SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the twelve months ended
December 31, 1999
Commission File No. 0-13829
PRECISION STANDARD, INC.
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Exact name of Company as specified in its Charter
Colorado 84-0985295
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State of other jurisdiction of I.R.S. Employer
incorporation or organization Identification No.
1943 North 50th Street
Birmingham, Alabama 35212
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Address of principal Zip Code
executive offices
Company's telephone number, including area code: 205-591-3009
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 par value
------------------------------
(Title of Class)
Indicate by check mark whether the Company (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Company was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
The aggregate market value of the Common Stock held by non-affiliates on
March 21, 2000 was approximately $26,169,020.
The number of shares of the Company's Common Stock outstanding as of March
21, 2000 was 3,978,811.
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, 1999) 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. Yes X No
FORM 10-K ANNUAL REPORT
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
PRECISION STANDARD. INC.
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PART I
Item 1. Business 1
Item 2. Properties 15
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 20
PART II
Item 5. Market for Company's Common Equity and Related
Stockholder Matters 21
Item 6. Selected Financial Data 21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data 32
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 74
PART III
Item 10. Directors and Executive Officers of the Company 74
Item 11. Executive Compensation 74
Item 12. Security Ownership of Certain Beneficial Owners and
Management 74
Item 13. Certain Relationships and Related Transactions 74
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 74
SIGNATURES 78
PART I
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ITEM 1. BUSINESS.
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A. GENERAL
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Precision Standard, Inc. (the "Company") is a diversified aviation and
aerospace company composed of three operating groups: Government Services,
Commercial Services, and Manufacturing and Overhaul.
The Company's primary business is providing aircraft maintenance and
modification services, including complete airframe inspection,
maintenance, repair and custom airframe design and modification. The
Company provides such services for government and military customers
through its Government Services Group, which specializes in providing
Programmed Depot Maintenance ("PDM") and Scheduled Depot Level Maintenance
("SDLM") on large transport aircraft and helicopters.
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 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 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.
B. SIGNIFICANT DEVELOPMENTS
------------------------
Contract Option Exercised by the U.S. Air Force for the KC-135
- --------------------------------------------------------------
In the fall of 1999, the U.S. Air Force exercised its options for the
sixth and seventh years of its seven year contract for the KC-135 aircraft
PDM. These options are for the government fiscal years beginning October
1, 1999 and October 1, 2000. This represents the first time in the
Company's history that the U.S. Air Force exercised two contract options
at the same time. At December 31, 1999, the Company had 45 KC-135 (PDM)
aircraft at its Birmingham, Alabama facility, up from 40 aircraft at
December 31, 1998.
Stevenson Verdict Reversed
- --------------------------
On September 17, 1999 the Alabama Supreme Court unanimously reversed the
November 3, 1997 verdict of a Jefferson County Alabama jury against the
Company's Pemco Aeroplex subsidiary. The November 3, 1997 verdict was in
the amount of $1 million compensatory and $3 million punitive damages, but
was subsequently reduced by post-trial motions to $1 million in
compensatory damages. The plaintiff filed a petition for a re-hearing.
The petition was denied by the Alabama Supreme Court on February 8, 2000.
(See Item 3. Legal Proceedings below.)
Settlement of Pemco World Air Services A/S Bankruptcy and Sterling Lawsuit
- ------------------------------------------------------------------
On March 28, 2000, the Company entered into a settlement agreement with
Sterling Airways A/S ("Sterling"), in bankruptcy trustees and Pemco World
Air Services A/S ("Pemco"), in bankruptcy trustees pursuant to which the
Company agreed to pay a total of $3.5 million by May 31, 2000 in
settlement of the Sterling litigation and all claims the Pemco trustees
may have against the Company under the undertakings. (See Item 3. Legal
Proceedings below.)
New Labor Agreement with the UAW
- --------------------------------
On December 19, 1999 the membership of the United Automobile, Aerospace,
and Agricultural Implement Workers of America (UAW) voted to ratify a new
five year contract with the Company's Pemco Aeroplex subsidiary. The
contract begins February 1, 2000 and extends through March 21, 2005. The
new contract represents an increase in term over the three-year term of
the previous contract. The new agreement calls for wage increases of
$0.40 per hour over the life of the contract and increases in Pension,
Life Insurance and Accidental Death and Dismemberment benefits.
Sale of Founders Stock
- ----------------------
On September 7, 1999 Matthew L. Gold, the Company's then President and
Chief Executive Officer who was also the founder and principal shareholder
of the Company, sold 1,000,000 shares of the Company's Common Stock,
representing approximately 25% of the Company's outstanding shares, to
Tennenbaum & Co., LLC, Mass Mutual Life Insurance Company, TMCT Ventures
LP and various other parties. In addition, Mr. Gold and Tennenbaum & Co.,
LLC jointly formed TCO/PSI, LLC into which Mr. Gold contributed his
remaining 1,026,908 shares representing an additional 26% of the Company's
outstanding shares. On this same date, two members of the Board of
Directors resigned from the Board, two new members were appointed, and Mr.
Gold stepped down as Chairman of the Board.
New President/CEO
- -----------------
On January 1, 2000 the Company elected Ronald A. Aramini as President and
Chief Executive Officer. Mr. Aramini brings extensive commercial airline
experience to the Company having served in executive positions within the
maintenance and operations organizations of two major air carriers and as
the President and Chief Executive Officer of two regional airlines.
Relocation of Company Headquarters
- ----------------------------------
On December 15, 1999 the Company relocated its headquarters from Denver,
Colorado to Birmingham, Alabama in order to move its corporate offices
closer to the Company's largest operations.
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 continue to be positive that the
third-party maintenance and modification industry will be the beneficiary
of these trends in the coming years.
In addition, the recent growth of E-Commerce layered on top of what was
already a rapid growth in air freight shipments should fuel an increase in
the demand for cargo aircraft, which in turn should result in increased
demand for cargo conversions in the next several years.
Military Maintenance and Modification Industry
- ----------------------------------------------
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 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.
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. Budget restrictions have limited
the U.S. Government's ability to replace substantial portions of its aging
transport fleets. The U.S. Government thus continues to utilize older
aircraft and these older aircraft require more service than newer
aircraft, which generates greater revenue for the military maintenance and
modification sector of the industry.
One of the Company's core competencies for 47 years has been military
aircraft maintenance and modification. Given projected market conditions,
this core competency positions the Company favorably to provide services
to its military customers and to participate in teaming arrangements with
public or private operators. However, bundling requirements may limit the
Company's ability to compete for new military contracts.
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% during that period. Boeing's World Air
Cargo Forecast estimates that the freighter fleet will nearly double in
the next ten 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. The commercial maintenance
industry is likely to grow in the upcoming years as airlines continue to
outsource their maintenance needs.
D. PRINCIPAL PRODUCTS AND SERVICES
-------------------------------
Aircraft Maintenance & 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. The principal services
performed are PDM, 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. While some of these
services are performed exclusively for either military or commercial
customers, the majority of the services are performed for both customer
groups.
The Company's competition for military aircraft maintenance contracts
includes Boeing Military Aircraft, Lockheed-Martin Aeromod, Raytheon-E
Systems, Chrysler Technologies and various military depots. The Company's
competition for outsourced commercial work in the United States consists
of the Tramco division of B.F. Goodrich, Dee Howard Company, Timco and
approximately ten 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. The Company's Victorville, California facility is strategically
located to provide service to carriers in the western sections of the U.S.
In addition, the Victorville facility offers an opportunity to provide
service to international carriers flying to the west coast.
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 transports such as the C-130 "Hercules" and refueling aircraft
such as the KC-135. Currently, the U.S. KC-135 tanker fleet is estimated
to include over 550 aircraft, and is projected to be in service through
2040. 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 to be
serviced for the duration of the program. In addition to the number of
aircraft originally contracted, the Armed Forces typically increase 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 intends to use its experience and expertise
to retain its existing contracts, 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. The aircraft is repainted at the completion of
the overhaul.
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 is 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 47 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 1994, the U.S. Air Force awarded the Company a new contract for
the PDM of its KC-135 aircraft consisting of one base year and six option
years. In September 1999, the KC-135 program was extended through fiscal
year 2001 by exercise of the fifth and sixth option years. The total
value of the contract over a seven year period, if fully funded, is
estimated to be over $422.7 million. The Company first performed PDM on
the KC-135 in 1968 and has since processed over 3,000 such aircraft.
On March 20, 1998, the U.S. Government released a request for proposal
(RFP) for the workload performed by the Sacramento Air Logistic Center,
including work related to its KC-135 aircraft. The Company's Pemco
Aeroplex subsidiary currently performs a portion of the programmed depot
maintenance of the KC-135 workload included in the RFP. On June 17, 1998,
the Company submitted a protest to the General Accounting Office ("GAO")
challenging the combination, or "bundling," of the KC-135 workload with
other unrelated workloads in the RFP. On September 25, 1998, the GAO
found in favor of the protest filed by Pemco. The GAO recommended that
the Air Force resolicit the contract to comply with the requirements of
federal laws and regulations, and awarded the Company its protest costs
and attorneys' fees.
Notwithstanding the GAO decision, the Air Force announced its award of the
bundled workload to Ogden Air Logistics Center on October 9, 1998, stating
that it was proceeding with the award. If the Air Force's action stands,
the KC-135 workload could be included in the contract awarded to Ogden ALC
upon expiration of the Company's contract. On October 13, 1998, Pemco
filed a complaint in U.S. District Court, Northern District of Alabama
against the Air Force seeking declaratory relief, an injunction, and an
order requiring the Air Force to comply with applicable federal laws as
recommended by the GAO. On October 5, 1999, the U.S. District Court
declined to grant relief to the Company. The Company appealed this
finding and the case is currently pending in the U.S. Court of Appeals for
the Eleventh Circuit. If the Company were to lose its appeal, resulting
in the loss of the KC-135 contract, which exceeds 48% of the Company's
revenues in 1999, it would likely have a material adverse effect on the
operations of the Company.
In addition to the KC-135 PDM maintenance contract, the Air Force also
awarded the Company a KC-135 battery system modification contract in
August 1995. As the Air Force continues to upgrade and modernize the KC-
135 fleet to ensure its viability through 2040, 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.
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 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 Company delivered two Navy
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 Company delivered two Navy SDLM H-3s and three
Egyptian H-3s in 1998, and five Egyptian H-3s in 1999.
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 is a more intensive inspection of the aircraft structure.
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 its particular
maintenance program approved by the FAA. A number of variables determine
the final form of a given program, including 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 addition to the tasks required in the "C" and "D" checks, additional
inspections are performed. These inspections include Supplemental
Structure Inspections ("SSI"), which are structural inspections focusing
on known problem areas and Corrosion Prevention and Control Programs
("CPCP"), which are inspections of known corrosion problems. These
additional inspections supplement and, in some cases, overlay the "C" and
"D" check tasks.
The Company also provides modification and integration services for its
commercial customers under its own or customer-provided Supplemental Type
Certificates ("STCs"), 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 Company's Dothan,
Alabama and Victorville, California facilities.
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 & Overhaul
- ------------------------
The Company, through its Manufacturing and Overhaul Group designs and
manufactures 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 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 complementary to the Company's aircraft
services businesses.
Space Vehicles and Support Systems
----------------------------------
The Company's Space Vector subsidiary maintains a research, development
and engineering staff dedicated to the design, 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. Department of
Defense programs. The Company also has prime contracts with NASA in
support of space science and performs 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. The Company, as a subcontractor, completed
its seventh successful flight under the HERA program in March 1997. During
the 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.
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 and prime contractors to the U.S. Government. 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 and certain 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. In 1996,
1997, 1998 and 1999 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 & 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 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
-------------
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 is provided by the Company's wholly owned subsidiary, Pemco
Air Support Services ("PASS"), which is 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.
Nacelle Overhaul & 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, which is located in Clearwater, Florida. There are
approximately five competitors in the United States and abroad.
E. RESEARCH AND DEVELOPMENT
------------------------
The Company charges directly to earnings the cost it incurs for company
sponsored research and development, which totaled $0.1 million in 1998 and
$0.9 million in 1997. The Company had no company sponsored research and
development in 1999. The research and development activities in 1998 were
principally in support of the Company's Target's programs, the assets of
which were sold in January 1998. The Company was not engaged in any
customer sponsored research and development efforts in 1997, 1998 or 1999.
F. SALES
-----
Foreign and Domestic Operations and Export Sales
- ------------------------------------------------
All of the Company's revenues during 1999 were generated in the United
States and all of the Company's assets were located in the United States.
However, approximately 6% of revenues in 1999 were generated from foreign
owned entities. 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 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. As a result of its bankruptcy, the
Danish subsidiary has been excluded from the Company's consolidated
financial statements effective January 1, 1997. (See Item 3. Legal
Proceedings below.)
During 1998 the Company maintained a sales office in France and had no
other foreign locations. In February 1999 the Company closed this sales
office. All sales activities are now conducted from U.S. 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, as well as its Aircraft Cargo
Systems division, also sell in export markets. The services and products
sold at the Company's U.S. locations are generally payable in U.S.
dollars. (See also notes to the accompanying financial statement.)
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:
<TABLE>
<CAPTION>
Product and Service Rendered 1999 1998 1997(1)
- ---------------------------- ---- ---- -------
<S> <C> <C> <C>
Aircraft Maintenance and Modification 85% 83% 77%
Supersonic and Subsonic Aerial Tow Targets
and Wing Tip Pods 0% <1% 3%
Space Vehicles and Support Systems 7% 7% 9%
Cargo Handling Systems 5% 6% 6%
Precision Springs and Components <1% 1% 1%
Parts Support and Component Overhauls <1% <1% 1%
Nacelle Overhaul and Repair 2% 2% 3%
---- ---- ----
Total 100% 100% 100%
==== ==== ====
Export Sales - Principally Europe 6% 11% 11%
</TABLE>
(1) Excludes the amounts related to the Company's Danish subsidiary. See
Notes to the Consolidated Financial Statements.
Major Customers
- ---------------
The following table presents the percentages of total sales for the
Company's largest customers for the last three fiscal years:
<TABLE>
<CAPTION>
Customer 1999 1998 1997(1)
- -------- ---- ---- -------
<S> <C> <C> <C>
U.S. Government - principally the Air Force,
Army, Navy, and NASA 63% 55% 61%
Northwest Airlines 12% 7% 1%
</TABLE>
G. BACKLOG
-------
The following table presents the Company's backlog (in thousands of
dollars) at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Customer Type 1999 1998(1)
- ------------- -------- --------
<S> <C> <C>
U.S. Government $169,172 $120,861
Commercial 17,560 30,983
-------- --------
Total $186,732 $151,844
======== ========
</TABLE>
(1) The Company has restated its 1998 backlog to exclude $35 million of
backlog pertaining to the Government's CTTS contract with the
Company's Space Vector operating unit. This contract qualifies the
Company to bid as one of a group of three qualified bidders on all
CTTS projects. The amount previously included as part of backlog
represented the Company's best estimate of the total amount that it
would receive under this bidding approach.
Government backlog, which represents 90.6% of the Company's total backlog,
increased from $120.9 million to $169.2 million during 1999, an increase
of $48.3 million. An increase in aircraft scheduled for PDM work under
the fourth and fifth option years of the Company's KC-135 contract
accounted for $64.4 million of this increase. The U.S. Government
delivered 20 aircraft in 1997, 35 aircraft in 1998, and 39 aircraft in
1999 under the contract. This large increase in the Company's government
backlog was offset by decreases in the backlog generated by Space Vector
and the Commercial Services Group. Space Vector's government backlog
decreased by $7.9 million primarily due to completion of its contracts
with SMC Kirkland AFB. The Commercial Services Group's government
backlog decreased $8.2 million under its H-3 helicopter contract due to
1999 deliveries.
The Company's commercial backlog at December 31, 1999 decreased 55.9% as
the Company made deliveries against existing backlog without producing the
requisite level of sales to adequately replenish the backlog. The Company
has taken steps in late 1999 and early 2000 to replace and strengthen the
sales and marketing activities of its non-government related groups.
The Company often derives an additional $0.40 in sales for each dollar
represented in its backlog. The backlog is based upon fixed prices for
specific scopes of work. In performing these scopes of work the Company
frequently discovers necessary repairs that are out of scope. These
additional repairs, which are approved by the customers before performing,
lead to these over and above time and material sales.
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 Government Furnished Material ("GFM"), the Company
experienced no significant shortages of raw material essential to its
business during 1999 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.
