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, 1995
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 29, 1996 was approximately $4,348,519.
The number of shares of the Company's Common Stock out-
standing as of February 29, 1996 was 12,468,288.
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, 1995) 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
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
PRECISION STANDARD. INC.
<S> <C> <C>
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.
A. GENERAL
Precision Standard, Inc. ("the Company") is a diversified aerospace
company with executive offices in Denver, Colorado. The Company is
composed of two operating groups, the Aircraft Maintenance and
Modification Group and the Manufacturing and Overhaul Group.
The Aircraft Maintenance and Modification Group, which maintains
and modifies large transport aircraft for the U.S. and foreign
governments and commercial customers, includes the Aeroplex Group
of Pemco Aeroplex, Inc. ("Pemco" or the "Aeroplex") and Pemco World
Air Services, A/S, located in Copenhagen, Denmark. The primary
military element of the Aircraft Maintenance and Modification Group
is located in Birmingham, Alabama and operates as the Birmingham
division of the Aeroplex. The primary commercial element of the
Aircraft Maintenance and Modification Group, which operates under
the name Pemco World Air Services, includes the Dothan, Alabama
division of the Aeroplex and Pemco World Air Services, A/S.
The Manufacturing and Overhaul Group includes the Hayes Targets
division of Pemco Aeroplex, Inc., which designs and manufactures
aerial target systems for domestic and foreign military customers;
Space Vector Corporation, which develops and manufactures rocket
launch vehicles and guidance systems for the U.S. Government as
well as foreign and commercial customers; Pemco Engineers Aircraft
Cargo Systems division, which designs and manufactures aircraft
cargo handling systems; Pemco Engineers Springs and Components
division, which designs and manufactures precision springs and
components; 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 Company affiliates; and
Pemco Nacelle Services, Inc. ("Nacelle"), which maintains and
overhauls engine nacelles and thrust-reversers for large jet
transport aircraft.
B. SIGNIFICANT DEVELOPMENTS
Conversion of a Boeing 727 to a "Combi" Configuration
The Company received Federal Aviation Administration ("FAA")
certification and Transport Canada certification in 1995 for the
conversion of a Boeing 727-200 to a configuration that incorporates
main deck compartments for both passengers and cargo. The aircraft
can be dispatched as a full passenger aircraft, a full freighter or
a "combi" aircraft, having up to six different combinations of
cargo pallets plus corresponding passenger loads. The Company is
the first to accomplish a conversion that incorporates a multi-
position, passenger and cargo compartment, with variable smoke
detection and fire suppression systems. First Air of Ottawa,
Ontario, the world's foremost Artic air carrier, was the Company's
launch customer for this program.
Agreement with Bombardier Business Aircraft
In the second quarter of 1995, the Company reached an agreement
with Bombardier Business Aircraft for the development and marketing
of a Cargo Variant ("CV") of the Canadair Challenger widebody
business jet. Under the terms of the agreement, Pemco World Air
Services will design and install the cargo conversions while
Canadair will provide the technical documentation and support for
the aircraft. Both companies will work to market the Challenger CV
and are currently seeking a launch customer for this program.
Lease Renewal of the Company's Birmingham Facility
The Company accepted an offer from the Birmingham Airport Authority
for a twenty year extension of its lease for the facility located
at the Birmingham International Airport. The lease extension offer
sets a new expiry date of September 30, 2019 and provides for the
release of certain, limited parcels to the Authority but otherwise
contains the same terms and conditions as are in effect under the
Company's present lease. Formal documentation of this renewal is
currently in progress.
Agreement with San Bernardino International Airport Authority
In May of 1995, the Company entered into a memorandum of
understanding for the lease of hangar, manufacturing and warehouse
space on the former Norton Air Force Base at San Bernardino,
California. The memorandum provides for a lease under which
approximately 650,000 square feet would be used by the Company as
an aircraft maintenance and modification center. The facility
would allow the Company to add substantially to its wide-body
aircraft maintenance capabilities and broaden the range of military
and commercial aircraft that it can service. The parties continue
to negotiate appropriate terms under an exclusive option
arrangement.
C. BUSINESS OUTLOOK
In general, demand for aircraft maintenance and modification
services is increasing. As aircraft operators strive to reduce
their operating expenses, both military and commercial operators
are looking to independent service providers. These operators are
also delaying expensive fleet renewal programs which results in the
need to keep aging fleets in flight-worthy condition. For both
reasons, signs are positive that the third-party maintenance and
modification industry will be the beneficiary of these trends over
the next few years.
Military Maintenance and Modification Industry
The amount and type of military maintenance and modification work
required by the U.S. Armed Services depends primarily upon the
nation's national security objectives in view of perceived global
political instability. Recently American personnel strength in
Europe has decreased from over 500,000 at the height of the Cold
War to approximately 100,000 presently. The growing integration of
Europe and the rise of new security structures competing with NATO
may cause that number to decrease even further in the future. The
clear pattern seems to be one of global retrenchment and the
inevitable return of most forward deployed forces to the United
States.
However, while the U.S. is being compelled by budget cuts and other
imperatives to pull back its forces, its vital interests and
obligations around the world are not undergoing a corresponding
decline. The U.S. still has commitments or vital interests in
Europe, the Middle East, throughout the Pacific region, and the
Western Hemisphere. Without globally deployed forces close to the
scene of potential conflicts, the U.S. must replace withdrawn
forward deployed forces with the ability to rapidly re-deploy
armament, equipment and supplies to these future trouble spots.
This strategic plan depends ultimately on the overall heavy air
lift capability of the U.S. Military.
This need for immediate rapid deployment of force has insulated the
military maintenance and modification industry from many of the
effects of the shrinking defense budget. In fact, it can be argued
that the budget cuts have actually aided the sector in certain
ways. By limiting future expenditures, the military has been
unable to initiate programs to replace substantial portions of
their aging transport fleets. These aging aircraft require more
service than newer aircraft, generating greater revenue for the
military maintenance and modification sector of the industry.
Furthermore, budget cutbacks have forced the military to close a
number of its bases and depots. As major repair depots are closed,
the military is less capable of maintaining and servicing its
aircraft internally. As a result, the military has stated its
intention to contract a greater portion of the maintenance and
service of its air fleet with the private sector. As a means to
reduce overall costs, the military has begun to privatize many of
the services that were traditionally provided internally. This
too, has expanded the demand for government contract services such
as those provided by the Company. Additionally, the Company
benefits from its forty-plus years of experience as a systems
integrator for both military and commercial customers.
Commercial Maintenance Industry
On the commercial maintenance front, there are many indicators that
point to the increasing use of third-party maintenance businesses
in the foreseeable future, as airlines continue to search for ways
to reduce costs without compromising their competitive edge or
reducing profitability. A number of airlines have discovered that
the work done by third-party companies is in many instances
relatively faster and cheaper, as compared with similar work
performed in-house. According to "Overhaul Maintenance Quarterly,
September 1995", America West contracted approximately 40% of its
maintenance in 1994, Continental 44% and industry trendsetter
Southwest Airlines contracted 73%.
Moreover, across the industry, the demand for contract overhaul,
maintenance and modification services is escalating. This
increased flow has been partially driven by the airlines'
reluctance to ramp up their fleet renewal programs. As a result,
the airlines are forced to have their aging fleets maintained more
frequently to keep them in flight-worthy condition.
Commercial Modification Industry
The rapid increase in worldwide freight movements has spawned a
demand for dedicated cargo aircraft. Few companies have the
capital to purchase factory new all-cargo aircraft, and thus the
majority of air cargo planes have been converted from a pure
passenger configuration. Overnight package delivery, a service
which has experienced much growth in the last fifteen years in the
U.S., is beginning to blossom in Europe. These package carriers
are a driving force in commercial modification, and their
anticipated success in Europe and elsewhere is expected to increase
the demand for cargo conversions.
Air cargo traffic is forecasted to grow at a rate of approximately
(7%) annually through the year 2013 and the number of all-cargo
planes is expected to approximately double over the next two
decades, increasing the demand for aircraft modification
commensurately. Passenger to freighter conversions are typically
performed on aircraft which offer high cargo capacity and low
capital costs. These include the DC-8, DC-9, DC-10, B-707, B-727,
B-747, L-1011 and the BAe-146, making the potential market for this
type work quite substantial.
However, new aircraft such as the B-737, B-757 and MD-80, which
offer favorable operating and maintenance cost trade-offs, are also
attractive candidates for conversion. As an example, passenger-to-
quick-change conversions have been performed solely on new or late
model B-737 aircraft. The passenger-to-quick-change conversion,
which was innovated by the Company, enables the carrier to convert
the aircraft from passenger to freighter configuration in
approximately thirty minutes, allowing the carrier to supplement
its passenger business with cargo operations.
D. PRINCIPAL PRODUCTS AND SERVICES
AIRCRAFT MAINTENANCE AND MODIFICATION
General
The Company's aircraft maintenance and modification services
include custom airframe design and modification and complete
airframe maintenance and repair together with technical
publications. A majority of the services are provided under multi-
year contracts for both military and commercial customers. The
Company's military customers include the United States Armed Forces
("Armed Forces") and certain foreign military services. The
Company's commercial customers include the major global lessors of
aircraft as well as airlines, couriers and air-freight carriers.
The Company employs a large skilled work force and a permanent
engineering, design and analysis staff. The principal services
performed are Programmed Depot Maintenance ("PDM"), Scheduled Depot
Level Maintenance ("SDLM"), commercial C-level and D-level heavy
maintenance checks, passenger-to-freighter conversions, passenger-
to-quick-change conversions, aircraft stripping and painting,
component overhaul, rewiring, parts fabrication and engineering
support. Some of these services are performed exclusively for the
military while others are performed for the Company's commercial
customers; however, most of these services are offered to both
customer groups.
The Company's competition for military aircraft maintenance
contracts includes Boeing Military Aircraft, Aerocorp, Lockheed-
Martin Aeromod, Raytheon-E Systems and Chrysler Technologies. The
Company's competition for its commercial work in the United States
consists of approximately 10 to 15 independent, unlimited repair
and modification stations ranging from $10 million to $150 million
in annual revenues. However, while many of the Company's domestic
competitors tend to specialize on specific portions of the
aircraft, the Company focuses on total airframe repair, maintenance
and conversion. Outside the United States, the majority of the
Company's competitors are affiliated with an airline.
The Company considers its competitive strengths to be its product
support, proprietary products, engineering and systems integration
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.
Military Maintenance and Modification
The Company provides aircraft maintenance and modification services
on a contract basis to the Armed Forces and other agencies of the
U.S. Government, as well as foreign military services. The
majority of the aircraft that the Company services are large
transport planes used to move troops, supplies, equipment and
armor, such as the C-130 "Hercules", or are logistical in nature,
such as the KC-135 in-flight refueling aircraft. These planes
provide the Armed Forces with the ability to quickly move troops
and forces to areas of conflict. These aircraft are essential to
the Armed Forces' "Global Reach, Global Power" concept, which
places an emphasis on the military's ability to rapidly mobilize
its forces and equipment on foreign land when needed. Due to the
focus on this new strategy, the Company is confident that these
aircraft will remain the military's work horses well into the
future. As this role will put tremendous demand and strain on
these aircraft, they will continually require the Company's
maintenance services.
Military modification and maintenance contracts average three to
five years in term. The contracts are originally set for a certain
number of aircraft for the duration of the program. In addition to
the number of aircraft originally agreed to in the program, the
military typically increases this number as aircraft that were not
scheduled for maintenance require servicing. These "drop-in"
aircraft generally increase the value of each contract. The
Company has a successful history with the military and expects this
history to help it retain the contracts that it currently holds as
well as increase the likelihood of securing additional contracts in
the future.
The principal services performed under military contracts are PDM,
SDLM, systems integration and modification of fixed and rotary wing
aircraft. The PDM/SDLM is the most thorough scheduled maintenance
"check-up" for a military aircraft, entailing a bolt-by-bolt, wire-
by-wire and section-by-section examination of the entire aircraft.
The process can average up to 148 days per aircraft. The typical
PDM program involves a nose to tail inspection and a repair program
on a four or five-year cycle. In addition to heavy maintenance,
the program can include airframe corrosion prevention and control,
rewiring, component overhauls and structural, avionics and various
other system modifications.
PDMs are performed primarily at the Birmingham division of the
Aeroplex on a flow-through system. Throughout the duration of the
maintenance procedure, the aircraft moves through the facility from
one work station to the next. Each station is responsible for
certain objectives, and once these tasks are completed, the
aircraft is moved to the next bay.
At the onset of the PDM, the aircraft is completely defueled and,
generally, stripped of paint in an acidic wash. The entire
airframe, including the ribbings, skins and wings undergoes a
thorough structural examination which can result in modifications
to the airframe. The plane's avionics, which essentially are the
electronics that control the flight of the aircraft, receive
examination and repair or modification as required. At the
completion of the overhaul, the aircraft is repainted.
