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, 1996
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
1225 17th Street
Suite 1800
Denver, CO 80202
Address of principal executive offices Zip Code
Company's telephone number, including area code: (303) 292-6565
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 par value
(Title of Class)
Indicate by check mark whether the Company (1) has filed all
reports required to be filed by section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Company was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
The aggregate market value of the Common Stock held by non-
affiliates on February 28, 1997 was approximately $4,749,027.
The number of shares of the Company's Common Stock out-
standing as of February 28, 1997 was 12,523,896.
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, 1996) 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
FORM 10-K ANNUAL REPORT
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
PRECISION STANDARD. INC.
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 ......................................
-i-
PART I
Item 1. Business.
A. GENERAL
Precision Standard, Inc. ("the Company") is a diversified aviation
and aerospace company with executive offices in Denver, Colorado.
The Company is composed of three operating groups: the Government
Services Group, located primarily in Birmingham, Alabama; the
Commercial Services Group, located in Dothan, Alabama and
Copenhagen, Denmark; and the Manufacturing and Overhaul Group with
facilities in Alabama, California, Colorado, Florida, and Denmark.
The Company provides aircraft maintenance and modification services
for the government and military customers through its Government
Services Group. These services include complete airframe
inspection, maintenance, repair and custom airframe design and
modification. For its military customers, the Company specializes
in providing Programmed Depot Maintenance ("PDM") and Scheduled
Depot Level Maintenance ("SDLM") on large transport aircraft and
helicopters. The Company's competitive strength in the military
market is its ability to provide total airframe repair. In
addition, the Company has a long, successful history of providing
high-quality maintenance, modification, and integration work on a
broad range of military aircraft including the KC-135, C-130, C-9,
P-3, T-34, A-10, F-16, and U.S. Navy helicopters. The Company
believes it is the most experienced provider in the world on two of
the United States Air Force's ("USAF") most heavily utilized
aircraft, the KC-135 tanker aircraft and the C-130 cargo aircraft.
The Company's Commercial Services Group provides commercial
aircraft maintenance and modification services on a contract basis
to the owners and operators of large commercial aircraft. The
Company has broad experience in modifying commercial aircraft and
providing value-added technical solutions and holds numerous,
proprietary STCs (Supplemental Type Certificates). The Company's
facilities, tooling, engineering capabilities, and experienced
labor force enable it to perform virtually any airframe
modification a commercial customer may require. The Company has
performed over 250 cargo conversions of narrow and wide-body
commercial aircraft. The Company also provides commercial aircraft
maintenance varying in scope from a single aircraft serviced over
a few days to multi-aircraft contracts lasting several years. The
Company is able to offer full range maintenance support services to
airlines coupled with the related engineering and technical
services required by these customers.
The Company's Manufacturing and Overhaul Group designs and
manufactures a wide array of proprietary aerospace products
including aerial tow targets; various space systems, such as
guidance control systems and launch vehicles; aircraft cargo-
handling systems; and precision parts and components for aircraft.
In addition, the Manufacturing and Overhaul Group provides engine
nacelle overhaul and repair and operates an aircraft parts
distribution company. The Company's well-trained and highly
respected research, development, and engineering staff is an
integral part in the winning of competitively bid aerospace and
defense manufacturing contracts from the United States military and
numerous "blue-chip" commercial customers.
B. SIGNIFICANT DEVELOPMENTS
Settlement of Contract Claims with the U.S. Government
In 1996, the Company reached an agreement with the U.S. Government
with respect to all outstanding Requests for Equitable Adjustment
(REA) on both its 1990 and 1995 KC-135 contracts for a total of $33
million. The Company and the Government negotiated to resolve all
disputes associated with the Government's untimely provision of
government furnished material (GFM), the incidence of major
structural repair work in excess of that contemplated at the time
of the contract formation, post-contract increases in inspection
requirements, consequent delay and disruption costs and other
associated costs.
Settlement of Labor Dispute at the Birmingham and Leeds Facilities
On March 21, 1997, the Company's United Auto Worker (UAW) employees
ratified a new three year agreement ending a work stoppage that
began on July 22, 1996. The new labor contract allows the Company
more operating flexibility and provides increases in wages and
certain benefits for union members.
Refinancing
In March of 1997, the Company finalized various amendments to its
credit and related agreements with its primary lender. As part of
these amendments, the Company paid $15 million in October 1996 to
its primary lender, which was applied to its Senior and Term debt,
and fully repaid the Revolving Credit facility.
The Company has entered into discussions with a number of other
institutional lenders that have expressed interest in providing
debt replacement financing in the form of a term loan and a
revolving line of credit in an aggregate amount sufficient to repay
the Company's existing debt, including the Company's primary
lender, and to provide working capital. The Company anticipates
that the refinancing will be complete during the second quarter of
1997.
Rocket Launch Contract Awarded to Space Vector Corporation
In the fourth quarter of 1996, the U.S. Government's Ballistic
Missile Defense Organization (BMDO) awarded the Company's Space
Vector subsidiary a five year contract for up to 30 sounding rocket
launches in support of BMDO experiments. The contract price of
$63.4 million is firm but not yet fully funded.
Agreement with National Aeronautic and Space Administration
In July of 1996, the Company was awarded a five year contract by
the National Aeronautic and Space Administration (NASA) to maintain
and support various aircraft under the control of the Langley
Research Center. Aircraft to be serviced under the agreement
include B-757, B-737, T-38, OV-10 and others.
Agreements for "Quick Change" Conversions
In March and September of 1996, respectively, the Company entered
into agreements with United Parcel Service (UPS) for the
development and conversion of five B-727-100 aircraft from cargo to
passenger. By utilizing the Company's innovative "Quick Change"
configuration, UPS will be able to convert their aircraft from
cargo to passenger service in approximately four hours, allowing
UPS to fly passengers during weekends when the aircraft are not
currently utilized.
Agreement with Sterling European Airlines for Fleet Maintenance
The Company's Copenhagen operation received a three year contract
to provide Sterling European Airlines with total maintenance
support, including airframe and component maintenance, line
maintenance, and engineering support for Sterling's fleet of five
B-727 aircraft.
Fleet Maintenance Agreement with Muk Air of Denmark
In May of 1996, the Company reached an agreement with Muk Air to
provide total maintenance support, including airframe and component
maintenance, line maintenance, and engineering support for Muk
Air's fleet of five Shorts 330 and 360 aircraft.
Agreements with British Airways
In March of 1997, the Company was awarded contracts with British
Airways (BA) for the performance of maintenance on five B-757
aircraft and one B-767 modification. The maintenance work will be
performed in Copenhagen, with the modification to be performed at
the Dothan facility.
Agreement with Pakistan International Airlines
In the fourth quarter of 1996, the Company's Pemco Nacelle Services
subsidiary reached an agreement with Pakistan International
Airlines (PIA) for the maintenance, repair, and overhaul of PIA's
nacelles and thrust reversers. Under the terms of the agreement,
PIA will utilize the Company for nacelle and thrust reverser
maintenance for its aircraft powered by CF6 and CFM56 series
engines. The agreement is for an initial period of three years.
Agreement with KLM Royal Dutch Airlines
In February of 1997, the Company signed an agreement with KLM Royal
Dutch Airlines for cockpit upgrades and maintenance on an a group
of seven B-737's. The work will be performed at the Company's
Copenhagen facility over a one year period, commencing in the third
quarter of 1997.
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
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
Budgetary constraints are forcing U.S. Government agencies such as
Department of Defense (DoD), National Aeronautics Space
Administration (NASA), the Federal Aviation Administration (FAA),
and the Department of Energy (DoE), to rely more heavily on
outsourcing and/or privatization of workloads at government
facilities. Plans for the closure of several major depot
facilities such as the Sacramento and San Antonio Air Logistics
Centers which have provided aircraft maintenance and modification
services, will reduce the government's internal capacity to provide
such services.
These budgetary constraints, combined with a shift in the nation's
national security objectives have resulted in a reduction of
American personnel and equipment overseas. 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,
increasing dependence on the heavy air lift capability of the U.S.
Military. Due to budget limitations, funds have not been made
available for the acquisition of new equipment, and thus, the
demand for maintenance, modification, and life extension programs
for a substantial portion of the existing fleet of aircraft should
continue.
This need for immediate rapid deployment of military forces 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.
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.
One of the Company's core competencies for 45 years has been
military aircraft maintenance and modification. Given projected
market conditions, this core competency positions the Company very
favorably to provide services to its military customers.
Commercial Maintenance Industry
World air travel is projected to grow by 70% during the next ten
years (Boeing Current Market Outlook, 1996). The International
Civil Aviation Organization forecasts that passenger air traffic
will increase at a rate of 5.5% annually through the year 2005,
with cargo traffic projected to increase by 7% per year.
For commercial maintenance, there are many indicators that point to
the increasing use of third-party maintenance facilities in the
foreseeable future. Airlines continue to search for ways to reduce
costs. A number of airlines realize that the work done by third-
party companies is in many instances relatively faster and cheaper,
as compared with similar work performed in-house. The airlines'
older fleets must be 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 cargo 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 grow 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.
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
substantial. Newer 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
exclusively by the Company on new or late model B-737 aircraft.
The passenger-to-quick-change conversion enables the carrier to
convert the aircraft from passenger to freighter configuration in
as little as thirty minutes, allowing the carrier to supplement its
passenger business with cargo operations.
Although air cargo traffic has been forecasted to grow at a rate of
approximately 7% annually through the year 2013 with the number of
all-cargo planes projected to almost double over the next two
decades, the number of cargo conversions has decreased during 1996.
The decrease in conversions is attributed to the shortage of
reasonably-priced passenger aircraft due to high passenger traffic.
FAA reviews and increased regulation will limit the entry of
competitors to the cargo conversion business and may increase the
cost of conversions to customers.
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 coupled with technical publications
and after market support. 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 Tramco, Dee Howard Company, Sabretech, Inc., Timco and
approximately 10 smaller independent repair and modification
operators. 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. In Europe,
the Company's primary competitors are FLS Aerospace, Shannon
Aerospace and Team Aer Lingus.
The Company considers its competitive strengths to be its
substantial capacity, a trained and experienced labor force,
product support, proprietary products, engineering and systems
integration capability, 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
those companies' fleets on two continents simultaneously. The
Company's Birmingham, Alabama facility is believed to be the
largest third party maintenance facility in North America.
Government Services Group
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 through its
Government Services Group. The majority of the aircraft that the
Company services are large transport planes used to move troops,
supplies and equipment, 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 equipment to areas of conflict. These
aircraft are essential to the Armed Forces' ability to rapidly
mobilize its forces on foreign land when needed. Due to the lack
of funding for development of new aircraft designs, the Company is
confident that these aircraft will remain the military's work
horses well into the future. The demands placed on these aircraft
mean that they will require maintenance services such as those
provided by the Company.
