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, 2007,
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
ALABAMA AIRCRAFT INDUSTRIES, INC.
(Exact name of registrant as specified in
its charter)
|
|
|
|
|
Delaware
|
|
84-0985295
|
|
(State or other jurisdiction of incorporation or organization)
|
|
(I.R.S. Employer Identification No.)
|
|
|
|
|
1943 North 50
th
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:
|
|
|
|
|
Common Stock, $.0001 par value
|
|
The NASDAQ Stock Market LLC
|
|
(Title of each class)
|
|
(Name of each exchange on which registered)
|
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether
the Company is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933.
¨
Yes
x
No
Indicate by check mark whether the Company is not required to file reports pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934.
¨
Yes
x
No
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 the 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
Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act.
|
|
|
|
|
|
|
|
|
|
|
(Check one):
|
|
Large accelerated filer
|
|
¨
|
|
Accelerated filer
|
|
¨
|
|
|
|
|
|
|
|
|
|
Non-accelerated filer
|
|
¨
|
|
Smaller reporting company
|
|
x
|
|
(Do not check if a smaller reporting company)
|
|
|
|
|
Indicate by check mark whether the Company is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
¨
Yes
x
No
The aggregate market value of the Common Stock held by non-affiliates on
June 29, 2007
was approximately
$16,904,280.
The number of shares of the Company’s Common Stock outstanding as of
March 20, 2008
was
4,128,950.
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, 2007) are incorporated by reference into Part III of this report.
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 2007
ALABAMA AIRCRAFT INDUSTRIES, INC.
- i -
FORWARD-LOOKING STATEMENTS—CAUTIONARY LANGUAGE
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 within the meaning of the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended). These forward-looking statements include, but are not limited to, statements about Alabama Aircraft Industries, Inc.’s (the “Company”) (formerly Pemco Aviation
Group, Inc.) plans, objectives, expectations and intentions, award or loss of contracts, the outcome of pending or future litigation, estimates of backlog and other statements contained in this Annual Report that are not historical facts. When used
in this Annual Report, the words “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, “may”, “will”, “should”,
“could” 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 the
section below entitled “Item 1A. Risk Factors”, which could cause actual results to differ materially from those expressed or implied by these forward-looking statements. The Company cautions readers not to place undue reliance on any
forward-looking statements, which speak only as of the date on which they are made. The Company does not undertake any obligation to update or revise any forward-looking statements.
PART I
Item 1. Business
A. GENERAL
Alabama Aircraft Industries, Inc., formerly Pemco Aviation Group, Inc. (“AAII” or the “Company”), is an aerospace and defense company composed of two operating segments: the Government Services
Segment (“GSS”) and the Manufacturing and Components Segment (“MCS”). The Company’s primary business is providing aircraft maintenance and modification services to the U.S. Government, including complete airframe inspection,
maintenance, repair and custom airframe design and modification. The businesses historically comprising the Commercial Services Segment (“CSS”) were sold in the third quarter of 2007 and are presented herein as discontinued operations.
The Company provides aircraft maintenance and modification services for government and military customers primarily through its Government
Services Segment, 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 GSS’s customers.
The GSS’s contracts are generally multi-aircraft programs lasting several years. The Company believes that GSS’s facilities, tooling, experienced labor force, quality, and on-time delivery record position it currently as one of the premier
providers of PDM for large transport aircraft in the country.
The Company’s Manufacturing and Components Segment designs and
manufactures a wide array of proprietary products including various rocket vehicles, guidance control systems and precision components for launch vehicles.
The Company’s website address is www.alabamaaircraft.com. The Company makes available free of charge through its website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and all amendments to those reports as soon as reasonably practicable after such materials have been filed with or furnished to the Securities and Exchange Commission (“SEC”).
B. SIGNIFICANT DEVELOPMENTS
Financial Condition of the Company
The Company’s primary sources of liquidity and capital resources include cash-on-hand, cash flows from operations (primarily from
collection of accounts receivables and conversion of work-in-process inventory to cash) and potential borrowing capability through lenders. Principal factors affecting the Company’s liquidity and capital resources position include, but are not
limited to, the following: results of operations; the results of the Company’s protest of the U.S. Air Force (“USAF”) award of the KC-135 contract to The Boeing Company; collection of accounts receivable; funding requirements
associated with the Company’s defined benefit pension plan; settlements of various claims; and potential divestitures. The Company anticipates that cash-on-hand will be sufficient to fund operations, make minimal capital expenditures and make
scheduled payments on debt obligations for the next twelve months. However, the Company is proposing and is expecting to propose on several programs in the next twelve months. If the Company is successful in winning some or all of these programs,
additional financing may be needed to fund working capital requirements related to the buildup of accounts receivable and inventory on the projects. Moreover, the Company does not have sufficient cash to make the required contributions to its
defined benefit pension plan without negatively impacting the cash and liquidity of the Company by the end of 2008. Therefore, the Company applied on February 29, 2008 to the Internal Revenue Service for a waiver of contributions to its defined
benefit pension plan through December 31, 2008. Without a waiver of contributions, the Company would be required to contribute approximately $3.7 million for the 2007 plan year by September 15, 2008. Contribution calculations for the 2008
plan year have not been completed; however, the Company currently estimates that the quarterly payments for the 2008 plan year will be approximately $1.1 million to $1.2 million with the first quarterly payment due April 15, 2008. Several
events could significantly impact the generation, availability and uses of cash over the next twelve months including:
|
|
•
|
|
whether the Company is successful in its protest of the USAF award of the KC-135 contract to The Boeing Company;
|
|
|
•
|
|
whether the Company is granted a waiver of contributions to its defined benefit pension plan through December 31, 2008;
|
|
|
•
|
|
whether the Company sells its subsidiary, Space Vector Corporation, in 2008;
|
|
|
•
|
|
whether the Company is able to win additional contracts, including in part as a result of qualifying with the Small Business Administration as a small business
under certain North American Industry Classification System codes; and
|
1
|
|
•
|
|
whether the Company is able to get additional funding from lenders to fund working capital increases needed if additional contracts are won.
|
There are no assurances that the Company will be successful in any of these respects and negative outcomes could
adversely impact the Company’s ability to meet financial obligations as they become due.
Sale of Pemco World Air Services
On September 19, 2007, the Company sold all of the outstanding stock in Pemco World Air Services, Inc., a wholly owned subsidiary of the Company
(“PWAS”), to WAS Aviation Services, Inc., an affiliate of Sun Capital Partners, Inc. (“WAS”). The sale was approved by the Company’s stockholders on September 17, 2007. As part of the transaction, the Company changed
its name from Pemco Aviation Group, Inc. to Alabama Aircraft Industries, Inc. PWAS historically has comprised substantially all of the CSS. The historical financial results of PWAS have been presented in the accompanying consolidated financial
statements as discontinued operations for all periods presented.
Sale of Pemco Engineers
On October 10, 2006, Pemco Engineers, Inc., a wholly-owned subsidiary of the Company, entered into an Asset Purchase Agreement (the “Purchase
Agreement”) with Global Aerospace Technology Corporation (“Global Aerospace”), a newly-formed entity controlled by prior members of Pemco Engineers’ management. Pursuant to the terms of the Purchase Agreement, Global Aerospace
purchased substantially all of the assets and assumed substantially all of the liabilities of Pemco Engineers in exchange for $2.0 million ($1.6 million in cash and $0.4 million in future product deliveries, all of which were received by the Company
prior to December 31, 2006). Pemco Engineers is presented in the accompanying consolidated financial statements as discontinued operations for all periods presented.
Repayment of Debt
On December 16, 2002, the Company entered into a Credit Agreement with
Wachovia Bank and Compass Bank (the “Credit Agreement”) that provided for a revolving credit facility and various term loans (“Bank Debt”). On October 12, 2006, the Company entered into an Amended and Restated Credit
Agreement (“Amended Credit Agreement”) with Wachovia Bank and Compass Bank. On September 19, 2007, the Company paid off the Bank Debt with the proceeds from the sale of PWAS. A Dothan Airport Authority term loan was paid off on
October 4, 2007. In addition to eliminating the Bank Debt and the Dothan Airport Authority term loan, the sale provided approximately $8.0 million of cash for future working capital needs.
Severance Agreements With Certain Key Employees
On January 21, 2008, the Compensation Committee of the Company’s Board of Directors approved the Alabama Aircraft Industries, Inc. Executive Retention Plan (the “Executive Retention Plan”). The purpose of the Executive
Retention Plan is to replace the Pemco Aviation Group, Inc. Separation Benefit Plan, which terminated on December 1, 2007, and to act as a retention incentive by providing certain eligible executives of the Company with severance payments in
the event their employment is terminated during 2008 by the Company without cause or by the executive for good reason.
If, prior to
January 1, 2009, a covered executive’s employment is terminated by the Company without cause or by the executive for good reason, payments under the Executive Retention Plan are due if the executive is ineligible for severance payments
under another existing employment letter, agreement, or arrangement. No payments will be made to a covered executive pursuant to the Executive Retention Plan if his or her employment is terminated by the Company at any time with cause or upon the
executive’s resignation without good reason. For each covered executive, the Executive Retention Plan provides for severance payments in the form of base salary continuation for a 365-day period and the payment of a post-tax lump sum equal to
the executive’s total group health insurance continuation (COBRA) premiums for the base salary continuation period. The Executive Retention Plan will terminate upon the later of December 31, 2008 or the date as of which all payments due to
be made under it have been made.
Eligible employees under the Executive Retention Plan include employees of the Company or subsidiaries of
the Company who have received a Coverage Letter under the Plan, so long as the employee, as of his or her termination date, (1) has not previously agreed in writing to waive eligibility for the Executive Retention Plan and (2) has no
employment agreement or arrangement that provides for the payment of employment separation benefits (other than agreements or arrangements that provide for the payment of separation benefits solely in connection with or due to (a) the sale of
any stock or assets of the Company and/or its subsidiaries or the merger or consolidation of the Company and/or subsidiary of the Company, or (b) a change in the membership of the Board of Directors of the Company and/or subsidiary of the
Company
2
that is a “change of control” or “change of ownership” under such an employment agreement or arrangement). Eligible employees currently
include individuals who are the named executive officers of the Company.
Boeing Logistics Support Systems (“LSS”)/AAII-Birmingham KC-135 PDM
Partnership
Boeing LSS and AAII-Birmingham (formerly Pemco Aeroplex, Inc.) agreed to continue as partners on the KC-135 PDM program
during 2005 as a result of the UASF decision to re-compete the KC-135 PDM contract. A teaming agreement with Boeing was signed and from May 2005 through June 2006, the Company worked in cooperation with Boeing to submit a proposal on the new KC-135
contract under a Memorandum of Agreement with Boeing (“MOA”). After filing an initial proposal with the USAF, which included critical financial and operational information on the Company’s KC-135 program, the Company believes Boeing
breached the MOA due to the USAF’s reducing the number of aircraft in the request for proposal. As part of the Company’s teaming arrangement with Boeing on the existing KC-135 contract, the Company had already spent several million dollars
to meet Boeing’s new requirement that the Company adopt its KC-135 methodology. From July 2006 to September 2007, the Company spent another million dollars preparing its own proposal for the new KC-135 contract. The Company’s proposal for
the KC-135 PDM program was unsuccessful as the contract was awarded to Boeing in September 2007. The Company filed a protest with the U.S. Government Accountability Office (“GAO”) and the contract was stayed for 100 days pending the
results of the protest. On December 27, 2007 the GAO upheld in part the Company’s protest on the basis that the USAF failed to conduct a proper analysis of Boeing’s cost/price proposal for realism or potential risk. The USAF filed a
Request for Reconsideration on January 7, 2008, which was denied by the GAO on February 1, 2008. On March 3, 2008, the USAF advised the Company that in response to the recommendation by the GAO it had completed additional review,
documentation and a new award decision and that the Company’s proposal was not selected for award. Company officials attended a debriefing from the USAF on the new award decision on March 7, 2008. The Company filed a protest on the new
award decision on March 11, 2008 as to the USAF’s lack of proper evaluation to meet GAO recommendations and sudden post-award change of work scope under the contract recompete. If the protest does not result in a positive outcome for the
Company, it could have a material adverse effect on the Company’s financial condition and prospects, materially harm the Company’s business and impair the value of its Common Stock
The Company and Boeing continue to be teamed on the KC-135 Bridge Contract for which the USAF exercised a second six-month option to extend through
September 30, 2008. There are no assurances that the Company will receive more than the three aircraft already inducted during these extensions of the KC-135 Bridge Contract.
L-3 Communications, Integrated Systems Division U.S. Navy P-3 SMIP Award
In an agreement announced
in February 2005, L-3 Integrated Systems (“L-3 IS”), a division of L-3 Communications, Inc., announced that it had selected AAII-Birmingham, a wholly-owned subsidiary of the Company, as a partner to pursue and execute military aircraft
maintenance contracts. In July 2005, the L-3/AAII-Birmingham team received a contract award from the U. S. Navy to perform P-3 maintenance and modification work under the Sustainment Modification and Inspection Program (“SMIP”). The
contract is an indefinite delivery, indefinite quantity contract with the U.S. Navy Aviation Program Management Agency. The contract encompasses periodic maintenance and unscheduled or special repairs and modifications for Navy P-3 aircraft as
required. The AAII-Birmingham subcontract with L-3 IS was finalized during September 2005. A total of nine aircraft were inducted by the Company under this contract of which eight had been delivered as of December 31, 2007. The final P-3
aircraft was delivered in January 2008. The Company does not anticipate any additional aircraft being inducted under this contract. The Company has learned that the U.S. Navy intends to recompete the P-3 SMIP in 2008 and the Company intends to
submit a proposal to perform the work on that program, however, the Company can provide no assurances that its proposal will be accepted or with respect to how much work it would receive under this program if its proposal was accepted.
Defined Benefit Pension Plan
As a result of
unfavorable investment returns related to the Company’s Defined Benefit Pension Plan (the “Pension Plan”) during 2002 and 2001, coupled with an increase in actuarial liability resulting from lower interest rates, increased mortality
rates and the terms of the collective bargaining agreements entered into in 2005, the Pension Plan was under-funded by approximately $9.2 million and $18.8 million at December 31, 2007 and 2006, respectively (See Note 9 to the Consolidated
Financial Statements). Pursuant to the minimum funding requirements of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), the Company made contributions to the Pension Plan during 2007 and 2006 of approximately $9.1
million and $11.0 million, respectively. The Company does not have sufficient cash to make the required
3
contributions to the Pension Plan without negatively impacting the cash and liquidity of the Company by the end of 2008. Therefore, the Company applied on
February 29, 2008 to the Internal Revenue Service for a waiver of contributions to the Pension Plan through December 31, 2008. Without a waiver of contributions, the Company would be required to contribute approximately $3.7 million for
the 2007 plan year by September 15, 2008. Contribution calculations for the 2008 plan year have not been completed. The Company currently estimates that the quarterly payments for the 2008 plan year will be approximately $1.1 million to $1.2
million with the first quarterly payment due April 15, 2008.
As a result of the sale of PWAS, a separate defined benefit pension plan
was established for substantially all employees at the Dothan, Alabama facility. The purchaser of PWAS assumed the benefit obligations of the employees of PWAS and will receive a portion of the invested assets of the Pension Plan in accordance with
Internal Revenue Service regulations. As a result of the sale of PWAS, WAS assumed $4.3 million of unfunded pension obligations and $0.3 million of postretirement obligations.
C. INDUSTRY OUTLOOK
Military Maintenance and Modification Industry
The GSS focuses on the maintenance and modification of military transport, tanker and patrol aircraft airframes, primarily for U.S. military customers.
This market is one segment of a worldwide military maintenance, repair and overhaul (“MRO”) market that includes depot level maintenance for airframe, engines and components. Military aircraft operators continue to face pressure to lower
their operating costs. While the Department of Defense budget reflects a year-to-year increase in the Operations and Maintenance budget line, increased operational requirements and their associated costs are consuming an increasing share of the
budget. In the wake of tight military budgets, the Company believes that maintenance costs will be closely scrutinized by its customers.
While the aging of the military transport, tanker and patrol aircraft fleets, along with the high operational requirements and budget restrictions for the acquisition of new aircraft, have limited the impact on this market from many of the
effects of defense budget cuts, the Company has experienced a reduction in recent years in the number of KC-135, C-130 and P-3 aircraft being inducted due to the continuing late fiscal year funding shifts associated with U.S. Armed Forces activity
in Iraq. Furthermore, in the event that it fails in its protest of the USAF’s KC-135 contract award decision, the Company may entirely lose its KC-135 based business. See “Boeing Logistics Support Systems (“LSS”)/AAII-Birmingham
KC-135 PDM Partnership” above for additional information regarding the KC-135 contract. Military depots such as Warner Robins Air Logistics Center and Oklahoma City Air Logistics Center currently perform more than 75% of U.S. military airframe
MRO work. The Company believes that the balance of maintaining government-operated depot capabilities and dependence upon private-sector contractors will not change dramatically.
The GSS is participating in the re-compete of the Flexible Acquisition and Sustainment Tool (FAST) by the USAF. FAST is the current Warner Robins Air
Logistics Center program of choice for acquiring contractor support for the military depot. The re-compete, Future Flexible Acquisition and Sustainment Tool, or F2AST, is expected to be awarded in September 2008. GSS expects an increase in C-130
related work from this program. The GSS also expects to compete in additional work on P-3 aircraft in 2008. Approximately 39 P-3 aircraft have been grounded due to structural issues.
Space Systems
Space Vector Corporation (“SVC”), a subsidiary of the Company, primarily
focuses on providing launch vehicles and related subsystems and engineering services to various governmental agencies and commercial customers. SVC’s primary customers are various units of the Lockheed Martin Space Systems Company, in support
of the U.S. Missile Defense Agency Targets & Countermeasures Program.
D. PRINCIPAL PRODUCTS AND SERVICES
Aircraft Maintenance & Modification
Government Services Segment
The Company provides aircraft maintenance and modification services which include complete
airframe maintenance and repair, and custom airframe design and modification. A majority of the services are provided under multi-year programs for military customers. The Company’s military customers include the U.S. Armed Forces (the
“Armed Forces”) and certain foreign military services. The Company employs a large, skilled work force. The principal services performed are PDM, aircraft modifications, aircraft stripping and painting, rewiring, parts fabrication, and
engineering support.
4
The Company’s competitors for military aircraft maintenance contracts include Boeing LSS,
Lockheed-Martin Aircraft and Logistics Center, L-3 Communications, and various military depots. The Company considers its competitive strengths to be its emphasis on quality, its record of on-time delivery, its substantial capacity, its trained,
experienced and stable labor force, product support and systems integration capability, and a strong customer base.
The Company provides
aircraft maintenance and modification services either directly as a prime contractor or indirectly as a sub-contractor to the Armed Forces and other agencies of the U.S. Government, as well as foreign militaries. The majority of the aircraft that
the Company services are transports such as the C-130 “Hercules”, refueling aircraft such as the KC-135, and the P-3 patrol aircraft.
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 (Unscheduled Depot Level Maintenance, or “UDLM” aircraft) generally increase the value of each contract.
The principal services performed under military contracts are PDMs, 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.
At the onset of the PDM, the aircraft is generally stripped of paint and the entire airframe, including the ribs, skins and
wings, undergoes a thorough structural examination, which result in repairs to the airframe. The aircraft’s avionics 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 repairs. 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 has provided quality maintenance, integration, and modification work on a wide variety of military aircraft over the past 50 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 USAF awarded the Company a
KC-135 PDM contract for the PDM consisting of one base year and six option years. The Company completed work on the final aircraft inducted for PDM under this contract during 2003. 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. The contract provided for one base year and five option years. The USAF elected to not exercise the final two option years of this contract to Boeing
and instead awarded a “bridge” contract for government fiscal year 2006 and 2007 inductions followed by two six-month options, which could result in inductions through September 2008. This provided the USAF the necessary time to obtain
proposals for a new KC-135 PDM contract.
Boeing LSS and AAII-Birmingham agreed to continue as partners on the KC-135 PDM program during
August 2005. This agreement resulted from the USAF decision to re-compete the KC-135 PDM contract. In the spring of 2006, the USAF changed the best estimated quantity (“BEQ”) for the competition for the follow-on contract from 44 to 24
aircraft annually. With this reduction, Boeing purported to terminate the Boeing/AAII-Birmingham teaming agreement. The Company requested, and the government agreed, to open the competition to additional potential suppliers. AAII-Birmingham
developed an independent proposal which was submitted to the USAF in September 2006. A Request for a Final Proposal Revision was released by the USAF in mid-January 2007, to which the Company responded on February 23, 2007. The Company’s
proposal for the KC-135 PDM program was unsuccessful as the contract was awarded to Boeing in September 2007. The Company filed a protest with the GAO and the contract was stayed for 100 days pending the results of the protest. On December 27,
2007 the GAO upheld in part the Company’s protest on the basis that the USAF failed to conduct a proper analysis of Boeing’s cost/price proposal for realism or potential risk. The USAF filed a Request for Reconsideration on January 7,
2008, which was denied by the GAO on February 1, 2008. On March 3, 2008, the USAF advised the Company that in response to the recommendation by the GAO it had completed additional review, documentation and a new award decision and that the
Company’s proposal was not selected for award. Company officials attended a debriefing from the USAF on the new award decision on March 7, 2008. The Company filed a protest on the new award decision on March 11, 2008 as to the
USAF’s lack of proper evaluation to meet GAO recommendations and sudden post-award change of work scope under the contract recompete. If the protest does not result in a positive outcome for the Company, it could have a material adverse effect
on the Company’s financial condition and prospects, materially harm the Company’s business and impair the value of its Common Stock.
5
The Company and Boeing continue to be teamed on the KC-135 Bridge Contract for which the USAF exercised a
second six-month option to extend through September 30, 2008. There are no assurances that the Company will receive more than the three aircraft already inducted during these extensions of the KC-135 Bridge Contract.
The Company first performed PDM on the KC-135 in 1968 and has since processed over 3,400 such aircraft. As the USAF continues to upgrade and modernize
the KC-135 fleet to ensure its viability through 2040, the Company anticipates that the KC-135 PDM program will further expand to include additional upgrades. 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.
In September 2004, the GSS, as part of a
team with Lockheed Martin Aircraft and Logistics Center, received a contract award from the USAF to perform C-130 UDLM. The UDLM contract is an indefinite delivery, indefinite quantity contract with the Warner Robins Air Logistics Center. The
contract encompasses any repairs for USAF C-130s that are required outside of the scheduled depot maintenance visits.
In November 2005,
the GSS, as part of a team with L-3 IS, received a contract from the U.S. Navy to perform P-3 SMIP. This program is an indefinite delivery, indefinite contract with Naval Air Systems Command. The contract includes PDM, structural modifications, and
avionics upgrades. The AAII-Birmingham subcontract with L-3 IS was finalized during September 2005. A total of nine aircraft were inducted by the Company under this contract of which eight had been delivered as of December 31, 2007. The final
P-3 aircraft was delivered in January 2008. The Company does not anticipate any additional aircraft being inducted under this contract. The Company has learned that the U.S. Navy intends to recompete the P-3 SMIP in 2008 and the Company intends to
submit a proposal to perform the work on that program.
The GSS is located in Birmingham, Alabama in facilities that the Company believes
to be the largest for third-party maintenance in North America with approximately 1.9 million square feet under roof.
Manufacturing and Components Segment
SVC specializes in providing low cost launch services, vehicles, and related
subsystems to government, scientific and commercial customers. Over the years, SVC has supported the U.S. Missile Defense Agency, the USAF, the U.S. Navy, DARPA, NASA, and numerous commercial customers worldwide.
SVC has a reputation built on providing its customers with highly-responsive and cost-effective solutions. SVC provides design, manufacture, integration,
test and launch of sub-orbital and orbital vehicles, as well as payload integration, mission analysis and design. SVC also provides a wide variety of specialized structural, mechanical, avionics and pneumatic subsystems and components.