A significant portion of the equipment and components used by the Company
in the fulfillment of its services under U.S. 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
encountered late delivery of GFM in 1997, 1998 and 1999, and as a result,
experienced a disruption in scheduled workflow. (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,
McDonnell 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 or results of
operations.
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.
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 at the Birmingham, Alabama facility. The
report cited various violations of environmental laws. The Company has
taken action to correct the 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 disagreed with the citations
and contested the penalties.
On December 21, 1998 the Company and the EPA entered into a Consent
Agreement and Consent Order (CACO) resolving the complaint and compliance
order. As part of the CACO, the Company has agreed to assess a portion of
the Birmingham facility for possible contamination by certain
constituents, remediate such contamination as necessary, and pay a penalty
of $95,000 over a three year period.
In response to an inspection conducted by the EPA in June 1997, the
Company entered into informal discussions regarding alleged violations
under the Toxic Substances Control Act (TSCA) related to electrical
equipment containing PCBs at the Company's Birmingham, Alabama facility.
On October 5, 1998, the Company's Pemco Aeroplex subsidiary was served
with a complaint filed by the EPA regarding such alleged violations of
TSCA and seeking penalties of $144,000. No release to the environment was
alleged and all issues raised by the inspection were fully addressed. On
November 19, 1998, the Company and the EPA entered into a Consent
Agreement and Consent Order (CACO) resolving the complaint. Under the
CACO, the Company agreed to pay a penalty of $91,800 over a three year
period.
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
---------
On December 31, 1999, the Company employed 2,201 persons. Approximately
1,582 of these employees are covered under collective bargaining
agreements with the United Automobile, Aerospace, and Agricultural
Implement Workers of America ("UAW"), International Aerospace and
Machinists ("IAM"), and other unions. (See Significant Developments.)
ITEM 2. PROPERTIES.
- ---------------------
Following is a list of the Company's properties, all of which are
generally well maintained and in good operating condition.
Denver, Colorado
- ----------------
Until December 15, 1999 the Company had its executive offices in
approximately 2,500 square feet of leased space in Denver, Colorado.
Pemco World Air Services, an operating unit of the Commercial Services
Group, maintained offices at the same location for sales, marketing,
product support and engineering departments occupying approximately 7,500
square feet until July 1, 1999. The lease commenced April 4, 1998 and
expires April 30, 2003 with an option to renew at the prevailing market
rate for an additional five year term. On December 15, 1999 the Company
relocated its headquarters from Denver to Birmingham, Alabama. The move
was undertaken to locate the corporate offices closer to the Company's
largest operations. (See Significant Developments.) The Company is
currently marketing the Denver space for sub-lease and recorded a charge
for the remaining lease term in 1999.
Birmingham, Alabama
- -------------------
The Government Services Group, together with the Company's executive
offices (since December 15, 1999), are located at the Birmingham
International Airport, in Birmingham, Alabama. The Birmingham facility is
located on 192 acres of land with approximately 1.9 million square feet of
production and administrative floor space. The facility includes ten flow-
through bays 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 3.0 million
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 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 20-year period under the same terms
and conditions and will expire September 30, 2019.
Dothan, Alabama
- ---------------
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 2015.
Victorville, California
- -----------------------
The Victorville facility of the Commercial Services Group 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 4.0 million square feet of ramp space are capable
of handling any aircraft in operation without the restrictions found at
most California airports. The facility opened and received approval as an
FAA repair station on July 19, 1998.
Clearwater, Florida
- -------------------
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 two 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), an FAA Flight Service Station and a control tower.
The facility houses the Pemco Nacelle Services and PASS operating units
of the Manufacturing and Overhaul Group.
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.
Chatsworth, California
- ----------------------
Space Vector Corporation, part of the Manufacturing and Overhaul Group, 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 2000. The Company will continue to occupy this space on a month
to month basis.
Fountain Valley, California
- ---------------------------
The Manufacturing and Overhaul Group also leases a 3,900 square foot
research and development and administrative office in Fountain Valley,
California for Space Vector Corporation. Approximately 1,700 square feet
is subject to a lease which expires in October 2000; the remaining 2,200
square feet is leased on a monthly basis.
Corona, California
- ------------------
The Pemco Engineers operating unit of the Manufacturing and Overhaul Group
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 2002.
ITEM 3. LEGAL PROCEEDINGS
- ---------------------------
Government Lawsuits
On May 27, 1997 the United States Attorney filed a 3 count civil complaint
alleging a violation of the Civil False Claims Act, contract claims based
on theories of mistake of fact, and unjust enrichment. The alleged
violations pertain to C-130 Wings which were purchased by the Company from
the Government as scrap, of which some were subsequently refurbished and
sold. On September 3, 1997 the Company's motions to dismiss the case were
granted. On October 31, 1997 the United States filed an appeal to the
Eleventh Circuit Court which affirmed the lower court's dismissal of the
case. Although the government did not seek a rehearing, in July 1999 en
banc reconsideration was ordered by the Eleventh Circuit Court. In
November of 1999 the Eleventh Circuit reversed and reinstated part of the
case. Throughout the history of this matter the Company has cooperated
with the government investigators and attorneys and provided all necessary
and appropriate information. The Company believes that it is in
compliance with all government contract provisions and regulations.
On October 13, 1998, the Company filed a complaint in the U.S.
District Court, Northern District of Alabama seeking to compel the United
States Air Force to reopen for competition a KC-135 PDM contract awarded
to the McDonnell Douglas subsidiary of Boeing and to enforce the General
Accounting Office (GAO) decision in favor of the Company which stated that
the manner in which the contract was put up for bids violated the
Competition in Contracting Act by unduly restricting competition. On
October 5, 1999, the Court issued a summary judgment in favor of McDonnell
Douglas. The Company continues to believe that the GAO correctly decided
the issue, and plans to pursue its appeal rights.
GATX Lawsuit
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 the
result of this lawsuit will not have a material financial statement
impact.
Insurance Lawsuit
On May 1, 1998, the Company's Pemco Aeroplex subsidiary was served
with a complaint filed by National Union Fire Insurance Company, the
Company's current insurer, seeking a declaration that the policies issued
by such insurer between 1987 and 1996 are not required to provide defense
costs or indemnity payments with respect to the litigation arising out of
the STCs for Boeing 747 cargo conversions owned by GATX and others. The
complaint filed in U.S. District Court of the Northern District of
California, also names American International Airways, Inc., a plaintiff
in one of the underlying cases, as a defendant. On December 30, 1998
Pemco Aeroplex filed a motion to stay the action pending resolution of the
underlying cases. The motion was granted on May 26, 1999. National Union
Fire Insurance Company has not subsequently moved to lift the stay.
Pemco World Air Services A/S Bankruptcy and Sterling Lawsuit
In November 1997, the Maritime and Commercial Court in Copenhagen,
Denmark granted the request of a supplier to place the Company's Danish
subsidiary, Pemco World Air Services A/S, in bankruptcy. Trustees were
appointed to operate the Danish subsidiary's facility. On September 30,
1998, the Company received notice from the bankruptcy estate that the
trustees were asserting a claim in the amount of approximately $2 million
against the Company for the alleged negative equity of the Danish
subsidiary. The trustees based this claim on certain undertakings entered
into by the Company in favor of the Danish subsidiary in 1996 and 1997.
The trustees allege that pursuant to these undertakings the Company
guaranteed the obligations of the Danish subsidiary. The Company has been
subsequently informed that additional claims have been filed by creditors
against the bankruptcy estate and that the aggregate amount of claims
filed against the bankruptcy estate exceeds $15 million.
On October 9, 1998, the Company was served with a complaint filed by
Sterling Airways A/S in bankruptcy ("Sterling") in the District Court for
the City and County of Denver, Colorado alleging breach of contract. The
complaint alleges that the Company guaranteed certain payments for parts
and materials supplied by Sterling to the Danish subsidiary. The
complaint seeks damages of approximately $1.4 million plus costs and
interest. On November 2, 1998, the Company filed a motion to dismiss the
complaint which was denied by the court on January 13, 1999. On January
24, 2000, Sterling filed a motion for summary judgment on liability and
partial damages which was denied by the court on March 23, 2000.
On March 28, 2000, the Company entered into a settlement agreement
with Sterling and the Danish subsidiary's bankrupt trustees pursuant to
which the Company agreed to pay a total of $3.5 million by May 31, 2000 in
settlement of the Sterling litigation and all claims the trustees may have
against the Company under the undertakings. Of the $3.5 million
settlement amount, $2.25 million will be placed in an escrow account and
can only be released to the trustees upon their satisfaction of certain
conditions. These conditions include, among other things, that the
trustees must obtain release from all of the Danish subsidiary's unsecured
creditors asserting claims in excess of $100,000 on or before October 5,
2000. If the trustees are unable to obtain these releases or certain
other events occur, the Company may, at its option, terminate the
settlement agreement as to the Danish subsidiary's bankruptcy trustees and
obtain a refund of the $2.25 million held in the escrow account. In such
an event, the portion of the settlement payment not placed into the escrow
account ($1.25 million) would be applied to settle the Sterling litigation
and the Danish subsidiary's trustees and creditors would retain any and
all claims they may have against the Company. The Company would
vigorously defend any such claims and, in any event, intends to vigorously
defend any claim brought by creditors of the Danish subsidiary that do not
release their claims in connection with the settlement agreement.
Breach of Contract Lawsuit
In September 1999, the Company's Pemco Aeroplex subsidiary was served
with a complaint filed by Sun Country Airlines in the Superior Court of
the State of California for the County of San Bernardino, alleging various
claims including breach of contract and negligence relating to maintenance
services performed by the Company's Victorville operation on one of Sun
Country's aircraft. The complaint seeks damages in excess of $800,000.
Based on information currently available, the Company believes the
plaintiff's claims have no factual basis and will vigorously defend this
case.
Employment Lawsuits
On December 9, 1999 the Company and its Pemco Aeroplex subsidiary
were served with a purported class action in the U.S. District Court,
Northern District of Alabama seeking declaratory, injunctive relief and
other compensatory and punitive damages based upon alleged unlawful
employment practices of race discrimination and racial harassment by the
Company's managers, supervisors, and other employees. The complaint seeks
damages in the amount of $75 million. The Company has taken effective
remedial and corrective action, acted promptly in respect to any specific
complaint by any employee, and will vigorously defend this case.
The purported class action 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 Automobile, Aerospace, and
Agricultural Implement Workers of America (UAW) union employees who were
terminated upon settlement of such strike was dismissed in the third
quarter of 1999. However, a new action was filed by 28 individuals
shortly thereafter, which has since been joined by approximately 65 other
individuals. The Company filed for summary judgment on all claims on
February 20, 2000. The Company continues to believe the plaintiffs'
claims have no factual basis and will vigorously defend the case.
Various claims alleging employment discrimination, including race, sex,
age and disability, have been made against the Company and its subsidiary,
Pemco Aeroplex, 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 are
also pending in Alabama state court. The Company believes that no one of
these claims is material to the Company as a whole and that such claims
are more reflective of the general increase in employment-related
litigation in the U.S., and Alabama 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 from
these types of claims.
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.
Verdict Reversed
On September 17, 1999 the Alabama Supreme Court unanimously reversed
and rendered the November 3, 1997 verdict of a Jefferson County Alabama
jury against the Company's Pemco Aeroplex subsidiary. The November 3,
1997 verdict was in the amount of $1 million compensatory and $3 million
punitive damages, but was subsequently reduced by post-trial motions to $1
million in compensatory damages. The plaintiff filed a petition for a re-
hearing, which was denied on February 8, 2000.
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 1999.
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
- ---------------------------------------------------------------------
The Company's common stock trades on the Nasdaq Small Cap Market under the
symbol "PCSN." The following table sets forth the range of high and low
bid quotations for the common stock on a quarterly basis for each of the
last two fiscal years as reported on the Nasdaq Small Cap Market.
Quotations represent prices between dealers, do not include retail mark-
ups, mark-downs or commissions, and do not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
1999 Bid Quotation 1998 Bid Quotations
------------------ -------------------
Quarter Ended High Low High Low
- ------------- -------- ------ ------ ------
<S> <C> <C> <C> <C>
March 31 $5 $3-5/8 $3-3/4 $1-3/4
June 30 $5 $3-1/2 $5-1/2 $1-1/8
September 30 $10-1/8 $3-3/8 $5-3/8 $3-3/8
December 31 $12-7/16 $7-3/8 $6-1/4 $3
</TABLE>
On March 21, 2000, there were 3,978,811 shares of common stock issued and
outstanding held by 216 owners of record.
The Company has never paid cash dividends on its common stock and
currently intends to continue that policy indefinitely.
ITEM 6. SELECTED FINANCIAL DATA
- ---------------------------------
Consolidated operating data for the Company is as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
Year Year Year Year Year
Ended Ended Ended Ended Ended
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Sales $169,273 $141,770 $122,258 $130,858 $154,658
Income (loss) from
Operations 7,592 9,331 (22,207) (2,353) 2,583
Net Income (loss) 6,177 10,054 (33,150) (3,960) (3,811)
Net Income (loss) per
common share - diluted $1.52 $2.53 ($9.19) ($1.27) ($1.24)
</TABLE>
Consolidated balance sheet data for the Company is as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
Year Year Year Year Year
Ended Ended Ended Ended Ended
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Working Capital ($7,618) $3,286 ($27,911) $9,180 $22,122
Total Assets 57,403 49,469 46,333 59,274 80,971
Long Term Debt 4,168 21,824 0 11,104 25,787
Other Liabilities 3,023 3,063 6,157 5,178 10,790
Stockholders' Equity
(deficit) 138 (6,040) (16,337) 13,128 13,874
</TABLE>
(1) 1997 figures exclude amounts related to the Company's Danish
subsidiary. See Notes to the Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 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.
Twelve months ended December 31, 1999
- -------------------------------------
Versus twelve months ended December 31, 1998
- --------------------------------------------
Revenues for the year ended 1999 increased $27.5 million, 19.4%, from
$141.8 million in 1998 to $169.3 million in 1999. Government sales
increased 35.3% in 1999, from $78.4 million in 1998 to $106.2 in 1999.
Commercial sales decreased slightly during 1999, from $63.4 million in
1998 to $63.1 million in 1999.
The Company's mix of business between government and commercial customers
shifted from 45% commercial and 55% government in 1998 to 37% commercial
and 63% government in 1999.
The $27.8 million increase in government sales in 1999 was due primarily
to increased throughput under the KC-135 PDM contract of $26.6 million at
the Birmingham facility, additional deliveries on the H-3 helicopter
contract at the Dothan facility of $0.7 million, and additional sales on
the AIT II contract at the Company's Space Vector operating unit amounting
to $1.6 million. Other government contracts, primarily at the Birmingham
facility, combined for a net decrease of approximately $1.2 million from
1998.
Commercial aircraft maintenance and modification sales increased $2.0
million at the Commercial Services Group's operations in Dothan, Alabama
and Victorville, California due primarily to increases in maintenance
related revenues.
Commercial sales for 1999 decreased approximately $2.3 million at the
Manufacturing and Overhaul Group's Pemco Engineers, 1st Engineering, and
Pemco Nacelle operating units.
Cost of sales increased from $116.3 million in 1998 to $136.5 million in
1999. The gross profit percentage increased from 17.9% in 1998 to 19.4%
in 1999. During the year, the Company recorded the following cost of
sales charges: $1.3 million for Inventory and accounts receivable write-
offs relating to scaling back the Company's Pemco Nacelle operations, and
$1.1 million to write-off older commercial inventory at the Birmingham
facility.
Selling, general and administrative expenses increased from $15.6 million
in 1998 to $18.9 million in 1999. The expenses increased slightly during
the year as a percentage of sales from 11.0% in 1998 to 11.2% in 1999.
During 1999 the Company took bad debt charges amounting to $1.6 million
against income to reflect disputes with several customers over the payment
of invoices. The 1998 charge amounted to $0.1 million.
The Company took several large one-time liquidation and contingency
charges to fund provisions during 1999, including $1.6 million relating to
the former CEO/President's employment agreement, $2.7 million for various
potential litigation settlements, and $0.4 million related to relocating
the Company headquarters from Denver, Colorado to Birmingham, Alabama.
The 1999 liquidation and contingency charges total $4.7 million versus
$0.3 million in 1998.
Interest expense was $3.3 million in 1999 versus $3.4 million in 1998.
The effective average interest rate on the Company's revolving credit
facility was approximately 11.25% in 1998 and 12.0% in 1999. Interest
expense was favorably impacted by the forgiveness of $1.3 million of
interest by the Company's previous lender, Bank of America, $0.3 million
of which was recorded in 1997, $0.1 million in 1998, and $0.1 million in
1999. The balance of $0.2 million will be reflected as yield adjustment
through 2001.
