31:
1995 $ 654,388
1996 690,788
$1,345,176
</TABLE>
Included in the allowance for future losses on uncompleted
contracts is a provision of $690,788 and $495,333 at December
31, 1994 and 1993, respectively, for a certain contract. This
is dependent upon the number of aircraft delivered to the
Company prior to December 31, 1995, as specified in the
contract. This represents management's best estimate of the
anticipated losses on the ultimate number of deliveries.
Deliveries greater than that estimated could result in the
realization of losses in excess of the allowance provided.
Also included in the allowance for future losses on
uncompleted contracts is a provision of $654,388 that relates
to a certain contract on which the Company has agreed to
perform additional work. This represents management's best
estimate of the total cost to perform this additional work.
The provision for losses under one of the Company's U.S.
Government contracts was increased by $120,000 in 1992. This
change in estimate was recognized through a charge to
operations. This contract was completed in 1992.
During 1994, 1993, and 1992, a provision for estimated losses
on contracts in progress in the amount of $849,843, $583,122
and $-0-, respectively, was recognized through a charge to
operations to provide for reserves on specific contracts in
progress at December 31, 1994, 1993, and 1992, respectively.
8. INCOME TAXES
Effective January 1, 1993, the Company adopted SFAS No. 109,
ACCOUNTING FOR INCOME TAXES, which changed the Company's
method of accounting for income taxes from the deferred method
required under Accounting Principles Board Opinion No. 11 to
the liability method. The principal difference between the
liability method and the deferred method is that, under the
liability method, deferred tax assets and liabilities are
adjusted to reflect changes in the statutory tax rates
resulting in income adjustments in the period such changes are
enacted. Prior years' financial statements have not been
restated for the accounting change.
<TABLE>
The provision (benefit) for income taxes for the year ended
December 31, 1994, 1993, and 1992 is as follows:
1994 1993 1992
<S> <C> <C> <C>
Current:
Federal $ 216,306 $ 279,333
State (106,190) 88,190 $ 215,541
Deferred:
Federal (8,542,246) (424,251)
State 217,776 376,902
$(8,214,354) $ 320,174 $ 215,541
</TABLE>
<TABLE>
The significant components of the deferred income tax benefit
attributable to income from continuing operations for the
years ended December 31, 1994 and 1993 are as follows:
1994 1993
<S> <C> <C>
Deferred tax benefit
(exclusive of the
effects of other
components listed below) $ (1,985,114) $ (2,520,404)
Utilization of operating
loss carryforwards 4,113,600 6,025,926
Portion of operating loss
carryforwards allocated
to reduce noncurrent
intangibles 2,756,755
Decrease in valuation
allowance (10,452,956) (6,309,626)
Total deferred benefit $ (8,324,470) $ (47,349)
</TABLE>
<TABLE>
A reconciliation between income taxes computed at the federal
statutory rate and the consolidated effective tax rate is as
follows:
Liability Deferred Deferred
Method Method Method
1994 1993 1992
<S> <C> <C> <C>
Computed tax expense at
federal statutory rate $1,124,709 $ 2,580,937 $ 768,767
State income taxes, net of U.S.
federal income tax benefit 1,018,862 393,246 212,396
Stock warrant accretion 782,000
Penalties and meals and
entertainment 101,213 149,048 43,412
Change in valuation allowance (10,452,956) (6,309,626)
Portion of tax benefit of
operating loss carryforwards
allocated to reduce noncurrent
intangible assets 2,756,755
Other (6,182) (32,186) 67,500
(Benefit) provision for
income taxes $(8,214,354) $ 320,174 $1,092,075
</TABLE>
<TABLE>
Deferred tax assets (liabilities) are comprised of the following:
<S> <C> <C>
Prepaid pension costs $(2,723,756) $ (2,588,643)
Pension intangible asset (1,867,530) (2,002,456)
Percentage of completion (223,361)
Gross deferred tax
liabilities (4,591,286) (4,814,460)
Accrued vacation 1,492,767 1,464,429
Inventory and accounts
receivable reserves 5,167,840 3,654,271
Federal and state loss
carryforwards 3,874,359 7,987,959
Intangible assets 890,115 1,145,167
Property, plant, and equipment 928,472 1,234,940
Alternative minimum tax credit
carryforwards 690,851 504,744
Pension minimum liability
adjustment 5,678,270 3,867,976
Percentage of completion 262,813
Foreign corporation net loss 782,010
Other 314,451
Gross deferred tax assets 19,767,497 20,173,937
Deferred tax asset valuation
allowance (2,102,417) (12,555,373)
Net deferred tax asset $13,073,794 $ 2,804,104
</TABLE>
SFAS No. 109 specifies that deferred tax assets are to be reduced
by a valuation allowance if it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
The Company has established valuation allowances primarily for
certain state net operating loss carryforwards and foreign tax
losses of which the realization is uncertain. Based on the
Company's projected taxable income, management believes it is more
likely than not that the Company will realize the benefit of the
net deferred tax assets existing at December 31, 1994.