Since 1969, SVC has served as the prime contractor or subcontractor for 37 launches and supported over 300 domestic and international launches as a
major subsystems supplier. SVC has also supported numerous classified and unclassified interceptor and target missions for U.S. Missile Defense Agency testing.
The principal markets for SVC’s space and missile products are the U.S. Government and prime contractors to the U.S. Government. SVC’s competition ranges from small organizations for subsystems to major
corporations for the design, systems integration, and manufacture of spacecraft and launch vehicles. SVC’s quality system is registered to the ISO 9001 and AS9100 standards.
E. SALES
Foreign and Domestic Operations and Export Sales
All of the Company’s revenues during 2007 were generated at facilities in the United States and all of its assets were located in the United States.
The Company provides maintenance and modification services for foreign-based military aircraft at its U.S. facilities. The services and products sold at either of the Company’s U.S. locations or at subcontractor locations are payable in U.S.
dollars.
6
The following table presents the percentages of total revenue from continuing operations for each
principal product and service rendered for the last two fiscal years. There were no foreign sales during the last two fiscal years.
|
|
|
|
|
|
|
|
|
Products and Services Rendered
|
|
2007
|
|
|
2006
|
|
|
KC-135 Aircraft Maintenance and Modification
|
|
66
|
%
|
|
74
|
%
|
|
C-130 Aircraft Maintenance and Modification
|
|
10
|
%
|
|
5
|
%
|
|
P-3 Aircraft Maintenance and Modification
|
|
9
|
%
|
|
5
|
%
|
|
Other Aircraft Maintenance and Modification
|
|
4
|
%
|
|
4
|
%
|
|
MCS Revenue
|
|
11
|
%
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Foreign Sales
|
|
0
|
%
|
|
0
|
%
|
Major Customers
The following table presents the percentages of total revenue for the Company’s two largest customers for 2007 and 2006:
|
|
|
|
|
|
|
|
|
Customer
|
|
2007
|
|
|
2006
|
|
|
U.S. Government Subcontracts:
|
|
|
|
|
|
|
|
Boeing Corporation (KC-135 Aircraft)
|
|
66
|
%
|
|
74
|
%
|
|
Lockheed Martin/MTC (C-130 Aircraft)
|
|
10
|
%
|
|
5
|
%
|
F. BACKLOG
The following table presents the Company’s backlog from continuing operations at December 31, 2007 and 2006:
(In $Thousands)
|
|
|
|
|
|
|
|
|
Contract
|
|
2007
|
|
2006
|
|
KC-135 Aircraft
|
|
$
|
24,945
|
|
$
|
21,766
|
|
C-130 Aircraft
|
|
|
2,160
|
|
|
4,180
|
|
P-3 Aircraft
|
|
|
1,274
|
|
|
6,153
|
|
Space Vector
|
|
|
3,657
|
|
|
3,495
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
32,036
|
|
$
|
35,594
|
|
|
|
|
|
|
|
|
U.S. Government backlog represented 100% of the Company’s total backlog at December 31,
2007 and 2006. Total backlog decreased $3.6 million, or 10.0%, from 2006. This decrease is primarily the result of fewer C-130 and P-3 aircraft in work. The Company had six C-130 aircraft and one P-3 aircraft in work at December 31, 2007 versus
twelve C-130 aircraft and six P-3 aircraft at December 31, 2006. The Company had six KC-135 aircraft in work at December 31, 2007 and 2006.
G. RAW MATERIALS
The Company purchases a variety of raw materials, including aluminum sheets and plates, extrusion, alloy
steel, and forgings. There are a large number of suppliers for these materials and they are readily available on the open market. The Company has not entered into any long-term contracts with its suppliers of raw materials. The Company experienced
no significant shortages of raw material essential to its business during 2007 and does not anticipate any shortages of critical commodities in the near future. The Company faces some dependence on suppliers for certain types of parts involving
highly
7
technical processes; however, this risk has decreased in the past few years as additional high technology suppliers have entered the market.
The U.S. Government and certain prime contractors furnish a 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 and prime contractor furnished material to meet delivery schedules, and untimely receipt of such material could
adversely affect production schedules, and contract profitability.
H. ENVIRONMENTAL COMPLIANCE
In December 1997, the Company received an inspection report from the Environmental Protection Agency (“EPA”) documenting the results of an
inspection at the Birmingham, Alabama facility. The report cited various violations of environmental laws. The Company has taken actions to correct the items raised by the inspection. 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 and
remediate such contamination as necessary. During 1999, the Company drilled test wells and took samples under its Phase I Site Characterization Plan. These samples were forwarded to the EPA in 1999. A Phase II Site Characterization Plan (“Phase
II Plan”) was submitted to the EPA in 2001 upon receiving the agency’s response to the 1999 samples. The Phase II Plan was approved in January 2003, wells installed and favorable sampling events recorded. The Company compiled the
results and submitted a revised work plan to the agency which was accepted on July 30, 2004. The Media Clean-up Standard Report, as required, was submitted to the EPA in January 2005. It is the Company’s policy to accrue environmental
remediation costs when it is probable that such costs will be incurred and when a range of loss can be reasonably estimated. The Company reviews the status of all significant existing or potential environmental issues and adjusts its accruals as
necessary. The Company recorded liabilities of approximately $100,000 related to the Phase II Plan at both December 31, 2007 and 2006, which are included in accrued liabilities—other on the accompanying Consolidated Balance Sheets. The
Company anticipates the total costs of the Phase II Plan to be approximately $550,000, of which the Company had paid approximately $450,000 as of December 31, 2007. Management believes that the results of the Phase II Plan will not have a
material impact on the Company’s financial position or results of operations.
In March 2005, Pemco Aeroplex (now AAII-Birmingham)
received notice from the South Carolina Department of Health and Environmental Control (“DHEC”) that it was believed to be a potentially responsible party (“PRP”) with regard to contamination found on the Philips Service
Corporation (“PSC”) site located in Rock Hill, South Carolina. Pemco was listed as a PRP due to alleged use by the Company of contract services in disposal of hazardous substances. The Company joined a large group of existing PRP
notification recipients in retaining environmental counsel. The Company believes it is possible that paint chips were disposed of with this contractor beginning in 1997. PSC filed for bankruptcy in 2003. It is noted that contamination seems to be
primarily linked to a diesel fuel tank leak whereby over 200,000 gallons of diesel product was lost or released into the environment at the Rock Hill site. The database of manifests located on-site at PSC has been reviewed and the waste-in
compilations have been completed, but remain subject to revision. The PRP group continues to increase. Management believes that the Company’s potential liability will not exceed $50,000. The Company believes it is adequately insured in this
matter. Management believes that the resolution of the above matter will not have a material impact on the Company’s financial position or results of operations.
In addition, in conjunction with the sale of PWAS, WAS and the Company contracted for division of any environmental liability that may be required to meet applicable environmental remediation standards at the
Company’s former Dothan, Alabama facilities such that, in the event significant environmental remediation is required, WAS will bear the risk of the first $1.0 million dollars of such losses and the Company will bear the risk of any such losses
in excess of $1.0 million but not to exceed $2.0 million in the aggregate. As a result, WAS would be responsible for all losses in excess of $3.0 million. The funds required to meet the Company’s obligations have been escrowed for a five-year
period.
Furthermore, the Company is subject to various environmental regulations at the federal, state, and local levels, particularly
with respect to the stripping, cleaning, and painting of aircraft. Compliance with environmental regulations have not had, and are not expected to have, a material effect on the Company’s financial position or results of operations.
I. EMPLOYEES
On December 31, 2007, the
Company had 608 employees. Approximately 450 of these employees are covered under collective bargaining agreements primarily with the United Automobile, Aerospace, and Agricultural Implement Workers of America (“UAW”). Negotiations took
place in 2005 with the UAW and a new collective bargaining agreement was signed
8
that year. The Company’s agreement with the UAW, which represents the GSS workforce, was ratified for a new five-year period and will expire on
March 21, 2010.
Item 1A. Risk Factors
RISK FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
You should carefully consider the following risk factors, in addition to the other information contained in this report, in your evaluation of the
Company, and its financial condition. Numerous risk factors, including potentially the risk factors described in this section, 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.
Substantially all of the Company’s revenues from continuing operations in 2007 and 2006 were derived directly or indirectly from U.S. Government contracts or subcontracts. 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
|
|
|
•
|
|
Final cost audits in which the value of the Company’s contracts may be reduced and may take a substantial number of years to be completed.
|
In addition, substantially all of the Company’s backlog scheduled for delivery can be terminated at the convenience
of the U.S. Government since orders are often placed well before delivery, and its 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.
All of the Company’s Revenues is Derived From a Few
Contracts, and the Termination or Failure to Renew Any of Them Could Materially Harm the Company’s Business.
A small number of
contracts account for all of the Company’s revenues. Contracts with the U.S. Government comprised approximately 100% of the Company’s revenues from continuing operations during 2007 and 2006. The USAF KC-135 PDM program in and of itself
comprised 66% and 74% of the Company’s total revenues from continuing operations during 2007 and 2006, respectively. Termination of a contract, a dispute over compliance with contract terms, a disruption of any of these contracts (including
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 its business and impair the value of its Common Stock.
Boeing LSS and AAII-Birmingham agreed to continue as partners on the KC-135 PDM program during August 2005. This agreement resulted from the USAF
decision to re-compete the KC-135 PDM contract. In the spring of 2006, the USAF changed the best estimated quantity (“BEQ”) for the competition for the follow-on contract from 44 to 24 aircraft annually. With this reduction, Boeing
purported to terminate the Boeing/AAII-Birmingham teaming agreement. The Company requested, and the government agreed, to open the competition to additional potential suppliers. GSS developed an independent proposal which was submitted to the USAF
in September 2006. A Request for a Final Proposal Revision was released by the USAF in mid-January 2007, to which the Company responded on February 23, 2007. The Company’s proposal for the KC-135 PDM program was unsuccessful as the
contract was awarded to Boeing in September 2007. The Company filed a protest with the Government Accountability Office (“GAO”) and the contract was stayed for 100 days pending the results of the protest. On December 27, 2007 the GAO
upheld in part the Company’s protest on the basis that the USAF failed to conduct a proper analysis of Boeing’s cost/price proposal for realism or potential risk. The USAF filed a Request for Reconsideration on January 7, 2008, which
was denied by the GAO on February 1, 2008. On March 3, 2008, the USAF advised the Company that in response to the recommendation by the GAO it had completed additional review, documentation and a new award decision and that the
Company’s proposal was not selected for award. Company officials attended a debriefing from the USAF on the new award decision on March 7, 2008. The Company filed a protest on the new award decision on March 11, 2008 as to the
USAF’s lack of proper evaluation to meet GAO recommendations and sudden post-award change of work scope under the contract recompete. If the protest does not result in a positive outcome for the
9
Company, it could have a material effect on the Company’s financial condition and prospects, materially harm the Company’s business and impair the
value of its Common Stock.
The Company’s Trust for its Defined Benefit Plan is Under-Funded and Subject to Financial Market Forces.
The Company maintains a Defined Benefit Plan (the “Pension Plan”), which covers substantially all employees at its
Birmingham, Alabama facilities. The Pension Plan’s assets consist primarily of equity mutual funds, bond mutual funds, hedge funds, and cash equivalents. These assets are exposed to various risks, such as interest rate, credit, and overall
market volatility. At December 31, 2007, the Pension Plan was underfunded by $9.2 million. Changes in investment returns, discount assumptions, mortality assumptions or benefit obligations may have a significant impact on the funded status of
the Pension Plan. Unless and until the Pension Plan under-funding is remedied sufficiently, the making of minimum required contributions may adversely affect the Company’s liquidity and cash flow, which could materially harm its business and
impair the value of its Common Stock.
The Company does not have sufficient cash to make the required contributions to the Pension Plan
without negatively impacting the cash and liquidity of the Company by the end of 2008. Therefore, the Company applied on February 29, 2008 to the Internal Revenue Service for a waiver of contributions through December 31, 2008. Without a
waiver of contributions, the Company would be required to contribute approximately $3.7 million for the 2007 plan year by September 15, 2008. Contribution calculations for the 2008 plan year have not been completed. The Company currently
estimates that the quarterly payments for the 2008 plan year will be approximately $1.1 million to $1.2 million with the first quarterly payment due April 15, 2008. There are no assurances that the waiver will be granted. If the waiver is not
granted, the Company will not have sufficient internal resources to fund operations for the next twelve months and will have to pursue external financing which may or may not be available.
The Company May Need Additional Financing to Maintain its Business Which May or May Not Be Available
The Company is proposing and is expecting to propose on several programs in the next twelve months. If the Company is successful in winning some or all of
these programs, additional financing may be needed to fund working capital requirements related to the buildup of accounts receivable and inventory on the projects. If additional financing is needed, the Company’s recent negative results of
operations and the uncertainties regarding future contract awards will likely make it more difficult and expensive for the Company to raise additional capital that may be necessary to continue its operations.
In addition, the United States credit markets have recently experienced significant dislocations and liquidity disruptions which have caused the spreads
on prospective debt financings to widen considerably. These circumstances have materially impacted liquidity in the debt markets, making financing terms for borrowers less attractive, and in certain cases have resulted in the unavailability of
certain types of debt financing. Continued uncertainty in the credit markets may negatively impact the Company’s ability to access debt financing or to refinance existing debt maturities on favorable terms (or at all), which may negatively
affect its ability to fund current and future programs. A prolonged downturn in the credit markets may case the Company to seek alternative sources of potentially less attractive financing, and may require the Company to adjust its business plan
accordingly. These events in the credit markets have also had an adverse effect on other financial markets in the United States, which may make it more difficult or costly for the Company to raise capital through the issuance of common stock,
preferred stock or other equity securities. If the Company cannot raise adequate funds on acceptable terms, or at all, then its business could be materially harmed.
The Company’s Markets are Highly Competitive and Some 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. Some of the Company’s private-sector competitors are
larger and more established companies with strategic advantages, including greater financial resources and greater name recognition. The Company’s competition for military aircraft maintenance includes Boeing Aerospace Support Center,
Lockheed-Martin Aircraft and Logistics Center, L-3 Communications and various military depots. If the Company is unable to compete effectively against any of these entities it could materially harm its 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 is exposed to legal claims relating to the services it provides. The Company is currently a party to several legal proceedings, including
breach of contract claims and claims based on the Company’s employment practices. While the Company maintains insurance covering many risks from its business, the insurance may not cover all relevant claims or may not provide sufficient
coverage. If the Company’s insurance coverage does not cover all costs resulting from these claims, an
10
adverse determination on these claims 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 EPA for violations of these laws and
regulations, and it may be required to pay additional penalties or remediation costs 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 an operator 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.
In addition, in conjunction with the sale of Pemco World Air Services, Inc., WAS Aviation Services, Inc. (“WAS”) and the Company contracted for division of any environmental liability that may be required to
meet applicable remediation standards at the Company’s former Dothan, Alabama facilities such that, in the event significant environmental remediation is required, WAS will bear the risk of the first $1.0 million of such losses and the Company
will bear the risk of any such losses in excess of $1.0 million but not to exceed $2.0 million in the aggregate. As a result, WAS would be responsible for all losses in excess of $3.0 million. The funds required to meet the Company’s
obligations have been escrowed for a five-year period.
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 has been intense. Any failure to attract and retain qualified personnel could materially harm the Company’s business and impair the value of its Common Stock.
Substantial layoffs of personnel have occurred while awaiting the outcome of the protest of the USAF award of the new KC-135 PDM contract to Boeing. Failure to negotiate new collective bargaining agreements in the future with unionized employees
could materially harm the Company’s business.
The Amount and Terms of the Company’s Indebtedness Restrict the Company’s Financial and
Operational Flexibility.
On February 15, 2006, the Company entered into a Note Purchase Agreement with Silver Canyon Services,
Inc. (“Silver Canyon”), pursuant to which it issued to Silver Canyon a senior secured note in the principal amount of $5.0 million (the “Note”). The Note contains customary events of default. The payment of all outstanding
principal, interest and other amounts owing under the Note may be declared immediately due and payable upon the occurrence of an event of default as defined by Section 12 of the Note Purchase Agreement. The Company may be unable to locate other
lenders at comparable interest rates if an event of default occurs. On July 31, 2006, the Note was purchased by Special Value Bond Fund, LLC, which is managed by Tennenbaum Capital Partners, LLC, a related party of the Company. The Note
Purchase Agreement was amended on July 31, 2007 to change the maturity date of the Note to February 15, 2009.
The Company
has pledged substantially all of its assets to secure the debt under the Note with Special Value Bond Fund, LLC. If the amounts outstanding under the Note were accelerated, the lender could proceed against those assets. Any event of default,
therefore, could have a material adverse effect on 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 March 20, 2008, the
Company’s executive officers, directors, and affiliates, in the aggregate, beneficially owned approximately 57.4% of the outstanding Common Stock. As a result, these stockholders are able to significantly influence matters requiring stockholder
approval, including 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 other stockholders to approve transactions that they may deem to be in their best interest.
11
The Company Has Material Weaknesses in its Internal Control Over Financial Reporting.
During the audit of the 2006 financial statements, the Company’s independent registered public accounting firm identified a material weakness in
internal control over financial reporting due to the resignation of the Director of Corporate Accounting and Manager of Financial Reporting in December 2006 which created a lack of resources in the financial close and reporting process. In addition,
it was noted that the Chief Financial Officer had the ability to make journal entries although no entries were made during the year ended December 31, 2006. As a result of the lack of financial reporting resources, the Company’s
independent registered public accounting firm identified miscellaneous audit adjustments. The Company added temporary resources to compensate for the departure of the accounting personnel. The Company has continued to experience a significant level
of turnover of financial personnel in 2007 and has experienced a reduction of full-time finance employees. The Company has determined that the material weakness due to the lack of financial resources remains at December 31, 2007.
Although the Company has taken and is continuing to undertake a number of initiatives to address these material weaknesses, the existence of a material
weakness is an indication that there is more than a remote likelihood that a material misstatement of its financial statements will not be prevented or detected timely in the current or any future period. In addition, the Company may in the future
identify other material weaknesses or significant deficiencies in its internal control over financial reporting that it has not discovered to date.
The
Company is Unable to Compete with the Pemco World Air Services, Inc. Business for Three Years from the Date of the Closing.
The stock
purchase agreement under which the Company sold PWAS includes a non-competition obligation which lasts for a period of three years from the closing of the sale. Under this provision, the Company is not able to engage in the business sold to WAS,
except with respect to military customers, for three years following the closing, which occurred on September 19, 2007. Additionally, the Company is not able to recruit or solicit employees of PWAS to terminate their employment for a one year
period following the September 19, 2007 closing. These limitations on the scope of the Company’s business operations may adversely effect its business prospects, operating results and financial condition.
The Company is Obligated to Indemnify WAS under Certain Circumstances.
While the representations and warranties in the stock purchase agreement under which the Company sold PWAS did not survive the closing of the sale, the Company agreed to a limited indemnity for any and all losses
incurred by WAS resulting from:
|
|
•
|
|
fraud with respect to any representation or warranty made by the Company or PWAS in the stock purchase agreement;
|
|
|
•
|
|
certain tax liabilities;
|
|
|
•
|
|
certain potential environmental remediation costs; and
|
|
|
•
|
|
losses resulting from the litigation between PWAS and GE Capital Aviation Services, Inc.
|
In the event that any such indemnification obligations do arise and are material, this may adversely effect the Company’s business prospects,
operating results and financial condition.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Following is a list of the Company’s properties.
Birmingham, Alabama
The GSS, as well as the
Company’s corporate offices, are located at the Birmingham International Airport, in Birmingham, Alabama. The Birmingham facility is located on approximately 190 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
12
shipping and receiving warehouse, a wing rehabilitation shop, a sheet metal shop, and a 55,000 square foot general office building that 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 that supplements the FAA-managed municipal air control tower for
handling aircraft on the Company’s property and a fire-fighting unit that supplements fire-fighting equipment operated by both the City of Birmingham and the Alabama Air National Guard. The Company is party to a Mutual Aid Agreement with
Birmingham Fire and Rescue and the Alabama Air National Guard for fire prevention and hazardous materials incident response capabilities.
The Birmingham facility is a complete aircraft modification and maintenance center. The facility is an approved FAA and JAA (Europe) repair station and maintains a Department of Defense “SECRET” security clearance.
The facility is leased from the Birmingham Airport Authority. The lease expires September 30, 2019.
Chatsworth, California
SVC is located in Chatsworth,
California. SVC’s facilities consist of two industrial buildings of approximately 44,000 square feet. One building houses production and administrative functions and the second building houses the engineering staff. SVC occupies these buildings
under two-year lease agreements expiring in 2009, with renewal options.
Item 3. Legal Proceedings
Breach of Contract Lawsuits
On January 16, 2004, the Company filed a complaint in the Circuit Court of Dale County, Alabama against GE Capital Aviation Services, Inc.
(“GECAS”) for monies owed for modification and maintenance services provided on nine 737-300 aircraft, all of which were re-delivered to GECAS during 2003 and are in service. On January 20, 2004, the Company received service of a suit
filed against the Company’s former subsidiary, Pemco World Air Services, Inc. in New York state court, claiming breach of contract with regard to two of the aircraft re-delivered. On March 5, 2004, the Company filed a motion to dismiss the
claim filed in the New York state court, which was denied. On March 24, 2004, the Circuit Court of Dale County, Alabama denied a motion filed by GECAS to dismiss or stay the proceedings. GECAS has subsequently paid in full charges owed on four
of the nine aircraft. The New York Court ordered mediation in the matter. Mediation took place on October 6, 2004, but was unsuccessful in bringing resolution. The case was again mediated on October 6, 2006 without success. On
October 16, 2006, the Court granted the Company partial summary judgment as to two of the five GECAS counterclaims. Discovery was completed on September 15, 2007, and trial has been set for late 2008. Management believes that the results
of the counterclaims by GECAS will not have a material impact on the Company’s financial position or results of operations.
Employment Lawsuits
Various claims alleging employment discrimination, including race, sex, disability, and age have been made against the Company and its
subsidiaries by current and former employees at its Birmingham, Alabama facilities in proceedings before the EEOC and before state and federal courts in Alabama. Workers’ compensation claims brought by employees are also pending in Alabama
state court. The Company believes that none of these claims, individually or in the aggregate, is material to the Company 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. Management believes that the results of these claims will not have a material impact on the Company’s financial position or results of operations.
Other Legal Proceedings
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 position or results of operations. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. If an
unfavorable ruling were to occur, there exists the possibility of a material adverse impact on the Company’s financial position or results of operations for the period in which the ruling occurs, or future periods.
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 2007.
13
PART II
Item 5. Market for Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s Common Stock trades on the Nasdaq Global Market under the symbol “AAII.” 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Quarter End
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
March 31
|
|
$
|
9.00
|
|
$
|
6.82
|
|
$
|
22.00
|
|
$
|
17.15
|
|
June 30
|
|
|
10.95
|
|
|
7.56
|
|
|
18.24
|
|
|
10.43
|
|
September 30
|
|
|
12.00
|
|
|
4.00
|
|
|
12.58
|
|
|
6.70
|
|
December 31
|
|
|
6.39
|
|
|
1.75
|
|
|
10.20
|
|
|
6.21
|
On March 20, 2008, there were 4,542,348 shares of Common Stock issued and 4,128,950 shares of
Common Stock outstanding held by approximately 108 owners of record and 897 beneficial owners.
The Company has never paid cash dividends
on its Common Stock and currently intends to continue that policy indefinitely. The Company’s Senior Secured Note restricts its ability to pay dividends.
The last reported sales price of the Company’s Common Stock on March 20, 2008 was $2.56.
