SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended Commission File No. 0-13829
September 30, 1994
PRECISION STANDARD, INC.
(Exact Name of Registrant as Specified in its Charter)
Colorado 84-0985295
(State of Incorporation) (I.R.S. Employer Identification No.)
One Pemco Plaza
1943 50th Street North
Birmingham, Alabama 35212
(Address of Principal Executive Offices)
(205) 591-3009
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of each of the issuer's classes
of common shares, as of the close of the period covered by this
report:
Class of Securities Outstanding Securities
$.0001 Par Value 12,344,291 shares
Common Shares Outstanding at September 30, 1994
<TABLE>
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
1994 1993
(Unaudited)
<S> <C> <C>
Current assets:
Cash $ 268,500
Accounts receivable, net of
allowance for doubtful accounts 17,190,653 $19,751,858
Inventories 25,234,965 27,344,833
Prepaid expenses and other 1,252,512 568,117
Deferred tax asset, net 2,804,104 2,804,104
Total current assets 46,750,734 50,468,912
Property, plant and equipment, at cost:
Leasehold improvements 9,587,583 9,266,839
Machinery and equipment 14,597,855 12,930,976
24,185,438 22,197,815
Less accumulated depreciation and
amortization (10,299,397) (8,360,674)
Net property and equipment 13,886,041 13,837,141
Other assets:
Intangible assets, net of
accumulated amortization 5,442,043 5,358,364
Unbilled receivable 3,510,271
Related party receivables 269,824 269,824
Deposits and other 1,001,050 970,510
Total other assets 10,223,188 6,598,698
$70,859,963 $70,904,751
<FN>
The accompanying notes are an integral part of
these consolidated financial statements.
</FN>
</TABLE>
<TABLE>
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
1994 1993
(Unaudited)
<S> <C> <C>
Current liabilities:
Bank overdrafts $ 798,185
Current maturities of long-term
debt $13,913,680 8,789,142
Accounts payable and accrued
expenses 19,926,955 16,596,177
Accrued warranty expense 607,000 575,000
Estimated losses on contracts
in progress 1,312,392 583,122
Total current liabilities 35,760,027 27,341,626
Long-term debt, net of current
maturities 18,286,179 28,567,327
Long-term portion of self-insured
workers' compensation reserve 3,698,431 3,404,684
Unfunded accumulated benefit
obligation 3,103,701 3,103,701
Total liabilities 60,848,338 62,417,338
Common stock purchase warrant 4,200,000 4,200,000
Stockholders' equity:
Common stock, $.0001 par value,
300,000,000 shares authorized,
12,681,551 and 12,677,380
shares issued, 12,344,291 and
12,340,120 outstanding at
September 30, 1994 and December 31,
1993, respectively. 1,268 1,268
Additional paid-in capital 762,795 759,723
Retained earnings 10,268,611 8,830,671
Minimum pension liability adjustment (4,662,462) (4,745,662)
Total paid-in capital and
retained earnings 6,370,212 4,846,000
Less cost of treasury shares
(337,260 shares) (558,587) (558,587)
Total stockholder's equity 5,811,625 4,287,413
$70,859,963 $70,904,751
<FN>
The accompanying notes are an integral part of
these consolidated financial statements.
</FN>
</TABLE>
<TABLE>
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Three
Months Ended Months Ended
September 30, September 30,
1994 1993
(Unaudited) (Unaudited)
<S> <C> <C>
Net sales $36,569,978 $42,204,115
Cost of sales 31,240,435 36,218,641
Gross profit 5,329,543 5,985,474
Selling, general and
administrative expenses (3,628,054) (3,684,908)
Bad debts expense (36,945) (47,217)
Research and development expense (170,756) (29,250)
Income from operations 1,493,788 2,224,099
Other expense:
Interest expense (799,909) (1,505,136)
Other, net 9,477 (19,572)
Income before income taxes 703,356 699,391
Net income tax (expense)/refund 11,184 (24,000)
Net income $ 714,540 $ 675,391
Earnings per common share and
common equivalent share
Note (3):
Income before extraordinary item $.04 $.05
Extraordinary item
Net income $.04 $.05
Earnings per common share -
assuming full dilution (Note 3):
Income before extraordinary item $.04 $.05
Extraordinary item
Net income $.04 $.05
Weighted average number of
common shares outstanding:
Common and common equivalent share 16,559,482 12,726,915
Assuming full dilution 16,559,482 12,736,946
<FN>
The accompanying notes are an integral part of
these consolidated financial statements.