Military modification and maintenance contracts are typically five
years or more in length. 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 contracted, the
military typically increases this number with aircraft that were
not scheduled for maintenance but which 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 on a production line "flow-through"
system at the Birmingham facility of the Government Services Group.
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 station.
At the onset of the PDM, the aircraft is completely defueled, and
generally, stripped of paint. 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,
replacement 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 hydraulic, electrical, sheet metal and
machine shops to satisfy all of its 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 estimated to include over 550 aircraft, and is projected to be
in service 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 total value of
the contract over a seven year period, if fully funded, is
estimated to be over $389 million. The Company first performed PDM
on the KC-135 in 1968 and has since processed 2,985 such aircraft
(including drop-in maintenance).
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 believed to number approximately 800
aircraft, which are projected to be in service 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,
which was due to expire in late 1996, has been extended through
June 1997. The Company has performed C-130 depot maintenance
continuously for over 30 years and has processed approximately 3000
such 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 U.S. Navy (USN) 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 USN input only two aircraft in the first year of the contract,
the contract minimum number. The USN was still performing in-house
SDLM work during the first year of the contract, prior to closure
of its the Naval Aviation Depot in Pensacola, Florida. During 1996
the Company delivered two USN SDLM aircraft and six Brazilian
modification aircraft. The Company projects delivery of eight SDLM
aircraft (two USN and six Egyptian government) in 1997. Due to the
U.S. government's aggressive marketing of the H-3 aircraft via
Foreign Military Sales (FMS), annual deliveries may increase in
subsequent years.
Commercial Services Group
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) through its
Commercial Services Group. Contracts for commercial maintenance
can range from a single aircraft to multi-aircraft contracts that
can span a year or longer. Modification contracts involve greater
effort per aircraft and often involve multiple aircraft 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 intensive 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 entire 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, and the number of take-offs and
landings (called flight cycles) that the aircraft regularly
endures. In particular, flight cycles can effect the intervals
required for major components to be changed or overhauled, thus
affecting 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, some aircraft are also 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 facility of the Commercial Services Group 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 250 aircraft including 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, DC-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.
MANUFACTURING AND OVERHAUL GROUP
The Company, through its Manufacturing and Overhaul Group designs
and manufactures a wide array of proprietary aerospace products
including aerial tow targets (for military use); various space
systems, such as guidance control systems and launch vehicles;
aircraft cargo-handling systems (which the Commercial Services
Group often installs); and high precision parts and components for
aircraft. In addition, the Company provides engine nacelle
overhaul and repair and operates an aircraft parts distribution
company. The Company's well trained and highly respected research,
development, and engineering staff continues to be instrumental in
the Company's winning of competitively bid aerospace and defense
manufacturing contracts from the United States military and
numerous "blue-chip" commercial customers. This group is comprised
of independent niche-manufacturing and service businesses which are
directly complementary to its aircraft services businesses. Most
of the Company's manufactured products are proprietary, protected
by patents and STCs, and are successful due to their high standards
of performance and innovative design. The Company's operations are
supported by its skilled engineers who have a broad range of
competencies in the areas of aerodynamics, propulsion, fluid
mechanics, flight operations, fuel and induction systems, controls,
communications, and radar instrumentation.
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 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 seventh HERA
test flight in March, 1997 with a 100% success rate, 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, the Company's 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. In 1996, this operation was named a Gold level
contractor by McDonnell Douglas in recognition of twelve
consecutive months of 100% quality and 100% on-time delivery.
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 strengths 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 the
Commercial Services Group 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 around-the-
clock "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 the marketing
and customer-base of its other subsidiaries. In 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
proprietary 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 over the next few years. Its future market
strength will depend on the Company's ability to create innovative
pricing structures, to provide higher quality service and to
acquire 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 manufactured by General Electric,
Pratt & Whitney and Rolls-Royce.
This service is provided by the Company's subsidiary, Pemco Nacelle
Services, Inc. which is located in 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 seeking to build its competitive strength on turnaround
time, in addition to quality and the convenience of exchange to the
customer.
E. RESEARCH AND DEVELOPMENT
The Company charged the cost it incurred for Company sponsored
research and development costs, which totaled $0.4 million in 1996,
$0.5 million in 1995 and $0.8 million in 1994 directly to earnings.
The research and development activities in 1996 were principally in
support of the Company's Target's programs. In 1997, 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 1994, 1995, or 1996.
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 eight percent of the Company's
consolidated revenue in 1996 and represent 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 generally payable 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):
Product and Service Rendered 1996 1995 1994
Aircraft Maintenance 75% 81% 81%
and Modification
Supersonic and Subsonic 4% 3% 3%
Aerial Tow Targets and
Wing Tip Pods
Space Vehicles and 11% 8% 8%
Support Systems
Cargo Handling Systems 6% 5% 6%
Precision Springs <1% <1% <1%
and Components
Parts Support and Component 2% 2% 2%
Overhauls
Nacelle Overhaul and Repair 1% <1% <1%
100% 100% 100%
Export sales 14% 15% 7%
-principally Europe
Major Customers
The following table presents the percentages of total sales for the
Company's largest customers for the last three fiscal years:
1996 1995 1994
U. S. Government 64% 59% 66%
-principally the Air Force,
Army, Navy, and NASA
G. BACKLOG
The following table presents the Company's backlog (in
thousands of dollars) at December 31, 1996 and 1995:
1996 1995
U. S. Government $136,391 $128,734
Commercial 16,740 16,474
Total $153,131 $145,208
As of December 31, 1996 and 1995, 89% of the Company's backlog was
with the U.S. Government. The Company's Government backlog
increased $24.9 million related to its Space Vector subsidiary,
primarily due to a contract awarded for up to 30 sounding rocket
launches in support of Ballistic Missile Defense tests performed by
various U.S. military organizations. Government backlog decreased
$13.0 million under the Company's KC-135 contract, primarily due to
a reduction in aircraft scheduled to be delivered for PDM work
under the second option year of the contract. The U.S. Government
delivered 34 aircraft under the first option year of the contract,
compared to 20 aircraft currently scheduled to be delivered for PDM
work under the second option year of the contract. The Company's
Government backlog also decreased $3.7 million under its C-130
program and $1.5 million under its Targets program, while it
increased $0.6 million under its H-3 helicopter contract.
The Company's commercial backlog at December 31, 1996 changed from
the prior year primarily due to a reduction of $8.9 million under
its B-737 cargo conversion program, resulting from the elimination
of some option ships under a contract that expired. Partially
offsetting this decline was additional backlog of $5.5 million
related to the conversion of five B-727 aircraft for United Parcel
Service (UPS) and a $1.8 million addition related to other B-727
conversion aircraft.
Approximately, $44.2 million of the 1996 backlog and $36.3 million
of the 1995 backlog reported above is firm but unfunded.
Additionally, the Company has an estimated $261 million of backlog
associated with the option periods for the KC-135 contract and the
HERA program which is not reflected above. The Company estimates
that $102 million of its December 31, 1996 backlog will be filled
in 1997.
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 with respect to GFM, the Company experienced no
significant shortages of raw material essential to its business
during 1996 and does not anticipate any shortages of critical
commodities over the longer term. Admittedly however, predicting
the availability of supplies is extremely difficult because so many
factors causing such possible shortages are outside the Company's
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, experienced a disruption in scheduled work flow.
During 1996, the Company and the government agreed on certain steps
to reduce the likelihood of a repetition of such delays recurring
in the future, but there can be no assurance that these steps will
be effective and that such delays will not recur. In February of
1996 and October of 1996, the Company settled these claims as
submitted in Requests for Equitable Adjustment (REAs) whereby the
Company was reimbursed for the additional costs it incurred as a
result of late GFM, as well as other cost impacts. (See Item 7.
Management's Discussion and Analysis of Financial Conditions and
Results of Operations under the heading "KC-135 Contract").
I. PATENTS, TRADEMARKS, COPYRIGHTS AND STCs
The Company holds approximately 120 FAA-issued Supplementary Type
Certificates (STCs) which authorize it to perform various
modifications to aircraft. These modifications include air-stair
installation, the conversion of commercial aircraft from passenger-
to-freighter or passenger-to-Quick Change configurations and ground
proximity and wind shear warning systems. The STCs are applicable
to Boeing 707, 727, 737, 747, Douglas DC-6, DC-8, DC-9, BAe-146,
Convair 580, General Dynamics 340/440, Lockheed 382 & 188,
Mitsubishi YS-11, Mc Donnell Douglas C-54 and Airbus A320 series
aircraft. Approximately 21 of the Company's STCs are 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 develops its STCs either
internally or under licensing agreements with the original
equipment manufacturer.
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. In addition, during 1996, the Company obtained a
design patent for a permanent door sill designed for use in cargo
configurations. 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 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 is required 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 28, 1997, the Company employed 2,649 persons.
Approximately 1,018 of these persons are covered under a collective
bargaining agreement with the United Auto Workers (UAW). The
Company's contract with its UAW employees expired in July of 1996
and the employees voted to stop work. On March 21, 1997, the UAW
employees ratified a new three year agreement ending the work
stoppage. The UAW bargaining agreement covers employees at the
Company's Birmingham, Alabama and Leeds, Alabama locations.
Approximately 380 of the 2,649 persons employed by the Company at
February 28, 1997 were replacement workers necessitated by the work
stoppage, most of whom will be terminated in March of 1997 in
conjunction with the new UAW bargaining agreement.
Employees at the Company's Dothan, Alabama location are covered
under a collective bargaining agreement with the International
Association of Machinists (IAM). The agreement with the IAM
employees was successfully negotiated without a work stoppage in
August of 1992 and was extended for five years to August of 1997.
Approximately 58 of the Company's 2,649 employees are employed on
a part-time basis.
Item 2. Properties.
All of the Company's properties are generally well maintained and
in good operating condition. All facilities were adequately
utilized during 1996.
Precision Standard, Inc. Executive Offices and Pemco World Air
Services Marketing Offices - Denver, Colorado
Precision Standard, Inc. and Pemco World Air Services have
executive offices in Denver, Colorado. The lease for this office
space expires in May, 2001.
The Government Services Group - Birmingham, Alabama
The Government Services Group is located primarily at the
Birmingham International Airport, in Birmingham, Alabama. The
Birmingham facility is located on 208 acres of land with
approximately 1,900,000 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 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 the present lease.
Formal documentation of this renewal is currently in progress.
Commercial Services Group
The Dothan Facility
The Dothan facility of the Commercial Services Group is located at
the Dothan-Houston County Airport, in 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 Dothan facility is an approved FAA, JAA and CAA (United
Kingdom) repair station. 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.
The Copenhagen Facility
The Copenhagen facility of the Commercial Services Group is located
at the Copenhagen Airport in Copenhagen, Denmark. 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 up to DC10-sized aircraft. 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.
Manufacturing and Overhaul Group
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 two pre-engineered metal
buildings with approximately 40,000 square feet of manufacturing
and office floor space. The Targets division occupies this
building under a lease agreement which, inclusive of a five year
renewal 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.