The Company recorded other expense of $0.8 million in 1999 versus $2.4
million of other income in 1998. During 1998, the Company sold the net
assets of its Hayes Targets division in Leeds, Alabama. The 1998 other
income reflects the gain on the sale of Hayes Targets of $3.1 million,
offset by approximately $0.1 million of other operating expenses.
The Company recorded income tax benefits in 1999 and 1998 of $2.7 and $1.7
million, respectively. (See Notes to the Consolidated Financial
Statements)
Twelve months ended December 31, 1998
- -------------------------------------
Versus twelve months ended December 31, 1997
- --------------------------------------------
Revenues for the year ended 1998 increased approximately 15.9% from $122.3
million in 1997 to $141.8 million in 1998. Government sales increased
8.9% in 1998, from $72.0 million in 1997 to $78.4 in 1998. Commercial
sales increased 26.0% in 1998, from $50.3 million in 1997 to $63.4 million
in 1998.
If the Hayes Targets operating unit is eliminated from revenue in both
years the Company's remaining operating units would have increased
revenues 19.3% from $118.9 million in 1997 to $141.8 million in 1998.
Government sales would have increased 9.9% in 1998, from $71.3 million in
1997 to $78.4 in 1998. Commercial sales would have increased 33.5% in
1998, from $47.5 million in 1997 to $63.4 million in 1998.
The Company's mix of business between government and commercial customers
shifted from 41% commercial and 59% government in 1997 to 45% commercial
and 55% government in 1998. Removing Hayes Targets from the 1998 revenue
would not change the mix. Removing Hayes Targets in 1997 would shift the
mix by 1% with commercial decreasing and government increasing.
The $7.1 million increase in government sales in 1998 was due primarily to
increased throughput and deliveries on the H-3 helicopter contract at the
Dothan facility of $4.9 million, additional sales under the KC-135 PDM
contract of $1.3 million, and drop in work on C-130s, primarily paint and
strip, in the amount of $1.2 million. Other government contracts combined
for a net decrease of approximately $0.9 million from 1997 with the
decrease due principally to the Space Vector facility which decreased $1.1
million.
Commercial aircraft maintenance and modification sales increased $15.9
million at the Company's operations in Dothan, Alabama and Victorville,
California due primarily to increases in maintenance related revenues.
Commercial sales for 1998 increased $1.5 million at the Company's Pemco
Engineers division and decreased $1.2 million at Pemco Nacelle.
Cost of sales decreased from $121.1 million in 1997 to $116.3 million in
1998. The gross margin percentage increased from 1.0% in 1997 to 17.9% in
1998.
Selling, general and administrative expenses increased from $13.9 million
in 1997 to $15.6 million in 1998, but decreased as a percentage of sales
from 11.4% in 1997 to 11.0% in 1998.
Interest expense was $3.4 million in 1998 versus $1.5 million in 1997.
Interest for the year was impacted by a higher effective interest rate on
the Company's revolving credit facility and interest payments to vendors.
The effective average interest rate on the revolving credit facility was
approximately 10.0% in 1997 and 11.25% in 1998. Interest expense was
favorably impacted by the forgiveness of $1.3 million of interest by the
Company's previous lender, Bank of America, $0.6 million of which was
recorded in 1996, $0.3 million in 1997, and $0.1 million in 1998. The
balance of $0.3 million will be reflected as yield adjustment through
2001.
The Company recorded other income of $2.3 million in 1998 versus $0.4
million of other expense in 1997. The 1998 other income reflects a gain
on the sale of its Hayes Targets operating unit discussed above of $3.1
million, offset by approximately $0.1 million of other operating expenses.
The Company recorded a $1.7 million tax benefit in 1998 versus a $9.0
million income tax expense in 1997. (See Notes to the Consolidated
Financial Statements)
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company maintains a $20 million revolving credit facility, with GMAC
Commercial Credit LLC ("GMAC"), which matures in August of 2000. Borrowing
availability under the facility is tied to percentages of accounts
receivables and inventory and, as a result of certain subordination
provisions, cannot exceed $17 million. Interest on the 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.
The Company also maintains a Subordinated Credit Agreement with the
Special Value Bond Fund, LLC in the amount of $6.15 million. Interest on
the Subordinated Credit Agreement accrues at the rate of 13.5%. The
Subordinated Loan will be repaid over five installments commencing on
August 31, 2000, due each subsequent quarter through June 30, 2001.
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
December 31, 1999.
The Company is currently working with various lenders to replace and
increase the revolving credit facility that matures in August of 2000.
The Company anticipates performing leasehold improvements during 2000 to
its Birmingham, Alabama and Dothan, Alabama facilities to bring these
locations into compliance with requirements to bid new federal government
contracts. Costs for these improvements will be approximately $6.5
million and will be incurred over a two year period, with most of the
costs occurring in the first year. 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,
- -------------------------------------------------------------------------
1999, 1998 and 1997.
- --------------------
The Company generated net income of $6.2 million in 1999 versus $10.1
million in 1998 and a loss of $33.2 million in 1997. Cash generated from
operations amounted to $7.6 million in 1999 versus a use of cash amounting
to $2.1 million and $10.0 million in 1998 and 1997, respectively. In 1999
the Company used $5.0 million of cash related to increases in accounts
receivable compared to $8.4 million in 1998 and $2.2 million in 1997.
This $5.0 million relating to increases in accounts receivable is prior to
the non-cash set up of the reserve for bad debts previously discussed.
Net inventory, prior to the inventory write-offs discussed above,
increased $4.2 million in 1999. Net Inventory decreased $ 0.1 million in
1998 and $2.0 million in 1997. This 1999 increase in inventory is mostly
attributable to work on the Company's KC-135 contract. Progress payment
balances on U.S. Government contracts and net commercial customer deposits
were $20.4 million, $20.7 million and $17.5 million and work in process
was $31.9 million, $30.2 million and $26.7 million at December 31, 1999,
1998 and 1997, respectively. Progress payment balances and net customer
deposits as a percent of gross work in process for each of the three years
were 64%, 69% and 65%, respectively. The fluctuation in the percentages
relates mainly to the Company's U.S. Government aircraft maintenance
contracts.
Accounts payable and accrued expenses were $35.0 million in 1999, $29.2
million in 1998 and $31.7 million in 1997. Accounts payable and accrued
expenses increased in 1999 due to the provisions made by the Company as
described above. These increases were partially offset by efforts of the
Company to pay down its trade debt during 1999.
Capital improvements amounted to $3.1 million, $0.7 million, and $0.5
million in 1999, 1998 and 1997, respectively. Additionally, the Company
made principal payments to one of its lenders of $1.2 million and $6.0
million in 1998 and 1997, respectively. The Company also made payments of
$0.2 million, $0.1 million and $0.4 million on various capital leases in
1999, 1998 and 1997, respectively.
Summary of Unaudited Financial Data:
- ------------------------------------
Unaudited quarterly financial information is as follows (in $Thousands):
<TABLE>
<CAPTION>
Quarter Quarter Quarter Quarter
Ended Ended Ended Ended
3/31/99 6/30/99 9/30/99 12/31/99
------- ------- ------- --------
<S> <C> <C> <C> <C>
Net Sales $39,885 $39,718 $45,891 $43,779
Gross Profit 9,338 7,161 8,947 7,304
Net Income 1,950 2,829 1,787 (389)
Net Income per Share:
Basic $0.49 $0.71 $0.45 ($0.10)
Diluted $0.49 $0.70 $0.43 ($0.10)
</TABLE>
<TABLE>
<CAPTION>
Quarter Quarter Quarter Quarter
Ended Ended Ended Ended
3/31/99 6/30/99 9/30/99 12/31/99
------- ------- ------- --------
<S> <C> <C> <C> <C>
Net Sales $34,454 $39,219 $32,091 $36,004
Gross Profit 6,640 8,516 6,088 4,189
Net Income 4,538 2,782 1,519 1,215
Net Income per Share:
Basic $1.23 $0.73 $0.39 $0.30
Diluted $1.15 $0.71 $0.38 $0.29
</TABLE>
CONTINGENCIES
- -------------
A material adverse effect on the Company's financial position and
liquidity could result if the Company is not successful in its defense of
its legal proceedings. (See discussion under Item 3. Legal Proceedings.)
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.
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.
On June 17, 1998, the Company submitted a protest to the General
Accounting Office ("GAO") challenging the combination, or "bundling," of
the KC-135 workload with other unrelated workloads in the RFP. On
September 25, 1998, the GAO found in favor of the protest filed by Pemco.
The GAO recommended that the Air Force resolicit the contract to comply
with the requirements of federal laws and regulations, and awarded the
Company its protest costs and attorneys' fees.
Notwithstanding the GAO decision, the Air Force announced its award of the
bundled workload to Ogden Air Logistics Center on October 9, 1998, stating
that it was proceeding with the award. If the Air Force's action stands,
the KC-135 workload could be included in the contract awarded to Ogden ALC
upon expiration of the Company's contract. On October 13, 1998, Pemco
filed a complaint in the U.S. District Court, Northern District of Alabama
against the Air Force seeking declaratory relief, an injunction, and an
order requiring the Air force to comply with applicable federal laws as
recommended by the GAO. On October 5, 1999, the U.S. District Court
declined to grant relief to the Company. The Company appealed this
finding and the case is currently pending in the U.S. Court of Appeals for
the Eleventh Circuit. If the Company were to lose its appeal, resulting
in the loss of the KC-135 contract, which exceeds 48% of the Company's
revenues in 1999, it would likely have a material adverse effect on the
operations of the Company.
New Accounting Pronouncement
- ----------------------------
The American Institute of Certified Public Accounts ('AICPA') issued
('SOP') 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR
OBTAINED FOR INTERNAL USE. This statement requires capitalization of
external direct costs of materials and services; payroll and payroll-
related costs for employees directly associated; and interests costs
during development of computer software for internal use (planning and
preliminary costs should be expense). Also, capitalized costs of computer
software developed or obtained for internal use should be amortized on a
straight-line basis unless another systematic and rational basis is more
representative of the software's use. The Company adopted this statement
during 1999, the impact of which did not have a material effect on the
consolidated financial statements.
FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
- ------------------------------------------
You should carefully consider the following risk factors in your
evaluation of the Company. Any of these risks could cause material harm
to the Company's business and impair the value of its common stock.
The Company is Heavily Dependent on U.S. Government Contracts.
- --------------------------------------------------------------
Approximately 63% of the Company's revenues in 1999 were derived from U.S.
Government contracts. U.S. Government contracts expose the Company to a
number of risks, including:
o unpredictable contract or project terminations,
o reductions in government funds available for the Company's projects
due to government policy changes, budget cuts and contract
adjustments,
o disruptions in scheduled workflow due to untimely delivery of
equipment and components necessary to perform government contracts,
o penalties arising from post award contract audits, and
o cost audits in which the value of the Company's contracts may be
reduced.
In addition, substantially all of the Company's government backlog
scheduled for delivery can be terminated at the convenience of the U.S.
Government since orders are often placed well before delivery, and the
Company's contracts typically provide that orders may be terminated with
limited or no penalties. If the Company is unable to address any of the
above risks, the Company's business could be materially harmed and the
value of its common stock could be impaired.
A Significant Portion of the Company's Revenue is Derived From a Few of
its Contracts.
- -------------------------------------------------------------------------
A small number of the Company's contracts account for a significant
percentage of its revenues. In 1999, the Company's largest revenue
producing contract was its KC-135 aircraft contract, which generated
approximately 48% of the Company's revenues. The Company's two largest
contracts generated approximately 60% of its revenues in 1999.
Termination or a disruption of any of these contracts, or the inability of
the Company to renew or replace any of these contracts when they expire,
could materially harm the Company's business and impair the value of its
common stock.
Bundling of U.S. Government Contracts Could Materially Harm the Company's
Business.
- -------------------------------------------------------------------------
Beginning in 1997, Congress began including provisions in appropriations
bills that require the "bundling" of contracts. Bundling refers to the
practice of combining a number of U.S. Government contracts into one
contract, which forces smaller companies, such as the Company, to team
with one or more operators to provide a bid for the bundled contract. The
Company is exposed to a number of risks from bundling, including:
o the inability to bid on contracts independently,
o the potential inability to locate suitable operators with which to
successfully team, and
o the potential inability to team with other operators on favorable
terms.
This same appropriations legislation allows private contractors to team
with military contractors to bid on bundled contracts and also allows
military contractors to bid on these contracts directly. Consequently,
the Company faces additional competition from military contractors. For
example, in March 1998, the C-130 PDM solicitation was cancelled and the
work was taken in house by the military.
On March 20, 1998 the U.S. Government determined that the services that
the Company currently provides under its KC-135 contract would be bundled
with other unrelated work after the expiration of the Company's current KC-
135 contract. The Company derived 48% of its revenues from this contract
in 1999. The Company has since challenged the bundling of this contract
and on September 25, 1998 the General Accounting Office found in favor of
the Company. Nonetheless, the U.S. Air Force elected o award the bundled
contract to another entity. On October 13, 1998 the Company filed a
complaint in U.S. District Court against the U.S. Air Force seeking an
order requiring the U.S. Air Force to comply with the previous finding in
favor of the Company. On October 5, 1999, the U.S. District Court
declined to grant relief to the Company. The Company appealed this
finding and the case is currently pending in the United States Court of
Appeals for the Eleventh Circuit. If the Company does not prevail in its
appeal and is precluded from obtaining work under its KC-135 contract or
other contracts, it could materially harm the Company's business and
impair the value of its common stock.
The Company's Markets are Highly Competitive and Many of its Competitors
Have Greater Resources than the Company.
- -------------------------------------------------------------------------
The aircraft maintenance and modification services industry is highly
competitive, and the Company expects that the competition in this industry
will continue to intensify. Many of the Company's competitors are larger
and more established companies with significant competitive advantages,
including greater financial resources and greater name recognition. In
addition, the Company is facing increased competition from entities
located outside of the United States, and entities that are affiliated
with commercial airlines. The Company's competition for military aircraft
maintenance includes Boeing Military Aircraft, Lockheed-Martin Aeromod,
Raytheon E-Systems and various military depots, and the Company's
competition for outsourced commercial aircraft maintenance includes the
Tramco division of B.F. Goodrich, Dee Howard Company and Timco. If the
Company is unable to compete effectively against any of these entities it
could materially harm the Company's business and impair the value of its
common stock.
The Company is a Party to Legal Proceedings that Could be Costly to
Resolve.
- -------------------------------------------------------------------------
The Company may be exposed to legal claims relating to the services it
provides. The Company is currently a party to several legal proceedings,
including an alleged violation of the False Claims Act, breach of contract
claims and claims based on the Company's employment practices. While the
Company maintains insurance covering many risks from its business, the
insurance may not cover all relevant claims or may not provide sufficient
coverage. If the Company's insurance coverage does not cover all costs
resulting from these claims, it could materially harm the Company's
business and impair the value of its common stock.
The Company Could Incur Significant Costs and Expenses Related to
Environmental Problems.
- -------------------------------------------------------------------------
Various federal, state and local laws and regulations require property
owners or operators to pay for the costs of removal or remediation of
hazardous or toxic substances located on a property. For example, there
are stringent legal requirements applicable to the stripping, cleaning and
painting of aircraft. The Company has previously paid penalties to the
Environmental Protection Agency for the violation of these laws and
regulations. While the Company is not currently aware of any other
necessary environmental remediation or other environmental liability on
the properties it operates, it may be required to pay additional penalties
in the future. These laws and regulations also impose liability on
persons who arrange for the disposal or treatment of hazardous or toxic
substances at another location for the costs of removal or remediation of
these hazardous substances at the disposal or treatment facility.
Further, these laws and regulations often impose liability regardless of
whether the entity arranging for the disposal ever owned or operated the
disposal facility. As operators of properties and as potential arrangers
for hazardous substance disposal, the Company may be liable under the laws
and regulations for removal or remediation costs, governmental penalties,
property damage and related expenses. Payment of any of these costs and
expenses could materially harm the Company's business and impair the value
of its common stock.
The Company May Not be Able to Hire and Retain a Sufficient Number of
Qualified Employees.
- -------------------------------------------------------------------------
The Company's success and growth will depend on its ability to continue to
attract and retain skilled personnel. Competition for qualified personnel
in the aircraft maintenance and modification services industry is intense.
Any failure to attract and retain qualified personnel could materially
harm the Company's business and impair the value of its common stock.
The Company May Need Additional Financing to Maintain its Business.