During 1994, the Company reduced its valuation allowance resulting
in an increase of net deferred tax assets and an increase in the
benefit for income taxes of approximately $10.5 million. This
reduction in the valuation allowance was attributable to the award
of a significant seven-year governmental contract which was in
negotiation at December 31, 1993. Upon receipt of this award,
realization of certain deferred tax assets became, in the opinion
of management, more likely than not.
The net change in the deferred tax asset of $2,804,104 in 1993
related to benefits arising from loss carryforwards. The deferred
tax asset related to these carryforwards has been recognized as a
current asset in the consolidated balance sheet at December 31,
1993. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.
In prior years, management estimated that the amount of
preacquisition federal operating loss carryfowards associated with
the acquisition of a subsidiary to be in the range of $15 million
to $20 million. The carryforward amounts were audited by the
Internal Revenue Service (IRS) during 1993 and the actual
carryforwards were found to be approximately $20 million.
In 1993, the Company utilized approximately $10 million of these
preacquisition loss carryforwards, and, in accordance with SFAS No.
109, the utilization of these carryforwards was first used to
offset all of the unamortized intangible assets associated with the
acquisition. This resulted in a $2,756,755 reduction in intangible
assets. The remaining operating loss carryforwards utilized during
the year ended December 31, 1993 were used to reduce tax expense.
<TABLE>
The following table shows the various expiration dates of federal
and state operating loss carryforwards as of December 31, 1994:
Federal Alabama Florida California
<S> <C> <C> <C> <C>
1996 $2,777,196
2001 $11,588,410
2002 18,083,213
2003 1,298,339
2004 $ 1,202,838 $ 261,343
2005 1,716,619
2006 2,397,527 7,376,025 1,491,879
2007 68,215 447,602
2008 1,096,270 569,397
2009 808,882 956,652
$ 3,600,365 $40,319,354 $5,443,492 $2,777,196
</TABLE>
The alternative minimum tax credit carryforwards of $690,851
included in the deferred tax assets above do not expire.
9. STOCK OPTIONS AND RESTRICTED SHARE PLANS
On September 8, 1989, the stockholders approved an Incentive
Stock Option and Appreciation Rights Plan and a Nonqualified
Stock Option Plan, pursuant to which a maximum aggregate of
2,000,000 shares of common stock have been reserved for grant
to key personnel. The plans expire by their terms on July 10,
1999 and September 8, 1999, respectively.
Under both plans, the option price may not be less than the
fair market value of the stock at the time the options are
granted. Generally, these options become exercisable over
staggered periods but may not be exercised after ten years
after the date of grant.
<TABLE>
Transactions under the plans are summarized as follows for the
years ended December 31, 1994 and 1993:
Shares
1994 Under Option Price Range
<S> <C> <C>
Incentive stock options:
Granted 128,000 $3.13
Exercised -0-
Outstanding at December 31, 1994 439,389 $.56 - $4.63
Exercisable at December 31, 1994 375,389 $.56 - $4.63
Nonqualified options:
Granted 419,000 $1.66
Exercised 4,171 $.56 - $1.31
Terminated 6,658
Outstanding at December 31, 1994 687,847
Exercisable at December 31, 1994 534,631
Total common shares reserved
and available for grant at
December 31, 1994:
Incentive stock options 560,611
Nonqualified options 277,862
Shares
1993 Under Option Price Range
Incentive stock options
Granted -0-
Exercised -0-
Outstanding at December 31, 1993 311,389 $ .56 - $1.10
Exercisable at December 31, 1993 311,389 $ .56 - $1.10
Nonqualified options:
Granted 102,483 $4.75
Exercised 30,120 $ .56 - $1.00
Terminated 7,281
Outstanding at December 31, 1993 279,676 $ .56 - $4.75
Exercisable at December 31, 1993 134,205 $ .56 - $4.75
Total common shares reserved
and available for grant at
December 31, 1993:
Incentive stock options 188,611
Nonqualified options 190,204
</TABLE>
Deferred Compensation - In December 1994, the Company adopted
a Restricted Share Plan (the Plan) designed to attract,
retain, and motivate executive officers of the Company. The
Plan authorizes the issuance of 105,657 common shares of
beneficial interest pursuant to restricted shares issued under
the Plan. In connection with the grant of shares under the
Plan, the Compensation Committee determines any vesting
requirements. In December of 1994 the Company issued $175,000
of restricted shares which will be amortized over the period
earned by the employee. In December 1994, the Company also
established certain other unvested cash bonuses which will be
amortized to compensation expense over the vesting period of
two years.
