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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000931763-02-000891.txt : 20020415
<SEC-HEADER>0000931763-02-000891.hdr.sgml : 20020415
ACCESSION NUMBER: 0000931763-02-000891
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 5
CONFORMED PERIOD OF REPORT: 20011231
FILED AS OF DATE: 20020327
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: PEMCO AVIATION GROUP INC
CENTRAL INDEX KEY: 0000771729
STANDARD INDUSTRIAL CLASSIFICATION: AIRCRAFT [3721]
IRS NUMBER: 840985295
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-13829
FILM NUMBER: 02588873
BUSINESS ADDRESS:
STREET 1: 12000 E 47TH AVENUE
STREET 2: SUITE 400 N
CITY: DENVER
STATE: CO
ZIP: 80237
BUSINESS PHONE: 3033716525
FORMER COMPANY:
FORMER CONFORMED NAME: PR INK INC
DATE OF NAME CHANGE: 19870323
FORMER COMPANY:
FORMER CONFORMED NAME: PRECISION STANDARD INC
DATE OF NAME CHANGE: 19920703
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<FILENAME>d10k405.txt
<DESCRIPTION>FORM 10-K405
<TEXT>
<PAGE>
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, 2001, or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 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 or 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. [X]
The aggregate market value of the Common Stock held by non-affiliates on March
21, 2002 was approximately
$40,490,938
The number of shares of the company's Common Stock outstanding as of March 21,
2002 was
4,094,129
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, 2001) are incorporated by reference in Part III.
<PAGE>
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 2001
PEMCO AVIATION GROUP, INC.
PART I Page
Item 1. Business 1
Item 2. Properties 13
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 17
PART II
Item 5. Market for company's Common Equity and Related Stockholder
Matters 17
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 33
Item 8. Financial Statements and Supplementary Data 34
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
- i -
<PAGE>
PART I
ITEM 1. BUSINESS.
A. GENERAL
Pemco Aviation Group, 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 believes that it is the only company in the
world currently certified by the FAA for passenger to freighter conversions of
the 737-300 and it is currently investigating the economic potential of the 757
for conversion to freighter configuration. The company's facilities, tooling,
and experienced labor force enable it to perform a broad range of airframe
modifications for commercial customers. 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.
B. SIGNIFICANT DEVELOPMENTS
CONTRACT WITH BOEING AEROSPACE SUPPORT CENTER
On December 12, 2001 the company entered into a contract with the Boeing
Aerospace Support Center to serve as a subcontractor to Boeing for Programmed
Depot Maintenance ("PDM") on KC-
- 1 -
<PAGE>
135 aircraft. This new contract continues the company's more than 32-year
involvement in KC-135 aircraft PDM. The contract provides for one base year and
five option years with an estimated value of approximately $600 million over
the course of the agreement if all options are exercised.
IMPACT OF SEPTEMBER 11, 2001 TERRORIST ACTIVITIES
The Commercial segments of the company's business have seen a general slow down
of sales since the terrorist attacks on September 11, 2001. Many airlines cut
the size of their fleets after the attacks by parking aircraft. In general, the
aircraft parked were those that were due for maintenance. As the airlines
continue to try to reduce expenditures they are actively deferring
discretionary maintenance and performing mostly mandatory maintenance. In the
event that commercial air traffic levels return to levels similar to those
prior to the terrorist attacks, the company anticipates that there will be a
surge in the general level of maintenance activity as airlines return parked
aircraft to service and resume performing deferred discretionary maintenance.
The Government Services Group of the company has seen no significant change in
business activity due to the attacks. It has, however, increased security at
its facility.
DEFINED BENEFIT PENSION PLAN
As a result of unfavorable investment returns related to the company's Defined
Benefit Pension Plan (the "Plan") in 2001 coupled with an increase in actuarial
liability, the company made a $3.0 million contribution to the Plan during the
fourth quarter of 2001. In addition to this contribution, the company accrued a
long-term pension benefit obligation in the amount of $15.3 million, recorded
an intangible pension asset of $6.5 million, increased its deferred tax asset
$3.3 million, and recorded a $5.5 million charge to comprehensive income. The
company anticipates that it will be required to make further contributions to
the Plan during 2002. Under ERISA rules, the company expects that the minimum
required contribution is approximately $1.6 million. It is possible that the
company may elect, as it did during 2001, to contribute more than the minimum
requirement.
TREASURY STOCK
At the end of the third quarter of 2001, the Board of Directors authorized the
company to repurchase up to 400,000 shares of its common stock, representing
approximately 10% of the issued and outstanding shares. The Board of Directors
approved the repurchase program after considering current economic and market
conditions, the capital position of the company, and the prevailing price at
which shares of the company's common stock were trading. The program does not
obligate the company to acquire any particular number of shares and may be
suspended at any time at the company's discretion. As of the date of this
report, the company had acquired 7,500 shares under the repurchase program.
AS 9000/ISO 9002 CERTIFICATION
On October 12, 2001 the Pemco Aeroplex subsidiary of the company was notified
that it had
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<PAGE>
completed the requirements for and been certified as ISO 9002 compliant. At
this same time Pemco Aeroplex also received the related Aerospace Standard, AS
9000, certification.
INCREASE IN THE NUMBER OF COMPANY DIRECTORS
On December 14, 2001 the company's Board of Directors passed a resolution
increasing the number of directors on the Board from six to seven. At this same
meeting, General Ronald W. Yates, USAF, Retired, was elected to fill the new
position. General Yates had previously served as a member of the Advisory Board
for the company since April of 2000 and has 35 years of experience and
expertise in military procurement.
CONTRACT WITH NORTHROP GRUMMAN
On February 7, 2002 the company entered into an agreement with Northrop Grumman
Corporation to perform Programmed Depot Maintenance on Joint Surveillance
Target Attack Radar Systems E-8C aircraft ("Joint STARS"). The contract
includes one base year and four option years. The E-8C aircraft is a highly
modified Boeing 707-300 aircraft that has become an integral component of the
airborne segment of the United States Air Force/United States Army Joint
Surveillance efforts.
DOTHAN EXPANSION
In December 2001, the company began construction on a hangar expansion at its
Dothan, Alabama facility. The project, estimated to cost approximately $2.5
million, will add an additional 25,000 square feet and an another set of
aircraft doors to one of the existing hangars at the facility. When completed
in August 2002, the expanded hangar will be able to accommodate five narrow
body or two wide body aircraft.
C. INDUSTRY OUTLOOK
In general, despite the signs of a short-term slow-down in commercial air
traffic growth caused by both the economy and the events of September 11, 2001,
the company believes that demand for aircraft maintenance and modification
services will recover strength. 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,
with its related increase in package deliveries, should provide additional
demand for cargo aircraft.
Industry estimates indicate that approximately one-third of the demand for
cargo aircraft will be met by deliveries of new aircraft with the remaining
two-thirds supplied by passenger to cargo aircraft conversions.
- 3 -
<PAGE>
MILITARY MAINTENANCE AND MODIFICATION INDUSTRY
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,
generating greater revenue for the military maintenance and modification sector
of the industry.
One of the company's core competencies for 49 years has been military aircraft
maintenance and modification. The company believes that this core competency
will enable it to continue 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 projects 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 with nearly 60% of the world's
air traffic focused in the United States. The commercial maintenance industry is
also expected to grow in the upcoming years as airlines continue to outsource
their maintenance needs. Based on Boeing's estimations of substantial growth in
the Maintnance Repair and Overhaul ("MRO") market over the next 20 years, and
the company's expectation that the percentage of outsourced airframe maintenance
in the MRO market could increase to 25% in that same time period, the company
believes that the market segment in which it operates could grow substantially
over the next several years.
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
company's commercial customers include some of the major global lessors of
aircraft as well as airlines and airfreight carriers.
- 4 -
<PAGE>
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 Aerospace Support Center, 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 Goodrich Airframe Services
Division (formerly Tramco), Dee Howard Aircraft Maintenance, Timco Aviation
Services, 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
cannot deploy without these resources. The demands placed on these aircraft
mean that they 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 of component upgrades 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 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.
- 5 -
<PAGE>
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 49 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.
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. The
company is currently completing work on aircraft inducted for PDM under this
contract. On December 12, 2001 the company entered into a contract with Boeing
Aerospace Support Center to serve as a subcontractor to Boeing for PDM on
KC-135 aircraft. In effect this new contract continues the company's
involvement in KC-135 aircraft PDM. The contract provides for one base year and
five option years with an estimated value of $600 million over the course of
the agreement if all options are exercised.
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 with approximately 1.9 million square feet under roof.
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"
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<PAGE>
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 Federal Aviation Administration ("FAA") approved maintenance program being
used, includes systems operational tests, thorough exterior cleaning, and
limited 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 more
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 performs.
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.
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.
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<PAGE>
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
FAA for passenger to freighter conversions of the 737-300, and based on its
belief that demand for conversions of this model of aircraft will increase, the
company is expecting to expand this line of business in 2002.
Contracts for commercial aircraft are performed at the company's Dothan,
Alabama facility. During 2001 and 2000 this facility received the FAA Diamond
award for its training activities.
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. This group is comprised of independent niche
manufacturing and service businesses, which, with the exception of space
systems, are complementary to the company's aircraft services businesses.
CARGO HANDLING SYSTEMS & HIGH PRECISION COMPONENTS
The company designs and manufactures on-board cargo-handling systems for many
types of large transport aircraft and certain military aircraft. In addition,
the company also produces high precision 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 major United
States and 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 precision components cover a wide range of manufacturers
in numerous industries. There are approximately 500 manufacturers of components
in the United States corresponding to an industry size of approximately $1
billion. The company's competitors range in size from "single-machine" shops to
companies with revenues exceeding $20 million. Most of the
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<PAGE>
competitors, however, produce a broader mix of products while the company
focuses on the manufacture of high precision 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 six years.
The company's Pemco Engineers division, located in Corona, California, produces
the cargo handling system and high precision components product lines.
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 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 has also had prime contracts with NASA in support of space science and
performs a limited amount of commercial space work.
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 small organizations for the component subsystems to
major corporations for the design systems integration, and manufacture of
spacecraft and launch vehicles. The company considers its competitive strength
to be its technical and managerial competence. The company's contracts are
awarded in accordance with the U.S. Government's competitive bidding practices.
The company's Space Vector subsidiary is located in Chatsworth, California.
E. SALES
FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
All of the company's revenues during 2001 were generated in the United States
and all of the company's assets were located in the United States.
Approximately 2% of revenues in 2001 were generated from foreign owned
entities.
The company provides maintenance and modification services for foreign-based
aircraft owners and operators at its U.S. facilities. The company's Space
Vector and Pemco Engineers subsidiaries 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:
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<PAGE>
Product and Service Rendered 2001 2000 1999
- ---------------------------- ---- ---- ----
Aircraft Maintenance and Modification 91% 89% 85%
Space Vehicles and Support Systems 4% 4% 7%
Cargo Handling Systems & High Precision 5% 6% 5%
Parts
Nacelle Overhaul and Repair 0% 1% 3%
---- ---- ----
Total 100% 100% 100%
==== ==== ====
Export Sales - Principally Europe and Canada 2% 2% 6%
MAJOR CUSTOMERS
The following table presents the percentages of total sales for the company's
largest customers for the last three fiscal years:
Customer 2001 2000 1999
- -------- ---- ---- ----
U.S. Government - principally the Air Force, 67% 75% 63%
Army, Navy, and NASA
Emery Worldwide 0% 9% 0%
Northwest Airlines 18% 5% 12%
F. BACKLOG
The following table presents the company's backlog (in thousands of dollars) at
December 31, 2001 and 2000:
Customer Type 2001 2000
- ------------- ---- ----
U.S. Government $ 127,145 $ 109,260
Commercial 16,257 12,041
--------- ---------
Total $ 143,402 $ 121,301
========= =========
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<PAGE>
Government backlog, which represents 88.7% of the company's total backlog,
increased $17.9 million, or 16.4 %. $13.7 million of this increase was
attributable to the company's Government Services Group, while the company's
Space Vector subsidiary increased backlog $4.9 million. During 2001, the
Commercial Services Group completed its final work under the H-3 helicopter
program, which resulted in its Government backlog decreasing $0.7 million.
The Government Services Group received 39 aircraft in 1999, 37 aircraft in 2000
and 33 aircraft in 2001 for PDM under its contracts. The company classifies all
work for which the final customer is the U.S. Government as U.S. Government
work whether the work is performed directly or under sub-contract.
Substantially all of the company's government backlog 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, 2001 increased $4.2 million or
35.0%. $4.1 million of this increase occurred at the Commercial Services Group
while the Pemco Engineers subsidiary increased its backlog $0.1 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 being performed, lead to
"over and above" time and material sales. While it cannot be certain that this
work will continue in the future, the company currently has no reason to believe
that it will decrease.
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 2001 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 that could cause 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.
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<PAGE>
Government in each of 1999, 2000 and 2001, and as a result, experienced a
disruption in scheduled workflow.
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 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 agreed to assess a portion of the Birmingham facility
for possible contamination by certain constituents, remediate such
contamination as necessary, and pay a penalty of $95,000 over a three-year
period. The company made the final payment in November 2001. During 1999 the
company drilled test wells and took samples under its Phase I Site
Characterization Plan. These samples
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were forwarded to the EPA in 1999. A Phase II Site Characterization Plan was
submitted to the EPA in 2001 upon receiving the agency's response to the 1999
samples. This plan was approved in 2001 and evaluation and testing continues.
On October 5, 1998, the company's Pemco Aeroplex subsidiary was served with a
complaint filed by the EPA regarding alleged violations of Toxic Substance
Control Act 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 CACO resolving the
complaint. Under the CACO, the company agreed to pay a penalty of $91,800 over
a three-year period, the final payment of which was made during 2001.
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
On December 31, 2001, the company employed 2,029 persons. Approximately 1,575
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").
ITEM 2. PROPERTIES.
Following is a list of the company's properties.
BIRMINGHAM, ALABAMA
The Government Services Group, as well as the company's corporate offices, is
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 aircraft 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
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<PAGE>
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 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 ten-year option
period, expires in December 2033.
CHATSWORTH, CALIFORNIA
Space Vector Corporation, part of the Manufacturing and Overhaul Group, is
located in Chatsworth, California. This facility consists of three industrial
buildings of approximately 63,000 square feet. One of these buildings,
approximately 7,000 square feet, is currently subleased. Space Vector
Corporation occupies these buildings under a lease agreement, that expires in
April 2004.
CORONA, CALIFORNIA
The Pemco Engineers subsidiary of the Manufacturing and Overhaul Group is
located in Corona, California. The facility consists of approximately 27,000
square feet and houses production and administrative functions. The facility is
held under a lease agreement, that, inclusive of a five-year option period,
expires in June 2007.
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. Until December 2001 the
facility housed the PASS subsidiary of the Manufacturing and Overhaul Group. In
December of 2001 the operations of the PASS business unit were transferred to
Dothan,
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<PAGE>
Alabama. 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 four optional renewal periods of five years each which would
extend the lease until September 2025.
ITEM 3. LEGAL PROCEEDINGS
GOVERNMENT LAWSUIT
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, some of which were subsequently refurbished and sold. On September 3,
1997 the company's motions to dismiss the case were granted. On October 31,
1997 the United States filed an appeal to the Eleventh Circuit Court, which
affirmed the lower court's dismissal of the case. Although the government did
not seek a rehearing, in July 1999 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.
HAYES INTERNATIONAL 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 during the mid to late 1980s. 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 named 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. On June 1, 2001,
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<PAGE>
the Court issued an Order of Dismissal dismissing Pemco Aeroplex from this
litigation.
BREACH OF CONTRACT LAWSUITS
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 sought
damages in excess of $0.8 million. On December 4, 2001 the company settled the
case for $50,000.