</FN>
</TABLE>
<TABLE>
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Nine Nine
Months Ended Months Ended
September 30, September 30,
1994 1993
(Unaudited) (Unaudited)
<S> <C> <C>
Net sales $107,683,556 $128,674,666
Cost of sales 92,265,837 106,779,728
Gross profit 15,417,719 21,894,938
Selling, general and
administrative expenses (10,691,923) (11,381,521)
Bad debts recovery/(expense) 45,946 (18,192)
Research and development expense (685,530) (251,280)
Income from operations 4,086,212 10,243,945
Other expense:
Interest expense (2,469,813) (4,531,042)
Other, net (72,880) (127,687)
Income before income taxes
and extraordinary item 1,543,519 5,585,216
Income tax expense (105,579) (265,000)
Income before
extraordinary item 1,437,940 5,320,216
Extraordinary Item - Litigation
settlement net of applicable
income taxes of $26,000 (1,274,000)
Net income $ 1,437,940 $ 4,046,216
Earnings per common share and common
equivalent share (Note 3):
Income before extraordinary item $.09 $.42
Extraordinary item (.10)
Net income $.09 $.32
Earnings per share - assuming
full dilution (Note 3):
Income before extraordinary item $.09 $.42
Extraordinary item (.10)
Net income $.09 $.32
Weighted average number of
common shares outstanding:
Common and common equivalent shares 16,609,695 12,657,410
Assuming full dilution 16,609,695 12,727,435
<FN>
The accompanying notes are an integral part of
these consolidated financial statements.
</FN>
</TABLE>
<TABLE>
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Nine
Months Ended Months Ended
September 30, September 30,
1994 1993
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating
activities:
Net income $ 1,437,940 $ 4,046,216
Adjustments to reconcile
net income to net cash
provided from operating
activities:
Depreciation and amortization 2,120,073 2,752,838
Pension cost in excess of
funding 83,200 1,309,142
Provision for warranty expense 32,000
Provision for losses on
contracts in progress 1,532,116 2,715,529
Provision for losses on
receivables 86,945 78,379
Utilization of contract (386,316) (2,268,357)
loss reserves
Loss on disposition
of equipment 336 1,214
Increase in interest expense
due to increase in common
stock purchase warrant 1,500,000
Changes in assets and
liabilities:
Accounts receivable 2,474,260 (2,401,088)
Inventories 1,693,338 (4,485,846)
Prepaid expenses (684,395) (86,318)
Intangible assets (248,875) (9,369)
Unbilled receivable (3,510,271)
Deposits and other (30,540) 39,626
Accounts payable and
accrued expenses 3,330,778 1,925,753
Self-insured workers'
compensation reserve 293,747 727,001
Total adjustments 6,786,396 1,798,504
Net cash provided by
operating activities 8,224,336 5,844,720
Cash flows from investing
activities:
Capital expenditures (1,579,554) (2,224,249)
Insurance proceeds receivable 354,600
Net cash used in
investing activities $(1,579,554) $(1,869,649)
<FN>
The accompanying notes are an integral part of
these consolidated financial statements.
</FN>
</TABLE>
<TABLE>
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
Nine Nine
Months Ended Months Ended
September 30, September 30,
1994 1993
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from financing
activities:
Proceeds from issuance of
common stock $ 3,072 $ 13,781
Net repayments
under short-term obligations $ (10,398) (224,843)
Borrowings under revolving
credit facility $ 43,900,000 35,300,000
Repayments under revolving
credit facility $(43,200,000) (33,300,000)
Principal payments under
long-term obligations $ (6,270,771) (4,545,641)
Change in cash overdraft $ (798,185) (1,218,368)
Net cash used in
financing activities $ (6,376,282) (3,975,071)
Net increase in cash
and cash equivalents 268,500 -0-
Cash and cash equivalents
beginning of period -0- -0-
Cash and cash equivalents
end of period $ 268,500 $ -0-
Supplemental disclosure of cash
flow information:
Cash paid during the period for:
Interest $ 2,010,277 $ 2,239,780
Income taxes 290,719 429,411
Supplemental disclosure of
non-cash investing activities:
Capital lease obligations incurred
for new equipment $ 424,559 $ 145,200
<FN>
The accompanying notes are an integral part of
these consolidated financial statements.