14
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
INTRODUCTION
The following discussion of the Company’s financial condition and results of operations should be read in conjunction with the
Company’s consolidated financial statements and notes thereto included herein as Item 8. This discussion contains forward-looking statements. Refer to “FORWARD-LOOKING STATEMENTS-CAUTIONARY LANGUAGE” on page i and “RISK
FACTORS THAT MAY AFFECT FUTURE PERFORMANCE” beginning on page 9, for a discussion of the uncertainties, risks, and assumptions associated with these statements.
EXECUTIVE OVERVIEW
The Company operates primarily in the aerospace and defense industry and its
principal business is providing aircraft maintenance and modification services to military customers. The Company’s services are provided under traditional contracting agreements that include fixed-price, time and material, cost plus and
variations of such arrangements. The Company’s revenue and cash flows are derived primarily from services provided under these contracts, and cash flows include the receipt of milestone or progress payments under certain contracts.
During the third quarter of 2007, the Company sold its Pemco World Air Services, Inc. (“PWAS”) subsidiary to WAS Aviation Services, Inc., an
affiliate of Sun Capital (“WAS”). The Company recorded a gain of $11.4 million, net of tax, related to the sale of PWAS. The sale of PWAS allowed the Company to pay off its revolving credit facility, treasury stock term loan and bank term
loan (“the Bank Debt”) with Wachovia Bank and Compass Bank. In addition to eliminating the Bank Debt, the sale provided approximately $8.0 million of cash for future working capital needs.
As part of the transaction in which the Company sold PWAS to WAS, the Company changed its name from Pemco Aviation Group, Inc. to Alabama Aircraft
Industries, Inc. PWAS historically comprised substantially all of the CSS. The historical financial results of PWAS have been presented in the Company’s consolidated financial statements as discontinued operations.
On September 30, 2006, the Company sold the assets and operations of Pemco Engineers, Inc., a wholly-owned subsidiary of the Company (“Pemco
Engineers”) which, are presented in the consolidated financial statements as discontinued operations, Pemco Engineers was previously included in the MCS segment.
As discussed in detail in Note 10 to the Company’s consolidated financial statements, the Company’s financial condition and prospects have been adversely impacted by several extraordinary events in
connection with the U.S. Air Force (“USAF”) KC-135 PDM program as a subcontractor to The Boeing Company and the related recompetition for the new KC-135 contract award. In summary, from May 2005 through June 2006, the Company worked in
cooperation with Boeing to submit a proposal on the new KC-135 contract under a Memorandum of Agreement with Boeing (“MOA”). After filing an initial proposal with the USAF, which included critical financial and operational information on
the Company’s KC-135 program, the Company believes Boeing breached the MOA due to the USAF’s reducing the number of aircraft in the request for proposal. As part of the Company’s teaming arrangement with Boeing on the existing KC-135
contract, the Company had already spent several million dollars to meet Boeing’s new requirement that the Company adopt its KC-135 methodology. The Company requested, and the government agreed, to open the competition to additional potential
suppliers. AAII-Birmingham developed an independent proposal which was submitted to the USAF in September 2006. A Request for a Final Proposal Revision was released by the USAF in mid-January 2007, to which the Company responded on February 23,
2007. The Company’s proposal for the KC-135 PDM program was unsuccessful as the contract was awarded to Boeing in September 2007. The Company filed a protest with the Government Accountability Office (“GAO”) and the contract was
stayed for 100 days pending the results of the protest. On December 27, 2007 the GAO upheld in part the Company’s protest on the basis that the USAF failed to conduct a proper analysis of Boeing’s cost/price proposal for realism or
potential risk. The USAF filed a Request for Reconsideration on January 7, 2008, which was denied by the GAO on February 1, 2008. On March 3, 2008, the USAF advised the Company that in response to the recommendation by the GAO it had
completed additional review, documentation and a new award decision and that the Company’s proposal was not selected for award. Company officials attended a debriefing from the USAF on the new award decision on March 7, 2008. The Company
filed a protest on the new award decision on March 11, 2008 as to the USAF’s lack of proper evaluation to meet GAO recommendations and sudden post-award change of work scope under the contract recompete.
15
In order to adjust for and mitigate the effects of the past events discussed above, the Company has taken
several significant steps. On November 6, 2007 the Company officially qualified with the Small Business Administration as a small business for military contracts. The Company believes that this will provide vital opportunities for defense
contracts which were previously unavailable. Management has also taken significant steps to reduce costs including headcount reductions, administrative cost reductions, freezing the defined benefit pension plan for salaried employees as of
December 31, 2007, eliminating salary increases for 2008 and restructuring the medical and dental benefit plans. Negotiations are in process with the union for similar cost reductions. In addition, the Board of Directors, in a unified move to
support the Company, has agreed to a 50% reduction in all Board fees for 2008. If the new protest does not result in a positive outcome for the Company, it would have a material adverse effect on the Company’s financial condition and prospects,
materially harm the Company’s business and impair the value of its Common Stock. The Company and Boeing continue to be teamed on the KC-135 Bridge Contract for which the USAF exercised a second six-month option to extend through September 30,
2008. There are no assurances that the Company will receive more than the three aircraft already inducted during these extensions of the KC-135 Bridge Contract.
The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. As a result of the awarding of the KC-135 contract to The Boeing Company and the
lack of other long-term contracts in conjunction with the sale of PWAS, which generated significant pretax income during 2007 and 2006, there is insufficient evidence for the Company to conclude as of December 31, 2007 that it is more likely
than not that the deferred income tax assets recorded by the Company would be realized. During 2007, the Company recorded a $9.7 million valuation allowance against the deferred income tax asset accounts which substantially increased the reported
income tax expense in 2007.
RESULTS OF OPERATIONS
Twelve months ended December 31, 2007 versus twelve months ended December 31, 2006
The table below presents major
highlights from the years ended December 31, 2007 and 2006 excluding the results of discontinued operations, except for net income.
(In $Millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
% Change
|
|
|
Revenue
|
|
$
|
72.8
|
|
|
$
|
97.6
|
|
|
(25.4
|
)%
|
|
Gross profit
|
|
|
5.0
|
|
|
|
12.0
|
|
|
(58.3
|
)%
|
|
Operating loss from continuing operations
|
|
|
(6.8
|
)
|
|
|
(2.1
|
)
|
|
(223.8
|
)%
|
|
Loss from continuing operations before taxes
|
|
|
(7.5
|
)
|
|
|
(2.7
|
)
|
|
(177.8
|
)%
|
|
Loss from continuing operations
|
|
|
(13.7
|
)
|
|
|
(1.7
|
)
|
|
(705.9
|
)%
|
|
Net income
|
|
|
1.0
|
|
|
|
0.5
|
|
|
100.0
|
%
|
|
EBITDA from continuing operations
|
|
|
(4.9
|
)
|
|
|
(0.0
|
)
|
|
—
|
|
The Company defines operating loss from continuing operations, as shown in the above table, as
revenue less cost of sales, less selling, general, and administrative expenses.
16
EBITDA from continuing operations for the years ended December 31, 2007 and 2006 was calculated
using the following approach:
(In $Millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Loss from continuing operations
|
|
$
|
(13.7
|
)
|
|
$
|
(1.7
|
)
|
|
Interest expense
|
|
|
0.6
|
|
|
|
0.7
|
|
|
Taxes
|
|
|
6.3
|
|
|
|
(1.0
|
)
|
|
Depreciation and Amortization
|
|
|
1.9
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA from continuing operations
|
|
$
|
(4.9
|
)
|
|
$
|
(0.0
|
)
|
|
|
|
|
|
|
|
|
|
|
The Company presents Earnings (Loss) Before Interest, Taxes, Depreciation and Amortization, more
commonly referred to as EBITDA, because its management uses the measure to evaluate the Company’s performance and to allocate resources. In addition, the Company believes EBITDA is an important gauge used by commercial banks, investment banks,
other financial institutions, and current and potential investors, to approximate its cash generation capability. Accordingly, the Company has included EBITDA as part of this report. The Depreciation and Amortization amounts used in the EBITDA
calculation are those that were recorded in the Consolidated Statements of Operations in this report. Due to the long-term nature of much of the Company’s business, the Depreciation and Amortization amounts recorded in the Consolidated
Statements of Operations will not directly match the change in Accumulated Depreciation and Amortization reflected on the Company’s Consolidated Balance Sheets. This is a result of the capitalization of depreciation expense on long-term
contracts into Work-in-Process. EBITDA is not a measure of financial performance under generally accepted accounting principles in the United States and should not be considered as a substitute for or superior to other measures of financial
performance reported in accordance with GAAP. EBITDA as presented herein may not be comparable to similarly titled measures reported by other companies.
The table below presents the highlights of revenue from continuing operations by operating segment for the years ended December 31, 2007 and 2006.
(In $Millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
|
% Change
|
|
|
GSS
|
|
$
|
65.1
|
|
$
|
85.5
|
|
$
|
(20.4
|
)
|
|
(23.9
|
)%
|
|
MCS
|
|
|
7.7
|
|
|
12.1
|
|
|
(4.4
|
)
|
|
(36.4
|
)%
|
|
Eliminations
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
72.8
|
|
$
|
97.6
|
|
$
|
(24.8
|
)
|
|
(25.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The $20.4 million decrease in revenue at the GSS was primarily due to decreases in deliveries of
KC-135 aircraft, offset by increases in C-130 and P-3 deliveries. The KC-135 PDM program, which accounted for 66% of GSS revenue in 2007, allows for the Company to provide services on PDM aircraft, drop-in aircraft, and other aircraft related areas.
Revenue from the KC-135 program decreased $24.2 million during 2007. During 2006, the Company delivered 19 PDM aircraft and two drop-ins, compared to 12 PDM aircraft and no drop-ins during 2007. Year-over-year the Company realized an increase in
revenue per PDM aircraft delivered in 2007 due to higher pricing on each aircraft delivered. Partially offsetting the decrease in GSS revenue was an increase in revenue of $2.6 million under contracts to perform non-routine maintenance work on other
aircraft, primarily C-130 aircraft. Revenue increased as a result of more C-130 aircraft in process during 2007 which increased the amount of non-routine services provided to the program. The Company delivered no U.S. Coast Guard (“USCG”)
C-130 aircraft during 2007 compared to two USCG C-130s during 2006 for depot level maintenance. Revenue from the USCG program decreased $3.4 million due to this decrease in deliveries. Revenue for the P-3 program increased $1.8 million in 2007 due
to the delivery of five P-3s during 2007 versus delivery of three P-3s during 2006.
17
Cost of sales decreased $17.8 million to $67.8 million in 2007 from $85.6 million in 2006. Cost of sales
decreased at a slightly lower rate than revenue because of the fixed expenses related to operating the Birmingham, Alabama facility. Cost of sales was adversely affected in 2007 by $2.6 million of losses on the P-3 contract, $1.7 million of losses
on the USAF C-130 contract and a charge of $0.8 million related to freezing the defined benefit pension plan for salaried employees. Cost of sales was adversely affected in 2006 by $3.7 million of losses on the P-3 contract, $1.3 million of losses
on the USAF C-130 contract and $0.5 million of losses on the USCG contract.
Gross profit at GSS decreased from $7.0 million to $3.7
million due to decreased deliveries of KC-135 aircraft. Overall, the Company’s gross profit as a percentage of revenue decreased to 5.7% in 2007 from 8.2% in 2006. The decrease in gross profit as a percentage of revenue in 2007 is primarily due
to the decline in revenue from the KC-135 program.
Selling, general and administrative (“SG&A”) expenses decreased $2.2
million, or 15.6%, to $11.9 million in 2007 from $14.1 million in 2006. As a percent of revenue from continuing operations, SG&A expenses increased to 16.3% in 2007 from 14.4% in 2006. The increase in SG&A expense as a percent of revenue
from continuing operations is primarily attributable to the reduction in KC-135 revenue which was offset by cost reductions to improve the profitability of the Company.
During 2007, the Company recorded income tax expense for continuing operations of $6.3 million. Income tax expense for 2007 was significantly affected by a valuation allowance on deferred income tax assets of $9.7
million which was recorded due to the uncertainty of future taxable income as a result of the lack of significant long-term contracts. During 2006, the Company recorded income tax benefits at an effective rate of 36.0%. The Company’s effective
tax rate is impacted by the allocation of taxable income, losses or gains between Alabama and California.
Revenue at MCS decreased $4.4
million during 2007 versus 2006 primarily due to the termination of a large missile program in late 2006. In addition, revenue in 2007 was adversely affected because revenue on work performed on several of the larger MCS programs has been deferred
due to the timing of revenue recognition milestones, the timing of receiving additional funding on projects and the timing of award fee recognition. Gross profit for the MCS decreased from $4.6 million in 2006 to $1.2 million in 2007 for these same
reasons.
Income from Discontinued Operations
Income from discontinued operations, net of tax, increased to $3.2 million in 2007 from $2.3 million in 2006. The CSS experienced large growth in cargo conversion revenue and maintenance, repair and overhaul revenue. The increase in volume
of business increased capacity utilization at the Company’s former Dothan, Alabama facility, supplemented by work performed in mainland China. The improvements in volume and utilization led to lower cost and increased profitability on all lines
of work.
Consolidated Unallocated Corporate SG&A Expenses, Interest Expense and Income Taxes
During 2007, the Company incurred $1.9 million of corporate SG&A expenses that previously had been allocated to PWAS for segment reporting purposes.
During 2006, the Company incurred $2.5 million of corporate SG&A expenses that previously had been allocated to PWAS and Pemco Engineers for segment reporting purposes. Under accounting principles generally accepted in United States, these
allocated amounts are recorded in continuing operations rather than discontinued operations.
Total interest expense, including amounts in
discontinued operations ($2.3 million), increased to $2.8 million in 2007 from $2.3 million in 2006. Interest expense increased primarily as a result of higher rates on variable interest rate loans resulting from amending existing credit agreements
and additional debt incurred on February 15, 2006.
Gain on Sale of Discontinued Operations
The Company recorded a pretax gain of $17.6 million for the sale of PWAS in the third quarter of 2007. The Company recorded $6.2 million in tax expense on
the gain due to differences in the gain on the sale for financial reporting purposes and income tax reporting purposes.
18
LIQUIDITY AND CAPITAL RESOURCES
General
The table below presents the major indicators of financial condition and liquidity.
(In $Thousands, except ratios)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2007
|
|
|
December 31,
2006
|
|
|
Change
|
|
|
Cash
|
|
$
|
8,750
|
|
|
$
|
23
|
|
|
$
|
8,727
|
|
|
Working Capital
|
|
$
|
16,193
|
|
|
$
|
(8,989
|
)
|
|
$
|
25,182
|
|
|
Current portion of long-term debt and capital lease obligations
|
|
$
|
80
|
|
|
$
|
28,760
|
|
|
$
|
(28,680
|
)
|
|
Long-term debt and capital lease obligations
|
|
$
|
5,002
|
|
|
$
|
1,786
|
|
|
$
|
3,216
|
|
|
Stockholders’ equity
|
|
$
|
16,326
|
|
|
$
|
7,380
|
|
|
$
|
8,946
|
|
|
Debt to equity ratio
|
|
|
0.31
|
x
|
|
|
4.14
|
x
|
|
|
(3.83
|
x)
|
Working Capital
The Company has no current arrangements with respect to sources of additional financing, and its negative results of operations in prior years and the current lack of long-term contracts, exacerbated by the current
state of the credit markets, will likely make it more difficult and expensive for the Company to raise additional capital that may be necessary to continue its operations.
The Company’s primary sources of liquidity and capital resources include cash-on-hand, cash flows from operations (primarily from collection of
accounts receivables and conversion of work-in-process inventory to cash) and potential borrowing capability through lenders. Principal factors affecting the Company’s liquidity and capital resources position include, but are not limited to,
the following: results of operations; the results of the Company’s protest of the U.S. Air Force (“USAF”) award of the KC-135 contract to The Boeing Company; collection of accounts receivable; funding requirements associated with the
Company’s defined benefit pension plan; settlements of various claims; and potential divestitures. The Company anticipates that cash-on-hand will be sufficient to fund operations, make minimal capital expenditures and make scheduled payments on
debt obligations for the next twelve months. However, the Company is proposing and is expecting to propose on several programs in the next twelve months. If the Company is successful in winning some or all of these programs, additional financing may
be needed to fund working capital requirements related to the buildup of accounts receivable and inventory on the projects. Moreover, the Company does not have sufficient cash to make the required contributions to its defined benefit pension plan
without negatively impacting the cash and liquidity of the Company by the end of 2008. Therefore, the Company applied on February 29, 2008 to the Internal Revenue Service for a waiver of contributions to its defined benefit pension plan through
December 31, 2008. Without a waiver of contributions, the Company would be required to contribute approximately $3.7 million for the 2007 plan year by September 15, 2008. Contribution calculations for the 2008 plan year have not been
completed. The Company currently estimates that the quarterly payments for the 2008 plan year will be approximately $1.1 million to $1.2 million with the first quarterly payment due April 15, 2008. Several events could significantly impact the
generation, availability and uses of cash over the next twelve months including:
|
|
•
|
|
whether the Company is successful in its protest of the USAF award of the KC-135 contract to The Boeing Company;
|
|
|
•
|
|
whether the Company is granted a waiver of contributions to its defined benefit pension plan through December 31, 2008;
|
|
|
•
|
|
whether the Company sells its subsidiary, Space Vector Corporation, in 2008;
|
|
|
•
|
|
whether the Company is able to win additional contracts, including in part as a result of qualifying with the Small Business Administration as a small business
under certain North American Industry Classification System codes; and
|
|
|
•
|
|
whether the Company is able to get additional funding from lenders to fund working capital increases needed if additional contracts are won.
|
19
There are no assurances that the Company will be successful in any of these respects and negative outcomes could
adversely impact the Company’s ability to meet financial obligations as they become due.
As discussed in detail in Note 10 to these
consolidated financial statements, the Company’s financial condition has been impacted by several extraordinary events in connection with the U.S. Air Force KC-135 PDM program as a subcontractor to Boeing Corporation and the related
recompetition for the new KC-135 contract award. In summary, from May 2005 through June 2006, the Company worked in cooperation with Boeing to submit a proposal on the new KC-135 contract under a Memorandum of Agreement with Boeing
(“MOA”). After filing an initial proposal with the U.S. Air Force, which included critical financial and operational information on the Company’s KC-135 program, the Company believes Boeing breached the MOA due to the USAF’s
reducing the number of aircraft in the request for proposal. As part of the Company’s teaming arrangement with Boeing on the existing KC-135 contract, the Company had already spent several million dollars to meet Boeing’s new requirement
that the Company adopt its KC-135 methodology. From July 2006 to September 2007, the Company spent another million dollars preparing its own proposal for the new KC-135 contract. The Company’s proposal for the KC-135 PDM program was
unsuccessful as the contract was awarded to Boeing in September 2007. The Company filed a protest with the GAO and the contract was stayed for 100 days pending the results of the protest. On December 27, 2007 the GAO upheld in part the
Company’s protest on the basis that the USAF failed to conduct a proper analysis of Boeing’s cost/price proposal for realism or potential risk. The USAF filed a Request for Reconsideration on January 7, 2008, which was denied by the
GAO on February 1, 2008. On March 3, 2008, the USAF advised the Company that in response to the recommendation by the GAO it had completed additional review, documentation and a new award decision and that the Company’s proposal was
not selected for award. Company officials attended a debriefing from the USAF on the new award decision on March 7, 2008. The Company filed a protest on the new award decision on March 11, 2008 as to the USAF’s lack of proper
evaluation to meet GAO recommendations and sudden post-award change of work scope under the contract recompete. The Company has expended substantial financial resources in connection with these events.
In order to adjust for and mitigate the effects of the events discussed above, the Company has taken several significant steps. On November 6, 2007
the Company officially qualified as a small business for military contracts. The Company believes that this will provide vital opportunities for defense contracts which were previously unavailable. Management has taken significant steps to reduce
costs including headcount reductions, administrative cost reductions, freezing the pension plan for salaried employees as of December 31, 2007, eliminating salary increases for 2008 and restructuring the medical and dental benefit plans.
Negotiations are moving forward with the union for similar cost reductions. In addition, the Board of Directors, in a unified move to support the Company, has agreed to a 50% reduction in all Board fees in 2008.
Cash Flow Overview
Operating activities provided
$3.5 million during 2007, compared to using $2.7 million during 2006. Cash payments to fund the Company’s defined benefit plan exceeded pension expense by $3.4 million and $6.0 million in 2007 and 2006, respectively. Cash of $0.6 million and
$2.0 million was used during 2007 and 2006, respectively, for capital expenditures. The sale of PWAS generated $31.4 million of cash during 2007. Financing activities used $25.5 million in 2007 and provided $3.1 million in 2006. The Company used a
portion of the proceeds from the sale of PWAS to pay off $24.1 million in long-term debt and the revolving credit facility The issuance of additional debt generated $5.0 million of cash in 2006.
Future Capital Requirements
The Company’s
potential capital requirements over the next twelve months include: required minimum funding of the Pension Plan (noted below), interest payments of long-term debt, the cost of protesting the award of the KC-135 PDM contract to Boeing, and working
capital required to fund increases in accounts receivable, inventory and equipment if GSS is awarded new contracts.
The Company maintains
a Defined Benefit Pension Plan (the “Pension Plan”), which covers substantially all employees at its Birmingham, Alabama facility. The Pension Plan’s assets consist primarily of equity mutual funds, bond mutual funds, hedge funds and
cash equivalents. As a result of unfavorable investment returns related to the Company’s Defined Benefit Pension Plan (the “Pension Plan”) during 2002 and 2001, coupled with an increase in actuarial liability resulting from lower
interest rates, increased mortality rates and the terms of the collective bargaining agreements entered into in 2005, the Pension Plan was under-funded by approximately $9.2 million and $18.8 million at December 31, 2007 and 2006, respectively
(See Note 9 to the Consolidated Financial Statements). Pursuant to the minimum funding requirements of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), the Company made contributions to the Pension Plan during
2007 and 2006 of approximately $9.1 million and $11.0 million, respectively.
20
The Company does not have sufficient cash to make the required contributions to its defined benefit
pension plan without negatively impacting the cash and liquidity of the Company by the end of 2008. Therefore, the Company applied on February 29, 2008 to the Internal Revenue Service for a waiver of contributions through December 31,
2008. Without a waiver of contributions, the Company would be required to contribute approximately $3.7 million for the 2007 plan year by September 15, 2008. Contribution calculations for the 2008 plan year have not been completed. The Company
currently estimates that the quarterly payments for the 2008 plan year will be approximately $1.1 million to $1.2 million with the first quarterly payment due April 15, 2008. There are no assurances that the waiver will be granted. If the
waiver is not granted, the Company will not have sufficient internal resources to fund operations for the next twelve months and will have to pursue external financing which may or may not be available.
Senior Secured Debt
On February 15, 2006, the
Company entered into a Note Purchase Agreement with Silver Canyon Services, Inc. (“Silver Canyon”) pursuant to which the Company issued to Silver Canyon a senior secured Note in the principal amount of $5.0 million (the “Note”).
The principal amount of the Note was to become due and payable on the earlier of (1) February 15, 2007, or (2) the date on which amounts outstanding under the Company’s Revolving Credit Facility become due and payable. The Note
accrues interest at an annual rate of 15%, which is payable quarterly in arrears commencing March 1, 2006. The Company may, at its election, redeem the Note at a price equal to 100% of the principal amount then outstanding, together with
accrued and unpaid interest thereon. The Note contains customary events of default and the payment of all outstanding principal, interest and other amounts owed under the Note may be declared immediately due and payable by the lender upon the
occurrence of an event of default, subject to certain standstill provisions. On February 15, 2007, the Company entered into an Amended and Restated Senior Secured Note with Special Value Bond Fund, LLC, pursuant to which the maturity date for
the principal amount of the Note was extended to the earlier of (1) February 15, 2008, or (2) the date on which amounts outstanding under the Company’s revolving credit facility become due and payable. In addition, the Company
executed Amendment No. 1 to the Note Purchase Agreement with Special Value Bond Fund, LLC, to confirm a revised maturity date for the Note. On July 31, 2007, the Company entered into an Amended and Restated Senior Secured Note with Special
Value Bond Fund, LLC, in which the maturity date for the principal amount of the Note was extended until February 15, 2009. All other terms and conditions of the Note and the Note Purchase Agreement remain the same.