This facility 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 and houses production and
administrative functions. The facility is under a lease agreement
which expires in June 30, 2002.
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 alleging employment discrimination, including race,
sex, age and disability, have been made against the Company and its
subsidiary, Pemco Aeroplex, Inc., by current and former employees
at its Birmingham and Dothan, Alabama facilities in proceedings
before the Equal Employment Opportunity Commission and before state
and federal courts in Alabama. Workers' compensation claims
brought by employees of Pemco Aeroplex, Inc. are also pending in
Alabama state court. The Company believes that no one of these
claims is material to the Company as a whole and that such claims
are more reflective of the general increase in employment-related
litigation in the U.S. and Alabama than of any actual
discriminatory employment practices by the Company or any
subsidiary. Except for workers' compensation benefits as provided
by statute, the Company believes these claims have no merit and
intends to vigorously defend itself in all litigation arising
therefrom.
The Company and its subsidiaries are also parties to other non-
employment related litigation, the results of which are not
expected to be material to the Company's financial condition.
Pemco Aeroplex, Inc. has been designated as a potential responsible
party under the Comprehensive Environmental Response, Compensation
and Liability Act with respect to a site near its Clearwater,
Florida 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 1996.
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.
Bid Quotations
High Low
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
1996
March 31, 1996 $1-3/8 $1
June 30, 1996 2-1/4 1-1/16
September 30, 1996 1-3/8 3/4
December 31, 1996 1-13/32 15/16
On December 31, 1996, there were 12,522,646 shares of common stock
issued and outstanding held by 229 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 warrant has not been exercised and is now the
subject of a repurchase agreement over a period of six quarters
ending October 31, 1998. The Company has the sole discretion to
repurchase the warrant for cash or common stock at a price equal to
the difference between the warrant exercise price and the fair
market value of the common stock on specified dates.
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.
Consolidated operating data for the Company is as follows
(in thousands of dollars):
Year Year Year Year Year
Ended Ended Ended Ended Ended
12/31/96 12/31/95 12/31/94 12/31/93 12/31/92
Net Sales $130,858 $154,658 $148,495 $169,868 $146,229
Income (loss) (2,353) 2,583 6,812 14,184 7,053
from
operations
Income (loss) (3,960) (3,811) 11,227 7,271 1,169
before extra-
ordinary item
Income (loss) (.32) (.31) .67 .58 .10
before extra-
ordinary item
per common
share
Net Income (3,960) (3,811) 11,227 5,997 2,046
(loss)
Net Income (.32) (.31) .67 .47 .16
(loss) per
common share
Consolidated balance sheet data for the Company is as
follows (in thousands of dollars):
Year Year Year Year Year
Ended Ended Ended Ended Ended
12/31/96 12/31/95 12/31/94 12/31/93 12/31/92
Working $ 9,180 $21,122 $14,277 $23,127 $14,615
Capital
Total 59,274 80,971 80,776 70,905 71,803
Assets
Long-Term
Obliga-
tions:
Debt 11,104 25,787 14,925 28,567 33,792
Other 5,178 10,790 15,671 10,708 4,218
Stockholders
equity 13,128 13,874 12,515 4,287 3,019
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
KC-135 Contract
The Company first performed Programmed Depot Maintenance (PDM) on
KC-135 aircraft in 1968 and has since processed approximately 2,114
such aircraft. In 1994, the Company was awarded a new, seven year
PDM contract and is currently performing work under the third 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. The Company's KC-135 contract with the U.S. Government
accounted for approximately 42% of the Company's total revenues in
1996, 41% in 1995 and 49% in 1994.
In February of 1996, the Company received $8.1 million from the
Government as settlement for a Request for Equitable Adjustment
(REA) related to specific late government furnished material (GFM)
on the Company's 1990 KC-135 contract. The Company recognized $3.5
million of revenue in 1994, $4.2 million of revenue in 1995 and
$0.4 million of interest income in 1995, associated with the $8.1
million settlement. The Company believes that it has incurred
costs of $10.3 million related to the factors cited in this
settlement. In October of 1996, the Company received $25.0 million
under an agreement with the U.S. Government with respect to all
outstanding REAs on both its 1990 and 1994 KC-135 contracts. The
Company and the Government negotiated to resolve all disputes
associated with the Government's untimely provision of GFM, the
incidence of major structural repair work greatly in excess of that
contemplated at the time of contract formation, post contract
increases in inspection requirements, consequent delay and
disruption costs and other associated costs. The Company
recognized $4.1 million of revenue in 1995, $17.6 million of
revenue in 1996 and $3.3 million of other income in 1996,
associated with the $25.0 million settlement. The $25.0 million
settlement was based upon a universal agreement between the
Government and the Company and did not necessarily take into
account associated costs per individual impacted ship and their
respective redelivery dates. The Company believes that it has
incurred costs of $31.5 million related to the factors cited in
this settlement.
In October 1996, the Company also reached an agreement with the
U.S. Government for additional pricing in respect of aircraft in
work at the time of the settlement, and the Government exercised
its option for PDM of the KC-135 aircraft for the 1997 fiscal year,
beginning on October 1, 1996. The Company's contract for this
option year was amended to include additional pricing for the
aforementioned directed and constructive changes to the contract
and incorporated a fixed-price incentive provision to the contract,
which contains limited cost/benefit sharing provisions. The
Company is still working with the government to provide concurrent
engineering and other related provisions of the settlement.
The U.S. Government delivered forty-five aircraft to the Company
under the first year of the 1994 contract and thirty-four aircraft
under the first option year. To date, the Government has scheduled
twenty aircraft to be delivered for PDM work under the second
option year of the contract, which began on October 1, 1996.
Twelve months ended December 31, 1996
Versus twelve months ended December 31, 1995
Revenues for the year ended 1996 decreased 16% from $154.7 million
in 1995 to $130.9 million in 1996. Government sales decreased 8%
in 1996, from $91.7 million in 1995 to $84.1 million in 1996.
Commercial sales decreased 26% in 1996, from $63.0 million in 1995
to $46.8 million in 1996. The Company's mix of business between
government and commercial customers shifted from 41% commercial and
59% government in 1995 to 36% commercial and 64% government in
1996.
A decrease in government sales in 1996 of $20.4 million was due
primarily to a reduction in the number of KC-135 PDM aircraft
redeliveries. Twenty-eight aircraft were redelivered in 1996
versus forty-five aircraft in 1995. The reduction in aircraft
redeliveries in 1996 was caused by disruption to the Company's
operations by the factors cited in the Company's REAs (see "KC-135
Contract", above), disruption due to a contract dispute and ensuing
work stoppage of the Company's United Auto Worker (UAW) employees
and a reduction in the number of aircraft input to the Company for
PDM work.
The above decrease in government sales was partially offset by
revenue recorded in 1996 in conjunction with the universal
settlement agreement with the Government in October of 1996 (see
"KC-135 Contract", above).
The Company realized increases in government sales of $2.5 million
under the Company's H-3 helicopter program, which is worked at its
Dothan facility, and $2.3 million at its Space Vector Division,
while it realized a decrease of $5.0 million in revenue related to
its C-130 PDM contract.
Commercial aircraft maintenance sales increased $3.7 million at the
Company's operations in Dothan, Alabama; however, lower aircraft
conversion revenue, resulting at least in part from a shortage of
aircraft available due to high passenger traffic volumes, caused
overall commercial sales to decline. There were three B-727
conversion redeliveries in 1996 versus fifteen redeliveries in
1995; no B-737 conversion redeliveries in 1996 versus four
redeliveries in 1995; no B-727 Combi redeliveries in 1996 versus
one redelivery in 1995.
The ratio of cost of sales ($115.7 million in 1996; $132.5 million
in 1995) to net sales ($130.9 million in 1996; $154.7 million in
1995) increased from 86% in 1995 to 88% in 1996. The resultant
decrease in gross profit is attributable primarily to a reduction
in profit realized under the Company's KC-135 program due to the
escalation and accumulation of the cost factors cited in the
Company's REAs (see "KC-135 Contract", above) and the disruption
caused by the work stoppage of the Company's United Auto Worker
(UAW) employees. (All of the Company's approximately 900 UAW
employees stopped work on July 22, 1996 and remained on strike
until March 31, 1997). This increase in costs under the KC-135
program was largely offset by revenue recorded in conjunction with
the universal settlement with the Government in October of 1996
(see "KC-135 Contract", above).
The Company reduced the losses at its Copenhagen aircraft facility
by $1.5 million, or 29%, in 1996 versus 1995, while revenues
remained relatively constant. The Company also improved the profit
margin and increased the volume of sales for its Space Vector and
Targets product lines in 1996. Additionally, the Company recorded
significantly lower pension expense in 1996 compared to 1995.
Pension cost decreased from $2.3 million in 1995 to $1.0 million in
1996 primarily because plan experience, including changes in
participant data and plan assets, was different from that expected
and due to an increase in the expected return on assets. However,
gross profit was negatively impacted in 1996 as compared to 1995
due to losses recorded under various commercial aircraft contracts
performed at the Company's Dothan facility, including recognition
of costs incurred in excess of those estimated to be recoverable
relating to the Company's new B-727 quick-change conversion
contract with UPS, and due to the lack of redeliveries under the
Company's B-737 and B-727 cargo conversion programs.
Selling, general and administrative expenses decreased from $19.1
million in 1995 to $17.1 million in 1996 but increased as a
percentage of sales from 12% in 1995 to 13% in 1996.
Interest expense was $2.5 million in 1996 versus $3.3 million in
1995. Interest expense was favorably impacted in 1996 by the
forgiveness of $1.3 million of interest by the Company's primary
lender, $0.6 million of which was recorded in 1996 and $0.7 million
of which will be recorded subsequent to 1996. Interest expense was
also favorably impacted by the payment of $15.0 million of
principal to the Company's primary lender in October of 1996. The
effective average interest rate on the Term Credit facility was
10.52% in 1996, versus 9.88% in 1995. The effective interest rate
for the Revolving Credit facility was 10.45% in 1996 versus 10.04%
in 1995.
The Company recorded a net of $3.2 million of other income in 1996
versus $0.3 million of other expense in 1995. Approximately $3.3
million of the Company's settlement with the U.S. Government in
October of 1996 was classified as other income; $1.8 million as
reimbursement for payroll tax penalties and $1.5 million for
excessive interest costs, both of which were incurred by the
Company due to the cash constraints caused by the cost impacts
cited in the Company's REAs (see "KC-135 Contract, above). The
Company recorded approximately $0.4 million of payroll tax
penalties in 1996. The primary components of other expense in 1995
are $1.2 million of penalties for the late payment of federal
payroll taxes stemming from timing issues related to the Company's
cash flow, offset by $0.6 million of interest income which was
primarily associated with the REA that was settled in February of
1996.