- -------------------------------------------------------------------------
The Company's growth strategy requires continued access to capital. From
time to time, the Company may require additional financing to enable it
to:
o finance unanticipated working capital requirements,
o develop or enhance existing services,
o respond to competitive pressures, or
o acquire complementary businesses.
The Company cannot assure you that, if it needs to raise additional funds,
such funds will be available on favorable terms, or at all. If the
Company cannot raise adequate funds on acceptable terms, its business
could be materially harmed and the value of its common stock impaired.
Failure to Introduce New Services in Response to Technological Advances
and Evolving Industry Standards Could Materially Harm the Company's
Business.
- -------------------------------------------------------------------------
The aircraft maintenance and modification services industry is
characterized by evolving industry standards and changing customer
requirements. The introduction of new aircraft embodying new technologies
and the emergence of new industry standards could render the Company's
existing services obsolete and cause the Company to incur significant
development and labor costs. Failure to introduce new services and
enhancements to the Company's existing services in response to changing
market conditions or customer requirements could materially harm the
Company's business and impair the value of its common stock.
Insiders Have Substantial Control Over the Company and Can Significantly
Influence Matters Requiring Shareholder Approval.
- -------------------------------------------------------------------------
As of December 31, 1999, the Company's executive officers, directors and
their affiliates, in the aggregate, beneficially owned approximately 42%
of the Company's outstanding common stock. As a result, these
shareholders are able to significantly influence all matters requiring
approval by the Company's shareholders, including the election of
directors and the approval of mergers or other business combination
transactions. Accordingly, these shareholders may make business decisions
that materially harm the Company's business and impair the value of its
common stock.
The Company's Forward Looking Statements May Prove to be Wrong.
- ---------------------------------------------------------------
Some of the information under the captions "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and elsewhere in this Annual Report are forward-looking statements. These
forward-looking statements include, but are not limited to, statements
about the Company's plans, objectives, expectations and intentions, award
of contracts, the outcome of pending or future litigation, estimates of
backlog and other statements contained in this Annual Report that are not
historical facts. When used in this Annual Report, the words "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates" and
similar expressions are generally intended to identify forward-looking
statements. Because these forward-looking statements involve risks and
uncertainties, there are important factors, including the factors
discussed in this section of the Annual Report, that could cause actual
results to differ materially from those expressed or implied by these
forward-looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
The Company is exposed to market risk from changes in interest rates as
part of its normal operations. The Company maintains various debt
instruments to finance its business operations. The debt consists of
fixed and variable rate debt. The variable rate debt is related to the
Company's revolving line of credit as noted in Note 7 to the Consolidated
Financial Statements and bears interest at prime plus 1.5% (12.0% at
December 31, 1999). If the prime rate increased 100 basis points, the
effect on net income would approximate a $125,000 reduction in net income.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY 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, 1999 and 1998 and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for each of the three years
in the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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, 1999 and 1998 and the
consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States.
Birmingham, Alabama ARTHUR ANDERSEN LLP
March 13, 2000 (except
for certain matters
discussed in Note 11
as to which the date
is March 28, 2000)
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
ASSETS
(In Thousands)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 527 $ 193
Accounts receivable, net 21,131 17,434
Inventories 17,035 15,286
Deferred income taxes 3,000 0
Prepaid expenses and other 763 995
------- -------
Total current assets 42,456 33,908
------- -------
Property, plant and equipment at cost:
Leasehold improvements 12,634 11,242
Machinery and equipment 19,780 18,656
------- -------
32,414 29,898
Less accumulated depreciation (20,858) (19,252)
------- -------
Net property, plant, and equipment 11,556 10,646
------- -------
Other non-current assets:
Prepaid pension costs 1,780 2,888
Deposits and other 1,386 1,274
Intangible assets, net 225 483
Related party receivable 0 270
------- -------
3,391 4,915
------- -------
Total assets $57,403 $49,469
======= =======
</TABLE>
The accompanying notes are an integral part
of these consolidated balance sheets.
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
(In Thousands)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Current liabilities:
Current portion of long term debt $15,104 $1,454
Accounts payable 6,075 9,596
Accrued liabilities - payroll related 7,471 8,056
Accrued liabilities - other 21,424 11,516
------- -------
Total current liabilities 50,074 30,622
------- -------
Long-term debt 4,168 21,824
Other long-term liabilities 3,023 3,063
------- -------
Total liabilities 57,265 55,509
------- -------
Commitments and contingencies
(see Notes 11 and 13)
Stockholders' equity (deficit):
Common stock, $.0001 par value,
300,000,000 shares authorized,
3,978,137 issued and outstanding
at December 31, 1999 and
3,977,721 issued and outstanding
at December 31, 1998 1 1
Additional paid-in capital 4,769 4,768
Accumulated deficit (4,632) (10,809)
------- -------
Total stockholders' equity (deficit) 138 (6,040)
------- -------
Total liabilities and stockholders'
equity (deficit ) $57,403 $49,469
======= =======
</TABLE>
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, 1999, 1998 and 1997
(In Thousands Except Income (Loss) per Common Share Information)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales $169,273 $141,770 $122,258
Cost of sales 136,523 116,337 121,074
-------- -------- --------
Gross profit 32,750 25,433 1,184
Selling, general, and
administrative expenses 18,889 15,641 13,894
Restructuring and other
charges 0 0 6,927
Bad debt expense 1,586 58 0
Litigation and contingency provisions 4,683 278 1,624
Research and development expense 0 125 946
-------- -------- --------
Income (loss) from operations 7,592 9,331 (22,207)
Other (income) expense:
Interest 3,266 3,368 1,530
Other, net 825 (2,399) 405
-------- -------- --------
Income (loss) before income taxes 3,501 8,362 (24,142)
Provision (benefit) for income taxes (2,676) (1,692) 9,008
-------- -------- --------
Net income (loss) $6,177 $10,054 $(33,150)
======== ======== ========
Net income (loss) per common share:
Basic $1.55 $2.65 $(9.19)
Diluted $1.52 $2.53 $(9.19)
Weighted average common shares outstanding:
Basic 3,978 3,801 3,608
Diluted 4,061 3,980 3,608
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
for the years ended December 31, 1999, 1998 and 1997
(Dollars and shares in thousands)
<TABLE>
<CAPTION>
Common Additional Retained
Stock Paid-in Earnings
Shares Capital (Deficit)
------ ---------- ----------
<S> <C> <C> <C>
Balance, December 31, 1996 3,131 $4,600 $12,287
Exercise of stock options 20 0 0
Issuance of Shares for warrants 464 164 0
Minimum pension liability
adjustment 0 0 0
Foreign currency
translation adjustment 0 0 0
Net loss 0 0 (33,150)
Comprehensive loss 0 0 0
-------- -------- --------
Balance, December 31, 1997 3,615 4,764 (20,863)
Exercise of stock options 2 4 0
Issuance of shares for warrants 361 0 0
Foreign currency
translation adjustment 0 0 0
Net income 0 0 10,054
Comprehensive income 0 0 0
-------- -------- --------
Balance, December 31, 1998 3,978 4,768 (10,809)
Exercise of stock options 0 1 0
Net Income 0 0 6,177
Comprehensive income 0 0 0
-------- -------- --------
Balance, December 31, 1999 3,978 $ 4,769 $(4,632)
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Minimum Other Compre-
Pension Comprehensive hensive
Liability Income Income
Adjustment (Loss) (Loss)
----------- ------------- --------
<S> <C> <C> <C>
Balance, December 31, 1996 $(3,920) $160
Exercise of stock options 0 0
Issuance of Shares for warrants 0 0
Minimum pension liability
adjustment 3,920 0 $3,920
Foreign currency
translation adjustment 0 (399) (399)
Net loss 0 0 (33,150)
--------
Comprehensive loss 0 0 $(29,629)
-------- -------- ========
Balance, December 31, 1997 0 (239)
Exercise of stock options 0 0
Issuance of shares for warrants 0 0
Foreign currency
translation adjustment 0 230 $239
Net income 0 0 10,054
--------
Comprehensive income 0 0 $10,293
-------- -------- ========
Balance, December 31, 1998 0 0
Exercise of stock options 0 0
Net Income 0 0 $6,177
--------
Comprehensive income 0 0 $6,177
-------- -------- ========
Balance, December 31, 1999 $0 $0
======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated statements.
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1999, 1998 and 1997
(In Thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss) $6,177 $10,054 $(33,150)
-------- -------- --------
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and amortization 2,637 2,396 2,516
Provision (benefit) for deferred
income taxes (3,000) (2,525) 8,865
Restructuring and other charges 0 0 6,927
Litigation and environmental
contingencies 4,683 278 1,624
Pension cost in excess of funding 1,108 1,218 1,404
Provision for losses on receivables 1,268 294 793
Provision for reduction in
inventory valuation 2,388 0 0
Provision for losses on
contracts-in-process 16 1,657 728
Interest expense - warrants 0 0 164
Gain on sale of division 0 (3,120) 0
Changes in assets and liabilities:
Related party receivable 270 0 0
Accounts receivable, trade (4,965) (8,381) (2,197)
Inventories (4,153) 134 1,950
Prepaid expenses and other 232 (38) (152)
Deposits and other (152) (794) 0
Accounts payable and accrued
liabilities 1,119 (3,280) 540
-------- -------- --------
Total adjustments 1,451 (12,161) 23,162
-------- -------- --------
Net cash provided by (used in)
operating activities 7,628 (2,107) (9,988)
-------- -------- --------
Cash flows from investing
activities:
Proceeds from sale of division 0 4,790 0
Capital expenditures (3,049) (746) (496)
-------- -------- --------
Net cash provided by (used in)
investing activities (3,049) 4,044 (496)
-------- -------- --------
Cash flows from financing
activities:
Proceeds from exercise of stock
options 1 4 0
Payment of debt issuance costs (240) 0 (720)
Net borrowings (repayments)
under revolving credit facility (3,769) (879) 16,427
Principal payments under
long-term borrowings (237) (1,238) (6,037)
-------- -------- --------
Net cash provided by (used in)
financing activities (4,245) (2,113) 9,670
-------- -------- --------
Net increase (decrease) in cash
and cash equivalents 334 (176) (814)
Cash and cash equivalents,
beginning of year 193 369 1,183
-------- -------- --------
Cash and cash equivalents,
end of year $527 $193 $369
======== ======== ========
Supplemental disclosure of
cash flow information:
Cash paid during the year for:
Interest $2,291 $3,425 $1,777
Income taxes $380 $316 $29
Supplemental disclosure of non-cash
investing and financing activities:
Capital lease obligations
incurred $504 $126 $950
Conversion of accounts payable
to debt $0 $484 $0
Forgiveness of debt for land $0 $70 $0
Conversion of capital lease
to debt $950 $0 $0
</TABLE>
The accompanying notes are an integral part
of these consolidated statements.
PRECISION STANDARD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - Precision Standard, Inc. (the "Company") is a diversified
aviation and aerospace company composed of three operating groups:
Government Services, Commercial Services, and Manufacturing and
Overhaul.
The Company's primary business is providing aircraft maintenance and
modification services, including complete airframe inspection,
maintenance, repair and custom airframe design and modification. The
Company provides such services for government and military customers
through its Government Services Group, which specializes in providing
Programmed Depot Maintenance ("PDM") and Scheduled Depot Level
Maintenance ("SDLM") on large transport aircraft and helicopters.
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
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 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.
On January 29, 1998, the Company sold its Hayes Targets Division
which designed, developed and manufactured aerial target systems.
(See Note 17)
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 financial
statements as a result of a Danish court's decision to grant a
supplier's request to place it involuntary bankruptcy. (See Note 11)
RESTRUCTURING AND OTHER CHARGES - During 1997, the Company
implemented a strategic restructuring plan to increase its liquidity
and return to profitability. As part of this plan, the Company
engaged a financial advisor to explore strategic alternatives, which
included an evaluation of the sale of one or more of its operating
units, ceased funding of its Danish facility upon it being placed in
involuntary bankruptcy and 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 in 1997. Further, in 1997 the Company
recognized losses incurred on its Danish subsidiary primarily related
to funding made subsequent to deconsolidation of $2.6 million.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles in the
United States 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.
CONTRACT ACCOUNTING - The Company recognizes revenue on aircraft
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.
Additionally, under certain contracts the Company negotiated cost
sharing provisions which cause the contracting parties to share cost
differences associated with target margins on the contracts. At
December 31, 1999 the Company has accrued approximately $4.0 million
representing cost sharing payable to the parties.
PROGRAM ACCOUNTING - 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. (See Note 4)
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 (in the case of
leasehold improvements, the useful life is the shorter of the lease
period or the economic life of the improvements):
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 $2,139,435, $2,137,169, and
$2,397,161 for the years ended December 31, 1999, 1998, and 1997,
respectively.
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
anticipated 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, 1999 and 1998. 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.
STOCK OPTIONS - The Company uses the intrinsic value method for stock
option grants under which no compensation is recognized for options
granted at or above the fair market value of the underlying stock on
the grant date. (See Note 9.)
NEW ACCOUNTING PRONOUNCEMENT - The American Institute of Certified
Public Accounts ("AICPA") issued Statement of Position ('SOP') 98-1,
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED
FOR INTERNAL USE. This statement requires capitalization of external
direct costs of materials and services; payroll and payroll-related
costs for employees directly associated; and interest costs during
development of computer software for internal use (planning and
preliminary costs should be expensed). Also, capitalized costs of
computer software developed or obtained for internal use should be
amortized on a straight-line basis unless another systematic and
rational basis is more representative of the software's use. The
Company adopted this statement during 1999, the impact of which did
not have a material effect on the consolidated financial statements.
RECLASSIFICATIONS - Certain amounts in the 1998 and 1997 consolidated
financial statements have been reclassified to conform to the 1999
presentation.
2. NET INCOME (LOSS) PER COMMON SHARE - The following table represents
the reconciliation of the number of weighted average shares
outstanding basic to the number of weighted average shares
outstanding diluted:
(in Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
Net Per Share
For the Year Ended December 31, 1999 Income Shares Amount
------------------------------------ -------- -------- ---------
<S> <C> <C> <C>
Basic earnings per share $6,177 3,978 $1.55
Dilutive securities - 83 .03
------- ------- -------
Diluted earnings per share $6,177 4,061 $1.52
======= ======= =======
Net Per Share
For the Year Ended December 31, 1998 Income Shares Amount
------------------------------------ -------- -------- ---------
Basic earnings per share $10,054 3,801 $2.65
Dilutive securities - 179 .12
------- ------- -------
Diluted earnings per share $10,054 3,980 $2.53
======= ======= =======
</TABLE>
Options/warrants to purchase 232,390, 578,843, and 861,197 shares of
common stock related to 1999, 1998, and 1997, respectively, were
excluded from the computation of diluted income (loss) per share
because the option exercise price was greater than the average market
price of the shares. There were no warrants outstanding at December
31, 1999 or 1998.
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net as of December 31, 1999 and 1998 consist of
the following:
(In Thousands)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
U.S. Government:
Amounts billed $6,021 $5,419
Recoverable costs and
accrued profit on progress
completed - not billed 7,715 4,551
Commercial Customers:
Amounts billed 6,855 8,080
Recoverable costs and
accrued profit on progress
completed - not billed 1,562 48
------- -------
22,153 18,098
Less allowance for
doubtful accounts (1,022) (664)
------- -------
Accounts receivable, net $21,131 $17,434
======= =======
</TABLE>
Recoverable costs and accrued profit not billed consist principally
of amounts of revenue recognized on contracts, for which billings had
not been presented to the contract owners because the amounts were
not billable at December 31, 1999 and 1998.
4. INVENTORIES
Inventories as of December 31, 1999 and 1998 consist of the
following:
(In Thousands)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Work in process $31,335 $30,185
Finished goods 3,365 3,324
Raw materials and supplies 2,704 2,968
Total 37,404 36,477
Less progress payments and
customer deposits (20,369) (20,708)
Less allowance for estimated
losses on work in process
(Note 7) 0 (483)
------- -------
$17,035 $15,286
======= =======
</TABLE>
A portion of the above inventory balances relates to U.S. Government
contracts. The Company receives progress payments on the majority of
its government contracts. The title to all inventory on which the
Company receives these payments is vested in the government to the
extent of the progress payment balance.
Included in work in process are $1,207,183 and $1,776,854 of deferred
production, initial tooling, and related nonrecurring costs
(collectively referred to as deferred costs) at December 31, 1999 and
1998, respectively. These costs are related primarily to the
Company's 727 and 737 conversion programs. The recovery of these
deferred costs is dependent on the number of conversions performed
and actual contract prices. 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.
