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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the Fiscal Year Ended December 31, 2000, or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
[No Fee Required] For The Transition Period From ________ To _________.
Commission file Number: 0-13829
PEMCO AVIATION GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-0985295
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1943 North 50th Street Birmingham, Alabama 35212
(Address of principal executive offices) (Zip Code)
205-592-0011
(Registrant's telephone number, including area code:
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. [X] Yes [_] No
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. [_]
The aggregate market value of the Common Stock held by non-affiliates on March
21, 2001 was approximately $19,722,497
The number of shares of the Company's Common Stock outstanding as of March 21,
2001 was 4,027,815
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, 2000) are incorporated by reference in Part III.
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 2000
PEMCO AVIATION GROUP, INC.
PART I
Item 1. Business 1
Item 2. Properties 16
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 20
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 33
Item 8. Financial Statements and Supplementary Data 33
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 72
PART III
Item 10. Directors and Executive Officers of the Company 72
Item 11. Executive Compensation 72
Item 12. Security Ownership of Certain Beneficial Owners and Management 72
Item 13. Certain Relationships and Related Transactions 72
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 72
SIGNATURES S-1
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PART I
Item 1. Business.
A. GENERAL
Pemco Aviation Group, Inc. (formerly 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
primarily through its Government Services Group, which specializes in providing
Programmed Depot Maintenance ("PDM") on large transport aircraft. In addition to
PDM, various other repair, maintenance and modification services are performed
for the Company's customers. The Government Services Group's contracts are
multi-aircraft programs generally lasting several years. The Group's facilities,
tooling, experienced labor force, quality, and on time delivery record position
it as one of the premiere providers of PDM for large transport aircraft in the
Country.
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 programs 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 facilities, tooling, and experienced labor force enable it to perform
virtually any airframe modification a commercial customer may require. The
Company has performed over 250 cargo conversions of narrow and wide-body
commercial aircraft.
The Company's Manufacturing and Overhaul Group designs and manufactures a wide
array of proprietary aerospace products including various space systems, such as
guidance control systems and launch vehicles; aircraft cargo-handling systems;
and precision parts and components for aircraft. In addition, the Manufacturing
and Overhaul Group operates an aircraft parts distribution company.
B. SIGNIFICANT DEVELOPMENTS
New Lending Facility
On November 2, 2000, the Company entered into new credit facilities, which were
used to pay off and terminate its previous facility. The new facilities consist
of a $20.0 million revolving credit facility, two term loans totaling $5.0
million in the aggregate, and a capital equipment
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acquisition facility of $3.1 million. The new credit facilities represent a
significant improvement in the interest rate compared to the rate of the
previous facility. (See Notes to Financial Statements Below.)
New Labor Agreement with the IAM
On August 19, 2000, the membership of the International Association of
Machinists and Aerospace Workers ("IAM") voted to ratify a new five-year
contract with the Dothan division of the Company's Pemco Aeroplex subsidiary.
The contract began August 19, 2000 and extends through August 9, 2005. The new
contract's five-year term compares favorably to the three-year term of the
previous contract. The new agreement calls for wage increases of 17% over the
life of the contract and increases in pension benefits.
Re-incorporation of the Company & Name Change
On May 18, 2000, the corporation stockholders of the Company approved the merger
of Precision Standard, Inc., incorporated in Colorado, with Pemco Aviation
Group, Inc., incorporated in Delaware. Pemco Aviation Group, Inc. is the
surviving corporation. The intent of the transaction was to change the state of
incorporation of the Company and to increase industry awareness of the Company
by aligning the parent company's name with that of its better-known subsidiaries
and trademarks.
Settlement of Pemco World Air Services A/S Bankruptcy and Sterling Lawsuit
On March 28, 2000, the Company entered into a settlement agreement with the
bankruptcy trustees of Sterling Airways A/S ("Sterling"), and the bankruptcy
trustees of Pemco World Air Services A/S ("Pemco"), pursuant to which the
Company paid a total of $3.5 million in settlement of the Sterling litigation
and all claims the Pemco trustees may have against the Company. As part of the
settlement, the Company received releases from all creditors with claims in
excess of $100,000. (See Item 3. Legal Proceedings below.)
KC-135 Bundling Litigation
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 that 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. During 2000 the Company determined that
pursuing the complaint further was not necessarily in its best interests.
Accordingly, in the interest of promoting a better relationship with one of its
primary customers, the Company filed a motion for dismissal with the court to
end this litigation. The motion was granted on July 7, 2000. (See Item 3. Legal
Proceedings below.)
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Review of the Company's Strategy & Operations
During 2000 the Company took steps to increase and strengthen the management
team and conducted detailed reviews of the Company's overall strategy and
operations. As a result of these reviews, the Company made the decision to
concentrate its commercial Maintenance Repair and Overhaul (MRO) activities in
one location, exit the business of repairing engine nacelles, which had lost
money during four of the past five years, and increase its emphasis on the
conversion of aircraft from passenger to cargo configurations. Accordingly,
during 2000 the Company took the following actions. The MRO operations in
Victorville, California were phased out and all commercial MRO operations are
now concentrated in Dothan, Alabama. The Company ceased sales activities in the
area of repairing engine nacelles and after performing its responsibilities on
its remaining contracts closed this operation in Clearwater, Florida and
transferred some employees and most of the remaining inventory and equipment to
the MRO operations in Dothan, Alabama. On August 10, 2000, the Company concluded
an agreement with Officine Meccaniche Aeronautiche S.p.A. (OMA) to manufacture
cargo doors for 737-300 aircraft for use in passenger to cargo conversion of
aircraft. The Company believes that it is the only company in the world
currently certified by the Federal Aviation Administration (FAA) for passenger
to freighter conversions of the 737-300.
C. INDUSTRY OUTLOOK
In general, in-spite of the signs of a slow-down in general economic growth, the
Company believes demand for aircraft maintenance and modification services will
remain strong. 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 should provide additional demand
for cargo aircraft, which in turn should result in increased demand for
passenger to cargo aircraft conversions in the next several years.
Military Maintenance and Modification Industry
Military maintenance and modification contracts continue to be 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 that 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 Government Services Group to team with one or
more other operators in order to provide a bid for the bundled contract.
The appropriation 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. For example, in March 1998,
the C-130 PDM
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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 budgets in prior years. 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. Typically
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 48 years has been military aircraft
maintenance and modification. The Company believes that this core competency
will enable it to provide services to its military customers and to participate
in teaming arrangements with public or private operators. Bundling requirements,
however, may limit the Company's ability to compete for major new military
contracts as a prime contractor. In order to mitigate the effects of contract
bundling, the Company plans to team with major contractors whenever desirable.
Commercial Maintenance and Modification 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
through the year 2010, 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 seventeen years. The commercial maintenance
industry is also expected to grow in the upcoming years as airlines continue to
outsource their maintenance needs. In its Market Outlook 2000, Boeing estimates
that no less than 25% of all airline heavy maintenance demand will be outsourced
to independent repair facilities.
The rapid increase in worldwide freight shipments has spawned a demand for
dedicated cargo aircraft. The majority (70%) of air cargo planes have been
converted from a pure passenger configuration. Overnight package delivery, a
service that has experienced much growth in the past 15 years in the U.S., is
beginning to grow in Europe. The anticipated success of overnight package
carriers in Europe and elsewhere is expected to increase the demand for cargo
conversions. Boeing estimates that 70% of the additional freighters will be
passenger-to-cargo conversions.
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 programs 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
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Company's commercial customers include some of the major global lessors of
aircraft as well as airlines, couriers and airfreight carriers.
The Company employs a large skilled work force. The principal services performed
are PDM, commercial C-level and D-level heavy maintenance checks, passenger-to-
cargo conversions, passenger-to-quick-change conversions, aircraft stripping and
painting, 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, and
various military depots. The Company's competition for outsourced commercial
work in the United States consists of the B.F. Goodrich Airframe Services
Division (formerly Tramco), Dee Howard Aircraft Maintenance, Timco owned by
Aviation Sales Company, Singapore Technologies (Mobile Aerospace Engineering and
Dalfort Aerospace), and approximately ten smaller independent repair and
modification operators. 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.
The Company considers its competitive strengths to be its emphasis on quality,
substantial capacity, a trained, experienced, and stable labor force, product
support, proprietary products, systems integration capability, and strong
customer base.
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 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 support peacetime
operations and war or contingency deployments. The armed forces of the U.S.
cannot deploy without these resources. 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, systems
integration and modification of fixed wing aircraft. The PDM 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
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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 work force is familiar with all aspects of military aircraft
maintenance, repair, and overhaul.
The Company has provided quality maintenance, integration and modification work
on a wide variety of military aircraft over the past 48 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 contract for the PDM of
its KC-135 aircraft consisting of one base year and six option years. In
September 2000, the KC-135 program began its sixth, and final, option year. The
total value of the contract over the seven-year period, if fully funded, is
estimated at over $500 million. While the Company is currently in negotiations
and discussions with the U.S. Air Force and other parties on its retention, for
an extended period, as an active source of repair on KC-135 aircraft there can
be no assurance that the Company will continue to provide maintenance services
on the KC-135. The Company first performed PDM on the KC-135 in 1968 and has
since processed over 3,000 such aircraft.
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 rewire, corrosion prevention control, auto pilot and fuel savings
advisory system modifications.
The Government Services group is located in Birmingham, Alabama in facilities
that are believed to be the largest for third party maintenance in North
America.
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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. Programs for commercial
maintenance range from single aircraft to multi-aircraft and can span a year or
longer. The principal services performed under commercial maintenance contracts
are "C" and "D" maintenance 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 process of converting a passenger plane to a freighter configuration entails
completely stripping the interior, strengthening the load-bearing capacity of
the flooring, installing the bulkhead or cargo net, cutting into the fuselage
for the installation of a cargo door, reinforcing the surrounding structure for
the new door, replacing windows with metal plugs, and installing the cargo door
itself. The aircraft interior may also need to be lined to protect cabin walls
from pallet damage, the air conditioning system modified, and smoke detection
installed. Additionally, the Company installs the on-board cargo handling
system. Conversion contracts also typically require concurrent "C" or "D"
maintenance checks as the operator takes maximum advantage of the time that the
aircraft will be out of service. It is also possible that the converted aircraft
have often been out of service for some time and maintenance is required to
bring the plane up to current FAA standards.
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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 air-stairs 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 currently
require.
Contracts for commercial aircraft are performed at the Company's Dothan, Alabama
facility. During 2000 this facility received the FAA Diamond award for its
training activities.