The Company recorded $2.3 million of state and federal income tax
expense in 1996 versus $2.7 million in 1995 and reduced its
deferred tax assets by $4.1 million in 1996 versus $3.2 million in
1995. The change in deferred tax assets in 1996 is primarily due
to the reduction of the Company's pension minimum liability and an
increase in the valuation allowance for certain state net operating
loss carryforwards, some of which have been disallowed based on the
findings of an Alabama state tax audit. The change in deferred tax
assets 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 believes that future
levels of taxable income will be sufficient to realize its deferred
tax assets.
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 "KC-135 Contract", above). In
addition to the reduction in the number of KC-135 PDM redeliveries
in 1995, the Company recorded approximately $0.1 million less in
revenue 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 B-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 B-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 was 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 operations in
Copenhagen, Denmark, and losses incurred and accrued under the
Company's C-130 PDM contract.
As indicated under the heading "KC-135 Contract", the reduced
profit realized under the KC-135 contract was primarily
attributable to late receipt of GFM and an unprecedented number of
major structural problems, both of which formed the basis of
requests for equitable adjustment of contract pricing.
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
experienced a lower than anticipated sales volume as well as
initial ship learning expense in 1995 on the facility's first-ever
B-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 suffered from the continuing and escalating
disruption of work on the KC-135 contract which resulted in the
continuous reshuffling of the Company's labor force (see "KC-135
Contract", above).
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 B-727 cargo conversion program
performed at the Company's Dothan, Alabama facility.
Selling, general and administrative expense increased from $15.0
million in 1994 to $19.1 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 was 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.
Other expense decreased from $0.5 million in 1994 to $0.3 million
in 1995. The primary components of other expense in 1995 were $1.2
million of penalties for the late payment of federal payroll taxes
stemming from timing issues related to the Company's cash flow
problems, offset by $0.6 million of interest income which was
primarily associated with the REA that was settled 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 "KC-135
Contract", above) 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).
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash resources in 1996 were significantly bolstered
by the settlement of its Requests for Equitable Adjustment (REAs)
with the U.S. Government. In February of 1996, the Company
received $8.1 million related to specific late government furnished
material (GFM) on the Company's 1990 KC-135 contract. In October
of 1996, the Company received $25.0 million under an agreement with
the U.S. Government with respect to all outstanding REAs on both
its 1990 and 1995 KC-135 contracts (see also Part 1, Item 7.
"Management's Discussion and Analysis - KC-135 Contract").
In October of 1996, the Company paid $15.0 million of principal to
its primary lender from the proceeds of the settlement with the
U.S. Government, with $2.8 million applied to the Senior
Subordinated loan, $4.2 million to the Term Credit facility and
$8.0 million to fully repay the Revolving Credit facility. In
March of 1997, the Company and its primary lender executed a Second
Amended and Restated Credit Agreement (the "Credit Agreement"), a
Second Amended and Restated Senior Subordinated Loan Agreement (the
"Subordinated Agreement") and an Amended and Restated Warrant
Agreement (the "Warrant Agreement"). The Credit Agreement extended
the terms of the remaining $5.0 million of principal to provide for
six monthly installments of $100,000 during 1997 with the $4.4
million balance due on January 31, 1998. The Subordinated
Agreement provides that the $7.2 million principal balance of the
loan be repaid in sixteen equal quarterly installments on the last
day of each calendar quarter, commencing on September 30, 1997 and
ending on June 30, 2001. The Credit Agreement and the Subordinated
Agreement also provide for the forgiveness of approximately $1.3
million of accrued but unpaid interest in 1996. The Company
recognized approximately $0.6 million of the forgiven interest in
1996 and anticipates recognizing the remaining $0.7 million
subsequent to 1996.
Under the warrant agreement, the Company's primary lender holds a
warrant for 4,215,753 shares of the Company's common stock. The
warrant is now the subject of a repurchase agreement over a period
of six quarters ending October 31, 1998. The Company has the right
to repurchase the warrant with cash or by the issuance of common
stock with a value equal to the difference between the $0.24
warrant exercise price and the fair market value of the common
stock on specified dates. While the Company presently intends to
exercise its right to repurchase the warrant with shares of common
stock, it may elect to repurchase all or a portion of the warrant
with cash.
Although the Company's cash position was significantly strengthened
by the settlements negotiated with the U.S. Government, the
Company's cash resources continued to be strained in 1996 primarily
due to excessive costs on its KC-135 program, additional costs
incurred for the procurement, housing and transportation of
contract labor necessitated by the work stoppage of the Company's
United Auto Worker (UAW) employees, delayed redelivery of KC-135
aircraft and losses incurred on various commercial aircraft
maintenance contracts performed at the Company's Dothan, Alabama
and Copenhagen, Denmark facilities including up-front costs
associated with the Company's new B-727 quick-change conversion
contract with UPS.
The Company is currently in the process of refinancing its debt.
The Company has entered into discussions with a number of other
institutional lenders that have expressed interest in providing
debt replacement financing in the form of a term loan and a
revolving line of credit in an aggregate amount sufficient to repay
the Company's existing debt, including the Company's primary
lender, and to provide working capital. The Company anticipates
completion of the refinancing during the second quarter of 1997.
The following is a discussion of the significant items in the
Company's Consolidated Statement of Cash Flows for the years ending
December 31, 1996, 1995 and 1994.
The Company increased the valuation allowance associated with its
deferred tax asset $2.5 million in 1996, primarily due to losses
incurred at the Company's Denmark facility and for certain state
net operating loss carryforwards, some of which have been
disallowed based on the findings of an Alabama state tax audit.
The valuation allowance was increased $2.4 million in 1995,
primarily due to losses incurred at the Company's Denmark facility.
In 1994, the valuation allowance was reduced $10.5 million as the
Company considered the increase in its firm but unfunded backlog
associated with the follow-on years of its government contracts
($206 million at December 31, 1994; $25 million at December 31,
1993). The decrease in deferred tax assets in 1996 is primarily
due to the reduction of the Company's pension minimum liability.
The decrease in deferred tax assets in 1995 and 1994 was due
primarily to the usage of net operating loss carryforwards.
The Company's pension expense as determined by its actuary for the
year 1996 is $1.0 million, as compared to $2.3 million in 1995.
The Company funded its pension $0.9 million in 1996 versus $1.3
million in 1995.
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 $0.5 million in 1996, $0.5
million in 1995 and $0.3 million in 1994 due to the expiration of
warranties and the fulfillment of warranty obligations. The Company
also provided for future warranty expenditures of $0.2 million in
1996 and 1995 and $1.3 million in 1994, related to new deliveries
and the modification of terms on certain outstanding warranties.
The Company recorded a $0.3 million, $0.7 million and $1.5 million
provision for reductions in the valuation of its inventory in 1996,
1995 and 1994, 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 it commercial aircraft finished goods
inventory due to engineering and design changes.
The Company's accounts receivable decreased in 1996 primarily due
to fewer redeliveries under the Company's KC-135 program in
December of 1996 as compared to December of 1995, and the timing of
such deliveries.
The Company received from the Government $8.1 million in February
of 1996 and $25.0 million in October of 1996 as settlement for its
Requests for Equitable Adjustment related to its 1990 and 1994 KC-
135 contracts. The Company had a short term receivable of $8.1
million and a long term receivable of $4.1 million related to these
settlements as of December 31, 1995. At December 31, 1994, the
Company had a $3.5 million receivable related to these settlements.
Net inventory increased $3.1 million in 1996, decreased $4.1
million in 1995 and increased $2.0 million in 1994. Progress
payment balances on U.S. Government contracts and net commercial
customer deposits were $27.9 million, $16.9 million and $6.2
million and work in process was $43.6 million, $31.0 million and
$26.0 million at December 31, 1996, 1995 and 1994, respectively.
Progress payment balances and net customer deposits as a percent of
gross work in process for each of the three years were 64%, 55% and
24%, 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 increased on the KC-135 contract primarily due to the cost
factors cited in the Company's REAs (see also Part 1, Item 7.
"Management's Discussion and Analysis - KC-135 Contract").
The increase of $0.8 million in 1996 in the Company's deposits
relates primarily to a security guarantee with a financial
institution in conjunction with the Company's Copenhagen, Denmark
facility lease agreement.
Accounts payable and accrued expenses were $26.5 million at
December 31, 1996 versus $28.2 million at December 31, 1995. In
April of 1996, the Company capitalized $2.2. million of interest
accrued and unpaid to its primary lender from July of 1995 through
April 1, 1996, in conjunction with the Eighth Amendment to the
Amended and Restated Credit Agreement and the Sixth Amendment to
the Amended and Restated Senior Subordinated Loan Agreement. This
transaction is reflected as a non-cash financing activity. At
December 31, 1996, the Company had accrued interest of $0.9
million, after reflecting the forgiveness of $0.6 million of
interest by its primary lender for interest accrued but unpaid for
the period of May through September of 1996.
Accounts payable and accrued expenses increased in 1995 due to an
increase of $5.4 million to the Company's vendors and due to the
Company's failure to timely remit $2.3 million of federal payroll
tax payments. 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
approximately $4.2 million). Accrued interest payments at December
31, 1995 were $1.5 million, representing a $1.2 million increase
over that due at December 31, 1994. Partially offsetting these
increases to accounts payable and accrued expenses, but negatively
impacting cash flow in 1995, was a reduction of $1.9 million in
customer deposits.
Cash provided from operating activities funded capital improvements
of $1.3 million, $2.9 million and $2.1 million in 1996, 1995 and
1994, respectively. Additionally, the Company funded principal
payments to its primary lender of $15.0 million, $4.0 million and
$8.0 million in 1996, 1995 and 1994, respectively, as well as $0.6
million, $0.4 million and $0.4 million on various capital leases.
CONTINGENCIES
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.
FORWARD LOOKING STATEMENTS
Statements herein concerning anticipated results of operations and
the Company's intent to take certain actions in the future are
forward looking statements, the accuracy of which cannot be
guaranteed by the Company. These forward looking statements are
subject to a variety of business risks and other uncertainties,
including but not limited to the effect of economic conditions, the
impact of competitive products and pricing, new product
development, the actual performance of work under contract,
customer contract awards and actions with respect to utilization
and renewal of contracts, and the results of financing efforts.
Item 8. Financial Statements and Supplemental Data.
The following financial statements and financial statement
schedules are submitted herewith:
Financial Statements:
Report of Independent Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Financial Statement Schedules:
Report of Independent Public Accountants
Schedule II - Valuation and Qualifying Accounts
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Precision Standard, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of
PRECISION STANDARD, INC. (a Colorado corporation) AND SUBSIDIARIES
as of December 31, 1996 and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year then
ended. 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 audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
As discussed in Note 6, the Company's primary lender extended the
terms of approximately $4.4 million of term debt through January
31, 1998; therefore this debt has been classified as long-term in
the consolidated financial statements. Also, management is in
discussion with a number of lenders who have expressed interest in
providing debt replacement financing. Management believes that
such refinancing will be completed prior to January 1, 1998.
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, 1996 and the consolidated results of their operations
and their cash flows for the year ended December 31, 1996 in
conformity with generally accepted accounting principles.