In order for the Company to efficiently complete its maintenance
procedures, it maintains hydraulics, sheet metal and machine shops
to satisfy all of its hydraulic testing and assembly needs and to
fabricate, repair and restore parts and components for aircraft
structural modification. The Company also performs in-house heat-
treatment on alloys used in aircraft modifications and repairs and
has complete non-destructive testing capabilities and test
laboratories.
The Company's skilled work force and engineering staff are familiar
with 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 has provided quality maintenance, integration and
modification work on a wide variety of military aircraft over the
past 45 years, including C-130, KC-135, C-9, P-3, T-34, A-10, F-4,
F-15, F-16, T-38 and U.S. Navy H-2 and H-3 helicopters.
KC-135 Aircraft Contract
The KC-135 is a United States Air Force ("USAF") tanker aircraft
which is used primarily for the in-flight refueling of combat and
combat-support aircraft. Currently, the U.S. KC-135 tanker fleet
is understood to number in the hundreds, and the aircraft is
projected to be serviceable through 2030.
In August of 1994, the USAF awarded the Company a new contract for
the PDM of its KC-135 aircraft. The contract is expected to last
seven years and involve the maintenance of as many as 389 aircraft.
The KC-135 PDM program involves a nose to tail inspection and
repair program on a scheduled five-year cycle. The funding
approved by the USAF under the first year of the contract is
projected to be $54.9 million and $49.0 million has been awarded
under the second year of the contract. The total value of the
contract over a seven year period, if fully funded, is expected to
be over $307.0 million. The Company first performed PDM on the KC-
135 in 1968 and has since processed 2,067 such aircraft.
In addition to the KC-135 PDM maintenance contract, the USAF also
awarded the Company a KC-135 battery system modification contract
in August 1995. As the USAF continues to upgrade and modernize the
KC-135 fleet to ensure its viability through 2030, the KC-135 PDM
program is anticipated to further expand to include additional
upgrades such as new cockpit and avionics systems. The Company has
performed other major upgrades in the past including wing re-skin,
major re-wire, corrosion prevention control and flight director,
auto pilot and fuel savings advisory system modifications.
C-130 Aircraft Contract
The C-130 is a four-engine, turboprop all-purpose military
transport and utility cargo aircraft. The aircraft has been built
by Lockheed since the mid-1950's and is still in production. The
current U.S. C-130 fleet is also understood to number in the
hundreds, and the aircraft is also projected to be serviceable
through 2030.
In 1991, the USAF awarded the Company a five year contract for the
PDM of its C-130 aircraft. The PDM program involves a nose to tail
inspection and repair program on a four-year cycle. The contract
expires in 1996, at which time the Company intends to vigorously
pursue its re-award. However, the government's re-bid process is
behind schedule which will likely result in the current contract
being extended through early 1997. The new contract is expected to
run for five years and will potentially involve 40 aircraft per
year versus an average of 12 aircraft under the current contract.
The increase in aircraft is anticipated due to depot closures and
the repatriation of work from foreign depots.
The Company has held the C-130 contract for approximately 30 years
and has provided service to approximately 1,844 aircraft.
H-3 Helicopter Contract
The H-3 helicopter is a utility, search and rescue, anti-submarine
warfare and VIP transport helicopter. The helicopter was built by
Sikorsky and is projected to be serviceable through 2010.
In 1994, the Navy awarded the Company a five year contract for SDLM
work of its H-3 aircraft. This contract is for a nose to tail
inspection and repair program on a four-year cycle. The Navy input
only two aircraft in the first year of the contract, the contract
minimum number. The Navy was still performing in-house SDLM work
during the first year of the contract, prior to its closing the
Naval Aviation Depot in Pensacola, Florida. The Company
anticipates working eleven aircraft in the second year of the
contract.
Commercial Aircraft Maintenance and Modification
The Company provides commercial aircraft maintenance and
modification services on a contract basis to both the owners and
operators of large commercial transport aircraft (i.e. leasing
companies, banks, airlines, air cargo carriers). Contracts for
commercial maintenance can range from the single aircraft which
might be in-house for a few days, to multi-plane efforts that can
span a year or longer. Modification contracts involve greater
effort per aircraft and often involve multiple units which range in
term from six months to three years. The principal services
performed under commercial maintenance and modification contracts
are "C" and "D" checks, which are similar to the PDM and SDLM
programs performed by the Company for military aircraft, passenger-
to-freighter conversions, passenger-to-quick-change conversions,
combination passenger and freighter conversions (combi), and strip
and paint.
The "C" check is an intermediate level service inspection that,
depending upon the FAA approved maintenance program being used,
includes systems operational tests, thorough exterior cleaning, and
cursory interior cleaning and servicing. It also includes engine
and operation systems lubrication and filter servicing. Visual
inspection of the external structure and the internal structure
through access panels is part of the "C" check. The normal
intervals between "C" checks can be as little as 1,000 flight hours
and as many as 5,000 flight hours, depending upon the type of
aircraft and the requirements of the operator's approved FAA
maintenance program.
The "D" check requires a more intense inspection. The "D" check
includes all of the work accomplished in the "C" check but places
a more detailed emphasis on the integrity of the systems and
structural functions. In the "D" check, the aircraft is
disassembled to the point where the whole structure can be
inspected and tested. Once the structure has been inspected and
repaired, the aircraft and its various systems are reassembled to
the detailed tolerances demanded in each system's functional test
series. The normal intervals between "D" checks can be as little
as 10,000 flight hours and as many as 25,000 flight hours,
depending upon the type of aircraft and the requirements of the
approved FAA maintenance program.
The form, function and interval of the "C" and "D" check is
different with each operator's program. Each operator must have
their particular maintenance program approved by the FAA and there
are a number of variables which dictate the final form of a given
program. Those variables include the age of the aircraft, the
environment in which the aircraft flies, the number of hours that
the aircraft regularly flies, the number of take-offs and landings
(called flight cycles) that the aircraft regularly endures and the
technical abilities of the entities performing the maintenance. In
particular, flight cycles can effect the intervals required for
major components to be changed or overhauled, thus effecting the
amount of work required during any given check.
In addition to the tasks required in the "C" and "D" check, there
are other associated tasks that are accomplished with these checks.
There are structural inspections, which focus on known problem
areas, that are required by the manufacturers. These are called
Supplemental Structure Inspections (SSI). With the recent
institution of the Aging Aircraft Programs by the manufacturers,
there are also inspection programs for areas of known corrosion
problems that are called Corrosion Prevention and Control Programs
("CPCP"). These additional inspections supplement and, in some
cases, overlay the "C" and "D" check tasks.
The process of converting a passenger plane to freighter
configuration entails completely stripping the interior;
strengthening the load-bearing capacity of the flooring; installing
the bulkhead or cargo net; cutting into the fuselage for the
installation of a large cargo door; reinforcing the surrounding
structures for the new door; replacing windows with metal plugs;
and fabricating and installing the cargo door itself. The aircraft
interior may also need to be lined to protect cabin walls from
pallet damage, the air conditioning system modified and smoke
detection system installed. Additionally, the Company installs the
on-board cargo handling system. Conversion contracts also
typically require "C" or "D" maintenance checks as these converted
aircraft have often been out of service for some time and
maintenance is required to bring the plane up to current FAA
standards. In addition, while the conversion and maintenance work
is being completed, many aircraft are fitted with hush-kits to
enable their engines to comply with FAA noise regulations.
The Company also regularly provides other modification and
integration services for its commercial customers under its own or
customer-provided Supplementary Type Certificates ("STC") including
integration of new avionics systems, installation of new galleys
and airstairs and reconfiguration of interior layouts and seating.
The Company believes that its facilities, tooling, engineering
capabilities and experienced labor force enable it to perform
virtually any air frame modification a commercial customer may
require.
Contracts for commercial aircraft are performed primarily at the
Dothan division of the Aeroplex and Pemco World Air Services, A/S
in Copenhagen, Denmark. The commercial aircraft are typically
docked and serviced in one bay for the duration of their particular
program.
The Company has performed maintenance work on a wide variety of
commercial aircraft and has approximately a 40% share of the after-
market cargo conversion business for large transport aircraft. The
Company has converted over 130 Boeing 727s, 29 BAe-146s, and 33
Boeing 737's.
The Company holds STCs from the FAA for the conversion of various
aircraft from passenger-to-freighter, passenger-to-quick-change,
and combination passenger and freighter conversions. Each type of
aircraft is certified by the FAA under a specific certificate.
Subsequent modifications to the aircraft require the review,
flight-testing and approval of the FAA and are then certified by an
additional STC. The Company holds passenger-to-freighter
configuration STCs for the conversion of Boeing 727-100, 727-200,
737-200, 737-300, and 747 aircraft, C-9 aircraft, and BAe-146
aircraft. Additionally, the Company holds a passenger-to-quick-
change configuration STC for the conversion of Boeing 737-300
aircraft and a combi configuration STC for the conversion of Boeing
727 aircraft.
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 21 years. Hayes Targets is presently designated as an Air
Force "Blue Ribbon Contractor".
The targets and pods are produced by the Company's Hayes 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 patented and proprietary
products, its superior product performance and its innovative
engineering capabilities.
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 on most of the
large U.S. Government Department of Defense programs with which it
is involved. 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 current 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 Company successfully completed its third HERA
test flight in February, 1996 and is well positioned to support the
upcoming intercept tests for the Theater High Altitude Area Defense
missile and radar system. 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 with the capability of locating spare parts for its
customers 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 Denver,
Colorado 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 Clearwater, Florida. 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 is building its competitive strength
on turnaround time, the convenience of customer exchange in lieu of
repair, quality, and price.
E. RESEARCH AND DEVELOPMENT
The Company charged the cost it incurred for company sponsored
research and development costs, which totalled $0.5 million in
1995, $0.8 million in 1994 and $0.4 million in 1993 directly to
earnings. The research and development activities in 1995 were
principally in support of the Company's aircraft and Targets
programs. In 1996, research and development costs are expected to
be in the $0.5 to $1.0 million range, principally in support of the
same programs. The Company was not engaged in any customer
sponsored research and development efforts in 1993, 1994, or 1995.
F. 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
liability company and Pemco Air Support Services, which is
registered as a Danish branch of a U.S. company. These foreign
operations contributed less than six percent of the Company's
consolidated revenue in 1995 and own less than five percent of the
Company's identifiable consolidated assets.
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, Nacelle 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):
<TABLE>
<S> <C> <C> <C>
Product and Service Rendered 1995 1994 1993
Aircraft Maintenance 81% 81% 86%
and Modification
Supersonic and Subsonic 3% 3% 2%
Aerial Tow Targets and
Wing Tip Pods
Space Vehicles and 8% 8% 6%
Support Systems
Cargo Handling Systems 5% 6% 5%
Precision Springs <1% <1% <1%
and Components
Parts Support and Component 2% 2% 1%
Overhauls
Nacelle Overhaul and Repair <1% <1% <1%
100% 100% 100%
Export sales 15% 7% 10%
-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:
<S> <C> <C> <C>
1995 1994 1993
U. S. Government 59% 66% 69%
-principally the Air
Force, Army, Navy, and NASA
</TABLE>
G. BACKLOG
<TABLE>
The following table presents the Company's backlog (in
thousands of dollars) at December 31, 1995 and 1994:
<S> <C> <C>
1995 1994
U. S. Government $128,734 $113,488
Commercial 16,474 59,882
Total $145,208 $173,370
</TABLE>
As of December 31, 1995, 89% of the Company's backlog was for the
U.S. Government versus 65% for the period ending December 31, 1994.
The Company's U.S. Government backlog increased primarily due to an
increase in backlog under the Company's KC-135 contract. In
September of 1995, the U.S. Air Force exercised its option for the
second year of a seven year contract for KC-135 PDM aircraft. The
Company's KC-135 backlog at December 31, 1995 was $91.0 million
versus $79.8 million in 1994. Also in September of 1995, the U.S.
Air Force exercised its option for the fifth and final year of its
contract for C-130 PDM aircraft. The Company's C-130 backlog at
the end of 1995 was $10.4 million versus $13.5 million in 1994.
Other changes in the Company's U.S. Government backlog include an
increase of $2.4 million for the targets product line, an increase
of $3.1 million associated with the H-3 Helicopter contract, and an
increase of $0.7 million under the Company's HERA contract.
The Company's commercial backlog at December 31, 1995 changed from
prior year primarily due to a reduction of $38.5 million under the
Company's 737 cargo conversion program. Approximately $11.3
million is due to revenues recognized over the past twelve months.