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. The FAA, under a specific certificate, certifies each
type of aircraft. 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. The Company
believes that it is the only company in the world currently certified by the
Federal Aviation Administration (FAA) for passenger to freighter conversions of
the 737-300, and with what it anticipates to be the increased demand for
conversions of this model of aircraft, the Company is expecting to expand this
line of business in 2001.
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 operates an aircraft parts
distribution company. This group is comprised of independent niche manufacturing
and service businesses, which, with the exception of Space Vehicles and Support
Systems, are complementary to the Company's aircraft services businesses.
Cargo Handling Systems & High Tolerance Components
The Company designs and manufactures on-board cargo-handling systems for all
types of large transport aircraft and certain military aircraft. In addition,
the Company also produces high tolerance components used in a variety of
industrial, commercial and residential applications. The Company employs its in-
house design engineering staff, skilled labor force, fully-computerized
machinery, and advanced manufacturing techniques to produce a wide variety of
products. These products include the Company's own proprietary aircraft cargo
handling systems as well as other cargo handling systems, individual spare parts
and other precision-machined components.
The Company's principal markets for cargo handling systems are all major United
States and
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foreign airlines and aircraft manufacturers. The Company has approximately eight
competitors in this market and considers its strengths in this industry to be
its innovation, quality and response time, and on time delivery.
The markets for high tolerance components cover a wide range of manufacturers in
numerous industries. There are approximately 500 manufacturers of 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 high tolerance components. The
Company considers its strengths in this industry to be its quality, competitive
pricing, and on time delivery.
McDonnell Douglas (Boeing) has recognized this division as a Gold or Silver
level contractor in each of the last 5 years.
The Company's Pemco Engineers division, located in Corona, California, produces
the cargo handling system and high tolerance components product lines.
Parts Support
The Company's Parts Support and Component Overhaul service provides a
comprehensive source for aircraft spare parts 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. PASS markets
its parts support and component overhaul service to commercial carriers
worldwide and, in addition sells to foreign armed services. In the area of
supporting and selling the Company's designed and manufactured parts, PASS
often benefits from the marketing and customer-base of its other subsidiaries.
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 Space Vector subsidiary is located in Chatsworth, 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
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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 U.S. Government's competitive bidding practices.
E. SALES
Foreign and Domestic Operations and Export Sales
All of the Company's revenues during 2000 were generated in the United States
and all of the Company's assets were located in the United States. Approximately
2% of revenues in 2000 were generated from foreign owned entities.
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 PASS 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.
The following table presents the percentages of total sales for each principal
product and service rendered for the last three fiscal years and the percentage
of export sales for the last three fiscal years:
Product and Service Rendered 2000 1999 1998
---------------------------- ---- ---- ----
Aircraft Maintenance and Modification 89% 85% 83%
Supersonic and Subsonic Aerial Tow Targets and 0% 0% 1%
Wing Tip Pods
Space Vehicles and Support Systems 4% 7% 7%
Cargo Handling Systems 6% 5% 6%
Parts Support and Component Overhauls *1% *1% 1%
Nacelle Overhaul and Repair *1% 2% 2%
---- ---- ----
Total 100% 100% 100%
==== ==== ====
Export Sales - Principally Europe and Canada 2% 6% 11%
* Less than
Major Customers
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The following table presents the percentages of total sales for the Company's
largest customers for the last three fiscal years:
Customer 2000 1999 1998
-------- ---- ---- ----
U.S. Government - principally the Air Force, 75% 63% 55%
Army, Navy, and NASA
Emery Worldwide 9% 0% 0%
Northwest Airlines 5% 12% 7%
F. BACKLOG
The following table presents the Company's backlog (in thousands of dollars) at
December 31, 2000 and 1999:
Customer Type 2000 1999
------------- ----- ----
U.S. Government $109,260 $169,172
Commercial 12,041 17,560
-------- --------
Total $121,301 $186,732
======== ========
Government backlog, which represents 90.1% of the Company's total backlog,
decreased $59.9 million, 35.4%. $53.1 million of the decrease is related to the
Company's KC-135 contract and is attributed to the U.S. Government not funding
the aircraft in the sixth option year of the contract as rapidly as had been
done in previous years and the lower number of aircraft currently slated for
induction into PDM at the Company's facilities. The U.S. Government delivered 20
aircraft in 1997, 35 aircraft in 1998, 39 aircraft in 1999, and 37 aircraft in
2000 under the contract. This decrease in the Company's government backlog was
exacerbated by a decrease in the backlog of the Commercial Services Group of
$5.6 million and a decrease at Space Vector of $1.2 million. The Commercial
Services decrease was due to the completion of the Company's H-3 Helicopter
contract.
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.
The Company's commercial backlog at December 31, 2000 decreased $5.5 million or
31.4% as the Company made deliveries against existing backlog in the Commercial
Services Group without
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producing the requisite level of orders to adequately replenish the backlog,
causing a decrease of $7.0 million. This decrease was partially offset by an
increase in backlog at Pemco Engineers of $1.5 million.
The Company has historically derived 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 over and
above time and material sales.
G. 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 2000 and does not
anticipate any shortages of critical commodities over the longer term.
Predicting the availability of supplies is extremely difficult because so many
factors causing such possible shortages are outside the Company's control.
The Company procures many components, parts and equipment items from various
domestic companies. The Company faces some dependence on suppliers for certain
types of parts involving highly technical processes; however, this risk has
lessened in the past few years as additional high technology suppliers have
entered the market.
The U.S. Government furnishes a significant portion of the equipment and
components used by the Company in the fulfillment of the Company's services
under U.S. Government contracts without charge to the Company. 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 from the
U.S. Government in each of 1998, 1999 and 2000, and as a result, experienced a
disruption in scheduled workflow.
During January of 2001, the Company has incurred a significant increase in its
costs for natural gas. This increase has been in the range of 2.5 times the
amount that the Company experienced in 2000 and is due to both the increase in
the cost of natural gas itself and an increase in the number of heating days.
Natural gas is used by the Company to heat its aircraft bays to the temperatures
required for the processes of striping and sealing aircraft. If recent trends
continue, the Company could see an impact on its earnings in the range of $0.5
to $1.0 million in 2001.
H. PATENTS, TRADEMARKS, COPYRIGHTS AND STCs
The Company holds approximately 120 FAA-issued STCs, that 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
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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) that
authorize it to manufacture parts of its own design or that of other
manufacturers related to its cargo handling systems. 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 doorsill
designed for use in cargo configurations and a design patent for a braking
roller for preventing unintended movement of cargo containers. The Company does
not believe that the expiration or invalidation of either of these patents would
have a material adverse impact upon its financial condition or results of
operations.
I. 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, re-mediate such
contamination as necessary, and pay a penalty of $95,000 over a three year
period. During 1999 the Company drilled test wells and took samples under its
Phase I Site Characterization Plan. These samples were forwarded to the EPA in
1999. Throughout 2000 the Company has been awaiting a response from the EPA.
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.
J. EMPLOYEES
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On December 31, 2000, the Company employed 2,037 persons. Approximately 1,571 of
these employees are covered under collective bargaining agreements with the
United Automobile, Aerospace, and Agricultural Implement Workers of America
("UAW"), International Association of Machinists and Aerospace Workers ("IAM"),
and the Association of Plant Police of America ("APPA"). (See Significant
Developments.)
On June 13, 2000 the employees of the Company's Pemco Engineers division voted
to organize as members of the United Automobile, Aerospace, and Agricultural
Implement Workers of America (UAW). As of the date of this report, an agreement
has been negotiated, but a contract has not been signed.
Item 2. Properties.
Following is a list of the Company's properties.
Birmingham, Alabama
The Government Services Group, together with the Company's executive offices,
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 55,000 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 for
handling air craft on the Company's property 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 (United Kingdom) Repair Station
and maintains Department of Defense "SECRET" security clearance.
The facility is leased from the Birmingham Airport Authority. The lease expires
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
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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.
Chatsworth, California
Space Vector Corporation, part of the Manufacturing and Overhaul Group, is
located in 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 2004.
Corona, California
The Pemco Engineers operating unit of the Manufacturing and Overhaul Group is
located in Corona, California. The facility consists of approximately 28,000
square feet and houses production and administrative functions. The facility is
held under a lease agreement, which expires in June 2002.
Clearwater, Florida
The Company's Clearwater facility is located at the St. Petersburg/Clearwater
International Airport in 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 PASS
operating unit of the Manufacturing and Overhaul Group, and until March 31,
2000, also housed the operations of Pemco Nacelles (See Significant
Developments). The majority of the facility has been sub-leased to a third
party aviation related business since April of 2000.
The facility is leased from Pinellas County, a political subdivision of the
State of Florida, under a lease agreement that expires in September 2005,
exclusive of three optional renewal periods of five years each which would
extend the lease until September 2020.
Item 3. Legal Proceedings
Government Lawsuits
On May 27, 1997, the United States Attorney filed a three 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
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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 the Eleventh Circuit Court
ordered en banc reconsideration. In November of 1999 the Eleventh Circuit
reversed and reinstated part of the case. On February 7, 2001 the case was
settled between the parties, with no recognition of liability.
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. During 2000 the Company determined that
pursuing the complaint further was not necessarily in its best interests.
Accordingly, in the interest of promoting a better relationship with one of its
primary customers, the Company filed a motion for dismissal with the court to
end this litigation. The motion was granted on July 7, 2000.
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. Following
several settlements, the only remaining claim is for indemnity on one aircraft
operated by Tower Air. Management believes that the result of this lawsuit will
not have a material impact on the business of the Company.
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 do not require National Union Fire Insurance Company 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/Airlog and others.
The complaint filed in the 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. As of the date of this report, National
Union Fire Insurance Company has not moved to lift the stay.
Pemco World Air Services A/S Bankruptcy and Sterling Lawsuit
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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 would assert a claim in the
amount of approximately $2 million against the Company for the alleged negative
equity of the Danish subsidiary. The Company was subsequently informed that
creditors against the bankruptcy estate filed additional claims and that the
aggregate amount of claims filed against the bankruptcy estate exceeded $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 that alleged breach of contract. The complaint
alleged that the Company expressly guaranteed certain payments for parts and
materials supplied by Sterling to the Danish subsidiary. The complaint sought
damages of approximately $1.4 million plus costs and interest.
On March 28, 2000, the Company entered into a settlement agreement with Sterling
and the Danish subsidiary's bankruptcy trustees pursuant to which the Company
paid a total of $3.5 million in three installments in settlement of the Sterling
litigation and all claims the trustees had against the Company under the
undertakings. Of the $3.5 million settlement amount, $2.25 million was placed
in an escrow account that could only be released to the trustees upon their
satisfaction of certain conditions. These conditions included, among other
things, that the trustees were required to obtain releases from all of the
Danish subsidiary's unsecured creditors that asserted claims in excess of
$100,000 on or before October 5, 2000.