Denver, Colorado ARTHUR ANDERSEN LLP
March 31, 1997
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 the related consolidated statements of income,
stockholders' equity, and cash flows for each of the two 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 the consolidated results of their operations
and their cash flows for each of the two years in the period ended
December 31, 1995 in conformity with generally accepted accounting
principles.
Birmingham, Alabama COOPERS & LYBRAND L.L.P.
March 31, 1996, except for
Note 6, 7 and 13 as to which the date
is April 15, 1996.
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
1996 1995
ASSETS
Current assets:
Cash and cash equivalents $ 1,183,200 $ 1,411,929
Accounts receivable, net 9,435,612 14,312,946
Inventories 23,183,608 21,753,009
Prepaid expenses and other 894,128 981,197
U.S. Government request for
equitable adjustment 0 8,144,522
Deferred taxes 4,347,098 5,038,205
Total current assets 39,043,646 51,641,808
Property, plant, and equipment,
at cost:
Leasehold improvements 10,508,585 10,322,638
Machinery and equipment 18,306,506 17,933,717
28,815,091 28,256,355
Less accumulated depreciation (15,730,794) (13,298,748)
Net property, plant and
equipment 13,084,297 14,957,607
Other non-current assets:
Intangible assets, net of
accumulated amortization 3,731,714 4,334,662
Related party receivable 269,824 269,824
Deposits and other 1,627,252 841,498
U.S. Government request for
equitable adjustment 0 4,100,000
Deferred taxes 1,517,349 4,825,129
7,146,139 14,371,113
Total assets $ 59,274,082 $80,970,528
The accompanying notes are an integral part
of these consolidated balance sheets.
LIABILITIES AND STOCKHOLDERS' EQUITY
1996 1995
Current liabilities:
Current maturities of
long-term debt $ 2,339,692 $ 955,155
Accounts payable and
accrued expenses 26,577,336 28,181,810
Accrued warranty expenses 858,856 1,178,636
Estimated losses on contracts
in progress 87,766 203,922
Total current liabilities 29,863,650 30,519,523
Long-term debt 11,104,410 25,787,030
Workers' compensation reserve 3,697,901 3,717,703
Unfunded accumulated benefit
obligation 1,480,237 7,072,103
Total liabilities 46,146,198 67,096,359
Commitments and contingencies
(Notes 6, 7, 8, 10, 11 and, 12)
Stockholders' equity:
Common stock, $.0001 par value,
300,000,000 shares authorized,
12,522,646 issued and outstanding
at December 31, 1996 and
12,793,215 and 12,455,955
issued and outstanding at
December 31, 1995 1,252 1,280
Additional paid-in capital 399,334 942,981
Common stock purchase warrant 4,200,000 4,200,000
Retained earnings 12,287,277 16,246,824
Deferred compensation 0 (87,500)
Accumulated foreign currency
translation adjustment 160,013 146,202
Minimum pension liability
adjustment (3,919,992) (7,017,031)
13,127,884 14,432,756
Less-cost of treasury shares
(337,260 shares at
December 31, 1995) 0 (558,587)
Total stockholders' equity 13,127,884 13,874,169
Total liabilities and
stockholders' equity $59,274,082 $80,970,528
The accompanying notes are an integral part
of these consolidated balance sheets.
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
Net sales $130,857,722 $154,658,414 $148,495,141
Cost of sales 115,675,503 132,456,980 125,844,149
Gross profit 15,182,219 22,201,434 22,650,992
Selling, general, and
administrative expenses 17,135,410 19,078,148 15,013,282
Research and development
expense 400,227 540,014 825,634
Income (loss) from
operations (2,353,418) 2,583,272 6,812,076
Other (income) expense:
Interest 2,514,889 3,325,927 3,308,617
Other, net (3,240,904) 337,473 490,318
Income (loss) before
income taxes (1,627,403) (1,080,128) 3,013,141
Provision (benefit) for
income taxes 2,332,143 2,731,214 (8,214,354)
Net income (loss) $ (3,959,546) $ (3,811,342) $11,227,495
Net Income (loss)
per common share:
Total $ (.32) $ (.31) $ .67
Weighted average common
shares outstanding 12,475,000 12,427,000 16,659,000
The accompanying notes are an integral part of these
consolidated statements.
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended December 31, 1996, 1995 and 1994
(Dollars and shares in thousand)
Accumu-
lated
Minimum Foreign Total
Add'l Pension Deferred Currency Stock-
Common Stock Paid-in Ret. Liab. Treas. Stock Compensa- Transl. holders'
Shares Amount Capital Earn. Adjust. Shares Amount tion Adjust. Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December
31, 1993 12,677 $1 $760 $8,831 ($4,746) 337 $(559) $ 0 $ 0 $ 4,287
Exercise
of stock
options 4 0 3 0 0 0 0 0 0 3
Minimum
pension
liability
adjustment 0 0 0 0 (3,003) 0 0 0 0 (3,003)
Issuance of
restricted
common
shares 106 0 175 0 0 0 0 (175) 0 0
Net income 0 0 0 11,227 0 0 0 0 0 11,227
Balance,
December
31, 1994 12,787 1 938 20,058 (7,749) 337 (559) (175) 0 12,514
Exercise
of stock
options 6 0 5 0 0 0 0 0 0 5
Minimum
pension
liability
adjustment 0 0 0 0 732 0 0 0 0 732
Amortization
of deferred
compensation 0 0 0 0 0 0 0 88 0 88
Reclassifi-
cation of
common
stock
purchase
warrant 0 0 4,200 0 0 0 0 0 0 4,200
Foreign
currency
translation
adjustment 0 0 0 0 0 0 0 0 146 146
Net loss 0 0 0 (3,811) 0 0 0 0 0 (3,8ll)
Balance,
December 31,
1995 12,793 1 5,143 16,247 (7,017) 337 (559) (87) 146 13,874
Exercise
of stock
options 55 0 3 0 0 0 0 0 0 3
Issuance of
restricted
shares 12 0 12 0 0 0 0 0 0 12
Retirement of
treasury
shares (337) (559) 0 0 (337) 559 0 0 0
Minimum
pension
liability
adjustment 0 0 0 0 3,097 0 0 0 0 3,097
Amortization
of deferred
compensation 0 0 0 0 0 0 0 87 0 87
Foreign
currency
translation
adjustment 0 0 0 0 0 0 0 0 14 14
Net loss 0 0 0 (3,959) 0 0 0 0 0 (3,959)
Balance,
December 31,
1996 12,523 $ 1 $4,599 $12,288 $(3,920) 0 $ 0 0 $160 $13,128
The accompanying notes are an integral part
of these consolidated statements.
</TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
Cash flows from operating
activities:
Net income (loss) $ (3,959,546) $ (3,811,342) $ 11,227,495
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation and amortization 2,763,419 2,766,572 2,704,116
Provision (benefit) for
deferred taxes 2,136,392 2,736,445 (8,324,470)
Pension cost in excess of
funding 77,034 1,028,993 118,517
Provision for losses on
receivables 290,852 399,030 636,541
Provision for warranty expense 173,778 158,000 1,268,236
Provision for reduction in
inventory valuation 346,027 691,811 1,465,202
Provision for losses on
contracts-in-process 1,286,669 1,474,598 1,010,996
Provision for losses on
insurance receivable 0 (119,800) 0
Loss (gain) on sale of equipment 233,499 (2,349) (11,815)
Changes in assets and liabilities:
Accounts receivable, trade 4,521,541 667,269 3,848,778
Request for Equitable
Adjustment (REA) 12,244,522 (8,734,251) (3,510,271)
Insurance proceeds receivable 0 0 (200,000)
Inventories (3,145,912) 4,079,087 (1,995,459)
Prepaid expenses and other 62,191 (124,217) (246,431)
Intangible assets 0 (64,645) (248,876)
Deposits and other (780,064) 162,674 (33,991)
Accounts payable and accrued
expenses 744,876 7,321,030 3,919,691
Accrued warranty expenses (493,558) (498,043) (324,557)
Estimated losses on
contracts in progress (116,156) (1,345,176) (87,789)
Workers' compensation reserve (19,802) 20,614 458,064
Total adjustments 20,325,308 10,617,642 446,482
Net cash provided by
operating activities 16,365,762 6,806,300 11,673,977
Cash flows from investing
activities:
Insurance proceeds receivable 0 0 (129,930)
Insurance proceeds received 0 249,730 200,000
Proceeds from sale of equipment 393,320 5,550 12,150
Capital expenditures (1,325,481) (2,909,139) (2,140,019)
Net cash used in
investing activities (932,161) (2,653,859) (2,057,799)
Cash flows from financing
activities:
Proceeds from issuance of
common stock 2,567 5,198 3,072
Borrowings under revolving
credit facility 1,500,000 25,900,000 57,200,000
Repayments of revolving
credit facility (1,500,000) (24,100,000) (57,800,000)
Principal payments under
long-term borrowings (15,625,127) (4,448,397) (8,397,185)
Change in cash overdraft 0 (176,120) (622,065)
Net cash used in
financing activities (15,622,560) (2,819,319) (9,616,178)
Effect of exchange rate
changes on cash (39,770) 78,807 0
Net increase (decrease)
in cash and cash
equivalents (228,729) 1,411,929 0
Cash and cash equivalents,
beginning of year 1,411,929 0 0
Cash and cash equivalents,
end of year $ 1,183,200 $ 1,411,929 $ 0
Supplemental disclosure of
cash flow information:
Cash paid during the year
for:
Interest $ 869,683 $ 1,906,654 $ 2,897,302
Income taxes $ 137,000 $ 155,155 $ 422,768
Supplemental disclosure of
noncash investing and
financing activities:
Interest capitalization $ 2,207,799 $ 0 $ 0
Capital lease obligations
incurred $ 119,245 $ 576,190 $ 456,148
The accompanying notes are an integral part
of these consolidated statements.
PRECISION STANDARD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
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 and Program Accounting - The Company recognizes
revenue on aircraft and aerial target systems 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 where 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 becomes reasonably estimable.
Major commercial aircraft conversion programs are planned,
committed and engineered based on long-term delivery
forecasts, normally for quantities in excess of contractually
firm orders. Cost of sales for commercial aircraft programs
is determined based on estimated average total cost and
revenue for the current program commitment quantity. For new
commercial aircraft programs, the program quantity is
initially based on an established number of units representing
what is believed to be a conservative market projection.
Program commitment quantities generally represent deliveries
up to 10 years. The program method of accounting effectively
amortizes or averages tooling and special equipment costs, as
well as unit production costs, over the estimated program
quantity. Because of the higher unit production costs
experienced at the beginning of a new program and the
substantial investment required for design and engineering,
initial tooling and special equipment, new commercial aircraft
programs normally have lower operating profit margins than
established programs. While the costs associated with the
initial design, production and tooling of a program are
amortized over the estimated program quantity, the Company
periodically reassesses the profitability of the program and
records losses if inherent in the program.