10. EMPLOYEE BENEFIT PLANS
Pension - The Company has a defined benefit pension plan in
effect, which covers substantially all employees at its
Birmingham, Dothan, and Leeds, Alabama facilities who meet
minimum eligibility requirements. Benefits for nonunion
employees are based on salary and years of service, while
benefits for union employees are based upon a fixed benefit
rate and years of service. The funding policy is consistent
with the funding requirements of federal law and regulations
concerning pensions. Pursuant to this practice, the Company
made contributions of $1,271,740, $908,496, and $74,358 in
1994, 1993, and 1992, respectively. Plan assets consist
primarily of stocks, bonds, and cash equivalents.
Pursuant to the requirements of SFAS No. 87, EMPLOYERS'
ACCOUNTING FOR PENSIONS, an additional minimum pension
liability of $14,444,846 and $9,839,673, representing the
excess of the accumulated benefit obligation over plan assets
plus prepaid pension cost, was recognized at December 31, 1994
and 1993, respectively. The additional liability has been
offset by intangible assets to the extent of previously
unrecognized prior service cost. Amounts in excess of
previously unrecognized prior service cost are recorded as a
reduction of stockholders' equity. The intangible asset and
reduction of stockholders' equity are $4,750,776 and
$7,748,850 (net of tax) and $5,094,011 and $4,745,662 (net of
tax) at December 31, 1994 and 1993, respectively.
Although the discount rate increased from 7.5 percent at
December 31, 1993 to 8.75 percent at December 31, 1994 (which
reduced the accumulated benefit obligation by $9,260,000), the
additional minimum liability adjustment increased primarily
due to lower than anticipated returns on plan assets
attributable to rising interest rates.
At December 31, 1993, a minimum liability was required to be
recognized primarily due to the decline in the discount rate
from 8.5 percent at December 31, 1992 to 7.5 percent at
December 31, 1993. The effect of the decline in the discount
rate of approximately $8,000,000 was partially offset by
changes made in other actuarial assumptions to more
appropriately reflect actual and expected experience of the
plan. The assumption changes decreased the accumulated
benefit obligation (ABO) by approximately $4,600,000. The
assumptions that were changed related to mortality, retirement
ages, and termination rates.
The projected benefit obligation is the actuarial present
value of that portion of the projected benefits attributable
to employee service rendered to date. Service cost is the
actuarial present value of the portion of the projected
benefits attributable to employee service rendered during the
year.
Increases in benefit obligations due to plan amendments are
amortized over the average future service of active
participants. Cumulative net actuarial gains and losses in
excess of the 10 percent corridor amount are amortized over
the average future service of active participants.
<TABLE>
Net pension costs for the years ended December 31, 1994, 1993,
and 1992 include the following components:
1994 1993 1992
<S> <C> <C> <C>
Service cost -
benefits earned
during the period $ 1,456,193 $ 1,480,402 $ 1,528,333
Interest cost on
projected benefit
obligation 6,534,008 7,004,224 6,878,339
Net amortization
of prior service
costs 628,438 437,808 366,306
8,618,639 8,922,434 8,772,978
Return on plan
assets:
Actual return 3,309,034 (6,279,367) (3,931,329)
Deferred loss (10,536,422) (764,812) (2,932,477)
Net recognized (7,227,388) (7,044,179) (6,863,806)
Net pension
expense $ 1,391,251 $ 1,878,255 $ 1,909,172
</TABLE>
<TABLE>
The significant actuarial assumptions used in determining the
present value of benefit obligations as of December 31, 1994, 1993,
and 1992 were as follows:
1994 1993 1992
<S> <C> <C> <C>
Weighted-average discount rate 8.75% 7.5% 8.5%
Rate of increase in future
compensation levels 6.0% 6.0% 6.0%
Expected long-term rate of
return on plan assets 9.0% 9.0% 9.0%
</TABLE>
<TABLE>
The following table reconciles the pension plans' funded status and
the amount reported in the consolidated balance sheets at December
31, 1994 and 1993:
1994 1993
<S> <C> <C>
Actuarial present value of
benefit obligations:
Vested $81,344,657 $85,489,771
Non-vested 875,187 1,140,830
Accumulated benefit
obligation 82,219,844 86,630,601
Impact of future salary
increases 2,524,427 2,675,431
Projected benefit obligation 84,744,271 89,306,032
Plan assets at fair value 74,391,414 83,526,900
Plan assets less than projected
benefit obligation (10,352,857) (5,779,132)
Unrecognized net loss 12,218,496 7,421,093
Unrecognized prior service cost 4,750,776 5,094,011
Minimum pension liability
adjustment (14,444,846) (9,839,673)
Unfunded accumulated benefit
obligation $(7,828,431) $(3,103,701)
</TABLE>
Nonpension Postretirment Benefits - Effective January 1, 1993,
the Company adopted SFAS No. 106, EMPLOYER'S ACCOUNTING FOR
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. SFAS No. 106
requires the Company to accrue the estimated cost of retiree
benefit payments, other than pensions, during employees'
active service period. The Company previously expensed the
cost of retiree health care benefits as claims were incurred.