On October 4, 2000 the Company received notice from the bankruptcy trustees that
they had received releases from all of the Danish subsidiary's unsecured
creditors that were asserting claims in excess of $100,000 and that the trustees
had no knowledge of written claims, or demands for payment, or threats of
litigation against the Company from the remaining unsecured creditors. Based
upon this notification, on October 19, 2000, the Company released the $2.25
million held in the escrow account. The Company will vigorously defend any
claim brought by creditors of the Danish subsidiary, whose claims were under
$100,000, and who were not required to affirmatively release the Company prior
to release of the escrowed funds.
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 subsidiary 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 the Company
will vigorously defend this case.
Employment Lawsuits
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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 plaintiffs have withdrawn
their request for class certification and the EEOC has entered the case
purporting a parallel class action. 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 UAW union employees who were terminated upon settlement of
such strike, was dismissed in the third quarter of 1999. 28 individuals shortly
thereafter filed a new action, which has since been joined by approximately 90
other individuals. The Company filed for summary judgment on all claims on
February 20, 2000. Two individual cases are to be tried prior to certification
of any issues for appeal. 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.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted for a vote of the corporation stockholders in
the fourth quarter of fiscal 2000.
PART II
Item 5. Market for Company's Common Equity and Related Stockholder Matters
Since December 27, 2000 the Company's common stock has traded on the Nasdaq
National Market
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System under the symbol "PAGI." Prior to December 27, 2000 the Company's common
stock traded on the Nasdaq Small Cap Market. 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. Quotations
represent prices between dealers, do not include retail mark-ups, markdowns or
commissions, and do not necessarily represent actual transactions.
2000 Bid Quotation 1999 Bid Quotation
Quarter Ended High Low High Low
------------- ---- --- ---- ---
March 31 $ 11-1/2 $ 7-7/8 $ 5 $3-5/8
June 30 $18-15/16 $ 8-1/8 $ 5 $3-1/2
September 30 $ 17-1/8 $12-3/16 $ 10-1/8 $3-3/8
December 31 $15-39/64 $ 9 $12-7/16 $7-3/8
On March 21, 2001, there were 4,027,815 shares of common stock issued and
outstanding held by approximately 1,000 owners of record.
The Company has never paid cash dividends on its common stock and currently
intends to continue that policy indefinitely.
The last reported sales price of the Company's common stock on March 21, 2001
was $9.31.
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with the
Company's financial statements and accompanying notes located elsewhere in this
report and Item 7 Management's Discussion and Analysis of Operations.
Consolidated operating data for the Company is as follows (in thousands of
dollars, except per share data):
Year Year Year Year Year
Ended Ended Ended Ended Ended
12/31/00 12/31/99 12/31/98 12/31/97 12/31/96
-------- -------- -------- -------- --------
Net Sales $ 161,664 $ 169,273 $ 141,770 $ 122,258 $ 130,858
Income (loss) from
Operations 10,620 7,592 9,331 (22,207) (2,353)
Net Income (loss) 9,449 6,177 10,054 (33,150) (3,960)
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Net Income (loss) per
common share - diluted $ 2.23 $ 1.52 $ 2.53 ($9.19) ($1.27)
Consolidated balance sheet data for the Company is as follows (in thousands of
dollars):
Year Year Year Year Year
Ended Ended Ended Ended Ended
12/31/00 12/31/99 12/31/98 12/31/97 12/31/96
-------- -------- -------- -------- --------
Working Capital $(4,409) ($7,618) $3,286 ($27,911) $9,180
Total Assets 59,223 57,403 49,469 46,333 59,274
Long Term Debt 4,139 4,168 21,824 0 11,104
Other Liabilities 2,641 3,023 3,063 6,157 5,178
Stockholders' Equity
(deficit) 9,927 138 (6,040) (16,337) 13,128
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, 2000
Versus twelve months ended December 31, 1999
Revenues for the year ended 2000 decreased $7.6 million, 4.5%, from $169.3
million in 1999 to $161.7 million in 2000. Sales in the Government Services
Group increased $14.4 million, 16.2%, in 2000, from $89.0 million in 1999 to
$103.4 in 2000. The Commercial Services Group sales decreased $16.2 million,
28.8%, during 2000, from $56.2 million in 1999 to $40.0 million in 2000. The
Manufacturing & Overhaul Group saw its revenue decline $5.5 million, 23.1%,
during 2000, from $23.8 million in 1999 to $18.3 million in 2000. The Other
category had $0.3 million of revenues in 1999, its last year of operations.
Without regard to operating segments, the Company's mix of business between
government and commercial customers shifted from 37% commercial and 63%
government in 1999 to 25% commercial and 75% government in 2000.
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The $14.4 million increase in the sales of the Government Services Group was due
primarily to increased throughput under the KC-135 PDM contract of $14.8 million
and an increase of $2.8 million under the C-130 Paint Contract, both of which
were offset partially by a drop of $3.2 million in other contracts.
The decrease in the Commercial Services Group revenue of $16.2 million was
primarily due to a drop in commercial Maintenance, Repair, and Overhaul ("MRO")
revenues of $18.1 million. This decrease was partially offset by additional work
on government contracts of $1.9 million.
Revenue in the Manufacturing & Overhaul Group decreased $5.5 million in 2000.
$4.0 million of the decrease occurred in the Space Vector operating unit. The
year over year difference is also affected by the elimination of the Pemco
Nacelles operating unit during the year causing an impact of $3.1 million.
Revenue in the Pemco Engineers operating group increased $1.5 million. The PASS
operating unit saw a slight revenue increase of $0.1 million.
Cost of sales decreased from $136.5 million in 1999 to $130.9 million in 2000,
due primarily to the decrease in revenue. This decrease was offset partially,
by higher average costs per hour in the Company's Commercial segment due to
lower volumes. The gross profit percentage decreased from 19.4% in 1999 to
19.0% in 2000 primarily as a result of these lower volumes in the Commercial
segment.
The Company, on an ongoing basis, is engaged in investigating and implementing,
where appropriate and cost justified, improvements to its processes, methods,
and systems. The costs of these investigations and implementations are expensed
as incurred.
Selling, general, and administrative expenses increased from $18.9 million in
1999 to $19.9 million in 2000. The expenses increased during the year as a
percentage of sales from 11.2% in 1999 to 12.3% in 2000. This increase in
selling, general, and administrative expenses is due to increased use of
consultants during the year, implementation of a formal performance package for
Company management, and relocation and recruiting expenses for Company
executives.
During 2000 the Company took bad debt charges amounting to $0.1 million against
income in settlement of disputes with several customers over the payment of
invoices. The 1999 charge amounted to $1.6 million.
Interest expense was $2.8 million in 2000 versus $3.3 million in 1999. The
effective average interest rate on the Company's revolving credit facility was
approximately 12.0% in 1999 and 12.5% in 2000. During 2000 the Company's
interest rate decreased from 13.0% to 10.0% upon closing the new credit facility
in November 2000. Interest expense was favorably impacted by the forgiveness of
$1.3 million of interest by the Company's previous lender, Bank of America in
1996, $0.9 million of which was recorded prior to 1998, $0.1 million in 1998,
$0.1 million in 1999 and $0.1 million in 2000. The balance of $0.1 million will
be reflected as a yield adjustment in 2001.
The Company recorded other expense of $0.1 million in 2000 versus $0.8 million
of expense in
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1999.
The Company recorded income tax benefits in 2000 and 1999 of $1.8 and $2.7
million, respectively. (See Notes to the Consolidated Financial Statements.)
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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. Sales in the Government Services
Group increased $25.4 million, 39.9%, in 1999, from $63.6 million in 1998 to
$89.0 million in 1999. The Commercial Services Group sales increased $2.8
million, 5.2%, during 1999, growing from $53.4 million in 1998 to $56.2 million
in 1999. The Manufacturing & Overhaul Group saw its revenue slightly increase
$0.3 million, 1.3%, during 1999, from $23.5 million in 1998 to $23.8 million in
1999. The Other category had $0.3 million of revenues in 1999, its last year of
operations, a decrease of $1.0 million from 1998.
Without regard to operating segment 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 $25.4 million increase in the sales of the Government Services Group was due
primarily to increased throughput under the KC-135 PDM contract of $26.6 million
offset partially by a drop of $1.2 million in other contracts.
The increase in the Commercial Services Group revenue of $2.8 million was
primarily due to increases of $2.0 million of maintenance and modification sales
at the Group's Dothan, Alabama and Victorville, California operations coupled
with additional sales under the H-3 helicopter contract of $0.7 million and
sales to other U.S. Government agencies of $0.1 million.
Revenue in the Manufacturing & Overhaul Group increased $0.3 million in 1999.
$1.8 million of the increase occurred in the Space Vector operating unit
primarily due to additional sales under the AIT II contract. The PASS operating
unit also generated a slight revenue increase of $0.1 million. Pemco Nacelles
generated a slight decrease in sales of $0.2 million while revenue in the Pemco
Engineers operating group decreased $1.4 million.
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
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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
totaled $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 in 1996, $0.6 million of which was recorded in
1996, $0.3 million in 1997, $0.1 million in 1998 and $0.1 million in 1999. The
balance of $0.2 million will be reflected as a 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 $0.7
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.)
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains a $20 million revolving credit facility, with a unit of
Wells Fargo Bank, which matures in November of 2003 and may be extended for up
to two additional one-year periods upon mutual agreement of the parties.
Borrowing availability under the facility is tied to percentages of accounts
receivable and inventory. Interest on the revolving credit facility accrues at
the prime rate plus 0.5%, 10% at December 31, 2000, with provisions for
increases related to certain events of default.
In addition, the Company maintains two term loans totaling $5.0 million in the
aggregate, and a capital equipment acquisition facility of $3.1 million, both of
which are also with Wells Fargo. At the Company's option, subject to meeting
certain pre-defined conditions and obtaining the lender's approval, it may
borrow an additional $1.9 million as a discretionary loan. These facilities
carry the same term as the revolving credit facility. The capital equipment
acquisition facility and one of the term loans ($2.9 million) bear interest at
the prime rate plus 0.5%. The other term loan ($2.1 million) and the
discretionary loan bear interest at prime rate plus 0.75%. As of December 31,
2000, the Company had not drawn funds against the capital equipment acquisition
facility.
