SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended Commission File No. 0-13829
June 30, 2000
PEMCO AVIATION GROUP, INC.
(FORMERLY PRECISION STANDARD, INC.)
(Exact Name of Registrant as Specified in its Charter)
Delaware 84-0985295
---------------------- ----------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
1943 North 50th Street
Birmingham, Alabama 35212
-------------------------------------
(Address of Principal Executive Offices)
(205) 591-3009
--------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (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 Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of each of the issuer's classes of common
shares, as of the close of the period covered by this report:
CLASS OF SECURITIES OUTSTANDING SECURITIES
------------------- ----------------------
$.0001 Par Value 4,015,815 shares
Common Shares Outstanding at July 28, 2000
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
ASSETS
-------
(In Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------- ---------
<S> <C> <C>
Current assets:
Cash 0 $ 527
Accounts receivable, net 12,461 21,131
Inventories 16,535 17,035
Prepaid expenses and other 1,015 763
Deferred taxes 5,060 3,000
------- ------
Total current assets 38,071 42,456
Property, plant and equipment,
at cost:
Leasehold improvements 15,905 12,634
Machinery and equipment 20,802 19,780
------- ------
Less accumulated depreciation (22,361) (20,858)
------- ------
Net property, plant
and equipment 14,346 11,556
------- ------
Other non-current assets:
Prepaid pension costs 1,171 1,780
Intangible assets, net 95 225
Deposits and other 1,227 1,386
------- ------
2,493 3,391
-------- ------
Total assets $ 54,910 $ 57,403
-------- --------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------
(In Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------- ---------
<S> <C> <C>
Current liabilities:
Current portion of debt $ 2,717 $15,104
Accounts payable and accrued
Expenses 30,717 34,970
------ ------
Total current liabilities 33,434 50,074
Long-term debt 11,817 4,168
Other long-term liabilities 3,021 3,023
------ ------
Total liabilities 48,272 57,265
------ ------
Stockholders' equity:
Common stock, $.0001 par value,
12,000,000 shares authorized,
4,015,815 and 3,978,137 shares
issued and outstanding at
June 30, 2000 and December 31,
1999, respectively 1 1
Additional paid-in capital 5,017 4,769
Retained earnings (deficit) 1,620 (4,632)
------ ------
Total stockholders' equity 6,638 138
------ ------
Total liabilities and
stockholders' equity $54,910 $57,403
======= =======
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
June 30, June 30,
2000 1999
------------ ------------
<S> <C> <C>
Net sales $46,653 $39,718
Cost of sales 39,009 32,557
------ ------
Gross profit 7,644 7,161
Selling, general and
administrative expenses 6,057 3,459
----- -----
Income from operations 1,587 3,702
Other expense:
Interest 1,045 660
Other, net 72 118
----- -----
Income before income
Taxes 470 2,924
Provision (credit) for income taxes (2,066) 95
------ ------
Net income $ 2,536 $ 2,829
======= =======
Net income per common share:
Basic $0.63 $0.71
Diluted $0.59 $0.70
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
<TABLE>
<CAPTION>
Six Six
Months Ended Months Ended
June 30, June 30,
2000 1999
------------ ------------
<S> <C> <C>
Net sales $87,176 $79,603
Cost of sales 70,797 63,104
------ ------
Gross profit 16,379 16,499
Selling, general and
administrative expenses 10,308 9,376
------ ------
Income from operations 6,071 7,123
Other expense:
Interest 1,452 1,622
Other, net 144 542
------ ------
Income before income
taxes 4,475 4,959
Provision (credit) for income taxes (1,776) 180
------ ------
Net income $ 6,251 $ 4,779
====== ======
Net income per common share:
Basic $1.56 $1.20
Diluted $1.49 $1.18
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
--------------------------------------
<TABLE>
<CAPTION>
Six Six
Months Ended Months Ended
June 30, June 30,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,251 $ 4,779
Adjustments to reconcile net
income to net cash provided by
(used in)operating activities:
Depreciation and amortization 1,503 920
Deferred taxes (2,060) 0
Pension cost in excess of
Funding 609 609
Changes in assets and liabilities:
Accounts receivable, net 5,671 (4,621)
Inventories 500 (6,148)
Prepaid expenses and other (252) (409)
Deposits and other 289 (75)
Accounts payable and accrued
expenses (4,255) 4,014
------ ------
Total adjustments 2,005 (5,710)