The Company provides health care benefits to both salaried and
hourly retired employees at its Birmingham, Leeds, and Dothan
facilities. The retirees' spouse and eligible dependents are
also entitled to coverage under this defined benefit plan, as
long as the retiree remains eligible for benefits. To be
eligible for coverage the retiree must have attained age 62
and the benefits cease once age 65 is reached.
The retirees pay premiums based on the full active coverage
rates. These premiums are assumed to increase at the same
rate as health care costs. Benefits under the plan are
subject to certain deductibles, copayments, and yearly and
lifetime maximums. Currently, the plan is unfunded.
<TABLE>
The following table sets forth the funded status of the plan
at December 31, 1994 and 1993:
1994 1993
<S> <C> <C>
Accumulated postretirement
benefit obligation:
Retirees $ 25,000 $ 23,000
Fully eligible active plan
participants 33,000 36,000
Other active plan participants 473,000 467,000
531,000 526,000
Plan assets, at fair value -0- -0-
Accumulated postretirement
benefit obligation in
excess of plan assets 531,000 526,000
Unrecognized prior period gain 176,000 211,000
Unrecognized transition obligation (585,000) (617,000)
Accrued post retirement benefit cost $ 122,000 $ 120,000
</TABLE>
<TABLE>
Estimated postretirement benefit cost for the years ended
December 31, 1994 and 1993 are composed of the following:
1994 1993
<S> <C> <C>
Service cost-benefits attributed to
service during the period $27,000 $ 35,000
Interest cost on accumulated
postretirement benefit obligation 40,000 53,000
Amortization of transition obligation
over 20 years 32,000 32,000
Amortization of unrecognized net gain (8,000)
Net periodic postretirement
benefit cost $91,000 $120,000
</TABLE>
<TABLE>
Actuarial assumptions used were:
1994 1993
<S> <C> <C>
Projected health care cost trend rate 11% 13.5%
Ultimate trend rate 5.5% 6%
Year ultimate trend rate is achieved 2005 2008
Effect of a 1% point increase in the
health care cost trend rate on the
postretirement benefit obligation $45,000 $48,000
Effect of a 1% point increase in the
health care cost trend rate on the
aggregate of service and interest
cost $7,000 $19,000
Discount rate 8.75% 7.5%
</TABLE>
The health care cost trend rate assumption has a significant
effect on the amounts reported. Rates listed above represent
assumed increases in per capita cost of covered health care
benefits for 1994 and 1993, respectively. For future years
the rate was assumed to decrease gradually and remain at the
ultimate trend rate thereafter.
The weighted-average discount rate used in determining the
accumulated postretirement benefit obligation was 8.75 and 7.5
percent at December 31, 1994 and 1993, respectively. At
January 1, 1994, the weighted average discount rate used was
7.5 percent. At January 1, 1993, the date of adoption of SFAS
No. 106, the weighted average discount rate used was 8.5
percent. In addition to these changes in assumption, the
mortality, retirement ages, and termination rates were also
changed. These changes in assumptions were the primary cause
of the $176,000 and $211,000 unrecognized gains at December
31, 1994 and 1993, respectively.
The Company recognized $91,000 and $120,000 of expense
associated with the plan in 1994 and 1993, respectively.
Self-Insurance - It is generally the policy of the Company to
act as a self-insurer for certain insurable risks consisting
primarily of employee health insurance programs and workers'
compensation. Losses and claims are accrued as incurred. The
Company maintains a self-insured health insurance plan for the
Birmingham, Leeds, and, effective October 1, 1992, its Dothan
divisions of its Pemco Aeroplex subsidiary. The Company has
reserves established in the amounts of $1,964,176 and
$1,380,790 for reported and incurred but not reported claims
at December 31, 1994 and 1993, respectively. Expense incurred
for this plan was $8,121,138, $6,561,761, and $7,259,426 for
1994, 1993, and 1992, respectively.
The Company also has a self-insured workers' compensation
program. The Company has a self-insured retention of $250,000
per occurrence. Claims in excess of this amount are covered
by insurance. Included in deposits and other, at December 31,
1994 and 1993, is $850,000 that has been placed on deposit
with the state of Alabama in connection with the Company's
self-insured workers' compensation plan. Use of these funds
is limited by the state. The Company has reserves of
$4,780,716 and $4,429,322 for reported and incurred but not
reported claims at December 31, 1994 and 1993, respectively.