Research and Development, General and Administrative Expenses-
Research and development and general and administrative
expenses are charged directly to earnings as incurred except
to the extent estimated to be directly recoverable under U.S.
Government contracts.
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 practices, 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:
Classification Useful Life In Years
Leasehold improvements 5 - 20
Machinery and equipment 3 - 12
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 amounted to
$2,652,453, $2,499,774, and $2,493,948 for the years ended
December 31, 1996, 1995, and 1994, respectively.
Intangible Assets - Intangible assets primarily consist of
supplemental type certificates which are being amortized on a
straight line basis over the estimated useful lives of 20
years. 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.
Income Taxes - The Company accounts for income taxes under the
asset and liability method in which deferred tax assets and
liabilities are recognized for future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled.
Nonpension Postretirement Benefits - The Company accrues the
estimated cost of retiree benefit payments, other than
pensions, during employees' active service period.
Provision for Warranty Expenses - The Company provides
warranties on certain work performed for a given time period,
in accordance with the terms of each specific contract. The
Company provides for future warranty claims based on
historical experience, current warranty trends, and specific
warranty terms. This reserve is management's best estimate of
anticipated costs related to aircraft that were under warranty
at December 31, 1996 and 1995. Periodic adjustments to the
reserve will be made as events occur which indicate changes
are necessary.
Cash Equivalents - For purposes of the consolidated 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.
Net Income (Loss) Per Common Share - Net income (loss) per
share is based on the weighted average number of outstanding
common shares, excluding restricted shares and stock options,
as this presentation was the more dilutive.
Foreign Currency Translation - The consolidated financial
position and consolidated 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.
Consolidated statements of operations amounts 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
stockholders' 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.
New Accounting Standards - Statement of Financial Accounting
Standards (SFAS) No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS, establishes guidance for recognizing and
measuring impairment losses related to long-lived assets and
would require that the carrying amount of impaired long-lived
assets be reduced to fair value. The adoption of SFAS No. 121
during 1996 did not have a material effect on the consolidated
financial statements of the Company.
In 1996, the Company adopted SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, which establishes fair value-based
financial accounting and disclosure standards for transactions
involving stock-based employee compensation plans and
transactions related to the issuance of equity instruments to
non-employees. In accordance with the provisions of SFAS 123,
the Company elected to continue to apply APB No. 25 in
accounting for its stock option plans and, accordingly, does
not recognize compensation cost for options granted at prices
which equal or exceed market value at the date of grant. The
disclosures required by SFAS 123 are set forth in Note 10.
2. TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable as of December 31, 1996 and 1995
consist of the following:
1996 1995
U.S. Government:
Amounts billed $ 1,188,277 $ 2,907,584
Recoverable costs and accrued
profit on progress
completed - not billed 6,639,875 4,785,646
Commercial customers:
Amounts billed 2,160,371 6,676,008
Recoverable costs and
accrued profit on
progress completed -
not billed 182,396 369,858
10,170,919 14,739,096
Less allowance for doubtful
accounts (735,307) (426,150)
Trade accounts receivable,
net $ 9,435,612 $14,312,946
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, 1996 and
1995.
3. INVENTORIES
Inventories as of December 31, 1996 and 1995 consist of the
following:
1996 1995
Work in process $43,555,521 $31,050,937
Finished goods 3,524,575 3,858,325
Raw materials and supplies 5,307,562 5,019,629
Total $52,387,658 $39,928,891
Less progress payments
and customer deposits (27,917,381) (16,901,206)
Less allowance for estimated
losses on contracts in
progress (Note 8) (1,286,669) (1,274,676)
$23,183,608 $21,753,009
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 $2,334,105 and $1,331,891 at
December 31, 1996 and 1995, respectively. These costs relate
primarily to certain over-and-above type work performed on
certain government and commercial contracts. Recoverability
of these costs is subject to future determination through
negotiation or other procedures not complete at the balance
sheet dates. All of the unrecovered costs at December 31,
1995 were settled during 1996. Management expects to recover
the 1996 costs in accordance with past experience.
Also included in work in process is $2,104,108 and $2,683,124
of deferred production, initial tooling, and related
nonrecurring costs (collectively referred to as deferred
costs) at December 31, 1996 and 1995, respectively, related
primarily to the Company's 737 conversion program. 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 the above is primarily
dependent on 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 Company's Dothan facility will derive a significant
portion of their revenue for the next 2 years in connection
with their quick change conversion program. Based on studies
performed by the Company, a market in excess of the Company's
20 ship program exists for such work. To date, orders for 5
ships with an option for an additional 15 have been received.
Costs under this program that have been deferred and included
in work in process total $3,000,000 at December 31, 1996 and
include production costs, engineering and tooling costs
incurred since the inception of the program less the cost of
units delivered based on the anticipated average costs of
producing 20 units under the program. The total cost incurred
to date approximates the aggregate cost of units delivered and
in process, based on the estimated average cost of all units
to be sold under the program, of which $2,500,000 is not
covered by existing orders. Recovery of the deferred costs is
dependent upon the number of units ultimately sold and their
selling prices and production costs.
The aggregate amount of general and administrative costs
incurred during 1996, 1995, and 1994 amounted to $18,424,883,
$18,956,954, and $14,560,608, respectively. The amount of
general and administrative costs remaining in inventories at
December 31, 1996 and 1995 amounted to $1,525,633 and
$1,786,373, 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
Intangible assets as of December 31, 1996 and 1995 consist of
the following:
1996 1995
Debt issuance costs, fully
amortized in 1996 $ 0 $ 4,923
Supplemental type certificates,
net of accumulated amortization
of $1,566,651 and $1,548,111,
respectively. 139,912 158,452
Pension (see Note 11) 3,591,802 4,171,287
$3,731,714 $4,334,662
Amortization charged to operations amounted to $148,953,
$204,331, and $210,168 for the years ended December 31, 1996,
1995, and 1994, respectively.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses as of December 31, 1996
and 1995 consist of the following:
1996 1995
Accounts payable $13,909,786 $15,870,209
Accrued liabilities - payroll
related 7,889,015 7,227,657
Customer deposits 419,927 162,409
Reserve for health claims 662,385 1,435,251
Accrued interest 882,110 1,515,389
Current portion of self-insured
workers' compensation reserve 1,170,099 1,150,297
Accrued rent 560,425 250,744
Accrued postretirement benefits 243,000 191,000
Other 841,589 378,854
$26,577,336 $28,181,810
6. LONG-TERM DEBT
Long-term debt as of December 31, 1996 and 1995 consists of
the following:
1996 1995
Revolving Credit facility
pursuant to $8 million
commitment; repaid in
1996 $ 0 $ 8,000,000
Term Credit facility;
1996 and 1995 interest
at 10% and 13.25%,
respectively 5,007,799 7,000,000
Senior Subordinated Loan;
1996 and 1995 interest
at 13.5% and 14.5%,
respectively 7,200,000 10,000,000
Note due to individual;
interest at 10%, due in 1996
collateralized by a
security interest in
certain equipment 377,173 447,173
Other obligations; interest from
8% to 18%, collateralized
by security interests in
certain equipment 859,130 1,295,012
Total long-term debt 13,444,102 26,742,185
Less current maturities 2,339,692 955,155
Long-term debt, net of
current maturities $11,104,410 $25,787,030
Aggregate maturities of long-term debt at December 31, 1996
are as follows:
Year ending December 31:
1997 $2,339,692
1998 6,410,341
1999 1,969,851
2000 1,824,218
2001 900,000
Total $13,444,102
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.
For the years ended December 31, 1996 and 1995, the effective
interest rates for the Revolving Credit facility were 10.45
percent and 10.04 percent, respectively. For the years ended
December 31, 1996 and 1995, the effective interest rates for
the Term Credit facility were 10.52 percent and 9.88 percent,
respectively.
The Company and its primary lender renegotiated terms and
conditions of its debt and warrant agreements through a series
of formal amendments in April 1996, October 1996 and March
1997. The amendments considered the Company's principal
payments of $2.8 million for the Senior Subordinated loan,
$4.2 million for the Term Credit facility and $8.0 million in
full payment for the Revolving Credit facility. In accordance
with these amendments, interest accrued through March 1996 in
the amount of $2,207,799 was capitalized into the principal
balance of the debt. They also provided for the forgiveness
of approximately $1.3 million of accrued but unpaid interest
for the period from May through September of 1996 which is
being recognized prospectively as a yield adjustment.
Repayment of the remaining $7.2 million Senior Subordinated
loan will be paid in sixteen quarterly payments of $450,000,
beginning on September 30, 1997. On March 31, 1997, the
lender extended the terms of the remaining $5.0 million Term
facility to provide for six installments of $100,000 during
1997 with the $4.4 million balance due on January 31, 1998.
The above loans are collateralized by substantially all of the
assets of the Company and have various covenants which limit
or prohibit the Company from incurring additional
indebtedness, disposing of assets, merging with other
entities, declaring dividends, or making 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. While the
Company was not in compliance with certain of its financial
covenants prior to the formal amendments noted above, the
Company was in compliance with such covenants at December 31,
1996 under the amended agreement.
Although the Company's cash position was significantly
strengthened by the settlements negotiated with the U.S.
Government, the Company's cash resources continued to be
strained in 1996 primarily due to excessive program and
procurement costs incurred, housing and transportation of
contract labor necessitated by the work stoppage of the
Company's United Auto Worker (UAW) employees and losses
incurred on various commercial aircraft maintenance contracts
performed. As a result of the strain on cash resources, the
Company negotiated the interim financing as noted above.
The Company is currently in the process of refinancing its
debt. The Company has entered into discussions with a number
of other institutional lenders that have expressed interest in
providing debt replacement financing in the form of a term
loan and a revolving line of credit in an aggregate amount
sufficient to repay the Company's existing debt, including the
Company's primary lender, and to provide working capital. The
Company anticipates completion of the refinancing during the
second quarter of 1997.
7. STOCK WARRANT
In connection with the Company's debt financing in 1988, a
detachable stock warrant was issued by the Company to its
primary lender to purchase 4,215,753 shares of common stock at
an exercise price of $.24 per share. The warrant originally
provided for mandatory repurchase periods between 1991 and
1993 based on the difference between the warrant exercise
price and the appraised value of the Company's common stock at
the repurchase date.
The Company and its lender modified the warrant agreement in
late 1996. The agreement states that the warrant holder may
exercise the warrant any time before September 9, 2000, but to
the extent the holder does not exercise the warrant, the
warrant shall be redeemed in installments commencing on August
31, 1997, and the last day of each successive January, April,
July, and October 31, 1998 on which date the warrant shall be
fully redeemed. These redemptions may be made in cash or
stock at the option of the Company based on the average price
of the Company's common stock for a predetermined time period
preceding the redemption date of the warrant.
8. ALLOWANCE FOR ESTIMATED LOSSES ON CONTRACTS IN PROCESS
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.