On October 6, 2000, the company's subsidiary, Pemco Aeroplex, filed suit
against Certex of Alabama, an unincorporated division of Bridon American
Corporation, for breach of contract and fraud with regard to the supply of
deficient wire rope that is installed as aircraft flight control cables on
KC-135 aircraft. The case, filed in the circuit court of Jefferson County,
Alabama, was brought to trial and on September 20, 2001, a jury returned with a
verdict in favor of the company in the amount of $7.5 million. The Court, upon
a post-judgment motion filed by Certex, reduced the judgment to $2.5 million.
Certex has appealed that Order to the Supreme Court of Alabama. The company
believes the appeal is without merit and will continue to pursue final judgment
on the Order. The company, pending appeal, has not recorded the $2.5 million
favorable judgment.
On October 12, 1995, Falcon Air AB filed a Complaint in the United States
District Court, Northern District of Alabama, alleging that the modification of
three 737 aircraft to Quick Change configuration by the company was defective,
limiting the commercial use of the aircraft. The case was ordered to
arbitration by the court and sent back to the District Court in 2001 when
settlement was not reached. District court denied the company's Motion for
Reinstatement. The company has filed for a stay of proceedings to resolve
certain matters filed before the 11th Circuit Court of Appeals on October 31,
2001; specifically, the issue of whether arbitration is required where the
contract calls for "alternative dispute resolution." Management believes that
the results of this lawsuit will not have a material impact on the business of
the company.
EMPLOYMENT LAWSUITS
On December 9, 1999 the company and its Pemco Aeroplex subsidiary were served
with a purported class action in the U.S. District Court, Northern District of
Alabama seeking declaratory, injunctive relief and other compensatory and
punitive damages based upon alleged unlawful employment practices of race
discrimination and racial harassment by the company's managers, supervisors,
and other employees. The complaint seeks damages in the amount of $75 million.
On July 27, 2000 the U.S. District Court, Northern District of Alabama
determined that the group would not be certified as a class as the plaintiffs
withdrew their request for class certification. The EEOC subsequently 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.
A purported class action, brought against the company and its Pemco Aeroplex
subsidiary on
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<PAGE>
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. Twenty-eight individuals filed a
new action shortly thereafter, in the circuit Court of Jefferson County,
Alabama, which has since been joined by approximately 90 other individuals. The
company filed for summary judgment on all claims on February 20, 2000. Summary
judgment was granted with regard to 35 of those individuals. The Court required
two individual cases to be tried prior to certification of any issues for
appeal. These two cases were tried in June of 2001. The Court directed a
verdict in the company's behalf in one case and a jury returned with a defense
verdict in favor of the company in the other case. The company has now accepted
an offer of settlement proposed by the plaintiffs under terms favorable to the
company. The parties are working towards finalization of that settlement.
Various claims alleging employment discrimination, including race, sex, age and
disability, have been made against the company and its subsidiaries 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 company's stockholders in the
fourth quarter of fiscal 2001.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The company's common stock trades on the Nasdaq National Market System under the
symbol "PAGI." The following table sets forth the range of high and low sales
prices for the common stock on a quarterly basis for each of the last two fiscal
years as reported on Nasdaq. Quotations represent prices between dealers, do not
include retail mark-ups, markdowns or commissions, and do not necessarily
represent actual transactions.
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<PAGE>
2001 2000
Quarter Ended High Low High Low
- ------------- ---- --- ---- ---
March 31 $ 12.00 $ 8.13 $ 11.50 $ 7.88
June 30 $ 11.89 $ 8.55 $ 18.94 $ 8.13
September 30 $ 14.40 $ 10.11 $ 17.13 $ 12.19
December 31 $ 18.00 $ 11.21 $ 15.61 $ 9.00
On March 21, 2002, there were 4,094,129 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 company's revolving credit
facility restricts its ability to pay dividends.
The last reported sales price of the company's common stock on March 21, 2002
was $21.00.
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 Financial Condition
and Results 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
12/31/01 12/31/00 12/31/99 12/31/98 12/31/97
-------- -------- -------- -------- --------
Net Sales $165,460 $161,664 $169,273 $141,770 $122,258
Income (loss) from
Operations 16,109 10,503 6,767 8,610 (22,611)
Net Income (loss) 14,862 9,449 6,177 10,054 (33,150)
Net Income (loss) per
common share - diluted $ 3.50 $ 2.23 $ 1.52 $ 2.53 ($9.19)
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Consolidated balance sheet data for the company is as follows (in thousands of
dollars):
Year Year Year Year Year
Ended Ended Ended Ended Ended
12/31/01 12/31/00 12/31/99 12/31/98 12/31/97
-------- -------- -------- -------- --------
Working Capital $9,728 $(4,455) ($7,618) $3,286 ($27,911)
Total Assets 76,176 60,129 57,403 49,469 46,333
Long Term Debt 3,994 4,199 4,168 21,824 0
Other Long Term
Liabilities 15,567 2,641 3,023 3,063 6,157
Stockholders' Equity
(deficit) 19,349 9,927 138 (6,040) (16,337)
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, 2001
VERSUS TWELVE MONTHS ENDED DECEMBER 31, 2000
The table below presents major highlights from the years ended December 31,
2001 and 2000.
(In $Millions)
2001 2000 Change
------- ------- --------
Revenue $165.5 $161.7 2.4%
Operating income 16.1 10.5 53.3%
Income before taxes 14.8 7.7 92.2%
Net income 14.9 9.5 56.8%
EBITDA 19.6 13.6 44.1%
Sales in the Government Services Group increased slightly from $104.1 million
in 2000 to $104.4 in 2001. The Commercial Services Group sales increased $5.4
million, 13.5%, during 2001, from
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$40.0 million in 2000 to $45.4 million in 2001. Sales in the Manufacturing &
Overhaul Group declined $2.5 million, 13.6%, during 2001, from $18.4 million in
2000 to $15.9 million in 2001.
Without regard to operating segments, the company's mix of business between
government and commercial customers shifted from 25% commercial and 75%
government in 2000 to 33% commercial and 67% government in 2001.
The $0.3 million increase in the sales of the Government Services Group was due
primarily to increased throughput under the KC-135 PDM contracts of $5.5
million and an increase of $0.6 million in other contracts. These increases
were partially offset by a drop of $5.8 million in the C-130 Paint Contract.
The KC-135 PDM contracts represented 97.7% of the revenue of the Government
Services Group in 2001 and 92.7% in 2000.
The increase in the Commercial Services Group revenue of $5.4 million was
primarily due to increases in commercial Maintenance, Repair, and Overhaul
("MRO") and Conversion revenues of $11.8 million and $0.4 million,
respectively. These increases were partially offset by lower work on government
contracts of $6.8 million primarily due to completion of the H-3 helicopter
contract.
Revenue in the Manufacturing & Overhaul Group decreased $2.5 million in 2001.
Sales at the Space Vector subsidiary decreased $0.5 million as a result of
lower revenues during the first five months of the year due to a lack of
contract revenues. Revenue in the Pemco Engineers subsidiary decreased $2.0
million during the year primarily due to a drop in orders for replacement parts
for cargo handling systems combined with a decrease in orders for new cargo
handling systems.
Cost of sales decreased from $130.9 million in 2000 to $128.9 million in 2001.
The lower cost of sales for 2001 was partially the result of higher production
efficiencies in the company's Commercial Services Group and Government Services
Group. Overall, the company's gross profit percentage increased from 19.0% in
2000 to 22.1% in 2001.
Selling, general, and administrative expenses increased slightly from $19.9
million in 2000 to $20.4 million in 2001. The expenses remained constant at
12.3% as a percentage of sales in 2000 and 2001.
Interest expense was $1.3 million in 2001 versus $2.8 million in 2000. The
effective average interest rate on the company's revolving credit facility was
approximately 12.5% in 2000 and 7.4% in 2001. During 2001 the company's
interest rate decreased due to the new credit facility signed in November 2000
and making final payments on high interest rate loans originated in prior years.
The company recorded income tax benefits in 2001 and 2000 of $0.1 million and
$1.8 million, respectively. (See Notes to the Consolidated Financial
Statements.)
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<PAGE>
TWELVE MONTHS ENDED DECEMBER 31, 2000
VERSUS TWELVE MONTHS ENDED DECEMBER 31, 1999
The table below presents major highlights from the years ended December 31,
2000 and 1999.
(In $Millions)
2000 1999 Change
------- ------- --------
Revenue $161.7 $169.3 -4.5%
Operating income 10.5 6.8 54.4%
Income before taxes 7.7 3.5 120.0%
Net income 9.5 6.2 53.2%
EBITDA 13.6 9.3 46.8%
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.
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 subsidiary. The year
over year difference is also affected by the elimination of the Pemco Nacelles
subsidiary during the year causing an impact of $3.1 million. Revenue in the
Pemco Engineers operating group increased $1.5 million. The PASS subsidiary
increased revenue slightly by $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
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<PAGE>
from 19.4% in 1999 to 19.0% in 2000 primarily as a result of these lower
volumes in the Commercial segment.
Selling, general, and administrative expenses increased from $19.7 million in
1999 to $19.9 million in 2000. The expenses increased during the year as a
percentage of sales from 11.6% 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 income tax benefits in 2000 and 1999 of $1.8 million and
$2.7 million, respectively. (See Notes to the Consolidated Financial
Statements.)
LIQUIDITY AND CAPITAL RESOURCES
The table below presents the major indicators of financial condition and
liquidity.
<TABLE>
<CAPTION>
(In $Thousands Except Long Term Debt to Equity)
December 31, December 31,
2001 2000 Change
-------------- -------------- --------
<S> <C> <C> <C>
Cash $927 $1,441 ($515)
Working Capital 9,729 (4,455) 14,184
Revolving credit facility 11,591 10,296 1,295
Long term debt and capital lease obligations 3,994 4,199 (205)
Shareholders' equity 19,349 9,927 9,422
Long term debt to equity 20.6% 42.3% 21.7%
</TABLE>
The company's revolving credit facility is included in current liabilities. See
Note 4 to the Consolidated Financial Statements for detailed explanations of
the company's debt and the classification of the revolving credit facility as
current. Management does not believe that the
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<PAGE>
subjective acceleration clause, included in the revolving credit facility
agreement, described in Note 4 to the consolidated financial statements, will
be invoked, although there can be no assurances in that regard.
Operating activities provided $5.5 million of cash for the twelve months ended
December 31, 2001. During this same period, the company borrowed $1.9 million
as a discretionary term loan and $0.8 million on its capital equipment
acquisition facility. These two new loans carry variable interest rates, which
were 5.25% and 5.50%, respectively, at December 31, 2001. Cash was used during
the twelve months ended December 31, 2001 for $5.7 million of capital
expenditures and to make the final two payments, totaling $2.5 million, under
the company's Senior Subordinated debt agreement.
At December 31, 2001 the company had additional borrowing capacity of $2.3
million under its capital equipment acquisition facility and $7.5 million under
its revolving line of credit.
On September 21, 2001 the Board of Directors authorized the company to
repurchase up to 400,000 shares of its common stock, representing approximately
10% of the company's issued and outstanding shares. The repurchases are
authorized to be made from time to time through open market purchases,
privately negotiated transactions, or both. The Board of Directors approved the
repurchase program after considering current economic and market factors and
the company's capital position. The program does not obligate the company to
acquire any particular number of shares and may be suspended at any time at the
company's discretion. As of the date of this report, the company has
repurchased 7,500 shares at an average price of $13.05 per share. The shares
repurchased under this program have been reflected as Treasury Stock in the
Stockholder's Equity section of the Consolidated Balance Sheets.
The company maintains a defined benefit pension plan (the "Plan") that covers
substantially all employees at its Birmingham and Dothan, Alabama facilities.
The Plan's assets consist primarily of stocks, bonds and cash equivalents.
These assets are exposed to various risks, such as interest rate, credit, and
overall market volatility. As a result of unfavorable investment returns
related to the Plan in 2001, the company made a $3.0 million contribution to
the Plan during the fourth quarter of 2001. In addition to this contribution,
the company accrued a long-term pension benefit obligation in the amount of
$15.3 million, accrued an intangible pension asset of $6.5 million, increased
its deferred tax asset $3.3 million and recorded a $5.5 million charge to
comprehensive income. The company anticipates that it will be required to make
further contributions to the Plan during 2002. Under ERISA rules, the company
expects that the minimum required contribution in 2002 is approximately $1.6
million. At December 31, 2001 the Plan was under-funded by approximately $13.5
million. It is possible that the company may elect, as it did during 2001, to
contribute more than the minimum requirement.
Funding for the advancement of the company's strategic goals, including the
possible investment in targeted business areas and acquisitions, is expected to
continue. The company plans to finance its capital expenditures, working
capital and liquidity requirements through the most advantageous sources of
capital available to the company at the time, which may include the sale of
equity or debt securities through public offerings or private placements, the
incurrence of
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<PAGE>
additional indebtedness through secured or unsecured borrowings and the
reinvestment of proceeds from the disposition of assets. The company believes
that its internally generated liquidity, together with access to external
capital resources, will be sufficient to satisfy existing commitments and plans
for at least the next twelve months. The company could elect, or could be
required, to raise additional funds during that period, and the company may
need to raise additional capital in the future. Additional capital may not be
available at all, or may not be available on terms favorable to the company.
Any additional issuance of equity or equity-linked securities may result in
substantial dilution to the company's stockholders. The company is continually
monitoring and reevaluating its level of investment in all of its operations,
as well as the financing sources available to achieve its goals in each
business area.
In December 2001 the company began construction on an addition to one of the
hangers at its Dothan, Alabama facility. The addition is projected to cost
approximately $2.5 million. The company anticipates that it will secure funding
for the addition through the issuance of an Airport Bond. The company currently
has no other material capital projects underway.
COMMITMENTS AND CONTINGENCIES
FACILITY AND 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 5 months to thirty-one 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, 2001 are as follows:
(In Thousands)
Vehicles
And
Year Ending Facilities Equipment Total
---------- --------- -----
2002 $1,143 $ 719 $1,862
2003 1,046 204 1,250
2004 665 165 830
2005 500 131 631
2006 500 71 571
Thereafter 1,750 0 1,750
------ ------ ------
Total minimum
future rental
commitments $5,604 $1,290 $6,894
====== ====== ======
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<PAGE>
REPAYMENT OF LONG TERM DEBT
Schedule of debt maturing over the next five years at December 31:
(In Thousands)
2002 $ 2,244
2003 1,236
2004 821
2005 753
2006 701
Thereafter 483
-------
$ 6,238
-------
TRADING ACTIVITIES
The company does not engage in trading activities or in trading non-exchange
traded contracts. As of December 31, 2001 and 2000, the carrying amounts of the
company's financial instruments are estimated to approximate their fair values,
due to their short-term nature, and variable or market interest rates. The
company has not hedged its interest rate or foreign exchange risks through the
use of derivative financial instruments. See Quantitative and Qualitative
Disclosures about Market Risk included in Section 7A of this 10K.
RELATED PARTY TRANSACTIONS
The company had accruals of approximately $0.4 million and $0.9 million at
December 31, 2001 and 2000, respectively, related to a severance agreement with
its former Chairman of the Board, Chief Executive Officer and major
stockholder. In accordance with the agreement, the accrued amounts are being
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 stockholder, purchased the company's
Senior Subordinated Loan from a financial institution. In April of 2001 the
company made the final principal payments under this debt obligation.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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.
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<PAGE>
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.
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 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, 2001
and 2000, respectively, is $417,000 and $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 the shorter of the
lease period or the economic life of the improvements):
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<PAGE>
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.