At December 31, 1996, approximately $3,000,000 was deferred and
included in work in process. Such deferred costs 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 the anticipated units under the program.
During 1997, $3,687,743 in deferred costs associated with this
program were written off to cost of sales because the principal
customer under this program did not exercise its option for the
additional ships.
The amount of general and administrative costs remaining in
inventories at December 31, 1999 and 1998 amounted to $2,636,663 and
$1,864,401, 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.
5. LONG -TERM DEBT
Long-Term Debt as of December 31, 1999 and 1998 consists of the
following:
(In Thousands)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Revolving credit facility $11,779 $15,548
Senior Subordinated Loan;
interest at 13.5% 6,150 6,150
Other obligations: interest from
6% to 18%, collateralized by security
interest in certain equipment 1,343 1,580
------- -------
Total long-term debt 19,272 23,278
Less portion reflected as current 15,104 1,454
------- -------
Long term-debt, net of current portion $4,168 $21,824
======= =======
</TABLE>
The Company maintains a $20 million revolving credit facility which
matures in August of 2000. Borrowing availability under the facility
is tied to percentages of accounts receivables and inventory and, as
a result of certain subordination provisions, cannot exceed $17
million. There was $3.7 million available under the credit facility
at December 31, 1999, based on the calculation which defines the
borrowing base. Interest rates on the revolving credit facility were
12.00% and 11.25% at December 31, 1999 and 1998, respectively.
Interest on the 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.
The Senior Subordinated loan is to be repaid over five quarterly
installments commencing on August 31, 2000. (See Note 12).
Schedule of debt maturing over the next five years at December 31:
(In Thousands)
2000 $15,104
2001 3,956
2002 122
2003 89
Thereafter 1
$19,272
=======
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 net worth
and capital expenditures made during 1999, the Company was in
violation of such covenants at December 31, 1999. However, the
Company's primary lender waived the financial debt covenant
violations at December 31, 1999.
6. 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 1,053,938 shares of common stock at an exercise
price of $.96 per share. The agreement, as amended, stated that the
warrant shall be redeemed on a net basis 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 could be made in cash or
stock at the option of the Company. Additionally, if the redemptions
were 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 36,858 shares
of Company common stock on December 31, 1997, the date on which the
Company issued 427,479 shares of common stock for the August 31, 1997
and October 31, 1997 redemptions. During 1998, the Company redeemed
the remaining warrants on the applicable redemption dates by issuing
approximately 360,000 shares of common stock.
7. 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 allowances for estimated losses on contracts in process as of
December 31, 1999 and 1998 amounted to $380,200 and $1,657,137,
respectively. Of these amounts at December 31, 1999 and 1998, $0 and
$482,761, respectively, are reflected as reductions of work in
process inventory. See Note 4. The remaining amounts at December
31, 1999 and 1998 of $380,200 and $1,174,376, respectively, related
to commitments to fulfill loss contracts at December 31, 1999 and
1998.
During 1999, 1998, and 1997, provisions for estimated losses on
contracts in process in the amounts of $15,583, $1,346,005, and,
$727,687, respectively, were recognized through charges to
operations.
8. INCOME TAXES
The provision (benefit) for income taxes for the years ended December
31, 1999, 1998, and 1997 is as follows:
(In Thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $324 $212 $0
State 0 621 143
------ ------ ------
324 833 143
------ ------ ------
Deferred:
Federal (2,615) (2,152) 9,417
State (385) (373) (552)
------ ------ ------
(3,000) (2,525) 8,865
------ ------ ------
$(2,676) $(1,692) $9,008
====== ====== ======
</TABLE>
The differences between the tax benefits at the federal statutory
rate and the provision for income taxes for the years ended December
31, 1999, 1998, and 1997 are primarily due to (decreases)/increases
in the deferred tax asset valuation allowance of $(2,490,000),
$(5,034,000), and $16,128,000 , respectively.
Deferred tax assets (liabilities) are comprised of the following:
(In Thousands)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Prepaid pension costs $(702) $(1,156)
Other (1,165) (327)
------- -------
Gross deferred tax liabilities (1,867) (1,483)
------- -------
Accrued vacation 1,784 1,616
Inventory, accounts receivable and
other reserves 8,442 4,876
Federal and state loss carry-forwards 3,911 6,859
Property, plant, and equipment 366 554
Alternative minimum tax credit
carryforwards 1,224 928
------- -------
Gross deferred tax assets 15,727 14,833
Deferred tax asset valuation
allowance (10,860) (13,350)
------- -------
Net deferred tax asset $3,000 $0
======= =======
</TABLE>
The Company establishes a valuation allowance for its deferred income
taxes unless realization is considered more likely than not. As a
result of the Company's losses during 1997, the Company provided an
additional valuation allowance through its tax provision to fully
reserve for its deferred tax assets at December 31, 1997. In 1999
and 1998, the Company returned to profitability and generated taxable
income for which net operating loss carry-forwards were utilized.
The 1999 net deferred tax assets reflect the portion of total
deferred taxes which management considers that realizability through
future profitability is more likely than not.
At December 31, 1999 and 1998, the Company had tax effected federal
and state operating loss carry-forwards of approximately $3,910,723
and $6,859,193 respectively. The loss carryforwards expire at
various dates between 2002 and 2014. These loss carryforwards are
partially reserved for through the deferred tax valuation allowance.
The alternative minimum tax credit carry-forwards of $1,224,104,
included in the deferred tax assets at December 31, 1999 do not
expire.
9. STOCK OPTION PLANS
On May 17, 1999, the Company's stockholders approved amendments to
the Nonqualified Stock Option Plan (the "Plan"), pursuant to which a
maximum aggregate of 1,000,000 shares of common stock have been
reserved for grant to key personnel. The plan expires by its terms
on September 8, 2008. The Company's Incentive Stock Option and
Appreciation Rights Plan expired during 1999 with outstanding options
being combined with the Nonqualified Stock Option Plan.
Under the Plan, the option price may not be less than 50% of 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 plan been
determined based on the options fair market value at the grant date,
the Company's net income (loss) and net income (loss) per share would
have been as reflected in the pro forma amounts indicated below:
(In Thousands Except Per Share Information)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income (loss) - as reported $6,177 $10,054 $(33,150)
Net income (loss) - pro forma 6,080 9,501 (33,178)
Net income (loss) per share,
basic - as reported 1.55 2.65 (9.19)
Net income (loss) per share,
diluted - as reported 1.52 2.53 (9.19)
Net income (loss) per share,
basic - pro forma 1.53 2.50 (9.20)
Net income (loss) per share,
diluted - pro forma 1.50 2.39 (9.20)
</TABLE>
The following table summarizes the changes in the number of shares
under option pursuant to the plan described above at December 31:
(In Thousands Except Per Share Information)
<TABLE>
<CAPTION>
Wtd. Wtd. Wtd.
Avg. Avg. Avg.
Ex Ex Ex.
1999 Price 1998 Price 1997 Price
---- ----- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding beginning of year 599 $5.53 235 $8.76 358 $8.60
Granted 107 9.83 383 3.53 10 5.32
Exercised (1) 2.78 (2) 2.37 (20) 5.12
Forfeited (251) 3.43(17) 2.45(113) 8.60
----- ----- -----
Outstanding end of year 454 7.69 599 5.53 235 8.76
===== ===== =====
Exercisable end of year 393 343 225
Estimated weighted
average fair value
of options granted $5.27 $2.33 $2.16
</TABLE>
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 1999, 1998 and 1997,
respectively: dividend yield of 0% for each year; expected volatility
of 98%, 96% and 72%; risk-free interest rate of 4.51% to 6.23%; and
expected life of 4.5, 3.43, and 3.43 years for each year. Of the
1999 options granted, 58,000 vest 25% each year, the remaining 49,000
vest immediately. The 1997 options granted vest 25% each year,
250,000 of the 1998 options granted expired during 1999 as certain
performance criteria were not met, the remaining 133,000 vested
immediately.
The following table summarizes information about stock options
outstanding at December 31, 1999:
(In Thousands)
<TABLE>
<CAPTION>
Number of Weighted Weighted
Outstanding Average Average
Options Remaining Exercise
Range of Exercise Prices 12/31/99 Life Price
------------------------ ---------- ---------- ----------
<S> <C> <C> <C>
$2.25 - $3.38 20 5.56 $2.58
3.39 - 5.06 187 7.96 3.87
5.07 - 7.59 78 5.72 6.69
7.60 - 11.39 107 9.92 9.83
18.50 62 4.14 18.50
---
454 6.93 7.69
===
</TABLE>
(In Thousands)
<TABLE>
<CAPTION>
Number of Weighted
Exercisable Average
Options at Exercise
Range of Exercise Prices 12/31/99 Price
------------------------ ---------- ----------
<S> <C> <C>
$2.25 - $3.38 20 $2.58
3.39 - 5.06 187 3.87
5.07 - 7.59 76 6.73
7.60 - 11.39 48 10.13
18.50 62 18.50
---
393 4.38
===
</TABLE>
On January 1, 2000 the Company entered into an employment agreement
with its Chief Executive Officer ('CEO'). Under the terms of the
agreement the CEO was granted options to purchase 100,000 shares of
the Company's stock at an exercise price equal to the fair market
value of the stock on the date of the grant. The options vest 20%
immediately with the remaining options vesting equally over the next
four years.
10. EMPLOYEE BENEFIT PLANS
PENSION - The Company has a defined benefit pension plan in effect,
which covers substantially all employees at its Birmingham and
Dothan, 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. No contributions were made in 1999, 1998 or
1997. Plan assets consist primarily of stocks, bonds, and cash
equivalents.
Effective for fiscal 1998 based on prior years negotiations with the
union, the Plan was amended to reflect a benefit increase of $1.00
per employee and a service year increase of 30 to 35 years.
Changes during the year in the projected benefit obligation and in
the fair value of plan assets were as follows:
Projected Benefit Obligation
(In Thousands)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Balance at beginning of year $102,678 $ 98,096
Service cost 1,341 1,324
Interest cost 6,974 6,875
Plan amendments 1,209 709
Benefits paid (8,935) (8,792)
Actuarial (gain) loss (8,529) 4,466
-------- --------
Balance end of year $ 94,738 $102,678
======== ========
</TABLE>
Plan Assets
(In Thousands)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Balance at beginning of year $100,781 $97,785
Return on plan assets 18,492 11,788
Benefits paid (8,935) (8,792)
-------- --------
Balance end of year $110,338 $100,781
======== ========
</TABLE>
The prepaid pension costs recognized in the consolidated balance
sheets were as follows:
(In Thousands)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Funded status $15,600 $(1,897)
Unrecognized prior service cost 4,406 3,884
Unrecognized net (gain) loss (18,226) 901
-------- --------
Prepaid pension costs $1,780 $2,888
======== ========
</TABLE>
Components of the plans' net cost were as follows:
(In Thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Service cost $1,341 $1,324 $1,248
Interest cost 6,974 6,875 7,070
Expected return on plan assets (8,053) (7,819) (7,697)
Recognized net gain 198 142 125
Net amortization 687 657 658
------- ------- -------
Net pension cost $1,147 $1,179 $1,404
======= ======= =======
</TABLE>
The weighted average rates assumed in the actuarial calculations for
the pension plan was:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Discount 8.00% 7.00% 7.25%
Annual Salary Increase 5.00 5.00 5.00
Long-term return on plan assets 9.50 9.50 9.50
</TABLE>
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 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.
Changes during the year in the projected benefit obligation and in the
fair value of plan assets were as follows:
(In Thousands)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Balance at beginning of year $775 $724
Service cost 36 45
Interest Cost 44 51
Benefits paid (102) (72)
Actuarial (gain) loss (141) 27
---- ----
Balance end of year $612 $775
==== ====
</TABLE>
The accrued postretirement costs recognized in the Consolidated
Balance Sheets were as follows:
(In Thousands)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Funded status $(612) ($775)
Unrecognized transition obligation 264 296
Unrecognized net loss (gain) (77) 61
----- -----
Accrued liability $(425) $(418)
===== =====
</TABLE>
Components of the plans' net cost were as follows:
(In Thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Service cost $36 $45 $38
Interest cost 44 51 52
Transition obligation 0 0 116
Net amortization 32 32 32
Recognized actuarial gain (3) 0 0
----- ----- -----
Net postretirement cost $109 $128 $238
===== ===== =====
</TABLE>
An additional assumption used in measuring the accumulated
postretirement benefit obligation was a weighted average medical care
cost trend rate of 6% for 1999, decreasing gradually to 5% through
the year 2004, and remaining at that level thereafter. The weighted
average discount rate assumed in the actuarial calculation for the
postretirement benefit plan was 8.00%, 7.00%, and 7.25% for the years
ended December 31, 1999, 1998 and 1997, respectively.
SELF-INSURANCE - The Company acts 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 plan for the Birmingham
and Dothan divisions of its Pemco Aeroplex subsidiary. The Company
has reserves established in the amounts of $1,919,643 and $840,857
for reported and incurred but not reported claims at December 31,
1999 and 1998, respectively. Additionally, the Company has deposits
with the Administrator of the plan in the amount of $800,000 at
December 31, 1999 and 1998.
The Company also maintains a self-insured workers' compensation
program and 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, 1999 and 1998, is $415,000,
that has been placed on deposit with the state of Alabama in
connection with the Company's self-insured workers' compensation
plan. The Company has reserves of $4,538,246 and $4,439,000 for
reported and incurred but not reported claims at December 31, 1999
and 1998, respectively.
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
1999, 1998, or 1997. Employees are always 100 percent vested in
their contributions.
11. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES - The Company's manufacturing and service operations
are performed principally on leased premises owned by municipal units
or authorities. Remaining lease terms range from two to nineteen
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, 1999 are as follows:
(In Thousands)
<TABLE>
<CAPTION>
Vehicles
And
Year Ending Facilities Equipment Total
----------- ---------- --------- -----
<S> <C> <C> <C>
2000 $1,138 $1,107 $2,245
2001 1,079 1,005 2,084
2002 1,079 800 1,879
2003 1,079 190 1,269
2004 773 57 830
Thereafter 2,870 0 2,870
------ ------ -------
Total minimum future
rental commitments $8,018 $3,159 $11,177
====== ====== =======
</TABLE>
Total rent expense charged to operations for the years ended December
31, 1999, 1998, and 1997 amounted to $2,223,999, $2,106,537, and
$3,181,677, respectively. Contingent rental amounts based on a
percentage of sales included in rent expense amounted to $572,942,
$477,264, and $556,860 for the years ended December 31, 1999, 1998,
and 1997, 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. On June 17, 1998, the Company submitted a
protest to the General Accounting Office ("GAO") challenging the
combination, or "bundling," of the KC-135 workload with other
unrelated workloads in the RFP. On September 25, 1998, the GAO found
in favor of the protest filed by Pemco. The GAO recommended that the
Air Force resolicit the contract to comply with the requirements of
federal laws and regulations, and awarded the Company its protest
costs and attorneys' fees.
Notwithstanding the GAO decision, the Air Force announced its award
of the bundled workload to Ogden Air Logistics Center on October 9,
1998, stating that it was proceeding with the award. If the Air
Force's action stands, the KC-135 workload could be included in the
contract awarded to Ogden ALC upon expiration of the Company's
contract. On October 13, 1998, Pemco filed a complaint in the U.S.
District Court, Northern District of Alabama against the Air Force
seeking declaratory relief, an injunction, and an order requiring the
Air force to comply with applicable federal laws as recommended by
the GAO. On October 5, 1999, the U.S. District Court declined to
grant relief to the Company. This finding was subsequently appealed
and is currently pending in the United States Court of Appeals for
the Eleventh Circuit. If the Company were to lose its appeal,
resulting in the loss of the KC-135 contract, which exceeds 48% of
the Company's revenues, it would likely have a material adverse
effect on the operations of the Company.
However, the Company considers this possibility unlikely. In the
fall of 1999, the U.S. Air Force exercised its options for the sixth
and seventh years of its seven year contract for the KC-135 Aircraft
Programmed Depot Maintenance (PDM). These options are for the U.S.
Government's fiscal years beginning October 1, 1999 and October 1,
2000. This represents the first time that the U.S. Air Force
exercised two contract options at the same time. At December 31,
1999, the Company had 45 KC-135 (PDM) aircraft at its Birmingham
Alabama facility, up from 40 aircraft at December 31, 1998.