------ ------
Net cash provided by (used in)
operating activities 8,256 (931)
------ ------
Cash flows from investing
activities:
Capital expenditures (4,293) (1,051)
------ ------
Net cash used in investing
activities (4,293) (1,051)
------ ------
Cash flows from financing
activities:
Net borrowings (repayments)
under revolving credit
facility (4,738) 3,262
Proceeds from exercise of
stock options 248 0
Net cash provided by
(used in) financing
activities (4,490) 3,262
------ ------
Net increase (decrease) in
Cash (527) 1,280
Cash beginning of period 527 193
------ ------
Cash end of period $ 0 $ 1,473
====== ======
Supplemental disclosure of
cash flow information:
Cash paid during the year
for:
Interest $ 1,484 $ 1,622
Income taxes $ 284 $ 180
</TABLE>
The accompanying notes are an integral part
of these consolidated statements.
PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated interim financial statements have been prepared by
the Company without audit. In the opinion of management, all
adjustments necessary for a fair presentation are reflected in the
interim financial statements. Such adjustments are of a normal and
recurring nature. The results of operations for the period ended
June 30, 2000 are not necessarily indicative of the operating results
expected for the full year. The interim financial statements should
be read in conjunction with the audited financial statements and
notes thereto included in the Company's 1999 Annual Report on Form 10-
K.
2. INVENTORIES
Inventories of the Company consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Work in-process $29,061 $31,335
Finished goods 1,560 3,365
Raw materials and supplies 4,147 2,704
------- -------
Total $34,768 $37,404
Less progress payments
and customer deposits (17,896) (20,369)
Less allowance for
estimated losses on
work in process (337) 0
------- -------
$16,535 $17,035
======= =======
</TABLE>
3. NET INCOME PER SHARE
Basic Earnings Per Share ("EPS") was computed by dividing net income
by the weighted average number of shares of common stock outstanding
during the periods. Diluted EPS was computed by dividing net income
by the weighted average number of shares of common stock and the
dilutive effects of the shares awarded under the Stock Option plan,
based on the treasury stock method using an average fair market value
of the stock during the respective periods.
The following table represents the net income per share calculations
for the three and six months ended June 30, 2000 and 1999:
(All numbers in thousands except Income Per Share)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30 June 30
<S> <C> <C>
2000
Net Income $2,536 $ 6,251
Weighted Average Shares 4,015 3,997
Basic Net Income Per Share .63 1.56
Dilutive securities:
Options 266 207
Diluted Weighted Average Shares 4,281 4,204
Diluted Net Income Per Share .59 1.49
1999
Net income $2,829 $ 4,779
Weighted Average Shares 3,978 3,978
Basic Net Income Per Share .71 1.20
Dilutive Securities:
Options 58 72
Diluted Weighted Average shares 4,036 4,050
Diluted Net Income Per Share .70 1.18
</TABLE>
Options to purchase approximately 46,000 and 579,000 shares of common
stock related to June 30, 2000 and 1999, respectively were excluded
from the computation of diluted income per share because the option
exercise price was greater than the average market price of the
shares.
4 NOTES PAYABLE
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------- ----------
(Unaudited) (Unaudited)
<S> <C> <C>
Revolving credit facility $ 7,647 $11,779
Senior Subordinated Loan
interest at 13.5% 6,150 6,150
Other obligations: interest
from 6 to 18%, collateralized
by security interests in
certain equipment 737 1,343
------ ------
Total debt 14,534 19,272
Less portion reflected
as current 2,717 15,104
------ ------
Long term debt, net of
current portion $11,817 $ 4,168
====== =======
</TABLE>
The Company maintains a $20 million revolving credit facility which
matures on August 31, 2000. The credit facility automatically renews
for one year in August unless cancelled by either the Lender or the
Borrower with 90 days notice. Neither the Borrower nor Lender gave
notice of cancellation during the required time period. 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 $1.4 million
available under the credit facility at June 30, 2000, based on the
calculation which defines the borrowing base. 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 Company is currently working with its lender to
negotiate a new three year credit facility.