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 will be 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, 2001 and 2000. 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 SFAS No. 123 "Accounting for Stock
Based Compensation".
RELEVANT NEW ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("FASB") issued
statement of Financial Accounting Standards ("SFAS") No. 144, Accounting
for the Impairment or Disposal of Long Lived Assets, which clarifies
accounting for assets held for sale, scheduled for abandonment or other
disposal, and recognition of impairment loss related to the carrying value
of long-lived assets. The company plans to adopt Statement No. 144 in
fiscal year 2002. Management does not believe the adoption of this
statement will have a
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<PAGE>
material effect on the consolidated financial
statements.
SUMMARY OF UNAUDITED FINANCIAL DATA:
Unaudited quarterly financial information is as follows (in thousands of
dollars):
Quarter Quarter Quarter Quarter
Ended Ended Ended Ended
3/31/01 6/30/01 9/30/01 12/31/01
------- ------- ------- --------
Net Sales $43,555 $42,235 $41,447 $38,223
Gross Profit 8,964 10,115 8,865 8,589
Net Income 1,806 3,523 2,382 7,151
Net Income per Share:
Basic $ 0.45 $ 0.87 $ 0.59 $ 1.78
Diluted $ 0.43 $ 0.84 $ 0.56 $ 1.67
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 $ 0.37
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.)
The company, as a U.S. Government contractor, is routinely subject to audits,
reviews and
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<PAGE>
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 and its financial condition. 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 67% of the company's revenues in 2001 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 67%, 75%, and 63%
of the company's revenues in 2001, 2000, and 1999, respectively. The U.S. Air
Force KC-135 contract in and of itself comprised 61%, 60%, and 48% of the
company's total revenues in 2001, 2000, and 1999, respectively. In December
2001 the company entered into a contract with Boeing to serve as a
subcontractor to Boeing for repair work on KC-135 aircraft. The contract
provides for one base year and five option years. Termination or a disruption
of any of these contracts (including by
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<PAGE>
way of option years not being exercised), 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 parties with whom to
successfully team, and
. the potential inability to team with other parties 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. 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.
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 Aerospace Support
Center, 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 Goodrich Airframe Services Division (formerly Tramco),
Dee Howard Aircraft Maintenance, Timco Aviation Services, 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
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<PAGE>
is currently a party to several legal proceedings, including breach of contract
claims and claims based on the company's employment practices (See Item 3,
Legal Proceedings). 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 violations 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
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<PAGE>
. 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 STOCKHOLDER APPROVAL.
As of December 31, 2001, the company's executive officers, directors and their
affiliates, in the aggregate, beneficially owned approximately 44% of the
company's outstanding common stock. As a result, these stockholders are able to
significantly influence matters requiring approval by the stockholders of the
company, including the election of directors and the approval of mergers or
other business combination transactions. This control may have the effect of
deterring hostile takeovers, delaying or preventing changes in control or
changes in management, or limiting the ability of our other stockholders to
approve transactions that they may deem to be in their best interests.
THE COMPANY'S TRUST FOR ITS DEFINED BENEFIT PLAN IS SUBJECT TO FINANCIAL MARKET
FORCES
The company maintains a defined benefit pension plan (the "Plan") that covers
substantially all employees at its Birmingham and Dothan, Alabama facilities.
The Plan's assets consist primarily of stocks, bonds and cash equivalents.
These assets are exposed to various risks, such as interest rate, credit, and
overall market volatility. Losses on the Plan's assets may lead to significant
cash contributions on the part of the company to fund the Plan to the actuarial
levels required by ERISA that could materially harm the company's business and
impair the value of its common stock. In 2002, the company expects that the
minimum required contribution will be approximately $1.6 million. It is
possible that the company may elect, as it did during 2001, to contribute more
than the minimum requirement.
THE COMPANY'S BUSINESS IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION.
The aircraft maintenance and modification services industry is subject to
extensive regulatory
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<PAGE>
and legal compliance requirements that result in significant costs. The FAA
from time to time issues directives and other regulations relating to the
maintenance and modification of aircraft that require significant expenditures.
Regulatory changes could materially harm the company's business by making its
current services less attractive or obsolete, or increasing the opportunity for
additional competition. Changes in, or the failure to comply with, applicable
regulations could materially harm the company's business and impair the value
of its common stock.
TERRORISM AND THE UNCERTAINTY OF WAR MAY ADVERSELY AFFECT THE COMPANY.
Terrorist attacks, such as the attacks that occurred in New York and
Washington, D.C. on September 11, 2001 and other acts of violence or war may
affect the company's operations and profitability, the markets in which the
company operates, and the market on which the company's common stock trades.
Further terrorist attacks against the United States or U.S. businesses may
occur. The potential near-term and long-term effect these attacks may have on
the company's customers, the markets for the company's services, the market for
the company's common stock and the U.S. economy are uncertain. The consequences
of any terrorist attacks, or any armed conflicts which may result, are
unpredictable and could 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, anticipated increase in demand for conversions, 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.
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, (5.25% and 5.50% at December 31,
2001). If the prime rate increased 100 basis points, net income would be
reduced by approximately $163,000 during the year. The actual fluctuation of
interest rates is not determinable, accordingly, actual results of interest
rate fluctuations could differ.
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<PAGE>
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
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<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pemco Aviation Group, Inc.
We have audited the accompanying consolidated balance sheets of PEMCO AVIATION
GROUP, INC. (a Delaware corporation) AND SUBSIDIARIES as of December 31, 2001
and 2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2001. 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, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States.
Birmingham, Alabama ARTHUR ANDERSEN LLP
March 1, 2002
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<PAGE>
PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
ASSETS
(In Thousands)
2001 2000
---- ----
Current assets:
Cash $ 927 $ 1,441
Accounts receivable, net 18,481 14,121
Inventories, net 18,669 16,790
Deferred income taxes 7,994 4,800
Prepaid expenses and other 923 1,755
-------- --------
Total current assets 46,994 38,907
-------- --------
Machinery, equipment, and improvements at
cost:
Machinery and equipment 26,547 25,024
Leasehold improvements 20,642 10,305
Construction in process 944 7,146
-------- --------
48,133 42,475
-------- --------
Less accumulated depreciation and
amortization (26,180) (23,134)
-------- --------
Net machinery, equipment, and
improvements 21,953 19,341
-------- --------
Other non-current assets:
Prepaid pension costs 0 189
Deposits and other 347 1,149
Intangible assets, net 6,882 543
-------- --------
7,229 1,881
-------- --------
Total assets $ 76,176 $ 60,129
======== ========
The accompanying notes are an integral part
of these consolidated balance sheets.
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<PAGE>
PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
LIABILITIES AND STOCKHOLDERS' EQUITY
(In Thousands, except common share information)
2001 2000
---- ----
Current liabilities:
Revolving credit facility $11,591 $10,296
Current portion of long-term debt 2,244 3,720
Accounts payable 1,578 2,482
Accrued liabilities - payroll related 10,257 12,138
Accrued liabilities - other 11,596 14,726
------- -------
Total current liabilities 37,266 43,362
------- -------
Long-term debt 3,994 4,199
Long-term pension benefit liability 13,523 0
Other long-term liabilities 2,044 2,641
------- -------
Total liabilities 56,827 50,202
------- -------
Commitments and contingencies (see Notes 5
and10)
Stockholders' equity:
Preferred Stock, $0.0001 par value,
5,000,000 shares authorized, none outstanding 0 0
Common stock, $0.0001 par value,
12,000,000 shares authorized, 4,043,273 and
4,027,815 issued at December 31, 2001 and
2000, respectively 1 1
Additional paid-in capital 5,223 5,109
Retained earnings 19,679 4,817
Treasury Stock, at cost - 7,500 shares at
December 31, 2001 (98) 0
Accumulated other comprehensive loss (5,456) 0
------- -------
Total stockholders' equity 19,349 9,927
------- -------
Total liabilities and stockholders' equity $76,176 $60,129
======= =======
The accompanying notes are an integral part
of these consolidated balance sheets.
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<PAGE>
PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 2001, 2000 and 1999
(In Thousands, Except Net Income per Common Share Information)
<TABLE>
<CAPTION>
2001 2000 1999
---- ---- ----
<S> <C> <C> <C>
Net sales $165,460 $161,664 $169,273
Cost of sales 128,927 130,878 136,523
-------- -------- --------
Gross profit 36,533 30,786 32,750
Selling, general, and administrative expenses 20,424 19,967 19,714
Bad debt expense 0 116 1,586
Litigation and environmental contingency provisions
0 200 4,683
-------- -------- --------
Income from operations 16,109 10,503 6,767
Interest expense 1,344 2,816 3,266
-------- -------- --------
Income before income taxes 14,765 7,687 3,501
Benefit from income taxes (97) (1,762) (2,676)
-------- -------- --------
Net income $ 14,862 $ 9,449 $ 6,177
======== ======== ========
Net income per common share:
Basic $ 3.69 $ 2.36 $ 1.55
Diluted $ 3.50 $ 2.23 $ 1.52
Weighted average common shares outstanding:
Basic 4,031 4,012 3,978
Diluted 4,248 4,241 4,061
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
- 38 -
<PAGE>
PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended December 31, 2001, 2000 and 1999
(In Thousands)
<TABLE>
<CAPTION>
Accum-
lated
Other
Additional Retained Compre- Total
Common Capital Paid-in Earnings Treasury hensive Stockholders'
Shares Stock Capital (Deficit) Stock (Loss) Equity
------ ----- ------- ------- ----- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1998 3,978 $1 $4,768 $(10,809) - - $ (6,040)
Exercise of stock options - - 1 - - - 1
Net income and
comprehensive income - - - 6,177 - - 6,177
----- -- -- ------ -- -- -----
December 31, 1999 3,978 1 4,769 (4,632) - - 138
Exercise of stock options 50 - 340 - - - 340
Net income and
comprehensive income - - - 9,449 - - 9,449
----- -- ----- ------ -- -- -----
December 31, 2000 4,028 1 5,109 4,817 - - 9,927
Exercise of stock options 15 - 114 - - - 114
Purchase of treasury
stock - - - - (98) - (98)
Comprehensive income:
Net income - - - 14,862 - - 14,862
Minimum pension liability
(net of tax of $3,344)
- - - - - (5,456) (5,456)
----- ------
Total comprehensive
income - - - - - - 9,406
----- -- ----- ------ ---- ----- ------
December 31, 2001 4,043 $1 $5,223 $19,679 $(98) $(5,456) $ 19,349
===== == ===== ====== ==== ===== ======
</TABLE>
The accompanying notes are an integral part
of these consolidated statements.
- 39 -
<PAGE>
PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 2001, 2000 and 1999
(In Thousands)
2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Net income $14,862 $9,449 $6,177
------- ------ ------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,306 3,327 2,637
Provision (benefit) for deferred income taxes 150 (1,800) (3,000)
Litigation and environmental contingencies 0 200 4,683
Pension expense in excess of funding 0 1,591 1,108
Funding in excess of pension cost (1,614) 0 0
Provision for losses on receivables 0 116 1,268
Provision for reduction in inventory valuation 914 707 3,038
Loss (gain) on retirement of improvements (38) 693 0
Provision for losses on contracts-in-process 315 0 16
Write-off of debt issuance costs 0 141 0
Changes in assets and liabilities:
Related party receivable 0 0 270
Accounts receivable, trade (4,360) 6,894 (4,965)
Inventories (3,108) (462) (4,803)
Prepaid expenses and other 832 (192) 232
Deposits and other 802 237 (152)
Accounts payable and accrued liabilities (6,514) (7,936) 1,119
------- ------- -------
Total adjustments (9,315) 3,516 1,451
------- ------- -------
Net cash provided by operating activities 5,547 12,965 7,628
------- ------- -------
Cash flows from investing activities:
Capital expenditures (5,692) (10,723) (3,049)
------- ------- -------
Net cash used in investing
activities (5,692) (10,723) (3,049)
------- ------- -------
- 40 -
<PAGE>
2001 2000 1999
---- ---- ----
Cash flows from financing activities:
Proceeds from exercise of stock options 114 340 1
Purchase of treasury stock (98) 0 0
Payment of debt issuance costs 0 (505) (240)
Net (repayments) borrowings under revolving 1,295 (1,483) (3,769)
credit facility
Borrowings under long-term debt 2,688 5,000 0
Principal payments under long-term debt (4,368) (4,680) (237)
----- ----- ---
Net cash used in financing activities (369) (1,328) (4,245)
----- ----- -----
Net increase (decrease) in cash and cash
equivalents (514) 914 334
Cash and cash equivalents, beginning of year 1,441 527 193
----- ----- -----
Cash and cash equivalents, end of year $ 927 $1,441 $ 527
===== ====== =====
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Interest $ 1,761 $ 3,132 $ 2,291
Income taxes $ 13 $ 280 $ 380
Supplemental disclosure of non-cash investing
and financing activities:
Capital lease obligations incurred $ 0 $ 0 $ 504
Conversion of capital lease to debt $ 0 $ 0 $ 950
Accrued liabilities of capital purchases $ 0 $ 930 $ 0
The accompanying notes are an integral part
of these consolidated statements.
- 41 -
<PAGE>
PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended
DECEMBER 31, 2001, 2000 and 1999
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - Pemco Aviation Group, 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.
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.
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
- 42 -
<PAGE>
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.
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 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, 2001
and 2000, respectively, is $417,000 and $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 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.
- 43 -
<PAGE>
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.
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 will be charged to earnings.
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting
for the Impairment or Disposal of Long Lived Assets", which clarifies
accounting for assets held for sale, scheduled for abandonment or other
disposal, and recognition of impairment loss related to the carrying
value of long-lived assets. The company plans to adopt Statement No. 144
in fiscal year 2002. Management does not believe the adoption of this
statement will have a material effect on the consolidated financial
statements.
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, 2001 and 2000. 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 SFAS No. 123 "Accounting for Stock
Based Compensation". (See Note 8.)
Reclassifications - Certain amounts in the 2000 and 1999 consolidated
financial statements have been reclassified to conform to the 2001
presentation.
2. NET INCOME PER COMMON SHARE
The following table represents the reconciliation of the number of weighted
average shares outstanding basic to the number of weighted average shares
outstanding diluted:
(In Thousands Except Per Share Amounts)
- 44 -
<PAGE>
Net Per Share
For the Year Ended December 31, 2001 Income Shares Amount
- ------------------------------------ ------ ------ ------
Basic earnings per share $14,862 4,031 $3.69
Dilutive securities - 217 .19
------- ----- -----
Diluted earnings per share $14,862 4,248 $3.50
======= ===== =====
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
======= ===== =====
Options to purchase 45,146, 59,171, and 232,390 shares of common stock
related to 2001, 2000, and 1999, respectively, were excluded from the
computation of diluted income per share because the option exercise price
was greater than the average market price of the shares.
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net as of December 31, 2001 and 2000 consist of the
following:
(In Thousands)
2001 2000
---- ----
U.S. Government:
Amounts billed $ 2,926 $ 3,243
Recoverable costs and
accrued profit on progress
completed - not billed 3,064 4,384
Commercial Customers:
- 45 -
<PAGE>
Amounts billed 8,964 6,685
Recoverable costs and
accrued profit on progress
completed - not billed 3,789 272
------- -------
18,743 14,584
Less allowance for
doubtful accounts (262) (463)
------- -------
Accounts receivable, net $18,481 $14,121
======= =======
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, 2001 and 2000.