The Company also maintains a Subordinated Credit Agreement with the Special
Value Bond Fund, LLC. Interest on the Subordinated Credit Agreement accrues at
the rate of 13.5%. The Subordinated Loan is being repaid over five installments
that commenced on August 31, 2000, due each subsequent quarter through June 30,
2001. During 2000 the Company paid the first three installments under this
agreement, leaving a balance of $2.46 million due at December 31, 2000.
The above loans are collateralized by substantially all of the assets of the
Company and have
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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 compliance with its
debt covenants at December 31, 2000.
In 2001 the Company anticipates continuing to invest in the leasehold
improvement program that it began in 2000 for its Birmingham, Alabama and
Dothan, Alabama facilities. Costs for these improvements are anticipated to be
approximately $9.0 million. Most of these costs were incurred in 2000 leaving
approximately $2.9 million that the Company will incur in 2001. 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, 2000,
1999 and 1998.
The Company generated net income of $9.5 million in 2000 versus $6.2 million and
$10.1 million in 1999 and 1998, respectively. Cash generated from operations
amounted to $13.0 million and $7.6 million in 2000 and 1999, respectively,
versus a use of cash amounting to $2.1 million in 1998.
In 2000 the Company generated $6.9 million of cash related to decreases in
accounts receivable versus using cash of $5.0 million in 1999 and $8.4 million
in 1998 for increases in accounts receivable.
Net inventory increased slightly by $0.5 million in 2000 versus an increase of
$4.8 million in 1999 and a decrease of $ 0.1 million in 1998. Progress payment
balances on U.S. Government contracts and net commercial customer deposits were
$16.0 million, $20.4 million and $20.7 million and work in process was $27.2
million, $31.3 million and $30.2 million at December 31, 2000, 1999 and 1998,
respectively. Progress payment balances and net customer deposits as a percent
of gross work in process for 2000, 1999, and 1998 were 59%, 65% and 69%,
respectively. The fluctuation in the percentages relates mainly to the Company's
U.S. Government aircraft maintenance contracts.
Accounts payable and accrued expenses decreased $7.9 million from 1999 to 2000
as a result of payment of liabilities or reductions in accruals. $3.5 million of
the decrease is attributable to payments related to the Bankruptcy Trustees of
Pemco World Air Services A/S and Sterling Airways A/S.
Capital improvements amounted to $10.7 million, $3.1 million, and $0.7 million
in 2000, 1999 and 1998, respectively. Additionally, the Company made principal
payments related to its Sr. Subordinated debt of $3.7 million and $1.2 million
in 2000 and 1998, respectively. No principal payments were made in 1999. During
2000, 1999, and 1998, the Company made principal payments under its long-term
debt of $4.7 million, $0.2 million, and $1.2 million, respectively, and had
borrowings of $5.0 million in 2000. The Company also made payments of $0.3
million, $0.2 million and $0.1 million on various capital leases in 2000, 1999
and 1998, respectively.
-25-
Summary of Unaudited Financial Data:
Unaudited quarterly financial information is as follows (in thousands of
dollars):
Quarter Quarter Quarter Quarter
Ended Ended Ended Ended
3/31/00 6/30/00 9/30/00 12/31/00
-------- -------- -------- ---------
Net Sales $ 40,523 $ 46,653 $ 40,363 $ 34,125
Gross Profit 8,735 7,644 7,947 6,460
Net Income 3,715 2,536 1,599 1,599
Net Income per Share:
Basic $ 0.93 $ 0.63 $ 0.40 $ 0.40
Diluted $ 0.90 $ 0.59 $ 0.37 $ 0.38
Quarter Quarter Quarter Quarter
Ended Ended Ended Ended
3/31/99 6/30/99 9/30/99 12/31/99
------- -------- -------- ---------
Net Sales $ 39,885 $ 39,718 $ 45,891 $ 43,779
Gross Profit 9,338 7,161 8,947 7,304
Net Income (Loss) 1,950 2,829 1,787 (389)
Net Income (Loss) per
Share:
Basic $ 0.49 $ 0.71 $ 0.45 ($0.10)
Diluted $ 0.49 $ 0.70 $ 0.43 ($0.10)
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 Item 3. Legal Proceedings.)
-26-
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 barred 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 any U.S. Government audits, reviews or investigations would not have
a materially adverse effect on the Company's consolidated results of operation,
financial position or cash flows.
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 75% of the Company's revenues in 2000 were derived from U.S.
Government contracts. U.S. Government contracts expose the Company to a number
of risks, including:
. unpredictable contract or project terminations,
. reductions in government funds available for the Company's projects due to
government policy changes, budget cuts and contract adjustments,
. disruptions in scheduled workflow due to untimely delivery of equipment
and components necessary to perform government contracts,
. penalties arising from post award contract audits, and
. 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. Contracts with the U.S. Government comprised 75%, 63%, and 55%
of the Company's revenues in 2000, 1999, and 1998, respectively. The KC-135
contract in and of itself comprised 60%, 48%, and 39% of the Company's total
revenues in 2000, 1999, and 1998, respectively. The
-27-
Company's four largest contracts generated approximately 84% of its revenues in
2000. 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:
. the inability to bid on contracts independently,
. the potential inability to locate suitable operators with which to
successfully team, and
. 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.
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 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. The Company's
competition for outsourced commercial work in the United States consists of the
B.F. Goodrich Airframe Services Division (formerly Tramco), Dee Howard Aircraft
Maintenance, Timco owned by Aviation Sales Company, and Singapore Technologies
(Mobile Aerospace Engineering and Dalfort Aerospace. 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
-28-
is currently a party to several legal proceedings, including 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:
. finance unanticipated working capital requirements,
. develop or enhance existing services,
. respond to competitive pressures, or
-29-
. 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.
Evolving industry standards and changing customer requirements characterize the
aircraft maintenance and modification services industry. 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, 2000, the Company's executive officers, directors and their
affiliates, in the aggregate, beneficially owned approximately 38% of the
Company's outstanding common stock. As a result, these corporation stockholders
are able to significantly influence matters requiring approval by the
corporation stockholders, including the election of directors and the approval
of mergers or other business combination transactions. Accordingly, these
corporation stockholders 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 or loss 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, which
could cause actual results to differ materially from those expressed or implied
by these forward-looking statements.
-30-
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, term
loans, and capital equipment acquisition facility as noted in Note 5 to the
Consolidated Financial Statements and bears interest at prime plus 0.50% or
0.75%, depending upon the loan, (10.0% and 10.25% at December 31, 2000). If the
prime rate increased 100 basis points, net income would be reduced by
approximately $135,000 during the year. The actual fluctuation of interest rates
is not determinable, accordingly, actual results of interest rate fluctuation
could differ.
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
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Financial Statement Schedules:
Report of Independent Public Accountants on Supplementary Information
Schedule II - Valuation and Qualifying Accounts
-31-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pemco Aviation Group, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of PEMCO AVIATION
GROUP, INC. (a Delaware corporation) (formerly Precision Standard, Inc.) AND
SUBSIDIARIES as of December 31, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2000. 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 Pemco Aviation
Group, Inc. and Subsidiaries as of December 31, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States.
Birmingham, Alabama ARTHUR ANDERSEN LLP
March 2, 2001
-32-
PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
ASSETS
(In Thousands)
2000 1999
---- ----
Current assets:
Cash $ 1,441 $ 527
Accounts receivable, net 14,121 21,131
Inventories, net 16,790 17,035
Deferred income taxes 4,800 3,000
Prepaid expenses and other 955 763
-------- --------
Total current assets 38,107 42,456
-------- --------
Machinery, equipment, and improvements at
cost:
Machinery and equipment 25,259 19,780
Leasehold improvements 17,110 12,634
-------- --------
42,369 32,414
Less accumulated depreciation and
amortization (23,134) (20,858)
-------- --------
Net machinery, equipment, and
improvements 19,235 11,556
-------- --------
Other non-current assets:
Prepaid pension costs 189 1,780
Deposits and other 1,149 1,386
Intangible assets, net 543 225
-------- --------
1,881 3,391
-------- --------
Total assets $ 59,223 $ 57,403
======== ========
The accompanying notes are an integral part
of these consolidated balance sheets.
-33-
PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
LIABILITIES AND STOCKHOLDERS' EQUITY
(In Thousands, except common share information)
2000 1999
---- ----
Current liabilities:
Revolving credit facility $10,296 $11,779
Current portion of long term debt 3,674 3,325
Accounts payable 2,482 3,748
Accrued liabilities - payroll related 12,138 14,467
Accrued liabilities - other 13,926 16,755
------- -------
Total current liabilities 42,516 50,074
------- -------
Long-term debt 4,139 4,168
Other long-term liabilities 2,641 3,023
------- -------
Total liabilities 49,296 57,265
------- -------
Commitments and contingencies (see Notes 10
and 12)
Stockholders' equity:
Common stock, $.0001 par value,
12,000,000 shares authorized, 4,027,815 and
3,978,137 issued and outstanding
at December 31, 2000 and 1999, respectively 1 1
Additional paid-in capital 5,109 4,769
Retained earnings (deficit) 4,817 (4,632)
------- -------
Total stockholders' equity 9,927 138
------- -------
Total liabilities and stockholders' equity $59,223 $57,403
======= =======
The accompanying notes are an integral part
of these consolidated balance sheets.
-34-
PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 2000, 1999 and 1998
(In Thousands, Except Net Income per Common Share Information)
2000 1999 1998
---- ---- ----
Net sales $161,664 $169,273 $141,770
Cost of sales 130,878 136,523 116,337
-------- -------- --------
Gross profit 30,786 32,750 25,433
Selling, general, and administrative 19,850 18,889 15,766
expenses
Bad debt expense 116 1,586 58
Litigation and environmental contingency
provisions 200 4,683 278
-------- -------- --------
Income from operations 10,620 7,592 9,331
Other (income) expense:
Interest 2,816 3,266 3,368
Other, net 117 825 (2,399)
-------- -------- --------
Income before income taxes 7,687 3,501 8,362
Benefit from income taxes (1,762) (2,676) (1,692)
-------- -------- --------
Net income $ 9,449 $ 6,177 $ 10,054
======== ======== ========
Net income per common share:
Basic $ 2.36 $ 1.55 $ 2.65
Diluted $ 2.23 $ 1.52 $ 2.53
Weighted average common shares outstanding:
Basic 4,012 3,978 3,801
Diluted 4,241 4,061 3,980
The accompanying notes are an integral part of these
consolidated statements.