The Company believes at least some of these ships eventually will
be converted under new or renegotiated contracts. Other changes in
the Company's commercial backlog include an increase of $2.1
million of backlog at the Company's Copenhagen facility, offset by
a $7.8 million decrease in 727 cargo conversion backlog.
Approximately $27.2 million of the reduction is due to the
elimination of assumed option ships, some of which were under
contracts that have expired.
Approximately $8.9 million of commercial backlog at December 31,
1995 (compared to $27.2 million at December 31, 1994) may not be
considered firm orders because it pertains to maintenance and
modification work to be performed under contracts that are
approaching their expiry. Additionally, the Company has
approximately $203 million of firm but unfunded backlog associated
with the five follow-on years of the KC-135 contract, which is not
included in the figures cited above. Approximately $99.8 million of
the December 31, 1995 backlog is expected to be filled in 1996.
H. RAW MATERIALS
The Company purchases a variety of raw materials including aluminum
sheets and plates, extrusion, alloy steel and forgings. Excepting
as noted below, the Company experienced no significant shortages of
raw material essential to its business during 1995 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 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 adversely affects production schedules and
contract profitability. The Company has encountered late delivery
of Government-Furnished Material (GFM) in 1993, 1994, 1995 and 1996
and as a result, has experienced a disruption in scheduled work
flow.
One example of late GFM is the government's failure to provide the
Company with production break fittings that are used in the
performance of the KC-135 PDM contract. Late availability of parts
caused the average production time required per KC-135 to increase
substantially. The disruption and subsequent acceleration impacts
on the Company's production line which resulted from these parts
shortages negatively impacted the profitability of the contract
from 1993-1995. The Company requested equitable adjustment of
approximately $10.3 million to compensate it for some of the costs
caused by the delay. In February 1996, the Company received $7.7
million plus $0.4 million in related interest in a negotiated
settlement with the government. The Company and the government are
working on ways to minimize the likelihood of a repetition of such
delays in the future, but there can be no assurance that such
delays will not recur. The Company anticipates submitting one or
more additional Requests for Equitable Adjustment (REAs) to cover
other cost impacts of late GFM not included in the REA settled in
February of 1996. (See Item 7. Management's Discussion and
Analysis of Financial Conditions and Results of Operations under
the heading "KC-135 Contract" for a detailed discussion.)
I. PATENTS, TRADEMARKS, COPYRIGHTS AND STCs
The Company holds 50 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, 747, Douglas DC-6, DC-8, DC-9,
BAe-146 and Convair 580 Series Aircraft. The Company also holds 21
STCs related to its cargo handling systems for various types of
large transport aircraft. STCs are not patentable; rather, they
indicate a procedure that is acceptable to the FAA to perform a
given air-worthiness modification.
The Company also holds 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 holds two active utility patents and three active
design patents related to the Hayes Targets 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.
The Company firmly believes that the value of its patents,
trademarks, copyrights and STCs exceed the amounts of its related
intangibles and deferred inventory.
J. 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.
K. EMPLOYEES
At February 29, 1996, the Company employed approximately 2,012
persons, of whom approximately 1,395 were covered by collective
bargaining agreements. Approximately 20 of these 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 1995 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 relocated 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
increased the utilization of the Clearwater facility but did not
bring it to a level of full utility.
Pemco World Air Services Marketing Offices and Precision Standard,
Inc. Executive Offices - Denver, Colorado
Pemco World Air Services relocated its marketing staff to Denver,
Colorado from Birmingham, Alabama in the first quarter of 1995 and
Precision Standard, Inc. established executive offices at the same
location later in 1995. The lease for this office space expires in
May, 2001.
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 the
Aeroplex administrative staff. 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.
During 1995, the Company accepted an offer from the Birmingham
Airport Authority for a twenty year extension of its lease for the
facility. The lease extension offer sets a new expiry date of
September 30, 2019 and provides for the release of certain, limited
parcels to the Authority but otherwise contains the same terms and
conditions as are currently in effect under Pemco's present lease.
Formal documentation of this renewal is currently in progress.
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 houses Pemco Nacelle Services, Inc. and administrative
staff of PASS. PASS also utilizes a warehouse at the Clearwater
facility.
The facility is leased from Pinellas County, a political
subdivision of the State of Florida, under a lease agreement that
expires in September 2000, exclusive of four optional renewal
periods of five years each which would extend the lease until
September 2020.
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 located at the Clearwater, Florida
facility (see description under "The Clearwater Facility").
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 Denver,
Colorado location, a warehouse at the Clearwater facility, and
administrative offices and a warehouse at the Pemco World Air
Services A/S facility in Copenhagen, Denmark.
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 is also a party to other, non-employee related
litigation, the results of which are not expected to be material to
the Company's financial condition.
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 1995.
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
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
1995
March 31, 1995 2 1-5/8
June 30, 1995 2-9/16 1-7/8
September 30, 1995 2 1-3/4
December 31, 1995 1-7/16 1
</TABLE>
On December 31, 1995, there were 12,793,215 shares of common stock
issued. There are 12,455,955 shares outstanding held by 230 owners
of record, which the Company believes were held by more than 500
beneficial owners. The Company also granted a warrant to its
primary lender in connection with its Senior Subordinated Loan to
purchase 4,215,753 shares of the Company's common stock at an
exercise price of approximately $.24 per share. The warrants have
not been exercised and expire on September 9, 2000.
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
12/31/95 12/31/94 12/31/93 12/31/92 12/31/91
Net Sales $154,658 $148,495 $169,868 $146,229 $137,248
Income 2,583 6,812 14,184 7,053 2,299
from
operations
Income (loss) (3,811) 11,227 7,271 1,169 (2,865)
before extra-
ordinary item
Earnings before (.31) .67 .58 .10 (.23)
extraordinary
item (loss) per
share of
common stock
(primary and
fully diluted)
Net Income (3,811) 11,227 5,997 2,046 (1,764)
(loss)
Net Income (.31) .67 .47 .16 (.16)
(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
12/31/95 12/31/94 12/31/93 12/31/92 12/31/91
Working $21,122 $14,277 $23,127 $14,615 $ 17,500
Capital
Total 80,971 80,776 70,905 71,803 72,757
Assets
Long-Term
Obliga-
tions:
Debt 25,787 14,925 28,567 33,792 43,212
Other 10,790 15,671 10,708 4,218 3,196
Stockholders
equity 13,874 12,515 4,287 3,019 974
</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, 1995
Versus twelve months ended December 31, 1994
Revenues for the year ended 1995 increased 4% from $148.5 million
in 1994 to $154.7 million in 1995. Government sales decreased 7%
in 1995, from $98.1 million in 1994 to $91.7 million in 1995.
Commercial sales increased 25% in 1995, from $50.4 million in 1994
to $63.0 million in 1995. The Company's mix of business between
government and commercial customers shifted from 34% commercial and
66% government in 1994 to 41% commercial and 59% government in
1995.
The decrease in government sales in 1995 was due primarily to a
reduction in the number of KC-135 Programmed Depot Maintenance
(PDM) aircraft redeliveries. Fifty-two aircraft were redelivered
in 1994 versus forty-five aircraft in 1995. Approximately eleven
aircraft that were scheduled to redeliver by the end of 1995 were
delayed, primarily due to late receipt of government furnished
material (GFM) and an unprecedented number of major structural
problems on the aircraft. (See below, under the heading "KC-135
Contract" for a detailed discussion). In addition to the reduction
in the number of KC-135 PDM redeliveries in 1995, the Company has
thus far seen a decline in revenue of approximately $0.1 million
for each aircraft redelivered under the 1994 (or "new") KC-135
contract due to a restructuring of the work package on the new
contract versus the 1990 (or "old") contract. Twenty-four of the
forty-five aircraft redelivered in 1995 were worked under the new
KC-135 contract.
The increase in the Company's commercial sales was due primarily to
an increase in aircraft maintenance and modification services,
other than cargo conversion aircraft. These services, which
included a contract with a major airline, were performed at the
Pemco World Air Service facilities in Dothan, Alabama and
Copenhagen, Denmark. Commercial sales also increased due to an
increase in the number of redeliveries on the Company's 727
program, fifteen redeliveries in 1995 compared to thirteen
redeliveries in 1994. The Company also recognized revenue in 1995
for the first ship converted under the Company's B-727 "combi"
conversion program. Partially offsetting the above increases was
a reduction in the number of 737 cargo conversion aircraft
redeliveries (four redeliveries in 1995 versus six redeliveries in
1994).
The ratio of cost of sales ($132.5 million in 1995; $125.8 million
in 1994) to net sales ($154.7 million in 1995; $148.5 million in
1994) increased from 85% in 1994 to 86% in 1995. The resultant
decrease in gross profit is attributable primarily to a reduction
in profit realized under the Company's KC-135 PDM program, losses
incurred at the Company's Pemco World Air Services division in
Copenhagen, Denmark, and losses incurred and accrued under the
Company's C-130 PDM contract.
As indicated below under the heading "KC-135 Contract", the reduced
profit realized under the KC-135 contract is primarily attributable
to late receipt of GFM and an unprecedented number of major
structural problems, both of which form the basis of requests for
equitable adjustment of contract pricing anticipated to be filed in
the second half of 1996.
The Company incurred a loss of $5.1 million in 1995 at its aircraft
facility in Copenhagen, Denmark, compared to a loss of $1.9 million
for approximately six months of operation in 1994. The facility has
experienced a lower than anticipated sales volume since commencing
operation in May of 1994 as well as initial ship learning expense
in 1995 on the facility's first-ever 727 cargo conversions.
The Company incurred a loss of approximately $1.0 million in 1995
under its C-130 PDM contract versus a profit of approximately $1.0
million in 1994. The Company also recorded a $0.5 million reserve
for losses anticipated from the remaining ships in work and to be
worked under the contract, which expires in September 1996. The
profitability of the contract has suffered due to a reduction in
the number of drop-in aircraft (twenty-three in 1995 versus thirty-
two in 1994) and a higher than anticipated concentration of PDM
ships requiring extensive repairs. The Company also believes the
C-130 contract has suffered from the continuing and escalating
disruption of work on the KC-135 contract which has resulted in the
continuous reshuffling of the Company's labor force (see below,
under the heading "KC-135 Contract" for a detailed discussion).
The Company also incurred losses in conjunction with its nacelle
overhaul and repair operations which suffered reduced volumes
during its relocation to the Company's Clearwater facility.
Additionally, the Company incurred initial ship learning expense on
the launch of its B-727 "combi" conversion project at its Dothan,
Alabama facility.
The Company also recorded significantly higher pension expense in
1995 compared to 1994. Pension expense increased due to higher
interest cost on the projected benefit obligation and due to the
fact that lower than anticipated returns on plan assets in 1994
adversely impacted actuarial assumptions for plan expense in 1995.
Partially offsetting these unfavorable impacts on gross profit was
an increase in efficiency on the 727 cargo conversion program
performed at the Company's Dothan, Alabama facility.
Selling, general and administrative expense increased from $14.4
million in 1994 to $18.7 million in 1995 and increased as a percent
of sales from 10% in 1994 to 12% in 1995. Selling, general and
administrative expense increased primarily due to the operation of
the aircraft maintenance facility in Copenhagen, Denmark which
began in May of 1994, the establishment of an office in Denver,
Colorado, relocation and addition of staff associated with the
nacelle product line and increased royalty fees resulting from
increased sales associated with the aircraft cargo handling systems
product line.
Interest expense was $3.3 million in 1995 and 1994. Total
consolidated indebtedness was $26.7 million at December 31, 1995
versus $28.8 million at December 31, 1994. However, the effective
average interest rate in 1995 on the term Credit facility was 9.88%
versus 6.99% in 1994 and the effective interest rate in 1995 on the
Revolving Credit facility was 10.04% versus 6.97% in 1994. The
effective interest rate is higher in 1995 partially due to
increased interest rates in the financial markets and partially due
to the additional interest charged by the Company's primary lender
as a result of the Company's failure to make certain of its
required debt payments. (See also, Liquidity and Capital
Resources, below.)
Other expense decreased from $0.5 million in 1994 to $0.3 million
in 1995. The primary components of other expense in 1995 are $1.2
million of penalties for the late payment of federal payroll taxes
stemming from the Company's cash flow problems offset by $0.6
million of interest income which was primarily associated with the
Request for Equitable Adjustment (REA) that was settled by the U.S.
Government in February of 1996. The Company's cash resources were
severely strained during 1995 by periodic late payments of its
largest customer, the cost effect of late receipt of GFM and an
unprecedented number of major structural problems on the KC-135
aircraft program (see below, under the heading "KC-135 Contract"
for a detailed discussion) and the cost impact of the start-up and
operation of the Company's Copenhagen aircraft maintenance
facility.