Expense incurred on this plan was $1,399,100, $3,351,608, and
$2,665,270 for 1994, 1993, and 1992, respectively.
Defined Contribution Plan - Effective November 1, 1990, the
Company adopted a 401(k) savings plan for employees who are
not covered by any collective bargaining agreement, have
attained age 21, and have completed one year of service.
Employee and Company matching contributions are discretionary.
The Company made no matching contributions during 1994, 1993,
or 1992. Company contributions vest as follows:
<TABLE>
Years of Service Percent Vested
<S> <C>
1 0%
2 0%
3 20%
4 40%
5 60%
6 80%
7 100%
</TABLE>
Employees are always 100 percent vested in their
contributions.
11. COMMITMENTS AND CONTINGENCIES
Operating Leases - The Company's manufacturing and service
operations are performed principally on leased premises owned
by municipal units or authorities. Remaining lease terms
range from two to eighteen years and provide for basic
rentals, plus contingent rentals based upon a graduated
percentage of sales. The Company also leases vehicles and
equipment under various leasing arrangements.
Future minimum rental payments required under operating leases
that have initial or remaining noncancelable lease terms in
excess of one year as of December 31, 1994 are as follows:
<TABLE>
Vehicles
Year Ending And
December 31 Facilities Equipment Total
<S> <C> <C> <C>
1995 $ 2,330,256 $234,920 $ 2,565,176
1996 2,403,886 112,805 2,516,691
1997 2,405,570 46,313 2,451,883
1998 2,407,580 31,829 2,439,409
1999 1,348,910 2,853 1,351,763
Thereafter 5,358,347 0 5,358,347
Total minimum
future rental
commitments $16,254,549 $428,720 $16,683,269
</TABLE>
Total rent expense charged to operations for the years ended
December 31, 1994, 1993, and 1992 amounted to $3,128,796,
$3,116,118, and $2,323,143, respectively. Contingent rental
amounts included in rent expense amounted to $1,196,481,
$1,443,128, and $830,228 for the years ended December 31,
1994, 1993, and 1992, respectively.
United States Government Contracts - The Company, as a U.S.
Government contractor, is subject to audits, reviews, and
investigations by the government related to its negotiation
and performance of government contracts and its accounting for
such contracts. Failure to comply with applicable U.S.
Government standards by a contractor may result in suspension
from eligibility for award of any new government contract and
a guilty plea or conviction may result in debarment from
eligibility for awards. The government may, in certain cases,
also terminate existing contracts, recover damages, and impose
other sanctions and penalties. The Company believes, based on
all available information, that the outcome of the U.S.
Government's audits, reviews, and investigations will not have
a materially adverse effect on the Company's consolidated
results of operation, financial position, or cash flows.
U.S. Government Request For Equitable Adjustment (REA) - The
Company has recorded revenue and a long-term unbilled
receivable of approximately $3,500,000 in anticipation of
settlement of a contract REA involving the KC-135 Programmed
Depot Maintenance (PDM) contract.
The REA, which has been certified by the Company and submitted
to the U.S. Government, is for equitable adjustment of the
cost effect of late delivery of government-furnished materials
(GFM). The disruption in scheduled work flow which occurred
as a result of the late delivery of GFM began in the second
quarter of 1993 and continues to impact ships in work at
December 31, 1994. The Company has obtained an opinion from
outside legal counsel specializing in government procurement
law and from independent management consultants that there is
a reasonable basis to support the REA. The Company feels
strongly that the evidence in support of the REA is objective
and verifiable, and the costs associated with the REA are
reasonable in view of the work performed and are not the
result of any deficiencies in the Company's performance. The
Company has considered the cost impact of ships redeliverable
to the government through December 31, 1994, and has recorded
the claim net of reserves. The reserves are deemed necessary
by the Company due to uncertainties in the process of
receiving equitable adjustment related to such claims. At
this time, the Company cannot estimate the length of time that
will be required to resolve the claim. Should the Company not
ultimately receive an equitable adjustment from the claim,
which event the Company deems unlikely, the Company would
realize a pre-tax reduction of revenue of approximately
$3,500,000.
Litigation - The Company is involved in various legal
proceedings arising in the normal course of business.
Management does not believe the ultimate outcome of such
litigation will have a material adverse effect on the
consolidated financial position, the results of operations of
the Company, or cash flows of the Company.
12. RELATED PARTY RECEIVABLE
The related party receivable reflected in the balance sheet
consists of various notes receivables from Matthew L. Gold,
who is an officer, director, and majority stockholder of the
Company.
