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, 1997
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:
None-****
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 27, 1997 was approximately $2,430,026.
The number of shares of the Company's Common Stock out-
standing as of February 27, 1998 was 14,771,870.
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, 1997) 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, 1997, 1996 AND 1995
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
Victorville, California; and the Manufacturing and Overhaul Group
with facilities in California, Colorado, Florida, and until January
1998, Alabama. The Commercial Services and Manufacturing and
Overhaul Groups discontinued operations at the facility located in
Copenhagen, Denmark during the fourth quarter of 1997.
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 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 also has broad experience in modifying
commercial aircraft and providing value-added technical solutions
and holds numerous, proprietary Supplemental Type Certificates
("STCs"). 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's Manufacturing and Overhaul Group designs and
manufactures a wide array of proprietary aerospace products
including 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
Review of Strategic Alternatives
The Company recently announced that it has retained the services of
an investment banking firm to explore a variety of strategic
alternatives to enhance shareholder value. All alternatives will be
examined including the possible sale of one or more operating
units.
Settlement of Labor Disputes
On March 21, 1997, the Company's United Auto Worker (UAW) employees
at the Company's Birmingham and Leeds facilities 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. On September 14, 1997, the Company's
International Association of Machinists (IAM) employees ratified a
new three year agreement ending a work stoppage at the Dothan,
Alabama facility that began on August 24, 1997. The new IAM labor
contract allows operating improvements through reduced job
classifications and greater flexibility. The agreement also
provides increases in wages and maintains benefit levels.
Credit Facility
In August of 1997, the Company entered into a three-year revolving
credit facility with a new primary lender that allows the Company
to borrow up to $20 million. While this new loan has provided the
Company with greater flexibility, it has not alleviated the
Company's persistent cash flow problems. As part of the August
transaction, the Company repaid in full its $5 million Term Credit
facility and a portion of its Senior Subordinated loan with Bank of
America. The amount of funds available to borrow under the new
revolving credit facility is tied to percentages of accounts
receivable and inventory. Interest on the new revolving credit
facility accrues at the prime rate plus 1.5% with a provision for
the reduction in the interest rate based on specific operating
performance targets. Scheduled principal amortization for the
portion of the Senior Subordinated loan that remains in place has
been deferred for the three-year term of the new revolving credit
facility, and will be repaid over five installments payable
quarterly commencing on August 31, 2000 through June 30, 2001.
Sale of Hayes Targets Division
On January 29, 1998, the Company's Pemco Aeroplex subsidiary sold
the assets relating to its Hayes Targets division to affiliates of
Meggitt PLC for approximately $5 million. The division, located in
Leeds, Alabama, develops and manufactures supersonic and subsonic
aerial tow targets for weapon system development and wing tip
infrared pods for the protection of military aircraft used by U.S.
and foreign military customers. The consideration for the sale was
based on the estimated fair market value of the assets. For the
purpose of Management's Discussion and Analysis, the Hayes Targets
financial figures have been included to allow a comparison to the
1996 results.
Agreement with AirTrans
In November of 1997 the Company's Pemco World Air Services
operation signed an agreement with AirTrans Airlines of Atlanta,
Georgia, for the interior modification of eleven DC-9 aircraft.
The work was performed at the Company's Dothan, Alabama facility
during the fourth quarter of 1997.
Award of Paint Contract for Air Force
In March of 1998, the Company's Pemco Aeroplex subsidiary received
an award from the U.S. Government for the painting and stripping of
an indefinite number of C-130 aircraft. The base contract
commences in April 1998 and runs through September 1998, and
provides for two options of one year each.
Agreement with Avianca Airlines
In September of 1997, the Company entered into an agreement with
Avianca Airlines of Bogota, Columbia for the maintenance and
certain interior modifications for a number of aircraft, including
Boeing 757, 767 and MD-83 models. Work commenced in September 1997
and is projected to extend into the third quarter of 1998. All
work will be performed at the Dothan, Alabama facility.
Agreement Regarding B-727 Cargo Conversion Technical Issues
In June 1997, the Company entered into an agreement with AirMod
One, Hamilton Aviation and Wagner Aeronautical for collaboration
and use of certain proprietary information developed to resolve
technical issues related to Supplementary Type Certificates (STCs)
for Boeing 727 cargo conversions. This technical solution has been
approved by the FAA, subject to a conformity installation. To the
Company's knowledge, this solution is the only one currently
approved by the FAA to address its issues of concern.
Repair Station Certification
In July, 1997, the Company's Pemco Engineers division received
approval from the Federal Aviation Administration to operate as a
certified Repair Station. This certification, coupled with its
existing manufacturing authority, will allow Pemco Engineers to
provide repair services for a wide range of aircraft cargo handling
products.
Closure of Copenhagen Facility
On November 11, 1997, a supplier of the Company's Danish
subsidiary, Pemco World Air Services A/S, filed a request for
bankruptcy, which the Danish court later granted. The Company made
the decision to cease operations at the Copenhagen facility, and in
December of 1997, the Copenhagen office of Pemco Air Support
Services was also closed. Trustees were appointed by the Court to
manage the operations of the Danish subsidiary. The Company
relocated its European sales office to France and product support
services were transferred to the Company's Clearwater, Florida
facility.
New Commercial Maintenance Facility in Victorville, California
In November 1997, the Company's Pemco, Inc. subsidiary leased space
at the former George Air Force Base in Victorville, California, 40
miles northeast of the Ontario County airport and 120 miles from
Los Angeles International Airport. The facility, which has two
hangars, will open during the second quarter of 1998, and will
provide a west coast presence for marketing to Pacific domestic and
foreign air carriers, as well as Latin American-based operators.
Changes to Company's Stock Listing
In February 1998, the Company's common stock was moved to the
NASDAQ SmallCap Market as the result of its failure to meet the
NASDAQ National Market Standard for the Net Tangible Assets and
Minimum Bid Price and subject to certain conditions and pursuant to
certain exceptions. The Company's trading symbol was changed from
PCSN to PCSNC. Due to this action, the Company has solicited
shareholder approval for a 1-for 4 reverse stock split in order to
meet the Minimum Bid Price requirements of the NASDAQ SmallCap
Market. (See Item 5. Market for the Company's Common Equity and
Related Stock Holder Matters below)
Stevenson Verdict Reduced
On January 29, 1998 the Alabama court in Stevenson v. Pemco
Aeroplex, Inc. granted the motion by the Company's Pemco Aeroplex
subsidiary to vacate the jury verdict and granted a new trial. On
February 27, 1998, the Court, in response to motions filed by the
plaintiff for reconsideration, upheld the jury's verdict in favor
of the individual defendant, reversed the court's previous decision
granting a new trial, and ordered a reduction of the jury's verdict
to $1 million in compensatory damages. (See Item 3. Legal
Proceedings below)
Agreement with Air Jamaica
In January 1998, the Company contracted with Air Jamaica of
Kingston, Jamaica, for the maintenance of their fleet of A310
aircraft. All work will be performed at the Dothan, Alabama
facility and will commence in the first quarter of 1998 and extend
through November 1998.
Agreement with Ogden Air Logistics Center
In the fourth quarter of 1997, the Company received a contract from
Ogden Air Logistics Center in Ogden, Utah for the modification of
seven C-130 transport aircraft. All work will be performed at the
Company's Birmingham, Alabama facility.
Contract Option Exercised by the U.S. Air Force
In the fall of 1997, the U.S. Air Force exercised its option for
the fourth year of its seven year contract for the KC-135
Programmed Depot Maintenance (PDM) aircraft for the fiscal year
beginning October 1, 1997.
Agreement with Parker Hannifin
In April of 1997, the Company's Pemco Engineers division entered
into an agreement with the Parker Hannifin Corporation to
manufacture precision assemblies for commercial transport aircraft.
KC-135 Request for Proposal Released
On March 20, 1998, the U.S. Government released a new request for
proposal (RFP) seeking proposals for all work related to its KC-135
aircraft. The Company's Pemco Aeroplex subsidiary currently
performs the airframe maintenance portion of the KC-135 workload,
which is included in the RFP. Pemco intends to pursue this
workload through teaming or subcontracting agreements.
C. INDUSTRY 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. Signs are positive
that the third-party maintenance and modification industry will be
the beneficiary of these trends in the coming 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.
However, military maintenance and modification contracts are in a
state of uncertainty as the result of Congressional action and
political pressure arising from the closure of certain military
bases. During 1997, Congress included provisions in appropriations
bills which required the combination of certain military contracts,
including airframe maintenance, into larger contracts for bid and
proposal. This practice, referred to as "bundling", requires
smaller companies such as the Company's Pemco Aeroplex subsidiary
to team with one or more other operators in order to provide a bid
for the bundled contract. The bundling concept is being reviewed
by the General Accounting Office, and could be the subject of
further government action. Therefore, the Company cannot predict
whether bundling will be fully implemented.
The appropriations legislation also allowed private contractors to
join with military contractors to bid on such bundled projects.
While the public-private teaming arrangement may provide certain
opportunities for the Company, the bundling of contracts prevents
smaller operations like the Company from bidding on the contracts
individually. In addition, military depots are competing against
private contractors for various projects. In March 1998, the C-130
PDM solicitation was canceled and the work taken in-house by the
military, to the exclusion of all private contractors.
While the U.S. Government is being compelled by budget cuts and
other imperatives to reduce American personnel and equipment
overseas, its vital interests and obligations around the world are
not undergoing a corresponding decline. The U.S. Government 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.
The 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 and to be
involved in teaming arrangements with public or private operators.
However, the Company could be limited in its ability to compete for
bundled contracts except through teaming or subcontracting
arrangements.
Commercial Maintenance Industry
World air travel is projected to continue to grow during the next
ten years. Forecasts by Airbus Industrie project that passenger
air traffic will increase at a rate of 5.9% annually through the
year 2006, with the active fleet to increase by 83%. Boeing's
World Air Cargo Forecast estimates that the freighter fleet will
nearly double in the next 10 years, while air cargo traffic will
grow at an average of 6.6% per year. Boeing estimates that 70% of
the additional freighters will be passenger-to-cargo conversions.
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 and maintain profitability. 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.
Commercial Modification Industry
The rapid increase in worldwide freight shipments has spawned a
demand for dedicated cargo aircraft. The majority (70%) 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.
Although air cargo traffic has been forecasted to grow at a rate of
approximately 7% annually through the next ten years with the
number of all-cargo planes projected to almost double over the next
two decades, the number of cargo conversions has decreased during
1997. The decrease in conversions is attributed to the shortage of
reasonably-priced passenger aircraft due to high passenger traffic
and possible FAA action related to converted aircraft. 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 complete airframe maintenance and repair, and custom
airframe design and modification, 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"), Standard 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 and
various military depots. The Company's competition for its
commercial work in the United States consists of Tramco, Dee Howard
Company, Timco and approximately 10 smaller independent repair and
modification operators. However, while many of the Company's
competitors tend to specialize on specific portions of the
aircraft, the Company focuses on total airframe repair, maintenance
and conversion. Outside the United States, the majority of the
Company's competitors are affiliated with an airline.
The Company considers its competitive strengths to be its
substantial capacity, a trained and experienced labor force,
product support, proprietary products, engineering and systems
integration capability, and strong customer base. The Company's
Birmingham, Alabama facility is believed to be the largest third
party maintenance facility in North America. With the addition of
the Victorville, California facility, the Company is strategically
located to provide service to carriers in the eastern and western
sections of the U.S. In addition, the Victorville facility
provides an opportunity to provide service to international
carriers flying to the west coast. The Company believes that its
competitive position has been weakened by its limited financial
resources which have hampered the pursuit of expansion
opportunities and limited the profitability of its existing
business.
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 such as the C-130
"Hercules"; or are logistical in nature, such as the KC-135 in-
flight refueling 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. These aircraft are essential to the Armed
Forces' ability to rapidly mobilize its forces on foreign land when
needed. The demands placed on these aircraft mean that they will
require maintenance services such as those provided by the Company.
Military contracts generally specify 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 intends to use its experience and
expertise to 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 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.
At the onset of the PDM, the aircraft is generally stripped of
paint and the entire airframe, including the ribbings, skins and
wings, undergoes a thorough structural examination, which can
result in modifications to the airframe. The aircraft's avionics,
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
In August of 1994, the United States Air Force ("USAF") awarded the
Company a new contract for the PDM of its KC-135 aircraft
consisting of one base year and six option years. The KC-135 PDM
program involves a nose to tail inspection and repair program on a
scheduled five-year cycle. In October 1997, the KC-135 program was
extended through 1998 by exercise of the third option year. 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
approximately 3,000 such aircraft (including drop-in maintenance).