-35-
PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended December 31, 2000, 1999 and 1998
(In Thousands)
Accum-
lated
Other
Compre-
Additional Retained hensive
Common Paid-in Earnings Income
Shares Capital (Deficit) (Loss)
------ ------- -------- ------
December 31, 1997 3,615 $4,764 ($20,863) ($239)
Exercise of stock options 2 4 0 0
Exercise of warrants 361 0 0 0
Foreign currency
translation adjustment 0 0 0 239
Net income 0 0 10,054 0
----- ------ --------- ------
December 31, 1998 3,978 4,768 (10,809) 0
Exercise of stock options 0 1 0 0
Net income 0 0 6,177 0
----- ------ --------- ------
December 31, 1999 3,978 4,769 (4,632) 0
Exercise of stock options 50 340 0 0
Net income 0 0 9,449 0
----- ------ --------- ------
December 31, 2000 4,028 $5,109 $ 4,817 $ 0
===== ====== ========= ======
The accompanying notes are an integral part
of these consolidated statements.
-36-
PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 2000, 1999 and 1998
(In Thousands)
2000 1999 1998
---- ---- ----
Cash flows from operating activities:
Net income $ 9,449 $ 6,177 $ 10,054
-------- ------- --------
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization 3,327 2,637 2,396
Benefit for deferred income taxes (1,800) (3,000) (2,525)
Litigation and environmental contingencies 200 4,683 278
Pension cost in excess of funding 1,591 1,108 1,218
Provision for losses on receivables 116 1,268 294
Provision for reduction in inventory valuation 707 3,038 0
Loss on retirement of improvements 693 0 0
Provision for losses on contracts-in-process 0 16 1,657
Write-off of debt issuance costs 141 0 0
Gain on sale of division 0 0 (3,120)
Changes in assets and liabilities:
Related party receivable 0 270 0
Accounts receivable, trade 6,894 (4,965) (8,381)
Inventories (462) (4,803) 134
Prepaid expenses and other (192) 232 (38)
Deposits and other 237 (152) (794)
Accounts payable and accrued liabilities (7,936) 1,119 (3,280)
-------- ------- --------
Total adjustments 3,516 1,451 (12,161)
-------- ------- --------
Net cash provided by (used in) operating
activities 12,965 7,628 (2,107)
-------- ------- --------
Cash flows from investing activities:
Proceeds from sale of division 0 0 4,790
Capital expenditures (10,723) (3,049) (746)
-------- ------- --------
Net cash provided by (used in) investing
activities (10,723) (3,049) 4,044
-------- ------- --------
-37-
2000 1999 1998
---- ---- ----
Cash flows from financing activities:
Proceeds from exercise of stock options 340 1 4
Payment of debt issuance costs (505) (240) 0
Net repayments under revolving credit facility (1,483) (3,769) (879)
Borrowings under long-term debt 5,000 0 0
Principal payments under long-term debt (4,680) (237) (1,238)
-------- ------- --------
Net cash used in financing activities (1,328) (4,245) (2,113)
-------- ------- --------
Net increase (decrease) in cash and cash
equivalents 914 334 (176)
Cash and cash equivalents, beginning of year 527 193 369
-------- ------- --------
Cash and cash equivalents, end of year $ 1,441 $ 527 $ 193
======== ======= ========
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Interest $ 3,132 $ 2,291 $ 3,425
Income taxes $ 280 $ 380 $ 316
Supplemental disclosure of non-cash investing
and financing activities:
Capital lease obligations incurred $ 0 $ 504 $ 126
Conversion of accounts payable to debt $ 0 $ 0 $ 484
Forgiveness of debt for land $ 0 $ 0 $ 70
Conversion of capital lease to debt $ 0 $ 950 $ 0
Accrued liabilities of capital purchases $ 930 $ 0 $ 0
The accompanying notes are an integral part
of these consolidated statements.
-38-
PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended
DECEMBER 31, 2000, 1999 AND 1998
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - Pemco Aviation Group, Inc. (formerly 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") on large transport aircraft.
The Company's Commercial Services Group provides commercial aircraft
maintenance and modification services on a contract basis to the owners and
operators of large commercial aircraft. The Company provides commercial
aircraft maintenance varying in scope from a single aircraft serviced over
a few days to multi-aircraft programs 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 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 wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
-39-
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted 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 as of 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.
Revenue Recognition - 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. Provision is made to
recognize estimated losses in the period in which management determines
that the estimated total contract costs will exceed the estimated total
contract revenues. An amount equal to contract costs attributable to claims
is included in revenues when realization is probable and the amount can be
reasonably estimated. (See Note 16.)
Under certain contracts the Company negotiated cost sharing provisions,
that cause the contracting parties to share cost differences associated
with target margins on the contracts. At December 31, 2000, the Company has
accrued approximately $3.7 million representing cost sharing payable to the
parties, which will be recovered in future periods through adjustments in
price.
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.
Machinery, Equipment, and Improvements - Leasehold improvements and
machinery and equipment are stated at cost, less accumulated amortization
and depreciation. Included in leasehold improvements at December 31, 2000
is $229,000 of capitalized interest. No capitalized interest was included
in leasehold improvements at December 31, 1999. 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
-40-
the shorter of the lease period or the economic life of the improvements):
Classification Useful Life In Years
-------------- --------------------
Machinery and equipment 3 - 12
Leasehold improvements 5 - 20
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 $2,407,000, $1,702,000, and $1,692,000 for the years ended
December 31, 2000, 1999, and 1998, respectively.
Long-Lived Assets - The Company continually evaluates whether events and
circumstances have occurred that indicate that the remaining balance of
long-lived assets and certain identifiable intangibles to be held and used
in operations of the Company may be impaired and not be recoverable. In
performing this evaluation, the Company uses an estimate of the related
cash flows expected to result from the use of the asset and its eventual
disposition. When this evaluation indicates the asset has been impaired,
the Company will measure such impairment based upon the asset's fair value
and the amount of impairment is charged to earnings.
Reserve 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 a reserve 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, 2000 and 1999. Periodic adjustments to the reserve will be made as
events occur which indicate changes are necessary.
Stock Options - The Company uses the intrinsic value method for stock
option grants to individuals defined as employees under which no
compensation is recognized for options granted at or above the fair market
value of the underlying stock on the grant date. The Company uses the fair
value method for stock options granted for services rendered by non-
employees in accordance with the Statement of Financial Accounting
Standards ("SFAS") No. 123 "Accounting for Stock Based Compensation". (See
Note 8.)
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. - 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
-41-
(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 1999 consolidated balance sheets
have been reclassified to conform to the 2000 presentation.
2. COMPREHENSIVE INCOME AND NET INCOME PER COMMON SHARE
Comprehensive income includes net income and the change in accumulated foreign
currency translation adjustments, which amounted to $0 in 2000 and 1999, and
$239,000 in 1998. Total Comprehensive income amounted to $9,449,000, $6,177,000,
and $ 10,293,000 for the years ended December 31, 2000, 1999, and 1998,
respectively.
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)
Net Per Share
For the Year Ended December 31, 2000 Income Shares Amount
---------------------------------------- ------ ------ ------
Basic earnings per share $ 9,449 4,012 $ 2.36
Dilutive securities - 229 .13
------- ----- ------
Diluted earnings per share $ 9,449 4,241 $ 2.23
======= ===== ======
Net Per Share
For the Year Ended December 31, 1999 Income Shares Amount
---------------------------------------- ------- ------ ------
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
======= ===== ======
-42-
Options to purchase 59,171, 232,390, and 578,843 shares of common stock
related to 2000, 1999, and 1998, 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.
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net as of December 31, 2000 and 1999 consist of the
following:
(In Thousands)
2000 1999
---- ----
U.S. Government:
Amounts billed $ 3,243 $ 6,021
Recoverable costs and
accrued profit on progress
completed - not billed 4,384 7,715
Commercial Customers:
Amounts billed 6,685 6,855
Recoverable costs and
accrued profit on progress
completed - not billed 272 1,562
------- -------
14,584 22,153
Less allowance for
doubtful accounts (463) (1,022)
------- -------
Accounts receivable, net $14,121 $21,131
======= =======
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, 2000 and 1999.
4. INVENTORIES
Inventories as of December 31, 2000 and 1999 consist of the following:
(In Thousands)
2000 1999
---- ----
Work in process $ 27,373 $ 31,335
Finished goods 3,301 3,365
-43-
Raw materials and supplies 2,286 2,704
-------- --------
Total 32,802 37,404
Less progress payments and
customer deposits (16,012) (20,369)
-------- --------
$ 16,790 $ 17,035
======== ========
A substantial portion of the above inventory balances relate to U.S.
Government contracts. The Company receives progress payments on the
majority of its government contracts. The title to all inventories on which
the Company receives these payments is vested in the government to the
extent of the progress payment balance.
The amount of general and administrative costs remaining in inventories at
December 31, 2000 and 1999 amounted to $2,287,776 and $2,636,663,
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, which amounted to approximately $5,718,000 and $5,011,000 at
December 31, 2000 and 1999, respectively. 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. DEBT
Debt as of December 31, 2000 and 1999 consists of the following:
(In Thousands)
2000 1999
---- ----
Revolving credit facility $10,296 $11,779
======= =======
Senior Subordinated Loan;
interest at 13.5% $ 2,460 $ 6,150
Term Loan A;
interest at Prime plus 0.50% 2,900 0
(10.00% at December 31, 2000)
Term Loan B;
Interest at Prime plus 0.75%
(10.25% at December 31, 2000) 1,925 0
Other obligations: interest from
8.75% to 14.00%, collateralized
by security interest in certain
equipment 528 1,343
------- -------
-44-
Total long-term debt 7,813 7,493
Less portion reflected as current 3,674 3,325
------- -------
Long term-debt, net of current
portion $ 4,139 $ 4,168
======= =======
During the first ten months of 2000, the Company maintained a $20.0 million
revolving credit facility. Borrowing availability under the facility was
tied to percentages of accounts receivable and inventories and, as a result
of certain subordination provisions, could not exceed $17.0 million.
Interest on the revolving credit facility accrued at prime rate plus 3.5%
with provisions for both reductions in the interest rate based on specific
operating performance targets and increases related to certain events of
default.
On November 2, 2000, the Company entered into new credit facilities, which
were used to pay off and terminate the previous facility. The new
facilities consist of a $20.0 million revolving credit facility, two term
loans totaling $5.0 million in the aggregate, and a capital equipment
acquisition facility of $3.1 million. At the Company's option, subject to
meeting certain pre-defined conditions and obtaining the lender's approval,
the Company may borrow an additional $1.9 million as a discretionary loan.