13. GEOGRAPHIC SEGMENTS AND MAJOR CUSTOMERS
The Company's operations are primarily concentrated in one
industry segment, the maintenance and modification of large
transport aircraft. Aggregate sales to customers in foreign
countries, principally in Europe, account for approximately 7
percent, 10 percent, and 15 percent of the Company's net sales
for the years ended December 31, 1994, 1993, and 1992,
respectively. Sales to major customers which accounted for 10
percent or more of the Company's net sales were as follows:
<TABLE>
1994 1993 1992
<S> <C> <C> <C>
U.S. Government $98,124,351 $117,585,743 $85,799,947
</TABLE>
14. CONCENTRATION OF CREDIT RISK
The Company provides aircraft modification and maintenance, as
well as engineering services, primarily to the United States
Government, various cargo companies, leasing companies, and
commercial airlines. The Company performs ongoing credit
evaluations of its customers and generally does not require
collateral. The Company maintains an adequate allowance for
potential credit losses. When the Company grants credit, with
the exception of the United States Government, it is primarily
to customers whose ability to pay is dependent upon the
economics prevailing in the air passenger and cargo traffic
industries.
The Company invests its excess cash in deposits with major
banks with strong credit ratings. These investments are
typically overnight repurchase agreements and, therefore, bear
minimal risk. The Company has not experienced any losses on
these investments.
15. EXTRAORDINARY ITEMS
On August 31, 1991, the Company's Dothan facility experienced
a fire that destroyed one of its hangars, as well as a
customer's plane. The property loss, as well as the business
interruption claim, were covered by the Company's insurance
carrier.
Amounts reflected in the 1991 financial statements relating to
the property loss and business interruption claims are
outlined below:
<TABLE>
Reduction
Accounts Accrued in Cost Extraordinary Other
Receivable Liabilities Of Sales Gain (Loss) Income
<S> <C> <C> <C> <C> <C>
Property loss:
Record
receivable $1,690,000 $1,400,000 $290,000
Less payment
received (500,000)
1,190,000
Write-off
destroyed
assets (299,442)
Business
interruption:
Record
receivable 920,000 $(120,000) $(800,000)
$2,110,000 $(120,000) $(800,000) $1,100,558 $290,000
</TABLE>
Construction of the new hangar was completed in 1992. Final
settlement of the claim occurred in 1993.
In June 1989, Rolando F. Sablon, a former stockholder and
director of the Company, named the Company and other related
defendants in a suit alleging theories of breach of contract,
breach of fiduciary duty, common law fraud, violations of the
Racketeer Influenced and Corrupt Organization Act, and
violations of the Securities and Exchange Act of 1934, as well
as corresponding violations of certain Florida state statutes.
During 1993, this claim was settled out of court by the
Company for $1.3 million. The Company's remaining
indebtedness under this settlement is $-0- and $800,000 at
December 31, 1994 and 1993, respectively (see Note 5). At
December 31, 1993, the settlement was recorded as an
extraordinary item and reduced net income by $1,274,000, net
of the income tax benefit of $26,000.
16. FOURTH QUARTER ADJUSTMENTS
In the fourth quarter of 1994, the Company recorded year-end
adjustments to the Company's inventory and inventory reserves,
uncollectible accounts receivable, warranty reserve, year-end
bonuses, and deferred tax asset valuation allowance which, in
the aggregate, increased net income for the quarter and year
ending December 31, 1994 by approximately $9,916,900.
In the fourth quarter of 1993, the Company recorded year-end
adjustments to the Company's self-insured workers'
compensation reserve, common stock purchase warrant,
inventory, and inventory reserves which, in the aggregate,
increased net income for the quarter and year ending December
31, 1993 by approximately $700,000.
In the fourth quarter of 1992, the Company recorded a
significant adjustment relating to a change in management's
estimate as to the appropriate level of workers' compensation
insurance reserves. This adjustment reduced net income by
approximately $1,100,000 for the quarter and year ending
December 31, 1992.
REPORT OF INDEPENDENT ACCOUNTANTS ON SUPPLEMENTARY INFORMATION
Board of Directors and Stockholders
Precision Standard, Inc.
Our report on the consolidated financial statements of Precision
Standard, Inc. and Subsidiaries is included on page F-1 of this
Form 10-K. In connection with our audit of such financial
statements, we have also audited the related financial statement
schedules listed in the index on page 32 of this Form 10-K.
In our opinion, the financial statement schedules referred to
above, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material
respects, the information required to be included therein.
Birmingham, Alabama
March 31, 1995, except for
Note 6 as to which the date
is April 14, 1995.