On March 20, 1998, the Government released a new request for
proposal (RFP) for the KC-135 PDM workload. Under the terms of this
new RFP, the contractor must include within its proposal all
aspects of the KC-135 such as engine repair, which the company does
not perform. Pemco intends to pursue this workload through teaming
or subcontracting arrangement with another operator. Should the
RFP result in an award of the broader contract to another
contractor, the Company's existing PDM contract for KC-135 aircraft
could be allowed to expire.
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 April 1997, the Company was notified that another contractor,
Aero Corporation ("Aero"), had been awarded the contract for the
PDM of the Air Force's C-130 aircraft. The Company had performed
C-130 depot maintenance continuously for over 30 years and has
processed approximately 3000 such aircraft. After reviewing the
USAF's basis for its decision to award the PDM contract to Aero, in
April 1997, the Company filed a protest with the General Accounting
Office "(GAO") challenging the award on a number of grounds. As a
result of such protest, the USAF agreed to provide corrective
action and canceled the award to Aero; based on the USAF's promise
of corrective action, the GAO dismissed Pemco's protest in May
1997. In June of 1997, the USAF announced its decision to perform
all C-130 PDM in-house at Robins Air Force Base while it re-
evaluated the solicitation. Pemco protested this decision, as
well. Although the GAO determined that portions of Pemco's protest
were premature, Pemco was awarded its protest costs in October
1997.
On March 3, 1998, the USAF announced that the C-130 solicitation
was being canceled and that the PDM work would be allocated between
Robins and Hill Air Force Bases. On March 13, 1998, Pemco filed
its protest of this action and is also seeking to recover its bid
and proposal costs.
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. During 1996 the Company delivered two
USN SDLM aircraft and six Brazilian modification aircraft. The
Company delivered two USN SDLM aircraft in 1997. Redeliveries of
SDLM aircraft were delayed in 1997 due to delays in the supply of
Government Furnished Material ("GFM") by the U.S. Government. The
delay in GFM is expected to continue during 1998.
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. The principal services performed under
commercial maintenance contracts are "C" and "D" checks, passenger-
to-freighter conversions, passenger-to-quick-change conversions,
combination passenger and freighter conversions (combi); strip and
paint; and interior reconfiguration and fleet standardization.
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.
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 form, function and interval of the "C" and "D" checks are
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" checks, 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 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
structure 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 concurrent "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 provides modification and integration services for
its commercial customers under its own or customer-provided 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 at the Dothan
facility of the Commercial Services Group and, beginning in the
second quarter of 1998, at the Victorville, California facility.
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 149 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;
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.
SPACE VEHICLES AND SUPPORT SYSTEMS
The Company's Space Vector subsidiary maintains a large research,
development and engineering staff dedicated to the design, and
manufacture and launch of space-related rocket systems. These
systems include scientific sounding rockets, sophisticated guided
target missiles, launch vehicles, guidance and control subsystems,
vehicle structures and recovery systems. The Company serves
primarily as a subcontractor on large U.S. Government Department of
Defense programs. However, the Company also has prime contracts
with NASA in support of space science and does a limited amount of
commercial space work.
The Company's largest current contracts support the National
Missiles Defense (NMD) and the Theater Missile Defense (TMD)
programs.
The HERA program, initiated in 1992 by the U. S. Army Space and
Strategic Defense Command, provides for target vehicles for use
during interceptor testing of various TMD systems through June
1998. The Company, as a subcontractor, completed its seventh
successful flight under the HERA program in March 1997. During
fourth quarter of 1997, the HERA program was restructured and three
Consolidated Theater Target Services (CTTS) contracts were awarded
to replace the HERA program options. The Company is participating
as a subcontractor to Lockheed on one CTTS contract. This contract
has an indefinite quantity and extends to 2003.
The Company participates in the NMD arena as a subcontractor on the
Payload Launch Vehicle program. The Space Vector subsidiary has
been awarded the procurement for an additional four systems under
this program.
The Space Vector subsidiary is a leader in sophisticated
exoatmospheric control systems and provides systems to NASA. These
systems are used primarily on scientific sounding rockets. In
1997, the Company developed an earth magnetic-vector control system
that supplements its more conventional gyroscope-controlled
spinning sensor.
The Company's Space Vector subsidiary 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-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 and
1997, 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 the Company's wholly owned subsidiary,
Pemco Air Support Services, Inc. ("PASS"). PASS closed its Denmark
office and is now located in Clearwater, Florida. 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. 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.
SUPERSONIC AND SUBSONIC AERIAL TOW TARGETS AND WING TIP INFRARED
PODS
Until January, 1998, the Company designed and manufactured
supersonic and subsonic aerial tow targets and wing tip infrared
pods. The targets and pods were produced by the Company's Hayes
Targets division at Leeds, Alabama. All assets related to this
division were sold in the first quarter of 1998. The division
provided low cost, high speed targets, known as the Hayes Universal
Tow Target System (HUTTS), which can be flown from any commercial
or military aircraft capable of carrying external stores, as well
as from most drone aircraft. 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.
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 consisted of one competitor on
the west coast of the United States and two foreign entities. The
Company considered its competitive strength in this market to be
its proprietary products, its superior product performance and its
innovative engineering capabilities.
In January 1998, the assets related to the Hayes Targets division
were sold to affiliates of Meggitt PLC.
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 directly to earnings the cost it incurred for
Company sponsored research and development costs, which totaled
$0.9 million in 1997, $0.4 million in 1996 and $0.5 million in
1995. The research and development activities in 1997 were
principally in support of the Company's Target's programs, the
assets of which were sold in January 1998. In 1998, research and
development costs are expected to be in the $0.5 to $0.8 million
range, principally in support of its STC program. The Company was
not engaged in any customer sponsored research and development
efforts in 1995, 1996, or 1997.
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. During 1997, the Company's wholly owned subsidiary,
Pemco World Air Services, A/S, (the "Danish subsidiary"), a Danish
limited liability company, operated in Copenhagen, Denmark. In
November of 1997, the Maritime and Commercial Court in Copenhagen,
Denmark granted the request of a supplier to place the Danish
subsidiary in bankruptcy. Trustees were appointed to operate the
facility. The Company has guaranteed certain obligations of the
Danish subsidiary. As a result of being placed in involuntary
bankruptcy, the Danish subsidiary has been excluded from the
Company's consolidated financial statements effective January 1,
1997.
During 1997, the Company's wholly owned subsidiary, Pemco Air
Support services, Inc. (PASS), operated from Denmark as a Danish
branch of a U.S. company. In December of 1997, the Company
determined that it was no longer cost-effective to maintain an
independent PASS office in Denmark and transferred all inventory
and records to Clearwater, Florida. The Company maintains a sales
office in France and has no other foreign locations.
The Company provides maintenance and modification services to
foreign-based aircraft owners and operators at its U.S. facilities.
The Company's Space Vector and Nacelle subsidiaries, and its
Aircraft Cargo Systems and former Targets 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 subsidiaries operating in Denmark accepted payments in
Danish kroner and U.S. dollars, as well as other foreign
currencies. (See also footnote numbers 14 and 18 to the
accompanying financial statements of the Company which are included
under Item 8 hereof):
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.
Product and Service Rendered 1997 (1) 1996 1995
Aircraft Maintenance 77% 75% 81%
and Modification
Supersonic and Subsonic 3% 4% 3%
Aerial Tow Targets and
Wing Tip Pods (former product)
Space Vehicles and 9% 11% 8%
Support Systems
Cargo Handling Systems 6% 6% 5%
Precision Springs 1% <1% <1%
and Components
Parts Support and Component 1% 2% 2%
Overhauls
Nacelle Overhaul and Repair 3% 1% <1%
100% 100% 100%
Export sales 11% 14% 15%
-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:
1997(1) 1996 1995
U. S. Government 61% 64% 59%
-principally the Air Force,
Army, Navy, and NASA
(1) Excludes the amounts related to the Company's Danish
subsidiary. See Note 18 to the Consolidated Financial
Statements.
G. BACKLOG
The following table presents the Company's backlog (in
thousands of dollars) at December 31, 1997 and 1996:
1997 1996
U. S. Government $124,345 $136,391
Commercial 20,515 16,740
Total $144,860 $153,131
The above numbers have been adjusted to exclude the backlog for the
Hayes Targets division which was sold in January, 1998. Based on
this adjustment, as of December 31, 1997, 85% of the Company's
backlog was with the U.S. Government compared to 90% at December
31, 1996. The Company's Government backlog increased $9 million
under its H-3 helicopter contract due to delays in work resulting
from the lack of GFM. This was offset by a reduction in government
backlog of $5.4 million related to its Space Vector subsidiary,
primarily due to completion or expiration of certain contracts.
Government backlog decreased $9.7 million under the Company's KC-
135 contract, primarily due to a reduction in aircraft scheduled to
be delivered for PDM work under the third option year of the
Company's KC-135 contract. The U.S. Government delivered 34
aircraft under the first option year of the contract, compared to
20 aircraft during 1997 contract year and 32 currently scheduled to
be delivered for PDM work under the third option year of the
contract. The Company's Government backlog also decreased $3.8
million due to the expiration of the C-130 program.
The Company's commercial backlog at December 31, 1997 increased
4.6% due to increased sales of $4.6 million in commercial
contracts. Commercial backlog increased $11 million at the Dothan
facility due to increased commercial maintenance contracts and $2
million at Pemco Engineers. This increase was partially offset by
a reduction of $2 million in commercial backlog due to the closure
of the Copenhagen facility and a reduction of $7.4 million under
the cargo conversion program.
1997 1996
Firm, unfunded Backlog $37 million $44.2 million
Estimated sales to be $185 million $261 million
derived from backlog
contracts
The $185 million of estimated backlog is associated with the option
periods for the KC-135 contract and the Space Vector CTTS program.
The Company estimates that $99 million of its December 31, 1997
backlog will be filled in 1998.
If backlog for the former Hayes Targets division is included,
government backlog for 1997 is increased by $1 million and $0.5
million for 1996; commercial backlog is increased by $2.9 million
for 1997 and $0.98 for 1996. Inclusion of Hayes Targets' numbers
changes the backlog ratios by less than 1.5% in 1997 and less than
.5% in 1996.
H. RAW MATERIALS
The Company purchases a variety of raw materials, including
aluminum sheets and plates, extrusion, alloy steel and forgings.
Except as noted below with respect to GFM, the Company experienced
no significant shortages of raw material essential to its business
during 1997 and does not anticipate any shortages of critical
commodities over the longer term. 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 GFM in 1993, 1994, 1995, 1996 and 1997, and as a result,
experienced a disruption in scheduled work flow. (See Item 7.
Management's Discussion and Analysis of Financial Conditions and
Results of Operations below)
I. PATENTS, TRADEMARKS, COPYRIGHTS AND STCs
The Company holds approximately 120 FAA-issued 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.
In addition, the Company has a U.S. design patent for a permanent
door sill designed for use in cargo configurations, granted in
1996, and a design patent for a latching device.
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. These copyrights will begin to expire after the year
2028.
Certain patents and copyrights were transferred to the purchaser
upon the sale of the assets of the Hayes Targets division in
January 1998. The sale included two active utility patents, three
active design patents, and 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.
The Company believes that the value of its patents, trademarks,
copyrights and STCs exceed the amounts of its related intangibles
and deferred inventory.
J. ENVIRONMENTAL COMPLIANCE
In December, 1997, the Company received an inspection report from
the Environmental Protection Agency (EPA) documenting the results
of an inspection on September 9, 1997. The report cited nine
violations of state law and three violations under the Resource
Conservation and Recovery Act (RCRA). Several of the purported
violations are items that had been inspected but not cited by the
State of Alabama. The Company has taken action to correct items
raised by the inspection. On April 2, 1998, the Company received
a complaint and compliance order from EPA proposing penalties of
$225,256. The Company disagrees with the RCRA citations and
believes such citations are not based on accurate information, and
intends to contest the citations and penalties.
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.
K. EMPLOYEES
At March 16, 1998, the Company employed 1,936 persons.
Approximately 1,365 of these persons are covered under a collective
bargaining agreements with the United Auto Workers (UAW),
International Aerospace and Machinists (IAM), and other unions. Of
the union employees, 1,334 are represented by the UAW or by the
IAM. 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 the former Leeds, Alabama
locations. Union employees at the former Hayes Targets division
who did not accept employment with the purchaser of the Hayes
Targets' assets were transferred to the Birmingham facility in
accordance with the terms of the union contract.
On August 24, 1997 the IAM employees voted to stop work. On
September 14, 1997, the IAM bargaining unit ratified a new three
year agreement and returned to work on September 15, 1997.
Approximately 85 of the Company's 1,936 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 1997.