The Company booked $2.7 million of state and federal income tax
expense in 1995 and reduced its current deferred tax asset by $3.1
million. The change in the deferred tax asset in 1995 resulted
primarily from a reduction of percentage of completion based
profits in work in process and the usage of net operating loss
carryforwards. The Company recorded an income tax benefit of $8.2
million in 1994 which related primarily to the change in the
Company's deferred tax asset 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
versus $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.
KC-135 Contract
The Company first performed PDM on KC-135 aircraft in 1968 and has
since processed approximately 2,067 such aircraft. In 1994, the
Company was awarded a new, seven year PDM contract and is currently
performing work under the second of those seven years. Prior to
this new contract, the Company had performed PDM on KC-135 aircraft
under a five year contract awarded in 1990. In 1995, the Company's
KC-135 contract accounted for approximately 68% of the Company's
sales to the U.S. Government and approximately 40% of the Company's
total revenues.
At December 31, 1994, the Company had recorded revenue and a long-
term unbilled receivable of $3.5 million in anticipation of
settlement of a Request for Equitable Adjustment (REA) related to
aircraft worked under the 1990 KC-135 PDM contract. The REA was
for the direct and indirect cost impact of the disruption of
scheduled work flow which occurred as a result of the late receipt
of a particular type of Government Furnished Material (GFM) called
a "production break" fitting. A "production break" is an integral
fitting required to join the inner and outer sections of the wing
of a KC-135 aircraft.
The late receipt of "production break" GFM occurred on a frequent
basis beginning in the second quarter of 1993 and lasted through
the duration of the 1990 contract. The total REA submitted to the
U.S. Government for the late GFM under the 1990 contract was $10.3
million, but at December 1994, the Company recorded significant
reserves against the REA due to uncertainties inherent in the
process of receiving such equitable adjustments. In 1995, the
Company recorded an additional $4.2 million of revenue for this REA
as well as $0.4 million of related interest income. Approximately
$2.3 million of the $4.2 million of revenue recorded in 1995,
related to ships redelivered prior to 1995. The Company's $8.1
million short term receivable for this REA, including interest, was
subsequently received from the U.S. Government in February 1996.
The late receipt of "production break" GFM continued during a
substantial portion of the first year of the 1994 contract.
Additionally, the Company was impacted by late receipt of other GFM
and by the performance of major structural repairs far in excess of
levels anticipated in government contract solicitation documents at
the time the new contract was bid. The increase in major
structural repairs is believed to be due to more stringent
inspection requirements as well as to higher than anticipated
utilization and aging of the aircraft. The Company has obtained an
opinion from outside legal counsel specializing in government
procurement law which documents that the Company is entitled to
compensation for the additional costs associated with late receipt
of GFM, excess major structural repairs, and other direct and
constructive changes to the contact. The Company anticipates
submitting one or more requests for equitable adjustment to the
U.S. Government in 1996 and is in the process of compiling the data
and completing the quantification of the cost impact required
therefore. The Company's independent management consultant has
determined a preliminary rough order magnitude of the cost impact
of the late GFM and excess major structural repairs for the twenty-
four aircraft under the 1994 contract that redelivered in 1995, and
based on this assessment, the Company has recorded in 1995 $1.8
million of revenue and a long-term receivable, net of reserves. The
reserves are deemed necessary by the Company due to uncertainties
inherent in the process of receiving equitable adjustment. The
Company feels strongly that the evidence in support of the recorded
revenue is objective and verifiable and the costs associated with
the recorded revenue are reasonable in view of the work performed
and are not the result of any deficiencies in the Company's
performance. However, should the Company not ultimately receive an
equitable adjustment from the U.S. Government on the 1994 contract,
which event the Company deems unlikely, the Company would realize
a pre-tax reduction of $1.8 million revenue recorded in 1995.
Additionally, absent the $1.8 million of revenue, the Company would
have suffered a net loss of approximately $1.1 million for the
twenty-four ships redelivered to the U.S. Government under the 1994
contract.
In addition to the $1.8 million of revenue discussed in the
paragraph above for ships under the 1994 contract, the Company also
recorded in 1995 $2.3 million of revenue and a long term receivable
related to the cost impact of disruption of scheduled work flow for
ships worked under the 1990 KC-135 PDM contract. The disruption was
caused by late "production break" GFM and other late GFM which were
not included on the REA that was previously filed and subsequently
settled in 1996. The Company's previous $8.1 million settlement
for late "production break" GFM expressly allowed the Company the
opportunity to request an equitable adjustment for any late GFM or
other constructive changes to its contract for which an adjustment
was not previously requested. The Company's independent management
consultant has determined a preliminary rough order magnitude of
the cost impact of late GFM for aircraft under the 1990 contract
and based on this assessment the Company has recorded a $2.3
million long-term receivable, net of reserves. These reserves are
deemed necessary by the Company due to uncertainties inherent in
the process of receiving equitable adjustment. The Company feels
strongly that the evidence in support of the recorded revenue is
objective and verifiable and the costs associated with the recorded
revenue are reasonable in view of the work performed and are not
the result of any deficiencies in the Company's performance.
However, should the Company not ultimately receive an equitable
adjustment from the U.S. Government on the 1990 contract, which
event the Company deems unlikely, the Company would realize a pre-
tax reduction of $2.3 million of revenue recorded in 1995.
At December 31, 1995, the Company had twenty-one KC-135 PDM
aircraft in process from the first year of the 1994 contract, all
at various stages of completion. The Company recognizes revenue on
its KC-135 contract upon redelivery of the aircraft to the customer
and thus no revenue is reflected in the Company's financial
statements for aircraft in process. The aircraft in process
continue to be impacted by late GFM, excess major structural
repairs and other direct and constructive changes to the contract.
The Company's independent management consultant has determined a
preliminary rough order magnitude of the cost impact of late GFM
and excess major structural repairs for the twenty-one aircraft in
work under the first year of the 1994 contract and the Company has
considered the impact of this assessment in determining that a
provision for losses on the contract is not needed. The Company
feels strongly that the evidence in support of the rough order
assessment is objective and verifiable and the costs associated
with the assessment are reasonable in view of the work performed
and are not the result of any deficiencies in the Company's
performance. The Company has not recorded a loss provision;
however, absent the impact of the rough order magnitude assessment
of the cost impact of late GFM and excess major structural repairs
on the aircraft in process, the Company would have recorded a loss
of approximately $1.0 million.
In addition to the twenty-one KC-135 aircraft in process from the
first year of the 1994 contract there are also six aircraft in
process from the second year. There is a customer-directed change
in work scope for aircraft under the second year of the contract
and a change in the PDM cycle from 48-months to 60-months. As a
result of this change in work scope, the Company has submitted a
contract price revision proposal to the U.S. Government which
currently is under review.
The Company is in the process of compiling the necessary
documentation required to submit REAs for the cost impacts cited in
the paragraphs above. However, the Company cannot reasonably
estimate the length of time before realization of the REAs. The
Company is also considering seeking amendment of the contract so as
to encompass the additional cost that will be incurred on
subsequent ship redeliveries that have late GFM and major
structural repair problems.
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
was for the equitable adjustment of the cost effect of late
delivery of GFM on the KC-135 PDM program. The total REA submitted
to the U.S. Government for late GFM under the 1990 contract was
$10.3 million, but at December 1994, the Company recorded
significant reserves against the REA due to uncertainties inherent
in the process of receiving such equitable adjustments. The
Company subsequently settled this REA with the U.S. Government in
February 1996 and received approximately $8.1 million, including
$0.4 million of related interest. (See Item 7. Management's
Discussion and Analysis of Financial Conditions and Results of
Operations under the heading "KC-135 Contract" for a detailed
discussion).
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 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%.
LIQUIDITY AND CAPITAL RESOURCES
The Company has been under severe cash constraints during 1995
primarily from the multiplicity of problems the Company has
encountered with its KC-135 program. The Company has suffered
excessive costs on the program from the direct and indirect cost
impact of the disruption of scheduled work flow which has occurred
due to the late receipt of GFM, excess major structural repairs and
other direct and constructive changes to the contract, as well as
from the customer's failure to make timely payments to the Company.
The Company has commenced discussions with its customer to seek
relief from the adverse progress payment impact resulting from the
aforementioned excessive costs. (See above under Results of
Operations and the heading "KC-135 Contract", for a detailed
discussion). The Company's cash resources have also been
adversely affected by the cost impact of the start-up and operation
of the Company's Copenhagen, Denmark facility.
As a consequence of these cash flow problems, the Company was late
in the fulfillment of its $2.0 million principal repayment
obligation on the Term Credit facility due June 30, 1995, and was
unable to meet its principal and interest obligations thereafter.
The Company was also in violation of three financial ratio
requirements as well as certain non-financial covenants of its loan
agreements with its primary lender as of June 30, September 30 and
December 31, 1995. Additionally, the Company was late in remitting
certain of its 1995 federal payroll tax payments.
On September 30, 1995, the Company and its primary lender executed
the Seventh Amendment and Limited Forbearance Agreement to their
Amended and Restated Credit Agreement to provide for a higher
interest rate, additional reporting requirements and an amendment
to the stock purchase warrant held by the lender to permit
cashless, or "net issuance", exercises thereof. The lender also
agreed to forbear from pursuing collection of the indebtedness owed
by the Company under the Restated Credit Agreement and the Senior
Subordinated Loan Agreement until October 30, 1995 so long as
certain interim steps were taken by the Company with respect to the
management of its cash flow.
The Company received substantial cash relief in February 1996,
receiving $8.1 million as settlement of its $10.3 million REA.
(See above under Results of Operations and the heading "KC-135
Contract", for a detailed discussion). The Company used the
proceeds of the REA settlement to reduce its accounts payable and
satisfy all outstanding federal payroll tax obligations. The
Company anticipates remitting payment for related payroll tax
penalties upon verification of the amounts due. The remainder of
the proceeds from the REA were used to fund the Company's
operations.
On April 15, 1996, the Company and its primary lender executed the
Eighth Amendment to the Amended and Restated Credit Agreement and
the Sixth Amendment to the Amended and Restated Senior Subordinated
Loan Agreement (the "Amendments"). The Amendments provided for all
interest accrued and unpaid as of April 1, 1996, less $100,000
which was paid at the time the Amendments were executed, to be
capitalized and added to the principal of the Company's Term Credit
facility. The amount of deferred interest capitalized was
$2,207,799. Additionally, the maturity dates of the Revolving
Credit facility, the Term Credit facility and the Senior
Subordinated Loan were extended until March 31, 1997 and a waiver
was given for all of the Company's covenant violations through
March 31, 1996. Also, the expiration date of the warrant, which
was granted to the Company's primary lender in conjunction with the
original making of the loans in 1988, was extended from September
9, 1998 to September 9, 2000.
The Amendments also provide for one-half percentage point increases
in the rates of interest payable on the loans if the Company has
not obtained refinancing commitments by August 15 and September 30,
1996.
The Company currently is in the process of compiling the necessary
documentation required to submit REAs for the cost impacts it is
experiencing on its KC-135 program. However, the Company cannot
reasonably estimate the length of time before realization of the
REAs. The Company also is considering seeking amendment of the
contract so as to encompass the additional cost that will be
incurred on subsequent ship redeliveries that have late GFM and
major structural repair problems. Additionally, the Company has
commenced discussions with its customer to seek relief from the
adverse progress payment impact resulting from the aforementioned
excessive costs. The Company also has arranged a standby financing
commitment with its principal shareholder which provides for the
extension by the principal shareholder of up to $2.0 million in
short-term advances upon demonstration of certain need factors by
the Company. The commitment which contains cross default
provisions to the Company's principal loan agreements, expires in
January 1997 and bears a fee of two percentage points. Advances
under the commitment bear interest at prime plus three percentage
points, have maturities of six months and are secured by a
subordinated security interest in the Company's assets and the
pledge of stock issuance to the extent of ninety percent of the
amount advanced. To date no advances have been made under this
commitment.
The following is a discussion of the significant items in the
Company's Consolidated Statement of Cash Flows for the years ending
December 31, 1995, 1994 and 1993.
Depreciation and amortization expense decreased in 1995 and 1994 as
compared to 1993 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 with 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 Company increased the valuation allowance associated with its
deferred tax asset $2.4 million in 1995 primarily due to losses
incurred at the Company's Copenhagen, Denmark facility. The
valuation allowance was reduced $10.5 million in 1994 and $6.3
million in 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 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'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 increased in 1995 as compared to
1994 because the Company recorded significantly higher pension
expense in 1995. Pension expense increased due to higher interest
cost on the projected benefit obligation and due to the fact that
lower than anticipated returns on plan assets in 1994 adversely
impacted actuarial assumptions for plan expense in 1995. The
Company funded its pension $1.3 million in 1995 and 1994 and $0.9
million in 1993. The Company recorded pension expense of $2.3
million in 1995, $1.4 million in 1994 and $1.9 million in 1993.