LITIGATION - A purported class action 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 Automobile,
Aerospace, and Agricultural Implement Workers of America ("UAW")
union employees who were terminated upon settlement of such strike
was dismissed in the third quarter of 1999. However, a new action
was filed by 28 individuals shortly thereafter, which has since been
joined by approximately 65 other individuals. The Company filed for
summary judgment on all claims on February 20, 2000. The Company
continues to believe the plaintiffs' claims have no factual basis and
will vigorously defend the case.
On May 27, 1997 the United States Attorney filed a 3 count civil
complaint alleging a violation of the Civil False Claims Act,
contract claims based on theories of mistake of fact, and unjust
enrichment. The alleged violations pertain to C-130 Wings which were
purchased by the Company from the Government as scrap, of which some
were subsequently refurbished and sold. On September 3, 1997 the
Company's motions to dismiss the case were granted. On October 31,
1997 the United States filed an appeal to the Eleventh Circuit Court
which affirmed the lower court's dismissal of the case. Although the
government did not seek a rehearing, in July 1999 en banc
reconsideration was ordered by the Eleventh Circuit Court. In
November of 1999 the Eleventh Circuit reversed and reinstated part of
the case. Throughout the history of this matter the Company has
cooperated with the government investigators and attorneys and
provided all necessary and appropriate information. The Company
believes that it is in compliance with all government contract
provisions and regulations.
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 a Supplemental type certificate
("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
the result of this lawsuit will not have a material financial
statement impact.
In May 1998, the Company's Pemco Aeroplex subsidiary was served with
a complaint filed by National Union Fire Insurance Company, the
Company's current insurer, seeking a declaration that the policies
issued by such insurer between 1987 and 1996 are not required to
provide defense costs or indemnity payments with respect to the
litigation arising out of the STCs for Boeing 747 cargo conversions
owned by GATX and others. The complaint filed in U.S. District Court
of the Northern District of California also names American
International Airways, Inc., a plaintiff in one of the underlying
cases, as a defendant. On December 30, 1998 Pemco Aeroplex filed a
motion to stay the action pending resolution of the underlying cases.
The motion was granted on May 26, 1999. National Union Fire
Insurance Company has not subsequently moved to lift the stay.
In November 1997, the Maritime and Commercial Court in
Copenhagen, Denmark granted the request of a supplier to place the
Company's Danish subsidiary, Pemco World Air Services A/S, in
bankruptcy. Trustees were appointed to operate the Danish
subsidiary's facility. On September 30, 1998, the Company received
notice from the bankruptcy estate that the trustees were asserting a
claim in the amount of approximately $2 million against the Company
for the alleged negative equity of the Danish subsidiary. The
trustees based this claim on certain undertakings entered into by the
Company in favor of the Danish subsidiary in 1996 and 1997. The
trustees allege that pursuant to these undertakings the Company
guaranteed the obligations of the Danish subsidiary. The Company has
been subsequently informed that additional claims have been filed by
creditors against the bankruptcy estate and that the aggregate amount
of claims filed against the bankruptcy estate exceeds $15 million.
On October 9, 1998, the Company was served with a complaint
filed by Sterling Airways A/S in bankruptcy ("Sterling") in the
District Court for the City and County of Denver, Colorado alleging
breach of contract. The complaint alleges that the Company
guaranteed certain payments for parts and materials supplied by
Sterling to the Danish subsidiary. The complaint seeks damages of
approximately $1.4 million plus costs and interest. On November 2,
1998, the Company filed a motion to dismiss the complaint which was
denied by the court on January 13, 1999. On January 24, 2000,
Sterling filed a motion for summary judgment on liability and partial
damages which was denied by the court on March 23, 2000.
On March 28, 2000, the Company entered into a settlement
agreement with Sterling and the Danish subsidiary's bankrupt trustees
pursuant to which the Company agreed to pay a total of $3.5 million
by May 31, 2000 in settlement of the Sterling litigation and all
claims the trustees may have against the Company under the
undertakings. Of the $3.5 million settlement amount, $2.25 million
will be placed in an escrow account and can only be released to the
trustees upon their satisfaction of certain conditions. These
conditions include, among other things, that the trustees must obtain
release from all of the Danish subsidiary's unsecured creditors
asserting claims in excess of $100,000 on or before October 5, 2000.
If the trustees are unable to obtain these releases or certain other
events occur, the Company may, at its option, terminate the
settlement agreement as to the Danish subsidiary's bankruptcy
trustees and obtain a refund of the $2.25 million held in the escrow
account. In such an event, the portion of the settlement payment not
placed into the escrow account ($1.25 million) would be applied to
settle the Sterling litigation and the Danish subsidiary's trustees
and creditors would retain any and all claims they may have against
the Company. The Company would vigorously defend any such claims
and, in any event, intends to vigorously defend any claim brought by
creditors of the Danish subsidiary that do not release their claims
in connection with the settlement agreement.
On September 17, 1999 the Alabama Supreme Court unanimously reversed
and rendered the November 3, 1997 verdict of a Jefferson County
Alabama jury against the Company's Pemco Aeroplex subsidiary. The
November 3, 1997 verdict was in the amount of $1 million compensatory
and $3 million punitive damages, but was subsequently reduced by post-
trial motions to $1 million in compensatory damages which had
previously been accrued by the Company. The plaintiff filed a
petition for a re-hearing, which was denied on February 8, 2000.
In September 1999, the Company's Pemco Aeroplex subsidiary was served
with a complaint filed by Sun Country Airlines in the Superior Court
of the State of California for the County of San Bernardino, alleging
various claims including breach of contract and negligence relating
to maintenance services performed by the Company's Victorville
operation on one of Sun Country's aircraft. The complaint seeks
damages in excess of $800,000. Based on information currently
available, the Company believes the plaintiff's claims have no
factual basis and will vigorously defend this case.
On December 9, 1999 the Company and its Pemco Aeroplex subsidiary
were served with a purported class action in the U.S. District
Court, Northern District of Alabama seeking declaratory, injunctive
relief and other compensatory and punitive damages based upon alleged
unlawful employment practices of race discrimination and racial
harassment by the Company's managers, supervisors, and other
employees. The complaint seeks damages in the amount of $75 million.
The Company has taken effective remedial and corrective action, acted
promptly in respect to any specific complaint by any employee, and
will vigorously defend this case.
Various claims alleging employment discrimination, including race,
sex, age and disability, have been made against the Company and its
subsidiary, Pemco Aeroplex, Inc., by current and former employees at
its Birmingham and Dothan, Alabama facilities in proceedings before
the Equal Employment Opportunity Commission and before state and
federal courts in Alabama. Workers' compensation claims brought by
employees of Pemco Aeroplex, Inc. are also pending in Alabama state
court. The Company believes that no one of these claims is material
to the Company as a whole and that such claims are more reflective of
the general increase in employment-related litigation in the U.S.,
and Alabama 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 from
these types of claims.
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.
The Company has evaluated the cases listed above, and based upon
discussions with legal counsel responsible for the matters, the
Company believes that settlements of all of the above cases will
result in losses and legal expenses of approximately $5.0 million,
which amount has been accrued at December 31, 1999.
ENVIRONMENTAL COMPLIANCE - In December 1998, the Company executed a
Consent Agreement and Consent Order ("CACO") with the Environmental
Protection Agency ("EPA"). The terms of the CACO require the
Company to remit a $95,000 penalty and perform certain environmental
remediation activities. The Company has recorded an accrual for the
above penalties and certain other related charges.
In response to an inspection conducted by the EPA in June 1997, the
Company entered into informal discussions regarding alleged
violations under the Toxic Substances Control Act (TSCA) related to
PCB-contained electrical equipment located on the Birmingham, Alabama
facility. On October 5, 1998, the Company's Pemco Aeroplex
subsidiary was served with a complaint filed by the EPA regarding
such alleged violations of TSCA and seeking penalties of $144,000.
No release to the environment was alleged and all issues raised by
the inspection were fully addressed. On November 19, 1998, the
Company and the EPA entered into a Consent Agreement and Consent
Order (CACO) resolving the complaint. Under the CACO, the Company
agreed to pay a penalty of $91,800 over a three year period.
12. RELATED PARTY TRANSACTIONS
The Company has accrued approximately $1.4 million at December 31,
1999 related to a severance agreement with its former Chairman of the
Board, Chief Executive Officer and major shareholder. In accordance
with the agreement, the accrued amounts will be paid over 36 months.
The related party receivable reflected in the 1998 consolidated
balance sheet consists of various notes receivables from a former
officer who is also a director. This amount was repaid in 1999.
During 1999 an Investment Fund controlled by one of the Directors of
the Company purchased the Company's Senior Subordinated Loan from a
financial institution. The terms of the loan remain consistent with
the original agreement. (See Note 5)
13. CAPITAL LEASES
The Company conducts part of its operations with leased machinery
which includes data processing equipment and production machinery.
Remaining lease terms range from one to five years.
The following is an analysis of the leased property under capital leases
by major classes:
(In Thousands)
<TABLE>
<CAPTION>
Class of Property 1999 1998
---- ----
<S> <C> <C>
Data Processing $143 $1,004
Production Equipment 867 856
Less: Accumulated amortization (300) (575)
----- ------
$710 $1,285
===== ======
</TABLE>
The following is a schedule by years of minimum lease payments for
capital leases together with the present value of the net minimum
lease payments as of December 31, 1999:
(In Thousands)
<TABLE>
<CAPTION>
Year Ending
<S> <C>
2000 $252
2001 189
2002 131
2003 94
2004 29
Thereafter 0
Total minimum
future lease
payments 695
Less: Amount
representing
interest (134)
----
Present value
of minimum
lease payments $561
====
</TABLE>
14. LABOR CONTRACTS
On December 19, 1999 the membership of the United Automobile,
Aerospace, and Agricultural Implement Workers of America (UAW) voted
to ratify a new five (5) year contract with the Company's Pemco
Aeroplex, Inc. subsidiary. The contract begins February 1, 2000 and
extends through March 21, 2005. The new contract represents an
increase in term over the 3 year term of the previous contract. The
new agreement calls for wage increases of $0.40 per hour over the
life of the contract and increases in Pension, Life Insurance and
Accidental Death and Dismemberment 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.
15. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
As of December 31, 1999 and 1998, the carrying amounts of the
Company's financial instruments are estimated to approximate their
fair values, due to their short term nature, and variable or market
interest rates.
The Company does not hedge its interest rate or foreign exchange
risks through the use of derivative financial instruments.
16. FOURTH QUARTER ADJUSTMENTS
In the fourth quarter of 1999, the Company recorded a benefit of $3.0
million to reduce its valuation allowance for deferred taxes as this
amount of net deferred tax assets reflects the portion of total
deferred taxes which management considers that realizability through
future profitability is more likely than not. In addition, the
Company took several large one-time charges during the fourth quarter
of fiscal 1999 including; $1.6 million relating to the former
CEO/President's employment agreement, $2.7 million for various
potential litigation settlements, and $0.4 million related to
relocating the Company headquarters from Denver, Colorado to
Birmingham, Alabama.
Also during the fourth quarter of 1999 the Company recognized the
following provisions, $1.3 million for inventory and accounts
receivable reserves relating to scaling back the Company's Pemco
Nacelle operations, and $1.1 million to reserve older commercial
inventory at the Birmingham facility and recorded charges amounting
to $1.6 million against income to reflect disputes with several
customers over the payment of invoices. The net impact of the above
adjustments was to reduce net income in the fourth quarter of 1999 by
$5.7 million.
In the Fourth Quarter of 1998, the Company recorded a benefit of
approximately $1.7 million to reduce its valuation allowance for
deferred taxes due to profitability of the Company. Also during the
fourth quarter of 1998 the Company revaluated the profitability of
contracts-in-process and recorded an additional charge of
approximately $.9 million. The net impact of the two 1998 fourth
quarter adjustments was to increase net income in the fourth quarter
of 1998 by approximately $0.8 million.
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. Also, during the fourth quarter of 1997 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 fourth quarter of 1997. The impact of the above was to increase
the fourth quarter net loss by approximately $15.4 million.
17. SALE OF DIVISION
During 1998, the Company sold 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 $4,790,000 and
resulted in a gain of $3,120,000. Net sales and operating income
contributed by the Hayes operation for the years ended December 31,
1998 and 1997 are as follows:
(In Thousands)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net Sales $27 $3,404
Operating Income
(loss) (486) 256
</TABLE>
18. SEGMENT INFORMATION
The Company has three reportable segments: Government Services Group,
Commercial Services Group, and Manufacturing and Overhaul Group. The
Government Services Group, located primarily in Birmingham, Alabama,
provides aircraft maintenance and modification services for the
government and military customers through its Government Services
Group. The Commercial Services Group, located in Dothan, Alabama,
and Victorville, California provides commercial aircraft maintenance
and modification services on a contract basis to the owners and
operators of large commercial aircraft. The Manufacturing and
Overhaul Group, located in California and Florida, designs and
manufactures a wide array of proprietary aerospace products including
various space systems, such as guidance control systems and launching
vehicles; aircraft cargo-handling systems; and precision parts and
components for aircraft. For reporting purposes, segments other than
government, commercial and manufacturing and overhead are combined as
an other segment. These additional segments perform engineering and
support services for the three main business segments.
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. The
Company evaluates performance based on total (external and inter-
segment) revenues, gross profits and operating income. The Company
accounts for inter-segment sales and transfers as if the sales or
transfers were to third parties, that is at current market prices.
The Company does not allocate income taxes, interest income and
interest expense to segments. The amount of intercompany profit is
not material.
The Company's reportable segments are strategic business units that
offer different products and services. They are managed separately
because each business requires different operating and marketing
strategies. However, the Commercial and Manufacturing and Overhaul
segments may generate sales to Governmental entities and the
Government segment may generate sales to commercial entities. Sales
to Governmental entities in fiscal 1999, 1998 and 1997 were $106.2
million, $78.4 million, and $73.3 million, respectively.
The following table presents information about 1999 segment profit or
loss:
(In Thousands)
<TABLE>
<CAPTION>
Manufacturing
Government Commercial & Overhaul
---------- ---------- -------------
<S> <C> <C> <C>
Revenues from external
domestic customers $88,991 $46,250 $23,782
Revenues from external
foreign customers 0 9,964 0
Inter-segment revenues 72 0 843
------- ------- -------
Total segment revenues $89,063 $56,214 $24,625
Elimination (73) 0 (843)
Total Revenue $89,990 $56,214 $23,782
Gross profit 22,713 8,374 2,606
Segment operating income 12,532 (84) (3,319)
Interest expense
Other
Benefit for income taxes
Net income
Assets $31,273 $12,767 $13,059
Depreciation/amortization 1,590 398 375
Capital Additions 1,984 503 562
</TABLE>
<TABLE>
<CAPTION>
Other Overhaul Consolidated
-------------- ------------
<S> <C> <C>
Revenues from external
domestic customers $ 287 $159,310
Revenues from external
foreign customers 0 9,964
Inter-segment revenues 0 915
------- --------
Total segment revenues $ 287 $170,189
Elimination 0 (916)
--------
Total Revenue $ 287 $169,273
========
Gross profit (943) 32,750
Segment operating income (1,039) 8,090
Interest expense 3,266
Other 1,323
Benefit for income taxes 2,676
--------
Net income $ 6,177
========
Assets $ 304 $ 57,403
Depreciation/amortization 274 2,637
Capital Additions 0 3,049
</TABLE>
The following table presents information about 1998 segment profit or
loss:
(In Thousands)
<TABLE>
<CAPTION>
Manufacturing
Government Commercial & Overhaul
---------- ---------- -------------
<S> <C> <C> <C>
Revenues from external
domestic customers $63,450 $41,074 $21,008
Revenues from external
foreign customers 0 12,351 2,575
Inter-segment revenues 147 0 168
------- ------- -------
Total segment revenues $63,597 $53,425 $23,751
Elimination 0 0 0
Total Revenue
Gross profit 10,758 9,157 5,397
Segment operating income 3,025 3,982 2,334
Interest expense
Other
Benefit for income taxes
Net income
Assets $31,096 $10,689 $6,141
Depreciation/amortization 1,401 545 450
Capital Additions 454 68 224
</TABLE>
<TABLE>
<CAPTION>
Other Overhaul Consolidated
-------------- ------------
<S> <C> <C>
Revenues from external
domestic customers $1,312 $126,844
Revenues from external
foreign customers 0 14,926
Inter-segment revenues 11 327
------- --------
Total segment revenues $1,323 $142,097
Elimination 0 (327)
--------
Total Revenue $141,770
========
Gross profit 121 25,433
Segment operating income 48 9,389
Interest expense (3,368)
Other 2,341
Benefit for income taxes 1,692
--------
Net income $ 10,054
========
Assets $1,544 $49,469
Depreciation/amortization 0 2,396
Capital Additions 0 746
</TABLE>
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, 1999 and 1998 and for
the years then ended taken as a whole. The schedule listed in the index
of financial statements as of December 31, 1999, 1998 and 1997 and for the
years then 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, 1999 and 1998 and for each of the
three years in the period ended December 31, 1999 and, in our opinion,
fairly states 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.