Precision Standard, Inc. Executive Offices and Pemco World Air
Services Marketing Offices - Denver, Colorado
Precision Standard, Inc. has its executive offices in Denver,
Colorado, and Pemco World Air Services maintains offices at the
same location. The lease for this office space expires in May,
2000. To reduce operating expenses the Company has leased
approximately 10,000 square feet of new executive office space in
Aurora, Colorado and will relocate its executive offices to that
location in the second quarter of 1998. This space will be shared
with the Pemco World Air Services Marketing and Sales, and Product
Support and Engineering departments. The lease for this new space
commences April 4, 1998 and Expires April 30, 2003 with an option
to renew at the prevailing market rate for an additional 5 year
term. The Company is seeking a tenant to sublease the Denver
office.
The Government Services Group - Birmingham, Alabama
The Government Services Group is located at the Birmingham
International Airport, in Birmingham, Alabama. The Birmingham
facility is located on 204 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. The
lease has been extended for an additional twenty year period under
the same terms and conditions and will expire September 30, 2019.
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 90.5 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 Victorville Facility
The Pemco, Inc. facility is located at Southern California
International Airport in Victorville, California. This west coast
facility consists of more than 200,000 square feet of hangar,
manufacturing and warehouse space with access to runways, tower
services, and ramp space. The main hangar can fully enclose a MD-
11 aircraft. Located at the former George Air Force Base, the
runways, taxiways and more than four million square feet of ramp
space are capable of handling any aircraft in operation without the
restrictions found at most California airports.
The Copenhagen Facility
In November of 1997, the Commercial Services Group ceased
operations at its facility at the Copenhagen Airport in Copenhagen,
Denmark. The facility was leased from the bankruptcy estate of
Sterling Airways under a lease expiring in May 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 a warehouse for
PASS.
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 Former Targets Division
The former Targets division is located at Leeds, Alabama. As part
of the sale of the division's assets, the facility lease was
assigned to the purchaser. The facility consisted of two metal
buildings with approximately 40,000 square feet of space located on
4 acres. The lease agreement expires December, 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 3,900 square foot research and
development and administrative office in Fountain Valley,
California. Approximately 1,700 square feet is subject to a lease
which expires in October of 2000; the remaining 2,200 square feet
is leased on a monthly basis.
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 is located at the Clearwater, Florida facility. Until
December 1997, PASS also maintained administrative offices and a
warehouse at the Pemco World Air Services A/S facility in
Copenhagen, Denmark.
Item 3. Legal Proceedings.
On January 29, 1998, the court in Stevenson v. Pemco Aeroplex,
Inc., et al. granted Pemco Aeroplex's motion to vacate the verdict
and remanded the case for a new trial. However, in response to a
motion for reconsideration of that decision filed by the Plaintiff,
the court issued an order on February 27, 1998 vacating its order
for a new trial on the condition that the plaintiff accepts a
reduction of the verdict to $1 million in compensatory damages.
The jury verdict in favor of the individual defendant supervisor
was affirmed by the trial court, as was the court's order granting
summary judgment and dismissing the Company from the case. On
March 3, 1998, the plaintiff accepted the reduced verdict. The
Company filed an additional motion for reconsideration which was
denied on March 27, 1998. On April 2, 1998, the Company filed its
notice of appeal to the Alabama Supreme Court. The appeal argues,
among other issues, that the jury's exoneration of the individual
supervisor means that Pemco cannot have any liability to the
plaintiff for the alleged wrongdoing by such individual. The
Company intends to vigorously pursue reversal of this decision.
The lawsuits previously filed in October 1997, by the Birmingham
Airport Authority against the Company's Pemco Aeroplex subsidiary
relating to the lease of the Birmingham facility were settled in
February, 1998. As part of the settlement, the Airport Authority
acknowledged the 20 year lease extension with Pemco and provided
certain financial incentives to Pemco for its release of 3.8 acres
from the leasehold.
On March 4, 1998, the Company's Pemco Aeroplex subsidiary was
served with a first amended complaint in The Bank of New York v.
GATX/Airlog Company, et al., U.S.D.C., N.D. Cal., filed by the
owner of an aircraft converted under a STC for 747 cargo
conversions owned by GATX and others. As a result of an
Airworthiness Directive issued by the FAA in January 1996, aircraft
which has been so converted were restricted to carrying reduced
payloads. The Company's Pemco Aeroplex subsidiary has been named
as one of five defendants in the case because of allegedly improper
engineering work performed in the 1980s by its predecessor, Hayes
International, Inc. The first amended complaint seeks damages from
Pemco based on allegations of fraud and intentional
misrepresentation, failure to disclose, negligence, breach of
contract, and violations of state law prohibiting unfair
competition. Pemco filed its motion to dismiss on March 27, 1998.
Pemco disputes the allegations and intends to vigorously defend
this case.
In GATX/Airlog Company, et al. v. Pemco Aeroplex, Inc., the owners
of a STC for Boeing 747 cargo conversion sued the Company's Pemco
Aeroplex subsidiary, the successor to Hayes International, Inc.,
which had performed engineering for the STC development and the FAA
application for GATX/Airlog. The lawsuit seeks damages and
indemnity for claims arising from an Airworthiness Directive issued
by the FAA in January 1996 restricting the amounts of cargo
aircraft converted pursuant to the STC could carry. The complaint,
which was filed in U.S. District Court for the Northern District of
California and served on July 14, 1997, alleges fraudulent and
negligent misrepresentation, professional negligence, breach of
contract, implied indemnity, equitable indemnity and contribution
by Pemco Aeroplex with respect to GATX/Airlog's alleged liability
to owners of converted aircraft. On January 9, 1998, the Court
denied Pemco's motion to dismiss the complaint. The Company
intends to vigorously defend against this claim.
The trial date in Bradley v. Pemco Aeroplex, Inc., Circuit Court of
Jefferson County, Alabama, has been set for October 26, 1998. This
case, conditionally certified as a class action, was brought
against the Company and its Pemco Aeroplex subsidiary on behalf of
those persons hired as replacement workers during the strike by
Pemco's UAW union employees and who were terminated upon settlement
of such strike. The Company intends to vigorously defend this
case.
In November, 1997, Pemco World Air Services, A/S, the Company's
Danish subsidiary, was placed in bankruptcy by the Maritime and
Commercial Court in Copenhagen, Denmark. The Company has
guaranteed certain obligations of the Danish subsidiary. On April
8, 1998, the Company received notice from the lessor of the
Copenhagen facility, that it would take action against the Company
unless certain amounts were paid, purportedly as due under the
lease. Based on current information, the Company believes that
the facility lease has been transferred to another third party and
that some, if not all, lease payments have been made. In addition,
the Company has a fully funded letter of credit in place which the
Company believes is sufficient to cover any claim under the
facility lease. The Company is continuing to investigate this
claim.
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. One claim alleging employment discrimination
has been made by a former employee of Space Vector Corporation
before the state court in California. 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 in
particular, than of any actual discriminatory employment practices
by the Company or any subsidiary. Except for workers' compensation
benefits as provided by statute, the Company 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 and
results of operations.
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 1997.
Item 5. Market for Company's Common Equity and Related Stockholder
Matters.
By letter dated November 20, 1997, the Company was notified by the
NASDAQ Stock Market (NASDAQ) of its concern regarding the continued
listing of the Company on the NASDAQ National Market ("National
Market") pursuant to the National Market's corporate governance
rules because of the Company's failure, among other things, to
maintain a minimum bid price of $1.00 per share for the ten
consecutive trading dates prior to the notice. After a hearing on
January 29, 1998 before a NASDAQ Listing Qualifications Panel, (the
"Panel"), the Company was informed by the Panel that the Company
would be moved to the NASDAQ SmallCap Market and that it must
effect a reverse stock split sufficient to meet or exceed the $1.00
minimum bid price requirement on or before April 15, 1998. As a
result, the Company has submitted a 1-for-4 reverse stock split for
shareholder approval at a special meeting of the Company's
Shareholders set for April 15, 1998, to be effective on that date.
As a result of the 1-for-4 reverse stock split, each four issued
shares of the Company's common stock held on the record date will
automatically be converted into one share of Common Stock. No
fractional shares will be issued and no cash will be paid for
fractional shares. Instead, each fractional share will be rounded
up to a whole share. As of February 13, 1998, the Company's common
stock trades on the NASDAQ SmallCap Market pursuant to certain
exceptions under the symbol "PCSNC". Approximately 56% of the
outstanding shares of record of the Company's common stock are 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
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
1997
March 31, 1997 $1-5/8 $1-1/8
June 30, 1997 $1-5/8 $1-1/16
September 30, 1997 $1-7/16 $1
December 31, 1997 $1-1/8 $3/8
On December 31, 1997, there were 14,459,488 shares of common stock
issued and outstanding held by 225 owners of record, which the
Company believes were held by more than 500 beneficial owners. In
connection with its Senior Subordinated Loan, the Company
previously granted to Bank of America a warrant to purchase
4,215,753 shares of the Company's common stock at an exercise price
determined according to a formula. The warrant is subject to 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. To date, the Company has issued
2,169,730 shares of Common Stock for the redemption of 2,634,846
warrants pursuant to the repurchase agreement. The company will
redeem the remaining 1,580,907 warrants during the next three
quarters as specified in the agreement.
The Company has never paid cash dividends on its common stock and
currently intends to continue its policy.
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
12/31/97(1) 12/31/96 12/31/95 12/31/94 12/31/93
Net Sales $122,258 $130,858 $154,658 $148,495 $169,868
Income (loss) (22,207) (2,353) 2,583 6,812 14,184
from
operations
Income (loss) (33,150) (3,960) (3,811) 11,227 7,271
before extra-
ordinary item
Income (loss) (2.30) (.32) (.31) .67 .58
before extra-
ordinary item
per common
share - diluted
Net Income (33,150) (3,960) (3,811) 11,227 5,997
(loss)
Net Income (2.30) (.32) (.31) .67 .47
(loss) per
common share -
diluted
Consolidated balance sheet data for the Company is as
follows (in thousands of dollars):
Year Year Year Year Year
Ended Ended Ended Ended Ended
12/31/97(1) 12/31/96 12/31/95 12/31/94 12/31/93
Working $(27,911) $ 9,180 $21,122 $14,277 $23,127
Capital
Total 46,333 59,274 80,971 80,776 70,905
Assets
Long term 0 11,104 25,787 14,925 28,567
debt
Other 6,157 5,178 10,790 15,671 10,708
Liabilities
Stockholders'
equity
(deficit) (16,337) 13,128 13,874 12,515 4,287
(1) Excludes the amounts related to the Company's Danish
subsidiary. See Note 18 to the Consolidated Financial
Statements.
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.
Although the financial statements for the year ended December 31,
1997 show a net loss of $33 million, the Company recorded
approximately $18 million in non-cash, non-recurring charges. This
amount is comprised of $6.9 million in restructuring charges, a
$1.6 million provision for litigation and other contingencies, and
a $9.8 million provision for income taxes, primarily related to an
increase in its valuation allowance to fully reserve for its
deferred tax assets. The recognition of these non-cash, non-
recurring charges is part of the Company's restructuring program as
explained below.
Restructuring Program
In 1997, the Company implemented a company-wide operational,
management, and financial restructuring program to more effectively
organize its operating units and aid the Company in returning to
profitability. This program, coupled with the Company's recent
retention of Houlihan, Lokey, Howard & Zukin, an investment banking
firm, to explore various strategic alternatives to enhance
shareholder value, including the possible sale of one or more
operating units, demonstrates the commitment of management to take
all necessary measures to restore the Company to profitability.
As part of the restructuring, the Company sold the assets relating
to its Hayes Targets division, closed its unprofitable Copenhagen,
Denmark facility, closed its overseas product support office and
consolidated it with the reduced staff now located in France. The
relocation and consolidation of the product support, engineering
and sales functions, and executive offices to less expensive
offices in Denver, Colorado are expected to reduce overhead expense
as well as personnel needed to support the Dothan and Victorville
facilities. As part of its management restructuring, the Executive
Group Vice President functions were eliminated and consolidated
with existing unit managers. Reduction of personnel company-wide
is an ongoing process.
The reduction of outstanding debt, subsequent to December 1997, and
associated cost was the result of an additional payment to Bank of
America following the sale of the assets of the Hayes Targets
division. The implementation of a new three year revolving credit
facility designed to provide greater operating flexibility and a
plan to centralize the accounting function at the corporate level
have been underway since the third quarter of 1997. Furthermore,
costs associated with the extended UAW strike, the IAM strike, and
the Company's REA settled with the U.S. Government for 1995, 1996,
and 1997, were fully recognized in 1997. This program and the
recognition of certain other charges for the year ended December
31, 1997 will place the Company in an optimal position to fully
assess all strategic options and should result in increased
profitability in the near term. (See Note 1 to the Consolidated
Financial Statements for the year ending December 31, 1997.)