4. INVENTORIES
Inventories as of December 31, 2001 and 2000 consist of the following:
(In Thousands)
2001 2000
---- ----
Work in process $ 25,795 $ 27,215
Finished goods 2,074 3,301
Raw materials and supplies 2,438 2,286
-------- --------
Total 30,307 32,802
Less progress payments and
customer deposits (11,638) (16,012)
-------- --------
$ 18,669 $ 16,790
======== ========
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, 2001 and 2000 amounted to $2.6 million and $2.3 million,
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 $2.7 million and $5.7
million at December 31, 2001 and 2000, respectively. During 2001 the
company disposed of $3.9 million of fully reserved inventory. Future
technological changes could render some additional inventory obsolete. No
estimate can be made of a range of
- 46 -
<PAGE>
amounts of loss that are reasonably possible should current design
specifications change.
5. DEBT
Debt as of December 31, 2001 and 2000 consists of the following:
(In Thousands)
2001 2000
---- ----
Revolving credit facility $11,591 $10,296
======= =======
Term Loan A;
interest at Prime plus 0.50%
(5.25% at December 31, 2001) $ 2,900 $ 2,900
Term Loan B;
Interest at Prime plus 0.75%
(5.50% at December 31, 2001) 875 1,925
Term Loan C;
Interest at Prime plus 0.75%
(5.50% at December 31, 2001) 1,266 0
Capital Acquisition Facility;
interest at Prime plus 0.50%
(5.25% at December 31, 2001) 749 0
Senior Subordinated Loan;
Interest at 13.5% 0 2,460
Capital lease obligations: interest
from 8.75% to 10.95%,
collateralized by security interest in
certain equipment 448 634
------ -------
Total long-term debt 6,238 7,919
Less portion reflected as current 2,244 3,720
------ -------
Long term-debt, net of current
portion $ 3,994 $ 4,199
======= =======
The company maintains a $20.0 million revolving credit facility, three
term loans that originally borrowed $6.9 million in the aggregate, and a
capital equipment acquisition facility of $3.1 million.
The facilities have an initial three-year term that began on November 2,
2000, and may be extended for up to two additional one-year periods upon
mutual agreement of the parties.
The company has the option, prior to October 31, 2002, to fold the unused
portion of the
- 47 -
<PAGE>
$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 $11.6 million at December 31, 2001.
Amounts available under the facility at December 31, 2001, based upon the
calculation which defines the borrowing base, totaled $7.5 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
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, 2001 amounted to
$2.9 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, 2001 amounted to $0.9
million and is being repaid over 24 installments of $87,500, which
commenced on December 1, 2000. The amount outstanding under Term Loan C
at December 31, 2001 amounted to $1.3 million and is being repaid over 24
installments of $79,167, which commenced on April 30, 2001.
Upon the company borrowing the entire amount of the available capital
equipment acquisition facility or on October 31, 2002, 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. On October 31, 2001,
the original conversion date for the capital equipment acquisition
facility, the company had borrowed $0.8 million. The lender extended the
date to borrow the remaining amount of the capital equipment acquisition
facility for an additional year contingent upon the company beginning
payments on the outstanding balance of the capital equipment acquisition
facility. The company began payments of $13,139 plus interest on the
initial capital equipment acquisition facility on October 31, 2001.
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 Financial Accounting Standards Board's 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 although there can be no assurances
in that regard.
- 48 -
<PAGE>
Schedule of debt maturing over the next five years at December 31:
(In Thousands)
2002 $2,244
2003 1,236
2004 821
2005 753
2006 701
Thereafter 483
------
$6,238
======
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, 2001.
Notwithstanding the covenants mentioned above which limit or prohibit the
company from incurring additional indebtedness, the company does have certain
assets that are not covered by these limitations or prohibitions that could
possibly be used to secure additional financing.
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 2001 2000
---- ----
Data Processing $ 303 $ 333
Production Equipment 666 666
Less: Accumulated amortization (122) (97)
----- -----
$ 847 $ 902
===== =====
The net present value of net minimum lease payments for capital leases as of
December 31, 2001 and the payments required by year are included in the
schedule of debt maturities.
6. ALLOWANCE FOR ESTIMATED LOSSES ON CONTRACTS IN PROCESS
The company provides for losses on uncompleted contracts in the period in which
- 49 -
<PAGE>
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, 2001 and 2000 amounted to $0.6 million and $0.3 million
respectively, and were related to commitments to fulfill loss contracts
at December 31, 2001 and 2000.
7. INCOME TAXES
The benefit for income taxes for the years ended December 31, 2001,
2000, and 1999 is as follows:
(In Thousands)
2001 2000 1999
---- ---- ----
Current:
Federal $(45) $38 $324
State (202) 0 0
----- --- ----
(247) 38 324
===== === ====
Deferred:
Federal 252 (1,080) (2,615)
State (102) (720) (385)
----- --- ----
150 (1,800) (3,000)
----- ------- -------
$(97) $(1,762) $(2,676)
===== ======= =======
The differences between the tax benefits at the federal statutory rate
and the provision for income taxes for the years ended December 31, 2001,
2000, and 1999 are primarily due to decreases in the deferred tax asset
valuation allowance of $5.9 million, $3.7 million, and $2.5 million,
respectively.
Deferred tax assets (liabilities) are comprised of the following:
(In Thousands)
2001 2000
---- ----
Pension costs (690) $(71)
Machinery, equipment, and
improvements (746) (815)
Net maintenance & service costs (6,663) 0
Other 0 (5)
------ ----
Gross deferred tax liabilities (8,099) (891)
------ ----
- 5O -
<PAGE>
Accrued vacation 1,585 1,474
Accrued worker's compensation 1,266 1,638
Inventory reserves 507 2,159
Contingency reserves 631 642
Pension minimum liability 3,344 0
Percentage of completion 0 657
Self insurance reserves 495 0
Federal and state loss carry-
forwards 5,526 3,100
Other accruals and reserves 2,658 1,880
Alternative minimum tax credit
carry-forwards 1,281 1,281
------ ------
Gross deferred tax assets 17,293 12,831
------ ------
Deferred tax asset valuation
allowance (1,200) (7,140)
------- ------
Net deferred tax asset $7,994 $4,800
======= ======
The company maintains a valuation allowance for its deferred income
taxes unless realization is considered more likely than not. In 2001,
2000, and 1999, the company returned to profitability and generated
taxable income for which net operating loss carry-forwards were utilized.
The reduction in the valuation allowance in fiscal 2001 was due to the
company securing the KC-135 subcontract from Boeing. The projected income
from this contract, as well as the company's demonstrated profitable
performance over the past few years indicates that realization through
future profitability is more likely than not.
At December 31, 2001 and 2000, the company had tax effected federal and
state operating loss carry-forwards of approximately $5.5 million and
$3.1 million, 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 $1.3 million,
included in the deferred tax assets at December 31, 2001 do not expire.
8. STOCK OPTION PLANS
On May 17, 2001, the company's stockholders approved amendments to the
company's Nonqualified Stock Option Plan (the "Plan"), pursuant to which
a maximum aggregate of 1,500,000 shares of common stock have been
reserved for grants 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 642,000 at December 31, 2001.
- 51 -
<PAGE>
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)
2001 2000 1999
---- ---- ----
Net income - as reported $14,862 $9,449 $6,177
Net income - pro forma 14,054 8,812 6,080
Net income per share,
basic - as reported 3.69 2.36 1.55
Net income per share,
diluted - as reported 3.50 2.23 1.52
Net income per share,
basic - pro forma 3.49 2.21 1.53
Net income per share,
diluted - pro forma 3.31 2.09 1.50
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
2001 Price 2000 Price 1999 Price
---- ----- ---- ----- ---- -----
Outstanding beginning of
year 629 $8.42 454 $7.69 599 $5.53
Granted 207 10.57 241 10.00 107 9.83
Exercised (38) 5.94 (50) 6.15 (1) 2.78
Forfeited (14) 9.48 (16) 18.5 (251) 3.43
---- ---- -----
- 52 -
<PAGE>
Outstanding end of year 784 9.10 629 8.42 454 7.69
=== === ===
Exercisable end of year 575 434 393
Estimated weighted
average fair value of
options granted $6.02 $7.09 $5.27
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 2001, 2000 and 1999,
respectively: dividend yield of 0% for each year; expected volatility of
72%, 96% and 98%; risk-free interest rate of 4.74% to 6.61%; and expected
life of 4.0, 4.3, and 4.5 years for each year respectively. Of the 1999
options granted, 58,000 vest 25% each year, the remaining 49,000 vested
immediately. Of the options granted in 2000, 85,000 vested immediately
with the remaining options vesting over periods from 2 to 4 years. During
2001, the company granted 207,000 options. 127,000 of these options
vested immediately, 15,000 vest over 2 years and the remaining 65,000
vest over 3 years.
The following table summarizes information about stock options outstanding at
December 31, 2001:
(In Thousands, Except Per Share Amounts)
Number of Weighted Weighted
Outstanding Average Average
Range of Exercise Options Remaining Exercise
Prices 12/31/01 Life Price
- ------ -------- ---- -----
$4.05 - $6.08 10 5.61 $4.83
6.09 - 9.11 387 4.71 8.01
9.12 - 13.67 380 7.94 9.88
13.68 - 18.50 7 2.36 17.90
--- ---- -----
784 7.42 $9.10
=== ==== =====
(In Thousands, Except Per Share Amounts)
Number of Weighted
Exercisable Average
Range of Exercise Options at Exercise
Prices 12/31/01 Price
- ------ -------- -----
$4.05 - $6.08 10 $4.45
6.09 - 9.11 313 8.12
9.12 - 13.67 245 9.89
- 53 -
<PAGE>
13.68 - 18.50 7 14.79
--- -----
575 $8.89
=== =====
9. EMPLOYEE BENEFIT PLANS
Pension - The company has a defined benefit pension plan (the "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, or 1999. During 2001 the company
contributed $3.0 million to the Plan. Plan assets consist primarily of
stocks, bonds, and cash equivalents. The Plan does not own any shares of
the company's stock.
As a result of the unfavorable investment return of the Plan in 2001 and
an increase in actuarial liability, the Accumulated Benefit Obligation
("ABO") of the Plan, $105.1 million, exceeds the fair value of Plan
assets. In the fourth quarter of 2001, the company recognized a liability
equal to the unfunded ABO and also recorded an intangible asset equal to
unrecognized prior service cost. The difference between the liability and
the intangible asset was recorded as an adjustment to comprehensive
income and reduced shareholders' equity, net of tax by $5.5 million.
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):
2001 2000
---- ----
Benefit Obligation at beginning of year $100,156 $ 94,738
Service cost 1,487 1,408
Interest cost 7,812 7,729
Plan amendments 0 4,964
Benefits paid (9,160) (9,184)
Actuarial loss 4,854 501
-------- --------
Benefit Obligation at end of year $105,149 $100,156
-------- --------
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<PAGE>
Plan Assets: Fair value
Balance at beginning of year $103,399 $110,338
Return on plan assets (7,680) 2,245
Company contribution 3,000 0
Benefits paid (9,160) (9,184)
-------- --------
Fair value at end of year $ 89,559 $103,399
-------- --------
Unfunded status $(15,590) $ 3,243
Unrecognized prior service cost 6,526 7,597
Unrecognized actuarial (gain) loss 10,868 (10,651)
-------- --------
Net amount recognized $ 1,804 189
-------- --------
Amounts recognized in the statement of financial position consist of:
Prepaid benefit cost $1,804
Accrued benefit liability (15,327)
--------
Total accrued benefit liability (13,523)
Intangible asset 6,527
Accumulated other comprehensive
income 8,800
------
Net amount recognized $1,804
======
Components of the plans' net pension cost were as follows (in thousands):
2001 2000 1999
---- ---- ----
Service cost $ 1,487 $ 1,408 $ 1,341
Interest cost 7,767 7,729 6,974
Expected return on plan assets (8,985) (8,663) (8,053)
Recognized net gain 0 0 198
Net amortization 1,116 1,117 687
------- ------- -------
Net pension cost $ 1,385 $ 1,591 $ 1,147
======= ======= =======
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<PAGE>
The weighted average rates assumed in the actuarial calculations for the
pension plan were:
2001 2000 1999
---- ---- ----
Discount 7.25% 7.50% 8.00%
Annual Salary Increase 5.00% 5.00% 5.00%
Long-term return on plan assets 9.25% 9.50% 9.50%
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 unfunded.
Changes during the year in the benefit obligation and in the fair value of plan
assets were as follows (in thousands):
2001 2000
Benefit Obligation:
Balance at beginning of year $625 $612
Service cost 40 37
Interest cost 42 46
Benefits paid (99) (107)
Actuarial (gain) loss (1) 37
---- ----
Balance end of year $607 $625
==== ====
The accrued postretirement costs recognized included in accrued liabilities -
other in the accompanying Consolidated Balance Sheets were as follows: (In
Thousands)
2001 2000
---- ----
Funded status $(607) $(625)
Unrecognized transition obligation 200 232
Unrecognized net gain (32) (35)
------ ------
Accrued liability $(439) $(428)
====== ======
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<PAGE>
Components of the plans' net cost were as follows:
(In Thousands)
2001 2000 1999
---- ---- ----
Service cost $40 $37 $36
Interest cost 42 46 44
Net amortization 32 32 32
Recognized actuarial gain (4) (5) (3)
---- ---- ----
Net postretirement cost $110 $110 $109
==== ==== ====
An additional assumption used in measuring the accumulated
postretirement benefit obligation was a weighted average medical care
cost trend rate of 5.56% for 2001, 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 7.25%, 7.50%, and 8.00% for the years ended December 31,
2001, 2000, and 1999, 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:
<TABLE>
<CAPTION>
1 - Percentage Point 1 - Percentage Point
Increase Decrease
----------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
12/31/01 12/31/00 12/31/99 12/31/01 12/31/00 12/31/99
-------- -------- -------- -------- -------- --------
Effect on total of service and
interest cost components $ 28 $ 19 $ 14 $ (23) $ (16) $ (15)
Effect on postretirement benefit
obligation 122 108 115 (108) (96) (105)
</TABLE>
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 $2.2 million and $2.5
million for reported and incurred but not reported claims at December 31,
2001 and 2000, respectively. Additionally, during 2000 the company had
deposits with the Administrator of the plan in the amount of $0.8
million, which were included in deposits and other on its balance sheets
at December 31, 2000.
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<PAGE>
During 2001 these deposits were refunded to the company.
In April 2001 the company converted to purchased insurance for worker's
compensation. The company remains self-insured for all occurrences prior
to its conversion. The company's self-insured workers' compensation
program had 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, 2001 and 2000, is $210,000 that has been
placed on deposit with the state of Alabama in connection with the
company's self-insured workers' compensation plan. The company has
reserves of $3.1 million and $4.3 million for reported and incurred but
not reported claims at December 31, 2001 and 2000, 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. A matching contribution of $10,263 was made in 2001. The
company made no matching contributions during 2000, or 1999. 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 5 months to thirty-one 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, 2001 are as follows:
(In Thousands)
Vehicles
And
Year Ending Facilities Equipment Total
---------- --------- -----
2002 $1,143 $719 $1,862
2003 1,046 204 1,250
2004 665 165 830
2005 500 131 631
2006 500 71 571
Thereafter 1,750 0 1,750
----- ----- -----
Total minimum
future rental
commitments $5,604 $1,290 $6,894
------ ------ ------
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<PAGE>
Total rent expense charged to operations for the years ended December
31, 2001, 2000, and 1999 amounted to $3.7 million, $3.5 million, and $2.2
million, respectively. Contingent rental amounts based on a percentage of
sales included in rent expense amounted to $1.2 million, $1.3 million,
and $0.6 million, for the years ended December 31, 2001, 2000, and 1999,
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. The company is currently completing work on
aircraft inducted for PDM under this contract. On December 12, 2001, the
company entered into a contract with Boeing Aerospace Support Center to
serve as a subcontractor to Boeing for PDM on KC-135 aircraft. In effect
this new contract continues the company's involvement in KC-135 aircraft
PDM. The contract provides for one base year and five option years with
an estimated value of $600 million over the course of the agreement if
all options are exercised.