Funding Sources
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 using existing cash and cash equivalents, the incurrence
of additional indebtedness through secured or unsecured borrowings and the reinvestment of proceeds from the potential disposition of Space Vector. Additional capital may not be available at all, or may not be available on terms favorable
to the Company. While not planned, any additional issuance of equity or equity-linked securities through the sale of equity or debt securities through public offerings or private placements 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.
The aircraft services industry has generally been in a consolidation phase. As a consequence, the Company receives and sometimes
initiates inquiries with respect to corporate combinations. However, there can be no assurances that the Company will be party to any such transactions in the future.
Contractual Obligations
The following table sets forth information with respect to the maturities of
the Company’s contractual obligations as of December 31, 2007.
21
(In $ Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2009 - 2010
|
|
2011 - 2012
|
|
After 2012
|
|
Total
|
|
Long-term debt and related interest
|
|
$
|
750
|
|
$
|
5,175
|
|
$
|
—
|
|
$
|
—
|
|
$
|
5,925
|
|
Capital lease obligations
|
|
|
80
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
82
|
|
Operating leases
|
|
|
884
|
|
|
814
|
|
|
334
|
|
|
1,077
|
|
|
3,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,714
|
|
$
|
5,991
|
|
$
|
334
|
|
$
|
1,077
|
|
$
|
9,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company’s manufacturing and service operations are performed principally on leased
premises owned by municipal units or authorities. The principal lease for the GSS expires on September 30, 2019. The principal leases for the MCS expire on August 31, 2009, with renewal options. The GSS lease provides for basic rentals,
plus contingent rentals based upon a graduated percentage of sales. The Company also leases vehicles and equipment under various operating and capital leasing arrangements.
The Company has future obligations with regard to the Pension Plan and its postretirement plans (“Plans”). Future contributions to the Plans
are not fixed and are subject to numerous variables. The Company does not have sufficient cash to make the required contributions to the Pension Plan without adversely impacting the cash and liquidity of the Company by the end of 2008. Therefore,
the Company applied on February 29, 2008 to the Internal Revenue Service for a waiver of contributions through December 31, 2008. Without a waiver of contributions, the Company would be required to contribute approximately $3.7 million for
the 2007 plan year by September 15, 2008. Contribution calculations for the 2008 plan year have not been completed. The Company currently estimates that the quarterly payments for the 2008 plan year will be approximately $1.1 million to $1.2
million with the first quarterly payment due April 15, 2008. There are no assurances that the waiver will be granted.
Included in
“Other Long-Term Liabilities” in the Consolidated Balance Sheets at December 31, 2007 is a deferred compensation plan liability of approximately $2.9 million related to deferred compensation plan assets for the Chief Executive Officer
(“CEO”) of the Company. The deferred compensation liability does not have a set maturity date and has been excluded from the table of contractual obligations presented above. In February 2008, the CEO withdrew approximately $2.2 million
from the deferred compensation plan assets thereby reducing the deferred compensation plan liabilities by $2.2 million.
Contingencies
While it is not anticipated, a material adverse effect on the Company’s financial position and results of operations could result if the Company
is not successful in its defense of its legal proceedings (See Item 3, Legal Proceedings, and Note 10 to the Consolidated Financial Statements for a description of ongoing legal proceedings).
The Company, as a U.S. Government contractor, is routinely subject to audits, reviews, and investigations by the U.S. Government related to its
negotiation and performance of U.S. Government contracts and its accounting for such contracts. Under certain circumstances, a contractor can be suspended or barred from eligibility for U.S. Government contract awards. The U.S. 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 will not
have a material adverse effect on the Company’s consolidated financial position or results of operations.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
TRADING ACTIVITIES
The Company does not engage in trading activities or in trading non-exchange
traded contracts. As of December 31, 2007 and 2006, the carrying amounts of the Company’s financial instruments were 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 risks through the use of derivative financial instruments. The Company did not have any foreign exchange risks at December 31, 2007.
22
RELATED PARTY TRANSACTIONS
On April 23, 2002, the Company loaned Ronald A. Aramini, its President and CEO, approximately $0.4 million under the terms of a promissory note. The promissory note carried a fixed interest rate of 5% per
annum and was payable within 60 days of Mr. Aramini’s termination of employment with the Company. On March 26, 2007. Mr. Aramini paid the accumulated interest on the promissory note. On February 1, 2008, the Company forgave
in full the loan represented by the promissory note, including all accrued and unpaid interest to date, in recognition of Mr. Aramini’s dual role as CEO of the Company and as acting President of the Company’s former subsidiary, PWAS
including Mr. Aramini’s critical role in the successful sale of PWAS.
On December 28, 2006, the Company and
Mr. Aramini entered into a Second Amendment (the “Second Amendment”), to the Executive Deferred Compensation Agreement, dated as of May 3, 2002 (the “Agreement”), between the Company and Mr. Aramini. The Agreement,
as amended, provided for annual contributions by the Company to an associated rabbi trust for the benefit of Mr. Aramini over the term of his employment agreement. The Company contributed $359,861 during January 2007 for the 2006 calendar year.
Pursuant to the Second Amendment to the Agreement, the Company’s final obligation to make the $380,326 lump sum trust contribution for the 2007 calendar year was eliminated. Company contributions to the trust are invested by the trustee and are
to be disbursed to Mr. Aramini in accordance with the terms of the Agreement.
On February 15, 2006, the Company entered into a
Note Purchase Agreement with Silver Canyon Services, Inc. (“Silver Canyon”), pursuant to which the Company issued to Silver Canyon a senior secured note in the principal amount of $5.0 million (the “Note”). On July 31, 2006,
Silver Canyon assigned the Note Purchase Agreement and sold the Note to Special Value Bond Fund, LLC, which is managed by Tennenbaum Capital Partners, LLC. Michael E. Tennenbaum is the Senior Partner of Tennenbaum Capital Partners, LLC and is
Chairman of the Board of Directors of the Company. The Note Purchase Agreement was amended on July 31, 2007 to extend the maturity date of the Note to February 15, 2009.
In February 2008, the CEO withdrew approximately $2.2 million from the deferred compensation plan assets thereby reducing the deferred compensation plan
liabilities by $2.2 million.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company’s significant accounting policies are disclosed in Note 1 of Notes to Consolidated Financial Statements. The preparation of financial
statements in conformity with generally accepted accounting principles requires that management use judgments to make estimates and assumptions that affect the amounts reported in the financial statements. As a result, there is some risk that
reported financial results could have been materially different had different methods, assumptions, and estimates been used.
The Company
believes that of its significant accounting policies, the following may involve a higher degree of judgment and complexity as used in the preparation of its consolidated financial statements.
Revenue Recognition
Revenue at the GSS is derived
principally from aircraft maintenance and modification services performed under contracts or subcontracts with government and military customers. The GSS recognizes revenue and associated costs under such contracts on the percentage-of-completion
method as prescribed by Statement of Position 81-1 (“SOP 81-1”), “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” These contracts generally provide for routine maintenance and modification
services at fixed prices detailed in the contract. Any nonroutine maintenance and modification services are provided based upon estimated labor hours at fixed hourly rates. The Company segments the routine and the nonroutine services for purposes of
accumulating costs and recognizing revenue. For routine services, the Company uses the units-of-delivery method as the basis to measure progress toward completion, with revenue recorded based upon the unit sales value stated in the contract and
costs of sales recorded based upon actual unit cost. An aircraft is considered delivered when work is substantially complete and acceptance by the customer has occurred by execution of a form DD 250. For nonroutine services, the Company uses an
output measure based upon units of work performed to measure progress toward completion, with revenue recorded based upon the stated hourly rates in the contract and costs of sales recorded based upon estimated average costs. The Company considers
each task performed for the customer as a unit of work performed. Revenue and costs of sales are recognized upon completion of all performance obligations in accordance with the contract. Such work is performed and completed throughout the PDM
process.
The MCS derives a portion of its revenue from cost-reimbursement types contracts accounted for under the principles prescribed by
SOP 81-1 and from sales of precision parts and components. Revenue on cost-reimbursable contracts is recognized to the extent of costs incurred plus a proportionate amount of estimated fee earned. For certain other fixed-price
23
contracts, revenue is recognized when performance milestones have been achieved in accordance with contract terms. Revenue related to sales of individual
components and parts is recognized upon delivery to the customer, and when the product price is fixed and determinable and collection of the resulting receivable is reasonably assured.
Contract accounting requires judgment relative to assessing risks and estimating contract revenues and costs. The Company employs various techniques to
project contract revenue and costs which inherently include significant assumptions and estimates. Contract revenues are a function of the terms of the contract and often bear a relationship to contract costs. Contract costs include labor, material,
an allocation of indirect costs, and, in the case of certain government contracts, an allocation of general and administrative costs. Techniques for estimating contract costs impact the Company’s proposal processes, including the determination
of pricing for routine and nonroutine elements of contracts, the evaluation of profitability on contracts, and the timing and amounts recognized for revenue and cost of sales. The Company provides for losses on uncompleted contracts in the period in
which management determines that the estimated total costs under the contract 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. An amount equal to contract costs attributable to claims is included in revenues when realization is probable and the amount can be reasonably estimated. Judgment is required in determining the potential realization of
claim revenue and estimating the amounts recoverable. Because of the significance of the judgments and estimates required in these processes, it is likely that materially different amounts could result from the use of different assumptions or if the
underlying conditions were to change. In addition, contracts accounted for under the percentage-of-completion, units-of-delivery method may result in material fluctuations in revenue and profit margins depending on the timing of delivery and
performance, the relative proportion of fixed price, cost reimbursement, and other types of contracts-in-process, and costs incurred in their performance. For additional information regarding accounting policies the Company has established for
recognizing revenue, see “Revenue Recognition” in Note 1 to the Consolidated Financial Statements.
Allowance for Doubtful Accounts
The Company’s allowance for doubtful accounts is recorded on the specific identification method. This method involves subjectivity
and includes an evaluation of historical experience with the customer, current relationship with the customer, aging of the receivable, contract terms, discussions with the customer, marketing, and contracts personnel, as well as other available
data. Given the nature of the GSS and MCS business and customers, write-offs have historically been nominal. GSS and MCS customers are primarily the U.S. Government or its prime contractors.
Inventory Reserves
The Company regularly estimates
the degree of technological obsolescence in its inventories and provides inventory reserves on that basis. Though the Company believes it has adequately provided for any such declines in inventory value to date, any unanticipated change in
technology or potential decertification due to failure to meet design specification could significantly affect the value of the Company’s inventories and thereby adversely affect gross profit and results of operations. In addition, an inability
of the Company to accurately forecast its inventory needs related to its maintenance obligations could adversely affect gross profit and results of operations.
Deferred Taxes
The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more
likely than not to be realized. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event the Company were to determine that it
would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should the Company determine that
it would not be able to realize all or part of its net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.
Machinery, Equipment and Improvements and Impairment
Machinery, equipment and leasehold improvements are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the 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. The Company estimates the useful lives based on historical experience and expectations of future conditions. Should the actual
useful lives be less than estimated, additional depreciation expense or recording a loss on disposal may be required.
The Company reviews
machinery, equipment and improvements for impairment whenever there is an indication that their carrying amount may not be recoverable and performs impairment tests on groups of assets that have separately
24
identifiable cash flow. The Company compares the carrying amount of the assets with the undiscounted expected future cash flows to determine if an impairment
exists. If an impairment exists, assets classified as held and used are written down to fair value and are depreciated over their remaining useful life, while assets classified as held for sale are written down to fair value less cost to sell. The
actual fair value may differ from the estimate.
Pension and Postretirement Plans
The Company maintains pension plans covering a majority of its employees and retirees, and postretirement benefit plans for retirees that include health
care benefits and life insurance coverage. For financial reporting purposes, net periodic pension and other postretirement benefit costs (income) are calculated based upon a number of actuarial assumptions including a discount rate for plan
obligations, assumed rate of return on pension plan assets, assumed annual rate of compensation increase for plan employees, and an annual rate of increase in the per capita costs of covered postretirement healthcare benefits. Each of these
assumptions is based upon the Company’s judgment, considering all known trends and uncertainties. Actual asset returns for the Company pension plans significantly below the Company’s assumed rate of return would result in lower net
periodic pension income (or higher expense) in future years. Actual annual rates of increase in the per capita costs of covered postretirement healthcare benefits above assumed rates of increase would result in higher net periodic postretirement
benefit costs in future years.
Insurance Reserves
The Company is partially self-insured for employee medical coverage and workers compensation claims. The Company records a liability for the ultimate settlement of claims incurred as of the balance sheet date based
upon estimates provided by the companies that administer the claims on the Company’s behalf. The Company also reviews historical payment trends and knowledge of specific claims in determining the reasonableness of the reserve. Adjustments to
the reserve are made when the facts and circumstances of the underlying claims change. Should the actual settlement of the medical or workers compensation claims be greater than estimated, additional expense will be recorded.
Contingencies
As further discussed in
Item 3—Legal Proceedings, and in Note 10 of Notes to Consolidated Financial Statements, the Company has been involved, and may continue to be involved, in various legal proceedings arising out of the conduct of its business, including
litigation with customers, employment related lawsuits, purported class actions, and actions brought by governmental authorities. The Company has, and will continue to, vigorously defend itself and to assert available defenses with respect to these
matters. Where appropriate, the Company has accrued an estimate of the probable cost of resolutions of these proceedings based upon consultation with outside counsel and assuming various strategies. A settlement or an adverse resolution of one or
more of these matters may result in the payment of significant costs and damages that could have a material adverse effect on the Company’s financial position or results of operations.
The Company, as a U.S. Government contractor, is routinely subject to audits, reviews, and investigations by the U.S. Government related to its
negotiation and performance of U.S. Government contracts and its accounting for such contracts. Under certain circumstances, a contractor can be suspended or barred from eligibility for U.S. Government contract awards. The U.S. 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 will not
have a material adverse effect on the Company’s consolidated financial position or results of operations.
RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157,
Fair Value
Measurements
(“FAS No. 157”) which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 is
effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. In February 2008, the FASB issued FASB staff position (“FSP”) 157-2 to defer SFAS No.
157’s effective date for all nonfinancial assets and liabilities, except for those items recognized or disclosed at fair value on an annual or more frequently occurring basis, until years beginning after November 15, 2008. The adoption of SFAS
No. 157 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
In
February 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities
(“SFAS No. 159”). SFAS No. 159
allows companies to measure many financial assets and liabilities at fair value. It also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after
25
November 15, 2007 and interim periods within those fiscal years. The adoption of SFAS No. 159 is not expected to have a material impact on the
Company’s financial position, results of operations or cash flows.
In December 2007, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 141(R),
Business Combinations
(“SFAS No. 141(R)”). SFAS No. 141(R) replaces SFAS No. 141,
Business Combinations
, but retains the requirement that the
purchase method of accounting for acquisitions be used for all business combinations. SFAS No. 141(R) expands on the disclosures previously required by SFAS No. 141, better defines the acquirer and the acquisition date in a business
combination, and establishes principles for recognizing and measuring the assets acquired (including goodwill), the liabilities assumed and any noncontrolling interests in the acquired business. SFAS No. 141(R) also requires an acquirer to
record an adjustment to income tax expense for changes in valuation allowances or uncertain tax positions related to acquired businesses. SFAS No. 141(R) is effective for all business combinations with an acquisition date in the first annual
period following December 15, 2008; early adoption is not permitted. The Company will adopt this statement as of January 1, 2009. The Company is currently evaluating the impact SFAS No. 141(R) will have on its financial position,
results of operations and cash flows.
In December 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 160,
Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51
(“SFAS No. 160”). SFAS No. 160 requires that noncontrolling (or minority) interests in subsidiaries
be reported in the equity section of the company’s balance sheet, rather than in a mezzanine section of the balance sheet between liabilities and equity. SFAS No. 160 also changes the manner in which the net income of a subsidiary is
reported and disclosed in the controlling company’s income statement. SFAS No. 160 also establishes guidelines for accounting for changes in ownership percentages and for deconsolidation. SFAS No. 160 is effective for financial
statements for fiscal years beginning on or after December 1, 2008 and interim periods within those years. The adoption of SFAS No. 160 is not expected to have a material impact on the Company’s financial position, results of
operations or cash flows.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company is not exposed to market
risk from changes in interest rates as part of its normal operations as it has no variable rate debt outstanding.
26
Item 8. Financial Statements and Supplementary Data
The following financial statements and financial statement schedule are submitted herewith:
27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Alabama Aircraft Industries, Inc. and Subsidiaries
We have
audited the accompanying consolidated balance sheets of Alabama Aircraft Industries, Inc. (formerly Pemco Aviation Group, Inc.) (a Delaware corporation) and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements
of operations, stockholders’ equity, and cash flows for each of the years then ended. Our audits of the basic financial statements included Schedule II – Valuation and Qualifying Accounts listed in the index appearing under Item 15
(a)(2). These financial statements and the related financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based
on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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. The Company is not required to have, nor were we engaged to perform an audit of its
internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position
of Alabama Aircraft Industries, Inc. (formerly Pemco Aviation Group, Inc.) and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects,
the information set forth therein.
As discussed in Notes 1 and 9 of the notes to consolidated financial statements, effective
January 1, 2007, the Company adopted the provisions of FASB Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109” and, effective December 31, 2006, the
company adopted the provisions of FASB Statement No. 158, “Employers’ Accounting for Defined Benefit and Pension and Other Retirement Plans: an amendment of FASB Statement No. 87,88,106 and 132(R).”
|
|
|
|
|
|
|
|
|
|
/s/ Grant Thornton LLP
|
|
|
|
|
Charlotte, North Carolina
|
|
|
|
March 31, 2008
|
|
|
28
ALABAMA AIRCRAFT INDUSTRIES, INC. AND SUBSIDIARIES
(Formerly Pemco Aviation Group, Inc.)
CONSOLIDATED BALANCE SHEETS
December 31, 2007 and 2006
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
8,750
|
|
|
$
|
23
|
|
|
Accounts receivable, net
|
|
|
11,363
|
|
|
|
16,872
|
|
|
Inventories, net
|
|
|
7,804
|
|
|
|
8,557
|
|
|
Deferred income taxes
|
|
|
—
|
|
|
|
2,629
|
|
|
Prepaid expenses and other
|
|
|
653
|
|
|
|
1,295
|
|
|
Assets of discontinued operations
|
|
|
—
|
|
|
|
18,895
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
28,570
|
|
|
|
48,271
|
|
|
|
|
|
|
|
|
|
|
|
|
Machinery, equipment and improvements at cost:
|
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
|
21,994
|
|
|
|
22,549
|
|
|
Leasehold improvements
|
|
|
18,925
|
|
|
|
18,687
|
|
|
Construction-in-process
|
|
|
31
|
|
|
|
217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,950
|
|
|
|
41,453
|
|
|
Less accumulated depreciation and amortization
|
|
|
(28,113
|
)
|
|
|
(27,253
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net machinery, equipment and improvements
|
|
|
12,837
|
|
|
|
14,200
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-current assets:
|
|
|
|
|
|
|
|
|
|
Deposits and other
|
|
|
3,213
|
|
|
|
2,664
|
|
|
Restricted cash-letter of credit
|
|
|
1,235
|
|
|
|
—
|
|
|
Deferred income taxes
|
|
|
—
|
|
|
|
11,122
|
|
|
Related party receivable
|
|
|
440
|
|
|
|
524
|
|
|
Intangible assets, net
|
|
|
—
|
|
|
|
260
|
|
|
Assets of discontinued operations
|
|
|
—
|
|
|
|
11,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,888
|
|
|
|
26,115
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
46,295
|
|
|
$
|
88,586
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated statements.
29
ALABAMA AIRCRAFT INDUSTRIES, INC. AND SUBSIDIARIES
(Formerly Pemco Aviation Group, Inc.)
CONSOLIDATED BALANCE SHEETS—continued
December 31, 2007 and 2006
(In Thousands, Except Share Information)
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
80
|
|
|
$
|
28,760
|
|
|
Accounts payable—trade
|
|
|
3,440
|
|
|
|
7,199
|
|
|
Accrued health and dental
|
|
|
491
|
|
|
|
646
|
|
|
Accrued liabilities—payroll related
|
|
|
2,958
|
|
|
|
3,566
|
|
|
Accrued liabilities—other
|
|
|
1,700
|
|
|
|
1,807
|
|
|
Customer deposits in excess of cost
|
|
|
3,708
|
|
|
|
2,385
|
|
|
Liabilities of discontinued operations
|
|
|
—
|
|
|
|
12,897
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
12,377
|
|
|
|
57,260
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current portion
|
|
|
5,002
|
|
|
|
1,786
|
|
|
Long-term pension and postretirement benefit liabilities
|
|
|
9,654
|
|
|
|
15,135
|
|
|
Other long-term liabilities
|
|
|
2,936
|
|
|
|
2,623
|
|
|
Liabilities of discontinued operations
|
|
|
—
|
|
|
|
4,402
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
29,969
|
|
|
|
81,206
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
Preferred Stock, $0.0001 par value, 5,000,000 shares authorized, none outstanding
|
|
|
—
|
|
|
|
—
|
|
|
Common Stock, $0.0001 par value, 12,000,000 shares authorized, 4,128,950 and 4,126,200 outstanding at December 31, 2007 and 2006, respectively
|
|
|
1
|
|
|
|
1
|
|
|
Additional paid-in capital
|
|
|
15,067
|
|
|
|
14,345
|
|
|
Retained earnings
|
|
|
30,358
|
|
|
|
29,413
|
|
|
Treasury stock, at cost—413,398 shares at December 31, 2007 and 2006
|
|
|
(8,623
|
)
|
|
|
(8,623
|
)
|
|
Accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
Pension and postretirement liabilities
|
|
|
(20,477
|
)
|
|
|
(27,756
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
16,326
|
|
|
|
7,380
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
46,295
|
|
|
$
|
88,586
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated statements.
30
ALABAMA AIRCRAFT INDUSTRIES, INC. AND SUBSIDIARIES
(Formerly Pemco Aviation Group, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2007 and 2006
(In Thousands, Except Per Share Information)
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Net sales
|
|
$
|
72,804
|
|
|
$
|
97,644
|
|
|
Cost of sales
|
|
|
67,798
|
|
|
|
85,644
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
5,006
|
|
|
|
12,000
|
|
|
Selling, general and administrative expenses
|
|
|
11,850
|
|
|
|
14,053
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss from continuing operations
|
|
|
(6,844
|
)
|
|
|
(2,053
|
)
|
|
Interest expense
|
|
|
(614
|
)
|
|
|
(656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(7,458
|
)
|
|
|
(2,709
|
)
|
|
Income tax expense (benefit)
|
|
|
6,269
|
|
|
|
(975
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(13,727
|
)
|
|
|
(1,734
|
)
|
|
Income from discontinued operations, net of tax
|
|
|
3,244
|
|
|
|
2,253
|
|
|
Gain on sale of discontinued operations, net of tax
|
|
|
11,428
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
945
|
|
|
$
|
519
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
Basic loss from continuing operations
|
|
$
|
(3.33
|
)
|
|
$
|
(0.42
|
)
|
|
Basic income from discontinued operations
|
|
$
|
3.56
|
|
|
$
|
0.55
|
|
|
Basic net income per share
|
|
$
|
0.23
|
|
|
$
|
0.13
|
|
|
Diluted loss from continuing operations
|
|
$
|
(3.33
|
)
|
|
$
|
(0.42
|
)
|
|
Diluted income from discontinued operations
|
|
$
|
3.55
|
|
|
$
|
0.53
|
|
|
Diluted net income per share
|
|
$
|
0.23
|
|
|
$
|
0.12
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
4,127
|
|
|
|
4,123
|
|
|
Diluted
|
|
|
4,131
|
|
|
|
4,228
|
|
The accompanying notes are an integral part of these consolidated statements.