Birmingham, Alabama ARTHUR ANDERSEN LLP
March 13, 2000
PRECISION STANDARD, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
for the periods ended December 31, 1999, 1998 and 1997
(in Thousands)
<TABLE>
<CAPTION>
Balance at Additions Additions
Beginning Charged to Charged to
Description Of Period Expense Assets
- ----------- ----------- ----------- -----------
<S> <C> <C> <C>
1999
Allowance for doubtful
accounts $664 $1,268
Reserve for contract
commitments 1,174 16
Reserve for obsolete
inventory 2,496 2,388
1998
Allowance for doubtful
accounts $1,180 294
Reserve for contract
commitments 668 1,174
Reserve for obsolete
inventory 2,975
1997
Allowance for doubtful
accounts $735 793
Reserve for contract
commitments 88 668
Reserve for obsolete
inventory 3,043
</TABLE>
<TABLE>
<CAPTION>
Balance at
End of
Description Deductions Period
- ----------- ----------- -----------
<S> <C> <C>
1999
Allowance for doubtful
accounts ($909) $1,022
Reserve for contract
commitments (810) 380
Reserve for obsolete
inventory (523) 4,361
1998
Allowance for doubtful
accounts (810) 664
Reserve for contract
commitments (668) 1,174
Reserve for obsolete
inventory (479) 2,496
1997
Allowance for doubtful
accounts (348) 1,180
Reserve for contract
commitments (88) 668
Reserve for obsolete
inventory (68) 2,975
</TABLE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report, 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).
Birmingham, Alabama ARTHUR ANDERSEN LLP
March 30, 2000
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 2000 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 2000 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 2000 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 2000 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, 1999.
c. EXHIBITS.
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)
4.3 Specimen Certificate for Common Stock. (3)
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. (4)
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. (4)
10.3 Assignment and Assumption Agreement executed July 30,
1987, effective June 4, 1986, between SG Trading Corp. and Matthew Gold.
(4)
10.4 Purchase Agreement dated December 31, 1986, between the
Company and Matthew Gold. (4)
10.5 Purchase Agreement executed August 6, 1987, effective
April 30, 1987, between the Company and Matthew Gold. (4)
10.6 Contract No. N68520-87-0007 between Monarch Aviation,
Inc., and the United States Navy. (4)
10.7 Lease dated November 1, 1986, between Monarch Properties
and Pemco Engineers, Inc. (4)
10.8 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)
10.9 Promissory Note dated July 17, 1987, from Monarch
Equities, Inc., to Pemco Engineers, Inc. (3)
10.10 Novation Agreement between Monarch Aviation, Inc., and
the Company dated August 6, 1987. (5)
10.11 Amended Executive Employment Agreement between the
Company and Walter M. Moede effective June 1, 1993, as amended March 11,
1994. (6)
10.12 Amended Executive Employment Agreement between the
Company and Matthew L. Gold effective June 1, 1993, as amended March 11,
1994. (6)
10.13 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)
10.14 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)
10.15 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)
10.16 Precision Standard, Inc. Nonqualified Stock Option Plan.
(8)
10.17 Precision Standard, Inc. Incentive Stock and Appreciation
Rights Plan. (8)
10.18 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)
10.19 Account Receivable Management and Security Agreement
between Precision Standard, Inc. and BNY of the Americas entered into as
of August 8, 1997. (9)
10.20 Amendment to Executive Employment Agreement between the
Company and Matthew L. Gold effective September 7, 1999.
10.21 Executive Employment Agreement between the Company and
Ronald A. Aramini effective January 1, 2000.
21 Subsidiaries of the Company.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
- ---------------------
(1) Filed as an exhibit 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 file number 33-79676 dated June 8, 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: 3/30/00 By:/s/Ronald A. Aramini
-----------------------------
Ronald A. Aramini, President
(Principal Executive Officer)
Dated: 3/30/00 By:/s/Richard G. Godin
-----------------------------
Richard G. Godin, Vice President Finance
(Principal Finance & Accounting 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/Michael E. Tennenbaum
- ------------------------ Chairman, Director 03/30/00
Michael E. Tennenbaum
/s/H.T. Bowling
- ------------------------ Vice Chairman, Director 03/30/00
H.T. Bowling
/s/Ronald A. Aramini
- ------------------------ President, Chief Executive
Ronald A. Aramini Officer, Director, (Principal
Executive Officer) 03/30/00
/s/Matthew L. Gold
- ------------------ Director 03/30/00
Matthew L. Gold
/s/Mark K. Holdsworth
- --------------------- Director 03/30/00
Mark K. Holdsworth
/s/Thomas C. Richards
- --------------------- Director 03/30/00
Thomas C. Richards
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report, 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).
/s/Arthur Andersen LLP
Birmingham, Alabama ARTHUR ANDERSEN LLP
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 527
<SECURITIES> 0
<RECEIVABLES> 21,131
<ALLOWANCES> 0
<INVENTORY> 17,035
<CURRENT-ASSETS> 42,456
<PP&E> 32,414
<DEPRECIATION> 20,858
<TOTAL-ASSETS> 11,556
<CURRENT-LIABILITIES> 50,074
<BONDS> 0
0
0
<COMMON> 4,770
<OTHER-SE> 138
<TOTAL-LIABILITY-AND-EQUITY> 57,403
<SALES> 169,273
<TOTAL-REVENUES> 169,273
<CGS> 136,523
<TOTAL-COSTS> 160,095
<OTHER-EXPENSES> 825
<LOSS-PROVISION> 1,586
<INTEREST-EXPENSE> 3,266
<INCOME-PRETAX> 3,501
<INCOME-TAX> (2,676)
<INCOME-CONTINUING> 6,177
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,177
<EPS-BASIC> 1.55
<EPS-DILUTED> 1.52
</TABLE>
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of January 1, 2000, by and between Precision
Standard, Inc., a Colorado corporation (the "Company"), and Ronald A.
Aramini ("Executive").
RECITALS
The Company desires to exclusively contract for the managerial and
business skills possessed by Executive, on the terms and conditions set
forth in this Agreement, and Executive desires to be so employed.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants set forth below, the parties hereby agree as follows:
1 EMPLOYMENT. The Company hereby agrees to employ Executive as
President and Chief Executive Officer, and Executive hereby accepts such
employment, on the terms and conditions hereinafter set forth.
2 TERM. The period of employment of Executive by the Company
hereunder (the "Employment Period") shall commence on January 1, 2000 and
shall terminate on December 31, 2004, unless extended in writing by the
parties. The Employment Period may be sooner terminated by either party
in accordance with Section 6 of this Agreement.
3 POSITION AND DUTIES. During the Employment Period, Executive
shall serve as President and Chief Executive Officer of the Company.
Executive shall have those powers and duties normally associated with the
position of President and Chief Executive Officer and such other powers
and duties as may be prescribed by the Board of Directors of the Company
(the "Board").
4 OUTSIDE BUSINESS ACTIVITIES PRECLUDED. During the Employment
Period, Executive shall devote his full energies, interest, abilities and
productive time to the performance of this Agreement. Executive shall
not, without the prior written consent of the Company, perform other
competitive services of any kind or engage in any other business activity,
with or without compensation. Executive shall not, without the prior
written consent of the Company, engage in any activity adverse to the
Company's interests.
5 COMPENSATION AND RELATED MATTERS.
(a) SALARY. The Company shall pay Executive an annual base
salary of $250,000 ("Base Salary") during each calendar year of the
Employment Period, prorated for any year in which this Agreement is in
effect for only a portion of the calendar year. Executive's Base Salary
shall be payable in approximately equal installments in accordance with
the Company's customary payroll practices. Executive's Base Salary shall
be reviewed by the Company from time to time at its discretion, and
Executive shall receive such salary increases, if any, as the Company, in
its sole discretion, shall determine. If Executive's Base Salary is
increased by the Company, such increased Base Salary shall then constitute
the Base Salary for all purposes of this Agreement.
(b) BONUS. The Board's compensation committee (the
"Compensation Committee") shall establish an executive bonus pool which
will permit Executive to earn a cash bonus of up to 100% of his Base
Salary in each year of the Employment Period depending upon the operating
profits of the Company and the performance of Executive. The amount of
Executive's cash bonus shall be determined in the sole discretion of the
Compensation Committee and shall be dependent upon, among other things,
the achievement of the performance targets set forth on Exhibit A hereto.
(c) STOCK OPTIONS. On the date of this Agreement, Executive
shall receive stock options to purchase 100,000 shares of the Company's
common stock at an exercise price equal to the fair market value per share
of the common stock on the date of this Agreement. Such options shall
vest as follows: 20% shall vest immediately and the remainder shall vest
at the rate of 20% per year over four years. Such options shall be
evidenced by a stock option agreement between the Company and Executive
containing customary terms and conditions consistent with the Company's
stock option plan. In the event of a Change of Control of the Company as
defined in Exhibit B hereto, any unvested options provided for under this
Section or any agreement between the Company and Executive shall
immediately vest.
(d) ALLOWANCE. The Company shall pay Executive a household
improvement allowance of $30,000 in the aggregate, payable within ten (10)
days following the earlier to occur of (i) September 1, 2000 or (ii) the
closing of the lease or purchase of Executive's new residence in the
Birmingham, Alabama area. In addition, the Company shall promptly
reimburse Executive in an amount not to exceed $3,200 per month for all
reasonable expenses incurred by Executive for housing, rental car, per
diem and similar expenses in the Birmingham, Alabama area between the date
of this Agreement and the earlier to occur of (A) September 1, 2000 or (B)
the closing of the lease or purchase of Executive's new residence in such
area.
The Company shall also reimburse Executive for all reasonable
expenses incurred by Executive for airfare, hotel, per diem, car rental
and similar expenses for one trip for Executive and his spouse to travel
to Birmingham, Alabama to search for a new residence in the area.
Executive may take such trip before or after the commencement of the
Employment Period.
The foregoing notwithstanding, the amount of any expenses
payable to Executive pursuant to this Section 5(d) shall be "grossed up"
to the extent necessary (on an after-tax basis) to compensate Executive
for any additional taxes owing as a result of the Company's payment of
such expenses.
(e) EXPENSES. The Company shall promptly reimburse Executive
for all reasonable business expenses upon the presentation of reasonably
itemized statements of such expenses in accordance with the Company's
policies and procedures now in force or as such policies and procedures
may be modified with respect to all executive officers of the Company.
(f) VACATION. Executive shall be entitled to the number of
weeks of vacation per year provided to the Company's executive officers
under a to-be-established executive vacation policy; provided, however,
that Executive's vacation shall not be less than three weeks per calendar
year.
(g) PENSION AND INCENTIVE BENEFIT PLANS. During the Employment
Period, Executive (and his spouse and dependents to the extent provided
therein) shall be entitled to participate in and be covered under all
welfare benefit plans or programs maintained by the Company from time to
time for the benefit of its executive officers including, without
limitation, all medical, dental, vision, life insurance and long-term
disability plans and programs. In addition, during the Employment Period,
Executive shall be eligible to participate in all pension, retirement,
401(k) and other employee benefit plans and programs maintained from time
to time by the Company for the benefit of its executive officers.
Promptly after the date of this Agreement, the Company shall undertake a
study of executive benefits and modify existing Company plans or create
new plans as it deems appropriate to compensate Executive and to assist in
the recruitment and retention of additional executives.
(h) DISABILITY BENEFITS. Until such time as the Company
institutes an executive disability benefits plan reasonably acceptable to
Executive, in the event of Executive's Disability (as defined below)
during the Employment Period, the Company shall pay to Executive 66 2/3%
of Executive's Base Salary for the greater of eighteen (18) months or the
remainder of the Employment Period following the Date of Termination (as
defined below). In addition, in the event of payments to Executive under
this Section, the Company shall maintain in full force and effect for the
continued benefit of Executive, his spouse and his dependents (as
applicable) the medical, dental, vision and life insurance plans and
programs in which Executive, his spouse or his dependents were
participating immediately prior to the Date of Termination at the level in
effect and upon substantially the same terms and conditions (including
without limitation contributions required by Executive for such benefits)
as existed prior to the Date of Termination.
For purposes of this Agreement, "Disability" shall mean a
physical or mental condition of Executive that, in the good faith judgment
of the Company, based upon certification of a licensed physician
reasonably acceptable to Executive and the Company, (i) prevents Executive
from being able to perform the services required by his position with the
Company, (ii) has continued for a period of at least three (3) months
during any period of twelve consecutive months, and (iii) is reasonably
expected to continue.
(i) LIFE INSURANCE. Until such time as the Company institutes
an executive life insurance policy substantially similar to Executive's
current policy, the Company shall pay for the actual cost of premiums for
Executive's life insurance policy that he has assumed from his former
employer, which is a $400,000 term life insurance policy issued by
Metropolitan Life Insurance Company with a current premium of $4,600 per
year.
(j) AUTOMOBILE ALLOWANCE. Commencing upon the earlier of (A)
the arrival of Executive's automobile in Birmingham, Alabama or (B) the
termination of the monthly expense reimbursement payments to Executive
under Section 5(d), and continuing through the remainder of the Employment
Period, Executive shall be entitled to an automobile allowance not to
exceed $1,000 per month. The amount of the allowance shall cover all
expenses related to the maintenance of a business use automobile,
including maintenance, depreciation, insurance and business-related
mileage.
6 TERMINATION. Executive's employment hereunder may be terminated
during the Employment Period under the following circumstances:
(a) DEATH. Executive's employment hereunder shall terminate
upon his death.
(b) DISABILITY. The Company shall have the right to terminate
Executive's employment hereunder upon his Disability.
(c) WITH OR WITHOUT CAUSE. The Company shall have the right to
terminate Executive's employment hereunder at any time with or without
Cause. For purposes of this Agreement, the Company shall have "Cause" to
terminate Executive's employment if, in the good faith judgment of the
Company, it is determined that Executive has engaged in:
(i) willful misconduct, or breach of fiduciary duty
involving personal profit;
(ii) willful or repeated failure to substantially perform
his duties or obligations hereunder (other than due to physical or mental
impairment); or
(iii) conviction of, or plea of guilty or nolo contendere
to, a felony.
(d) VOLUNTARY. Executive shall have the right to terminate his
employment hereunder at any time by providing the Company with a Notice of
Termination.
7 TERMINATION PROCEDURE.
(a) NOTICE OF TERMINATION. Any termination of Executive's
employment by the Company or by Executive during the Employment Period
(other than termination pursuant to Section 6(a)) shall be communicated by
written Notice of Termination to the other party hereto in accordance with
Section 11. For purposes of this Agreement, a "Notice of Termination"
shall mean a notice which shall indicate the specific termination
provision in this Agreement relied upon and shall set forth in reasonable
detail the facts and circumstances claimed to provide a basis for
termination of Executive's employment under the provision so indicated.
(b) DATE OF TERMINATION. "Date of Termination" shall mean (i)
if Executive's employment is terminated by his death, the date of his
death, (ii) if Executive's employment is terminated pursuant to Section
6(b) or 6(c), immediately upon delivery of a Notice of Termination to
Executive (unless a later date is set forth in the Notice of Termination),
and (iii) if Executive's employment is terminated pursuant to Section
6(d), ninety (90) days following the delivery of a Notice of Termination
to the Company; provided that, in the case of this clause (iii), the
Company may determine upon receipt of the Notice of Termination that
Executive's Date of Termination shall be immediate or some time prior to
the expiration of the ninety-day notice period.
8 COMPENSATION UPON TERMINATION. In the event Executive's
employment terminates during the Employment Period, the Company shall
provide Executive with the payments and benefits set forth below.
Executive acknowledges and agrees that the payments set forth in this
Section 8 constitute liquidated damages for termination of his employment
during the Employment Period.
(a) DEATH. If Executive's employment is terminated by his
death:
(i) the Company shall pay to Executive's beneficiary,
legal representative or estate, as the case may be, Executive's Base
Salary and accrued vacation pay through the Date of Termination, as soon
as practicable following the Date of Termination, but in any event not
later than sixty (60) days thereafter;
(ii) the Company shall reimburse Executive's beneficiary,
legal representative or estate, as the case may be, pursuant to Section
5(e) for reasonable expenses incurred, but not paid prior to such
termination of employment; and
(iii) Executive's beneficiary, legal representative or
estate, as the case may be, shall be entitled to any other rights,
compensation and/or benefits as may be due to any such persons or estate
in accordance with the terms and provisions of any agreements, plans or
programs of the Company.