Sale of Hayes Targets Assets
On January 29, 1998, the Company's Pemco Aeroplex subsidiary sold
the assets relating to its Hayes Targets division to affiliates of
Meggitt PLC for approximately $5 million. The division, located in
Leeds, Alabama, developed and manufactured supersonic and subsonic
aerial tow targets for weapon system development and wing tip
infrared pods for the protection of military aircraft used by U.S.
and foreign military customers. The consideration for the sale was
based on the estimated fair market value of the assets.
Results of Operations
KC-135 Contract
The Company first performed Programmed Depot Maintenance (PDM) on
DC-135 aircraft in 1968 and has since processed approximately 3,000
such aircraft. In 1994, the Company was awarded a new, seven year
PDM contract (one base year and six option years) and is currently
performing work under the (fourth option year) 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 40% of the Company's total revenues in 1997, 42% in
1996 and 41% in 1995. On March 20, 1998, the Government released
a new request for proposal (RFP) for the KC-135 PDM workload.
Under the terms of this new RFP, the contractor must include within
its proposal all aspect of the KC-135 such as engine repair, which
the Company does not perform. The Company's Pemco Aeroplex
subsidiary intends to pursue this workload through teaming or
subcontracting arrangements with one or more other operators.
Should the RFP result in an award of the broader contract to
another contractor, the Company's existing PDM contract for KC-135
aircraft could be allowed to expire.
The Company's contract for the third option year of the KC-135
contract was amended in 1997 to include additional pricing,
additional workscope, incentive provisions, and limited
cost/benefit sharing provisions. The U.S. Government delivered
forty-five aircraft to the Company under the first year of the 1994
contract, thirty-four aircraft under the first option year, and
twenty aircraft under the second option year. The government has
scheduled thirty-two aircraft under the third option year, which
began on October 1, 1997.
Twelve months ended December 31, 1997
Versus twelve months ended December 31, 1996
In November, 1997, the Company's Pemco World Air Services A/S
subsidiary in Copenhagen, Denmark (the "Danish subsidiary") was
placed in bankruptcy. As a result, the Company's financial
statements for 1997 excluded revenues and operating expenses
generated by the Danish subsidiary with the net impact of
deconsolidation having been classified as a component of the
restructuring charge. (See Note 18 to the Company's Consolidated
Financial Statements for year ended December 31, 1997)
Revenues for the year ended 1997 decreased approximately 7% from
$130.9 million in 1996 to $122.3 million in 1997. The decrease was
due in part to the deconsolidation of the Danish subsidiary which
had contributed $10.5 million in revenues in 1996. Additionally,
government sales decreased 13% in 1997, $84.1 million in 1996 to
$73.3 in 1997. Commercial sales increased 6% in 1997, from $46.8
million in 1996 to $50 million in 1997. The Company's mix of
business between government and commercial customers shifted from
36% commercial and 64% government in 1996 to 39% commercial and 61%
government in 1997. The mix of business was also impacted by the
elimination of commercial revenues previously generated by the
Danish subsidiary.
A $10.8 million decrease in government sales in 1997 was due
primarily to reduced inputs of aircraft during the strike at the
Birmingham facility. In addition, delays in delivery of Government
Furnished Material for the Company's H-3 contract reduced
deliveries, and thus reduced government sales $3.3 million under
such contract.
Government sales in 1997 also decreased $4 million at the Space
Vector facility due to completion of the Altair program during 1996
and, $1 million due to the expiration of the C-130 PDM contract at
the Birmingham facility.
Commercial aircraft sales increased $3.7 million at the Company's
operations in Dothan, Alabama. This increase occurred
notwithstanding the labor strike at the Dothan facility which
reduced aircraft throughput. Revenues from aircraft conversions
increased slightly in 1997, but conversions remained low due to a
shortage of available aircraft resulting from increased passenger
traffic and possible FAA action related to converted aircraft.
During 1997, the Company redelivered five conversions versus three
in 1996.
Commercial sales for 1997 increased $2.1 million at the Company's
Pemco Engineers division and $3.1 million at Pemco Nacelle. The
increased sales at Pemco Nacelle was due primarily to business
generated from new geographic markets.
Cost of sales increased from $115.7 million for the year ended
December 31, 1996 to $121.0 million during 1997, for a 110 basis
point deterioration in gross margin to 1%. The decrease was due in
large part to the recognition of $17.6 million in sales during 1996
resulting from the settlement of the Company's Request for
Equitable Adjustment (REA) with the U.S. Government, without a
corresponding benefit in 1997. Additionally in 1997, the Company
also suffered from inefficiencies, increased costs, and delays in
aircraft inputs associated with the strike and through-put problems
associated with the KC-135 program at the Birmingham facility.
Selling, general and administrative expenses decreased from $17.1
million in 1996 to $13.9 million in 1997, and decreased as a
percentage of sales from 13% in 1996 to 11% in 1997. These
decreases resulted primarily due to the Company's reduction of
overhead expenses and corporate management changes. Pension
expense increased slightly in 1997 from $1 million in 1996 to $1.4
million.
Interest expense was $1.5 million in 1997 versus $2.5 million in
1996. Interest expense was favorably impacted by the repayment of
certain principal amounts and the forgiveness of $1.3 million of
interest by the Company's lender, Bank of America, $0.6 million of
which was recorded in 1996 and $0.3 million in 1997. The balance
of $0.4 million will be reflected as yield adjustment through 2001.
The effective average interest rate on the new Revolving Credit
facility was approximately 10.0% during 1997 as compared to 10.52%
under the Term Credit facility in 1996. The effective interest
rate in 1996 for the old Revolving Credit facility, which was
repaid in October 1996, was 10.45%.
The Company recorded other expense of $0.4 million in 1997 versus
$3.2 million of other income in 1996. The 1996 other income
reflects amounts received by the Company due to its settlement with
the U.S. Government of the REA of which $3.3 million was reflected
as other income.
The Company recorded $9 million of income tax expense in 1997
versus $2.3 million in 1996. The increase in tax expense resulted
from an increase in the deferred tax valuation allowance to fully
reserve for deferred tax assets at December 31, 1997. (See Note 9
to the Consolidated Financial Statements)
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 Form 10-
K/A for year ended December 31, 1996), 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
Form 10-K/A for year ended December 31, 1996).
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 lease 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 Form 10-K/A for year ended December 31, 1996)
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 Form 10-K/A for year ended December 31, 1996).
Gross profit was negatively impacted in 1997 as compared to 1996
due to redelivery of KC-135 aircraft that did not benefit from
price adjustments and cost sharing provisions subsequently provided
(see KC-135 contract), and the inefficiencies and costs associated
with the work stoppage at the Birmingham and Dothan facilities.
The work stoppages were resolved during 1997.
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.
Payment of the $15.0 million was not required under the terms of
the loan but was paid as part of an agreement reached between the
Company and its primary lender that was formalized in March 1997
when the Credit Agreement, Senior Subordinated Loan Agreement and
Warrant were modified. A portion of the consideration for the
$15.0 million principal payment was forgiveness of the $1.3 million
in interest. 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 nd $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 Form 10-K/A for the year ended
December 31, 1996). 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 Form 10-K/A for year ended December
31, 1996). 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.
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
request 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 conversion.
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 Form 10-
K/A for year ended December 31, 1996).
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 sale 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 Form 10-K/A
for year ended December 31, 1996) 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 initially borrowed funds from its primary lender at
that time, Bank of America National Trust and Saving Association
("Bank of America"), beginning in 1988 pursuant to a Credit
Agreement that provided for a term credit facility and a revolving
credit facility (the "Credit Agreement"), and a Senior Subordinate
Loan agreement (the "Subordinated Agreement"). In connection with
these agreements, the Company issued to Bank of America a warrant
to purchase shares of the Company's Common Stock (the "Warrant").
The Credit Agreement and the Subordinated Agreement with Bank of
America also provided 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. During 1997, the Company recognized $0.3 million and the
balance of the $0.4 million will be recorded over the period 1998
through 2001 as a yield adjustment on the remaining debt balance.
On August 8, 1997, the Company executed an agreement with a new
primary lender for a revolving credit facility that allows the
Company to borrow up to $20 million. While this new loan has
provided the Company with greater flexibility, it has not
alleviated the Company's persistent cash flow problems. As part of
the August transaction, the Company repaid in full its $5 million
Term Credit facility under the Credit Agreement and a portion of
the Subordinated Agreement. The Subordinated Agreement was amended
on August 8, 1997 to provide that all scheduled principal
amortization for the portion of the Subordinated Loan that remains
in place has been deferred for the three-year term of the new
revolving credit facility. The Subordinated Loan will be repaid
over five installments commencing on August 31, 2000, due each
subsequent quarter through June 30, 2001. The amount of funds
available to borrow under the new revolving credit facility is tied
to percentages of accounts receivable and inventory. Interest on
the new revolving credit facility accrues at prime rate plus 1.5%
with provisions for adjustments in the interest rate based on
specific operating performance targets.
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,
including those with respect to working capital, tangible net
worth, and losses in a quarter. The Company has informed its
lender of certain violations of such covenants and has obtained
waivers through March 31, 1998, although there is no assurance that
the Company will not violate its debt covenants in the future.
The Warrant, as amended, permits Bank of America to purchase from
the Company 4,215,753 shares of the Company's Common Stock at an
aggregate purchase price of $0.24 per share, subject to certain
adjustments for changes in the Company's Common Stock and for
dilutive issuances dating back to 1988, any time before September
9, 2000. The Company believes that no events that would trigger a
material adjustment in the number of shares issuable upon exercise
of the Warrant have occurred.
The Company is required to repurchase the Warrant over a period of
six quarters beginning August 31, 1997 with cash or by the issuance
of Common Stock with a value equal to the redemption price. The
redemption price for three-eights of the total shares which was due
on August 31, 1997 and all future redemptions is the difference
between the average market price of the Common Stock for the 25
trading days preceding the date which is five trading days prior to
the date on which the redemption is actually paid. In addition,
interest accrues on the unpaid redemptions in the form of cash
and/or shares of Common Stock. The amount of interest is equal to
the sum of (i) $75,000 in cash (or the number of shares which is
the result of dividing $75,000 by the average market price of the
Common Stock for the 25 trading days immediately preceding the date
which is five trading days prior to August 31, 1997, or $1.4537 per
share), payable immediately, plus (ii) .0004 of a share of Common
Stock per unredeemed Warrant share per day from the respective
installment date until the redemption is made. Such interest is
paid quarterly 10 days after the last day of each calendar quarter.
Such interest may be paid in the form of Common Stock only if such
stock is then registered and freely tradable; otherwise, the cash
equivalent must be paid, calculated as the market value of the
stock as of the lst day of the calendar quarter. The Company may
exercise its right to repurchase the Warrant with shares of Common
Stock, only if the Shares when issued are the subject of an
effective registration statement and immediately publicly tradable.
Effective December 31, 1997, the Shares underlying the Warrant were
registered with the Securities and Exchange Commission. On
December 31, 1997, the Company issued 1,298,151 Shares for the
redemption due on August 31, 1997, and 411,765 Shares for the
redemption due on October 31, 1997. Also on December 31, 1997, the
Company issued 147,432 shares in payment of interest due under the
Warrant.
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 remaining Warrant with cash.
The Company's cash resources in 1997 continued to be strained due
to delays and reductions in progress payments for amounts billed to
the U.S. Government, increased workloads under government
contracts, costs associated with the strike at the Birmingham
facility, and delays in inputs and redeliveries at the Dothan
facility due to the IAM strike.
The Company intends to replace its outdated, multi-type financial
information systems with enterprise-wide systems from Oracle. The
hardware, software and implementation costs will be approximately
$1.8 million to be incurred over a two year period. The costs of
the system are being financed by various vendors over periods of
three to five years. Currently, the Company has no other
commitments for any material capital expenditures.
The following is a discussion of the significant items in the
Company's Consolidated Statement of Cash Flows for the years ending
December 31, 1997, 1996, and 1995.
The Company increased the valuation allowance associated with its
deferred tax assets by $16.1 million in 1997, primarily because the
Company cannot be sure that it will have sufficient levels of
future taxable income to realize the deferred tax assets. In 1996,
the valuation allowance was increased $2.5 million 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.
The decrease in deferred tax assets in 1997 is due to the increase
in the valuation allowance.
The Company's pension expense as determined by its actuary for the
year 1997 is $1.4 million, as compared to $1.0 million in 1996.