The allowance for estimated losses on contracts in process as
of December 31, 1996 and 1995 amounted to $1,374,435 and
$1,478,598, respectively. Of these amounts at December 31,
1996 and 1995, $1,286,669 and $1,274,676, respectively is
reflected as a reduction of work in process inventory. See
Note 3. The remaining amounts at December 31, 1996 and 1995
of $87,766 and $203,922, respectively, related to aircraft to
be delivered to the Company during 1996 and 1997,
respectively.
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 continued 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 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 in process under the first year of the 1994
contract. Based on this preliminary rough order magnitude,
the Company considered the impact of this assessment in
determining that a provision for losses on the contract was
not needed at December 31, 1995.
During 1996, 1995, and 1994, the provision for estimated
losses on contracts in process in the amounts of $1,286,669,
$1,474,598, and $1,010,996, respectively, were recognized
through charges to operations.
9. INCOME TAXES
The provision (benefit) for income taxes for the years ended
December 31, 1996, 1995, and 1994 is as follows:
1996 1995 1994
Current:
Federal $ 0 $ (18,939) $ 216,306
State 195,751 13,708 (106,190)
Deferred:
Federal 1,974,219 2,880,935 (8,542,246)
State 162,173 (144,490) 217,776
$2,332,143 $ 2,731,214 $(8,214,354)
A reconciliation between income taxes computed at the federal
statutory rate and the consolidated effective tax rate is as
follows:
1996 1995 1994
Tax provision (benefit) at
federal statutory rate $ (553,317) $ (367,244) $ 1,124,709
State income taxes, net of U.S.
federal income tax benefit 236,230 303,708 1,018,862
Penalties and meals and
entertainment 146,752 412,395 101,213
Change in valuation allowance 2,503,602 2,409,255 (10,452,956)
Other (1,124) (26,900) (6,182)
Provision (benefit) for
income taxes $2,332,143 $ 2,731,214 $(8,214,354)
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.
Deferred tax assets (liabilities) are comprised of the following:
1996 1995
Prepaid pension costs $(2,302,368) $ (2,319,258)
Pension intangible asset (1,420,199) (1,639,734)
Percentage of completion (1,566,757) (910,677)
Gross deferred tax
liabilities (5,289,324) (4,869,669)
Accrued vacation 1,361,096 1,207,627
Inventory, accounts
receivable and other reserves 4,552,759 4,741,255
Federal and state loss
carryforwards 3,745,903 3,559,653
Intangible assets 274,351 557,188
Property, plant, and equipment 495,723 623,430
Alternative minimum tax credit
carryforwards 695,287 709,291
Pension minimum liability
adjustment 2,764,093 4,976,459
Foreign corporation net loss 4,279,833 2,869,772
Gross deferred tax assets 18,169,045 19,244,675
Deferred tax asset valuation
allowance (7,015,274) (4,511,672)
$ 5,864,447 $ 9,863,334
The Company has established a valuation allowance primarily
for certain non-current 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 net deferred tax assets existing at December 31,
1996.
The following table shows the various expiration dates of
federal and state operating loss carryforwards as of December
31, 1996:
Federal Alabama Florida
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
2011 291,778 2,707,717 286,941
$3,431,688 $42,674,698 $7,412,390
The alternative minimum tax credit carryforwards of $695,287
included in the deferred tax assets at December 31, 1996 do
not expire.
10. STOCK OPTIONS AND RESTRICTED SHARE PLANS
Stock Options-On May 29, 1996, the Company's stockholders
approved amendments to the Incentive Stock Option and
Appreciation Rights Plan and the Nonqualified Stock Option
Plan, pursuant to which a maximum aggregate of 3,000,000
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 expire ten years after the date of
grant.
The Company accounts for these plans under APB opinion No. 25,
under which no compensation expense has been recognized. Had
compensation expense for the Company's stock option plans for
awards in 1996 and 1995 been determined under SFAS No. 123
based on the options fair market value at the grant date, the
Company's net loss and net loss per share would have been as
reflected in the pro forma amounts indicated below:
1996 1995
Net Loss - as reported $(3,959,546) $(3,811,342)
Net Loss - pro forma (4,095,768) (3,829,781)
Net Loss per share - as reported (0.32) (0.31)
Net Loss per share - pro forma (0.33) (0.31)
The following table summarizes the changes in the number of
shares under option pursuant to the plan described above:
Weighted Weighted
Average Average
Exercise Exercise
12/31/96 Price 12/31/95 Price 12/31/94
Outstanding
beginning
of year 1,195,634 $2.24 1,127,912 $2.31 719,741
Granted 374,000 1.37 86,125 1.24 419,000
Exercised (54,358) 0.66 (6,007) 1.28 (4,171)
Forfeited (81,840) 0.99 (12,396) 2.70 (6,658)
Outstanding
end of year 1,433,436 2.15 1,195,634 2.24 1,127,912
Exercisable
end of year 1,285,235 1,023,624 910,696
Estimated
weighted
average fair
value of
options granted $0.59 $0.75
The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1996
and 1995: dividend yield of 0%; expected volatility of .72;
risk-free interest rate of 5.87%; expected life of 3.43 years.
48,750 of the options granted in 1995 vest 25% each year and
the remainder of the options granted in 1995 and 1996 vest on
the date of grant.
451,295 of the 1,433,436 options outstanding at December 31,
1996 have exercise prices between $.56 and $1.05 with a
weighted average exercise price of $.88 and a weighted average
remaining contractual life of 3 years; all of these options
were exercisable at December 31, 1996. 600,591 of the options
outstanding at December 31, 1996 have exercise prices between
$1.10 and $1.89 with a weighted average exercise price of
$1.52 and a weighted average remaining contractual life of 6
years of which 464,873 options were exercisable at December
31, 1996. The remaining 381,550 options outstanding at
December 31, 1996 have an exercise price of $4.63 and a
weighted average remaining contractual life of 6 years;
369,067 of these options were exercisable at December 31,
1996.
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 amount was amortized over the
period earned by the employee.
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 $937,503, $1,250,002, and $1,271,740, in
1996, 1995, and 1994, 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 $6,990,625 and $12,659,525, representing the
excess of the accumulated benefit obligation over plan assets
plus prepaid pension cost, was recognized at December 31, 1996
and 1995, 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 at
December 31, 1996 and 1995 amounted to $3,591,802 and
$4,171,287, respectively and the reduction of stockholders'
equity amounted to $3,919,992 (net of tax) and $7,017,031 (net
of tax) at December 31, 1996 and 1995, respectively.
The discount rate increased from 7.25% at December 31, 1995 to
7.75% at December 31, 1996 resulting in a decrease to the
accumulated benefit obligation of approximately $800,000. The
additional minimum liability adjustment decreased primarily
due to higher than anticipated returns on plan assets in 1996.
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 approximately $11,000,000.
The additional minimum liability adjustment decreased
primarily due to higher than anticipated returns on plan
assets in 1995.
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.
Net pension expense for the years ended December 31, 1996,
1995, and 1994 include the following components:
1996 1995 1994
Service cost -
benefits earned
during the period $ 1,287,414 $1,289,288 $ 1,456,193
Interest cost on
projected benefit 6,688,050 7,184,470 6,534,008
Net amortization
of prior service
costs 677,981 905,909 628,438
8,653,445 9,379,667 8,618,639
Return on plan
assets:
Actual return (11,831,720) (17,741,368) 3,309,034
Deferred gain (loss) 4,192,812 10,640,696 (10,536,422)
Net return (7,638,908) (7,100,672) (7,227,388)
Net pension
expense $ 1,014,537 $2,278,995 $ 1,391,251
The significant actuarial assumptions used in determining the
present value of benefit obligations as of December 31, 1996, 1995,
and 1994 were as follows:
1996 1995 1994
Weighted-average discount rate 7.75% 7.25% 8.75%
Rate of increase in future
compensation levels 5.0% 4.5% 6.0%
Expected long-term rate of
return on plan assets 9.5% 9.5% 9.0%
The following table reconciles the pension plans' funded status and
the amount reported in the consolidated balance sheets at December
31, 1996 and 1995:
1996 1995
Actuarial present value of
benefit obligations:
Vested $91,239,424 $92,052,846
Non-vested 942,294 950,060
Accumulated benefit
obligation 92,181,718 93,002,906
Impact of future salary
increases 2,107,866 2,181,610
Projected benefit obligation 94,289,584 95,184,516
Plan assets at fair value 90,701,482 85,930,803
Plan assets less than projected
benefit obligation (3,588,102) (9,253,713)
Unrecognized net loss 5,506,688 10,669,848
Unrecognized prior service cost 3,591,802 4,171,287
Minimum pension liability
adjustment (6,990,625) (12,659,525)
Unfunded accumulated benefit
obligation $(1,480,237) $(7,072,103)
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,
1996 from 7.75% to 7.25% would have increased the accumulated
benefit obligation and thus the minimum pension liability
adjustment and change to equity $3,993,761.
Nonpension Postretirement Benefits - The Company accrues the
estimated cost of retiree benefit payments, other than
pensions, during employees' active service period. 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.
The following table sets forth the funded status of the plan
at December 31:
1996 1995 1994
Accumulated postretirement
benefit obligation:
Retirees $ 35,000 $ 45,000 $ 25,000
Fully eligible active plan
participants 69,000 78,000 33,000
Other active plan participants 515,000 704,000 473,000
619,000 827,000 531,000
Plan assets, at fair value 0 0 0
Accumulated postretirement
benefit obligation in
excess of plan assets 619,000 827,000 531,000
Unrecognized prior period
gain (loss) 100,000 (83,000) 176,000
Unrecognized transition obligation (476,000) (553,000) (585,000)
Accrued postretirement benefit $ 243,000 $ 191,000 $ 122,000
Estimated postretirement benefit cost for the years ended December 31,
1996, 1995 and 1994 are composed of the following:
1996 1995 1994
Service cost-benefits attributed to
service during the period $32,000 $ 30,000 $ 27,000
Interest cost on accumulated
postretirement benefit obligation 44,000 61,000 40,000
Amortization of transition obligation
over 20 years 77,000 32,000 32,000
Amortization of unrecognized net gain (1,000) 0 (8,000)
Net periodic postretirement
benefit cost $152,000 $123,000 $ 91,000
Actuarial assumptions used were:
1996 1995 1994
Projected health care cost trend rate 9.0% 10.5% 11.0%
Ultimate trend rate 5.0% 5.5% 5.5%
Year ultimate trend rate is achieved 2004 2005 2005
Effect of a 1% increase in the
health care cost trend rate on the
postretirement benefit obligation $113,000 $78,000 $45,000
Effect of a 1% increase in the
health care cost trend rate on the
aggregate of service and interest
cost $17,000 $6,000 $ 7,000
Discount rate 7.75% 7.25% 8.75%
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 1996, 1995 and 1994, respectively. For future
years the rate was assumed to decrease gradually and remain at
the ultimate trend rate thereafter.