(b) DISABILITY. If Executive's employment is terminated for
Disability pursuant to Section 6(b):
(i) the Company shall provide Executive the benefits set
forth in Section 5(h) to the extent applicable;
(ii) the Company shall pay to Executive his Base Salary and
accrued vacation pay through the Date of Termination, as soon as
practicable following the Date of Termination;
(iii) the Company shall reimburse Executive pursuant to
Section 5(e) for reasonable expenses incurred, but not paid prior to such
termination of employment; and
(iv) Executive shall be entitled to any other rights,
compensation and/or benefits as may be due to Executive in accordance with
the terms and provisions of any agreements, plans or programs of the
Company.
(c) WITHOUT CAUSE. If Executive's employment is terminated by
the Company without Cause:
(i) the Company shall continue paying Executive his Base
Salary in accordance with the Company's customary payroll practices (and
shall pay Executive his accrued vacation) through the earliest of (A)
twenty-four (24) months following the Date of Termination, (B) the
expiration of the Employment Period or (C) the date on which Executive
becomes eligible to receive compensation from some other source;
(ii) to the extent permitted by applicable law, the Company
shall maintain in full force and effect, for the continued benefit of
Executive, his spouse and his dependents (as applicable) through the
earliest of (A) twenty-four (24) months following the Date of Termination,
(B) the expiration of the Employment Period or (C) the date or dates on
which Executive becomes eligible to receive coverage and benefits from
some other source (such coverage and benefits to be determined on a
coverage-by-coverage, or benefit-by-benefit, basis), the medical, dental,
vision and long-term disability plans and programs in which Executive, his
spouse and his dependents (as applicable) were participating immediately
prior to the Date of Termination at the level in effect and upon
substantially the same terms and conditions (including without limitation
contributions required by Executive for such benefits) as existed
immediately prior to the Date of Termination;
(iii) the Company shall reimburse Executive pursuant to
Section 5(e) for reasonable expenses incurred, but not paid prior to such
termination of employment;
(iv) Executive shall be entitled to any other rights,
compensation and/or benefits as may be due to Executive in accordance with
the terms and provisions of any agreements, plans or programs of the
Company; and
(v) any unvested stock options held by Executive shall
immediately vest and Executive shall be entitled to exercise the stock
options pursuant to the terms and conditions of any Company agreement or
plan then in effect.
The foregoing notwithstanding, the total of the severance
payments payable under this Section 8 and/or Section 5(c) shall be reduced
to the extent the payment of such amounts would cause Executive's total
termination benefits (as determined in good faith by the Company's public
accountants) to constitute an "excess" parachute payment under Section
280G of the Internal Revenue Code of 1986, as amended.
(d) CAUSE; VOLUNTARY. If Executive's employment is terminated
by the Company for Cause pursuant to Section 6(c) or by Executive for any
reason:
(i) the Company shall pay Executive his Base Salary and,
to the extent required by applicable law, his accrued vacation pay through
the Date of Termination, as soon as practicable following the Date of
Termination;
(ii) the Company shall reimburse Executive pursuant to
Section 5(e) for reasonable expenses incurred, but not paid prior to such
termination of employment, unless such termination resulted from a
misappropriation of Company funds; and
(iii) Executive shall be entitled to any other rights,
compensation and/or benefits as may be due to Executive in accordance with
the terms and provisions of any agreements, plans or programs of the
Company.
9 CONFIDENTIAL INFORMATION OWNERSHIP OF DOCUMENTS; NON-
COMPETITION.
(a) CONFIDENTIAL INFORMATION. Executive shall hold in a
fiduciary capacity for the benefit of the Company all trade secrets and
confidential information, knowledge or data relating to the Company and
its businesses and investments, which shall have been obtained by
Executive during Executive's employment by the Company and which is not
generally available public knowledge (other than by acts of Executive in
violation of this Agreement). Except as may be required or appropriate in
connection with carrying out his duties under this Agreement, Executive
shall not, without the prior written consent of the Company or as may
otherwise be required by law, or as is necessary in connection with any
adversarial proceeding against the Company (in which case Executive shall
use his reasonable best efforts in cooperating with the Company in
obtaining a protective order against disclosure by a court of competent
jurisdiction), communicate or divulge any such trade secrets, information,
knowledge or data to anyone other than the Company and those designated by
the Company or on behalf of the Company in the furtherance of its business
or to perform duties hereunder.
(b) REMOVAL OF DOCUMENTS; RIGHTS TO PRODUCTS. All records,
files, drawings, documents, models, equipment, and the like relating to
the Company's business which Executive has control over shall not be
removed from the Company's premises without its written consent, unless
such removal is in the furtherance of the Company's business or is in
connection with Executive's carrying out his duties under this Agreement
and, if so removed, shall be returned to the Company promptly after
termination of Executive's employment hereunder, or otherwise promptly
after removal if such removal occurs following termination of employment.
Executive shall assign to the Company all rights to trade secrets and
other products relating to the Company's business developed by him alone
or in conjunction with others at any time while employed by the Company.
(c) PROTECTION OF BUSINESS. During the Employment Period and
until the second anniversary of Executive's Date of Termination (but only
in the event Executive is terminated by the Company for Cause or Executive
terminates his employment), Executive shall not (i) engage, anywhere
within the geographical areas in which the Company or any of its
affiliates (the "Designated Entities") are conducting their business
operations or providing services as of the Date of Termination, in any
business which is being engaged in by the Designated Entities as of the
Date of Termination, directly or indirectly, alone, in association with or
as a shareholder, principal, agent, partner, officer, director, employee
or consultant of any other organization, (ii) divert to any entity which
is engaged in any business conducted by the Designated Entities in the
same geographic area as the Designated Entities, any customer of any of
the Designated Entities, or (iii) solicit any officer, employee or
consultant of any of the Designated Entities to leave the employ of any of
the Designated Entities. If, at any time, the provisions of this Section
9(c) shall be determined to be invalid or unenforceable, by reason of
being vague or unreasonable as to area, duration or scope of activity,
this Section 9(c) shall be considered divisible and shall become and be
immediately amended to only such area, duration and scope of activity as
shall be determined to be reasonable and enforceable by the court or other
body having jurisdiction over the matter; and Executive agrees that this
Section 9(c) as so amended shall be valid and binding as though any
invalid or unenforceable provision had not been included herein.
(d) INJUNCTIVE RELIEF. In the event of a breach or threatened
breach of this Section 9, Executive agrees that the Company shall be
entitled to seek injunctive relief in a court of appropriate jurisdiction
to remedy any such breach or threatened breach, Executive acknowledging
that damages would be inadequate and insufficient.
(e) CONTINUING OPERATION. Except as specifically provided in
this Section 9, the termination of Executive's employment or of this
Agreement shall have no effect on the continuing operation of this Section
9.
10 SUCCESSORS; BINDING AGREEMENT. Neither this Agreement nor the
rights or obligations hereunder shall be assignable by Executive. The
Company may assign this Agreement to any successor of the Company, and
upon such assignment any such successor shall be deemed substituted for
the Company upon the terms and subject to the conditions hereof.
11 NOTICE. All notices or other communications which are required
or permitted hereunder shall be in writing and sufficient if delivered
personally, or sent by nationally-recognized, overnight courier or by
registered or certified mail, return receipt requested and postage
prepaid, addressed as follows:
If to Executive:
Ronald A. Aramini
12130 East Arabian Park Drive
Scottsdale, Arizona 85259
Facsimile: (480) 614-3796
If to the Company:
Precision Standard, Inc.
1943 North 50th Street
Birmingham, Alabama 35212
Attn: Chairman of the Board
Facsimile: (205) 595-6631
or to such other address as any party may have furnished to the other in
writing in accordance herewith. All such notices and other communications
shall be deemed to have been received (a) in the case of personal
delivery, on the date of such delivery, (b) in the case of a telecopy,
when the party receiving such telecopy shall have confirmed receipt of the
communication, (c) in the case of delivery by nationally-recognized,
overnight courier, on the business day following dispatch and (d) in the
case of mailing, on the third business day following such mailing.
12 MISCELLANEOUS. No provisions of this Agreement may be amended,
modified or waived unless such amendment or modification is agreed to in
writing signed by Executive and by a duly authorized officer of the
Company, and such waiver is set forth in writing and signed by the party
to be charged. No waiver by either party hereto at any time of any breach
by the other party hereto of any condition or provision of this Agreement
to be performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been
made by either party which are not set forth expressly in this Agreement.
The respective rights and obligations of the parties hereunder of this
Agreement shall survive Executive's termination of employment and the
termination of this Agreement to the extent necessary for the intended
preservation of such rights and obligations.
13 VALIDITY. The invalidity or unenforceability of any provision
or provisions of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which shall
remain in full force and effect.
14 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same instrument.
15 ENTIRE AGREEMENT. This Agreement sets forth the entire
agreement of the parties hereto in respect of the subject matter contained
herein and supersedes all prior agreements, promises, covenants,
arrangements, communications, representations or warranties, whether oral
or written, by any officer, employee or representative of any party hereto
in respect of such subject matter. Any prior agreement of the parties
hereto in respect of the subject matter contained herein is hereby
terminated and canceled.
16 WITHHOLDING. All payments hereunder shall be subject to any
required withholding of federal, state and local taxes pursuant to any
applicable law or regulation.
17 SECTION HEADINGS. The section headings in this Agreement are
for convenience of reference only, and they form no part of this Agreement
and shall not affect its interpretation.
18 PUBLIC DISCLOSURE. No press release or other public disclosure,
either written or oral, of this Agreement or its terms shall be made by
Executive without the prior written consent of the Company.
[signature page follows]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
on the date first above written.
Company:
PRECISION STANDARD, INC.,
a Colorado corporation
By:/s/Michael E. Tennenbaum
Name: Michael E. Tennenbaum
Title: Chairman of the Board
Executive:
/s/Ronald A. Aramini
Name: Ronald A. Aramini
EXHIBIT A
PERFORMANCE TARGETS
-------------------
Within six (6) months from the commencement of employment, Executive
and the Board will establish mutually acceptable performance criteria for
determining Executive's bonus under Section 5(b).
EXHIBIT B
CHANGE OF CONTROL
-----------------
A "Change of Control" shall occur if:
(a) the individuals who, as of December 1, 1999, constitute the
Board (the "Incumbent Board"), cease for any reason to constitute at least
a majority of the Board; provided, however, that any individual becoming a
director subsequent to December 1, 1999 whose election, or nomination for
election by the Company's stockholders, was approved by a vote of at least
a majority of the directors then comprising the Incumbent Board shall be
considered as though such an individual were a member of the Incumbent
Board; or
(b) any individual, entity or group (within the meaning of
Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended), other than any such individual, entity or group which includes a
member of the Incumbent Board, acquires (directly or indirectly) the
beneficial ownership (within the meaning of Rule 13d-3 promulgated under
such Act) of more than 50% of the voting power of the then outstanding
voting securities of the Company entitled to vote generally in the
election of directors ("Voting Power"); or
(c) the Company's stockholders approve a merger or
consolidation involving the Company, or a sale or disposition of all or
substantially all of the Company's assets, or a plan of liquidation or
dissolution of the Company, other than (i) a merger or consolidation in
which the holders of the voting securities of the Company outstanding
immediately prior to the merger or consolidation hold at least a majority
of the Voting Power of the surviving corporation immediately after such
merger or consolidation, (ii) a merger or consolidation effected to
implement a recapitalization of the Company (or similar transaction) by
which no person, other than any individual, entity or group which includes
a member of the Incumbent Board, acquires more than 50% of the Voting
Power of the Company, or (iii) a merger or consolidation in which the
Company is the surviving corporation and such transaction was determined
not to be a Change of Control, which transaction and determination was
approved by a majority of the Board in actions taken prior to, and with
respect to, such transaction.
AGREEMENT
WHEREAS, Precision Standard, Inc. (the "Company") and Matthew L.
Gold (the "Employee") entered into an Executive Employment Agreement ("the
Agreement") as of June 1, 1993, as amended March 11, 1994; and
WHEREAS, the Employee has agreed to sell approximately one-half
of the common stock of the Company he currently owns to Tennenbaum & Co.,
LLC and certain other investors (the "Sale"); and
WHEREAS, the Employee and the Company have come to certain
understandings as a result of the contemplated consummation of the Sale.
NOW, THEREFORE, the Company and the Employee agree as follows:
1. If the Sale is consummated, the Company agrees that the
Employee is entitled to the payments described in Section VIII E(5)(a) of
the Agreement, (payable ratably, monthly over the three years beginning as
of the first day of the month coincident with or next following the
Termination Date (as defined below) and the medical benefits described in
Section VIII F of the Agreement.
2. The Employee agrees that, to the extent the aggregate
present value of the amounts he is to receive pursuant to Paragraph 1
would constitute "excess parachute payments" within the meaning of Section
280G of the Internal Revenue Code of 1986 (the "Code"), the payments
(other than the medical benefits in Section VIII F) will be reduced by the
minimum possible amount so that the aggregate present value of the
payments is $1 less than three times his "base amount" (within the meaning
of Code section 280G(b)(2)(A)). The determination of the amount to be
reduced shall be made by the Company's outside auditors, subject to review
by the Employee. The aggregate amount payable under this paragraph shall
be further reduced before payments begin by any amounts by which the
Employee is indebted to the Company as of the day immediately preceding
the Termination Date.
3. The Employee agrees that, upon the consummation of the
Sale, Section VII of the Agreement will remain in full force and effect
for the three-year period during which the Employee will receive payments
pursuant to Paragraph 1 above, provided, however, that the Employee's
obligation under such Section shall terminate if the Company fails to make
any payment required under Paragraph 1 or to provide the medical coverage
required by such paragraph and such failure continues for a period of five
business days following the Company's receipt of written notice thereof.
4. The Company and the Employee hereby waive any notice from
the other that otherwise would be required under the Agreement.
5. The Employee shall continue to act as the Chief Executive
Officer of the Company (but not as President or Chairman of the Board of
Directors) until the earlier of the date (a) which is six months from the
date on which the Sale is consummated and (b) on which a new Chief
Executive Officer is appointed to replace the Employee (the "Termination
Date"). The Employee shall continue to be paid his Annual Base Salary (as
defined in the Agreement and as in effect on September 1, 1999) from the
date hereof to the Termination Date, on the same basis as it has been paid
prior to the date hereof. During this period, the Employee shall be
entitled to participate in all employee benefit plans maintained by the
Company, to the same extent as he was on September 1, 1999.
6. Other than as expressly provided above, the Company and the
Employee agree that the Agreement shall terminate in all respects upon the
consummation of the Sale, and that the Employee's receipt of the payment
and other benefits pursuant to Paragraph 1 above shall discharge the
Company's obligation to make any future payments to the Employee under the
Agreement, including without limitation any salary, bonus, severance or
other compensatory payments under Section V or VIII of the Agreement.
7. The Company and the Employee agree that, if the Sale is not
consummated, the Agreement will continue in full force and effect without
regard to this agreement.
Agreed to this 7th day of September, 1999.
PRECISION STANDARD, INC.
By:/s/Darryl E. Mazow
/s/Matthew L. Gold
Matthew L. Gold
EXHIBIT 21
LIST OF SUBSIDIARIES
NAME UNDER
STATE OF WHICH SUBSIDIARY
NAME OF BUSINESS INCORPORATION DOES BUSINESS
- ---------------- ------------- -----------------
Hayes Holdings I Inc. Delaware
Hayes Holdings II Inc. Delaware
Pemco Aeroplex, Inc.* Alabama Pemco World Air
Services, a Precision
Standard Company
Air International Incorporated Delaware Pemco Aeroplex
Space Vector Corporation Delaware
Pemco Capital Corporation** Colorado
Pemco Nacelle Services, Inc. Colorado
Pemco Air Services System, Inc. Colorado Pemco Air Support
Services, Inc.
Pemco World Air Services, Inc. Colorado
Pemco World Air Services, A/S Copenhagen, Denmark
Pemco Inc.*** Delaware
* Hayes International Corporation changed its name to Pemco Aeroplex,
Inc.
** Pemcorp Industries, Inc. changed its name to Pemco Capital
Corporation
*** Precision Standard Corp. changed it name to Pemco Inc.