<TABLE>
PRECISION STANDARD, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
for the periods ending December 31, 1994, 1993 and 1992
Balance At Additions Balance
Beginning Charged To Charged To At End of
Description Of Period Expense Assets Deductions Period
<S> <C> <C> <C> <C> <C>
1994
Allowance
for
doubtful
accounts $ 207,957 $ 636,541 $ 26,892 $ (4,184) $ 867,206
Estimated
losses on
contracts
in
progress 583,122 849,843 (87,789) 1,345,176
Estimated
losses on
work in
process 321,827 161,153 (321,827) 161,153
Reserve for
obsolete
inventory 2,809,531 1,465,202 407,785 (80,295) 4,602,223
Reserve for
warranty
expenses 575,000 1,268,236 (324,557) 1,518,679
Deferred
tax asset
valuation
allowance 12,555,373 (10,452,956) 2,102,417
Total $17,052,810 $4,380,975 $434,677 $(11,271,608) $10,596,854
1993
Allowance
for
doubtful
accounts $ 75,512 $ 72,667 $ 59,778 $ 207,957
Estimated
losses on
contracts
in
progress 583,122 583,122
Estimated
losses on
work in
process 1,412,587 321,827 (1,412,587) 321,827
Reserve for
obsolete
inventory 1,108,270 875,301 825,960 2,809,531
Reserve for
warranty
expenses 325,000 250,000 575,000
Deferred
tax asset
valuation
allowance 15,359,477 (2,804,104) 12,555,373
Total $2,921,369 $2,102,917 $16,245,215 $(4,216,691) $17,052,810
1992
Allowance
for
doubtful
accounts $ 972,870 $ 749,685 $(1,647,043) $ 75,512
Estimated
losses on
work in
process 3,483,549 1,337,587 (3,408,549) 1,412,587
Reserve
for
obsolete
inventory 620,323 487,947 1,108,270
Reserve
for
warranty
expenses 325,000 325,000
Total $5,076,742 $2,900,219 $(5,055,592) $2,921,369
</TABLE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANT
We consent to the incorporation by reference in the registration
statement of Precision Standard, Inc. on Form S-8 ( File Nos. 33-
34206 and 33-79676) of our report dated March 31, 1995 except for
Note 6 as to which the date is April 14, 1995, on our audits of the
consolidated financial statements and financial statement schedules
of Precision Standard, Inc. as of December 31, 1994 and 1993, and
for the years ended December 31, 1994, 1993, and 1992, which report
is included in this Annual Report on Form 10-K.
Birmingham, Alabama
March 31, 1995
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Company.
Information regarding the directors and executive
officers of the Company is incorporated by reference from the
"ELECTION OF DIRECTORS" section of the Company's definitive 1995
Proxy Statement.
Item 11. Executive Compensation.
Information regarding management remuneration and
transactions is incorporated by reference from the "EXECUTIVE
COMPENSATION" section of the Company's definitive 1995 Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
Information regarding the security ownership of certain
beneficial owners and management is incorporated by reference from
the "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT" section of the Company's definitive 1995 Proxy
Statement.
Item 13. Certain Relationships and Related Transactions.
Information regarding certain relationships and related
transactions is incorporated by reference from the "TRANSACTIONS
WITH MANAGEMENT AND OTHERS" section of the Company's definitive
1995 Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.
Financial Statement Schedules. The Financial Statement
Schedules listed below appear in Part II, Item 8 hereof.
a. Financial Statements:
Report of Independent Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Schedule VIII. Valuation and Qualifying Accounts.
Schedule X. Supplementary Income Statement Information.
All other financial statement schedules have been
omitted, as the required information is inapplicable or the
information is presented in the financial statements or the notes
thereto.
b. Reports on Form 8-K. No Reports on Form 8-K were
filed with the Commission during the quarter ended December 31,
1994.
c. Exhibits.
2 Not applicable.
3.1 Amended and First Restated Articles of
Incorporation of the Company. (1)
3.2 Amended and First Restated Bylaws of the
Company. (1)
3.3 Articles of Amendment to the Articles of
Incorporation. (2)
4.1 Asset Sales and Purchase Agreement dated
July 19, 1984, among Monarch Equities, Inc., Pemco Engineers, Inc.,
Robert D. Lang, Georgia L. Lang and Monarch Aviation, Inc. (3)
4.2 Promissory Note dated July 17, 1987, from
Monarch Equities, Inc., to Pemco Engineers, Inc. (3)
4.3 Credit Agreement among Precision Standard,
Inc., the Lenders Named Herein and Bank of America National Trust
and Savings Association, Agent, dated September 5, 1988. (1)
4.4 Amended and Restated U.S. $10,000,000
Senior Subordinated Loan Agreement dated as of September 9, 1988,
among Precision Standard, Inc., as Borrower, and the Financial
Institutions listed on the Signature Pages hereof as Lender. (1)
4.5 Amended and Restated Credit Agreement
among Precision Standard, Inc., the Lenders Named Herein and Bank
of America National Trust and Savings Association, Agent, dated
November 30, 1988. (1)
4.6 First Amendment to Amended and Restated
Credit Agreement dated as of June 14, 1989. (1)
4.7 First Amendment to Amended and Restated
Senior Subordinated Loan Agreement dated June 14, 1989. (1)