The new facilities have an initial three-year term, which may be extended
for up to two additional one-year periods upon mutual agreement of the
parties. The revolving credit facility, the capital equipment acquisition
facility and Term Loan A ($2.9 million) bear interest at prime rate plus
0.50% (10.00% at December 31, 2000). The Term Loan B ($2.1 million at
origination) and the discretionary loan bear interest at prime rate plus
0.75% (10.25% at December 31, 2000). In connection with the new credit
facilities, the Company capitalized $505,000 of loan origination cost that
are included in intangible assets in the accompanying 2000 consolidated
balance sheet, and are being amortized over the life of the credit
facility. In addition, during 2000 the Company wrote off $292,000 of loan
costs related to the prior credit facility.
The Company has the option, prior to December 31, 2001, to convert up to
$1.9 million of the revolving credit facility into additional availability
under the capital equipment facility, bringing its total up to $5.0
million, or to fold the $3.1 million capital equipment facility into the
revolving credit facility, bringing its total up to $23.1 million.
Borrowing availability under the revolving credit facility is tied to
percentages of eligible accounts receivable and inventories. Amounts
outstanding under the revolving credit facility totaled $10.3 million at
December 31, 2000. Amounts available under the facility at December 31,
2000, based upon the calculation, which defines the borrowing base, totaled
$5.4 million. Under the capital equipment facility, borrowing availability
is tied to a percentage of the value of certain capital assets acquired
since January 1, 2000 and capital assets that are acquired in the future.
All of the new facilities have provisions for increases in the interest
rate during any period when an event of default exists.
The amount outstanding under Term Loan A at December 31, 2000 amounted to
$2.9
-45-
million and will be repaid in 60 installments of $48,333 plus interest
commencing on November 30, 2002 with a balloon payment of the remaining
balance upon the termination of the credit facility. The amount outstanding
under Term Loan B at December 31, 2000 amounted to $1.9 million and is
being repaid over 24 installments of $87,500, which commenced on November
30, 2000. Upon the Company borrowing the entire amount of the available
capital equipment acquisition facility or on October 31, 2001, whichever
occurs first, the Company will commence repayment of the amounts borrowed
based on a 5-year amortization schedule with a balloon payment of the
remaining balance upon the termination of the credit facility. The
discretionary loan, if borrowed, will be repaid commencing the month after
it is borrowed based on 24 installments with a balloon payment of the
remaining balance upon the termination of the credit facility.
The Company's Senior Subordinated Debt is being repaid over five equal
quarterly installments that commenced on August 31, 2000, with a final
payment due on June 30, 2001. (See Note 11.)
Due to the "Lockbox" provisions of the Company's revolving credit facility
with its lender, coupled with a subjective acceleration clause, all of the
revolving credit facility has been classified as current per the Emerging
Issues Task Force (EITF) Issue No. 95-22, notwithstanding the three-year
term of the credit agreement. Management does not believe that the
subjective acceleration clause will be invoked.
Schedule of debt maturing over the next five years at December 31:
(In Thousands)
2001 $3,674
2002 1,360
2003 707
2004 662
2005 591
Thereafter 819
------
$7,813
======
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 compliance with its debt covenants at December
31, 2000.
Notwithstanding the covenants mentioned above which limit or prohibit the
Company from incurring additional indebtedness, the Company does have
certain assets that are not
-46-
covered by these limitations or prohibitions that could possibly be used to
secure additional financing.
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. During 1998, the Company redeemed the remaining warrants on the
applicable redemption dates by issuing approximately 360,000 shares of
common stock.
6. ALLOWANCE FOR ESTIMATED LOSSES ON CONTRACTS IN PROCESS
The Company provides for losses on uncompleted contracts in the period in
which management determines 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, 2000 and 1999 amounted to $277,739 and $380,200, respectively, and were
related to commitments to fulfill loss contracts at December 31, 2000 and
1999.
During 2000 and 1999, there were no material changes to the provisions.
During 1998, $1,346,005 was recognized through charges to operations.
7. INCOME TAXES
The benefit for income taxes for the years ended December 31, 2000, 1999,
and 1998 is as follows:
(In Thousands)
2000 1999 1998
---- ---- ----
Current:
Federal $ 38 $ 324 $ 212
State 0 0 621
------- ------- -------
38 324 833
------- ------- -------
Deferred:
Federal (1,080) (2,615) (2,152)
State (720) (385) (373)
------- ------- -------
(1,800) (3,000) (2,525)
------- ------- -------
$(1,762) $(2,676) $(1,692)
======= ======= =======
The differences between the tax benefits at the federal statutory rate and
the provision for
-47-
income taxes for the years ended December 31, 2000, 1999, and 1998 are
primarily due to decreases in the deferred tax asset valuation allowance of
$3,720,000, $2,490,000, and $5,034,000, respectively.
Deferred tax assets (liabilities) are comprised of the following:
(In Thousands)
2000 1999
---- ----
Prepaid pension costs $ (71) $ (702)
Machinery, equipment, and
improvements (815) 0
Other (5) (1,165)
------- --------
Gross deferred tax liabilities (891) (1,867)
------- --------
Accrued vacation 1,474 1,784
Accrued worker's compensation 1,638 1,793
Inventory reserves 2,159 2,055
Contingency reserves 642 1,975
Percentage of completion 657 657
Machinery, equipment, and
improvements 0 366
Federal and state loss
carry-forwards 3,100 3,911
Other accruals and reserves 1,880 1,962
Alternative minimum tax credit
carry-forwards 1,281 1,224
------- --------
Gross deferred tax assets 12,831 15,727
------- --------
Deferred tax asset valuation
allowance (7,140) (10,860)
------- --------
Net deferred tax asset $ 4,800 $ 3,000
======= ========
The Company maintains 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 a valuation allowance
through its tax provision to fully reserve for its deferred tax assets at
December 31, 1997. In 2000, 1999 and 1998, the Company returned to
profitability and generated taxable income for which net operating loss
carry-forwards were utilized. The net deferred tax assets at December 31,
2000 and 1999 reflect the portion of total deferred taxes which management
considers that realization through future profitability is more likely than
not.
At December 31, 2000 and 1999, the Company had tax effected federal and
state operating
-48-
loss carry-forwards of approximately $3,099,957 and $3,910,723,
respectively. The loss carry-forwards expire at various dates between 2002
and 2014. These loss carry-forwards are partially reserved for through the
deferred tax valuation allowance.
The alternative minimum tax credit carry-forwards of $1,281,445, included
in the deferred tax assets at December 31, 2000 do not expire.
8. STOCK OPTION PLANS
On May 17, 1999, the Company's stockholders approved amendments to the
Company's 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. Options available to be granted under the
plan amounted to approximately 302,000 at December 31, 2000.
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 fair market value of the options at the grant date,
the Company's net income and net income per share would have been as
reflected in the pro forma amounts indicated below:
(In Thousands Except Per Share Information)
2000 1999 1998
---- ---- ----
Net income - as reported $9,449 $6,177 $10,054
Net income - pro forma 8,812 6,080 9,501
Net income per share,
basic - as reported 2.36 1.55 2.65
Net income per share,
diluted - as reported 2.23 1.52 2.53
Net income per share,
basic - pro forma 2.21 1.53 2.50
Net income per share,
diluted - pro forma 2.09 1.50 2.39
-49-
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)
Wtd. Wtd. Wtd.
Avg. Avg. Avg.
Ex Ex Ex
2000 Price 1999 Price 1998 Price
---- ----- ---- ----- ---- -----
Outstanding beginning of
year 454 $ 7.69 599 $5.53 235 $8.76
Granted 241 10.00 107 9.83 383 3.53
Exercised (50) 6.15 (1) 2.78 (2) 2.37
Forfeited (16) 18.5 (251) 3.43 (17) 2.45
---- ---- ----
Outstanding end of year 629 8.42 454 7.69 599 5.53
==== ==== ====
Exercisable end of year 434 393 343
Estimated weighted
average fair value of
options granted $7.09 $5.27 $2.33
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 2000, 1999 and 1998, respectively: dividend
yield of 0% for each year; expected volatility of 96%, 98% and 96%; risk-
free interest rate of 4.74% to 6.61%; and expected life of 4.3, 4.5, and
3.43 years for each year respectively. Of the 1999 options granted, 58,000
vest 25% each year, the remaining 49,000 vest immediately. 250,000 of the
1998 options granted expired during 1999 as certain performance criteria
were not met, the remaining 133,000 vested immediately. During 2000, the
Company granted 241,000 options. 85,000 of these options vested immediately
with the remaining options vesting over periods from 2 to 4 years.
The following table summarizes information about stock options outstanding at
December 31, 2000:
(In Thousands, Except Per Share Amounts)
Number of Weighted Weighted
Outstanding Average Average
Range of Exercise Options Remaining Exercise
Prices 12/31/00 Life Price
------ -------- ---- -----
$2.25 - $3.38 17 3.94 $ 2.55
-50-
3.39 - 5.06 176 5.83 4.11
5.07 - 7.59 42 4.28 6.21
7.60 - 13.24 348 9.18 9.92
18.50 46 3.13 18.50
-----
629 7.69 8.42
=====
(In Thousands, Except Per Share Amounts)
Number of Weighted
Exercisable Average
Range of Exercise Options at Exercise
Prices 12/31/00 Price
------ -------- -----
$2.25 - $ 3.38 17 $ 2.55
3.39 - 5.06 176 4.11
5.07 - 7.59 42 6.21
7.60 - 13.24 153 9.92
18.50 46 18.50
-----
434 8.09
=====
9. 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
2000, 1999 or 1998. Plan assets consist primarily of stocks, bonds, and
cash equivalents.
Effective for fiscal 1998 based on prior negotiations with the union, the
Company's Pension 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 benefit obligation and in the fair value of
Pension Plan assets were as follows (in thousands):
2000 1999
---- ----
Benefit Obligation at beginning of year $ 94,738 $102,678
Service cost 1,408 1,341
Interest cost 7,729 6,974
-51-
Plan amendments 4,964 1,209
Benefits paid (9,184) (8,935)
Actuarial (gain) loss 501 (8,529)
-------- --------
Benefit Obligation at end of year $100,156 $ 94,738
-------- --------
Plan Assets: Fair value
Balance at beginning of year 110,338 100,781
Return on plan assets 2,245 18,492
Benefits paid (9,184) (8,935)
------- -------
Fair value at end of year 103,399 110,338
------- -------
Funded status 3,243 15,600
Unrecognized prior service cost 7,597 4,406
Unrecognized net (gain) loss (10,651) (18,226)
------- -------
Prepaid pension costs 189 1,780
------- -------
Components of the plans' net pension cost were as follows (in thousands):
2000 1999 1998
---- ---- ----
Service cost $ 1,408 $ 1,341 $ 1,324
Interest cost 7,729 6,974 6,875
Expected return on plan assets (8,663) (8,053) (7,819)
Recognized net gain 0 198 142
Net amortization 1,117 687 657
------- ------- -------
Net pension cost $ 1,591 $ 1,147 $ 1,179
======= ======= =======
The weighted average rates assumed in the actuarial calculations for the pension
plan was:
2000 1999 1998
---- ---- ----
Discount 8.00% 8.00% 7.00%
Annual Salary Increase 5.00 5.00 5.00
Long-term return on plan assets 9.50 9.50 9.50
-52-
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, Alabama 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 un-funded.