</FN>
</TABLE>
PRECISION STANDARD, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated interim financial statements included in
this report have been prepared by the Company without audit.
In the opinion of management, all adjustments necessary for
a fair presentation are reflected in the interim financial
statements. Such adjustments are of a normal and recurring
nature excepting as noted in Note 5 to the Consolidated
Financial Statements. The results of operations for the
period ended September 30, 1994 are not necessarily
indicative of the operating results for the full year. The
interim financial statements should be read in conjunction
with the audited financial statements and notes thereto
included in the Company's 1993 10-K. Certain
reclassifications have been made to the 1993 financial
statements included herein to conform with the presentation
used in 1994.
2. INVENTORIES
<TABLE>
Inventories consist of the following:
September 30, December 31,
1994 1993
(Unaudited)
<S> <C> <C>
Work in-process $23,164,875 $20,361,218
Finished goods 3,150,156 3,259,872
Raw materials and supplies 5,879,704 7,083,837
Total $32,194,735 $30,704,927
Less progress payments (6,221,413) (3,038,267)
Less reserve for estimated
losses on contracts in
progress (738,357) (321,827)
$25,234,965 $27,344,833
</TABLE>
3. EARNINGS PER COMMON SHARE
In 1994, the computation of primary and fully diluted
earnings per share is based on the weighted average number
of outstanding common shares assuming the exercise of stock
options and stock warrants. The stock warrants were granted
to Bank of America in connection with the Senior
Subordinated Loan and allow for the purchase of 4,215,753
shares of the Company's common stock at an exercise price of
approximately $.24 per share.
In 1993, the computation of primary and fully diluted
earnings per share was based on the weighted average number
of outstanding common shares assuming the exercise of stock
options. However, the stock warrants were treated as debt
rather than equity, as that presentation was most dilutive.
4. NOTES PAYABLE
<TABLE>
Short-term debt consists of the following:
September 30, December 31,
1994 1993
<S> <C> <C>
Term Credit facility $ 8,000,000 $8,000,000
Senior Subordinated Loan 5,000,000 -0-
Note due to individual,
bears interest at 10%
collateralized by a
security interest in
certain equipment 447,172 447,172
Other obligations, 8% to 16%,
collateralized by security
interests in certain equipment 466,508 341,970
$13,913,680 $8,789,142
</TABLE>
<TABLE>
Long-term debt consists of the following:
September 30, December 31,
1994 1993
<S> <C> <C>
Senior Subordinated Loan $ 5,000,000 $10,000,000
Term Credit facility 5,000,000 11,000,000
Revolving Credit facility 7,500,000 6,800,000
Other obligations, 8% to 16%
collateralized by security
interests in certain
equipment 786,179 767,327
$18,286,179 $28,567,327
</TABLE>
The Company reached an agreement in March 1994 with its primary
lender to extend the maturity date of both the Revolving Credit
facility and Term Credit facility. Both of these instruments
were previously due in September 1994. The restated credit
agreement provides that the maturity date of the Revolving
Credit facility is September 30, 1995. The agreement also
provides that the maturity date of the Revolving Credit
facility can be extended to March 31, 1996 pursuant to the
payment of the extension fee specified in the agreement. The
provisions of the Revolving Credit facility agreement require a
commitment fee of one-half of one percent per annum on the
unused portion.
The Term Credit facility provides for three equal quarterly
installments of $2.0 million, December 31, 1994 through June
30, 1995, and a final payment of $7.0 million on September 30,
1995. The agreement provides that the maturity date of the
Term Credit facility can be extended pursuant to the payment of
the extension fee specified in the agreement. This extension
would allow the Company to repay the balance in two
installments of $2.0 million each on September 30 and December
31, 1995 and a final payment equal to the remaining unpaid
balance on March 31, 1996.