31
ALABAMA AIRCRAFT INDUSTRIES, INC. AND SUBSIDIARIES
(Formerly Pemco Aviation Group, Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years Ended December 31, 2007 and 2006
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares
|
|
Capital
Stock
|
|
Additional
Paid-in
Capital
|
|
Retained
Earnings
|
|
Treasury
Stock
|
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
Total
Stockholders’
Equity
|
|
|
January 1, 2006
|
|
4,527
|
|
$
|
1
|
|
$
|
13,188
|
|
$
|
28,894
|
|
$
|
(8,623
|
)
|
|
$
|
(21,921
|
)
|
|
$
|
11,539
|
|
|
Exercise of stock options (including tax benefit of $31)
|
|
13
|
|
|
|
|
|
155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
155
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
1,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,002
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
519
|
|
|
|
|
|
|
|
|
|
|
519
|
|
|
Minimum pension and post-retirement liabilities (net of tax of $64)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169
|
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
688
|
|
|
Adjustment to initially apply SFAS 158, (net of tax of $3,649)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,004
|
)
|
|
|
(6,004
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
4,540
|
|
|
1
|
|
|
14,345
|
|
|
29,413
|
|
|
(8,623)
|
|
|
|
(27,756)
|
|
|
|
7,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options (including tax benefit of $8)
|
|
2
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
707
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
945
|
|
|
|
|
|
|
|
|
|
|
945
|
|
|
Pension and post-retirement liabilities (net of tax of $0)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,116
|
|
|
|
1,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,061
|
|
|
Impact from sale of PWAS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,163
|
|
|
|
6,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
4,542
|
|
$
|
1
|
|
$
|
15,067
|
|
$
|
30,358
|
|
$
|
(8,623
|
)
|
|
$
|
(20,477
|
)
|
|
$
|
16,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated statements.
32
ALABAMA AIRCRAFT INDUSTRIES, INC. AND SUBSIDIARIES
(Formerly Pemco Aviation Group, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2007 and 2006
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
945
|
|
|
$
|
519
|
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of machinery, equipment and leasehold improvements
|
|
|
2,825
|
|
|
|
3,754
|
|
|
Amortization of intangible assets
|
|
|
260
|
|
|
|
345
|
|
|
Provision for deferred income taxes
|
|
|
13,746
|
|
|
|
379
|
|
|
Funding in excess of pension cost
|
|
|
(3,438
|
)
|
|
|
(6,044
|
)
|
|
Provisions (recoveries) for losses on receivables
|
|
|
253
|
|
|
|
(638
|
)
|
|
Provision for inventory valuation
|
|
|
1,607
|
|
|
|
634
|
|
|
Gain on Sale of Pemco World Air Services
|
|
|
(17,579
|
)
|
|
|
—
|
|
|
Loss on disposals of machinery and equipment
|
|
|
42
|
|
|
|
—
|
|
|
Provision for (reversal of) losses on contracts-in-process
|
|
|
1,433
|
|
|
|
(627
|
)
|
|
Stock based compensation expense
|
|
|
707
|
|
|
|
1,002
|
|
|
Income tax benefit from exercise of nonqualified stock options
|
|
|
8
|
|
|
|
—
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
(1,235
|
)
|
|
|
—
|
|
|
Accounts receivable, trade
|
|
|
7,662
|
|
|
|
(7,223
|
)
|
|
Inventories
|
|
|
(3,151
|
)
|
|
|
5,605
|
|
|
Prepaid expenses and other
|
|
|
888
|
|
|
|
84
|
|
|
Deposits and other
|
|
|
(450
|
)
|
|
|
(412
|
)
|
|
Customer deposits in excess of cost
|
|
|
2,841
|
|
|
|
(2,795
|
)
|
|
Accounts payable and accrued liabilities
|
|
|
(3,841
|
)
|
|
|
2,761
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
2,578
|
|
|
|
(3,175
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
3,523
|
|
|
|
(2,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(595
|
)
|
|
|
(2,034
|
)
|
|
Proceeds from the sale of Pemco World Air Services
|
|
|
31,359
|
|
|
|
—
|
|
|
Proceeds from the sale of Pemco Engineers
|
|
|
—
|
|
|
|
1,617
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
30,764
|
|
|
|
(417
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
7
|
|
|
|
124
|
|
|
Payment of debt issuance costs
|
|
|
—
|
|
|
|
(501
|
)
|
|
Net change under revolving credit facility
|
|
|
(21,855
|
)
|
|
|
355
|
|
|
Borrowings under long-term debt
|
|
|
—
|
|
|
|
5,000
|
|
|
Principal payments under long-term debt
|
|
|
(3,712
|
)
|
|
|
(1,908
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(25,560
|
)
|
|
|
3,070
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
8,727
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of year
|
|
|
23
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
8,750
|
|
|
$
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash paid (received) during the year for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
3,131
|
|
|
$
|
3,348
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
28
|
|
|
$
|
(310
|
)
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated statements.
33
ALABAMA AIRCRAFT INDUSTRIES, INC. AND SUBSIDIARIES
(Formerly Pemco Aviation Group, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended
DECEMBER 31, 2007 and 2006
1. BUSINESSES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business—
Alabama Aircraft Industries, Inc., formerly Pemco Aviation Group, Inc. (the “Company”), is a diversified aerospace and defense company composed of two operating segments: Government Services Segment
(“GSS”) and Manufacturing and Components Segment (“MCS”).
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 GSS, which
specializes in providing Programmed Depot Maintenance (“PDM”) on large transport aircraft.
The Company’s MCS 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.
The Company’s primary sources of liquidity and capital resources include cash-on-hand, cash flows from operations (primarily from collection of
accounts receivables and conversion of work-in-process inventory to cash) and potential borrowing capability through lenders. Principal factors affecting the Company’s liquidity and capital resources position include, but are not limited to,
the following: results of operations; the results of the Company’s protest of the U.S. Air Force (“USAF”) award of the KC-135 contract to The Boeing Company; collection of accounts receivable; funding requirements associated with the
Company’s defined benefit pension plan; settlements of various claims; and potential divestitures. The Company anticipates that cash-on-hand will be sufficient to fund operations, make minimal capital expenditures and make scheduled payments on
debt obligations for at least the next twelve months. However, the Company is proposing and is expecting to propose on several programs in the next twelve months. If the Company is successful in winning some or all of these programs, additional
financing may be needed to fund working capital requirements related to the buildup of accounts receivable and inventory on the projects. Moreover, the Company does not have sufficient cash to make the required contributions to its defined benefit
pension plan without negatively impacting the cash and liquidity of the Company by the end of 2008. Therefore, the Company applied on February 29, 2008 to the Internal Revenue Service for a waiver of contributions to its defined benefit pension
plan through December 31, 2008. Without a waiver of contributions, the Company would be required to contribute approximately $3.7 million for the 2007 plan year by September 15, 2008. Contribution calculations for the 2008 plan year have
not been completed. The Company currently estimates that the quarterly payments for the 2008 plan year will be approximately $1.1 million to $1.2 million with the first quarterly payment due April 15, 2008. Several events could significantly
impact the generation, availability and uses of cash over the next twelve months including:
|
|
•
|
|
whether the Company is successful in its protest of the USAF award of the KC-135 contract to The Boeing Company;
|
|
|
•
|
|
whether the Company is granted a waiver of contributions to its defined benefit pension plan through December 31, 2008;
|
|
|
•
|
|
whether the Company sells its subsidiary, Space Vector Corporation, in 2008;
|
|
|
•
|
|
whether the Company is able to win additional contracts, including in part as a result of qualifying with the Small Business Administration as a small business
under certain North American Industry Classification System codes; and
|
|
|
•
|
|
whether the Company is able to get additional funding from lenders to fund working capital increases needed if additional contracts are won.
|
There are no assurances that the Company will be successful in any of these respects and negative outcomes could adversely impact the
Company’s ability to meet financial obligations as they become due.
34
Principles of Consolidation—
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant inter-company 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 (“GAAP”) 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 that may be subject to
significant change in the near term include those associated with evaluation of the ultimate profitability of the Company’s contracts, pension and postretirement benefits, legal contingencies, collectability of accounts receivable, the use and
recoverability of inventory, impairment of long-lived assets, self-insurance accruals and the realization of deferred tax assets. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period that they
are determined to be necessary. Actual results could differ from those estimates.
Cash & Cash Equivalents—
Cash
equivalents are composed of highly liquid instruments with maturities of three months or less when purchased. Due to the short maturity of these instruments, carrying value on the Company’s consolidated balance sheets approximates fair value.
Allowance for Doubtful Accounts
—The Company’s allowance for doubtful accounts is recorded on the specific identification
method. This method involves subjectivity and includes an evaluation of historical experience with the customer, current relationship with the customer, aging of the receivable, contract terms, discussions with the customer, marketing, and contracts
personnel, as well as other available data.
Given the nature of the GSS business and customers, write-offs have historically been nominal.
GSS customers are primarily the U.S. Government or its prime contractors. The CSS primarily services the commercial airline market, and is therefore more susceptible to collection issues. The Company’s services are contract driven, and fees for
services performed in accordance with the agreed upon terms of the contract with the customer are collected.
Inventories
—Raw
materials and supplies are stated at the lower of cost or net realizable value, with cost principally determined by the last-in first-out method. Finished goods and work-in-process include materials, direct labor, manufacturing overhead, and other
indirect costs incurred under each contract, less amounts in excess of estimated realizable value. Pursuant to contract provisions, agencies of the U.S. Government and certain other customers have title to, or a security interest in, inventories
related to such contracts as a result of advances and customer deposits. Such advances and deposits are reflected as an offset against the related inventory balances to the extent costs have been accumulated. Inventoried costs on U.S. Government
fixed price contracts include direct engineering, production and tooling costs, and applicable overhead. In addition, inventoried costs on U.S. Government contracts include general and administrative expenses estimated to be recoverable.
Machinery, Equipment, and Improvements
—Leasehold improvements and machinery and equipment are stated at cost, less accumulated
amortization and depreciation. Depreciation and amortization are computed using the straight-line method over the following estimated useful lives (in the case of leasehold improvements, the useful life is the shorter of the lease period or the
economic life of the improvements):
|
|
|
|
|
Classification
|
|
Useful Life In Years
|
|
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 periodically evaluates whether events and circumstances have occurred that indicate the carrying value of
long-lived assets and certain identifiable intangibles of the Company may not be recoverable. Recoverability of long-lived assets to be held and used is evaluated by a comparison of the carrying amount of the asset to future net undiscounted cash
flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized for the excess of the carrying amount over the fair value of the asset. The fair
value of the asset or asset group is measured by quoted market prices, if available, or by utilizing present value techniques, such as discounted cash flows.
Restricted Cash-Letter of Credit
—The Company maintains approximately $1.2 million of cash on account with Wachovia Bank to collateralize a letter of credit that supports the Company’s workers
compensation obligations.
Intangible Assets
—The Company amortizes intangible assets, if appropriate, over their estimated
lives. The Company’s intangible assets have historically consisted primarily of capitalized loan origination fees. The loan origination fees had a balance of approximately $0.3 million December 31, 2006. All capitalized loan origination
fees were amortized during 2007.
Deferred Compensation
—The Company has a deferred compensation arrangement for its Chief
Executive Officer, which provides for payments upon retirement, death or termination of employment. The Company funds the deferred compensation liability by making contributions to a rabbi trust. The contributions are invested in U.S. treasury
bills, and do
35
not include Company Common Stock. The fair market values of the assets at December 31, 2007 and 2006 were $2.9 million and $2.4 million, respectively,
and are reflected in “deposits and other” in the accompanying consolidated balance sheets. The deferred compensation liability is adjusted, with a corresponding charge or credit to compensation cost, to reflect changes in the fair market
value of the compensation liability. The amounts accrued under this plan were $2.9 million and $2.4 million at December 31, 2007 and 2006, respectively, and are reflected in other long-term liabilities in the accompanying consolidated balance
sheets.
Income Taxes—
The Company accounts for income taxes under the asset and liability method. Federal and state income
taxes are computed at current tax rates, less tax credits. Taxes are adjusted both for items that do not have tax consequences and for the cumulative effect of any changes in tax rates from those previously used to determine deferred tax assets or
liabilities. Tax provisions include amounts that are currently payable, plus changes in deferred tax assets and liabilities that arise because of temporary differences between the time when items of income and expense are recognized for financial
reporting and income tax purposes. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not such assets will be realized.
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 48 “Accounting for
Uncertainty in Income Taxes – an interpretation of FASB Statement 109.” FIN 48 establishes a single model to address accounting for uncertain tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum
recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods,
disclosure and transition.
The Company adopted the provisions of FIN 48 on January 1, 2007. Upon adoption, the Company recognized no
adjustment in the amount of unrecognized tax benefits. As of the date of adoption, the Company had no unrecognized tax benefits. The Company’s policy is to recognize interest and penalties that would be assessed in relation to the settlement
value of unrecognized tax benefits as a component of income tax expense. The Company has recognized no interest or penalties since the adoption of FIN 48.
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax in multiple state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal income tax
examinations for years before 2004. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses were generated and carried forward, and make adjustments up to the amount of the
net operating loss carryforward amount.
During 2007, the Internal Revenue Service examination of the Company’s 2005 federal tax
return was completed with no changes to the return as filed. The Company is currently under examination by the State of Alabama and Washington.
Pensions—
The Company’s funding policy for the pension plan is to contribute, at a minimum, the statutorily required amount to an irrevocable trust. Benefits under the plan are based on age at retirement, average annual
compensation during the last five years of employment and years of service. The actuarial cost method used in determining the net periodic pension cost is the projected unit credit method. The Company does not have sufficient cash to make the
required contributions to its defined benefit pension plan without negatively impacting the cash and liquidity of the Company by the end of 2008. Therefore, the Company applied on February 29, 2008 to the Internal Revenue Service for a waiver
of contributions through December 31, 2008. Without a waiver of contributions, the Company would be required to contribute approximately $3.7 million for the 2007 plan year by September 15, 2008. Contribution calculations for the 2008 plan
year have not been completed. The Company currently estimates that the quarterly payments for the 2008 plan year will be approximately $1.1 million to $1.2 million with the first quarterly payment due April 15, 2008.
In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an
amendment of FASB Statements No. 87, 88, 106 and 132(R) (“FAS No. 158”) which improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan
as an asset or liability in its statements of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity. This statement also requires an employer to
measure the funded status of a plan as of the date of its year-end statement of financial position. As required by FAS No. 158, the Company adopted the balance sheet recognition provisions at December 31, 2007 which resulted in the Company
recording $6.0 million in accumulated comprehensive income for amounts that had not been previously recorded in net periodic benefit cost.
Customer Deposits in Excess of Cost—
In the normal course of business, the Company may receive payments from customers in excess of costs that it has expended on contracts. These payments are associated with milestone payments or
36
deposits to hold production slots. To the extent that the Company has deposits in excess of expended costs on a contract, the amount in excess of cost is
reflected as a liability.
Stock Options—
Effective January 1, 2006, the Company adopted FASB Statement No. 123(R)
using the modified prospective transition method, which requires measurement and recognition of compensation expense for all stock-based payment awards made to employees and directors, including stock options based on fair values. The Company’s
financial statements as of December 31, 2007 and 2006 reflect the impact of FAS 123(R). Stock-based compensation expense is based on the portion of stock-based payment awards that is ultimately expected to vest. Stock-based compensation expense
in the Company’s Consolidated Statement of Operations as of December 31, 2007 and 2006 included compensation expense for unvested stock-based payment awards granted prior to December 31, 2005 (based on the grant date fair value
estimated in accordance with the pro forma provisions of SFAS No. 123) and compensation expense for the stock-based payment awards granted subsequent to December 31, 2005 (based on the grant date fair value estimated in accordance with the
provisions of SFAS No. 123(R)).
Revenue Recognition
—Revenue at the GSS is derived principally from aircraft
maintenance and modification services performed under contracts or subcontracts with government and military customers. The GSS recognizes revenue and associated costs under such contracts on the percentage-of-completion method as prescribed by
Statement of Position 81-1 (“SOP 81-1”),
Accounting for Performance of Construction-Type and Certain Production-Type Contracts
. These contracts generally provide for routine maintenance and modification services at fixed prices
detailed in the contract. Any nonroutine maintenance and modification services are provided based upon estimated labor hours at fixed hourly rates. The Company segments the routine and the nonroutine services for purposes of accumulating costs and
recognizing revenue. For routine services, the Company uses the units-of-delivery method as the basis to measure progress toward completion, with revenue recorded based upon the unit sales value stated in the contract and costs of sales recorded
based upon actual unit cost. An aircraft is considered delivered when work is substantially complete and acceptance by the customer has occurred. For nonroutine services, the Company uses an output measure based upon units of work performed to
measure progress toward completion, with revenue recorded based upon the stated hourly rates in the contract and costs of sales recorded based upon estimated average costs. The Company considers each task performed for the customer as a unit of work
performed. Revenue and costs of sales are recognized upon completion of all performance obligations for each specific task. Such work is performed and completed throughout the PDM process.
The MCS derives a portion of its revenue from cost-reimbursement type contracts accounted for under the principles prescribed by SOP 81-1 and from sales
of precision parts and components. Revenue on cost-reimbursable contracts is recognized to the extent of costs incurred plus a proportionate amount of estimated fee earned. For certain other fixed-price contracts, revenue is recognized when
performance milestones have been achieved in accordance with contract terms. Revenue related to sales of individual components and parts is recognized upon delivery to the customer, and when the product price is fixed and determinable and collection
of the resulting receivable is reasonably assured.
The Company provides for losses on uncompleted contracts in the period in which
management determines that the estimated total costs under the contract 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. An amount equal to contract costs attributable to claims is included in revenues when realization is probable and the amount can be reasonably estimated.
Comprehensive Income—
Comprehensive income consists primarily of net income (loss) and the after-tax impact of the pension and postretirement
liabilities. Income taxes related to components of other comprehensive income are recorded based on the Company’s estimated effective tax rate.
Earnings Per Share—
Basic and diluted per share results for all periods presented were computed based on the net earnings or loss for the respective periods. The weighted average number of common shares
outstanding during the period was used in the calculation of basic earnings per share. In accordance with SFAS No. 128,
Earnings Per Share
, the weighted average number of common shares used in the calculation of diluted per share amounts
is adjusted for the dilutive effects of stock options based on the treasury stock method only if the Company records earnings from continuing operations (i.e., before discontinued operations, extraordinary items and cumulative effects of changes in
accounting), as such adjustments would otherwise be anti-dilutive to earnings per share from continuing operations.
37
Treasury Stock—
Treasury stock is accounted for by the cost method. Treasury stock activity is
presented in the consolidated statements of stockholders’ equity.
Statement of Cash Flows—
Non-cash investing and
financing activities are excluded from the consolidated statements of cash flows. Non-cash transactions during 2007 included the acquisition of machinery and equipment of $0.1 million under capital lease obligations. Non-cash transactions during
2006 included $0.4 million of inventory received for the sale of Pemco Engineers.
Recently Issued Accounting Standards—
In
September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157,
Fair Value Measurements
(“FAS No. 157”) which defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those
fiscal years. In February 2008, the FASB issued FASB staff position (“FSP”) 157-2 to defer SFAS No. 157’s effective date for all nonfinancial assets and liabilities, except for those items recognized or disclosed at fair value on an
annual or more frequently occurring basis, until years beginning after November 15, 2008. The adoption of SFAS No. 157 is not expected to have a material impact on the Company’s financial position, results of operations or cash
flows.
In February 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 159,
The
Fair Value Option for Financial Assets and Financial Liabilities
(“SFAS No. 159”). SFAS No. 159 allows companies to measure many financial assets and liabilities at fair value. It also establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for financial statements issued for fiscal years beginning
after November 15, 2007 and interim periods within those fiscal years. The adoption of SFAS No. 159 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
In December 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141(R),
Business
Combinations
(“SFAS No. 141(R)”). SFAS No. 141(R) replaces SFAS No. 141,
Business Combinations
, but retains the requirement that the purchase method of accounting for acquisitions be used for all business
combinations. SFAS No. 141(R) expands on the disclosures previously required by SFAS No. 141, better defines the acquirer and the acquisition date in a business combination, and establishes principles for recognizing and measuring the
assets acquired (including goodwill), the liabilities assumed and any noncontrolling interests in the acquired business. SFAS No. 141(R) also requires an acquirer to record an adjustment to income tax expense for changes in valuation allowances
or uncertain tax positions related to acquired businesses. SFAS No. 141(R) is effective for all business combinations with an acquisition date in the first annual period following December 15, 2008; early adoption is not permitted. The
Company will adopt this statement as of January 1, 2009. The Company is currently evaluating the impact that SFAS No. 141(R) will have on its financial position, results of operations or cash flows.
In December 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 160, “Noncontrolling
Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 requires that noncontrolling (or minority) interests in subsidiaries be reported in the equity section of
the company’s balance sheet, rather than in a mezzanine section of the balance sheet between liabilities and equity. SFAS No. 160 also changes the manner in which the net income of the subsidiary is reported and disclosed in the
controlling company’s income statement. SFAS No. 160 also establishes guidelines for accounting for changes in ownership percentages and for deconsolidation. SFAS No. 160 is effective for financial statements for fiscal years
beginning on or after December 1, 2008 and interim periods within those years. The adoption of SFAS No. 160 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
38
2. INCOME/LOSS FROM CONTINUING OPERATIONS PER COMMON SHARE
Computation of basic and diluted earnings from continuing operations per share:
(In Thousands Except Per Share Information)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2007
|
|
Loss
from continuing
operations
|
|
|
Shares Outstanding
|
|
Income per
Share
|
|
|
Basic earnings and per share amounts
|
|
$
|
(13,727
|
)
|
|
4,127
|
|
$
|
(3.33
|
)
|
|
Dilutive securities
|
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings and per share amounts
|
|
$
|
(13,727
|
)
|
|
4,127
|
|
$
|
(3.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2006
|
|
Loss
from continuing
operations
|
|
|
Shares Outstanding
|
|
Income per
Share
|
|
|
Basic earnings and per share amounts
|
|
$
|
(1,734
|
)
|
|
4,123
|
|
$
|
(0.42
|
)
|
|
Dilutive securities
|
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings and per share amounts
|
|
$
|
(1,734
|
)
|
|
4,123
|
|
$
|
(0.42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase 1,147,438 and 785,928 shares of Common Stock related to 2007 and 2006,
respectively, were excluded from the computation of diluted earnings per share because the option exercise price was greater than the average market price of the shares.
3. ACCOUNTS RECEIVABLE
Accounts receivable as of December 31, 2007 and 2006 consists of the
following:
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
U.S. Government:
|
|
|
|
|
|
|
|
Amounts billed
|
|
$
|
8,979
|
|
$
|
11,408
|
|
Recoverable costs and accrued profit on progress completed—not billed
|
|
|
2,384
|
|
|
5,464
|
|
|
|
|
|
|
|
|
|
Accounts receviable
|
|
$
|
11,363
|
|
$
|
16,872
|
|
|
|
|
|
|
|
|
Recoverable costs and accrued profit on progress completed 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, even though earned, were not billable under the contract terms at December 31, 2007 and 2006.