The Company was not required to and did not make any contributions
to its pension in 1997 versus a $0.9 million contribution in 1996.
The Company recorded a $0.0 million, $0.3 million and $0.7 million
provision for reductions in the valuation of its inventory in 1997,
1996 and 1995, 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. In addition, in
1997, the Company wrote off its deferred costs related to the quick
change conversion program as the result of delays in additional
orders from its principal customer.
Net inventory decreased $2.0 million in 1997, $3.1 million in 1996,
and decreased $4.1 million in 1995. Progress payment balances on
U.S. Government contracts and net commercial customer deposits were
$17.5 million, $27.9 million and $16.9 million and work in process
was $26.7 million, $43.6 million and $31.0 million at December 31,
1997, 1996, and 1995, respectively. Progress payment balances and
net customer deposits as a percent of gross work in process for
each of the three years were 65%, 64%, and 55%, 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. The decrease of $10.4
million in 1997, versus $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 $32.4 million at
December 31, 1997 versus $27.5 million at December 31, 1996.
Included in the $27.5 million for 1996 is approximately $3.0
million in accounts payable related to the Company's Danish
subsidiary which ceased operations in 1997, and therefore
corresponding amounts have been excluded from the accounts payable
and accrued expense for 1997. Accounts payable and accrued
expenses increased in 1997 due to an increase in payables to the
Company's vendors as the Company continued to suffer from cash flow
constraints.
Capital improvements amounted to $0.5 million, $1.3 million, and
$2.9 million in 1997, 1996 and 1995, respectively. Additionally,
the Company made principal payments to its primary lender of $6.0
million, $15.0 million, and $4.0 million in 1997, 1996, and 1995,
respectively, as well as $0.4 million, $0.6 million, and $0.4
million on various capital leases.
CONTINGENCIES
As previously discussed, a material adverse effect on the Company's
financial position and liquidity could result if the verdict in the
Stevenson v. Pemco Aeroplex, et al. case is upheld. On January 29,
1998, the Court granted Pemco's motion to vacate the verdict and
granted a new trial. However, in response to motion for
reconsideration filed by the plaintiff, the court issued an order
on February 27, 1998 vacating such previous order on the condition
that the plaintiff accept a reduction of the verdict to $1 million.
On March 3, 1998, the plaintiff accepted the reduced verdict. The
Company filed an additional motion for reconsideration which was
denied and a notice of appeal was filed by the Company on April 2,
1998. (See discussion under Item 3. Legal Proceedings)
Year 2000 Compliance
The Company has performed a limited assessment of the need for year
2000 compliance for its computer and operating systems. Based on
information gathered to date, the Company has taken steps to
address the potential impacts of year 2000 compliance on its
financial accounting systems. Although manufacturing and
production systems may be impacted, production and manufacturing
operations could continue through the use of manual systems, if
necessary, and therefore, any impacts should not be material. The
primary focus of the Company in achieving year 2000 compliance will
be to replace its financial and accounting systems. As the Company
has previously stated, it intends to replace its outdated,multi-
type financial information systems with enterprise-wide systems
from Oracle. The Oracle system is year 2000 compliant. The
hardware, software and implementation costs are estimated at
approximately $1.8 million to be incurred over a two year period.
The costs are being financed by various vendors over periods of
three to five years.
Although it is not possible to quantify the effects year 2000
compliance will have on the Company's customers or suppliers, the
Company does not anticipate related material adverse effects on its
financial condition, liquidity or results of operations.
The Company plans to perform a year 2000 compliance assessment of
each operating group during 1998. Due to the fact that not all
information has been reviewed, some uncertainty remains as to the
impacts of year 2000 compliance on the Company's overall
operations.
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
With the exception of historical facts, statements contained in
Management's Discussion and Analysis are forward looking
statements. Statements contained herein concerning anticipated
results of operations, award of contracts, the outcome of pending
and future litigation, the outcome of audits, reviews and
investigations by the U.S. Government, the outcome of claims filed
with the U.S. Government, the Company's estimates concerning year
2000 compliance issues, the Company's expectations concerning
levels of capital spending, estimates of backlog, the outcome of
claims realted to the Copenhagen facility, and the Company's intent
to make certain action 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.
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 (Deficit)
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 sheets of
PRECISION STANDARD, INC. (a Colorado corporation) AND SUBSIDIARIES
as of December 31, 1997 and 1996 and the related consolidated
statements of operations, stockholders' equity (deficit), and cash
flows for the years 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
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the 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, 1997 and 1996 and the consolidated results of their
operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note
19 to the financial statements, the Company has suffered recurring
losses from operations and has a net capital deficiency. Although
the bank has waived the Company's financial debt covenant
violations through March 31, 1998, there is no assurance that the
Company will not be in violation of these covenants in the future.
The above issues raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 19. The
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the
amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.
Denver, Colorado ARTHUR ANDERSEN LLP
April 14, 1998
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Precision Standard, Inc.
We have audited the accompanying consolidated statements of
operations, stockholders' equity (deficit) and cash flows of
PRECISION STANDARD, INC. AND SUBSIDIARIES for the year 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
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.
In our opinion, the consolidated statements of operations,
stockholders' equity (deficit) and cash flows referred to above
present fairly, in all material respects, the consolidated results
of operations and cash flows of Precision Standard, Inc. and
Subsidiaries for the year ended December 31, 1995 in conformity
with generally accepted accounting principles.
Birmingham, Alabama COOPERS & LYBRAND L.L.P.
March 31, 1996, except for
Notes 6, 7 and 13 as to which the date
is April 15, 1996.
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
ASSETS
1997 1996
Current assets:
Cash and cash equivalents $ 369,334 $ 1,183,200
Accounts receivable, net 10,138,430 9,435,612
Inventories 17,047,983 23,183,608
Prepaid expenses and other 1,045,564 894,128
Deferred income taxes 0 4,347,098
Total current assets 28,601,311 39,043,646
Property, plant, and equipment,
at cost:
Leasehold improvements 10,826,369 10,508,585
Machinery and equipment 19,298,310 18,306,506
30,124,679 28,815,091
Less accumulated depreciation (17,991,714) (15,730,794)
Net property, plant and
equipment 12,132,965 13,084,297
Other non-current assets:
Prepaid pension costs 4,106,609 0
Intangible assets, net of
accumulated amortization 741,241 3,731,714
Related party receivable 269,824 269,824
Deposits and other 480,593 1,627,252
Deferred income taxes 0 1,517,349
5,598,267 7,146,139
Total assets $ 46,332,543 $59,274,082
The accompanying notes are an integral part
of these consolidated balance sheets.
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
1997 1996
Current liabilities:
Current portion of debt $24,784,318 $ 2,339,692
Accounts payable and
accrued expenses 31,728,406 27,523,958
Total current liabilities 56,512,724 29,863,650
Long-term debt 0 11,104,410
Workers' compensation reserve 3,631,734 3,697,901
Deferred income tax liability 2,525,231 0
Unfunded accumulated benefit
obligation 0 1,480,237
Total liabilities 62,669,689 46,146,198
Commitments and contingencies
(Notes 6, 7, 8, 9, 10, 11, 12,
18 and 19)
Stockholders' equity (deficit):
Common stock, $.0001 par value,
300,000,000 shares authorized,
14,459,488 issued and outstanding
at December 31, 1997 and
12,522,646 issued and outstanding
at December 31, 1996 1,446 1,252
Additional paid-in capital 4,763,139 4,599,334
Retained earnings (deficit) (20,862,729) 12,287,277
Cumulative foreign currency
translation adjustment (239,002) 160,013
Minimum pension liability
adjustment 0 (3,919,992)
Total stockholders' equity
(deficit) (16,337,146) 13,127,884
Total liabilities and
stockholders' equity
(deficit) $46,332,543 $59,274,082
The accompanying notes are an integral part
of these consolidated balance sheets.
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
Net sales $122,258,435 $130,857,722 $154,658,414
Cost of sales 121,073,746 115,675,503 132,456,980
Gross profit 1,184,689 15,182,219 22,201,434
Selling, general, and
administrative expenses 13,893,835 17,135,410 19,078,148
Restructuring and other
charges 6,926,899 0 0
Litigation and contingency
provisions 1,624,800 0 0
Research and development
expense 945,779 400,227 540,014
Income (loss) from
operations (22,206,624) (2,353,418) 2,583,272
Other (income) expense:
Interest 1,529,538 2,514,889 3,325,927
Other, net 405,711 (3,240,904) 337,473
Loss before
income taxes (24,141,873) (1,627,403) (1,080,128)
Provision for income
taxes 9,008,133 2,332,143 2,731,214
Net loss $(33,150,006) $ (3,959,546) $(3,811,342)
Net loss per
common share:
Basic and Diluted $ (2.30) $ (.32) $ (.31)
Weighted average common
shares outstanding:
Basic and Diluted 14,433,000 12,475,000 12,427,000
The accompanying notes are an integral part of these
consolidated statements.
<TABLE>
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
for the years ended December 31, 1997, 1996 and 1995
(Dollars and shares in thousand)
Cumula-
tive Total
Minimum Foreign Stock-
Add'l Ret. Pension Deferred Currency holders'
Common Stock Paid-in Earn. Liab. Treas. Stock Compensa- Transl. Equity
Shares Amount Capital (Def.) Adjust. Shares Amount tion Adjust. (Deficit)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
Reclassification
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 (3,811)
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) 0 (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
Exercise
of stock
options 79 0 0 0 0 0 0 0 0 0
Issuance of
shares for
warrants 1,857 0 164 0 0 0 0 0 0 164
Minimum
pension
liability
adjustment 0 0 0 0 3,920 0 0 0 0 3,920
Foreign
currency
translation
adjustment 0 0 0 0 0 0 0 0 (399) (399)
Net loss 0 0 0 (33,150) 0 0 0 0 0 (33,150)
Balance,
December 31,
1997 14,459 $ 1 $4,763 $(20,862) $ 0 0 $ 0 $ 0 $ (239) $(16,337)
The accompanying notes are an integral part
of these consolidated statements.
</TABLE>
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
Cash flows from operating
activities:
Net loss $ (33,150,006) $ (3,959,546) $ (3,811,342)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 2,515,680 2,763,419 2,766,572
Provision for
deferred taxes 8,864,625 2,136,392 2,736,445
Restructuring and other charges 6,926,899 0 0
Litigation and environmental
contingencies 1,624,800 0 0
Pension cost in excess of
funding 1,403,779 77,034 1,028,993
Provision for losses on
receivables 793,129 290,852 399,030
Provision for warranty expense 0 173,778 158,000
Provision for reduction in
inventory valuation 0 346,027 691,811
Provision for losses on
contracts-in-process 727,687 1,286,669 1,474,598
Provision for losses on
insurance receivable 0 0 (119,800)
Interest expense warrants 163,999 0 0
Loss (gain) on sale of equipment 0 233,499 (2,349)
Changes in assets and liabilities:
Accounts receivable, trade (2,197,281) 4,521,541 667,269
Request for Equitable
Adjustment (REA) 0 12,244,522 (8,734,251)
Inventories 1,949,978 (3,145,912) 4,079,087
Prepaid expenses and other (151,436) 62,191 (124,217)
Intangible assets 0 0 (64,645)
Accounts payable and accrued
expenses 539,742 (704,474) 5,739,906
_____________ ____________ ____________
Total adjustments 23,161,601 20,285,538 10,696,449
Net cash provided by (used
in) operating activities (9,988,405) 16,325,992 6,885,107
Cash flows from investing
activities:
Insurance proceeds received 0 0 249,730
Proceeds from sale of equipment 0 393,320 5,550
Capital expenditures (495,829) (1,325,481) (2,909,139)
Net cash used in
investing activities (495,829) (932,161) (2,653,859)
Cash flows from financing
activities:
Proceeds from issuance of
common stock 0 2,567 5,198
Payment of debt issuance
costs (719,848) 0 0
Borrowings under revolving
credit facility 16,427,130 1,500,000 25,900,000
Repayments of revolving
credit facility 0 (1,500,000) (24,100,000)
Principal payments under
long-term borrowings (6,036,914) (15,625,127) (4,448,397)
Change in cash overdraft 0 0 (176,120)
Net cash used in
financing activities 9,670,368 (15,622,560) (2,819,319)
Net increase (decrease)
in cash and cash
equivalents (813,866) (228,729) 1,411,929
Cash and cash equivalents,
beginning of year 1,183,200 1,411,929 0
Cash and cash equivalents,
end of year $ 369,334 $ 1,183,200 $ 1,411,929
Supplemental disclosure of
cash flow information:
Cash paid during the year
for:
Interest $ 1,776,935 $ 869,683 $ 1,906,654
Income taxes $ 28,508 $ 137,000 $ 155,155
Supplemental disclosure of
noncash investing and
financing activities:
Interest capitalization $ 0 $ 2,207,799 $ 0
Capital lease obligations
incurred $ 950,000 $ 119,245 $ 576,190
The accompanying notes are an integral part
of these consolidated statements.