CONCENTRATIONS
In the ordinary course of business, the company extends credit to many of
its customers. As of December 31, 2001, accounts receivable from four
customers amounted to $11.1 million, or approximately 60.7% of total
accounts receivable. As of December 31, 2000, two customers amounted to
$4.7 million, or approximately 36.0% of total accounts receivable.
A small number of the company's contracts account for a significant
percentage of its revenues. Contracts with the U.S. Government comprised
67%, 75%, and 63% of the company's revenues in 2001, 2000, and 1999,
respectively. The KC-135 contract in and of itself comprised 61%, 60%,
and 48% of the company's total revenues in 2001, 2000, and 1999,
respectively. In December 2001 the company entered into a contract with
Boeing to serve as a subcontractor to Boeing for repair work on KC-135
aircraft. The contract provides for one base year and five option years.
During 2001 and 1999, the
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<PAGE>
company had a contract with a commercial airline that comprised 18% and
12%, respectively, of total revenues. There were no significant
commercial contracts in excess of 10% of revenues with other customers
during 2000. Termination or a disruption of any of these contracts
(including by way of option years not being exercised), 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
GOVERNMENT LAWSUIT
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 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.
HAYES INTERNATIONAL 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
during the mid to late 1980s. 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 LAWSUITS
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 named
American International Airways,
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<PAGE>
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. On June 1, 2001, the Court issued an Order of Dismissal
dismissing Pemco Aeroplex from this litigation.
BREACH OF CONTRACT LAWSUITS
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 sought damages in excess of $800,000.
On December 4, 2001 the company settled the case for $50,000.
On October 6, 2000, the company's subsidiary, Pemco Aeroplex, filed suit
against Certex of Alabama, an unincorporated division of Bridon American
Corporation, for breach of contract and fraud with regard to the supply
of deficient wire rope that is installed as aircraft flight control
cables on KC-135 aircraft. The case, filed in the circuit court of
Jefferson County, Alabama, was brought to trial and on September 20,
2001, a jury returned with a verdict in favor of the company in the
amount of $7.5 million. The Court, upon a post-judgment motion filed by
Certex, reduced the judgment to $2.5 million. Certex has appealed that
Order to the Supreme Court of Alabama. The company believes the appeal is
without merit and will continue to pursue final judgment on the Order.
The company, pending appeal, has not recorded the $2.5 million favorable
judgment.
On October 12, 1995, Falcon Air AB filed a Complaint in the United States
District Court, Northern District of Alabama, alleging that the
modification of three 737 aircraft to Quick Change configuration by the
company was defective, limiting the commercial use of the aircraft. The
case was ordered to arbitration by the court and sent back to the
District Court in 2001 when settlement was not reached. District court
denied the company's Motion for Reinstatement. The company has filed for
a stay of proceedings to resolve certain matters filed before the 11th
Circuit Court of Appeals on October 31, 2001; specifically, the issue of
whether arbitration is required where the contract calls for "alternative
dispute resolution." Management believes that the results of this lawsuit
will not have a material impact on the business of the company.
EMPLOYMENT LAWSUITS
On December 9, 1999 the company and its Pemco Aeroplex subsidiary were
served with a purported class action in the U.S. District Court, Northern
District of Alabama seeking declaratory, injunctive relief and other
compensatory and punitive damages based upon alleged unlawful employment
practices of race discrimination and racial harassment by the company's
managers, supervisors, and other employees. The complaint seeks damages
in the amount of $75 million. On July 27, 2000 the U.S. District Court,
Northern District of Alabama determined that the group would not be
certified as a class as the plaintiffs
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<PAGE>
withdrew their request for class certification. The EEOC subsequently
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.
A purported class action, brought against the company and its Pemco
Aeroplex subsidiary on behalf of those persons hired as replacement
workers during the strike by Pemco's UAW union employees who were
terminated upon settlement of such strike, was dismissed in the third
quarter of 1999. Twenty-eight individuals filed a new action shortly
thereafter, in the circuit Court of Jefferson County, Alabama, which has
since been joined by approximately 90 other individuals. The company
filed for summary judgment on all claims on February 20, 2000. Summary
judgment was granted with regard to 35 of those individuals. The Court
required two individual cases to be tried prior to certification of any
issues for appeal. These two cases were tried in June of 2001. The Court
directed a verdict in the company's behalf in one case and a jury
returned with a defense verdict in favor of the company in the other
case. The company has now accepted an offer of settlement proposed by the
plaintiffs under terms favorable to the company. The parties are working
towards finalization of that settlement.
Various claims alleging employment discrimination, including race, sex,
age and disability, have been made against the company and its
subsidiaries, Pemco Aeroplex and Pemco World Air Services, 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 and Pemco World Air Services 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 approximate $1.7
million, which amount has been accrued at December 31, 2001.
Environmental Compliance - On October 5, 1998, the company's Pemco
Aeroplex subsidiary was served with a complaint filed by the EPA
regarding alleged violations of Toxic Substance Control Act and seeking
penalties of $144,000. No release to the environment was alleged and all
issues raised by the inspection were fully addressed. On
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<PAGE>
November 19, 1998, the company and the EPA entered into a CACO resolving
the complaint. Under the CACO, the company agreed to pay a penalty of
$91,800 over a three-year period, the final payment of which was made
during 2001.
11. RELATED PARTY TRANSACTIONS
The company had accruals of approximately $0.4 million and $0.9 million
at December 31, 2001 and 2000, respectively, related to a severance
agreement with its former Chairman of the Board, Chief Executive Officer
and major stockholder. In accordance with the agreement, the accrued
amounts are being 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 stockholder, purchased the
company's Senior Subordinated Loan from a financial institution. In April
of 2001 the company made the final principal payments under this debt
obligation.
12. 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 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 World Air Services 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). The contract, which
began on December 4, 2000, has a four-year term.
13. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
As of December 31, 2001 and 2000, the carrying amounts of the company's
financial instruments are estimated to approximate their fair values, due
to their short-term nature, and variable or market interest rates. The
company does not hedge its interest rate or
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<PAGE>
foreign exchange risks through the use of derivative financial
instruments.
14. FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of 2001, the company recorded a benefit of
approximately $5.0 million to reduce its valuation allowance for deferred
taxes. The amount of net deferred tax assets reflected on the balance
sheet represents the portion of total deferred taxes for which management
considers it is more likely than not that realization will occur through
future profitability.
In the fourth quarter of 2000, the company recorded a benefit of $0.9
million to reduce its valuation allowance for deferred taxes. The amount
of net deferred tax assets reflected on the balance sheet represents the
portion of total deferred taxes for which management considers it is more
likely than not that realization will occur through future profitability.
In addition, the company took a one-time charge during the fourth quarter
of 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. The amount
of net deferred tax assets reflected on the balance sheet represents the
portion of total deferred taxes for which management considers it is more
likely than not that realization will occur through future profitability.
In addition, the company took several large one-time charges during the
fourth quarter of 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.
15. 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 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
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<PAGE>
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 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 2001, 2000, and 1999 were $110.7 million, $121.4 million, and
$106.2 million, respectively.
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<PAGE>
The following table presents information about 2001 segment profit or loss:
(In Thousands)
<TABLE>
<CAPTION>
Manufacturing
Government Commercial & Overhaul Other Consolidated
---------- ---------- ------------ ----- ------------
<S> <C> <C> <C> <C> <C>
Revenues from external
domestic customers $104,185 $43,170 $14,069 $0 $161,424
Revenues from external
foreign customers 0 2,228 1,808 0 4,036
Inter-segment revenues 198 0 4 0 202
------- ------ ------ -- -------
Total segment revenues $104,383 $45,398 $15,881 $0 $165,662
Elimination 0 0 0 0 (202)
- - - - -------
Total Revenue $104,383 $45,398 $15,881 $0 $165,460
Gross profit 32,064 2,187 2,282 0 36,533
Segment operating
income (loss) 17,472 (2,344) 981 0 16,109
Interest expense 1,344
Other 0
Benefit for income taxes (97)
Net income 14,862
Assets $ 43,009 $22,133 $11,034 $0 $ 76,176
Depreciation/amortization 2,492 636 375 0 3,503
Capital Additions 3,848 1,743 101 0 5,692
</TABLE>
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<PAGE>
The following table presents information about 2000 segment profit or loss:
(In Thousands)
<TABLE>
<CAPTION>
Manufacturing
Government Commercial & Overhaul Other Consolidated
---------- ---------- ---------- ----- ------------
<S> <C> <C> <C> <C> <C>
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 25,879 2,399 2,508 0 30,786
Segment operating
income (loss) 16,642 (3,345) (2,794) 0 10,503
Interest expense 2,816
Other 0
Benefit for income taxes (1,762)
----------
Net income $ 9,449
==========
Assets $ 37,092 $ 13,069 $ 9,968 $ 0 $ 60,129
Depreciation/amortization 2,259 448 407 0 3,114
Capital Additions 7,589 2,700 434 0 10,723
</TABLE>
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<PAGE>
The following table presents information about 1999 segment profit or
loss:
(In Thousands)
<TABLE>
<CAPTION>
Manufacturing
Government Commercial & Overhaul Other Consolidated
---------- ---------- ------------- ----- ------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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SUPPLEMENTARY INFORMATION
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<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To Pemco Aviation Group, Inc.
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 1, 2002. 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 1, 2002
- 70 -
<PAGE>
PEMCO AVIATION GROUP, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
for the periods ended December 31, 2001, 2000 and 1999
(in Thousands)
<TABLE>
<CAPTION>
Balance at Additions Additions Balance at
Description Beginning Charged to Charged to End of
- ----------- Of Period Expense Assets Deductions Period
--------- ------- ------ ---------- ------
<S> <C> <C> <C> <C>
2001
Allowance for doubtful
accounts $463 $0 $(201) $262
Reserve for contract
Commitments, losses 278 315 0 593
Reserve for obsolete
inventory 5,718 914 (3,907) 2,725
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
</TABLE>
- 71 -
<PAGE>
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 2002 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 2002 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
2002 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 2002 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
- 72 -
<PAGE>
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Schedule II. Valuation and Qualifying Accounts.
All other financial statement schedules have been omitted, as the
required information is inapplicable or the information is presented in the
financial statements or the notes thereto.
b. Reports on Form 8-K. No Reports on Form 8-K were filed with the
Commission during the quarter ended December 31, 2001.
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.
- 73 -
<PAGE>
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: 03/22/02 By:/s/Ronald A. Aramini
-------------------
Ronald A. Aramini, President
(Principal Executive Officer)
Dated: 03/22/02 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 03/25/02
- ------------------------ --------
Michael E. Tennenbaum
/s/H.T. Bowling Vice Chairman, Director 03/25/02
- --------------- --------
H.T. Bowling
/s/Ronald A. Aramini President, Chief Executive Officer, 03/22/02
- -------------------- --------
Ronald A. Aramini Director, (Principal Executive Officer)
/s/Matthew L. Gold Director 03/25/02
- ------------------ --------
Matthew L. Gold
/s/Mark K. Holdsworth Director 03/25/02
- --------------------- --------
Mark K. Holdsworth
/s/Thomas C. Richards Director 03/22/02
- --------------------- --------
Thomas C. Richards
/s/Ronald W. Yates Director 03/25/02
- ------------------ --------
Ronald W. Yates
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description Reference
- ----- ----------- ---------
<S> <C> <C>
3.1 Certificate of Incorporation of Pemco Aviation Group, Inc............ (3)
3.2 Bylaws of Pemco Aviation Group, Inc.................................. (3)
4.1 Provisions of the Certificate of Incorporation and Bylaws of Pemco
Aviation Group, Inc. which define the rights of Securities Holders... (3)
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 Amendment to Executive Employment Agreement between the company
and Matthew L. Gold effective September 7, 1999...................... (2)
10.3 Executive Employment Agreement between the company and Ronald A.
Aramini effective January 1, 2000.................................... (2)
10.4 Agreement and Plan of Merger dated April 20, 2000 between Precision
Standard, Inc and Pemco Aviation Group, Inc........................... (3)
10.5 Credit and Security Agreement dated November 2, 2000 between Pemco
Aviation Group, Inc. and Wells Fargo Business Credit, Inc............. (4)
10.6 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............................................. (4)
10.7 Non-Qualified Stock Option Plan dated June 1, 1999 as amended and
restated May 17, 2001................................................. (5)
10.8 Repair Agreement dated December 12, 2001 between McDonnellInc
Douglas Corporation, a wholly owned subsidiary of the Boeing Company
and Pemco Aeroplex,Inc**.............................................. *
21 Subsidiaries of the company........................................... *
23 Consent of Arthur Andersen LLP........................................ *
99 Letter to the Securities and Exchange Commission regarding Arthur
Andersen LLP Representations to the Company *
</TABLE>
* Filed Herewith
** A request for confidential treatment with respect to portions of the
Exhibit that have been omitted (indicated by *) is currently pending.
E-1
<PAGE>
(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-K for
the fiscal year ended December 31, 1999, and incorporated by
reference herein.
(3) Filed as an exhibit to the company's Form 10-Q for the quarter ended
June 30, 2000, and incorporated by reference herein.
(4) Filed as an exhibit to the company's Form 10-Q for the quarter ended
September 30, 2000, and incorporated by reference herein.
(5) Filed as an exhibit to the company's Form 10-Q for the quarter ended
June 30, 2001, and incorporated by reference herein.
E-2
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.8
<SEQUENCE>3
<FILENAME>dex108.txt
<DESCRIPTION>REPAIR AGREEMENT
<TEXT>
<PAGE>
Exhibit 10.8
CERTAIN MATERIAL (INDICATED BY *) HAS BEEN OMITTED FROM THIS DOCUMENT PURSUANT
TO A REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED MATERIAL HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
MCDONNELL DOUGLAS CORPORATION
A WHOLLY OWNED SUBSIDIARY OF THE BOEING COMPANY
WARNING. Information subject to the export control laws. This document, which
includes any attachment and exhibits hereto, may contain information subject to
International Traffic in Arms Regulation (ITAR) or Export Administration (EAR)
of 1979, which may not be exported, released, or disclosed to foreign nationals
inside or outside the U.S. without first obtaining an export license. Violators
of ITAR or EAR may be subject to a penalty of 10 years imprisonment and a fine
of $1,000,000 under 22 U.S.C. 2778 or Section 2410 of the Export Administration
Act of 1979. Include this notice with any reproduced portion of these documents.
REPAIR AGREEMENT NO. 01-003
---------------------------
EXECUTIVE SUMMARY
A. This Agreement is entered into by and between MCDONNELL DOUGLAS
CORPORATION A WHOLLY OWNED SUBSIDIARYOF THE BOEING COMPANY (hereinafter
referred to as "MDC"), and Pemco AEROPLEX, INC., (hereinafter referred to as
"SELLER"), with offices at 1943 50/th/ St. North, Birmingham AL 35212. ("The
Parties").
B. The Boeing Aerospace Support Center (BASC), 375 Airlift Drive, 2n Floor
/ C-43, San Antonio TX 78226 will issue and manage the resultant Long Term
Requirements Contract (LTRC).
C. MDC and Seller entered into a Memorandum of Agreement (MOA) on 27 Oct
00, where the parties agreed to a mutual effort in preparing a proposal and
performing the resulting contract for KC-135 PDM. This LTRC is the outcome of
stated efforts.
D. This agreement is issued under Government Prime Contract
F42620-98-D-0054 and the intent is to perform the Program Depot Maintenance
(PDM) on the KC-135 aircraft per the Statement of Work.