All scheduled principal amortization for the Senior Subordinated loan
has been deferred for the original three-year term of the revolving
credit facility. The Senior Subordinated loan will be repaid over
five installments commencing on August 31, 2000, due each subsequent
quarter through August 31, 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. The Company was in violation
of some of these covenants at June 30,2000, which violation has been
waived by the lender as part of the new loan negotiation.
5. CONTINGENCIES
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.
LITIGATION
Pemco World Air Services A/S Bankruptcy and Sterling Lawsuit
The Company has been involved in certain bankruptcy litigation since
1997 relating to the Company's Danish subsidiary, Pemco World Air
Services A/S (Pemco World). During the quarter ending June 30, 2000
the Company made the $2.25 million of escrow payments called for in
its March 28, 2000 settlement agreement with Sterling Airways A/S and
the bankruptcy trustees of Pemco World. The escrowed amounts can only
be released to the trustees upon their satisfaction of certain
conditions. These conditions include, among other things, that the
trustees must obtain releases from all of the Danish subsidiary's
unsecured creditors that are 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 in the escrow account ($1.25
million), paid in March of 2000, 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 not released in connection with
the settlement agreement.
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.
On July 27, 2000 the U.S. District Court, Northern District of
Alabama determined that the group would not be certified as a class.
The Company has acted promptly with respect to any specific complaint
by any employee, and will continue to vigorously defend any
litigation resulting from this case.
Other
In addition to the above, the Company is involved in various legal
proceedings arising in the normal course of business. Management
does not believe the ultimate outcome of all such litigation will
have a material adverse effect on the consolidated financial position
of results of operations.
6. INCOME TAXES
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 1998,
1999 and during the first half of 2000, the Company returned to
profitability and generated taxable income for which net operating
loss carry-forwards were utilized. During the second quarter of 2000
the Company decreased its valuation allowance through its tax
provision to restore approximately $2.1 million to deferred tax
assets. The net deferred tax assets at June 30, 2000 reflect that
portion of total deferred taxes which management considers will more
likely than not be realized through future taxable income.
7. SEGMENT AND RELATED INFORMATION
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, at December 31, 1998 which
changed the way the Company reports information about its operating
segments. The Company has provided this segment information for the
three months and six months ended June 30, 2000 and June 30, 1999.
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. 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.
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
intersegment) revenues, gross profits and operating income. The
Company accounts for intersegment 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.
The following table presents information about segment profit or loss for
the quarter ended June 30, 2000:
<TABLE>
<CAPTION>
(In $ Thousands)
Mfg. and Consoli-
Government Commercial Overhaul dated
---------- ---------- -------- -------
<S> <C> <C> <C> <C>
Revenues from
external,
domestic
customers $27,900 $13,624 $ 4,680 $ 46,204
Revenues from
external
foreign
customers 0 449 0 449
Intersegment
revenues 222 0 0 222
------- ------ ------ ------
Total
Segment
Revenues $28,122 $14,073 $ 4,680 $46,875
Elimination (222)
-------
Total Revenues $46,653
=======
Gross Profit 6,915 (240) 968 7,643
Segment Operating
Income 4,130 (2,463) (80) 1,587
Interest
Expense 1,045
Other 72
Income taxes (2,066)