The Company provides for warranty expense based on its warranty
claim history and the warranty terms and conditions of each
specific contract. The Company's warranty provision relates
primarily to its commercial aircraft conversion programs. The
Company decreased its warranty reserve by $0.5 million in 1995 and
$0.3 million in 1994 due to expiration of warranties and the
fulfillment of warranty obligations. The Company also provided for
future warranty expenditures of $0.2 million in 1995 and 1993 and
$1.3 million in 1994, related to new deliveries and the
modification of terms on certain outstanding warranties.
The Company recorded a $0.7 million, $1.5 million and $0.9 million
provision for reductions in the valuation of its inventory in 1995,
1994 and 1993, 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
inventory due to engineering and design changes.
The Company provided $1.3 million for losses in work in process in
1995, $0.4 million of which was recorded for aircraft under the
Company's C-130 contract. The profitability of the C-130 contract
has suffered due to a reduction in the number of drop-in aircraft
(twenty-three in 1995 versus thirty-two in 1994) and a higher than
anticipated concentration of PDM ships requiring extensive repairs.
The Company also believes the C-130 contract has suffered from the
disruption of work on the KC-135 contract. Additionally, the
Company recorded losses on some commercial work and on the first
two helicopters in work under the H-3 helicopter contract, which
was awarded by the Navy in 1994. The H-3 contract losses were due
to learning costs associated with the initial ships, as well as to
delays in work caused by the late receipt of GFM, government
furnished equipment and technical data.
The Company provided $0.2 million in 1995 for losses related to
future aircraft to be worked, $0.1 million of which was recorded
for aircraft to be worked under the Company's C-130 contract. The
Company also relieved all of a $0.7 million reserve related to a
contract for which the loss reserve depended on the number of
aircraft delivered to the Company prior to December 31, 1995.
Additionally, the Company relieved a $0.6 million reserve which
related to a contract on which the Company had agreed to perform
additional work, as the probability of having to perform said work
had become remote.
At December 31, 1995, the Company's receivable for REAs from the
U.S. Government was $12.2 million versus $3.5 million at December
31, 1994. The Company received $8.1 million of this receivable
from the Government in February 1996. The Company's $4.1 million
long term unbilled receivable represents additional REAs that the
Company anticipates submitting in 1996 relating to aircraft under
the 1990 and 1994 KC-135 PDM contracts. The REAs will cover the
impact of late GFM not included on the aforementioned REA, which
was settled in February 1996, and the cost impact of excess major
structural repairs and other direct and constructive changes to the
contracts. (See above under Results of Operations and the heading
"KC-135 Contract", for a detailed discussion).
Accounts payable and accrued expenses increased in 1995 partially
due to the Company's failure to timely remit $2.3 million of
federal payroll tax payments due at December 31, 1995. As of
December 31, 1995, the Company had been unable to remit federal
payroll tax payments relating to amounts due from November 21,
1995, forward. The Company was also liable for approximately $1.0
million of payroll tax penalties at December 31, 1995. The Company
used part of the proceeds of the $8.1 million REA settlement
received in February of 1996 to satisfy all outstanding federal
payroll tax obligations (which then approximated $4.2 million),
exclusive of penalties. The Company anticipates remitting payment
of outstanding payroll tax penalties upon verification of amounts
due.
Additionally, amounts payable to the Company's vendors increased
$5.4 million in 1995 as compared to 1994. Also, accrued interest
payments at December 31, 1995 were $1.5 million, representing a
$1.2 million increase over 1994. The Company had been unable to
remit the interest owed to its primary lender since July 1995.
Partially offsetting accounts payable and accrued expenses but
negatively impacting cash flow, was a reduction of $1.9 million in
customer deposits.
Net inventories decreased $4.1 million in 1995 and increased $2.0
million and $3.4 million in 1994 and 1993, respectively. Net
inventory decreased in 1995 due to an increase of $10.7 million in
progress payments. Progress payment balances on U.S. Government
contracts and net commercial customer deposits were $16.9 million,
$6.2 million and $3.0 million and work in process was $31.0
million, $26.0 million and $20.4 million in 1995, 1994 and 1993,
respectively. Progress payment balances and net customer deposits
as a percent of gross work in process for each of the three years
were 55%, 24% and 15%, respectively. The fluctuation in the
percentages relates mainly to the Company's U.S. Government
aircraft maintenance contracts. Progress payments on these
contracts are based on costs incurred, and thus the level of
payments received is inversely related to the level of
profitability of the Company's contracts. Cost has increased on
the KC-135 contract due to the impact of the late GFM and the
inordinate number of major structural problems that are occurring
on the KC-135 aircraft.
The excessive costs incurred on the KC-135 PDM contract have
adversely impacted the progress payments made to the Company.
Since the Company firmly believes that these costs are the direct
result of the aforementioned cost impacts suffered from late
receipt of GFM, excess major structural problems and other direct
and constructive changes to its contract, it has commenced
discussions with its customer to seek relief in this regard.
Cash provided from operating activities funded capital improvements
of $2.9 million, $2.1 million and $2.7 million in 1995, 1994 and
1993, respectively. Additionally, the Company funded principal
payments of $4.0 million, $8.0 million and $6.0 million on its Term
Credit facility in 1995, 1994 and 1993, respectively, as well as
$0.4 million, $0.4 million and $0.5 million on various capital
leases. Cash of $1.8 million was also provided to the Company via
the full utilization of its $8.0 million Revolving Credit facility
at December 31, 1995, versus $6.2 million at December 31, 1994.
CONTINGENCIES
As previously discussed above, a denial of the Company's
anticipated requests for equitable adjustment from the U.S.
Government for the cost impact of late delivery of GFM, excess
major structural repairs and other direct and constructive changes
to its KC-135 PDM contract, which event the Company deems unlikely,
would cause a pre-tax reduction of revenue of $4.1 million and the
recognition of a loss reserve of approximately $1.0 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, 1995
and 1994, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1995. 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, 1995 and 1994, and the consolidated results of their
operations and their cash flows for each of the three years in the
period ended December 31, 1995 in conformity with generally
accepted accounting principles.
As discussed in Notes 1, 9 and 11 to the consolidated
financial statements, in 1993 the Company changed its method of
accounting for income taxes and certain postretirement benefits.
COOPERS & LYBRAND L.L.P.
Birmingham, Alabama
March 31, 1996, except for
Notes 6 and 7 as to which
the date is April 15, 1996
<TABLE>
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
<S> <C> <C>
1995 1994
ASSETS
Current assets:
Cash and cash equivalents $ 1,411,929
Accounts receivable, net 14,312,946 $15,266,539
Inventories 21,753,009 27,713,937
Prepaid expenses and other 981,197 814,548
U.S. Government request for
equitable adjustment, current 8,144,522
Deferred taxes 5,038,205 8,147,544
Total current assets 51,641,808 51,942,568
Property, plant, and equipment,
at cost:
Leasehold improvements 10,322,638 9,784,364
Machinery and equipment 17,933,717 14,992,089
28,256,355 24,776,453
Less accumulated depreciation (13,298,748) (10,837,428)
Net property and equipment 14,957,607 13,939,025
Other assets:
Intangible assets, net of
accumulated amortization 4,334,662 5,053,837
Related party receivable 269,824 269,824
Deposits and other 841,498 1,004,501
Insurance proceeds receivable 129,930
U.S. Government request for
equitable adjustment, non-
current, net 4,100,000 3,510,271
Deferred taxes 4,825,129 4,926,250
14,371,113 14,894,613
Total assets $ 80,970,528 $80,776,206
<FN>
The accompanying notes are an integral part of these
consolidated financial statements.
</FN>
</TABLE>
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
1995 1994
Current liabilities:
Bank overdrafts $ 176,120
Current maturities of
long-term debt $ 955,155 13,889,790
Accounts payable and
accrued expenses 28,181,810 20,736,232
Accrued warranty expenses 1,178,636 1,518,679
Estimated losses on contracts
in progress 203,922 1,345,176
Total current liabilities 30,519,523 37,665,997
Long-term debt, net of current
maturities 25,787,030 14,924,602
Long-term portion of self-insured
workers' compensation reserve 3,717,703 3,642,384
Unfunded accumulated benefit
obligation 7,072,103 7,828,431
Total liabilities 67,096,359 64,061,414
Commitments and contingencies
(Notes 8, 11, and 12)
Common stock purchase warrant 4,200,000
Stockholders' equity:
Common stock, $.0001 par value,
300,000,000 shares authorized,
12,793,215 and 12,787,208
shares issued, 12,455,955
and 12,344,291 outstanding
at December 31, 1995 and 1994,
respectively 1,280 1,279
Additional paid-in capital 942,981 937,784
Additional paid-in capital,
common stock purchase warrant 4,200,000
Deferred compensation on
restricted shares (87,500) (175,000)
Retained earnings 16,246,824 20,058,166
Foreign currency
translation adjustment 146,202
Minimum pension liability
adjustment (see Note 11) (7,017,031) (7,748,850)
14,432,756 13,073,379
Less cost of treasury shares
(337,260 shares) (558,587) (558,587)
Total stockholders' equity 13,874,169 12,514,792
Total liabilities and
stockholders' equity $80,970,528 $80,776,206
<FN>
The accompanying notes are an integral part of these
consolidated financial statements.
</FN>
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1995, 1994 and 1993
<S> <C> <C> <C>
1995 1994 1993
Net sales $154,658,414 $148,495,141 $169,867,796
Cost of sales 132,456,980 125,844,149 138,867,188
Gross profit 22,201,434 22,650,992 31,000,608
Selling, general, and
administrative expenses (18,679,118) (14,376,741) (16,329,020)
Bad debt expense (399,030) (636,541) (72,667)
Research and development
expense (540,014) (825,634) (415,035)
Income from operations 2,583,272 6,812,076 14,183,886
Other expense:
Interest expense (see
Note 7) (3,325,927) (3,308,617) (6,293,378)
Other, net (337,473) (490,318) (299,517)
Income before
income tax and
extraordinary items (1,080,128) 3,013,141 7,590,991
Benefit (provision) for
income taxes (2,731,214) 8,214,354 (320,174)
Income (loss) before
extraordinary items (3,811,342) 11,227,495 7,270,817
Extraordinary items:
Extraordinary loss from
litigation settlement,
net of applicable
income taxes of
$26,000 (see Note 16) (1,274,000)
Net income (loss) $ (3,811,342) $11,227,495 $ 5,996,817
Earnings (loss) per common
share:*
Primary:
Before extraordinary
item $ (.31) $ .67 $ .58
Extraordinary item (.11)
Total $ (.31) $ .67 $ .47
Fully diluted:
Before extraordinary
item $ (.31) $ .67 $ .57
Extraordinary item (.10)
Total $ (.31) $ .67 $ .47
<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, 1995, 1994 and 1993
(In thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Deferred
Minimum Compensa- Foreign Total
Add'l Pension tion on Currency Stock
Common Stock Paid-in Ret. Liab. Treas. Stock Restrict. Transl. holders
Shares Amount Capital Earn. Adjust. Shares Amount Shares Adjust. Equity
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
Exercise
of stock
options 6 5 5
Minimum
pension
liability
adjustment 732 732
Amortization
of deferred
compensation 87 87
Reclassifi-
cation of
common
stock
purchase
warrants 4,200 4,200
Foreign
currency
translation
adjustment 146 146
Net income (3,811) (3,811)
Balance,
December 31,
1995 12,793 $1 $5,143 $16,247 $(7,017) 337 $(559) $(88) $146 $13,874
<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, 1995, 1994 and 1993
<S> <C> <C> <C>
1995 1994 1993
Cash flows from operating
activities:
Net income (loss) $ (3,811,342) $ 11,227,495 $ 5,996,817
Adjustments to reconcile net
income (loss) to net cash
provided from operating
activities:
Depreciation and amortization 2,766,572 2,704,116 3,620,060
Provision for deferred taxes 2,736,445 (8,324,470) (47,349)
Pension cost in excess of
funding 1,028,993 118,517 969,714
Provision for losses on
receivables 399,030 636,541 72,667
Provision for warranty expense 158,000 1,268,236 250,000
Provision for reduction in
inventory valuation 691,811 1,465,202 875,301
Provision for losses on
work in process 1,270,676 161,153 321,827
Provision for losses on contracts
in progress 203,922 849,843 583,122
Provision for losses on
insurance receivable (119,800)
Loss (gain) on sale of equipment (2,349) (11,815) 919
Increase in interest expense due
to increase in common stock
purchase warrant value 2,300,000
Changes in assets and liabilities:
Accounts receivable, trade 667,269 3,848,778 (585,299)
Request for Equitable
Adjustment (REA) (8,734,251) (3,510,271)
Insurance proceeds receivable (200,000) 150,000
Inventories 4,079,087 (1,995,459) (3,368,580)
Prepaid expenses and other (124,217) (246,431) 51,767
Intangible assets (64,645) (248,876) (9,369)
Deposits and other 162,674 (33,991) 78,622
Accounts payable and accrued
expenses 7,321,030 3,919,691 (6,081,178)
Accrued warranty expenses (498,043) (324,557)
Estimated losses on
contracts in progress (1,345,176) (87,789)
Self-insured workers'
compensation reserve 20,614 458,064 1,504,968
Total adjustments 10,617,642 446,482 687,192
Net cash provided from
operating activities 6,806,300 11,673,977 6,684,009
Cash flows from investing
activities:
Insurance proceeds receivable (129,930) 204,600
Insurance proceeds received 249,730 200,000
Proceeds from sale of equipment 5,550 12,150
Capital expenditures (2,909,139) (2,140,019) (2,705,299)
Net cash applied to
investing activities (2,653,859) (2,057,799) (2,500,699)
Cash flows from financing
activities:
Proceeds from issuance of
common stock 5,198 3,072 17,024
Borrowing under revolving
credit facility 25,900,000 57,200,000 48,600,000
Repayments of revolving
credit facility (24,100,000) (57,800,000) (45,800,000)
Principal payments under
long-term borrowings (4,448,397) (8,397,185) (6,496,848)
Change in cash overdraft (176,120) (622,065) (503,486)
Net cash applied to
financing activities (2,819,319) (9,616,178) (4,183,310)
Effect of exchange rate
changes on cash 78,807
Net increase
in cash and cash
equivalents 1,333,122 -0- -0-
Cash and cash equivalents,
beginning of year -0- -0- -0-
Cash and cash equivalents,
end of year $ 1,411,929 $ -0- $ -0-
Supplemental disclosure of
cash flow information:
Cash paid during the year
for:
Interest $ 1,906,654 $ 2,897,302 $ 3,399,943
Income taxes $ 155,155 $ 422,768 $ 552,502
Supplemental disclosure of
noncash investing and
financing activities:
Capital lease obligations
incurred $ 576,190 $ 456,148 $ 373,700
Minimum pension liability
charge to equity - Note 11
<FN>
The accompanying notes are an integral part of
these consolidated financial statements.