39
4. INVENTORIES
Inventories as of December 31, 2007 and 2006 consist of the following:
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Work in process
|
|
$
|
10,402
|
|
|
$
|
10,902
|
|
|
Raw materials and supplies
|
|
|
6,394
|
|
|
|
7,163
|
|
|
Finished goods
|
|
|
786
|
|
|
|
786
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
17,582
|
|
|
|
18,851
|
|
|
Less reserves for obsolete inventory
|
|
|
(3,100
|
)
|
|
|
(2,165
|
)
|
|
Less milestone payments and customer deposits
|
|
|
(6,678
|
)
|
|
|
(8,129
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,804
|
|
|
$
|
8,557
|
|
|
|
|
|
|
|
|
|
|
|
A substantial portion of the above inventories relate to U.S. Government contracts or
sub-contracts. The Company receives milestone payments on the majority of its government contracts. The title to all inventories on which the Company receives milestone payments is vested in the customer to the extent of the milestone payment
balance.
The amount of general and administrative costs remaining in inventories at December 31, 2007 and 2006 amounted to $1.8
million and $1.9 million, respectively, and are associated with government contracts.
Raw Material and Finished Goods inventories related
to the modification and maintenance of aircraft are subject to technological obsolescence and potential decertification due to failure to meet design specifications. The Company actively reserves for these obsolete inventories. Future technological
changes could render some additional inventories obsolete. No estimate can be made of the loss that would occur should current design specifications change.
40
5. DEBT
Debt as of December 31, 2007 and 2006 consists of the following:
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Revolving Credit Facility; interest at LIBOR plus 6.0% (11.35% at December 31, 2006)
|
|
$
|
—
|
|
|
$
|
21,855
|
|
|
Bank Term Loan; interest at LIBOR plus 3.00% (8.35% at December 31, 2006)
|
|
|
—
|
|
|
|
1,000
|
|
|
Treasury Stock Term Loan; Interest at LIBOR plus 3.00% (8.35% at December 31, 2006)
|
|
|
—
|
|
|
|
719
|
|
|
Airport Authority Term Loan; interest at BMA plus 0.36% (4.07% at December 31, 2006)
|
|
|
—
|
|
|
|
1,960
|
|
|
Senior Secured Note, interest at 15%
|
|
|
5,000
|
|
|
|
5,000
|
|
|
Capital Lease Obligations; interest from 5.0% to 11.0%, collateralized by security interest in certain equipment
|
|
|
82
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
5,082
|
|
|
|
30,546
|
|
|
Less portion reflected as current
|
|
|
(80
|
)
|
|
|
(28,760
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Long term-debt, net of current portion
|
|
$
|
5,002
|
|
|
$
|
1,786
|
|
|
|
|
|
|
|
|
|
|
|
On December 16, 2002, the Company entered into a Credit Agreement with Wachovia Bank and
Compass Bank (the “Credit Agreement”) that provides for a Revolving Credit Facility and a Bank Term Loan. On October 12, 2006, the Company entered into an Amended and Restated Credit Agreement (“Amended Credit Agreement”)
with Wachovia Bank and Compass Bank. On September 19, 2007, the Company paid off the Revolving Credit Facility, the Bank Term Loan and the Treasury Stock Term Loan with the proceeds from the sale of PWAS. The Airport Authority Term Loan was
paid off on October 4, 2007.
On February 15, 2006, the Company entered into a Note Purchase Agreement with Silver Canyon
Services, Inc. (“Silver Canyon”), pursuant to which the Company issued to Silver Canyon a senior secured note in the principal amount of $5.0 million (the “Note”). The Note accrues interest at an annual rate of 15%, which is
payable quarterly in arrears. The Company may, at its election, redeem the Note at a price equal to 100% of the principal amount then outstanding, together with accrued and unpaid interest thereon. The Note contains customary events of default. The
payment of all outstanding principal, interest and other amounts owing under the Note may be declared immediately due and payable upon the occurrences of an event of default. On July 31, 2006, the Note was purchased by Special Value Bond Fund,
LLC, which is managed by Tennenbaum Capital Partners, LLC, a related party of the Company. The Note Purchase Agreement was amended on July 31, 2007 to extend the maturity date of the Note to February 15, 2009.
If additional financing is needed, the Company’s recent negative results of operations and the uncertainties regarding future contract awards will
likely make it more difficult and expensive for the Company to raise additional capital that may be necessary to continue its operations. If the Company cannot raise adequate funds on acceptable terms, or at all, its business could be materially
harmed.
6. ALLOWANCE FOR ESTIMATED LOSSES ON CONTRACTS-IN-PROCESS
At December 31, 2007 and 2006, the allowance for estimated losses on contracts-in-process of approximately $1.8 million and $3.2 million, respectively, was netted against inventory in accordance with
SOP 81-1 to adjust inventory to the net realizable value. This accrual is based upon management assumptions and estimates, and includes the application of the Company’s normal cost accounting methods and provisions for performance
penalties. It is possible that actual results could differ from those assumptions used by management and changes to those assumptions could occur in the near term, which could result in the realization of additional losses. Management believes these
assumptions are a reasonable estimate of the losses to be incurred on the respective loss contract activity through completion.
41
7. INCOME TAXES
The provision for (benefit from) income taxes for the years ended December 31, 2007 and 2006 is as follows:
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(362
|
)
|
|
$
|
—
|
|
|
State
|
|
|
23
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(339
|
)
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
5,739
|
|
|
|
(917
|
)
|
|
State
|
|
|
869
|
|
|
|
(133
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,608
|
|
|
|
(1,050
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,269
|
|
|
$
|
(975
|
)
|
|
|
|
|
|
|
|
|
|
|
42
Deferred tax assets and liabilities are recognized for the future tax effects of temporary differences
between the tax basis of an asset or liability and its reported amount in the financial statements. The measurement of deferred tax assets and liabilities is based on enacted tax laws and rates currently in effect in each of the jurisdictions in
which the Company operates. Deferred tax assets (liabilities) are comprised of the following at December 31:
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Pension costs
|
|
$
|
(9,083
|
)
|
|
$
|
(11,574
|
)
|
|
Net maintenance and service costs
|
|
|
(908
|
)
|
|
|
(1,235
|
)
|
|
Other
|
|
|
—
|
|
|
|
(1,403
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
(9,991
|
)
|
|
|
(14,212
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
651
|
|
|
|
382
|
|
|
Machinery, equipment, and improvements
|
|
|
400
|
|
|
|
301
|
|
|
Accrued vacation
|
|
|
602
|
|
|
|
1,170
|
|
|
Deferred compensation
|
|
|
304
|
|
|
|
235
|
|
|
Accrued worker’s compensation
|
|
|
165
|
|
|
|
410
|
|
|
Inventory reserves
|
|
|
906
|
|
|
|
824
|
|
|
Pension liability
|
|
|
12,620
|
|
|
|
13,303
|
|
|
Deferred income
|
|
|
1,494
|
|
|
|
909
|
|
|
Other accruals and reserves
|
|
|
496
|
|
|
|
1,028
|
|
|
Federal operating loss carry-forwards
|
|
|
110
|
|
|
|
7,237
|
|
|
State operating loss carry-forwards
|
|
|
629
|
|
|
|
1,428
|
|
|
Alternative minimum tax credit carry-forwards
|
|
|
1,894
|
|
|
|
1,386
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
20,271
|
|
|
|
28,613
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset valuation allowance
|
|
|
(10,280
|
)
|
|
|
(650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
—
|
|
|
$
|
13,751
|
|
|
|
|
|
|
|
|
|
|
|
For tax purposes, the Company deducts direct labor, overhead, general and administrative costs,
supplies and replacement parts as incurred. This tax accounting differs from GAAP accounting for these items creating a temporary difference, which is reflected as net maintenance and service costs in the table above. The accumulated temporary
difference for these items at December 31, 2007 and 2006 is $2.4 million and $3.2 million, respectively. Using the tax rates for deferred taxes for each year results in deferred tax liabilities of $0.9 million and $1.2 million for
December 31, 2007 and 2006, respectively.
The Company maintains a valuation allowance for its deferred income taxes unless
realization is considered more likely than not. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company
considers projected future taxable income and tax planning strategies in making this assessment. The Company has recorded a valuation allowance to reflect the estimated amount of deferred tax assets that may not be realized due to the expiration of
certain net operating losses and tax credit carryovers.
The Company records a valuation allowance to reduce its deferred tax assets to the
amount that is more likely than not to be realized. As a result of the awarding of the KC-135 contract to The Boeing Company and the lack of other long-term contracts in conjunction with the sale of PWAS, which generated significant pretax income
during 2007 and 2006, there is insufficient evidence for the Company to conclude as of December 31, 2007 that it is more likely than not that the deferred income tax assets recorded by the Company would be realized. During 2007, the Company
recorded a $9.7 million valuation allowance against the deferred income tax asset accounts which substantially increased the reported income tax expense in 2007.
43
A reconciliation from income tax expense computed at the U.S. federal statutory rate of 35% to the
Company’s provision for income tax expense (benefit) from continuing operations is as follows:
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Income tax expense (benefit) at federal statutory rate
|
|
$
|
(2,610
|
)
|
|
$
|
(948
|
)
|
|
State income tax expense (benefit)
|
|
|
(365
|
)
|
|
|
(109
|
)
|
|
Increase in valuation allowance
|
|
|
9,630
|
|
|
|
—
|
|
|
Other, net
|
|
|
(386
|
)
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
6,269
|
|
|
$
|
(975
|
)
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007 and 2006, the Company had estimated tax effected federal and state
operating loss carry-forwards of approximately $0.3 million and $9.2 million, respectively. The loss carry-forwards expire at various dates between 2007 and 2023. These loss carry-forwards are partially reserved for through the deferred tax
valuation allowance. The alternative minimum tax credit carry-forwards of $1.9 million and $1.4 million, respectively, included in the deferred tax assets at December 31, 2007 and 2006 do not expire.
8. STOCK OPTION PLANS
On May 14, 2003, the
Company’s stockholders approved amendments to the Company’s Nonqualified Stock Option Plan (the “Stock Option Plan”), pursuant to which a maximum aggregate of 2,000,000 shares of Common Stock have been reserved for grants to key
personnel. The Stock Option Plan expires by its terms on September 8, 2009. The Company’s Incentive Stock Option and Appreciation Rights Plan expired during fiscal year 2000 with outstanding options being combined with the Stock Option
Plan. Options available to be granted under the Stock Option Plan amounted to approximately 264,000 at December 31, 2007. Options granted under the Stock Option Plan become exercisable over staggered periods and expire ten years after the date
of grant.
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards
(“SFAS”) No. 123(R),
Share Based Payment,
which revises SFAS No. 123,
Accounting for Stock-Based Compensation.
Prior to the adoption of SFAS No. 123(R), stock-based compensation expense related to stock
options was not recognized in the results of operations if the exercise price was at least equal to the market value of the common stock on the grant date, in accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock
Issued to Employees.
SFAS No. 123(R) requires the Company to recognize expense related to the fair value of its stock-based compensation awards, including employee stock options, over the service period (generally the vesting period) in the
consolidated financial statements. SFAS No. 123(R) permits entities to use any option-pricing model that meets the fair value objective in the Statement. For options with graded vesting, the Company values the stock option grants and recognizes
compensation expense as if each vesting portion of the award was a separate award. Under the modified prospective method, awards that were granted, modified, or settled on or after January 1, 2006 are measured and accounted for in accordance
with SFAS No. 123(R). Unvested equity-classified awards that were granted prior to January 1, 2006 will continue to be accounted for in accordance with SFAS No. 123, except that all awards are recognized in the results of operations
over the remaining vesting periods. The compensation cost recorded for these awards will be based on their grant-date fair value as calculated for the pro forma disclosures required by SFAS No. 123. The impact of forfeitures that may occur
prior to vesting is also estimated and considered in the amount recognized. In addition, the realization of tax benefits in excess of amounts recognized for financial reporting purposes will be recognized as a financing activity, rather than as an
operating activity as in the past.
44
The following table summarizes Stock Option Plan activity for the years ended December 31 2007 and
2006:
(In Thousands, Except Exercise Price Per Share Information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
Weighted
Average
Exercise
Price
|
|
2006
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding beginning of year
|
|
|
1,071
|
|
|
$
|
20.29
|
|
|
1,054
|
|
|
$
|
20.42
|
|
Granted
|
|
|
202
|
|
|
|
8.35
|
|
|
79
|
|
|
|
17.42
|
|
Exercised
|
|
|
(3
|
)
|
|
|
2.85
|
|
|
(13
|
)
|
|
|
9.89
|
|
Forfeited
|
|
|
(113
|
)
|
|
|
17.89
|
|
|
(49
|
)
|
|
|
21.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding end of year
|
|
|
1,157
|
|
|
|
18.49
|
|
|
1,071
|
|
|
|
20.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable end of year
|
|
|
1,079
|
|
|
|
|
|
|
1,001
|
|
|
|
|
|
Estimated weighted average fair value of options granted
|
|
$
|
3.90
|
|
|
|
|
|
$
|
7.89
|
|
|
|
|
The aggregate intrinsic value for options exercised during 2007 was $20,048. The aggregate
intrinsic value for options exercisable as of December 31, 2007 was $0.
The following table summarizes information about stock options
outstanding at December 31, 2007:
(In Thousands, Except Remaining Life and Exercise Price Per Share Information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Prices
|
|
Number of
Outstanding
Options at
12/31/2007
|
|
Weighted
Average
Remaining
Life
|
|
Weighted
Average
Exercise
Price
|
|
Number of
Exercisable
Options at
12/31/2007
|
|
Weighted
Average
Exercise
Price
|
|
$ 4.58 - $8.35
|
|
197
|
|
8.74
|
|
$
|
8.14
|
|
136
|
|
$
|
8.05
|
|
$ 8.72 - $10.59
|
|
235
|
|
2.52
|
|
|
9.72
|
|
235
|
|
|
9.72
|
|
$13.24 - $16.49
|
|
197
|
|
3.90
|
|
|
15.76
|
|
197
|
|
|
15.76
|
|
$17.38 - $24.53
|
|
291
|
|
5.98
|
|
|
22.25
|
|
275
|
|
|
22.52
|
|
$25.51 - $29.25
|
|
64
|
|
6.78
|
|
|
27.07
|
|
63
|
|
|
27.10
|
|
$35.70 - $35.70
|
|
173
|
|
6.16
|
|
|
35.70
|
|
173
|
|
|
35.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,157
|
|
5.47
|
|
$
|
18.49
|
|
1,079
|
|
$
|
19.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of options granted during the years ended December 31, 2007 and 2006 was estimated
on the date of grant using the binomial method and the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Risk-free interest rate
|
|
4.54
|
%
|
|
4.84% - 4.88%
|
|
|
Expected volatility
|
|
60
|
%
|
|
59
|
%
|
|
Expected term
|
|
4.38
|
|
|
4.20
|
|
|
Dividend yield
|
|
0
|
%
|
|
0
|
%
|
|
Exercise factor
|
|
2.00
|
|
|
2.00
|
|
|
Post-vest %
|
|
5.04
|
%
|
|
6.51
|
%
|
The options pricing model used to calculate the fair value of options granted requires the input
of subjective assumptions that will usually have a significant impact on the fair value estimated.
9. EMPLOYEE BENEFIT PLANS
On December 31, 2006, the Company adopted the recognition provision of SFAS No. 158,
Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans—an Amendment of FASB Statements 87, 88, 106, and 132(R).
SFAS 158 requires an employer to recognize the funded status of a defined benefit postretirement plan as an asset or liability in its statement of
financial position and to recognize changes in that funded status in the year in which the changes occur in accumulated other comprehensive income. At December 31, 2006, the Company had a defined benefit postretirement plan, which is discussed
further below, that met the recognition criteria of SFAS 158. Accordingly, at December 31, 2006, the Company recognized the funded status of this plan with a corresponding adjustment to accumulated other comprehensive income. The adjustment to
accumulated other comprehensive income at adoption represents the net actuarial losses and net prior service costs. These amounts subsequently will be recognized as periodic net pension cost pursuant to the Company’s historical accounting
policy for amortizing such amounts. Additionally, actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic pension costs in the same periods will be subsequently recognized as a component of accumulated
other comprehensive income in the same manner as prior amounts.
45
The adoption of SFAS 158 had no impact on the Company’s Consolidated Statements of Operations for
the year ended December 31, 2006, or for any period presented, and it will not impact the Company’s operating results in the future. The impact of adopting SFAS 158 on the Company’s balance sheet at December 31, 2006, is
presented in the following table (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to
Adopting
SFAS 158
|
|
|
Impact of
Adoption
|
|
|
Reported
December 31, 2006
|
|
|
Defined benefit pension plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible pension asset
|
|
$
|
7,763
|
|
|
$
|
(7,763
|
)
|
|
$
|
—
|
|
|
Pension benefit liability-short and long-term
|
|
|
(17,128
|
)
|
|
|
(1,644
|
)
|
|
|
(18,772
|
)
|
|
Postretirement benefit liability
|
|
|
(574
|
)
|
|
|
(246
|
)
|
|
|
(820
|
)
|
|
Accumulated other comprehensive income (loss)
|
|
|
21,752
|
|
|
|
6,004
|
|
|
|
27,756
|
|
|
Deferred income tax assets
|
|
|
13,457
|
|
|
|
3,649
|
|
|
|
17,106
|
|
Pension
—The Company has a defined benefit pension plan (the “Pension Plan”)
in effect, which covers substantially all employees at its Birmingham, Alabama facility who meet minimum eligibility requirements. Benefits for non-union employees are based upon salary and years of service, while benefits for union employees are
based upon a fixed benefit rate and years of service. The Company froze the Pension Plan effective December 31, 2007 for all non-union employees. The funding policy is consistent with the funding requirements of federal laws and regulations
concerning pensions. The Company uses a December 31 measurement date in accounting for the Pension Plan.
Changes during the year in
the benefit obligation, fair value of plan assets, funded status, and amounts recognized in the statements of financial condition at December 31 were as follows:
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
CHANGE IN BENEFIT OBLIGATION
|
|
|
|
|
|
|
|
|
|
Benefit obligation, beginning of year
|
|
$
|
136,004
|
|
|
$
|
129,351
|
|
|
Effect of Sale of PWAS
|
|
|
(30,645
|
)
|
|
|
—
|
|
|
Service Cost
|
|
|
1,803
|
|
|
|
2,728
|
|
|
Interest Cost
|
|
|
6,422
|
|
|
|
7,505
|
|
|
Curtailment/Amendment
|
|
|
(1,575
|
)
|
|
|
621
|
|
|
Assumption changes
|
|
|
1,754
|
|
|
|
5,614
|
|
|
Actuarial (gain) loss
|
|
|
2,323
|
|
|
|
(44
|
)
|
|
Benefits paid
|
|
|
(9,559
|
)
|
|
|
(9,771
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation, end of year
|
|
$
|
106,527
|
|
|
$
|
136,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHANGE IN PLAN ASSETS
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, beginning of year
|
|
$
|
117,233
|
|
|
$
|
103,031
|
|
|
Effect of Sale of PWAS
|
|
|
(25,214
|
)
|
|
|
—
|
|
|
Actual return on plan assets
|
|
|
5,916
|
|
|
|
13,156
|
|
|
Employer contribution
|
|
|
9,059
|
|
|
|
10,952
|
|
|
Benefits and expenses paid
|
|
|
(9,694
|
)
|
|
|
(9,906
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, end of year
|
|
$
|
97,300
|
|
|
$
|
117,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
(9,227
|
)
|
|
$
|
(18,771
|
)
|
|
|
|
|
|
|
|
|
|
|
46
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Long-term pension and postretirement liabilities
|
|
$
|
(9,227
|
)
|
|
$
|
(18,771
|
)
|
|
|
|
|
|
|
|
|
|
|
AMOUNTS RECOGNIZED IN ACCUMULATED OTHER COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Net actuarial loss
|
|
$
|
29,306
|
|
$
|
36,853
|
|
Prior service cost
|
|
|
3,742
|
|
|
7,763
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
33,048
|
|
$
|
44,616
|
|
|
|
|
|
|
|
|
The accumulated benefit obligation for the Pension Plan was $106.5 million and $134.4 million at
December 31, 2007 and 2006, respectively. Information for the Pension Plan with an accumulated benefit obligation in excess of plan assets, as of December 31, 2007 and 2006, was as follows:
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Projected benefit obligation
|
|
$
|
106,527
|
|
$
|
136,004
|
|
Accumulated benefit obligation
|
|
|
106,527
|
|
|
134,360
|
|
Fair value of plan assets
|
|
|
97,300
|
|
|
117,233
|
Components of the Pension Plan’s net periodic benefit cost were as follows:
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Service cost
|
|
$
|
1,803
|
|
|
$
|
2,728
|
|
|
Interest cost
|
|
|
6,422
|
|
|
|
7,505
|
|
|
Expected return on plan assets
|
|
|
(7,853
|
)
|
|
|
(9,069
|
)
|
|
Amortization of prior service cost
|
|
|
966
|
|
|
|
1,334
|
|
|
Amortization of net loss
|
|
|
2,049
|
|
|
|
2,411
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
|
3,387
|
|
|
|
4,909
|
|
|
Effect of curtailment
|
|
|
826
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in net periodic pension benefit cost
|
|
$
|
4,213
|
|
|
$
|
4,909
|
|
|
|
|
|
|
|
|
|
|
|
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income were as follows:
47
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Net gain
|
|
$
|
(7,547
|
)
|
|
$
|
(792
|
)
|
|
Prior service cost
|
|
|
—
|
|
|
|
620
|
|
|
Amortization of prior service cost
|
|
|
(4,020
|
)
|
|
|
(1,334
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total net change of OCI
|
|
|
(11,567
|
)
|
|
|
(1,506
|
)
|
|
|
|
|
|
Effect of Sale of PWAS on OCI
|
|
|
9,882
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in other comprehensive income, net of PWAS sale
|
|
$
|
(1,685
|
)
|
|
$
|
(1,506
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Sale of PWAS on Pension benefit liability
|
|
$
|
3,014
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in net periodic pension benefit cost, other comprehensive income and gain on sale of PWAS
|
|
$
|
(486
|
)
|
|
$
|
3,403
|
|
|
|
|
|
|
|
|
|
|
|
The estimated net loss and prior service cost for the Pension Plan that will be amortized from
accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $1.8 million and $0.8 million, respectively.
The weighted average assumptions used to determine benefit obligations under the Pension Plan at December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Discount rate
|
|
6.25
|
%
|
|
6.00
|
%
|
|
Rate of compensation increase
|
|
3.50
|
%
|
|
3.50
|
%
|
The weighted average assumptions used to determine net periodic pension cost were as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Discount rate
|
|
6.00
|
%
|
|
6.00
|
%
|
|
Expected long-term return on plan assets
|
|
8.50
|
%
|
|
8.50
|
%
|
|
Rate of compensation increase
|
|
3.50
|
%
|
|
3.50
|
%
|
The expected long-term rate of return on Pension Plan assets was determined based upon historical
market returns, expectations of future long-term capital market appreciation, and the Pension Plan’s target asset allocations. In estimating the discount rate, the Company considered rates of return on high quality fixed-income investments
currently available, and expected to be available, during the period to maturity of the pension benefits. The Company used the CitiGroup Pension Liability Curve in determining the discount rate.
The Company’s weighted average asset allocations at December 31, 2007 and 2006, by asset category, are as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Domestic equity funds
|
|
31.9
|
%
|
|
54.5
|
%
|
|
International equity funds
|
|
8.7
|
%
|
|
11.3
|
%
|
|
Domestic fixed income funds and cash equivalents
|
|
50.0
|
%
|
|
24.9
|
%
|
|
Other
|
|
9.4
|
%
|
|
9.3
|
%
|
48
The basic goal underlying the Company’s investment policy is to ensure the assets of the Pension
Plan are invested in a prudent manner. The Company’s investment objectives with regards to its pension plan assets include achieving a rate of return that is competitive with returns achieved by similar pension portfolios and by market
averages. The Company’s strategy for achieving its desired total rate of return while reducing risk to an acceptable level includes appropriate diversification of Pension Plan assets. The Company believes diversification across different asset
classes and different capital markets allows the portfolio to take advantage of a variety of economic environments and at the same time acts to reduce risk by dampening the portfolio’s volatility of returns. The Company’s target asset
allocation guidelines at December 31, 2007 were as follows:
|
|
|
|
|
|
|
|
Target
Allocation
Ranges
|
|
|
Equity funds
|
|
50%-75
|
%
|
|
Domestic fixed income funds and cash equivalents
|
|
25%-50
|
%
|
|
Other
|
|
0%-10
|
%
|
The Plan’s assets were more heavily weighted with cash equivalents and more lightly weighted
with equity funds at December 31, 2007 in preparation for the spin-off of the PWAS pension plan assets which occurred in early January 2008.