E. In consideration of the promises set forth herein, the parties hereto
mutually agree that this Repair Agreement along with its attachment will be
incorporated into Special Condition 9803 of the LTRC:
Attachment 1 - Specifications
(a) Air Force FY02 Rev 1 Work Specification for -135
aircraft PDM
The McDonnell Douglas Corporation Proprietary Rights are included in the
information disclosed herein. Recipient by accepting this document agrees that
neither this document nor the information disclosed herein nor any part thereof
shall be reproduced or transferred to the other documents or used or disclosed
to other for manufacturing or any other purposes except as specifically
authorized in writing by the McDonnell Douglas Corporation. All rights reserved
under the copyright laws by the McDonnell Douglas Corporation.
<PAGE>
dated 10 Oct 01.
(also referred as Appendix A)
(b) Air Force FY02 Work Specification for -135 aircraft
PDM dated 10 Oct 01.
(also referred as Appendix A - Addendum No. 1)
(c) Air Force Specification for Landing Gear
99-001dated 04 May 99.
(d) Air Force FY02 Work Specification for Maintenance
Compression Requirements for -135 Type Aircraft
dated 30 Aug 01.
(d)(1) Air Force FY02-07 Work Specification for
Maintenance Compression Requirements for
-135 Type Aircraft Revision 1 dated 10 Oct 01.
(e) Air Force Specification for Accomplishment of
Phase/Isochronal Inspection During PDM for all -135
Series Aircraft LCR-SOW-97-037 Revision K, dated
24 Jan 01.
(f) Air Force Specification for Drop-In
Modifications/Maintenance dated 1 Oct 96
Attachment 2 - Schedules, Change 7 dated 15 Oct 01
(a) Price Schedule: Qty 20-24
(b) Price Schedule: Qty 25-28
(c) Price Schedule: Qty 29-32
(d) Price Schedule: Qty 33-36
(e) Price Schedule: Qty 37+
(f) Touch Labor Hours
Attachment 3 - General Terms and Conditions set forth on The Boeing
General Provisions GP-2 (Fixed Priced Services
Contract dated 2/1/01).
(a) Paragraphs 5 of the General Provisions are
superseded by paragraph XXI of this agreement.
(b) Paragraph 27 of the General Provisions is
superseded by Special Condition 7572 of the
purchase order.
Attachment 4 - Air Force prime contract F42620-98-D0054 flow-down
clauses dated 7/2/99.
Attachment 5 - Work Requirements and Procedures, Change 2, dated 16
Oct 01.
Attachment 6 - BASC Subcontractor-Held Government Property Control
(MCD-025 Revision C) Dated 25 Sep 00
Attachment 7 - Air Force Contract F42620-98-D0054, Appendix B dated
1 Nov 01.
Attachment 8 - Air Force Contract F42620-98-D0054, Appendix C dated
20 Mar 98.
Attachment 9 - Reserved
Attachment 10 - Alternative Dispute Resolution Provisions.
Attachment 11 - Air Force Contract F42620-98-D0054, Contract Data
Requirement List (CDRL) dated 16 Mar 01
Attachment 12 - Mini-SOW for Fixed Priced Tasks, change 1 dated 8
Oct 01
The McDonnell Douglas Corporation Proprietary Rights are included in the
information disclosed herein. Recipient by accepting this document agrees that
neither this document nor the information disclosed herein nor any part thereof
shall be reproduced or transferred to the other documents or used or disclosed
to other for manufacturing or any other purposes except as specifically
authorized in writing by the McDonnell Douglas Corporation. All rights reserved
under the copyright laws by the McDonnell Douglas Corporation.
<PAGE>
Attachment 13 - Reserved
Attachment 14 - Award Term Plan change 5 dated 2 Nov 01
See Special Condition 9532 for order of precedence.
STATEMENT OF WORK
Seller will perform PDM on the KC-135 aircraft in accordance with the attached
Statement of Works (attachments 1a and1f) and the Work Requirements and
Procedures (attachment 5).
TERM OF PERFORMANCE / OPTIONS
A. This purchase order contains One (1) basic period effective 1 Oct 01
through 30 Sep 02 (FY02) and Five (5) one-year option periods
as follows:
FY Term: - Exercise Date
03 1 Oct 02 through 30 Sep 03 30 Sep 02
04 1 Oct 03 through 30 Sep 04 30 Sep 03
05 1 Oct 04 through 30 Sep 05 30 Sep 04
06 1 Oct 05 through 30 Sep 06 30 Sep 05
07 1 Oct 06 through 30 Sep 07 30 Sep 06
B. BASC may exercise these options by a change order to the purchase
contract or by letter within the time specified in paragraph C, below,
which will be confirmed afterwards by a change order to the purchase
contract.
C. Notwithstanding the exercise dates in this paragraph, seller agrees
that BASC may exercise any of the above options at any time prior to
one hundred twenty (120) days beyond the purchase contract's
expiration date with no change in the appropriate year price. This
option may be exercised by BASC in writing at any time prior to the
Exercise Date specified above or any time within120 days of this
agreement including any extensions.
D. Award Term Plan:
1. Performance Periods. The basic award covers one year of
performance (FY 02). FYs 03 through 07 are priced extension
periods designed to allow MDC to extend the purchase contract
based on Seller's performance. The number of extension granted
is between zero and five. When awarded, a one-year extension
will be granted not to exceed a maximum of five one-year
extensions. The total of all such extensions will not exceed
five years, resulting in a total purchase contract ordering of
one to six years from the date of award.
The McDonnell Douglas Corporation Proprietary Rights are included in the
information disclosed herein. Recipient by accepting this document agrees that
neither this document nor the information disclosed herein nor any part thereof
shall be reproduced or transferred to the other documents or used or disclosed
to other for manufacturing or any other purposes except as specifically
authorized in writing by the McDonnell Douglas Corporation. All rights reserved
under the copyright laws by the McDonnell Douglas Corporation.
<PAGE>
2. Monitoring of Performance. Performance monitors, whose findings
are reported to the Award Term Review Board (ATRB), will
continually monitor the Seller's performance. The ATRB
recommends an award term to the Term Determining Official (TDO)
who makes the final decision of the award term points based on
the Seller's performance during the award term evaluation
period.
3. Award Term Plan. The evaluation criteria and associated grades
are specified in the award term plan, Attachment 14 to this
agreement. The evaluation periods with the associated award
term extensions and performance criteria with associated award
term times are also specified in the award term plan.
4. Modification of Award Term Plan. Unilateral changes may be made
to the award term plan if the Seller is provided written
notification by the procurement agent before the start of the
upcoming evaluation period. Changes affecting the current
evaluation period must be made by bilateral agreement.
5. Self-Evaluation. The Seller may submit to the Procurement Agent
within five (5) working days after the end of the evaluation
period a brief written self-evaluation of its performance for
that period. This evaluation shall not exceed fifteen pages.
This self-evaluation will be used in the ATRB's evaluation of
the Seller's performance during this period.
6. Award Term Extension. The purchase contract period will be
unilaterally modified to reflect the TDO decision. The total
purchase contract ordering period including extensions under
this clause will not exceed six years. If at any time the
ordering period does not extend more than two years from the
TDO decision, the operation of the award term clause will cease
and the ordering period will not extend beyond the term set
forth at this time.
7. Notwithstanding provisions of the Award Term Plan, exercise of
Seller's option(s) is contingent upon exercise of the
option(s) from the Air Force at the prime contract level.
QUANTITIES / WORK SHARE
A. Provided the Air Force contracts for the projected 55 PDM's per
year to MDC, no less than 25 aircraft per year will be
subcontracted to Seller. This will constitute the Seller's work
share.
1. In the event the Air Force contracts for more than the projected
55 aircraft per year, the work share will be determined via
the following ratio. For every three additional inductions, the
first one will be inducted at MDC, the second will be inducted
at Seller's facility and the third one will be inducted at MDC.
The McDonnell Douglas Corporation Proprietary Rights are included in the
information disclosed herein. Recipient by accepting this document agrees that
neither this document nor the information disclosed herein nor any part thereof
shall be reproduced or transferred to the other documents or used or disclosed
to other for manufacturing or any other purposes except as specifically
authorized in writing by the McDonnell Douglas Corporation. All rights reserved
under the copyright laws by the McDonnell Douglas Corporation.
<PAGE>
2. In the event the Air Force contracts for less than the projected
55 aircraft, the work share will be determined via the
following ratio. For every three reductions, the first one will
be reduced from MDC's share, the second one from Seller's share
and the third one will be reduced from MDC's share.
3. MDC may elect to subcontract and Seller agrees to perform
additional aircraft from the provision described above.
B. For FY02, the following work share has been established. If the Air
Force contracts for the projected 57 PDM's to MDC, no less than
29 aircraft will be subcontracted to Seller. This will constitute
the Seller's work share. If the Air Force contracts for other
quantities, paragraphs IV.A.1 and 2 will be used to determine the
work share split. For FY 03-07, the work share formula at
paragraph A will be used.
C. MDC shall exercise the options in this agreement as long as the Air
Force exercises its options under Air Force Prime Contract
F42620-98-D0054 and as long as Seller meets or exceeds all the
criteria in the ATP and all other material obligations outlined in
this purchase contract.
D. MDC may not perform the work share designated for Seller itself or
subcontract the Seller's work share to other than Seller as long
as Seller meets or exceeds all the criteria in the ATP and all
other obligations in this purchase contract.
E. Drop-in maintenance aircraft will be equally inducted between BASC
and Pemco.
F. MDC will make a good faith effort to ensure the distribution of
aircraft models is equally divided between Seller and MDC (i.e.
R/T vs. D/E). Actual distribution of model aircraft shall not
constitute a basis for equitable adjustment and it is not subject
to the disputes provisions of this repair agreement.
INPUT / OUTPUT SCHEDULE
A. Seller agrees to provide, upon request, an input / output schedule
for each fiscal year based on the estimated number of aircraft to
be inducted. Seller agrees to revise the schedule as necessary.
B. The input / output schedule will be used as a tool to schedule
aircraft into Seller's facility and in no way represents a
contractual commitment on number of aircraft nor induction dates.
The McDonnell Douglas Corporation Proprietary Rights are included in the
information disclosed herein. Recipient by accepting this document agrees that
neither this document nor the information disclosed herein nor any part thereof
shall be reproduced or transferred to the other documents or used or disclosed
to other for manufacturing or any other purposes except as specifically
authorized in writing by the McDonnell Douglas Corporation. All rights reserved
under the copyright laws by the McDonnell Douglas Corporation.
<PAGE>
C. Actual induction dates may vary from the schedule based on Air
Force inductions on Air Force Prime Contract F42620-98-D0054.
DELIVERY
A. Seller shall have 306 flow-days to perform PDM on the KC-135
aircraft. Actual delivery flow-days will be negotiated upon
completion of the Evaluation & Inspection report.
B. Seller agrees to provide the MDC Supplier Manager with a copy of
the daily status report including funding status for each
aircraft.
C. Overtime and/or holiday work performed by seller shall be at its
own expense unless directed by the MDC procurement agent.
D. A full delivery of the aircraft is authorized when the delay is due
to Government delay of work for failure to provide Landing Gear
(i.e. Statement of Work 99-001 for Deferred Landing Gear). Seller
is authorized to invoice for appropriate costs in accordance with
paragraph XIII below.
RESERVED.
TERMS OF PAYMENT
Payment terms are net 30 days after receipt of a valid invoice.
TAXES
For Resale: Permit No. 72-6225083.
PRICE
A. Price schedule is located at attachment 2a through 2e to this
repair agreement. Seller agrees to provide pricing according to the
following ranges:
1. Quantities of 20-24 aircraft
2. Quantities of 25-28 aircraft
3. Quantities of 29-32 aircraft.
4. Quantities of 33-36 aircraft.
The McDonnell Douglas Corporation Proprietary Rights are included in the
information disclosed herein. Recipient by accepting this document agrees that
neither this document nor the information disclosed herein nor any part thereof
shall be reproduced or transferred to the other documents or used or disclosed
to other for manufacturing or any other purposes except as specifically
authorized in writing by the McDonnell Douglas Corporation. All rights reserved
under the copyright laws by the McDonnell Douglas Corporation.
<PAGE>
5. Quantities over 37+ aircraft.
B. MDC will establish Seller's work share for FY03-07 in accordance
with paragraph IV.A by 15 Sep of each year. Pricing will be
established in accordance with sub-paragraph G below.
C. FY02 Pricing. The following price structure has been established
for FY02:
1. Aircraft quantities to be inducted in FY02 are identified in
paragraph IV.B.
2. Aircraft will be inducted at the prices established for the
29-32 aircraft price range.
3. At the end of FY02, if actual quantities of aircraft inducted
fall under 29, the price will be re-determined for all aircraft
at the correct range: 20-24 ([*]/hr range) or 25 -28 [*]/hr
range)
4. At the time MDC inducts more than 32 aircraft during FY02, any
future inductions will be at the new step pricing provided in
that price range; however, the first 32 aircraft will not be
subject to a price re-determination (i.e. aircraft 1-32 will be
at [*]/hr range, while aircraft 33-36 will be at the [*]/hr
range and aircraft over 37 will be at [*]/hr range).
D. Seller will provide a cost proposal that will reasonably estimate
the cost to perform new or deleted work and will include
supporting data sufficiently detailed to permit MDC to evaluate
the cost proposal.
E. If required, Seller agrees to provide certified cost and pricing
data (Standard Form 1411) and allow its proposal and subsequent
rates proposals to be audited by the Defense Contract Audit Agency
(DCAA) and forward the results of any such audit to MDC promptly.
F. Hours for baseline PDM and fixed price tasks are fixed and located
at attachment 2.f. They may only be renegotiated based on
added/deleted work per new Air Force work specifications.
G. Rate Re-Opener. The parties have agreed to the wrap labor rates
identified at attachments 2a through 2e for FY02 through FY07.
The rates for FY02 will be firm. There will be a rate re-opener
provision for FY03 through FY07. Seller agrees to provide MDC with
a firm rate proposal no later than 23 Jul of each Calendar Year
preceding each FY. This re-opener clause will also be applicable
to the CAP
The McDonnell Douglas Corporation Proprietary Rights are included in the
information disclosed herein. Recipient by accepting this document agrees that
neither this document nor the information disclosed herein nor any part thereof
shall be reproduced or transferred to the other documents or used or disclosed
to other for manufacturing or any other purposes except as specifically
authorized in writing by the McDonnell Douglas Corporation. All rights reserved
under the copyright laws by the McDonnell Douglas Corporation.
Certain Material (indicated by *) has been omitted from this page pursuant to
a request for confidential treatment. The omitted material has been filed
separately with the Securities and Exchange Commission.
<PAGE>
handling fee.
H. For purposes of negotiations the parties have further agreed to
profit rate of [*]% for FY02-07. This rate is not subject to the rate
re-opener clause.
I. Seller agrees to update this data, as required, to support MDC in
any negotiations with the U.S. Air Force.
RESERVED
FUNDING
A. Each aircraft will be inducted via Delivery Order subject to the
terms and conditions of this LTRC.
B. Each Delivery Order will be issued with the following line item
sequence:
. Line Item 001 - Basic PDM for aircraft model
. Line Item 002 - Lump Sum amount for FFP Tasks
. Line Item 003 - Over & Above 75 Hours and Less.
. Line Item 004 - Over & Above Over 75 Hours
. Line Item 005 - Local Manufacture 75 Hours and Less.
. Line Item 006 - Local Manufacture Over 75 Hours
. Line Item 007 - Contractor Acquired Property
C. Seller will be allowed to insert a prefix in front of the line item
for their internal purposes (i.e. A001, A002, etc.)