Net $ 2,536
=======
Assets $32,290 $10,937 $11,683 $ 54,910
Deprec/Amort 428 192 74 694
Cap. Additions 1,612 959 197 2,768
</TABLE>
The following table presents information about segment profit or loss for
the quarter ended June 30, 1999:
<TABLE>
<CAPTION>
(In $ Thousands)
Mfg. and Consoli-
Government Commercial Overhaul dated
---------- ---------- -------- -------
<S> <C> <C> <C> <C>
Revenues from
external,
domestic
customers $18,861 $11,628 $ 6,085 $ 36,574
Revenues from
external
foreign
customers 0 3,144 0 3,144
Intersegment
revenues 20 0 95 115
------- ------ ------ ------
Total
Segment
Revenues $18,881 $14,772 $ 6,180 $39,833
Elimination (115)
-------
Total Revenues $39,718
=======
Gross Profit 2,486 2,929 1,746 7,161
Segment Operating
Income 2,240 557 5 $ 2,802
Interest
Expense 660
Other (782)
Income taxes 95
Net $ 2,829
=======
Assets $30,113 $16,874 $14,537 $61,524
Deprec/Amort 71 163 140 374
Cap. Additions 248 141 357 746
</TABLE>
The following table presents information about segment profit or loss for
the six months ended June 30, 2000:
<TABLE>
<CAPTION>
(In $ Thousands)
Mfg. and Consoli-
Government Commercial Overhaul dated
---------- ---------- -------- -------
<S> <C> <C> <C> <C>
Revenues from
external,
domestic
customers $53,583 $22,509 $ 9,888 $ 85,980
Revenues from
external
foreign
customers 0 1,196 0 1,196
Intersegment
revenues 228 0 12 240
------- ------ ------ ------
Total
Segment
Revenues $53,811 $23,705 $ 9,900 $ 87,416
Elimination (240)
-------
Total Revenues $87,176
=======
Gross Profit 13,063 1,154 2,162 16,379
Segment Operating
Income 8,314 (2,251) 8 6,071
Interest
Expense 1,452
Other 144
Benefit
for income
taxes (1,776)
Net Income $ 6,251
=======
Assets $32,290 $10,937 $11,683 $ 54,910
Deprec/Amort 775 295 144 1,214
Cap. Additions 3,063 1,026 204 4,293
</TABLE>
The following table presents information about segment profit or loss for
the six months ended June 30, 1999:
<TABLE>
<CAPTION>
(In $ Thousands)
Mfg. and Consoli-
Government Commercial Overhaul dated
---------- ---------- -------- -------
<S> <C> <C> <C> <C>
Revenues from
external,
domestic
customers $41,283 $19,078 $13,258 $ 73,619
Revenues from
external
foreign
customers 0 5,984 0 5,984
Intersegment
revenues 35 0 125 160
------- ------ ------ ------
Total
Segment
Revenues $41,318 $25,062 $13,383 $ 79,763
Elimination (160)
-------
Total Revenues $79,603
=======
Gross Profit 9,956 3,870 2,673 16,499
Segment Operating
Income 5,931 787 405 7,123
Interest
Expense 1,622
Other 542
Benefit
for income
taxes 180
Net Income $ 4,779
=======
Assets $30,113 $16,874 $14,537 $ 61,524
Deprec/Amort 437 259 224 920
Cap. Additions 426 232 393 1,051
</TABLE>
ITEM 2.
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.
During the second quarter of 2000, the Company reported operating income
of approximately $1.6 million, a decrease of $2.1 million over the same
period of 1999. Total income before taxes for the second quarter of 2000
was approximately $0.5 million vs. $2.9 million for the same period in
1999. During the first six months of 2000, the Company reported operating
income of approximately $6.1 million, a decrease of $1.0 million over the
same period of 1999. Total income before taxes for the first six months
of 2000 was approximately $4.5 million vs. $5.0 million for the same
period in 1999.
RESULTS OF OPERATIONS
Three months ended June 30, 2000
versus three months ended June 30, 1999
Revenues from operations for the second quarter of 2000 grew from the
second quarter of 1999, increasing 17.6% from $39.7 million in 1999 to
$46.7 million in 2000. Government segment sales increased approximately
48.7% from $18.9 million in 1999 to $28.1 million in 2000. Commercial
segment sales decreased 4.7% from $14.8 million in 1999 to $14.1 million
in 2000. Sales in the Manufacturing and Overhaul segment decreased 24.2%
from $6.2 million in 1999 to $4.7 million in 2000. The Company's overall
mix of business between government and commercial customers moved from
23.3% commercial and 76.7% government in 1999 to 31.5% commercial and
68.5% government in 2000.