4.8 Specimen Certificate for Common Stock.
(4)
Pursuant to Paragraph (b)(4)(iii) of Item 601 of
Regulation S-K, the Company has not filed certain instruments with
respect to other long-term debt of the Company or its consolidated
subsidiaries. Copies of such documents will be furnished to the
Commission upon request.
9 Not applicable.
10.1 Sale of Assets Agreement dated June 2,
1986 among Monarch Equities, Inc., Pemco Engineers, Inc., Monarch
Aviation, Inc., Rolando Sablon and Matthew Gold. (3)
10.2 Amendment to Sale of Assets Agreement and
Closing Statement dated June 3, 1986, among Monarch Equities, Inc.,
Pemco Engineers, Inc., Monarch Aviation, Inc., and SG Trading Corp.
(3)
10.3 Assignment and Assumption Agreement
executed July 30, 1987, effective June 4, 1986, between SG Trading
Corp. and Matthew Gold. (3)
10.4 Purchase Agreement dated December 31,
1986, between the Company and Matthew Gold. (3)
10.5 Purchase Agreement executed August 6,
1987, effective April 30, 1987, between the Company and Matthew
Gold. (3)
10.6 Contract No. N68520-87-0007 between
Monarch Aviation, Inc., and the United States Navy. (3)
10.7 Novation Agreement between Monarch
Aviation, Inc., and the Company dated August 6, 1987. (5)
10.8 Lease dated November 1, 1986, between
Monarch Properties and Pemco Engineers, Inc. (3)
10.9 Amended and Restated Incentive Stock
Option and Appreciation Rights Plan. (6)
10.10 Amended and Restated Nonqualified Stock
Option Plan. (6)
10.11 Amended Executive Employment Agreement
between the Company and Walter M. Moede effective June 1, 1993, as
amended March 11, 1994. (7)
10.12 Amended Executive Employment Agreement
between the Company and Matthew L. Gold effective June 1, 1993, as
amended March 11, 1994. (7)
10.13 Executive Employment Agreement between the
Company and C. Fredrik Groth effective June 1, 1993. (7)
12 Not applicable.
13 Not applicable.
16 Not applicable.
18 Not applicable.
21 Subsidiaries of the Company. (7)
22 Not applicable.
23 Consent of Coopers & Lybrand to the
incorporation by reference of their report in Company's Form S-8
Registration Statement (File No. 33-34206 and 33-79676).
24 Not applicable.
27 Financial Data Schedule - Electronic Data
Gathering Analysis and Retrieval (EDGAR).
28 Not applicable.
29 Not applicable.
____________________
(1) Filed as exhibits to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1988, and incorporated
by reference herein.
(2) Filed as an exhibit to the Company's Registration Statement on
Form S-8 dated June 1, 1994, and incorporated by reference
herein.
(3) Filed as exhibits to the Company's Annual Report on Form 10-K
for the fiscal year ended April 30, 1987, and incorporated by
reference herein.
(4) Filed as an exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1989, and
incorporated by reference herein.
(5) Filed as an exhibit to the Company's Annual Report on Form 10-
K for the fiscal year ended April 30, 1988, and incorporated
by reference herein.
(6) Filed as exhibits to the Company's Definitive Proxy Statement
for the 1994 Annual Meeting of Shareholders, and incorporated
by reference herein.
(7) Filed as an exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993, and
incorporated by reference herein.
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.
PRECISION STANDARD, INC.
Dated: 4-13-95 By: /s/Matthew L. Gold
Matthew L. Gold, President
(Principal 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.
Signature Capacity Date
/s/Matthew L. Gold Chairman, President 4-13-95
Matthew L. Gold Chief Executive Officer
and Director
(Principal Executive Officer)
/s/Walter M. Moede Executive Vice President 4-15-95
Walter M. Moede Chief Financial Officer,
Secretary and Director
(Principal Financial Officer)
/s/Donald C. Hannah Director 3-31-95
Donald C. Hannah
/s/George E.R. Kinnear II Director 3-31-95
George E. R. Kinnear II
/s/Wesley L. McDonald Director 3-31-95
Wesley L. McDonald
/s/Ben J. Shapiro, Jr. Director 3-31-95
Ben J. Shapiro, Jr.
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