PRECISION STANDARD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 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 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. On January
29, 1998, the Company sold its Hayes Targets Division which
designed, developed and manufactured aerial target systems.
(See Note 18)
Principles of Consolidation - The consolidated financial
statements include the accounts of the Company and its
subsidiaries, except for its Danish subsidiary, all of which
are wholly owned. All significant intercompany accounts and
transactions have been eliminated. Effective January 1, 1997,
the Company's Danish subsidiary has been excluded from the
consolidated presentation as a result of a Danish court's
decision to grant a supplier's request to place it into
bankruptcy. (See Note 18)
Restructuring As a result of recent operating results, the
Company has implemented a strategic restructuring plan to
increase its liquidity and return to profitability. As part
of this plan, the Company has engaged a financial advisor to
evaluate the sale of one or more of its operating units, has
ceased funding of its Danish facility and has reduced
overhead.
In connection with its change in strategy, the Company
re-evaluated the carrying amount of deferred costs related to
certain long-term programs. As a result of this
re-evaluation, the Company recognized a charge of $4.3
million. Further, the Company reclassified losses incurred on
its Danish subsidiary related to fundings made subsequent to
deconsolidation of $2.4 million to restructuring and other
charges, and recognized a loss of $.2 million related to its
cumulative translation adjustment balance in equity.
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. Material
estimates which may be subject to significant change in the
near term include those associated with evaluation of the
ultimate profitability of the Company's contracts, recognition
of losses associated with pending litigation and realization
of certain assets, including deferred tax assets. Actual
results could differ from those estimates. Further, the
financial statements do not include any adjustments relating
to the recoverability of assets, carrying amounts or the
amount and classification of liabilities should the Company be
unable to continue as a going concern.
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
$2,397,161, $2,652,453, and $2,499,774 for the years ended
December 31, 1997, 1996, and 1995, respectively.
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, 1997 and 1996. 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 Loss Per Common Share - In February 1997, the Financial
Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 128, EARNINGS PER
SHARE. SFAS No. 128 revises the methodology to be used in
computing earnings per share ("EPS") such that the
computations required for primary and fully diluted EPS are to
be replaced with "basic" and "diluted" EPS. Basic EPS is
computed by dividing net income by the weighted average number
of shares outstanding during the period. Diluted EPS is
computed in the same manner as fully diluted EPS, except that,
among other changes, the average share price for the period is
used in all cases when applying the treasury stock method to
potentially dilutive securities. All share and per share
information included in these financial statements have been
restated to give effect to the adoption of SFAS No. 128.
The following table represents the amount of potentially
dilutive securities outstanding, excluded from EPS because
they were antidilutive for all years presented:
1997 1996 1995
Warrant 2,505,838 4,215,753 4,215,753
Options 71,654 628,060 957,435
2,577,492 4,843,813 5,173,188
Options to purchase 867,293, 805,376, and 238,199 shares of
common stock related to 1997, 1996, and 1995, respectively
were excluded from the computation of diluted loss per share
because the option exercise price was greater than the average
market price of the shares.
Both basic and diluted earnings per share were the same
restated, for adoption of SFAS No. 128, as previously reported
earnings per share for the years ended December 31, 1996 and
1995.
Foreign Currency Translation - The consolidated financial
position and consolidated results of operations of the
Company's foreign subsidiary in Copenhagen, Denmark were
measured using local currency as the functional currency.
Assets and liabilities of this foreign subsidiary were
translated at the exchange rate in effect at each year-end
that the subsidiary was included in the consolidation.
Consolidated statements of operations amounts were translated
at the average rate of exchange prevailing during each year
that the subsidiary was included in the consolidation.
Translation adjustments arising from differences in exchange
rates from period to period were included in the cumulative
foreign currency translation adjustments account in
stockholders' equity (deficit) and the cash flows from foreign
operations were translated at the average rate of exchange
prevailing during each year that the subsidiary was included
in the consolidation. As further discussed in Note 18, for
purposes of the 1997 consolidated financial statement
presentation, the Danish subsidiary has been excluded from the
consolidation as a result of it being placed into involuntary
bankruptcy and the cumulative translation adjustment was
charged to operations and was not material to the results of
operations.
Stock Options and Warrants The Company uses the intrinsic
value method for stock options granted employees under which
no compensation is generally recognized for options granted at
or above the fair market value of the underlying stock. Stock
options, warrants and other equity instruments granted to
non-employees are recorded at the fair value of the instrument
or the consideration received, whichever is more readily
determinable.
Reclassifications - Certain amounts in the 1996 and 1995
consolidated financial statements have been reclassified to
conform to the 1997 presentation.
2. TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable as of December 31, 1997 and 1996
consist of the following:
1997 1996
U.S. Government:
Amounts billed $2,390,060 $ 2,160,371
Recoverable costs and
accrued profit on progress
completed - not billed 2,227,495 1,188,277
Commercial customers:
Amounts billed 6,060,495 6,639,875
Recoverable costs and
accrued profit on
progress completed -
not billed 640,365 182,396
11,318,415 10,170,919
Less allowance for doubtful
accounts (1,179,985) (735,307)
Trade accounts receivable,
net $10,138,430 $ 9,435,612
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, 1997 and
1996.
3. INVENTORIES
Inventories as of December 31, 1997 and 1996 consist of the
following:
1997 1996
Work in process $26,732,001 $43,555,521
Finished goods 3,125,830 3,524,575
Raw materials and supplies 5,987,419 5,307,562
Total $35,845,250 $52,387,658
Less progress payments
and customer deposits (17,451,262) (27,917,381)
Less allowance for estimated
losses on work in
process (Note 8) (1,346,005) (1,286,669)
$17,047,983 $23,183,608
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 values of $899,076 and $2,334,105 at
December 31, 1997 and 1996, 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,
1996 were either evaluated to be not realizable and written
off or were settled during 1997. Management expects to
recover the 1997 costs in the near term based on their
evaluation.
Also included in work in process is $1,821,640 and $2,104,108
of deferred production, initial tooling, and related
nonrecurring costs (collectively referred to as deferred
costs) at December 31, 1997 and 1996, 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.
At December 31, 1996, the Company estimated that its Dothan
facility would derive a significant portion of their revenue
for the following two 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. At December 31, 1996, orders for 5
ships with an option for an additional 15 had been received.
Costs under this program that were deferred and included in
work in process totaled approximately $3,000,000 at December
31, 1996 and included production costs, engineering and
tooling costs incurred since the inception of the program less
the cost of units delivered based on anticipated average costs
of producing 20 units under the program. Management continues
to believe that a viable market exists for such conversions
with this customer and other similar companies. During 1997,
the $3,687,743 in deferred costs associated with this program
were written off because its principal customer under this
program has not exercised its option for the additional ships
because of delays associated with their evaluation of the
conversions as a result of a work stoppage at the customer's
facilities.
The aggregate amount of general and administrative costs
incurred during 1997, 1996, and 1995 amounted to $19,223,507,
$18,424,883, and $18,956,954, respectively. The amount of
general and administrative costs remaining in inventories at
December 31, 1997 and 1996 amounted to $1,912,140 and
$1,525,633, 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, 1997 and 1996 consist of
the following:
1997 1996
Supplemental type certificates,
("STCs") net of accumulated
amortization of $249,536 and
$230,996, respectively. $ 121,372 $ 139,912
Deferred debt costs, net 619,869 0
Pension (see Note 11) 0 3,591,802
$ 741,241 $3,731,714
STCs are granted by the Federal Aviation Administration
("FAA") and are being amortized on a straight line basis over
20 years. Amortization charged to operations amounted to
$18,540, $148,953, and $204,331 for the years ended December
31, 1997, 1996, and 1995, respectively. Deferred debt costs
are being amortized by a method which approximates the level
yield method and amounted to $99,979 in fiscal 1997.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses as of December 31, 1997
and 1996 consist of the following:
1997 1996
Accounts payable $14,529,307 $14,911,521
Accrued liabilities - payroll
related 8,706,990 7,905,090
Current portion of self-insured
workers' compensation reserve 1,251,834 1,170,099
Accrued liabilities - other 7,240,275 3,537,248
$31,728,406 $27,523,958
6. DEBT
Debt as of December 31, 1997 and 1996 consists of the
following:
1997 1996
Revolving credit facility $16,427,130 $ 0
Term Credit facility;
repaid in 1997 0 5,007,799
Senior Subordinated Loan;
interest at 13.5%, 6,700,000 7,200,000
Note due to individual;
interest at 10%, due in 1997
collateralized by a
security interest in
certain equipment 277,202 377,173
Other obligations; interest from
8% to 18%, collateralized
by security interests in
certain equipment 1,379,986 859,130
Total debt 24,784,318 13,444,102
Less portion reflected
as current 24,784,318 2,339,692
Long-term debt, net of
current portion $ 0 $11,104,410
On August 8, 1997, the Company entered into a three-year
revolving credit facility with a new lender. As part of this
transaction, the Company repaid its $5 million Term Credit
facility under the Credit Agreement with Bank of America and
$500,000 of its Senior Subordinated loan under the Loan
Agreement. The amount of funds available to borrow under the
new $20 million revolving credit facility is tied to
percentages of accounts receivables and inventory and, as a
result of certain subordination provisions, cannot exceed $17
million. There was no remaining availability under the
facility at December 31, 1997 based on the calculation which
defines the borrowing base. Interest on the new revolving
credit facility accrues at prime rate plus 1.5% with
provisions for both reductions in the interest rate based on
specific operating performance targets and increases related
to certain events of default. Interest is accrued and charged
to the loan balance on a monthly basis.
All scheduled principal amortization for the Senior
Subordinated loan has been deferred for the three-year term of
the new revolving credit facility. The Senior Subordinated
loan will be repaid over five installments commencing on
August 31, 2000, due each subsequent quarter through June 30,
2001.
As a result of renegotiated terms and conditions of its debt
and warrant agreements in March 1997, the new agreements in
part provided for forgiveness of approximately $1.3 million of
accrued but unpaid interest which is being recognized
prospectively as a yield adjustment.
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. As a result
of its losses from operations, the Company was in violation of
substantially all of such covenants. Although the Company's
primary lender has waived the financial debt covenant
violations through March 31, 1998, there is no assurance that
the Company will not be in violation of its debt covenants in
the future, that the Company will have sufficient availability
under its revolving credit facility to fund operations until
implementation of its restructuring strategies or that the
bank will continue to fund under the current arrangements if
the Company remains in violation of its covenants subsequent
to March 31, 1998.
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 at that time 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 October,
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
difference in the exercise price and the average price of the
Company's common stock for a predetermined time period
preceding the redemption date of the warrant. Additionally,
if the redemptions are not made on the respective redemption
dates, the Company must pay interest on the redeemable amount
up to the actual redemption date based on the average price of
the Company's common stock during the respective period.
During 1997, this interest requirement totaled $164,000 and
was satisfied with the issuance of 147,432 shares of Company
common stock on December 31, 1997, the date on which the
Company issued 1,709,915 shares of common stock for the August
31, 1997 and October 31, 1997 redemptions.
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, 1997 and 1996 amounted to $2,014,356 and
$1,374,435, respectively. Of these amounts at December 31,
1997 and 1996, $1,346,005 and $1,286,669, respectively is
reflected as a reduction of work in process inventory. See
Note 3. The remaining amounts at December 31, 1997 and 1996
of $668,351 and $87,766, respectively, related to commitments
to fulfill contracts at December 31, 1997 and 1996.
During 1997, 1996, and 1995, the provisions for estimated
losses on contracts in process in the amounts of $727,687,
$1,286,669, and $1,474,598, respectively, were recognized
through charges to operations.
9. INCOME TAXES
The provision (benefit) for income taxes for the years ended
December 31, 1997, 1996, and 1995 is as follows:
1997 1996 1995
Current:
Federal $ 0 $ 0 $ (18,939)
State 143,508 195,751 13,708
Deferred:
Federal 9,416,615 1,974,219 2,880,935
State (551,990) 162,173 (144,490)
$9,008,133 $ 2,332,143 $ 2,731,214
The differences between the tax benefits at the federal
statutory rate and the provision for income taxes for the
years ended December 31, 1997, 1996, and 1995 are primarily
due to increases in the deferred tax asset valuation allowance
of $16,127,650, $2,503,602, and $2,409,255, respectively.