Government segment sales in the second quarter of 2000 increased
approximately $9.2 million due primarily to increases in deliveries and
sales under the Birmingham facility's KC-135 and C-130 contracts.
Commercial segment sales increased $4.6 million under commercial aircraft
maintenance/modification contracts at the Dothan and Victorville
facilities but decreased $5.3 million in government related H-3 helicopter
sales.
Sales of the Manufacturing and Overhaul segment decreased $1.5 million
principally due to lower sales in both the Space Vector operating unit and
at Pemco Nacelle (whose operations were curtailed at the end of the first
quarter of 2000).
Cost of sales increased during the second quarter from $32.6 million in
1999 to $39.0 million in 2000. The ratio of cost of sales to net sales
increased from 82.0% in the second quarter of 1999 to 83.6% in 2000. Most
of this increase is attributable to the Commercial segment which
experienced losses on several aircraft delivered during the quarter and
minimal margins on its deliveries of H-3 helicopters.
Selling, general and administrative (SG&A) expenses increased from $3.5
million in the second quarter of 1999 to $6.1 million in 2000. Selling,
general and administrative expenses increased as a percentage of revenue
increasing from 8.7% in the second quarter of 1999 to 13.0% during the
same period of 2000. During the second quarter of 2000 the Company
continued its overall corporate restructuring, which began in the third
quarter of 1999, recruiting and adding key executives, developing an
improved corporate legal structure, pursuing a new and increased credit
facility, and developing compensation packages for the Company.
Interest expense was $0.7 million in second quarter of 1999 versus $1.0
million in 2000. The average interest rate in the second quarter of 2000
on the Revolving Credit facility was 12.75% as compared to 11.25% during
the second quarter of 1999.
Six months ended June 30, 2000
versus six months ended June 30,1999
Revenues from operations for the first half of 2000 grew over the first
half of 1999, increasing 9.5% from $79.6 million in 1999 to $87.2 million
in 2000. Government segment sales increased approximately 30.3% from
$41.3 million in 1999 to $53.8 million in 2000. Commercial segment sales
decreased 5.6% from $25.1 million in 1999 to $23.7 million in 2000. Sales
in the Manufacturing and Overhaul segment decreased 26.1% from $13.4
million in 1999 to $9.9 million in 2000. The Company's overall mix of
business between government and commercial customers moved from 30.9%
commercial and 69.1% government in 1999 to 30.0% commercial and 70.0%
government in 2000.
Government segment sales in the first six months of 2000 increased
approximately $12.5 million due primarily to increases in deliveries and
sales under the Birmingham facility's KC-135 and C-130 contracts.
Commercial segment sales increased $2.9 million under commercial aircraft
maintenance/modification contracts at the Dothan and Victorville
facilities. This increase in Commercial revenue was offset by decreases of
$4.3 million in government related H-3 helicopter sales.
Sales of the Manufacturing and Overhaul segment decreased $3.5 million
principally due to lower sales in both the Space Vector operating unit and
at Pemco Nacelle (whose operations were curtailed at the end of the first
quarter of 2000), partially offset by slightly higher sales at Pemco
Engineers.
Cost of sales increased during the first six months of the year growing
from $63.1 million in 1999 to $70.8 million in 2000. The ratio of cost of
sales to net sales increased from 79.3% in the first half of 1999 to 81.2%
in 2000. Most of this increase is attributable to the Commercial segment
which experienced losses on several aircraft delivered during the second
quarter and minimal margins on its deliveries of H-3 helicopters.
Selling, general and administrative expenses increased from $9.4 million
in the first six months of 1999 to $10.3 million in 2000. Selling, general
and administrative expenses as a percentage of revenue remained constant
at 11.8% for the first half of 1999 and 2000.