INVOICE AND PAYMENT
A. The fixed priced PDM and fixed priced tasks will be paid based upon the
following milestone payment schedule:
. 1st: 25% of price upon aircraft induction
. 2nd: 25% of price upon commencement of E&I work
. 3rd: 20% of price upon completion of PDM 3 & 4 work.
(Equivalent to introduction to station 80)
. 4th: 10% of price upon completion of PDM restore work
(Equivalent to completion of station 82 work)
. 5th: 20% of price upon aircraft delivery (DD-250)
(Seller will advise of any changes to equivalent stations)
The McDonnell Douglas Corporation Proprietary Rights are included in the
information disclosed herein. Recipient by accepting this document agrees that
neither this document nor the information disclosed herein nor any part thereof
shall be reproduced or transferred to the other documents or used or disclosed
to other for manufacturing or any other purposes except as specifically
authorized in writing by the McDonnell Douglas Corporation. All rights reserved
under the copyright laws by the McDonnell Douglas Corporation.
Certain Material (indicated by *) has been omitted from this page pursuant to a
request for confidential treatment. The omitted material has been filed
separately with the Securities and Exchange Commission.
<PAGE>
B. MDC will authorize payment for Over & Above (O&A) work over and
under 75 hours that is not fixed priced only after DCM
definitization of that work via modification to the prime contract
F42620-98-D0054. Seller is required to provide adequate
documentation to support invoice. MDC and Seller agree to approach
DCM as a team to establish a Memorandum of Agreement to streamline
invoice and payment procedures that will result in the benefit of
all parties.
C. MDC will authorize payment for Contractor Acquired Property (CAP)
every two weeks. Seller is required to provide adequate
documentation to support invoice.
D. The on-site MDC Supplier Manager or his designee will approve
Seller's invoices and will not unreasonably withhold approval.
E. Upon approval of invoice, Seller shall submit one original and two
copies to: Boeing Aerospace Support Center
Attn. (Procurement Agent in Charge)
375 Airlift Dr.
2nd Floor / C-43
San Antonio TX 78226
F. Seller's Name, Address and Point of Contract is as follows:
Pemco Aeroplex, Inc.
1943 50th St. North
Birmingham AL, 35212
Attn: Harold Emery
ADMINSTRATION
A. Administration of this subcontract will be performed by the Boeing
Aerospace Support Center (BASC). Seller may not negotiate or
enter into agreements with the Air Force customer or DCM
administration agency of this subcontract directly. All requests
for consideration must be presented to the MDC procurement agent
or his designee.
B. BASC will provide an on-site supplier manager that will serve as
the procurement agent representative in the administration of
this effort to include but not limited to ensuring Seller's
compliance with the requirements and providing an interface
between Seller and the DCM.
C. Seller agrees to support MDC in any negotiations with the
Government as requested.
D. In the event the supplier manager, procurement agent, or other
designee, is not available, Seller is authorized to interface
with DCM-Pemco directly to obtain
The McDonnell Douglas Corporation Proprietary Rights are included in the
information disclosed herein. Recipient by accepting this document agrees that
neither this document nor the information disclosed herein nor any part thereof
shall be reproduced or transferred to the other documents or used or disclosed
to other for manufacturing or any other purposes except as specifically
authorized in writing by the McDonnell Douglas Corporation. All rights reserved
under the copyright laws by the McDonnell Douglas Corporation.
<PAGE>
clarification and/or guidance. Seller agrees to provide written
minutes to the supplier manager within 48 hours of the meeting. Seller
is not authorized to make binding commitments on behalf of MDC.
GOVERNMENT/BASC FURNISHED PROPERTY / SUPPLY INFORMATION
A. Seller will maintain and be responsible for (and accountable to MDC
-------------------------------------------------------------------
and/or MDC's customer) all such inventory delivered to the Seller
-----------------------------------------------------------------
in the performance of this contract. Further, the Seller agrees to
------------------------------------------------------------------
promptly provide secure storage space for all such inventory and
----------------------------------------------------------------
shall be responsible for unaccountable physical inventory losses
----------------------------------------------------------------
or shortages.
------------
B. Seller shall comply with the following requirements:
---------------------------------------------------
1. FAR clauses in part 45, as supplemented, hereby incorporated
------------------------------------------------------------
into this contract by reference at attachment "4".
-------------------------------------------------
2. The BASC Subcontractor-Held Government Property Control,
--------------------------------------------------------
MCD-025, incorporated into this contract as attachment "6". Any
---------------------------------------------------------------
contradictions between Pemco's Government approved property
-----------------------------------------------------------
plan and MCD-25 must be identified before award of the LTRC for
---------------------------------------------------------------
consideration.
-------------
C. Seller must comply with all requirements of attachment 7 (Appendix
------------------------------------------------------------------
B to Air Force prime contract F42620-98-D0054):
----------------------------------------------
1. Seller is authorized to do their own parts/material requisitions
----------------------------------------------------------------
through the Military Standards Requisitions and Issue
-----------------------------------------------------
Procedures (MILSTRIP) directly to OO-ALC and report under the
-------------------------------------------------------------
G009 system directly to OO-ALC. The following MILSTRIP codes
------------------------------
are to be used For CARD Columns 30-35 use BASC's EZ Code:
EZ1746 For CARD Columns 45-50 use Pemco's current EZ Code:
EZ8178.
2. Seller and MDC agree to material transfers (see paragraph XVI
-------------------------------------------------------------
below) of GFM between the BASC site in San Antonio, TX and the
---------------------------------------------------------------
Pemco site at Birmingham, AL. Pemco agrees to perform any
---------------------------------------------------------
internal paperwork to show a transfer of GFM/GFE between sites.
---------------------------------------------------------------
BASC will perform its own internal paperwork.
--------------------------------------------
3. Upon approval of the DCM-Birmingham Administrative Contracting
--------------------------------------------------------------
Officer, transfers of GFM and Rob-Backs between contracts
----------------------------------------------------------
F42620-98-D0054 (Boeing's Air Force Prime Contract) and
-------------------------------------------------------
F34601-94-C0664 (Pemco's Air Force Prime Contract) are
------------------------------------------------------
authorized. Cannibalizations between contracts are prohibited.
-------------------------------------------------------------
Seller agrees to perform all internal paperwork to show a
---------------------------------------------------------
transfer of GFM between contracts.
---------------------------------
The McDonnell Douglas Corporation Proprietary Rights are included in the
information disclosed herein. Recipient by accepting this document agrees that
neither this document nor the information disclosed herein nor any part thereof
shall be reproduced or transferred to the other documents or used or disclosed
to other for manufacturing or any other purposes except as specifically
authorized in writing by the McDonnell Douglas Corporation. All rights reserved
under the copyright laws by the McDonnell Douglas Corporation.
<PAGE>
4. Government Furnished Equipment (GFE) accountable under Air
----------------------------------------------------------
Force Prime Contact F34601-94-C0664 is authorized to use under
--------------------------------------------------------------
this subcontract to F42620-98-D0054 on a non-interference, no
------------------------------------------------------------
charge for use basis.
-------------------
5. Upon expiration of Air Force contract F34601-94-C0664, Seller
-------------------------------------------------------------
agrees to follow MDC Procurement Agent and Air Force
----------------------------------------------------
Contracting Officer direction to transfer Government Furnished
--------------------------------------------------------------
Property accountable under F34601-94-C0664 to become
----------------------------------------------------
accountable GFP under this subcontract to F42620-98-D0054.
---------------------------------------------------------
D. Any request to purchase parts/material (Contractor Acquired
-----------------------------------------------------------
Property) or Fabrication shall be performed within the same
-----------------------------------------------------------
guidelines of Appendix B.
------------------------
E. The Air Force Procuring Contracting Officer and DCM - Pemco will
----------------------------------------------------------------
provide Seller with a flight crew to perform Functional Check
-------------------------------------------------------------
Flights.
-------
F. JP-8 Fuel shall be procured by Seller under CAP procedures of
-------------------------------------------------------------
attachment 7.
------------
MATERIAL TRANSFER
1. MDC and Seller agree to share parts and materials in support of
prime contract F42620-98-D0054 when such sharing does not
seriously impact the operations of the losing organization and it
is critical for the gaining organization to meet the needs of the
customer.
2. When the parts or material is GFM, the transfer will be via
Government Bill of Lading in accordance with applicable FAR
provisions incorporated at paragraph XXI.
3. When the parts of material is company-owned, a fair price will be
negotiated at the time of purchase and handled under separate
purchase contracts.
ENGINEERING SUPPORT
A. BASC shall provide one (1) liaison engineer to be located at
Seller's facilities to evaluate, disposition, and code AFMC
Form 202s (Non-Conforming Technical Assistance Requests and
Replies) that are generated on this purchase contract.
Specifically, this engineer will:
1. Review each AFMC 202 deficiency to thoroughly understand the
problem and potential disposition actions. This will usually
require viewing the problem on the aircraft and discussing the
deficiency with maintenance supervisor.
The McDonnell Douglas Corporation Proprietary Rights are included in the
information disclosed herein. Recipient by accepting this document agrees that
neither this document nor the information disclosed herein nor any part thereof
shall be reproduced or transferred to the other documents or used or disclosed
to other for manufacturing or any other purposes except as specifically
authorized in writing by the McDonnell Douglas Corporation. All rights reserved
under the copyright laws by the McDonnell Douglas Corporation.
<PAGE>
2. Determine the best solution to the problem considering not only
technical requirements but also cost and schedule impacts on
the PDM line. A major consideration in any repair disposition
should be the long-term safety and airworthiness of the
aircraft.
3. Complete Part B of the AFMC 202 detailing the repair
disposition including any special instructions and/or
sketches. Also, evaluate each AFMC 202 for potential work
requirements at next PDM and annotate each AFMC 202 in the
lower right hand corner of Block 22 with a rating from 0
(replaced this PDM) to 5 (replace next PDM) as outlined in
Attachment 1.
4. Annotate Block 24 (as applicable) if any shortcomings in -135
technical orders, PDM specifications, Statements of Work, or
other Technical Directives are uncovered during disposition of
any AFMC 202. Additionally, provide corrective actions or
recommendations along with pertinent information/data
(sketches, drawings, etc.) with the AFMC Form 202.
5. Attend status meetings, production meetings, etc. to discuss
the status or disposition of AFMC 202s as required.
6. Collect repair information for all repeat AFMC 202s
(dispositions with the same repair used to repair 2 or more
identical or similar defects in a 1 year period). This
information shall contain the problem description, repair
instructions, repair applicability and repair limitations (the
most severe damage allowed for use of this repair to date).
DOCUMENTS/SPECIFICATIONS
A. MDC will provide any specifications and changes thereto (including
technical data & drawings) directly to Seller. Seller is required
to reach an agreement with MDC.
B. Seller will be given access to REDARS and has the right to use any
MDC proprietary data provided by MDC in the performance of this
agreement and MDC agrees to provide all proprietary data required
to carryout the work successfully. Any technical data shall not be
used in dealing with non-Boeing entities without obtaining a
license from the procurement agent. Furthermore, all data are
subject to the restrictions of the Non-Disclosure agreement signed
by MDC and Seller on 20 Sep 00.
QUALITY ASSURANCE
A. MDC will have on-site quality representatives (Procurement Quality
Analysts) to provide oversight to the entire subcontract.
The McDonnell Douglas Corporation Proprietary Rights are included in the
information disclosed herein. Recipient by accepting this document agrees that
neither this document nor the information disclosed herein nor any part thereof
shall be reproduced or transferred to the other documents or used or disclosed
to other for manufacturing or any other purposes except as specifically
authorized in writing by the McDonnell Douglas Corporation. All rights reserved
under the copyright laws by the McDonnell Douglas Corporation.
<PAGE>
B. Additional quality requirements are located in the Special
Conditions 2026 and 2054 of the purchase order.
2026: Seller shall, upon request on forms designated by Buyer,
provide statements of corrective action on failures of
Seller's hardware. Corrective action statements, at Buyer's
discretion, may require approval signature by Buyer and
government quality representatives. All rejected articles
resubmitted by Seller to Buyer shall bear adequate
identification, including references to Buyer's rejection
document.
2054: MDA Process Validation Assessments (PVA) will be performed
during the design and manufacture of product at your plant.
Upon receipt of this contract, promptly notify the MDA Supplier
Quality Management (SQM) Representative who normally services
your plant. If your plant is not presently serviced by a SQM
Representative, promptly notify the MDA Purchasing
Representative. The Seller is allowed to ship product without
evidence of MDA source inspection. This condition shall take
precedence over 2004 if that condition is included in this
contract.
C. For the purposes of Special Condition 2054, the on-site MDC PQA
will perform the MDA Supplier Quality Management Coordinator
functions.
D. MDC has performed an audit of Seller's Quality System and
approved it to meet the MIL Standards and TO's applicable to the
KC-135 PDM Contract Requirements to include all required processes
to accomplish stated requirements. Seller agrees to maintain
stated approval. Additionally, Seller agrees to allow MDC to
perform follow-on audits, as required, to ensure Seller's
continual compliance with MDC Quality System requirements.
E. DCM - BASC has delegated quality assurance and inspection
functions to DCM - Pemco AEROPLEX.
F. DCM - Pemco AEROPLEX will perform quality assurance functions
as provided by the delegation letter from DCM - BASC.
G. Final buy-back inspection and final acceptance (via DD-250)
will be jointly performed by MDC and DCM-Pemco AEROPLEX.
The McDonnell Douglas Corporation Proprietary Rights are included in the
information disclosed herein. Recipient by accepting this document agrees that
neither this document nor the information disclosed herein nor any part thereof
shall be reproduced or transferred to the other documents or used or disclosed
to other for manufacturing or any other purposes except as specifically
authorized in writing by the McDonnell Douglas Corporation. All rights reserved
under the copyright laws by the McDonnell Douglas Corporation.
<PAGE>
WARRANTY
A. Definitions:
"Acceptance" as used in this clause, means the act of an
authorized representative of the MDC/Government by which the
MDC/Government assumes for itself, or as agent of another,
ownership of existing and identified supplies, or approves
specific services rendered, as partial or complete performance of
the contract.
"Correction" as used in this clause, means the correction of a
defect.
"Days" as used in this clause, means calendar days.
"Defect" as used in this clause, means any condition or
characteristic in any supplies or services furnished by the
contractor under this contract that is not in compliance with
the requirements of this contract.
"Supplies" as used in this clause, means the end items furnished
by the contractor and related services required by this
contract. The word does not include "data".
B. Notwithstanding inspection and acceptance by the MDC/Government of
supplies and services furnished under this contract, the Seller
warrants that all supplies and services provided under this
contract, including O&A and Contractor Acquired Property (CAP),
shall be free from defects in material and workmanship and will
conform with all requirements of this contract for 180 days after
Government final acceptance of the aircraft.
C. With respect to GFM, the Seller's warranty shall extend only to its
proper installation, unless the Seller performs some modification
or other work on the property, in which case the Seller's warranty
shall extend to the modification or other work.
D. The Seller shall annotate the AFTO Form 781, Aerospace Vehicle
Flight Data Document, for each aircraft with a statement that the
work performed by the Seller under this repair agreement is
warranted, the date the warranty expires, and the date by which
the Seller must be notified of defects covered by the warranty.
E. To exercise its rights under this warranty, within 180 days after
acceptance, if the MDC procurement agent determines that a defect
exists in any of the supplies or services accepted by MDC under
this agreement, the Procurement Agent shall promptly notify the
Seller of the defect, in writing, but no later than 30 days after
discovery of the defect (not to exceed 210 days after Government
final acceptance of the aircraft). There are two options for
corrective action, Seller repair and MDC/Government repair, as are
described below:
1. Seller Repair:
(a) The Procurement Agent will notify the Seller of the need
for correction or
The McDonnell Douglas Corporation Proprietary Rights are included in the
information disclosed herein. Recipient by accepting this document agrees that
neither this document nor the information disclosed herein nor any part thereof
shall be reproduced or transferred to the other documents or used or disclosed
to other for manufacturing or any other purposes except as specifically
authorized in writing by the McDonnell Douglas Corporation. All rights reserved
under the copyright laws by the McDonnell Douglas Corporation.