Deferred tax assets (liabilities) are comprised of the
following:
1997 1996
Prepaid pension costs $ (1,622,111) $ (2,302,368)
Pension intangible asset 0 (1,420,199)
Percentage of completion (903,120) (1,566,757)
Gross deferred tax
liabilities (2,525,231) (5,289,324)
Accrued vacation 1,462,231 1,361,096
Inventory, accounts
receivable and other reserves 5,744,475 4,552,759
Federal and state loss
carryforwards 10,385,245 3,745,903
Intangible assets 27,453 274,351
Property, plant, and equipment 548,400 495,723
Alternative minimum tax credit
carryforwards 695,287 695,287
Pension minimum liability
adjustment 0 2,764,093
Foreign corporation net loss 4,279,833 4,279,833
Gross deferred tax assets 23,142,924 18,169,045
Deferred tax asset valuation
allowance (23,142,924) (7,015,274)
Net deferred tax benefit
(liability) $(2,525,231) $ 5,864,447
The Company established a valuation allowance primarily for
certain non-current state net operating loss carryforwards and
foreign tax losses for which realization was considered
uncertain at December 31, 1996. As a result of the Company's
continuing losses during 1997 the Company provided an
additional valuation allowance through its tax provision to
fully reserve for its deferred tax assets. The Company's
estimate of its valuation allowance may change significantly
in 1998 depending on the results of its strategic
restructuring. (See Note 1)
At December 31, 1997, the Company had federal and state
operating loss carryforwards of approximately $20,520,967 and
$68,774,922, respectively. The loss carryforwards expire at
various dates between 2002 and 2012. These loss carryforwards
are completely reserved for through the deferred tax valuation
allowance.
The alternative minimum tax credit carryforwards of $695,287
included in the deferred tax assets at December 31, 1997 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.
Had compensation expense for the Company's stock option plans
been determined 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:
1997 1996 1995
Net Loss - as reported $(33,150,006) $(3,959,546) $(3,811,432)
Net Loss - pro forma (33,177,660) (4,095,768) (3,829,781)
Net Loss per share
- as reported (2.30) (0.32) (0.31)
Net Loss per share
- pro forma (2.30) (0.33) (0.31)
The following table summarizes the changes in the number of shares
under option pursuant to the plan described above:
Wtd. Wtd. Wtd.
Avg. Avg. Avg.
Ex. Ex. Ex.
12/31/97 Price 12/31/96 Price 12/31/95 Price
Outstanding
beginning
of year 1,433,436 $2.15 1,195,634 $2.24 1,127,912 $2.31
Granted 35,333 1.33 374,000 1.37 86,125 1.24
Exercised (79,495) 1.28 (54,358) 0.66 (6,007) 1.28
Forfeited (450,327) 2.15 (81,840) 0.99 (12,396) 2.70
Outstanding
end of year 938,947 2.19 1,433,436 2.15 1,195,634 2.24
Exercisable
end of year 889,109 1,285,235 1,023,624
Estimated
weighted
average
fair
value of
options
granted $0.54 $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 1997, 1996
and 1995: dividend yield of 0%; expected volatility of .72; risk-
free interest rate of 5.87%; expected life of 3.43 years. Of the
options granted in 1995, 48,750 vest 25% each year. The remainder
of the options granted in 1995 and 1996 vest on the date of grant.
The options granted in 1997 vest 25% each year.
Of the 938,947 options outstanding at December 31, 1997, 261,722
have exercise prices between $.56 and $1.05 with a weighted average
exercise price of $.78 and a weighted average remaining contractual
life of 7 years; 256,389 of these options were exercisable at
December 31, 1997. 401,389 of the options outstanding at December
31, 1997 have exercise prices between $1.15 and $1.90 with a
weighted average exercise price of $1.44 and a weighted average
remaining contractual life of 7 years of which 356,884 options were
exercisable at December 31, 1997. The remaining 275,836 options
outstanding at December 31, 1997 have an exercise price of $4.63 and
a weighted average remaining contractual life of 5 years; all of
these options were exercisable at December 31, 1997.
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 and $1,250,002 in 1996 and
1995. No contributions were made in 1997. 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
resulting from the excess of the accumulated benefit obligation over
plan assets plus prepaid pension cost, was recognized at December
31, 1996. The additional liability was offset by intangible assets
to the extent of previously unrecognized prior service cost.
Amounts in excess of previously unrecognized prior service cost were
recorded as a reduction of stockholders' equity. At December 31,
1997, the intangible asset and reduction of stockholders' equity
were reduced to zero. The intangible asset at December 31, 1996
amounted to $3,591,802 and the reduction of stockholders' equity
amounted to $3,919,992 (net of tax). respectively.
The discount rate decreased from 7.75% at December 31, 1996 to 7.25%
at December 31, 1997 resulting in an increase to the accumulated
benefit obligation of $3,925,163. The additional minimum liability
adjustment was eliminated in 1997 due to higher than anticipated
returns on plan assets.
Net pension expense for the years ended December 31, 1997, 1996, and
1995 include the following components:
1997 1996 1995
Service cost -
benefits earned
during the period $1,248,045 $1,287,414 $ 1,289,288
Interest cost on
projected benefit 7,070,475 6,688,050 7,184,470
Net amortization
of prior service
costs 782,602 677,981 905,909
9,101,122 8,653,445 9,379,667
Return on plan
assets:
Actual return (16,546,210) (11,831,720) (17,741,368)
Deferred gain 8,848,867 4,192,812 10,640,696
Net return (7,697,343) (7,638,908) (7,100,672)
Net pension
expense $1,403,779 $1,014,537 $ 2,278,995
The significant actuarial assumptions used in determining the
present value of benefit obligations as of December 31, 1997,
1996, and 1995 were as follows:
1997 1996 1995
Weighted-average discount rate 7.25% 7.75% 7.25%
Rate of increase in future
compensation levels 5.0% 5.0% 4.5%
Expected long-term rate of
return on plan assets 9.5% 9.5% 9.5%
The following table reconciles the pension plans' funded
status and the amount reported in the consolidated
balance sheets at December 31, 1997 and 1996:
1997 1996
Actuarial present value of
benefit obligations:
Vested $94,611,365 $91,239,424
Non-vested 1,216,798 942,294
Accumulated benefit
obligation 95,828,163 92,181,718
Impact of future salary
increases 2,267,927 2,107,866
Projected benefit obligation 98,096,090 94,289,584
Plan assets at fair value 97,785,243 90,701,482
Plan assets less than
projected benefit obligation (310,847) (3,588,102)
Unrecognized net loss 585,686 5,506,688
Unrecognized prior service cost 3,831,770 3,591,802
Minimum pension liability
adjustment 0 (6,990,625)
Prepaid (accrued)
pension costs $ 4,106,609 $(1,480,237)
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.
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:
1997 1996 1995
Accumulated postretirement
benefit obligation:
Retirees $ 64,000 $ 35,000 $ 45,000
Fully eligible active plan
participants 80,000 69,000 78,000
Other active plan
participants 580,000 515,000 704,000
724,000 619,000 827,000
Plan assets, at fair value 0 0 0
Accumulated postretirement
benefit obligation in
excess of plan assets 724,000 619,000 827,000
Unrecognized prior period
gain (loss) (34,000) 100,000 (83,000)
Unrecognized transition
obligation (328,000) (476,000) (553,000)
Accrued postretirement
benefit $ 362,000 $ 243,000 $ 191,000
Estimated postretirement benefit cost for the years ended December
31, 1997, 1996 and 1995 are composed of the following:
1997 1996 1995
Service cost-benefits attributed
to service during the period $ 38,000 $ 32,000 $ 30,000
Interest cost on accumulated
postretirement benefit obligation 52,000 44,000 61,000
Amortization of transition obligation
over 20 years 148,000 77,000 32,000
Amortization of unrecognized net gain 0 (1,000) 0
Net periodic postretirement
benefit cost $238,000 $152,000 $123,000
Actuarial assumptions used were:
1997 1996 1995
Projected health care cost trend rate 8.0% 9.0% 10.5%
Ultimate trend rate 5.0% 5.0% 5.5%
Year ultimate trend rate is achieved 2004 2004 2005
Effect of a 1% increase in the
health care cost trend rate on
the postretirement benefit
obligation $117,000 $113,000 $78,000
Effect of a 1% increase in the
health care cost trend rate on the
aggregate of service and interest
cost $ 14,000 $17,000 $ 6,000
Discount rate 7.25% 7.75% 7.25%
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
1997, 1996 and 1995, 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
$(34,000), $100,000, and $(83,000) unrecognized gains/(losses) at
December 31, 1997, 1996 and 1995, 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
$1,221,027 and $662,385 for reported and incurred but not reported
claims at December 31, 1997 and 1996, respectively. Expenses
incurred for this plan were $5,782,627, $6,110,803, and $8,748,411,
for 1997, 1996, and 1995, 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, 1997
and 1996, is $415,000 and $850,000, respectively, 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
$4,884,000 and $4,868,000 for reported and incurred but not
reported claims at December 31, 1997 and 1996, respectively.
Expenses incurred on this plan were $1,337,474, $1,326,571, and
$1,650,901, for 1997, 1996, and 1995, respectively. The workers'
compensation liability at December 31, 1997 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
considering current conditions 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
1997, 1996, or 1995. 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, 1997 are as follows:
Vehicles
And
Facilities Equipment Total
Year Ending:
1998 $1,910,993 $212,060 $2,123,053
1999 1,421,281 150,508 1,571,789
2000 994,506 90,656 1,085,162
2001 795,460 25,071 820,531
2002 659,500 0 659,500
Thereafter 6,421,625 0 6,421,625
Total minimum
future rental
commitments $12,203,365 $478,295 $12,681,660
Total rent expense charged to operations for the years ended
December 31, 1997, 1996, and 1995 amounted to $3,181,677,
$3,857,375, and $3,909,557, respectively. Contingent rental
amounts based on a percentage of sales included in rent
expense amounted to $556,860, $784,852, and $934,731 for the
years ended December 31, 1997, 1996, and 1995, 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.
On March 20, 1998, the U.S. Government released a request for
proposal (RFP) seeking proposals for all work related to its
KC-135 aircraft. The Company's Pemco Aeroplex subsidiary
currently performs the airframe maintenance portion of the KC-
135 workload, which is included in the RFP. Pemco intends to
pursue this workload through teaming or subcontracting
agreements.
U.S. Government Request for Equitable Adjustments (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.
The Company is preparing an REA related to its H-3 helicopter
contract with the U.S. Government. The primary grounds for
this REA are delays in GFM, increased cost of pilot services,
and late delivery of technical data. The Company's
independent management consultant has determined a preliminary
rough order of magnitude of the cost impact under the H-3
contract of $238,000. Though the Company believes that
evidence in support of the proposed REA is objective,
verifiable and reasonable in view of the work performed, the
Company has not recorded any benefit given the uncertainty as
to its realization in the near term.
Litigation - A purported class action was brought against the
Company and its Pemco Aeroplex subsidiary on behalf of those
persons hired as replacement workers during the strike by
Pemco's United Auto Worker ("UAW") union employees and who
were terminated upon settlement of such strike. The complaint
alleges fraud, breach of contract, and civil conspiracy and
seeks both compensatory and punitive damages. The Company
believes the plaintiffs' claims have no factual basis and will
vigorously defend the case.
The Company's Pemco Aeroplex subsidiary, successor to Hayes
International, is a defendant in several suits seeking damages
and indemnity for claims arising from an Airworthiness
Directive issued by the FAA. That Directive restricts the
cargo capacity of Boeing 747 aircraft converted pursuant to an
STC for such conversions. Hayes International had performed
engineering for the development of the STC. Certain of the
suits also allege fraud, misrepresentation and violations of
the Racketeer Influenced and Corrupt Organization Act.
Management believes that Pemco has no liability under the
claims.
On November 3, 1997, a Jefferson County, Alabama jury returned
a verdict against the Company's Pemco Aeroplex subsidiary in
the amount of $1 million compensatory and $3 million punitive
damages. The case involved an employee who alleged a
supervisor had made sexual advances against her. Pemco was
sued for the actions of its employee undertaken in the course
of employment. However, the jury found in favor of the
supervisor and against Pemco. Various post-trial motions
resulted in the trial court reducing the verdict to $1 million
in compensatory damages. Pemco has appealed this decision.
The Company believes it will successfully reverse the decision
upon appeal as the supervisor was not found liable. However,
an accrual was established in the fourth quarter for the
compensatory damage award pending outcome of the appeal.
In addition to the above, the Company is involved in various
legal proceedings arising in the normal course of business.
Management does not believe the ultimate outcome of all such
litigation will have a material adverse effect on the
consolidated financial position or results of operations.