Interest expense was $1.6 million in six months ending June 30 of 1999
versus $1.5 million for the same period in 2000. The average interest rate
in the first half of 2000 on the Revolving Credit facility was 12.47% as
compared to 11.25% during the first six months of 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash resources showed significant improvement over the six
months ended June 30 1999. In the first half of 2000 the Company
generated cash from operating activities of $8.3 million vs. using cash of
$0.9 million during the same period of 1999.
The following is a discussion of the significant items in the Company's
Consolidated Statement of Cash Flows for the quarters ended June 30, 1999
and 2000.
The Company's pension expense as determined by its actuary is $1.1 million
for 1999 and 2000. In the first half of 1999 and 2000, the Company made
no contributions to the pension plan and expensed approximately $0.6
million.
Accounts payable and accrued expenses decreased by $4.3 million from $35.0
million at December 31, 1999 to $30.7 million at the end of the first half
of 2000. During the same period of 1999 Accounts payable and accrued
expenses increased $4.0 million. Accrued interest payments at June 30,
2000 were $0.0 million representing a decrease of $0.2 million over that
due at June 30, 1999.
Accounts receivable decreased $5.7 million in the six months ended June
30, 2000, dropping from $21.1 million at December 31, 1999 to $15.4
million at the end of the first half. During 1999 accounts receivable
increased $4.6 million. Net inventories had a slight decrease during the
first six months of $0.5 million. In 1999 net inventories grew by $6.1
million during the same period.
During the first half of 2000, the Company significantly increased the
cash used in investing activities, spending approximately $4.3 million,
primarily on leasehold improvements and capital assets whose acquisition
had been deferred during prior years. In 1999 the Company invested $1.1
million in the same period.
At June 30, 2000, the Company had open borrowing capacity under its lines
of credit of $1.4 million. At June 30, 1999 the Company was over its
borrowing capacity by $0.7 million.
During 1999 and 2000, inflation and changing prices have had no
significant impact on the Company's net sales or revenues or on income
from continuing operations.
BACKLOG
The following table presents the Company's backlog (in thousands of
dollars) at June 30, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
U.S. Government $121,921 $161,499
Commercial 10,843 24,028
-------- -------
$132,764 $185,527
======== =======
</TABLE>
As of June 30, 2000, 92% of the Company's backlog related to work for the
U.S. Government versus 87% for the period ending June 30, 1999. The
Company's Government backlog decreased $39.6 million as compared to the
first half of 1999. Of this amount, approximately $26.0 million is in the
Government segment and is primarily related to increased deliveries of
aircraft under the KC-135 contract coupled with a lower level of aircraft
input during the first half. The completion of the AIT II contract at the
Company's Space Vector operating unit accounts for $6.7 million of the
year to year reduction and the remaining $6.5 million is due to the
winding down of the Commercial segment's H-3 Helicopter program. Overall
Commercial backlog decreased $13.2 million. Most of this reduction is in
the Commercial Segment and represents weaker than anticipated orders
during the first half of 2000. Based upon recent business development
activities, it is management's opinion that both Government and Commercial
backlog will increase in the coming months.
CONTINGENCIES
See Note 5 to the Consolidated Financial Statements included herein.
FORWARD LOOKING STATEMENTS
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 Quarterly 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
Quarterly Report that are not historical facts. When used in this
Quarterly Report, the words "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates" and similar expressions are generally
intended to identify forward-looking statements. Such forward-looking
statements are necessarily estimates reflecting the Company's best
judgment based on current information. Because these forward-looking
statements involve risks and uncertainties, there are important factors
that could cause actual results to differ materially from those expressed
or implied by these forward-looking statements. Such factors include
those identified from time to time in the Company's Securities and
Exchange Commission filings and other public announcements.
ITEM 3.
QUANTATIVE 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 4 to the Consolidated
Financial Statements herein and bears interest at prime 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 (13.0% at June 30, 2000). If the prime rate increased 100 basis
points, the effect on net income would approximate a $76,500 reduction in
net income on an annual basis, $19,100 for the second quarter of 2000.