Changes during the year in the benefit obligation and in the fair value of plan
assets were as follows (in thousands):
2000 1999
---- ----
Benefit Obligation:
Balance at beginning of year $ 612 $ 775
Service cost 37 36
Interest cost 46 44
Benefits paid (107) (102)
Actuarial (gain) loss 37 (141)
----- -----
Balance end of year $ 625 $ 612
===== =====
The accrued postretirement costs recognized included in accrued liabilities -
other in the accompanying Consolidated Balance Sheets were as follows: (In
Thousands)
2000 1999
---- ----
Funded status $(625) $(612)
Unrecognized transition obligation 232 264
Unrecognized net gain (35) (77)
----- -----
Accrued liability $(428) $(425)
===== =====
-53-
Components of the plans' net cost were as follows:
(In Thousands)
2000 1999 1998
----- ----- -----
Service cost $ 37 $ 36 $ 45
Interest cost 46 44 51
Net amortization 32 32 32
Recognized actuarial gain (5) (3) 0
----- ----- -----
Net postretirement cost $ 110 $ 109 $ 128
===== ===== =====
An additional assumption used in measuring the accumulated postretirement
benefit obligation was a weighted average medical care cost trend rate of
5.75% for 2000, 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 7.50%, 8.00%, and 7.00% for the years ended December 31, 2000, 1999
and 1998, respectively.
Assumed health care cost trend rates have significant effect on the
amounts reported for the health care plans. A one percentage point change
in assumed health care cost trend rates would have the following effects:
1 - Percentage Point 1 - Percentage Point
Increase Decrease
----------------------------------- -------------------------------------
12/31/00 12/31/99 12/31/98 12/31/00 12/31/99 12/31/98
--------- --------- --------- --------- --------- ---------
Effect on total of service and
interest cost components $ 19 $ 14 $ 20 $ (16) $ (15) $ (17)
Effect on postretirement benefit
obligation 108 115 135 (96) (105) (118)
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 and dental plans for the
Birmingham and Dothan divisions of its Pemco Aeroplex subsidiary. The
Company has reserves established in the amounts of $2,487,924 and
$1,919,643 for reported and incurred but not reported claims at December
31, 2000 and 1999, respectively. Additionally, the Company has deposits
with the Administrator of the plan in the amount of $800,000, which is
included in deposits and other on its balance sheets at December 31, 2000
and 1999.
-54-
The Company also maintains a self-insured workers' compensation program
with 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, 2000 and 1999, is $210,000 and $415,000,
respectively, 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 $4,317,479 and $4,538,246 for reported and
incurred but not reported claims at December 31, 2000 and 1999,
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
and have attained age 21. Employee and Company matching contributions are
discretionary. The Company made no matching contributions during 2000,
1999, or 1998. Employees are always 100 percent vested in their
contributions.
10. 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 15 months 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 non-cancelable lease terms in excess of one year as
of December 31, 2000 are as follows:
(In Thousands)
Vehicles
And
Year Ending Facilities Equipment Total
---------- --------- -----
2001 $1,286 $ 756 $2,042
2002 1,200 731 1,931
2003 1,027 580 1,607
2004 659 52 711
2005 500 4 504
Thereafter 2,500 0 2,500
------ ------ ------
Total minimum
future rental
commitments $7,172 $2,123 $9,295
====== ====== ======
-55-
Total rent expense charged to operations for the years ended December 31, 2000,
1999, and 1998 amounted to $3,524,368, $2,223,999, and $2,106,537, respectively.
Contingent rental amounts based on a percentage of sales included in rent
expense amounted to $1,287,692, $572,942, and $477,264 for the years ended
December 31, 2000, 1999, and 1998, 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 any U.S. Government's audits, reviews, and investigations would
not have a materially adverse effect on the Company's consolidated results of
operations, financial position, or cash flows.
KC-135 Contract - In August 1994, the U.S. Air Force awarded the Company a
contract for the PDM of its KC-135 aircraft consisting of one base year and six
option years. In September 2000, the KC-135 program began its sixth, and final,
option year. The total value of the contract over the seven-year period, if
fully funded, is estimated at over $500 million. The Company is currently in
negotiations and discussions with the U.S. Air Force and other parties on its
retention as an active source of repair on KC-135 aircraft.
Concentration of Credit Risk
A small number of the Company's contracts account for a significant percentage
of its revenues. Contracts with the U.S. Government comprised 75%, 63%, and 55%
of the Company's revenues in 2000, 1999, and 1998, respectively. The KC-135
contract in and of itself comprised 60%, 48%, and 39% of the Company's total
revenues in 2000, 1999, and 1998, respectively. The KC-135 contract is currently
in its sixth and final option year. During 1999, the Company had a contract with
a commercial airline that comprised 12% of total revenues. There were no
significant contracts in excess of 10% of revenues with other customers during
2000 or 1998. 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.
Litigation
On May 27, 1997, the United States Attorney filed a three 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
-56-
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 the
Eleventh Circuit Court ordered en banc reconsideration. In November of 1999 the
Eleventh Circuit reversed and reinstated part of the case. On February 7, 2001
the case was settled between the parties, with no recognition of liability.
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. During 2000 the Company determined that
pursuing the complaint further was not necessarily in its best interests.
Accordingly, in the interest of promoting a better relationship with one of its
primary customers, the Company filed a motion for dismissal with the court to
end this litigation. The motion was granted on July 7, 2000.
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. Following
several settlements, the only remaining claim is for indemnity on one aircraft
operated by Tower Air. Management believes that the result of this lawsuit will
not have a material impact on the business of the Company.
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 do not require National Union Fire Insurance Company 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/Airlog and others.
The complaint filed in the 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. As of the date of this report, National
Union Fire Insurance Company has not 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
-57-
subsidiary's facility. On September 30, 1998, the Company received notice from
the bankruptcy estate that the trustees would assert a claim in the amount of
approximately $2 million against the Company for the alleged negative equity of
the Danish subsidiary. The Company was subsequently informed that creditors
against the bankruptcy estate filed additional claims and that the aggregate
amount of claims filed against the bankruptcy estate exceeded $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 that alleged breach of contract. The complaint
alleged that the Company expressly guaranteed certain payments for parts and
materials supplied by Sterling to the Danish subsidiary. The complaint sought
damages of approximately $1.4 million plus costs and interest.
On March 28, 2000, the Company entered into a settlement agreement with Sterling
and the Danish subsidiary's bankruptcy trustees pursuant to which the Company
paid a total of $3.5 million in three installments in settlement of the Sterling
litigation and all claims the trustees had against the Company under the
undertakings. Of the $3.5 million settlement amount, $2.25 million was placed in
an escrow account that could only be released to the trustees upon their
satisfaction of certain conditions. These conditions included, among other
things, that the trustees were required to obtain releases from all of the
Danish subsidiary's unsecured creditors that asserted claims in excess of
$100,000 on or before October 5, 2000.
On October 4, 2000 the Company received notice from the bankruptcy trustees that
they had received releases from all of the Danish subsidiary's unsecured
creditors that were asserting claims in excess of $100,000 and that the trustees
had no knowledge of written claims, or demands for payment, or threats of
litigation against the Company from the remaining unsecured creditors. Based
upon this notification, on October 19, 2000, the Company released the $2.25
million held in the escrow account. The Company will vigorously defend any claim
brought by creditors of the Danish subsidiary, whose claims were under $100,000,
and who were not required to affirmatively release the Company prior to release
of the escrowed funds.
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 subsidiary 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 the Company
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
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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 plaintiffs have withdrawn their request for class
certification and the EEOC has entered the case purporting a parallel class
action. 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 UAW union employees who were terminated upon settlement of
such strike, was dismissed in the third quarter of 1999. 28 individuals shortly
thereafter filed a new action, which has since been joined by approximately 90
other individuals. The Company filed for summary judgment on all claims on
February 20, 2000. Two individual cases are to be tried prior to certification
of any issues for appeal. 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.
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 $1.7 million, which amount has been accrued at December 31,
2000.
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.
-59-
On October 5, 1998, the Company's Pemco Aeroplex subsidiary was served
with a complaint filed by the EPA regarding such alleged violations of
Toxic Substance Control Act ("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.
11. RELATED PARTY TRANSACTIONS
The Company had accruals of approximately $0.9 million and $1.4 million
at December 31, 2000 and 1999, respectively, 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 a 36-month period that began January 2000.
During 1999, an Investment Fund controlled by one of the Directors of the
Company, who is also a significant company shareholder, 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.)
12. CAPITAL LEASES
The Company conducts part of its operations with leased machinery that
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)
Class of Property 2000 1999
----- -----
Data Processing $ 175 $ 143
Production Equipment 666 867
Less: Accumulated amortization (97) (300)
----- -----
$ 744 $ 710
===== =====
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The following is a schedule by years of the net present value of net minimum
lease payments for capital leases as of December 31, 2000:
(In Thousands)
Year Ending
2001 $208
2002 185
2003 139
2004 77
2005 11
Thereafter 0
----
Total minimum future lease payments 620
Less: Amount representing interest (92)
----
Present value of minimum lease payments $528
====
13. 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 year contract with the Company's Pemco Aeroplex,
Inc. subsidiary. The contract began 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 cost of living and 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.
On August 19, 2000, the membership of the International Association of
Machinists and Aerospace Workers (IAM) voted to ratify a new five-year
contract with the Company's Pemco Aeroplex subsidiary. The contract
began August 19, 2000 and extends through August 9, 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
17% over the life of the contract and increases in Pension benefits.
On June 13, 2000 the employees of the Company's Pemco Engineers
division voted to organize as members of the United Automobile,
Aerospace, and Agricultural Implement Workers of America (UAW). As of
the date of this report, an agreement has been negotiated, but a
contract has not been signed.
14. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
As of December 31, 2000 and 1999, the carrying amounts of the
Company's financial instruments are estimated to approximate their
fair values, due to their short-term nature,
-61-
and variable or market interest rates.
15. FOURTH QUARTER ADJUSTMENTS
In the fourth quarter of 2000, the Company recorded a benefit of $0.9
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 a one-time charge during the fourth quarter of fiscal 2000 of
$0.7 million relating to leasehold improvements at its Clearwater,
Florida facility.