The Company’s investment policy prohibits investment activity in municipal or tax exempt securities; commodities; securities of the Pension Plan Trustee or Investment Manager, including affiliates; unregistered or restricted stock;
short sales; and margin purchases. The Pension Plan does not own any shares of the Company’s Common Stock.
The following benefit payments, which
reflect expected future service as appropriate, are expected to be paid:
(In Thousands)
|
|
|
|
|
|
Expected Benefit Payments:
|
|
|
|
|
|
|
|
2008
|
|
$
|
8,523
|
|
2009
|
|
|
8,473
|
|
2010
|
|
|
8,405
|
|
2011
|
|
|
8,372
|
|
2012
|
|
|
8,327
|
|
2013 – 2017
|
|
|
41,310
|
The Company does not expect to make a contribution to the Pension Plan in 2008. The Company does
not have sufficient cash to make the required contributions to its defined benefit pension plan without negatively impacting the cash and liquidity of the Company by the end of 2008. Therefore, the Company applied on February 29, 2008 to the
Internal Revenue Service for a waiver of contributions through December 31, 2008. Without a waiver of contributions, the Company would be required to contribute approximately $3.7 million for the 2007 plan year by September 15, 2008.
Contribution calculations for the 2008 plan year have not been completed. The Company currently estimates that the quarterly payments for the 2008 plan year will be approximately $1.1 million to $1.2 million with the first quarterly payment due
April 15, 2008.
Postretirement Benefits
—The Company accrues the estimated cost of retiree benefit payments, other than
pensions, during the employees’ active service period. The Company provides health care benefits to both salaried and hourly retired employees at its Birmingham, Alabama facility. 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 annual and lifetime maximums. Currently, the plan is unfunded. The Company uses a December 31 measurement date in accounting for its other postretirement benefit plan.
49
Changes in the benefit obligation, plan assets, and funded status during the year and amounts recognized
in the statements of financial condition at December 31 were as follows:
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
CHANGE IN BENEFIT OBLIGATION
|
|
|
|
|
|
|
|
|
|
Benefit obligation, beginning of year
|
|
$
|
820
|
|
|
$
|
763
|
|
|
Effect of Sale of PWAS
|
|
|
(286
|
)
|
|
|
—
|
|
|
Service cost
|
|
|
52
|
|
|
|
63
|
|
|
Interest cost
|
|
|
36
|
|
|
|
47
|
|
|
Actuarial (gain) loss
|
|
|
(93
|
)
|
|
|
41
|
|
|
Benefits paid
|
|
|
(102
|
)
|
|
|
(94
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation, end of year
|
|
$
|
427
|
|
|
$
|
820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHANGE IN PLAN ASSETS
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, beginning of year
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Employer contribution
|
|
|
102
|
|
|
|
94
|
|
|
Benefits paid
|
|
|
(102
|
)
|
|
|
(94
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, end of year
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
(427
|
)
|
|
$
|
(820
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Current liabilities
|
|
$
|
(20
|
)
|
|
$
|
(81
|
)
|
|
Noncurrent liabilities
|
|
|
(407
|
)
|
|
|
(739
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded status
|
|
$
|
(427
|
)
|
|
$
|
(820
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AMOUNTS RECOGNIZED IN ACCUMULATED OTHER COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Net actuarial loss
|
|
$
|
50
|
|
|
$
|
157
|
|
|
Prior service cost
|
|
|
(2
|
)
|
|
|
(3
|
)
|
|
Net transition obligation
|
|
|
—
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
48
|
|
|
$
|
246
|
|
|
|
|
|
|
|
|
|
|
|
50
Information for the postretirement benefit plan with a benefit obligation in excess of plan assets is as
follows:
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Benefit obligation
|
|
$
|
427
|
|
$
|
820
|
|
Fair value of plan assets
|
|
|
—
|
|
|
—
|
Components of the plan’s net periodic pension cost were as follows:
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Service cost
|
|
$
|
52
|
|
|
$
|
63
|
|
|
Interest cost
|
|
|
36
|
|
|
|
47
|
|
|
Amortization of net actuarial loss
|
|
|
—
|
|
|
|
9
|
|
|
Amortization of prior service cost
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
Amortization of net transition obligation
|
|
|
11
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
98
|
|
|
$
|
134
|
|
|
|
|
|
|
|
|
|
|
|
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income were
as follows:
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Actuarial gain
|
|
$
|
(43
|
)
|
|
$
|
41
|
|
|
Amortization of actuarial gain
|
|
|
—
|
|
|
|
(9
|
)
|
|
Amortization of prior service cost
|
|
|
1
|
|
|
|
1
|
|
|
Transition asset
|
|
|
(81
|
)
|
|
|
—
|
|
|
Amorization of net transition asset
|
|
|
(11
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(134
|
)
|
|
|
17
|
|
|
Effect of Sale of PWAS
|
|
|
(249
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in other comprehensive income
|
|
$
|
(383
|
)
|
|
$
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in net periodic pension benefit cost and other comprehensive income
|
|
$
|
(285
|
)
|
|
$
|
151
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average assumptions used to determine the benefit obligation at December 31 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Discount rate
|
|
5.75
|
%
|
|
6.00
|
%
|
The weighted-average assumptions used to determine net periodic benefit cost for the years ended
December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Discount rate
|
|
6.00
|
%
|
|
6.25
|
%
|
51
An additional assumption used in measuring the accumulated postretirement benefit obligation was a
weighted average medical care cost trend rate of 7.5% for 2008, decreasing gradually to an ultimate rate of 5.0% in year 2013, and remaining at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A one-percentage point change in assumed health care cost trend rates would have the following effects:
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/07
|
|
12/31/06
|
|
|
|
12/31/07
|
|
|
12/31/06
|
|
|
Effect on total service and interest cost components
|
|
$
|
5
|
|
$
|
10
|
|
|
|
$
|
(5
|
)
|
|
$
|
(9
|
)
|
|
Effect on postretirement benefit obligation
|
|
$
|
41
|
|
$
|
70
|
|
|
|
$
|
(37
|
)
|
|
$
|
(62
|
)
|
The Company expects to contribute $20,000 to the postretirement benefit plan during 2008. The
following benefit payments, which reflect expected future service as appropriate, are expected to be paid:
(In Thousands)
|
|
|
|
|
|
2008
|
|
$
|
20
|
|
2009
|
|
|
29
|
|
2010
|
|
|
39
|
|
2011
|
|
|
51
|
|
2012
|
|
|
60
|
|
2013 – 2017
|
|
|
276
|
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 self-insured health and dental plans for employees at its Alabama facilities. The Company has reserves established in the amounts of $0.5 million and $0.7 million for reported and for incurred but not reported claims at
December 31, 2007 and 2006, respectively.
The Company has a self-insured workers compensation program with a self-insured retention
of $300,000 per occurrence. Claims in excess of the retention level are fully insured. Included in deposits and other in the accompanying consolidated balance sheets at December 31, 2007 and 2006, is $130,000 deposited with the State of Alabama
in connection with the Company’s self-insured workers’ compensation programs. The Company recorded reserves of $0.4 million and $0.8 million for workers’ compensation claims related to the self-insured programs at December 31,
2007 and 2006, respectively. A Letter of Credit of $1.2 million with Wachovia Bank supports the self-insured workers’ compensation programs.
The Company maintained a self-insured life insurance program for employees and retirees who are not insurable under the Company’s purchased life insurance programs. Individuals eligible for this program were those employees, former
employees, and spouses who met one of the following criteria at the time the Company changed life insurance carriers:
|
|
•
|
|
Employees on Total and Permanent Disability
|
|
|
•
|
|
Active employees over 70 years of age
|
|
|
•
|
|
Employees on Leave of Absence
|
|
|
•
|
|
Spouse with remaining Bridge and Transition benefits.
|
Self-insurance reserves are developed based on prior experience and consider current conditions to predict future experience. These reserves are estimates and actual experience may differ from these estimates.
Defined Contribution Plan
—The Company maintains a 401(k) savings plan for employees who are not covered by any collective
bargaining agreement and have attained age 21. Employee and Company matching contributions are discretionary. The Company maintains a 401(k) savings plan for firefighter and security employees who are covered by a
52
collective bargaining agreement. A matching contribution of $9,000 and $5,000 was made in 2007 and 2006, respectively to the 401(k) savings plan for
firefighter and security employees. 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. The principal lease for the GSS (in Birmingham, Alabama) expires on September 30, 2019. The principal leases for the MCS expire on August 31, 2009, with renewal options. The GSS lease provides for basic rentals, plus
contingent rentals based upon a graduated percentage of sales. The Company also leases vehicles and equipment under various operating and capital 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, 2007 are as follows:
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending
|
|
Facilities
|
|
Vehicles
And
Equipment
|
|
Total
|
|
2008
|
|
$
|
738
|
|
$
|
146
|
|
$
|
884
|
|
2009
|
|
|
557
|
|
|
68
|
|
|
625
|
|
2010
|
|
|
160
|
|
|
29
|
|
|
189
|
|
2011
|
|
|
160
|
|
|
14
|
|
|
174
|
|
2012
|
|
|
160
|
|
|
—
|
|
|
160
|
|
Thereafter
|
|
|
1,077
|
|
|
—
|
|
|
1,077
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum future rental commitments
|
|
$
|
2,852
|
|
$
|
257
|
|
$
|
3,109
|
|
|
|
|
|
|
|
|
|
|
|
Total rent expense charged to continuing operations for the years ended December 31, 2007 and
2006 amounted to $1.5 million and $1.7 million, respectively. Contingent rental amounts based on a percentage of sales included in rent expense amounted to $0.5 million and $0.8 million, for the years ended December 31, 2007 and 2006,
respectively.
United States Government Contracts—
The Company, as a U.S. Government contractor, is subject to audits, reviews,
and investigations by the U.S. 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 audits, reviews, and investigations would not have a materially adverse effect on the Company’s consolidated financial
position or results of operations.
Concentrations
In the ordinary course of business, the Company extends credit to many of its customers. As of December 31, 2007 and 2006, accounts receivable from two customers amounted to $7.5 million and $14.4 million,
respectively.
A small number of the Company’s contracts account for a significant percentage of its revenues. Contracts and
sub-contracts with the U.S. Government comprised 100% of the Company’s revenues from continuing operations in 2007 and 2006, respectively. The KC-135 program in and of itself comprised 66% and 74% of the Company’s total revenues from
continuing operations in 2007 and 2006, respectively. 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 have a material adverse effect on the Company’s financial position or results of operations.
Boeing LSS and
AAII-Birmingham (formerly Pemco Aeroplex, Inc.) agreed to continue as partners on the KC-135 PDM program during 2005 as a result of the UASF decision to re-compete the KC-135 PDM contract. A teaming agreement with Boeing was signed and from May 2005
through June 2006, the Company worked in cooperation with Boeing to submit a proposal on the new KC-135 contract under a Memorandum of Agreement with Boeing (“MOA”). After filing an initial proposal with the USAF, which included critical
financial and operational information on the Company’s KC-135 program, the Company believes Boeing breached the MOA due to the USAF’s reducing the number of aircraft in the request for proposal. As part of the Company’s teaming
arrangement with Boeing on the existing KC-135 contract, the Company had already spent several million dollars to meet Boeing’s new requirement that the Company adopt its KC-135 methodology. From July 2006 to September 2007, the Company spent
another million dollars preparing their own proposal for the new KC-135 contract. The Company’s proposal for the KC-135 PDM program was unsuccessful as the contract was awarded to Boeing in September 2007. The Company filed a protest with the
U.S. Government Accountability Office (“GAO”) and the contract was stayed for 100 days pending the results of the protest. On December 27, 2007 the GAO upheld in part the Company’s protest on the basis that the USAF failed to
conduct a proper analysis of Boeing’s cost/price proposal for realism or potential risk. The USAF filed a Request for Reconsideration on January 7, 2008, which was denied by the GAO on February 1, 2008. On March 3, 2008, the USAF
advised the Company that in response to the recommendation by the GAO it had completed additional review, documentation and a new award decision and that the Company’s proposal was not selected for award. Company officials attended a debriefing
from the USAF on the new award decision on March 7, 2008. The Company filed a protest on the new award decision on March 11, 2008 as to the USAF’s lack of proper evaluation to meet GAO recommendations and sudden post-award change of
work scope under the contract recompete. If the protest does not result in a positive outcome for the Company, it could have a material adverse effect on the Company’s financial condition and prospects, materially harm the Company’s
business and impair the value of its Common Stock.
Litigation
53
Breach of Contract Lawsuits
On January 16, 2004, the Company filed a complaint in the Circuit Court of Dale County, Alabama against GE Capital Aviation Services, Inc. (“GECAS”) for monies owed for modification and maintenance
services provided on nine 737-300 aircraft, all of which were re-delivered to GECAS during 2003 and are in service. On January 20, 2004, the Company received service of a suit filed against the Company’s former subsidiary, Pemco World Air
Services, Inc. in New York state court, claiming breach of contract with regard to two of the aircraft re-delivered. On March 5, 2004, the Company filed a motion to dismiss the claim filed in the New York state court, which was denied. On
March 24, 2004, the Circuit Court of Dale County, Alabama denied a motion filed by GECAS to dismiss or stay the proceedings. GECAS has subsequently paid in full charges owed on four of the nine aircraft. The New York Court ordered mediation in
the matter. Mediation took place on October 6, 2004, but was unsuccessful in bringing resolution. The case was again mediated on October 6, 2006 without success. On October 16, 2006, the Court granted the Company partial summary
judgment as to two of the five GECAS counterclaims. Discovery was completed on September 15, 2007, and trial has been set for late 2008. Management believes that the results of the counterclaims by GECAS will not have a material impact on the
Company’s financial position or results of operations.
Employment Lawsuits
In December 1999, the Company and Pemco Aeroplex 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 sought damages in the amount of $75 million. On July 27, 2000, the U.S. District Court determined that the group would not be certified as a class since the plaintiffs withdrew their request for class certification. The Equal
Employment Opportunity Commission (“EEOC”) subsequently entered the case purporting a parallel class action. The Court denied consolidation of the cases for trial purposes but provided for consolidated discovery. On June 28, 2002, a
jury determined that there was no hostile work environment in the original case and granted verdicts for the Company with regard to all 22 plaintiffs. The Company has reached an agreement to settle the case with the EEOC for $0.4 million.
During 2006, the Company reversed $0.5 million of accruals related to the settlement of the case with the EEOC.
Various claims alleging
employment discrimination, including race, sex, disability, and age 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 EEOC and before
state and federal courts in Alabama. Workers’ compensation claims brought by employees are also pending in Alabama state court. The Company believes that none of these claims, individually or in the aggregate, is material to the Company 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. Management believes that the results of these claims will not have a material impact on the
Company’s financial position or results of operations.
Environmental Compliance
In December 1997, the Company received an inspection report from the Environmental Protection Agency (“EPA”) documenting the results of an
inspection at the Birmingham, Alabama facility. The report cited various violations of environmental laws. The Company has taken actions to correct the items raised by the inspection. 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 and
remediate such contamination as necessary. During 1999, the Company drilled test wells and took samples under its Phase I Site Characterization Plan. These samples were forwarded to the EPA in 1999. A Phase II Site Characterization Plan (“Phase
II Plan”) was submitted to the EPA in 2001 upon receiving the agency’s response to the 1999 samples. The Phase II Plan was approved in January 2003, wells installed and favorable sampling events recorded. The Company compiled the
results and submitted a revised work plan to the agency which was accepted on July 30, 2004. The Media Clean-up Standard Report, as required, was submitted to the EPA in January 2005. It is the Company’s policy to accrue environmental
remediation costs when it is probable that such costs will be incurred and when a range of loss can be reasonably estimated. The Company reviews the status of all significant existing or potential environmental issues and adjusts its accruals as
necessary. The Company recorded liabilities of approximately $100,000 related to the Phase II Plan at both December 31, 2007 and 2006, which are included in accrued liabilities—other on the accompanying Consolidated Balance Sheets. The
Company anticipates the total costs of the Phase II Plan to be approximately $550,000, of which the Company had paid approximately $450,000 as of December 31, 2007. Management
54
believes that the results of the Phase II Plan will not have a material impact on the Company’s financial position or results of operations.
In March 2005, Pemco Aeroplex received notice from the South Carolina Department of Health and Environmental Control (“DHEC”) that it was
believed to be a potentially responsible party (“PRP”) with regard to contamination found on the Philips Service Corporation (“PSC”) site located in Rock Hill, South Carolina. Pemco was listed as a PRP due to alleged use by the
Company of contract services in disposal of hazardous substances. The Company joined a large group of existing PRP notification recipients in retaining environmental counsel. The Company believes it is possible that paint chips were disposed of with
this contractor beginning in 1997. PSC filed for bankruptcy in 2003. It is noted that contamination seems to be primarily linked to a diesel fuel tank leak whereby over 200,000 gallons of diesel product was lost or released into the environment at
the Rock Hill site. The database of manifests located on-site at PSC has been reviewed and the waste-in compilations have been completed, but remain subject to revision. The PRP group continues to increase. It is believed that the Company’s
potential liability will not exceed $50,000. The Company believes it is adequately insured in this matter. Management believes that the resolution of the above matter will not have a material impact on the Company’s financial position or
results of operations.
In addition, in conjunction with the sale of PWAS, WAS and the Company contracted for division of any environmental
liability that may be required to meet applicable environmental remediation standards at the Company’s former Dothan, Alabama facilities such that, in the event significant environmental remediation is required, WAS will bear the risk of the
first $1.0 million dollars of such losses and the Company will bear the risk of any such losses in excess of $1.0 million but not to exceed $2.0 million in the aggregate. As a result, WAS would be responsible for all losses in excess of $3.0
million. The funds required to meet the Company’s obligations have been escrowed for a five-year period.
Furthermore, the Company is
subject to various environmental regulations at the federal, state, and local levels, particularly with respect to the stripping, cleaning, and painting of aircraft. Compliance with environmental regulations have not had, and are not expected to
have, a material effect on the Company’s financial position or results of operations.
11. RELATED PARTY TRANSACTIONS
On April 23, 2002, the Company loaned Ronald A. Aramini, its President and Chief Executive Officer (“CEO”), approximately $0.4 million
under the terms of a promissory note. The promissory note carried a fixed interest rate of 5% per annum and was payable within 60 days of Mr. Aramini’s termination of employment with the Company. On March 26, 2007.
Mr. Aramini paid the accumulated interest on the promissory note. On February 1, 2008, the Company forgave in full the loan represented by the promissory note, including all accrued and unpaid interest to date, in recognition of
Mr. Aramini’s dual role as CEO of the Company and as acting President of the Company’s former subsidiary, PWAS, including Mr. Aramini’s critical role in the successful sale of PWAS.
On December 28, 2006, the Company and Mr. Aramini entered into a Second Amendment (the “Second Amendment”), to the Executive Deferred
Compensation Agreement, dated as of May 3, 2002 (the “Agreement”), between the Company and Mr. Aramini. The Agreement, as amended, provided for annual contributions by the Company to an associated rabbi trust for the benefit of
Mr. Aramini over the term of his employment agreement. The Company contributed $359,861 during January 2007 for the 2006 calendar year. Pursuant to the Second Amendment to the Agreement, the Company’s final obligation to make the $380,326
lump sum trust contribution for the 2007 calendar year was eliminated. Company contributions to the trust are invested by the trustee and are to be disbursed to Mr. Aramini in accordance with the terms of the Agreement.
On February 15, 2006, the Company entered into a Note Purchase Agreement with Silver Canyon Services, Inc. (“Silver Canyon”), pursuant to
which the Company issued to Silver Canyon a senior secured note in the principal amount of $5.0 million (the “Note”). On July 31, 2006, Silver Canyon assigned the Note Purchase Agreement and sold the Note to Special Value Bond Fund,
LLC, which is managed by Tennenbaum Capital Partners, LLC. Michael E. Tennenbaum is the Senior Partner of Tennenbaum Capital Partners, LLC and is Chairman of the Board of Directors of the Company. The Note Purchase Agreement was amended on
July 31, 2007 to extend the maturity date of the Note to February 15, 2009.
12. LABOR CONTRACTS
On December 31, 2007, the Company had 608 employees. Approximately 450 of these employees are covered under collective bargaining agreements
primarily with the United Automobile, Aerospace, and Agricultural Implement Workers of America (“UAW”). Negotiations last took place with the union in 2005. The Company’s agreement with the UAW, which represents the GSS workforce, was
ratified for a new five-year period and will expire on March 21, 2010.
55
13. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
As of December 31, 2007 and 2006, the carrying amounts of the Company’s financial instruments are estimated to approximate their fair values,
due to their short-term nature, and variable or market interest rates. The Company does not hedge its interest rate or foreign exchange risks through the use of derivative financial instruments.
56
14. FOURTH QUARTER ADJUSTMENTS (UNAUDITED)
During the fourth quarter of 2007, the Company recorded $0.9 million of legal and accounting fees related to the protest of the KC-135 contract and $0.8
million of pension expense related to freezing the Pension Plan for salary employees at December 31, 2007. The Company also recorded $0.3 million of expense related to the estimated obsolescence of raw material inventory.
During the fourth quarter of 2006, the Company reversed $0.5 million of accruals for EEOC claims based on settlement negotiations prior to the issuance
of the financial statements. The Company also recorded charges of $2.5 million related to losses on the U.S. Navy P-3 program including expected future losses on aircraft in work at December 31, 2007.
15. SEGMENT INFORMATION
The Company has two
operating segments: GSS and MCS. The GSS, located in Birmingham, Alabama, provides aircraft maintenance and modification services for government and military customers. The MCS, 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. The businesses historically comprising the Commercial Services Segment have been sold and are not presented in the segment
information.
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
has not historically allocated income taxes, other income or expense, interest income and interest expense to segments. The Company does allocate these items between continuing operations and discontinued operations; therefore, interest expense and
income tax expense or benefit is not consistent with previously reported amounts.
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 MCS may generate revenues from governmental entities or programs.