<PAGE>
replacement of the alleged nonconforming supplies or services
by providing a copy of the Government's Product Quality
Deficiency Report (PQDR). The notification will specify a date
for response from the Seller.
(b) Within ten days of notification, the Seller shall provide a
response. The seller's response will be reviewed and
accepted by DCM-Pemco prior to submittal to MDC.
(c) If the Seller agrees with the validity of MDC's warranty
claim, the response shall include a recommendation
regarding the Seller's use of a field team or return of
the aircraft to the Seller's facility, which shall include
adequate supporting information in sufficient detail for
the Procurement Agent to determine what corrective action,
if any, shall be undertaken.
(d) If the Seller disagrees with the validity of MDC's warranty
claim, the written recommendation shall also include
facts and circumstances supporting the Seller's denial of
the MDC's warranty claim. Seller agrees that non-warranty
defects can be corrected under the Over & Above provisions.
(e) If MDC determines the warranty claim to be valid, the
Procurement Agent will provide written direction to the
Seller, within thirty days of Seller's response, as to
what corrective action the Seller shall take and when the
corrective action shall be completed. The direction shall
also include whether the corrective action is to take
place at the Seller's facility or the site where the
aircraft is located.
(f) The Seller shall comply with the direction of the
Procurement Agent for the corrective action, without
regard to any doubt or disagreement concerning the breach
of warranty.
(g) When the Seller's recommendation to use the Seller's field
team for corrective action is accepted by the MDC, the
Seller shall be responsible for all costs of the field
team.
(h) When the Seller's recommendation to return the aircraft to
the Seller's facility is accepted by MDC, the Seller
shall be responsible for the costs to MDC for returning
the aircraft to the Seller's facility and, after
correction, returning the aircraft to the designated
Government installation. The specific costs for which the
Seller is responsible are:
(1) Fuel costs to fly the aircraft for reinput and return
to base, and
(2) Temporary duty expenses for the Government flight crew
which shall
The McDonnell Douglas Corporation Proprietary Rights are included in the
information disclosed herein. Recipient by accepting this document agrees that
neither this document nor the information disclosed herein nor any part thereof
shall be reproduced or transferred to the other documents or used or disclosed
to other for manufacturing or any other purposes except as specifically
authorized in writing by the McDonnell Douglas Corporation. All rights reserved
under the copyright laws by the McDonnell Douglas Corporation.
<PAGE>
be IAW the Government's Joint Travel Regulation. These
expenses include commercial transportation for the
crew to return to base and back to the Seller's
facility for return of the aircraft to base after
corrective action. The method of commercial
transportation shall be selected by the MDC/Government.
The Seller's liability for temporary duty expenses
shall not exceed the costs of commercial transportation
and three (3) days of per diem per flight crew member. .
(i) Government Repair: The Procurement Agent will notify
the Seller if the Government has chosen to retain
and correct, by contract or other action, the
nonconforming supplies or services, and charge the
Seller the Government cost for the correction. The
Seller may be given advance notice of the
nonconformance(s) which the Government has chosen to
correct. The Seller may have the opportunity to
inspect the nonconformance(s), at the location of the
aircraft, prior to Government corrective action.
Absence of the advance notice and opportunity to
inspect shall not void the MDC's rights under this
paragraph.
(j) The choice by MDC to require correction/replacement/
re-performance or charge the Seller for the cost of the
correction or make an equitable adjustment in the purchase
order price {or have the seller reimburse MDC via check}
will be driven by Government's action. However, the
Government will normally only choose to charge contractors
for the cost of repairs when safety of flight or mission
readiness problems are encountered or when the
nonconformance is of sufficiently minor magnitude that is
more cost-effective for the Government to perform the
repairs itself on-site.
(k) All supplies and services, in connection with the
corrective action performed by the Seller, shall be
subject to this clause to the same extent as those
initially accepted, and warranted for the same period
of time beginning with the date of acceptance of the
aircraft after completion of the correction action.
F. Failure to agree on any determination made under this clause shall be
subject to the Alternative Dispute Resolution provisions provided at
attachment 10.
G. The rights and remedies of MDC provided by this clause are in
addition to, and do not limit, any rights of MDC under any other
clause of this contract.
ADDITIONAL GOVERNMENT CLAUSES
A. In addition to the Government clauses identified in attachment 4,
the following clauses are hereby incorporated:
The McDonnell Douglas Corporation Proprietary Rights are included in the
information disclosed herein. Recipient by accepting this document agrees that
neither this document nor the information disclosed herein nor any part thereof
shall be reproduced or transferred to the other documents or used or disclosed
to other for manufacturing or any other purposes except as specifically
authorized in writing by the McDonnell Douglas Corporation. All rights reserved
under the copyright laws by the McDonnell Douglas Corporation.
<PAGE>
1. FAR 52.242-10, (Apr 84) F.O.B. Origin - Government Bills of Lading
or Prepaid Postage.
2. FAR 52.247-1, (Apr 84) Commercial Bill of Lading Notations.
3. FAR 52.251-1, (Apr 84) Government Supply Sources
4. FAR 52.245-2 (Dec 89), Government Property
5. FAR 52.246-24 (Feb 97), Limitation of Liability - High End Items.
6. DFARS 252.228-7001 (Sep 96), Ground & Flight Risk.
7. DFARS 252.242-7003, (Dec 91) Application for U.S. Government
Shipping Documentation/Instructions
8. AFMCFARS 5352.228-9002 (Apr 01), Ground & Flight Risk Supplement.
(l) The additional information contained in the subparagraphs
below apply: (i) In subparagraph (a)(2), the term "contractor's
premises" means the property which comprises the facilities
utilized by the Seller at Birmingham, AL
MAINTENANCE ACCELERATION/COMPRESSION
The Seller recognizes that a situation could occur which would
require immediate availability of aircraft, engines, or end items to
support the Air Force. As such, a need exists for a method of
amending the purchase contract in an expeditious action. If and when
such a situation occurs, the Procurement Agent shall issue a
directive in accordance with General Provisions GP2, paragraph 8
which will make attachment 1d of this purchase order operative. When
the directive is issued, attachment 1d shall become applicable as a
work specification. Price, terms & conditions shall be negotiated and
incorporated into this agreement and any resultant purchase contract
/ delivery order. The procurement agent shall issue the directive in
writing, or verbally if time does not permit issuance of the
directive in writing. However, the Procurement Agent shall confirm
any such verbal directive in writing at the earliest possible date.
CONTRACT DATA REQUIREMENTS LIST (CDRL's)
A. Seller agrees to provide electronic distribution of required data
as outlined by Air Force prime contract F42620-98-D0054 CDRL list
(Attachment 11) to the Procurement Agent or his designee one day
before the due date specified in the CDRL document.
B. MDC reserves the right to change distribution of the CDRL's at no
extra cost in order to meet prime contract requirements.
COMPLIANCE
A. During the duration of this agreement, Seller agrees to maintain
the following Government-approved systems:
The McDonnell Douglas Corporation Proprietary Rights are included in the
information disclosed herein. Recipient by accepting this document agrees that
neither this document nor the information disclosed herein nor any part thereof
shall be reproduced or transferred to the other documents or used or disclosed
to other for manufacturing or any other purposes except as specifically
authorized in writing by the McDonnell Douglas Corporation. All rights reserved
under the copyright laws by the McDonnell Douglas Corporation.
<PAGE>
1. Procurement System.
2. Property Management System.
B. Seller agrees to provide copies of such approvals, to include any
pertinent DCAA audits, and changes thereto. Seller will be
granted 30 days to make corrections resulting from DCAA audits.
C. Seller agrees to take all necessary good faith efforts to pursue
and obtain Boeing preferred supplier certification. For
information visit http://www.boeing.com/companyoffices/doingbiz/
DROP-IN MAINTENANCE
A. From time-to-time, MDC's may drop in additional KC-135
aircraft for emergency repair and maintenance. To the extent
feasible, based on Seller's facilities and experience, MDC may
redirect such aircraft for repair and maintenance to Seller's
facility. The Procurement Agent shall provide authority and
direction for such inputs.
B. The Procurement Agent shall, if MDC is unable to provide a
specific statement of work prior to induction and provided
funds are available, authorize such preliminary work sufficient
for the Seller to submit an estimate for completion of the
required repairs or maintenance within 2 days after
notification.
C. If it is not possible or feasible to provide an estimate for
completion, Seller shall provide a rough order of magnitude
(ROM) estimate of the work to be performed in phases or steps.
(For example: trouble-shooting to identify possible repair or
work options, anticipated work following trouble-shooting and
analysis, unanticipated work discovered or encountered while
performing anticipated work, etc).
D. No work shall begin until authorization is received from the
Procurement Agent. When sufficient funding is available, the
Procurement Agent shall authorize completion of the work as an
O&A work request. The over and above rates (Attachment 2a
through 2c) of the agreement shall apply to all such work.
E. If, in the process of performing the work, the Seller discovers
additional work to be performed, the Seller shall provide a
description of the proposed/additional work together with a
price for the proposed/additional work to the Procurement
Agent. The Seller shall also indicate any effect the
proposed/additional work will have on the delivery schedule of
the affected aircraft or other aircraft work in progress.
The McDonnell Douglas Corporation Proprietary Rights are included in the
information disclosed herein. Recipient by accepting this document agrees that
neither this document nor the information disclosed herein nor any part thereof
shall be reproduced or transferred to the other documents or used or disclosed
to other for manufacturing or any other purposes except as specifically
authorized in writing by the McDonnell Douglas Corporation. All rights reserved
under the copyright laws by the McDonnell Douglas Corporation.
<PAGE>
The Procurement Agent shall approve the price and schedule prior
to Seller's commencement of work.
F. Should such work interrupt the normal PDM or ACI aircraft flow
through the Seller's facility, the Seller shall immediately
notify the Procurement Agent for advice and provide a cost
proposal upon request. If MDC approves the interruption, the
Procurement Agent shall negotiate an equitable adjustment.
OFFICE FACILITY
A. Seller shall provide an office/office space in close proximity to
the repair shop that will accommodate at least seven MDC
representatives at no cost to BASC. Staffing will be filled on an
incremental basis and the Seller will be given a 30-day notice
when possible. The office(s) space must be sufficient in size to
house office equipment and filing cabinets and telephone service
(including a separate computer line) and will be provided at no
charge.
B. The office/office space must incorporate lavatory/restroom
facilities or be in close proximity to it.
INTERNATIONAL ORGANIZATION FOR STANDARDIZATION (ISO) CERTFICATION
Seller agrees to maintain ISO 9002 / AS9100 certification during
performance of this purchase contract.
XXIX. AUDIT & AWARD
Seller agrees to allow the DCAA to perform an audit of their cost and
rates proposal. Seller agrees to enter into good faith negotiations to
resolve any issues identified by the DCAA. See paragraph X.F for rate
re-opener provisions.
XXX. ALTERNATIVE DISPUTE RESOLUTION (ADR)
A. Seller agrees, to the maximum extent possible, to use the ADR
provisions at attachment 10 rather than litigation:
1. As the first choice whenever negotiation of a contract issue
reaches impasse.
2. To resolve controversial contract issues at the lowest level
and as early as possible using the least expensive means.
3. To enhance the long-term partnering of the Seller and MDC by
seeking creative, efficient and sensible outcomes to contractual
disagreements.
The McDonnell Douglas Corporation Proprietary Rights are included in the
information disclosed herein. Recipient by accepting this document agrees that
neither this document nor the information disclosed herein nor any part thereof
shall be reproduced or transferred to the other documents or used or disclosed
to other for manufacturing or any other purposes except as specifically
authorized in writing by the McDonnell Douglas Corporation. All rights reserved
under the copyright laws by the McDonnell Douglas Corporation.
<PAGE>
XXXI. FINANCIAL INFORMATION
Seller shall provide financial data, on a quarterly basis, or as
requested to the Boeing Corporate Credit Office for credit and
financial condition reviews. Said data shall include but not be
limited to balance sheets, schedules of accounts payable and
receivable, major lines of credit, creditors, income statements
(profit and loss), cash flow statements, firm backlog, and headcount.
Copies of such data are to be made available within 72 hours of any
written request by Boeing's Corporate Credit Office. All such
information shall be treated as confidential.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date
noted below:
MCDONELL DOUGLAS CORPORATION
A WHOLLY OWNED SUBSIDIARY OF
THE BOEING COMPANY (SELLER'S NAME)
By:/S/ Jose P. Garza By:/S/ Raymond J. Hauck
----------------- --------------------
Authorized Agent Title: President
Jose P. Garza Date 12/12/01 Raymond J. Hauck Date 11/9/01
The McDonnell Douglas Corporation Proprietary Rights are included in the
information disclosed herein. Recipient by accepting this document agrees that
neither this document nor the information disclosed herein nor any part thereof
shall be reproduced or transferred to the other documents or used or disclosed
to other for manufacturing or any other purposes except as specifically
authorized in writing by the McDonnell Douglas Corporation. All rights reserved
under the copyright laws by the McDonnell Douglas Corporation.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>4
<FILENAME>dex21.txt
<DESCRIPTION>SUBSIDIARIES OF THE COMPANY
<TEXT>
<PAGE>
Exhibit 21
SUBSIDIARIES OF PEMCO AVIATION GROUP, INC.
Name of Subsidiary State of Organization
- ------------------ ---------------------
Pemco Aeroplex, Inc. Alabama
Pemco World Air Services, Inc Delaware
Pemco Air Services System, Inc. Colorado
Pemco Engineers Inc. Delaware
Space Vector Corporation Delaware
Air International Incorporated Delaware
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>5
<FILENAME>dex23.txt
<DESCRIPTION>CONSENT OF ARTHUR ANDERSEN LLP
<TEXT>
<PAGE>
Exhibit :23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report, included in this Form 10-K, into the Company's previously filed
Registration Statements on Form S-8 (File Nos. 33-34206 and 33-79676 and
333-30491) and on Form S-3 (File No. 333-33933).
Birmingham, Alabama /S/ ARTHUR ANDERSEN LLP
March 22, 2002 -----------------------
ARTHUR ANDERSEN LLP
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>6
<FILENAME>dex99.txt
<DESCRIPTION>LETTER TO THE SEC
<TEXT>
<PAGE>
Exhibit 99
[Company Letterhead]
March 25, 2002
Securities and Exchange Commission
450 Fifth Street N.W.
Judiciary Plaza
Washington, DC 20549
Re: Confirmation of Arthur Andersen Representations
This letter confirms that Pemco Aviation Group, Inc. has received from Arthur
Andersen LLP, the independent public accountant engaged by the company to
examine the company's financial statements that are included in the Form 10K to
which this letter is filed as an exhibit, a representation letter addressed to
the company stating that:
. the audit for the year ended December 31, 2001 was subject to Andersens
quality control system for the U.S. accounting and auditing practice to
provide reasonable assurance that the engagement was conducted in
compliance with professional standards; and
. that there was appropriate continuity of Andersen personnel working on
the audit, and availability of national office consultation and
availability of personnel at foreign affiliates of Arthur Andersen to
conduct relevant portions of the audit.
Although the Andersen letter contains a representation as to the availability
of personnel at foreign affiliates of Arthur Andersen to conduct relevant
potions of the audit, the company has no foreign operations.
Sincerely
Pemco Aviation Group, Inc.
By: /S/ John R. Lee
---------------
John R. Lee
Sr. Vice President and
Chief Financial Officer
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----