Environmental Compliance - In December, 1997, the Company
received an inspection report from the Environmental
Protection Agency ("EPA") which cited certain violations. The
Company has taken action to correct items raised by the
inspection. On April 2, 1998, the Company received a
complaint and compliance order from EPA proposing penalties of
$225,256. The Company disagrees with the citations and
believes such citations are not based on factual or correct
information, and intends to contest the citations and
penalties but has recorded an accrual for the above penalties
and certain other related charges.
13. RELATED PARTY TRANSACTIONS
During 1996, the Company's principal shareholder provided a
guarantee 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, accounted for approximately 11 percent, 14 percent
and 15 percent of the Company's net sales for the years ended
December 31, 1997, 1996 and 1995, respectively. Sales to
major customers which accounted for 10 percent or more of the
Company's net sales were as follows:
1997 1996 1995
U.S. Government $74,010,000 $84,055,502 $91,632,344
15. LABOR CONTRACTS
The Company's contract with the UAW at its Pemco Aeroplex,
Inc. subsidiary 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
included the modification in job classifications sought by the
Company but also provided 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 Association of
Machinists and Aerospace Workers Union ("IAM") at its Pemco
Aeroplex, Inc. subsidiary in Dothan, Alabama expired in July,
1997. Following a brief work stoppage, on September 14, 1997,
management and the IAM agreed to a new three year agreement
which provides increases in wages, but maintains benefit
levels and reduces job classifications.
16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
As of December 31, 1997 and 1996, the carrying amounts of the
Company's financial instruments are estimated to approximate
their fair values, due to their short term nature, variable
and market interest rates.
The Company does not hedge its interest rate or foreign
exchange risks through the use of derivative financial
instruments.
17. FOURTH QUARTER ADJUSTMENTS
In the fourth quarter of 1997, the Company recorded a
provision of approximately $9.4 million to raise its valuation
allowance account to fully reserve for its deferred tax
assets. The Company considered the need for such a provision
in connection with its strategic restructuring. The Company's
view of the realization of these deferred tax assets may
change in 1998 once the success of its restructuring strategy
is reasonably assured. Also, during the fourth quarter the
Company evaluated realization of program and other deferred
costs and wrote off costs totaling $4.4 million. The write
off of the program costs resulted from failure by the
Company's principal customer to exercise its options for
additional ships because of delays associated with their
evaluation of such conversions which were a result of a work
stoppage at the customer's facilities. Finally, the Company
recorded other charges totaling $1.6 million, primarily to
establish a litigation and environmental reserve related to
developments during the quarter. See Note 12. The impact of
all of the above was to increase the fourth quarter net loss
by approximately $15.4 million.
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.
18. TRANSACTIONS AFFECTING SUBSIDIARY OPERATIONS
On November 11, 1997, a supplier filed a request for
bankruptcy against Pemco World Air Services A/S ("PWAS"), the
Company's Danish subsidiary. On November 20, 1997, the
Maritime and Commercial Court in Copenhagen granted that
supplier's request and appointed trustees to operate the
facility. The Company has guaranteed certain obligations of
PWAS. As a result of the subsidiary being placed in
involuntary bankruptcy, effective January 1, 1997, PWAS has
been excluded from the Company's consolidated financial
statement presentation. Related to the deconsolidation, the
Company recognized net charges of $2.6 million. The Company
continues to maintain a liability of $1.3 million related to
its basis in the Company at time of bankruptcy for claims
which may be made against the Company.
Net sales, expenses, and net loss of PWAS which are included
in the consolidated statements of operations for the years
ended December 31, 1996 and 1995 are as follows:
1996 1995
Net Sales $ 8,762,038 $ 8,508,275
Expenses 12,665,111 13,810,922
Net Loss $(3,903,073) $(5,302,647)
Subsequent to year end, the Company completed the sale of the
net assets of its Hayes Targets division in Leeds, Alabama.
The sale, which was closed on January 29, 1998, yielded net
proceeds of approximately $5,000,000.
Net sales and operating income contributed by the Hayes
operation for the years ended December 31, 1997, 1996 and 1995
are as follows:
1997 1996 1995
Net Sales $3,404,000 $5,189,000 $5,238,000
Operating Income 256,000 1,409,000 775,000
19. GOING CONCERN
During 1997, the Company continued to incur losses and
negative cash flow from operations which resulted in a net
capital deficiency. These losses resulted from continued
funding of the Company's Danish subsidiary, incremental strike
related costs from the UAW work stoppage at the Company's
Birmingham facility, revenue shortfalls which resulted from
down time during the July 1997 work stoppage by the IAM at the
Company's Dothan facility and continuing problems with its KC-
135 contract for the U.S. Government stemming from heightened
maintenance requirements due to the age of the fleet and
throughput issues. These losses have caused significant cash
liquidity issues for the Company and placed it in violation of
substantially all of its debt covenants. Although the
Company's primary lender has waived the financial debt
covenant violations through March 31, 1998, there is no
assurance that the Company will not be in violation of its
debt covenants in the future, that the Company will have
sufficient availability on its revolving credit facility to
fund operations until implementation of its restructuring
strategies or that the bank will continue to fund under the
current arrangements if violation of the Company's debt
covenants continue subsequent to March 31, 1998. As a result,
during the fourth quarter of 1997 and the first quarter of
1998 the Company initiated a strategic restructuring. As a
part of the restructuring, the Company sold the assets of its
Hayes Targets division and has ceased funding and vacated its
unprofitable Copenhagen, Denmark facility. (See Note 18 for
further discussion). Additionally, the Company has retained
a financial advisor to evaluate the sale of one or more of its
other operating units, has amended its KC-135 government
contract and has reduced overhead. While the Company believes
these matters will ease the liquidity issues and enable it to
continue as a going concern, additional capital resources may
be required before December 31, 1998.
SUPPLEMENTARY INFORMATION
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SUPPLEMENTARY INFORMATION
To Precision Standard, Inc. and Subsidiaries:
Our audits were made for the purpose of forming an opinion on the
basic consolidated financial statements as of December 31, 1997 and
1996 and for the years then ended taken as a whole. The schedule
listed in the index of financial statements as of December 31,
1997, 1996 and 1995 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 audits of the basic consolidated
financial statements as of December 31, 1997 and 1996 and for the
years 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. The statements as of December 31, 1995 and for the year
then ended, were audited by other auditors whose report dated March
31, 1996 (except for Notes 6, 7, and 13 as to which date is April
15, 1996), expressed and unqualified opinion on those statements.
Denver, Colorado ARTHUR ANDERSEN LLP
April 14, 1998
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.
Birmingham, Alabama COOPERS & LYBRAND L.L.P.
March 31, 1996, except for
Notes 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, 1997, 1996 and 1995
Balance At Additions Balance
Beginning Charged To Charged To At End of
Description Of Period Expense Assets Deductions Period
1997
Allowance
for
doubtful
accounts $ 735,307 $ 793,129 $ 0 $ (348,451) $1,179,985
Reserve for
contracts
commitments 87,766 668,351 0 (87,766) 668,351
Estimated
losses on
work in
process 1,286,669 59,336 0 0 1,346,005
Reserve for
obsolete
inventory 3,042,836 0 0 (67,928) 2,974,908
Reserve for
warranty
expense 858,856 0 0 (184,721) 674,135
Deferred
tax asset
valuation
allowance 7,015,274 16,127,650 0 0 23,142,924
Total $13,026,708 $17,648,466 $ 0 $ (688,866) $29,986,308
1996
Allowance
for
doubtful
accounts $ 426,150 $ 290,852 $ 18,305 $ 0 $ 735,307
Reserve for
contract
commitments 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
Reserve for
contract
commitments 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
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, 33-79676 and 333-30491) and on Form S-3 (File No. 333-33933)
of our report dated March 31, 1996, except for Note 6, Note 7 and
Note 13 as to which the date is April 15, 1996, on our audit of the
consolidated financial statements and financial statement schedules
of Precision Standard, Inc. as of December 31, 1995 and for the
year then ended, which report is included in this Annual Report on
Form 10-K.
Birmingham, Alabama COOPERS & LYBRAND L.L.P.
April 15, 1998
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, 1997 and 1996 and for the years 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 and 333-30491) and on Form S-3 (File No. 333-33933).
Denver, Colorado ARTHUR ANDERSEN LLP
April 14, 1998
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.
None.
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 1998
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 1998 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 1998 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
1998 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 Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity (Deficit)
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,
1997.
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 Specimen Certificate for Common Stock.
(4)
4.4 Second Amended and Restated Credit Agreement
between Precision Standard, Inc. and bank of America National Trust
and Savings Association entered into as of December 31, 1997. (7)
4.5 Second Amended and Restated senior Subordinated
Loan Agreement between Precision Standard, Inc. and bank of America
National Trust and Savings Association entered into as of December
31, 1997. (7)
4.6 Amended and Restated Warrant issued by
Precision Standard, Inc. to the Bank of America National Trust and
Savings Association entered into as of December 31, 1997. (7)
4.7 First Amendment to Second Amended and Restated
Senior Subordinated Loan Agreement between Precision Standard, Inc.
and Bank of America National Trust and Savings Association entered
into as of August 8, 1997. (9)
4.8 Account Receivable Management and Security
Agreement between Precision Standard, Inc. and BNY of the Americas
entered into as of August 8, 1997. (9)
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 Executive Employment Agreement between
the Company and Walter M. Moede effective June 1, 1993, as amended
March 11, 1994. (6)
10.10 Amended Executive Employment Agreement between
the Company and Matthew L. Gold effective June 1, 1993, as amended
March 11, 1994. (6)
10.11 Executive Employment Agreement between the
Company and C. Fredrik Groth effective June 1, 1993. (6)
10.12 Precision Standard, Inc. Nonqualified Stock
Option Plan. (8)
10.13 Precision Standard, Inc. Incentive Stock and
Appreciation Rights Plan. (8)
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 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.
(7) Filed as an exhibit to the Company's Annual Report on Form 10-
Q for the quarter ended March 3, 1997, and incorporated by
reference here in.
(8) Filed as an exhibit to the Company's Registration Statement on
Form S-3 dated July 1, 1997, and incorporated by reference
herein.
(9) Filed as an exhibit to the Company's Form 10-Q for the quarter
ended June 30, 1997, and incorporated by reference herein.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the Company has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PRECISION STANDARD, INC.
Dated: 4/15/98 By:/s/Matthew L. Gold
Matthew L. Gold, President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange
Act of 1934, this Report has been signed below by the following
persons on behalf of the Company and in the capacities and on the
dates indicated.
Signature Capacity Date
/s/Matthew L. Gold Chairman, President 4/15/98
Matthew L. Gold Chief Executive Officer
and Director
(Principal Executive Officer
and Principal Financial and
Accounting Officer)
/s/Donald C. Hannah Director 4/15/98
Donald C. Hannah
/s/George E. R. Kinnear II Director 4/15/98
George E. R. Kinnear II
/s/Thomas C. Richards Director 4/15/98
Thomas C. Richards
/s/J. Ben Shapiro, Jr. Director 4/15/98
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, 33-79676 and 333-30491) and on Form S-3 (File No. 333-33933)
of our report dated March 31, 1996, except for Note 6, Note 7 and
Note 13 as to which the date is April 15, 1996, on our audit of the
consolidated financial statements and financial statement schedules
of Precision Standard, Inc. as of December 31, 1995 and for the
year then ended, which report is included in this Annual Report on
Form 10-K.
Birmingham, Alabama COOPERS & LYBRAND L.L.P.
April 15, 1998
[CASH] 369,334
[SECURITIES] 0
[RECEIVABLES] 11,318,415
[ALLOWANCES] 1,179,985
[INVENTORY] 17,047,983
[CURRENT-ASSETS] 28,601,311
[PP&E] 30,124,679
[DEPRECIATION] 17,991,714
[TOTAL-ASSETS] 46,332,543
[CURRENT-LIABILITIES] 56,512,724
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 1,446
[OTHER-SE] 16,338,592
[TOTAL-LIABILITY-AND-EQUITY] 46,332,543
[SALES] 122,258,435
[TOTAL-REVENUES] 122,258,435
[CGS] 121,073,746
[TOTAL-COSTS] 144,465,059
[OTHER-EXPENSES] 405,711
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 1,529,538
[INCOME-PRETAX] (24,141,873)
[INCOME-TAX] 9,008,133
[INCOME-CONTINUING] (33,150,006)
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (33,150,006)
[EPS-PRIMARY] (2.30)
[EPS-DILUTED] (2.30)
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, 1997 and 1996 and for the years 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 and 333-30491) and on Form S-3 (File No. 333-33933).
Denver, Colorado ARTHUR ANDERSEN LLP
April 14, 1998