Due to the long-term nature of much of the Company’s business, the depreciation and amortization amounts recorded in the consolidated statements of
operations will not directly match the change in accumulated depreciation and amortization reflected on the Company’s consolidated balance sheets. This is a result of the capitalization of costs on long-term contracts into work-in-process
inventory. The following table reconciles the effect of this capitalization of costs:
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change in accumulated depreciation and amortization reflected on the consolidated balance sheets
|
|
$
|
1,898
|
|
|
$
|
2,036
|
|
|
Net depreciation and amortization removed from work-in-process
|
|
|
(5
|
)
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization recorded in cost of goods sold upon delivery of aircraft
|
|
$
|
1,893
|
|
|
$
|
1,986
|
|
|
|
|
|
|
|
|
|
|
|
57
The following table presents information about 2007 segment profit or loss:
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GSS
|
|
|
MCS
|
|
|
Unallocated
Corporate
|
|
|
Consolidated
|
|
|
Revenues from external domestic customers
|
|
$
|
65,061
|
|
|
$
|
7,743
|
|
|
$
|
—
|
|
|
$
|
72,804
|
|
|
Revenues from external foreign customers
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Inter-company revenues
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment revenues
|
|
|
65,061
|
|
|
|
7,743
|
|
|
|
—
|
|
|
|
72,804
|
|
|
Elimination
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
72,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
3,713
|
|
|
$
|
1,195
|
|
|
$
|
98
|
|
|
$
|
5,006
|
|
|
Segment operating loss
|
|
|
(4,042
|
)
|
|
|
(739
|
)
|
|
|
(2,063
|
)
|
|
|
(6,844
|
)
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(614
|
)
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(13,727
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
24,257
|
|
|
$
|
5,750
|
|
|
$
|
16,288
|
|
|
$
|
46,295
|
|
|
Depreciation/amortization
|
|
|
1,584
|
|
|
|
172
|
|
|
|
137
|
|
|
|
1,893
|
|
|
Capital additions
|
|
|
433
|
|
|
|
79
|
|
|
|
7
|
|
|
|
519
|
|
The following table presents information about 2006 segment profit or loss:
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GSS
|
|
|
MCS
|
|
Unallocated
Corporate
|
|
|
Consolidated
|
|
|
Revenues from external domestic customers
|
|
$
|
85,499
|
|
|
$
|
12,145
|
|
$
|
—
|
|
|
$
|
97,644
|
|
|
Revenues from external foreign customers
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
Inter-company revenues
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment revenues
|
|
|
85,499
|
|
|
|
12,145
|
|
|
—
|
|
|
|
97,644
|
|
|
Elimination
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
97,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
7,003
|
|
|
$
|
4,590
|
|
$
|
407
|
|
|
$
|
12,000
|
|
|
Segment operating income (loss)
|
|
|
(1,506
|
)
|
|
|
1,839
|
|
|
(2,386
|
)
|
|
|
(2,053
|
)
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(656
|
)
|
|
Income tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,734
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
33,243
|
|
|
$
|
5,929
|
|
$
|
18,974
|
|
|
$
|
58,146
|
|
|
Depreciation/amortization
|
|
|
1,602
|
|
|
|
137
|
|
|
247
|
|
|
|
1,986
|
|
|
Capital additions
|
|
|
1,510
|
|
|
|
38
|
|
|
186
|
|
|
|
1,734
|
|
58
16. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company’s unaudited consolidated quarterly financial data for the years ended December 31, 2007 and 2006 are presented below.
(In Thousands, Except Per Share Information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
Ended
3/31/07
|
|
|
Quarter
Ended
6/30/07
|
|
|
Quarter
Ended
9/30/07
|
|
|
Quarter
Ended
12/31/07
|
|
|
Net Sales
|
|
$
|
22,391
|
|
|
$
|
18,019
|
|
|
$
|
14,942
|
|
|
$
|
17,452
|
|
|
Gross Profit (Loss)
|
|
|
3,106
|
|
|
|
1,168
|
|
|
|
(357
|
)
|
|
|
1,089
|
|
|
Loss from Continuing Operations
|
|
|
(302
|
)
|
|
|
(1,278
|
)
|
|
|
(10,949
|
)
|
|
|
(1,198
|
)
|
|
Loss from Continuing Operations per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.07
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
(2.65
|
)
|
|
$
|
(0.29
|
)
|
|
Diluted
|
|
$
|
(0.07
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
(2.65
|
)
|
|
$
|
(0.29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
Ended
3/31/06
|
|
Quarter
Ended
6/30/06
|
|
|
Quarter
Ended
9/30/06
|
|
|
Quarter
Ended
12/31/06
|
|
|
Net Sales
|
|
$
|
24,615
|
|
$
|
27,682
|
|
|
$
|
21,692
|
|
|
$
|
23,655
|
|
|
Gross Profit
|
|
|
3,740
|
|
|
3,778
|
|
|
|
2,229
|
|
|
|
2,253
|
|
|
Income (Loss) from Continuing Operations
|
|
|
214
|
|
|
(234
|
)
|
|
|
(913
|
)
|
|
|
(801
|
)
|
|
Income (Loss) from Continuing Operations per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.05
|
|
$
|
(0.06
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.19
|
)
|
|
Diluted
|
|
$
|
0.05
|
|
$
|
(0.06
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.19
|
)
|
17. DISCONTINUED OPERATIONS
On September 19, 2007, the Company sold all of the outstanding stock in Pemco World Air Services, Inc., a wholly owned subsidiary of the Company (“PWAS”), to WAS Aviation Services, Inc., an affiliate of
Sun Capital Partners, Inc. (“WAS”). The sale was approved by the Company’s stockholders on September 17, 2007. PWAS historically has comprised substantially all of the CSS. The historical financial results of PWAS have been
presented in the accompanying consolidated financial statements as discontinued operations for all periods presented.
On October 10,
2006, Pemco Engineers, Inc., a wholly-owned subsidiary of the Company, entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Global Aerospace Technology Corporation (“Global Aerospace”), a newly-formed entity
controlled by prior members of Pemco Engineers’ management. Pursuant to the terms of the Purchase Agreement, Global Aerospace purchased substantially all of the assets and assumed substantially all of the liabilities of Pemco Engineers in
exchange for $2.0 million ($1.6 million in cash and $0.4 million in future product deliveries, all of which were received by the Company prior to December 31, 2006). Pemco Engineers is presented in the accompanying consolidated financial
statements as discontinued operations for all periods presented.
In accordance with SFAS No. 144,
Accounting for the Impairment or
Disposal of Long-Lived Assets
, the business operations of PWAS and Pemco Engineers are reported as discontinued operations in these consolidated financial statements and, accordingly, income and losses from discontinued operations have been
reported separately from continuing operations. Net sales and income from discontinued operations for the years ended December 31, 2007 and 2006 were as follows:
59
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
(In Thousands)
|
|
Net Sales
|
|
$
|
83,756
|
|
$
|
78,940
|
|
Income before income taxes
|
|
$
|
5,455
|
|
$
|
3,683
|
|
Income tax expense
|
|
|
2,211
|
|
|
1,430
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
$
|
3,244
|
|
$
|
2,253
|
|
|
|
|
|
|
|
|
Included within the results from discontinued operations is an allocation of interest expense.
Interest expense allocated to discontinued operations was approximately $2.3 million and $2.8 million for the years ended December 31, 2007 and 2006, respectively.
60
To conform with this presentation, all prior periods have been reclassifed. As a result, the assets and
liabilities of the discontinued operations have been reclassified on the balance sheet from the historical classifications and presented under the captions “assets of discontinued operations” and “liabilities of discontinued
operations,” respectively. As of December 31, 2007 and 2006, net assets of discontinued operations, substantially all of which at December 31, 2007 relate to Pemco World Air Services, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2007
|
|
December 31,
2006
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
—
|
|
|
10,805
|
|
|
Inventories, net
|
|
|
—
|
|
|
5,908
|
|
|
Deferred income taxes
|
|
|
—
|
|
|
1,684
|
|
|
Prepaid expenses and other
|
|
|
—
|
|
|
498
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
—
|
|
|
18,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Machinery, equipment and improvements at cost:
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
|
—
|
|
|
9,081
|
|
|
Leasehold improvements
|
|
|
—
|
|
|
12,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
21,307
|
|
|
Less accumulated depreciation and amortization
|
|
|
—
|
|
|
(12,668
|
)
|
|
|
|
|
|
|
|
|
|
|
Net machinery, equipment and improvements
|
|
|
—
|
|
|
8,639
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
—
|
|
|
2,886
|
|
|
Deposits and other
|
|
|
—
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets
|
|
|
—
|
|
|
11,545
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
—
|
|
$
|
30,440
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of pension and post-retirement liabilities
|
|
|
—
|
|
|
44
|
|
|
Accounts payable—trade
|
|
|
—
|
|
|
7,650
|
|
|
Accrued health and dental
|
|
|
—
|
|
|
225
|
|
|
Accrued liabilities—payroll related
|
|
|
—
|
|
|
2,035
|
|
|
Accrued liabilities—other
|
|
|
—
|
|
|
1,622
|
|
|
Customer deposits in excess of cost
|
|
|
—
|
|
|
1,321
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
—
|
|
|
12,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current portion
|
|
|
|
|
|
|
|
|
Long-term pension and post-retirement liabilities
|
|
|
—
|
|
|
4,375
|
|
|
Other long-term liabilities
|
|
|
—
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
—
|
|
|
17,299
|
|
|
|
|
|
|
|
|
|
|
|
Net Assets
|
|
$
|
—
|
|
$
|
13,141
|
|
|
|
|
|
|
|
|
|
|
61
SUPPLEMENTARY INFORMATION
ALABAMA AIRCRAFT INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
For the Periods Ended December 31, 2007 and 2006
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
Description
|
|
Balance at
Beginning
of Period
|
|
Charged to
Costs and
Expenses
|
|
Charged
to Other
Accounts
|
|
Deductions
|
|
|
Balance at
End of
Period
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
1,333
|
|
$
|
253
|
|
$
|
—
|
|
$
|
(20
|
)
|
|
$
|
1,566
|
|
Reserve for contract commitments, losses
|
|
|
3,202
|
|
|
1,433
|
|
|
—
|
|
|
(2,787
|
)
|
|
|
1,848
|
|
Reserve for obsolete inventories
|
|
|
1,441
|
|
|
1,607
|
|
|
—
|
|
|
(673
|
)
|
|
|
2,375
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
1,333
|
|
$
|
5
|
|
$
|
—
|
|
$
|
(5
|
)
|
|
$
|
1,333
|
|
Reserve for contract commitments, losses
|
|
|
3,829
|
|
|
3,202
|
|
|
—
|
|
|
(3,829
|
)
|
|
|
3,202
|
|
Reserve for obsolete inventories
|
|
|
1,019
|
|
|
696
|
|
|
—
|
|
|
(274
|
)
|
|
|
1,441
|
62
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A(T). Controls and Procedures
(a)
Evaluation of disclosure controls and procedures
.
The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the
design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation and the issues discussed below, the Chief Executive Officer and the Chief Financial Officer
have concluded that the Company’s disclosure controls and procedures are not operating effectively and are not properly designed to ensure that information required to be disclosed is accumulated and communicated to the Company’s
management to allow timely decisions regarding required disclosure in the reports filed or submitted under the Securities Exchange Act of 1934, as amended.
(b)
Management’s report on internal control over financial reporting
.
Under Section 404 of The Sarbanes-Oxley Act
of 2002, our management is required to assess the effectiveness of the Company’s internal control over financial reporting as of the end of each fiscal year and report, based on that assessment, whether the Company’s internal control over
financial reporting is effective.
Management of the Company is responsible for establishing and maintaining adequate internal control over
financial reporting. As defined in Exchange Act Rule 13a-15(f), internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our Board of
Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. Internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, internal control over financial reporting determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and may not prevent or detect all misstatements.
Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer, we assessed the effectiveness of the Company’s internal control over financial reporting as of the end of the period covered by this report. In this assessment,
the Company applied criteria based on the “Internal Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. These criteria are in the areas of control environment, risk assessment,
control activities, information and communication, and monitoring. The Company’s assessment included documenting, evaluating and testing the design and operating effectiveness of its internal control over financial reporting. Based upon this
evaluation, and the issues discussed below our management concluded that our internal control over financial reporting was not effective as of December 31, 2007.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to
attestation by the Company’s registered public accounting firm pursuant to temporary SEC rules that permit the Company to provide only management’s report in this annual report.
(c)
Changes in internal control over financial reporting
.
In addition to management’s evaluation of disclosure controls and procedures as discussed above, in connection with the audits of our financial statements for the fiscal years ended December 31, 2007 and 2006, we are continuing to
review and enhance policies and procedures involving accounting, information systems and monitoring.
During the audit of the 2006
financial statements, the Company’s independent registered public accounting firm identified a material weakness in internal control over financial reporting due to the resignation of the Director of Corporate Accounting and Manager of
Financial Reporting in December 2006 which created a lack of resources in the financial close and reporting process. In addition, it was noted that the Chief Financial Officer had the ability to make journal entries although no entries were made
during the year ended December 31, 2006. As a result of the lack of financial reporting resources, the Company’s independent registered public accounting firm identified miscellaneous audit adjustments. The Company added temporary
resources to compensate for the departure of the accounting personnel. The Company has continued to experience a significant level of turnover of financial personnel in 2007 and has experienced a reduction of full-time finance employees. The Company
has determined that the material weakness due to the lack of financial resources remains at December 31, 2007.
63
Except as noted above, there have been no changes to the Company’s internal control over financial
reporting that occurred during the Company’s fourth quarter ended December 31, 2007 that are reasonably likely to materially affect the Company’s internal control over financial reporting.
Item 9B. Other Information
None.
64
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The Company has established a Code of
Ethics & Business Conduct (the “Code of Ethics”) that applies to its officers (including its Chief Executive Officer and Chief Financial Officer), directors and employees. The Code of Ethics contains general guidelines for
conducting the Company’s business consistent with the highest standards of business ethics, and is intended to qualify as a “code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and Item 406 of
Regulation S-K promulgated by the SEC. The Code of Ethics is available, free of charge, on the Company’s website at www.alabamaaircraft.com under the heading “Investors.”
The other information required by this item is incorporated by reference from the “ELECTION OF CLASS II DIRECTORS” and “EXECUTIVE
COMPENSATION AND OTHER INFORMATION” sections of the Company’s definitive 2008 Proxy Statement.
Item 11. Executive Compensation
Certain of the information required by this item is incorporated by
reference from the “EXECUTIVE COMPENSATION AND OTHER INFORMATION” section of the Company’s definitive 2008 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required by this item is incorporated by reference from the “SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT” section of the Company’s definitive 2008 Proxy Statement.
The following table summarizes the securities that have been authorized for issuance under the Company’s sole equity compensation plan, the
Nonqualified Stock Option Plan, as of December 31, 2007. The Plan is described in Note 8 to the financial statements.
|
|
|
|
|
|
|
|
|
Plan Category
|
|
Number of Shares
to be issued
upon exercise of
outstanding options,
warrants and rights
|
|
Weighted-average
exercise
price of
outstanding options,
warrants and rights
|
|
Number of Shares
remaining available for
future issuance under
equity compensation plans
(excluding Shares
reflected in column (a))
|
|
|
|
(a)
|
|
(b)
|
|
(c)
|
|
Equity compensation plans approved by security holders
|
|
1,157,412
|
|
$18.49
|
|
264,175
|
|
Equity compensation plans not approved by security holders
|
|
-0-
|
|
N/A
|
|
N/A
|
|
Total
|
|
1,157,412
|
|
$18.49
|
|
264,175
|
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information required
by this item is incorporated by reference from the “CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS” and “ELECTION OF CLASS II DIRECTORS” sections of the Company’s definitive 2008 Proxy Statement.
Item 14. Principal Accountant Fees and Services
Information required by this item is incorporated by
reference from the “RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS” section of the Company’s definitive 2008 Proxy Statement.
65
PART IV
Item 15. Exhibits and Financial Statement Schedules
a.
Financial Statement
Schedules
.
The Financial Statement Schedules listed below appear in Part II, Item 8 hereof.
|
|
|
|
|
|
|
1.
|
|
Financial Statements:
|
|
|
|
|
|
Reports of Independent Registered Public Accounting Firm
|
|
28
|
|
|
|
Consolidated Balance Sheets
|
|
29
|
|
|
|
Consolidated Statements of Operations
|
|
31
|
|
|
|
Consolidated Statements of Stockholders’ Equity
|
|
32
|
|
|
|
Consolidated Statements of Cash Flows
|
|
33
|
|
|
|
Notes to Consolidated Financial Statements
|
|
34
|
|
|
|
|
|
2.
|
|
Financial Statement Schedule:
|
|
|
|
|
|
Schedule II - Valuation and Qualifying Accounts
|
|
62
|
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.
Exhibits
.
The exhibits listed on the EXHIBIT INDEX on page 68 of this Form 10-K are either filed herewith or incorporated herein by reference, as noted on the EXHIBIT INDEX.
66
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.
|
|
|
|
|
|
|
|
|
ALABAMA AIRCRAFT INDUSTRIES, INC.
|
|
|
|
|
|
Dated: March 31, 2008
|
|
By:
|
|
/s/ R
ONALD
A. A
RAMINI
|
|
|
|
|
|
Ronald A. Aramini, President and
|
|
|
|
|
|
Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
|
|
Dated: March 31, 2008
|
|
By:
|
|
/s/ R
ANDALL
C. S
HEALY
|
|
|
|
|
|
Randall C. Shealy, Senior Vice President
and
|
|
|
|
|
|
Chief Financial Officer
(Principal Financial Officer and Principal 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/ M
ICHAEL
E. T
ENNENBAUM
|
|
Chairman, Director
|
|
March 31, 2008
|
|
Michael E. Tennenbaum
|
|
|
|
|
|
|
|
|
|
/s/ H.T. B
OWLING
|
|
Vice Chairman, Director
|
|
March 31, 2008
|
|
H.T. Bowling
|
|
|
|
|
|
|
|
|
|
/s/ R
ONALD
A. A
RAMINI
|
|
President, Chief Executive Officer and Director
|
|
March 31, 2008
|
|
Ronald A. Aramini
|
|
|
|
|
|
|
|
|
/s/ T
HOMAS
C. R
ICHARDS
|
|
Director
|
|
March 31, 2008
|
|
Thomas C. Richards
|
|
|
|
|
|
|
|
|
|
/s/ R
ONALD
W. Y
ATES
|
|
Director
|
|
March 31, 2008
|
|
Ronald W. Yates
|
|
|
|
|
|
|
|
|
|
/s/ R
OBERT
E. J
OYAL
|
|
Director
|
|
March 31, 2008
|
|
Robert E. Joyal
|
|
|
|
|
|
|
|
|
|
/s/ H
UGH
S
TEVEN
W
ILSON
|
|
Director
|
|
March 31, 2008
|
|
Hugh Steven Wilson
|
|
|
|
|
|
|
|
|
|
/s/ R
ANDALL
C. S
HEALY
|
|
Senior Vice President and Chief Financial Officer
|
|
March 31, 2008
|
|
Randall C. Shealy
|
|
|
|
67
EXHIBIT INDEX
|
|
|
|
|
|
|
Exhibit
Number
|
|
Description
|
|
Reference
|
|
|
|
|
|
3.1
|
|
Certificate of Incorporation of Alabama Aircraft Industries, Inc.
|
|
(1)
|
|
|
|
|
|
3.2
|
|
Certificate of Amendment to Certificate of Incorporation of Alabama Aircraft Industries, Inc.
|
|
(13)
|
|
|
|
|
|
3.3
|
|
Bylaws of Alabama Aircraft Industries, Inc.
|
|
(1)
|
|
|
|
|
|
4.1
|
|
Provisions of the Certificate of Incorporation and Bylaws of Alabama Aircraft Industries, Inc. which define the rights of Securities Holders
|
|
(1)
|
|
|
|
|
|
10.1
|
|
Agreement and Plan of Merger dated April 20, 2000 between Precision Standard, Inc. and the Company
|
|
(1)
|
|
|
|
|
|
10.2
|
|
Doris K. Sewell Employment Letter dated March 2, 2000.†
|
|
(10)
|
|
|
|
|
|
10.3
|
|
Randall C. Shealy Employment Letter dated October 1, 2006.†
|
|
(10)
|
|
|
|
|
|
10.4
|
|
Repair Agreement dated December 12, 2001 between McDonnell Douglas Corporation, a wholly owned subsidiary of the Boeing Company, and Pemco Aeroplex, Inc.
|
|
(3)
|
|
|
|
|
|
10.5
|
|
Executive Deferred Compensation Agreement between the Company and Ronald A. Aramini dated May 3, 2002†
|
|
(2)
|
|
|
|
|
|
10.6
|
|
First Amendment to Executive Deferred Compensation Agreement between the Company and Ronald A. Aramini dated May 16, 2003†
|
|
(5)
|
|
|
|
|
|
10.7
|
|
Non-Qualified Stock Option Plan amended and restated May 14, 2003
|
|
(4)
|
|
|
|
|
|
10.8
|
|
Form of Notice of Stock Option Grant to Non-Employee Directors under the Nonqualified Stock Option Plan
|
|
(6)
|
|
|
|
|
|
10.9
|
|
Form of Notice of Stock Option Grant to Executive Officers under the Nonqualified Stock Option Plan.†
|
|
(6)
|
|
|
|
|
|
10.10
|
|
Note Purchase Agreement dated February 15, 2006, among the Company, Silver Canyon and the subsidiary guarantors.
|
|
(7)
|
|
|
|
|
|
10.11
|
|
Second Amendment to Executive Deferred Compensation Agreement between the Company and Ronald A. Aramini dated December 29, 2006†
|
|
(9)
|
|
|
|
|
|
10.12
|
|
Amendment No. 1, dated February 15, 2007, to the Note Purchase Agreement among the Company, Special Value Bond Fund, LLC and the subsidiary guarantors
|
|
(11)
|
|
|
|
|
|
10.13
|
|
Amendment No. 2, dated July 31, 2007, to the Note Purchase Agreement among the Company, Special Value Bond Fund, LLC and the subsidiary guarantors
|
|
(12)
|
|
|
|
|
|
10.14
|
|
Amended and Restated Senior Secured Note Due February 15, 2009
|
|
(12)
|
|
|
|
|
|
10.15
|
|
Alabama Aircraft Industries, Inc. Executive Retention Plan†
|
|
(14)
|
|
|
|
|
|
10.16
|
|
Form of Coverage Letter under the Alabama Aircraft Industries, Inc. Executive Retention Plan (issued to Randall C. Shealy and Doris K. Sewell)†
|
|
(14)
|
|
|
|
|
|
10.17
|
|
Employment Letter, dated January 21, 2008, with Ronald A. Aramini†
|
|
(14)
|
|
|
|
|
|
21
|
|
Subsidiaries of the Company
|
|
*
|
|
|
|
|
|
23.1
|
|
Consent of Grant Thornton LLP
|
|
*
|
|
|
|
|
|
31
|
|
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
*
|
|
|
|
|
|
32
|
|
Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
*
|
68
|
†
|
These exhibits constitute management contracts or compensation plans or arrangements.
|
|
(1)
|
Filed as an exhibit to the Company’s Form 10-Q for the quarter ended June 30, 2000, and incorporated by reference herein.
|
|
(2)
|
Filed as an exhibit to the Company’s Form 10-Q for the quarter ended March 31, 2002, and incorporated by reference herein.
|
|
(3)
|
Filed as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001, and incorporated by reference herein.
|
|
(4)
|
Filed as an exhibit to the Company’s Form 10-Q for the quarter ended June 30, 2003, and incorporated by reference herein.
|
|
(5)
|
Filed as an exhibit to the Company’s Form 10-Q for the quarter ended September 30, 2003 and incorporated by reference herein.
|
|
(6)
|
Filed as an exhibit to the Company’s Form 10-Q for the quarter ended March 31, 2005 and incorporated by reference herein.
|
|
(7)
|
Filed as an exhibit to the Company’s Current Report on Form 8-K dated February 15, 2006 and incorporated by reference herein.
|
|
(8)
|
Filed as an exhibit to the Company’s Current Report on Form 8-K dated December 14, 2006 and incorporated by reference herein.
|
|
(9)
|
Filed as an exhibit to the Company’s Current Report on Form 8-K dated December 28, 2006 and incorporated by reference herein.
|
|
(10)
|
Filed as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, and incorporated by reference herein.
|
|
(11)
|
Filed as an exhibit to the Company’s Current Report on Form 8-K dated February 15, 2007 and incorporated by reference herein.
|
|
(12)
|
Filed as an exhibit to the Company’s Current Report on Form 8-K dated July 31, 2007 and incorporated by reference herein.
|
|
(13)
|
Filed as an exhibit to the Company’s Current Report on Form 8-K dated September 19, 2007 and incorporated by reference herein.
|
|
(14)
|
Filed as an exhibit to the Company’s Current Report on Form 8-K dated February 1, 2008 and incorporated by reference herein.
|
69
Aaipharma (NASDAQ:AAII)
Historical Stock Chart
From Mar 2024 to Apr 2024
Aaipharma (NASDAQ:AAII)
Historical Stock Chart
From Apr 2023 to Apr 2024