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 evaluated the profitability of
contracts-in-process and recorded an additional charge of
approximately $0.9 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.
16. CLAIMS
The Company as a Government Contractor, utilizes the U.S. Government's
Request For Equitable Adjustment (REA) process as provided by the
Federal Acquisition Regulation when it seeks to recover costs from the
Government due to Government caused delays, errors in specifications
and designs, contract terminations, change orders in dispute or
unapproved as to both scope and price, or other causes of
unanticipated additional costs. The Company recognizes revenue on
these claims if: (1) there is a legal basis for the claim, (2) the
additional costs are caused by circumstances that were unforeseen at
the contract date, (3) the costs associated with the claim are
identifiable or otherwise
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determinable in view of the work performed, and (4) the evidence
supporting the claim is objective and verifiable. The amount of
revenue recognized is management's best estimate of the amount it will
be able to realize based upon the claim. During the third quarter of
2000, the Company recognized $1.0 million of revenue associated with
claims pertaining to one of its contracts with the U.S. Government.
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 loss contributed by the
Hayes operation for the year ended December 31, 1998 were
approximately as follows: Net Sales $27,000, Operating Loss $486,000.
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 in Birmingham, Alabama, provides
aircraft maintenance and modification services for the government and
military customers. The Commercial Services Group, located primarily
in Dothan, Alabama 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. During 1998 and part of 1999, these additional segments
performed support services for the three main business segments.
During 1999, these other segments were consolidated into the three
reportable 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. 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. 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 2000, 1999, and 1998 were $113.9 million, $106.2 million,
and $78.4 million, respectively.
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The following table presents information about 2000 segment profit or loss:
(In Thousands)
Manufacturing
Government Commercial & Overhaul Other Consolidated
---------- ---------- ---------- ----- ------------
Revenues from external
domestic customers $103,360 $38,202 $16,681 $0 $158,243
Revenues from external
foreign customers 0 1,795 1,626 0 3,421
Inter-segment revenues 752 0 96 0 848
-------- ------- ------- -- --------
Total segment revenues $104,112 $39,997 $18,403 $0 $162,512
Elimination (752) 0 (96) 0 (848)
-------- ------- ------- -- --------
Total Revenue $103,360 $39,997 $18,307 $0 $161,664
========
Gross profit Segment operating 25,879 2,399 2,508 0 30,786
income (loss) 16,722 (3,321) (2,781) 0 10,620
Interest expense 2,816
Other 117
Benefit for income taxes (1,762)
--------
Net income $ 9,449
========
Assets $ 36,533 $12,872 $ 9,818 $0 $ 59,223
Depreciation/amortization 2,399 497 431 0 3,327
Capital Additions 7,589 2,700 434 0 10,723
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The following table presents information about 1999 segment profit or loss:
(In Thousands)
Manufacturing
Government Commercial & Overhaul Other Consolidated
---------- ---------- ------------- ----- ------------
Revenues from external
domestic customers $88,990 $46,250 $23,782 $ 287 $159,309
Revenues from external
foreign customers 0 9,964 0 0 9,964
Inter-segment revenues 73 0 843 0 916
------- ------- ------- ------- --------
Total segment revenues $89,063 $56,214 $24,625 $ 287 $170,189
Elimination (73) 0 (843) 0 (916)
------- ------- ------- ------- --------
Total Revenue $88,990 $56,214 $23,782 $ 287 $169,273
========
Gross profit 22,713 8,374 2,606 (943) 32,750
Segment operating
Income (loss) 12,168 (218) (3,319) (1,039) 7,592
Interest expense 3,266
Other 825
Benefit for income taxes 2,676
--------
Net income $ 6,177
========
Assets $31,273 $12,767 $13,059 $ 304 $ 57,403
Depreciation/amortization 1,590 398 375 274 2,637
Capital Additions 1,984 503 562 0 3,049
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The following table presents information about 1998 segment profit or loss:
(In Thousands)
Manufacturing
Government Commercial & Overhaul Other Consolidated
---------- ---------- ------------- ---- ------------
Revenues from external
domestic customers $63,450 $41,074 $21,008 $1,312 $126,844
Revenues from external
foreign customers 0 12,351 2,575 0 14,926
Inter-segment revenues 147 0 168 11 326
------- ------- ------- ------ --------
Total segment revenues 63,597 53,425 23,751 1,323 142,096
Elimination (147) 0 (168) (11) (326)
------- ------- ------- ------ --------
Total Revenue $63,450 $53,425 $23,583 $1,312 $141,770
========
Gross profit 10,758 9,157 5,397 121 25,433
Segment operating income 2,994 3,955 2,334 48 9,331
Interest expense 3,368
Other 2,399
Benefit for income taxes 1,692
--------
Net income $ 10,054
========
Assets $31,096 $10,689 $ 6,141 $1,543 $ 49,469
Depreciation/amortization 1,401 545 450 0 2,396
Capital Additions 454 68 224 0 746
-66-
SUPPLEMENTARY INFORMATION
-67-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To Pemco Aviation Group, Inc. and Subsidiaries:
We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements included in this Form 10-K,
and have issued our report thereon dated March 2, 2001. Our audits were made
for the purpose of forming an opinion on those statements taken as a whole. The
financial statement schedule listed in the accompanying index, included in item
8 of the 10-K document, is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Birmingham, Alabama ARTHUR ANDERSEN LLP
March 2, 2001
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PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
for the periods ended December 31, 2000, 1999 and 1998
(in Thousands)
Balance at Additions Additions Balance at
Description Beginning Charged to Charged to End of
- ----------- Of Period Expense Assets Deductions Period
--------- ------- ------ ---------- ------
2000
Allowance for doubtful
accounts $ 1,022 $ 116 $(675) $ 463
Reserve for contract
Commitments, losses 380 0 (102) 278
Reserve for obsolete
inventory 5,011 707 0 5,718
1999
Allowance for doubtful
accounts $ 664 $ 1,268 $ (910) $ 1,022
Reserve for contract
Commitments, losses 1,174 16 (810) 380
Reserve for obsolete
inventory 2,496 3,038 (523) 5,011
1998
Allowance for doubtful $ 1,180 $ 294 $ (810) $ 664
accounts
Reserve for contract 668 1,657 (1,151) 1,174
Commitments, losses
Reserve for obsolete 2,975 0 (479) 2,496
inventory
-69-
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" and "EXECUTIVE
COMPENSATION" sections of the Company's definitive 2001 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 2001 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
2001 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 2001 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
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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, 2000.
c. Exhibits. The exhibits listed on the EXHIBIT INDEX on the
following page of this Form 10-K are either filed herewith or incorporated
herein by reference, as noted on the EXHIBIT INDEX.
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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.
PEMCO AVIATION GROUP, INC.
Dated: 03/26/01 By:/s/ Ronald A. Aramini
---------------------
Ronald A. Aramini, President
(Principal Executive Officer)
Dated: 03/26/01 By:/s/ John R. Lee
---------------
John R. Lee, Sr. Vice President and
Chief Financial Officer
(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 03/26/01
- ------------------------- --------
Michael E. Tennenbaum
/s/ H.T. Bowling Vice Chairman, Director 03/26/01
- ---------------- --------
H.T. Bowling
/s/ Ronald A. Aramini President, Chief Executive Officer, 03/26/01
- --------------------- Director, (Principal Executive Officer) --------
Ronald A. Aramini
/s/ Matthew L. Gold Director 03/26/01
- ------------------- --------
Matthew L. Gold
/s/ Mark K. Holdsworth Director 03/26/01
- ---------------------- --------
Mark K. Holdsworth
/s/ Thomas C. Richards Director 03/26/01
- ---------------------- --------
Thomas C. Richards
S-1
EXHIBIT INDEX
Exhibit
Number Description Reference
- ------ ----------- ---------
3.1 Certificate of Incorporation of Pemco Aviation Group, Inc.................................... (5)
3.2 Bylaws of Pemco Aviation Group, Inc.......................................................... (5)
4.1 Provisions of the Certificate of Incorporation and Bylaws of Pemco Aviation Group, Inc.
which define the rights of Securities Holders................................................ (5)
10.1 Amended Executive Employment Agreement between the Company and Matthew L. Gold effective
June 1, 1993, as amended March 11, 1994...................................................... (1)
10.2 Second Amended and Restated Credit Agreement between the Company and Bank of America
National Trust and Savings Association entered into as of December 31, 1997.................. (2)
10.3 Second Amended and Restated senior Subordinated Loan Agreement between the Company and Bank
of America National Trust and Savings Association entered into as of December 31, 1997....... (2)
10.4 May 17, 1999 Amendment to the Nonqualified Stock Option Plan................................. *
10.5 First Amendment to Second Amended and Restated Senior Subordinated Loan Agreement between the
Company and Bank of America National Trust and Savings Association entered into as of August
8, 1997 .................................................................................... (3)
10.6 Account Receivable Management and Security Agreement between the Company and BNY of the
Americas entered into as of August 8, 1997................................................... (5)
10.7 Amendment to Executive Employment Agreement between the Company and Matthew L. Gold
effective September 7, 1999.................................................................. (4)
10.8 Executive Employment Agreement between the Company and Ronald A. Aramini effective January 1,
2000......................................................................................... (4)
10.9 Agreement and Plan of Merger dated April 20, 2000 between Precision Standard, Inc and Pemco
Aviation Group, Inc.......................................................................... (5)
10.10 Credit and Security Agreement dated November 2, 2000 between Pemco Aviation Group, Inc. and
Wells Fargo Business Credit, Inc............................................................. (6)
-72-
10.11 Subordination Agreement dated November 1, 2000 by and among WELLS FARGO
BUSINESS CREDIT, INC., BANK OF NEW YORK, as Securities Agent, SPECIAL
VALUE BOND FUND, LLC, and PEMCO AVIATION GROUP, INC.......................... (6)
21 Subsidiaries of the Company.................................................. *
23 Consent of Arthur Andersen LLP............................................... *
- -------------------
* Filed Herewith
(1) 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.
(2) Filed as an exhibit to the Company's Annual Report on Form 10-Q for the
quarter ended March 31, 1997, and incorporated by reference herein.
(3) Filed as an exhibit to the Company's Form 10-Q for the quarter ended June
30, 1997, 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, 1999, and incorporated by reference herein.
(5) Filed as an exhibit to the Company's Form 10-Q for the quarter ended June
30, 2000, and incorporated by reference herein.
(6) Filed as an exhibit to the Company's Form 10-Q for the quarter ended
September 30, 2000, and incorporated by reference herein.
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