Changes in various assumptions, such as the mortality,
retirement ages, and termination rates were the primary cause
of the $100,000, $(83,000), and $176,000 unrecognized
gains/(losses) at December 31, 1996, 1995 and 1994,
respectively.
Self-Insurance - It is generally the policy of the Company to
act as a self-insurer for certain insurable risks consisting
primarily of employee health insurance programs and workers'
compensation. Losses and claims are accrued as incurred.
The Company maintains a self-insured health insurance plan for
the Birmingham, Leeds, and Dothan divisions of its Pemco
Aeroplex subsidiary. The Company has reserves established in
the amounts of $662,385 and $1,435,251 for reported and
incurred but not reported claims at December 31, 1996 and
1995, respectively. Expense incurred for this plan was
$6,110,803, $8,748,411, and $8,121,138, for 1996, 1995, and
1994, 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,
1996 and 1995, 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 for reported and incurred but not reported claims
at both December 31, 1996 and 1995. Expense incurred on this
plan was $1,326,571, $1,650,901, and $1,399,100, for 1996,
1995, and 1994, respectively. The workers' compensation
liability at December 31, 1996 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 - The Company maintains 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 1996, 1995, or 1994. 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.
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, 1996 are as follows:
Vehicles
And
Facilities Equipment Total
Year Ending:
1997 $2,936,038 $ 98,745 $3,034,783
1998 2,956,066 58,765 3,014,831
1999 1,821,382 3,320 1,824,702
2000 1,126,464 0 1,126,464
2001 927,418 0 927,418
Thereafter 7,149,105 0 7,149,105
Total minimum
future rental
commitments $16,916,473 $160,830 $17,077,303
Total rent expense charged to operations for the years ended
December 31, 1996, 1995, and 1994 amounted to $3,857,375,
$3,909,557, and $3,128,796, respectively. Contingent rental
amounts based on a percentage of sales included in rent
expense amounted to $784,852, $934,731, and $1,196,481 for the
years ended December 31, 1996, 1995, and 1994, 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) -
At December 31, 1995, the Company had a receivable totaling
$12.2 million in anticipation of settlement of contract REAs
involving the KC-135 Programmed Depot Maintenance (PDM)
contract. The REA was submitted to the U.S. Government and
was for equitable adjustment of the cost effect of late
delivery of government-furnished materials (GFM), excess major
structural repairs and other changes to the contract. The
disruption in scheduled work flow, which occurred as a result
of late delivery of GFM, began in the second quarter of 1993
and continued to impact ships through December 31, 1995.
During 1996, the Company received $33.1 million in
satisfaction of all REAs involving the KC-135 PDM contract.
This amount satisfied the $12.2 million in receivables
recorded at December 31, 1995, with the remaining $20.9
million recorded in income in the accompanying 1996
consolidated statement of operations. Of this amount, $17.6
million has been reflected as sales and $3.3 million has been
reflected as other income.
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
During 1996, the Company's principal shareholder provided a
quarantee of up to $7.2 million of the Company's debt. No
advances were made under this guarantee during 1996.
The related party receivable reflected in the consolidated
balance sheet consists of various notes receivables from an
officer who is also a director, and majority stockholder of
the Company.
14. CONCENTRATION OF CREDIT RISK, GEOGRAPHIC SEGMENTS AND MAJOR
CUSTOMERS
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.
Aggregate sales to customers in foreign countries, principally
in Europe, account for approximately 14 percent, 15 percent,
and 7 percent of the Company's net sales for the years ended
December 31, 1996, 1995, and 1994, respectively. Sales to
major customers which accounted for 10 percent or more of the
Company's net sales were as follows:
1996 1995 1994
U.S. Government $84,055,502 $91,632,344 $98,124,351
15. LABOR CONTRACTS
The Company's contract with the United Auto Workers (UAW) at
its Pemco Aeroplex, Inc. division in Birmingham, Alabama and
its Hayes Targets division in Leeds, Alabama expired in July,
1996. Following contract expiration, the Company's
approximately 900 UAW employees voted to stop work at these
facilities. The primary disagreement between the Company and
its UAW employees centered on the Company's proposal to modify
job classifications and descriptions which the Company deemed
critical to its ability to increase efficiency and remain
competitive. Production and shipments continued by using
management and supervisory personnel and by employment of
temporary replacement workers.
On March 21, 1997, the UAW voted to accept the Company's
proposed three year labor term, ending the strike. The terms
include the modification in job classifications sought by the
Company but also provide for employee training in performing
different jobs. Additionally, the strike provided for wage
increases, improvements in vacation, overtime and insurance
benefits.
The Company's contract with the International Machinist Union
at its Pemco Aeroplex, Inc. division in Dothan, Alabama
representing approximately 20% of the Company's workforce
expires in July, 1997. Though management does not anticipate
that the July 1997 contract negotiations will have a
significant effect on the Company's consolidated financial
position, there can be no assurance that a work stoppage would
not occur during contract negotiations and that losses will
not result during such a work stoppage.
16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
As of December 31, 1996 and 1995, the carrying amounts of
accounts receivable and accounts payable are estimated to
approximate fair values.
As of December 31, 1996 and 1995, the carrying amounts of
long-term debt of $13,444,102 and $26,742,185 were estimated
to approximate fair values given the number of recent
amendments and renegotiations of debt in recent months.
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.
SUPPLEMENTARY INFORMATION
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SUPPLEMENTARY INFORMATION
To Precision Standard, Inc. and Subsidiaries:
Our audit was made for the purpose of forming an opinion on the
basic consolidated financial statements as of December 31, 1996 and
for the year ended taken as a whole. The schedule listed in the
index of financial statements as of December 31, 1996 and for the
year ended is presented for purposes of complying with the
Securities and Exchange Commissions rules and is not part of the
basic consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the
basic consolidated financial statements as of December 31, 1996 and
for the year then ended and, in our opinion, fairly state in all
material respects the financial data required to be set forth
therein in relation to the basic consolidated financial statements
taken as a whole.
Denver, Colorado ARTHUR ANDERSEN LLP
March 31, 1997
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 __ of this Form
10-K. In connection with our audit of such financial statements,
we have also audited the related financial statement schedules as of
and for the years ended December 31, 1995 and 1994 listed on 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
Note 6, 7 and 13 as to which date is
April 15, 1996
PRECISION STANDARD, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
for the periods ended December 31, 1996, 1995 and 1994
Balance At Additions Balance
Beginning Charged To Charged To At End of
Description Of Period Expense Assets Deductions Period
1996
Allowance
for
doubtful
accounts $ 426,150 $ 290,852 $ 18,305 $ 0 $ 735,307
Estimated
losses on
contracts
in
progress 203,922 0 0 (116,156) 87,766
Estimated
losses on
work in
process 1,274,676 1,286,669 0 (1,274,676) 1,286,669
Reserve for
obsolete
inventory 4,986,013 346,027 0 (2,289,204) 3,042,836
Reserve for
warranty
expense 1,178,636 173,778 0 (493,558) 858,856
Deferred
tax asset
valuation
allowance 4,511,672 2,503,602 0 0 7,015,274
Total $12,581,069 $4,600,928 $ 18,305 $ (4,173,594) $13,026,708
1995
Allowance
for
doubtful
accounts $ 867,206 $ 399,030 $ 0 $ (840,086) $ 426,150
Estimated
losses on
contracts
in
progress 1,345,176 203,922 0 (1,345,176) 203,922
Estimated
losses on
work in
process 161,153 1,274,676 0 (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 0 (498,043) 1,178,636
Deferred
tax asset
valuation
allowance 2,102,417 2,409,255 0 0 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 0 (87,789) 1,345,176
Estimated
losses on
work in
process 321,827 161,153 0 (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 0 (324,557) 1,518,679
Deferred
tax asset
valuation
allowance 12,555,373 0 0 (10,452,956) 2,102,417
Total $17,052,810 $4,380,975 $434,677 $(11,271,608) $10,596,854
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.
See the Company's Form 8-K dated December 30, 1996 filed
with the Commission on January 6, 1997, Form 8-K/A dated December
30, 1996 filed with the Commission on January 13, 1997, and Form 8-
K dated January 14, 1997 filed with the Commission on January 21,
1997, all of which are incorporated herein by reference.
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 1997
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 1997 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 1997 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
1997 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,
1996.
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.
23.1 Consent of Coopers & Lybrand LLP
23.2 Consent of Arthur Andersen LLP
24 Not applicable.
27 Financial Data Schedule - Electronic Data
Gathering Analysis and Retrieval (EDGAR).
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: By:
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
Chairman, President 3/31/97
Matthew L. Gold Chief Executive Officer
and Director
(Principal Executive Officer)
Vice President 3/31/97
Timothy A. Rabon and Treasurer
(Principal Financial
and Accounting Officer)
Donald C. Hannah Director 3/31/97
Director 3/31/97
George E. R. Kinnear II
Director 3/31/97
Thomas C. Richards
Director 3/31/97
J. Ben Shapiro, Jr.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
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
Note 6 and Note 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 for the years ended
December 31, 1995 and 1994, which report is included in this Annual Report
on Form 10-K.
Birmingham, Alabama COOPERS & LYBRAND L.L.P.
March 31, 1997
EXHIBIT 21
LIST OF SUBSIDIARIES
NAME UNDER
STATE OF WHICH SUBSIDIARY
NAME OF BUSINESS INCORPORATION DOES BUSINESS
Precision Standard Corp. Delaware
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
Incorporated Delaware
Space Vector Corporation Delaware
Pemco Capital Corporation** 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.
** Pemcorp Industries, Inc. changed its name to Pemco Capital
Corporation
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,183,200
<SECURITIES> 0
<RECEIVABLES> 10,170,919
<ALLOWANCES> 735,307
<INVENTORY> 23,183,608
<CURRENT-ASSETS> 39,043,646
<PP&E> 28,815,091
<DEPRECIATION> 15,730,794
<TOTAL-ASSETS> 59,274,082
<CURRENT-LIABILITIES> 29,863,650
<BONDS> 0
0
0
<COMMON> 1,252
<OTHER-SE> 13,126,632
<TOTAL-LIABILITY-AND-EQUITY> 59,274,082
<SALES> 130,857,722
<TOTAL-REVENUES> 130,857,722
<CGS> 115,675,503
<TOTAL-COSTS> 133,211,140
<OTHER-EXPENSES> (3,240,904)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,514,889
<INCOME-PRETAX> (1,627,403)
<INCOME-TAX> 2,332,143
<INCOME-CONTINUING> (3,959,546)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,959,546)
<EPS-PRIMARY> (.32)
<EPS-DILUTED> (.32)
</TABLE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report on the consolidated financial
statements as of December 31, 1996 and for the year then ended,
included in this Form 10-K, into the Company's previously filed
Registration Statements on Form S-8 (File Nos. 33-34206 and 33-
79676).
Denver, Colorado ARTHUR ANDERSEN LLP
March 31, 1997