</FN>
</TABLE>
PRECISION STANDARD, INC. AND SUBSIDIARIES
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.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates
of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
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. An
amount equal to contract costs attributable to claims is
included in revenues when realization is probable and the
amount can be reliably estimated.
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 - Leasehold improvements and
machinery and equipment are stated at cost, less accumulated
depreciation. 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
$2,499,774, $2,493,948, and $2,336,694 for the years ended
December 31, 1995, 1994, and 1993, 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>
Supplemental type
certificates Straight-line 20
Debt issuance costs Straight-line 1
</TABLE>
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 as net operating loss carryforwards not
established as deferred tax assets in the initial purchase
price allocation have been utilized. The debt issuance costs
are amortized over the life of the related debt.
Income Taxes - The Company accounts for income taxes under the
liability method in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, ACCOUNTING FOR INCOME
TAXES.
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 11).
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
1995, the Company decreased its warranty reserve by $340,043
to $1,178,636 due to warranties expiring and the payment of
warranty items, partially offset by warranties related to new
deliveries and the modification of terms on certain
outstanding warranties. This reserve is management's best
estimate of anticipated costs related to aircraft that were
under warranty at December 31, 1995. Actual experience may be
different than that anticipated for warranty work.
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 - The 1995 primary and fully diluted
earnings per share is based on the weighted average number of
outstanding common shares, excluding restricted shares and
stock options, as this presentation was the most dilutive.
The 1994 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
certain 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 shares used in the
computations for the three years were as follows (in
thousands):
<TABLE>
1995 1994 1993
<S> <C> <C> <C>
Primary 12,427 16,659 12,641
Fully diluted 12,427 16,659 12,667
</TABLE>
Foreign Currency Translation - The financial position and
results of operations of the Company's foreign operations in
Copenhagen, Denmark are measured using local currency as the
functional currency. Assets and liabilities of this foreign
subsidiary are translated at the exchange rate in effect at
each year-end. Income statement accounts are translated at
the average rate of exchange prevailing during the year.
Translation adjustments arising from differences in exchange
rates from period to period are included in the accumulated
foreign currency translation adjustments account in
shareholders' equity. The cash flows from foreign operations
are translated at the average rate of exchange prevailing
during the year. These translated cash flows are combined
with the U.S. domestic company's cash flows to arrive at
amounts reported on the Consolidated Statements of Cash Flows
for the year ended December 31, 1995.
Recently Issued Accounting Standards - Statement of Financial
Accounting Standards No. 121 (SFAS No. 121), ACCOUNTING FOR
THE IMPAIRMENT OF LONG-LIVED ASSETS, establishes guidance
beginning in 1996, for recognizing and measuring impairment
losses and would require that the carrying amount of impaired
assets be reduced to fair value. Management does not believe
that the adoption of SFAS No. 121 will have a material effect
on the consolidated financial statements of the Company.
Statement of Financial Accounting Standards No. 123 (SFAS No.
123), ACCOUNTING FOR STOCK-BASED COMPENSATION, establishes
fair value-based financial accounting and reporting standards
for all transactions involving, or relating to the Company's
equity instruments. The Company will adopt SFAS No. 123 and
will, accordingly, comply with the disclosure requirements set
forth in the statement. Management does not believe that the
effect of SFAS No. 123 will be material to the Company's pro
forma net income or pro forma earnings per share.
Reclassifications - Certain prior year amounts have been
reclassified to conform with the presentation used in 1995.
2. TRADE ACCOUNTS RECEIVABLE
<TABLE>
Trade accounts receivable as of December 31, 1995 and 1994
consist of the following:
<S> <C> <C>
1995 1994
U.S. Government:
Amounts billed $ 2,907,584 $ 4,954,727
Recoverable costs and accrued
profit on progress
completed - not billed 4,785,646 4,316,359
Commercial customers:
Amounts billed 6,676,008 6,194,636
Recoverable costs and
accrued profit on
progress completed -
not billed 369,858 668,023
14,739,096 16,133,745
Less allowance for doubtful
accounts (426,150) (867,206)
Trade accounts receivable,
net $14,312,946 $15,266,539
</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, 1995 and
1994.
3. INVENTORIES
<TABLE>
Inventories as of December 31, 1995 and 1994 consist of the
following:
<S> <C> <C>
1995 1994
Work in process $31,050,937 $26,018,727
Finished goods 3,858,325 3,012,119
Raw materials and supplies 5,019,629 5,038,428
Total 39,928,891 34,069,274
Less progress payments
and customer deposits (16,901,206) (6,194,184)
Less allowance for estimated
losses on contracts in
progress (Note 8) (1,274,676) (161,153)
$21,753,009 $27,713,937
</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 $1,331,891 and $516,439 at
December 31, 1995 and 1994, 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, 1995 and 1994,
respectively. All of the unrecovered costs at December 31,
1994 were settled during 1995. Management expects to recover
the 1995 costs in accordance with past experience.
Also included in work in process is $2,683,124 and $3,160,586
of deferred production, initial tooling, and related
nonrecurring costs (collectively referred to as deferred
costs) at December 31, 1995 and 1994, 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 $507,531
and $1,352,082 of deferred costs at December 31, 1995 and
1994, respectively, is dependent on the profitability of firm
contracts. Recoverability of the remaining $2,175,593 and
$1,808,504 of deferred costs at December 31, 1995 and 1994,
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.
The aggregate amounts of general and administrative costs
incurred during 1995, 1994, and 1993 were $18,956,954,
$14,560,608, and $15,684,055, respectively. The amounts of
general and administrative costs remaining in inventories at
December 31, 1995 and 1994 were $1,786,373 and $1,508,537,
respectively, and are associated with government contracts.
Inventory related to modification and maintenance of aircraft
is subject to technological obsolescence and potential
decertification due to failure to meet design specifications.
The Company actively reserves for obsolete inventory.
However, future technological changes could render some
inventory obsolete. No estimate can be made of a range of
amounts of loss that are reasonably possible should current
design specifications change.
4. INTANGIBLE ASSETS
<TABLE>
Intangible assets as of December 31, 1995 and 1994 consist of
the following:
1995 1994
<S> <C> <C>
Debt issuance costs, net of
accumulated amortization of
$5,261,241 and $5,075,450,
respectively $ 4,923 $ 126,069
Supplemental type certificates,
net of accumulated amortization
of $1,548,111 and $1,529,571,
respectively. 158,452 176,992
Pension (see Note 11) 4,171,287 4,750,776
$4,334,662 $5,053,837
</TABLE>
Amortization charged to operations was $204,331, $210,168 and
$1,283,366 for the years ended December 31, 1995, 1994, and
1993, respectively.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
Accounts payable and accrued expenses as of December 31, 1995
and 1994 consist of the following:
1995 1994
<S> <C> <C>
Accounts payable $15,870,209 $ 7,208,759
Salaries, wages, and related
costs 7,227,657 7,136,286
Customer deposits 162,409 2,093,068
Self-insured health and
dental claims reserve 1,435,251 1,964,176
Accrued interest 1,515,389 262,639
Current portion of self-insured
workers' compensation reserve 1,190,297 1,245,002
Accrued rent 250,744 213,197
Accrued income taxes (158,203) 1,462
Accrued postretirement benefits
(see Note 11) 191,000 122,000
Other 497,057 489,643
$28,181,810 $20,736,232
</TABLE>
6. Standby Financing Commitment
The financial statements of the Company have been prepared
contemplating the realization of assets and the satisfaction
of liabilities in the normal course of business. During the
year the Company experienced disruption in scheduled work flow
which occurred as a result of the late delivery of government-
furnished material. This disruption inhibited the ability of
the Company to meet current obligations as they became due; as
a result, the Company failed to timely pay interest and
principal on its Term Credit facility, Revolving Credit
facility and Senior Subordinated Loan, payroll taxes and
payroll tax penalties, certain vendor payables and other
obligations. In February of 1996 the Company realized its
Request for Equitable Adjustment (see Note 12) and was able to
settle the majority of its obligations exclusive of debt
service. In April the Company's primary lender extended the
maturity date of all accrued interest and principal to March
31, 1997 (see Note 7). The Company has also arranged a
standby financing commitment with its principal shareholder
which provides for the extension by the principal shareholder
of up to $2.0 million in short-term advances upon
demonstration of certain need factors by the Company. The
commitment which contains cross default provisions to the
Company's principal loan agreements, expires in January 1997
and bears a fee of two percentage points. Advances under the
commitment bear interest at prime plus three percentage
points, have maturities of six months and are secured by a
subordinated security interest in the Company's assets and the
pledge of stock issuance to the extent of ninety percent of
the amount advanced. To date no advances have been made under
this commitment.
7. LONG-TERM DEBT
<TABLE>
Long-term debt as of December 31, 1995 and 1994 consists of
the following:
1995 1994
<S> <C> <C>
Bank credit facility
described below $25,000,000 $27,200,000
Note due to individual,
bears interest at 10%,
due in 1996, 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 1,295,012 1,167,219
Total long-term debt 26,742,185 28,814,392
Less current maturities 955,155 13,889,790
Long-term debt, net of
current maturities $25,787,030 $14,924,602
</TABLE>
<TABLE>
Aggregate maturities of long-term debt at December 31, 1995
are as follows:
<S> <C>
Year ending December 31:
1996 $ 955,155
1997 25,434,605
1998 174,222
1999 156,800
2000 21,403
Total $26,742,185
</TABLE>
<TABLE>
The bank credit facility consists of the following at December
31, 1995 and 1994:
<S> <C> <C>
1995 1994
Revolving Credit facility
pursuant to $8 million
commitment $ 8,000,000 $ 6,200,000
Term Credit facility 7,000,000 11,000,000
Senior Subordinated Loan 10,000,000 10,000,000
$25,000,000 $27,200,000
</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, 1995 and 1994:
1995 1994
Interest Interest
Amount Rate Amount Rate
<S> <C> <C> <C> <C>
Revolving Credit
facility $ 8,000,000 12.25% $ 4,000,000 8.19%
$ 2,200,000 10.00%
$ 8,000,000 $ 6,200,000
Term Credit
facility $ 7,000,000 13.25% $11,000,000 8.44%
</TABLE>
The Senior Subordinated Loan payable bears interest at 14.5
percent.
For the years ended December 31, 1995 and 1994, the effective
interest rate for the Revolving Credit facility was 10.04
percent and 6.97 percent, respectively. For the years ended
December 31, 1995 and 1994, the effective interest rate for
the Term Credit facility was 9.88 percent and 6.99 percent,
respectively.