PEMCO AVIATION GROUP, INC.
OTHER INFORMATION
PART II.
Item 1 Legal Proceedings
See Note 5 to Part I, Financial Statements
Item 2 Changes in Securities
Effective May 23, 2000, the Company completed a change in its
state of incorporation from Colorado to Delaware. As a result of this
change in state of incorporation, the constituent instruments defining the
rights of holders of the Company's common stock have changed from Colorado
instruments to Delaware instruments. The Company is now governed by a
Certificate of Incorporation filed in the State of Delaware, a copy of
which is attached to this Form 10-Q as Exhibit 3.1, and by Delaware
Bylaws, a copy of which is attached to this Form 10-Q as Exhibit 3.2. In
addition, the rights of holders of common stock of the Company are now
governed by the Delaware General Corporation Law rather than by the
corporate law of the State of Colorado.
Item 3 Defaults Upon Senior Securities
None
Item 4 Submission of Matters to a Vote of Security Holders
The Company's Annual meeting of shareholders was held on May 18,
2000. At the meeting the shareholders approved a change in the Company's
state of incorporation from Colorado to Delaware. As a result of this
change in the state of incorporation the Company's name changed from
Precision Standard, Inc. to Pemco Aviation Group, Inc. As a further result
of the Delaware incorporation the Board of Directors was divided into
three classes which will serve staggered terms. At the meeting Michael E.
Tennenbaum and Matthew L. Gold were elected as Class III directors and
will serve until 2003. General Thomas C. Richards and Mark K. Holdsworth
were elected as Class II directors and will serve until 2002. H.T. "Skip"
Bowling and Ronald A. Aramini were elected as Class I directors and will
serve until 2001. The shareholders also ratified the appointment of
Arthur Andersen LLP as the Company's independent public accountants for
the year ending December 31, 2000.
The number of votes cast for, against, abstained, or were not
voted for the change in the Company's state of incorporation from Colorado
to Delaware was as follows:
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-votes
---------- -------- ------- ---------
<S> <C> <C> <C>
2,027,984 24,676 2,113 1,313,397
</TABLE>
The number of votes cast for or withheld for each director
nominee was as follows:
<TABLE>
<CAPTION>
Nominee For Withheld
------- --------- --------
<S> <C> <C>
Michael E. Tennebaum 3,357,932 10,238
Matthew L. Gold 3,346,657 21,513
Gen. Thomas C. Richards 3,357,932 10,238
Mark K. Holdsworth 3,357,932 10,238
H.T."Skip" Bowling 3,357,932 10,238
Ronald A. Aramini 3,357,932 10,238
</TABLE>
The number of votes cast for, against and abstentions for
ratification of auditors was as follows:
<TABLE>
<CAPTION>
For Against Abstain
---------- -------- --------
<S> <C> <C>
3,337,302 18,630 12,238
</TABLE>
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Incorporation of Pemco Aviation Group,
Inc.
3.2 Bylaws of Pemco Aviation Group, Inc.
10.1 Agreement and Plan of Merger dated April 20, 2000
between Precision Standard, Inc and Pemco Aviation Group,
Inc.
11.1 Computation Of Earnings Per Share included in Part I,
Item I, Note 3 of this Form 10-Q
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEMCO AVIATION GROUP, INC.
Date: 07/31/00 By: /s/ Ronald A. Aramini
---------------------------
Ronald A. Aramini, Chief
Executive Officer
(Principal Executive Officer)
Date: 07/31/00 By: /s/ John R. Lee
----------------------------
John R. Lee
Sr. Vice President, Chief Financial
Officer (Principal Finance & Accounting
Officer)
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
3.1 Certificate of Incorporation of Pemco Aviation Group, Inc.
3.2 Bylaws of Pemco Aviation Group, Inc.
10.1 Agreement and Plan of Merger dated April 20, 2000 between
Precision Standard, Inc and Pemco Aviation Group, Inc.
27.1 Financial Data Schedule
All of the foregoing exhibits are filed electronically herewith.