The Company defaulted on its Credit facility and Senior
Subordinated Loan monthly interest payments from July through
December of 1995 in the aggregate, approximate amount of
$1,500,000. In addition, the Company defaulted on its third
and fourth quarter 1995 principal payments in the aggregate
amount of $9,000,000.
On April 15, 1996 the Company received an Amended and Restated
Credit facility and an Amended and Restated Senior
Subordinated Loan. In accordance with these amendments,
interest accrued through March 1996 in the amount of
$2,207,799 is capitalized into the principal balance of the
debt. In accordance with the amendments, the maturity date of
the Credit facility and the Senior Subordinated Debt has been
extended to March 31, 1997, at which date the unpaid principal
and deferred interest balance is due in its entirety.
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, 1995, the
Company was in violation of its tangible net worth requirement
for the fourth quarter of 1995 and was in violation of its
leverage ratio and fixed charge coverage ratio requirements
for the second, third, and fourth quarter of 1995. On April
15, 1996, the Company's primary lender issued waivers
regarding these covenants and modified certain financial and
nonfinancial covenants for each of the four quarters in 1996.
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 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 provided that the maturity date of
the Revolving Credit facility is September 30, 1995. The
agreement also provided that the maturity date of the
Revolving Credit facility could 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 required a commitment fee of one-half of one percent
per annum on the unused portion. The restated Term Credit
facility provided 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 provided that the maturity date of
the Term Credit facility could 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. At December 31, 1994, the Company
had assumed this extension and, accordingly, the debt has been
classified as long term in accordance with the agreement.
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 provided 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 was 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, 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 consolidated financial statements.
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 accretion in 1993 was
recorded as an increase 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. In accordance with the eighth amendment to the
Revolving Credit facility the expiration date of the warrants
has been extended to September 9, 2000.
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 as of December 31, 1994 represented 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. In conjunction with the recision of the
Company's call of the warrant during 1995, the Company has
reclassified the warrant from the mezzanine section of the
balance sheet to additional paid-in capital at December 31,
1995. The warrant otherwise remains as a binding and
enforceable agreement between the Company and its primary
lender.
8. 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, 1995 and 1994 is as follows:
1995 1994
<S> <C> <C>
Inventory allowance (See Note 3) $1,274,676 $ 161,153
Allowance for future losses on
uncompleted contracts in
progress 203,922 1,345,176
$1,478,598 $1,506,329
</TABLE>
Management expects that the losses provided for in the
allowance for future losses on uncompleted contracts at
December 31, 1995 will be incurred in 1996.
At December 31, 1995 the Company had twenty-one KC-135
aircraft in process from the first year of the 1994 contract,
all at various stages of completion. These aircraft in
process continue to be impacted by late government furnished
material (GFM), excess major structural repairs and other
direct and constructive changes to the contract (see Note 12).
The Company's independent management consultant has determined
a preliminary rough order magnitude of the cost impact of late
GFM and excess major structural repairs for the twenty-one
aircraft in work under the first year of the 1994 contract.
Based on this preliminary rough order magnitude, the Company
has considered the impact of this assessment in determining
that a provision for losses on the contract is not needed.
Should the Company not ultimately receive an equitable
adjustment from the U.S. Government, the Company's management
estimates a contract loss of approximately $1,000,000.
In addition to the twenty-one KC-135 aircraft in process from
the first year of the 1994 contract there are also six
aircraft in process as of December 31, 1995 from the second
year. It is the opinion of management that the U.S.
Government has changed the work scope beginning with the
second year of the contract. This change in work scope
relates to the fact that the U.S. Government has increased the
PDM cycle from a 48-month PDM cycle to a 60-month PDM cycle.
As a result of this change in work scope, the Company has
submitted a significant contract price revision proposal to
the U.S. Government. The Company has obtained an opinion from
outside legal counsel specializing in government procurement
law that there is a reasonable basis to support this proposed
contract price revision. Due to this price revision and the
low, aggregate percent complete of ships delivered to the
Company under the second year of the contract, it is the
opinion of management that the profitability or range of loss
on aircraft delivered, and to be delivered, is neither
probable, nor estimable.
Included in the allowance for estimated losses on contracts in
progress is a provision at December 31, 1995 of $542,550
related to a certain contract on which it is more likely than
not that a total contract loss will be recognized on the
remaining units to deliver. Of the $542,550 allowance,
$438,628 relates to recoverability of work in process and
$103,922 relates to aircraft to be delivered to the Company
during 1996.
Included in the allowance for future losses on uncompleted
contracts is a provision of $690,788 at December 31, 1994, for
a certain contract. These losses were dependent upon the
number of aircraft delivered to the Company prior to December
31, 1995, as specified in the contract. At December 31, 1995,
this reserve was removed due to the expiration of the delivery
time period, as specified in the contract.
Also included in the allowance for future losses on
uncompleted contracts at December 31, 1994 is a provision of
$654,388 that relates to a certain contract on which the
Company has agreed to perform additional work. At December
31, 1995, it is management's best estimate that the likelihood
of this additional work being performed is only reasonably
possible, not probable, and has accordingly removed this
reserve.
During 1995, 1994, and 1993, a provision for estimated losses
on contracts in progress in the amount of $203,922, $849,843
and $583,122, respectively, was recognized through a charge to
operations to provide for reserves on specific contracts in
progress at December 31, 1995, 1994, and 1993, respectively.
9. INCOME TAXES
The Company follows SFAS No. 109, ACCOUNTING FOR INCOME TAXES,
which accounts for income taxes under the liability method.
<TABLE>
The provision (benefit) for income taxes for the year ended
December 31, 1995, 1994, and 1993 is as follows:
1995 1994 1993
<S> <C> <C> <C>
Current:
Federal $ (18,939) $ 216,306 $ 279,333
State 13,708 (106,190) 88,190
Deferred:
Federal 2,880,935 (8,542,246) (424,251)
State (144,490) 217,776 376,902
$ 2,731,214 $(8,214,354) $ 320,174
</TABLE>
<TABLE>
The significant components of the deferred income tax
provision (benefit) attributable to income from continuing
operations for the years ended December 31, 1995 and 1994 are
as follows:
1995 1994 1993
<S> <C> <C> <C>
Deferred tax
benefit (exclusive
of the effects of
other components
listed below) $ 12,484 $ (1,985,114) $2,520,404
Utilization of
operating loss
carryforwards 314,706 4,113,600 6,025,926
Portion of operating
loss carryforwards
allocated to reduce
noncurrent intangibles 2,756,755
Increase (decrease),
in valuation allowance 2,409,255 (10,452,956) (6,309,626)
Total deferred
provision (benefit) $ 2,736,445 $ (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:
1995 1994 1993
<S> <C> <C> <C>
Computed tax expense at
federal statutory rate $ (367,244) $ 1,124,709 $2,580,937
State income taxes, net of U.S.
federal income tax benefit 303,708 1,018,862 393,246
Stock warrant accretion 782,000
Penalties and meals and
entertainment 412,395 101,213 149,048
Change in valuation allowance 2,409,255 (10,452,956) (6,309,626)
Portion of tax benefit of
operating loss carryforwards
allocated to reduce noncurrent
intangible assets 2,756,755
Other (26,900) (6,182) (32,186)
Provision (benefit) for
income taxes $ 2,731,214 $(8,214,354) $ 320,174
</TABLE>
<TABLE>
Deferred tax assets (liabilities) are comprised of the following:
1995 1994
<S> <C> <C>
Prepaid pension costs $(2,319,258) $ (2,723,756)
Pension intangible asset (1,639,734) (1,867,530)
Percentage of completion (910,677) -0-
Gross deferred tax
liabilities (4,869,669) (4,591,286)
Accrued vacation 1,207,627 1,492,767
Inventory and accounts
receivable reserves 4,741,255 5,167,840
Federal and state loss
carryforwards 3,559,653 3,874,359
Intangible assets 557,188 890,115
Property, plant, and equipment 623,430 928,472
Alternative minimum tax credit
carryforwards 709,291 690,851
Pension minimum liability
adjustment 4,976,459 5,678,270
Percentage of completion -0- 262,813
Foreign corporation net loss 2,869,772 782,010
Gross deferred tax assets 19,244,675 19,767,497
Deferred tax asset valuation
allowance (4,511,672) (2,102,417)
$ 9,863,334 $ 13,073,794
</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, 1995.
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.
In 1993, the Company utilized approximately $10 million of
preacquisition loss carryforwards associated with the purchase of
Hayes, 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, 1995:
Federal Alabama Florida California
<S> <C> <C> <C> <C>
1996 $1,248,180
2001 $10,558,534
2002 18,083,213
2003 1,298,339
2004 $1,189,202 $ 261,343
2005 1,716,619
2006 1,950,708 7,376,025 1,491,879
2007 447,602
2008 320,470 1,323,699
2009 265,529 1,112,527
2010 2,064,871 771,780
$3,139,910 $39,966,981 $7,125,449 $1,248,180
</TABLE>
The alternative minimum tax credit carryforwards of $709,291
included in the deferred tax assets above do not expire.
10. 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, 1995, 1994 and 1993:
Shares
1995 Under Option Price Range
<S> <C> <C>
Incentive stock options:
Granted None
Exercised None
Outstanding at December 31, 1995 439,389 $ .56 - $4.63
Exercisable at December 31, 1995 439,389 $ .56 - $4.63
Nonqualified options:
Granted None
Exercised 6,007 $ .56 - $1.00
Terminated 12,396
Outstanding at December 31, 1995 670,120 $ .56 - $4.63
Exercisable at December 31, 1995 584,235 $ .56 - $4.63
Total common shares reserved
and available for grant at
December 31, 1995:
Incentive stock options 560,611
Nonqualified options 289,582
Shares
1994 Under Option Price Range
Incentive stock options:
Granted 128,000 $4.63
Exercised None
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 688,523
Exercisable at December 31, 1994 535,307
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 None
Exercised None
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 nonvested cash bonuses which will be
amortized to compensation expense over the vesting period of
two years.
11. 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 $1,250,002, $1,271,740, and $908,496 in
1995, 1994, and 1993, 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 $12,659,525 and $14,444,846, representing the
excess of the accumulated benefit obligation over plan assets
plus prepaid pension cost, was recognized at December 31, 1995
and 1994, 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 $4,171,287 and
$7,017,031 (net of tax) and $4,750,776 and $7,748,850 (net of
tax) at December 31, 1995 and 1994, respectively.
The discount rate decreased from 8.75% at December 31, 1994 to
7.25% at December 31, 1995 resulting in an increase to the
accumulated benefit obligation of $11,000,000. The additional
minimum liability adjustment decreased primarily due to higher
than anticipated returns on plan assets in 1995.
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.
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, 1995, 1994,
and 1993 include the following components:
<S> <C> <C> <C>
1995 1994 1993
Service cost -
benefits earned
during the period $1,289,288 $ 1,456,193 $ 1,480,402
Interest cost on
projected benefit 7,184,470 6,534,008 7,004,224
Net amortization
of prior service
costs 905,909 628,438 437,808
9,379,667 8,618,639 8,922,434
Return on plan
assets:
Actual return (17,741,368) 3,309,034 (6,279,367)
Deferred gain (loss) 10,640,696 (10,536,422) (764,812)
Net recognized (7,100,672) (7,227,388) (7,044,179)
Net pension
expense $2,278,995 $ 1,391,251 $ 1,878,255
</TABLE>
<TABLE>
The significant actuarial assumptions used in determining the
present value of benefit obligations as of December 31, 1995, 1994,
and 1993 were as follows:
1995 1994 1993
<S> <C> <C> <C>
Weighted-average discount rate 7.25% 8.75% 7.5%
Rate of increase in future
compensation levels 4.5% 6.0% 6.0%
Expected long-term rate of
return on plan assets 9.5% 9.0% 9.0%
</TABLE>
<TABLE>
The following table reconciles the pension plans' status and the
amount reported in the consolidated balance sheets at December 31,
1995 and 1994:
1995 1994
<S> <C> <C>
Actuarial present value of
benefit obligations:
Vested $92,052,846 $81,344,657
Non-vested 950,060 857,187
Accumulated benefit
obligation 93,002,906 82,219,844
Impact of future salary
increases 2,181,610 2,524,427
Projected benefit obligation 95,184,516 84,744,271
Plan assets at fair value 85,930,803 74,391,414
Plan assets less than projected
benefit obligation (9,253,713) (10,352,857)
Unrecognized net loss 10,669,848 12,218,496
Unrecognized prior service cost 4,171,287 4,750,776
Minimum pension liability
adjustment (12,659,525) (14,444,846)
Unfunded accumulated benefit
obligation $(7,072,103) $(7,828,431)
</TABLE>
Liabilities related to pension benefits are calculated using
actuarial assumptions which are estimates. Actual experience
may differ from estimated assumptions and the Company's
liability may change based on actual experience. A decrease
in the weighted-average discount rate used at December 31,
1995 from 7.25% to 7.00% would have increased the accumulated
benefit obligation and thus the minimum pension liability
adjustment and change to equity $1,950,000.
Nonpension Postretirement 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, co-payments, and yearly and
lifetime maximums. Currently, the plan is unfunded.
<TABLE>
The following table sets forth the status of the plan at
December 31:
1995 1994 1993
<S> <C> <C> <C>
Accumulated postretirement
benefit obligation:
Retirees $ 45,000 $ 25,000 $ 23,000
Fully eligible active plan
participants 78,000 33,000 36,000
Other active plan participants 704,000 473,000 467,000
827,000 531,000 526,000
Plan assets, at fair value -0- -0- -0-
Accumulated postretirement
benefit obligation in
excess of plan assets 827,000 531,000 526,000
Unrecognized prior period
(gain) loss (83,000) 176,000 211,000
Unrecognized transition obligation (553,000) (585,000) (617,000)
Accrued postretirement benefit cost $ 191,000 $ 122,000 $ 120,000
</TABLE>
<TABLE>
Estimated postretirement benefit cost for the years ended December 31,
1995, 1994 and 1993 are composed of the following:
1995 1994 1993
<S> <C> <C> <C>
Service cost-benefits attributed to
service during the period $30,000 $ 27,000 $ 35,000
Interest cost on accumulated
postretirement benefit obligation 61,000 40,000 53,000
Amortization of transition obligation
over 20 years 32,000 32,000 32,000
Amortization of unrecognized net gain (8,000)
Net periodic postretirement
benefit cost $123,000 $ 91,000 $120,000
</TABLE>
<TABLE>
Actuarial assumptions used were:
1995 1994 1993
<S> <C> <C> <C>
Projected health care cost trend rate 10.5% 11% 13.5%
Ultimate trend rate 5.5% 5.5% 6%
Year ultimate trend rate is achieved 2005 2005 2008
Effect of a 1% point increase in the
health care cost trend rate on the
postretirement benefit obligation $78,000 $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 $6,000 $ 7,000 $19,000
Discount rate 7.25% 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 1995, 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 7.25 and
8.75 percent at December 31, 1995 and 1994, 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 $(83,000), $176,000 and $211,000 unrecognized
(gains)/losses at December 31, 1995, 1994 and 1993,
respectively.
The Company recognized $123,000, $91,000 and $120,000 of
expense associated with the plan in 1995, 1994 and 1993,
respectively.
Liabilities related to postretirement benefits are calculated
using actuarial assumptions which are estimates. Actual
experience may differ from estimated assumptions and the
Company's liability may change based on actual experience. A
decrease of the discount rate used at December 31, 1995 from
7.25% to 7.0% would have increased the accumulated
postretirement benefit obligation by $18,000.
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 Dothan divisions of its Pemco Aeroplex
subsidiary. The Company has reserves established in the
amounts of $1,435,251 and $1,964,176 for reported and incurred
but not reported claims at December 31, 1995 and 1994,
respectively. Expense incurred for this plan was $8,748,411,
$8,121,138, and $6,561,761 for 1995, 1994, and 1993,
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,
1995 and 1994, 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
$4,868,000 and $4,780,716 for reported and incurred but not
reported claims at December 31, 1995 and 1994, respectively.
Expense incurred on this plan was $1,650,901, $1,399,100, and
$3,351,608 for 1995, 1994, and 1993, respectively. The
workers' compensation liability at December 31, 1995 does not
include the effect of the settlement of numerous claims
regarding an issue for which no estimate can be made of a
range of amounts of loss that are reasonably possible should
these claims be settled unfavorably.
Self-insurance reserves are developed based on prior
experience and actuarial assumptions to predict future
experience. These reserves are estimates and actual
experience may differ from these estimates.
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 1995, 1994,
or 1993. Employees are always 100 percent vested in their
contributions.
12. 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.
<TABLE>
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, 1995 are as follows:
Vehicles
Year Ending And
December 31 Facilities Equipment Total
<S> <C> <C> <C>
1996 2,730,557 232,523 2,963,089
1997 2,740,794 98,745 2,839,539
1998 2,777,118 58,765 2,835,883
1999 1,586,497 3,320 1,589,817
2000 858,546 858,546
Thereafter 7,740,625 7,740,625
Total minimum
future rental
commitments $18,434,137 $393,363 $18,827,499
</TABLE>
Total rent expense charged to operations for the years ended
December 31, 1995, 1994, and 1993 amounted to $3,909,557,
$3,128,796, and $3,116,118, respectively. Contingent rental
amounts included in rent expense amounted to $934,731,
$1,196,481, and $1,443,128 for the years ended December 31,
1995, 1994, and 1993, 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 operations, financial position, or cash flows.
U.S. Government Request for Equitable Adjustment (REA) -
During 1995 the Company recorded revenue and a current
receivable of $4,200,000 in anticipation of settlement of a
contract REA involving the KC-135 Programmed Depot Maintenance
(PDM) contract. This amount relates to, and is in addition
to, the $3,500,000 REA receivable recorded in 1994. The REA,
which was certified by the Company and submitted to the U.S.
Government, was 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,
1995. This total equitable adjustment is classified as a
current receivable at December 31, 1995 and was received in
its entirety subsequent to December 31, 1995.
In addition to the receivable mentioned above, the Company
has recorded revenue and a long-term unbilled receivable of
$4,100,000 in anticipation of the submission and settlement of
another contract REA involving the KC-135 PDM contract. The
receivable is for equitable adjustment of the cost effect of
late delivery of GFM, excess major structural repairs on
certain KC-135 aircraft and other direct and constructive
changes to the contract. 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
obtained an opinion from outside legal counsel specializing in
government procurement law which states that the Company is
entitled to compensation for additional costs associated with
late GFM and excess major structural repairs. The Company's
independent management consultant has determined a preliminary
rough order magnitude of the cost impact of the late GFM and
excess structural repairs, and the Company has recorded this
receivable based on this rough order magnitude, net of
reserves. The reserves are deemed necessary by the Company
due to uncertainties inherent in the process of receiving
equitable adjustment. The Company cannot reasonably estimate
the length of time before the formal filing of this REA nor
can it reasonably estimate the length of time before its
realization. Should the Company not ultimately receive an
equitable adjustment from the U.S. Government, the Company
would realize a pre-tax reduction of revenue of $4,100,000.
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, results of operations or cash
flows of the Company.
13. RELATED PARTY TRANSACTIONS
The Company has arranged a standby financing commitment with
its principal shareholder which provides for the extension by
the principal shareholder of up to $2.0 million in short-term
advances upon demonstration of certain need factors by the
Company. (See Note 6).
The related party receivable reflected in the consolidated
balance sheet consists of various notes receivables from
Matthew L. Gold, who is an officer, director, and majority
stockholder of the Company.
14. 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 15
percent, 7 percent, and 10 percent of the Company's net sales
for the years ended December 31, 1995, 1994, and 1993,
respectively. Sales to major customers which accounted for 10
percent or more of the Company's net sales were as follows:
<TABLE>
1995 1994 1993
<S> <C> <C> <C>
U.S. Government $91,632,344 $98,124,351 $117,585,743
</TABLE>
15. 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.
16. EXTRAORDINARY ITEM
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- at December 31,
1995 and 1994. 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.
17. FOURTH QUARTER ADJUSTMENTS
In the fourth quarter of 1995, the Company recorded year-end
adjustments to the Company's inventory and inventory reserves,
uncollectible accounts receivable, warranty reserve, year-end
bonuses, deferred tax asset valuation allowance and Request
for Equitable Adjustment which, in the aggregate, increased
net income for the quarter and the year ended December 31,
1995 by approximately $2,084,000.
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 the
year ended 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 ended December
31, 1993 by approximately $700,000.
18. LABOR CONTRACT
In June of 1993, the Birmingham Division of Pemco Aeroplex and
the Targets Division negotiated a three year labor contract
with Local 1155 of the United Automobile Aerospace Workers of
America. The agreement currently covers approximately 934
employees or 76% of the Company's work force.
This contract expires in June of 1996. In the past, the
Company has been affected by work stoppages in the course of
contract negotiations; however, they have always been short in
duration, and none have had a significant effect on the
Company's consolidated financial position, results of
operations or cashflows. Management does not anticipate that
the June 1996 contract negotiations will have a significant
effect on the Company's consolidated financial position,
results of operations or cashflows. No estimate can be made
of a range of amounts of loss that are reasonably possible
should a work stoppage occur during contract negotiations.
SUPPLEMENTARY INFORMATION
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 __ 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.
COOPERS & LYBRAND L.L.P.
Birmingham, Alabama
March 31, 1996, except for
Notes 6 and 7 as to which
the date is April 15, 1996
<TABLE>
PRECISION STANDARD, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
for the periods ending December 31, 1995, 1994 and 1993
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>
1995
Allowance
for
doubtful
accounts $ 867,206 $ 399,030 $ (840,086) $ 426,150
Estimated
losses on
contracts
in
progress 1,345,176 203,922 (1,345,176) 203,922
Estimated
losses on
work in
process 161,153 1,274,676 (161,153) 1,274,676
Reserve for
obsolete
inventory 4,602,223 834,684 $283,902 (734,796) 4,986,013
Reserve for
warranty
expense 1,518,679 158,000 (498,043) 1,178,636
Deferred
tax asset
valuation
allowance 2,102,417 2,409,255 4,511,672
Total $10,596,854 $5,279,567 $283,902 $ (3,579,254) $12,581,069
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
expense 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
expense 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
</TABLE>
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 1996
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 1996 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 1996 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
1996 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 II. Valuation and Qualifying Accounts.
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,
1995.
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)
11 Not applicable.
12 Not applicable.
13 Not applicable.
16 Not applicable.
18 Not applicable.
21 Subsidiaries of the Company.
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.
99 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: April 15, 1996 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 4/15/96
Matthew L. Gold Chief Executive Officer
and Director
(Principal Executive Officer)
/s/Walter M. Moede Executive Vice President 4/15/96
Walter M. Moede Chief Financial Officer,
Secretary and Director
(Principal Financial Officer)
/s/Donald C. Hannah Director 4/15/96
Donald C. Hannah
/s/George E.R. Kinnear II Director 4/15/96
George E. R. Kinnear II
/s/Thomas C. Richards Director 4/15/96
Thomas C. Richards
/s/Ben J. Shapiro, Jr. Director 4/15/96
Ben J. Shapiro, Jr.
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, 1996 except for
Notes 6 and 7 as to which the date is April 15, 1996, on our audits
of the consolidated financial statements and financial statement
schedules of Precision Standard, Inc. as of December 31, 1995 and
1994, and for the years ended December 31, 1995, 1994, and 1993,
which report is included in this Annual Report on Form 10-K.
Birmingham, Alabama
March 31, 1996, except for
Notes 6 and 7 as to which
the date is April 15, 1996
EXHIBIT 21
LIST OF SUBSIDIARIES
NAME UNDER
STATE OF WHICH SUBSIDIARY
NAME OF BUSINESS INCORPORATION DOES BUSINESS
Hayes Holdings I Inc. Delaware
Hayes Holdings II Inc. Delaware
Pemco Aeroplex, Inc.* Alabama Pemco World Air Services,
a Precision Standard
Company
Air International Incorporated Delaware Pemco Aeroplex
Space Vector Corporation Delaware
Pemcorp Industries, Inc. Colorado
Pemco Nacelle Services, Inc. Colorado
Pemco Air Services System, Inc. Colorado Pemco Air Support
Services, Inc.
Pemco World Air Services, Inc. Colorado
Pemco World Air Services, A/S Copenhagen, Denmark
*Hayes International Corporation changed its name to Pemco Aeroplex, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,411,929
<SECURITIES> 0
<RECEIVABLES> 14,739,096
<ALLOWANCES> 426,150
<INVENTORY> 21,753,009
<CURRENT-ASSETS> 51,641,808
<PP&E> 28,256,355
<DEPRECIATION> 13,298,748
<TOTAL-ASSETS> 80,970,528
<CURRENT-LIABILITIES> 30,519,523
<BONDS> 0
0
0
<COMMON> 1,280
<OTHER-SE> 13,872,889
<TOTAL-LIABILITY-AND-EQUITY> 80,970,528
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<INTEREST-EXPENSE> 3,325,927
<INCOME-PRETAX> (1,080,128)
<INCOME-TAX> (2,731,214)
<INCOME-CONTINUING> (3,811,342)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,811,342)
<EPS-PRIMARY> (0.31)
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</TABLE>