Accordingly, the Company has classified indebtedness with
stated maturities, including extensions, of over one year as
long term.
The Senior Subordinated Loan is repayable in two principal
installments of $5.0 million each, due in September 1995 and
1996.
5. CONTINGENCIES
The Company has recorded revenue and a long term unbilled
receivable of $3.5 million in anticipation of settlement of a
contract claim involving the KC-135 Programmed Depot
Maintenance (PDM) contract. The Company recorded $2.1 million
of revenue associated with the claim in the second quarter of
1994 and $1.4 million in the third quarter of 1994. The
additional $1.4 million of revenue booked in the third quarter
is due to refinement of the cost data supporting the original
claim as well as inclusion of ships redelivered in July of
1994.
The claim, which has been certified by the Company and
submitted to the U.S. Government, is for equitable adjustment
of the cost effect of late delivery of government-furnished
materials (GFM). The disruption in scheduled work flow which
occurred as a result of the late delivery of GFM began in the
second quarter of 1993 and continues to impact ships in work at
September 30, 1994. The Company's position, based on advice of
outside legal counsel specializing in government procurement
law and independent management consultants, is that the grounds
for the claim are legally and factually sound and that recovery
is substantially probable. The Company has recorded
appropriate reserves against the claim and has only considered
the cost impact of ships redelivered to the government through
July 31, 1994. The Company plans to submit an additional claim
for equitable adjustment of the cost impact of late delivery of
GFM for ships redelivered subsequent to July 31, 1994.
At this time, the Company cannot estimate the length of time
that will be required to resolve the claim. Should the Company
not ultimately receive an equitable adjustment from the claim,
which event the Company deems unlikely, the Company would
realize a pre-tax reduction of revenue of $3.5 million.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the
Company's consolidated financial statements and notes thereto
included herein.
RESULTS OF OPERATIONS
Three months ended September 30, 1994
Versus three months ended September 30, 1993
Revenues for the third quarter of 1994 decreased 13%, from $42.2
million for 1993 to $36.6 million for 1994. Government sales
decreased 22% in the third quarter, from $31.2 million in 1993 to
$24.4 million in 1994. Commercial sales increased 10% in the third
quarter, from $11.0 million in 1993 to $12.1 million in 1994.
The decrease in government sales was due primarily to a decrease in
the redelivery of KC-135 and C-130 aircraft under Programmed Depot
Maintenance (PDM) contracts with the U.S. Air Force. There were
nineteen KC-135 redeliveries in the third quarter of 1993 versus
twelve redeliveries in 1994. Four C-130 PDM aircraft were
redelivered in the third quarter of 1993 compared with one
redelivery in the third quarter of 1994.
The above decrease in government sales was partially offset by $1.4
million of revenue recorded in the third quarter in anticipation of
settlement of a contract claim (see Note 5 to the Consolidated
Financial Statements). The claim, which has been certified by the
Company and submitted to the U. S. Government, is for equitable
adjustment of the cost effect of late delivery of government-
furnished materials on the KC-135 PDM program. The Company recorded
$2.1 million of claim revenue in the second quarter; the additional
$1.4 million of revenue recorded in the third quarter is due to
refinement of the cost data supporting the original claim as well as
inclusion of ships redelivered in July of 1994. The Company's
position, based on advice of outside legal counsel specializing in
government procurement law and independent management consultants,
is that the grounds for the claim are legally and factually sound
and that recovery is substantially probable. The Company has
recorded appropriate reserves against the claim, and has only
considered the cost impact of ships redelivered to the government
through July 31, 1994. At this time, the Company can not reasonably
estimate the length of time that will be required to resolve the
claim. Should the Company not ultimately receive an equitable
adjustment from the claim, which event the Company deems unlikely,
the Company would realize a pre-tax reduction of revenue of $3.5
million.
The increase in commercial sales was due primarily to additional
revenue generated at the Company's aircraft maintenance facility in
Copenhagen, Denmark, which began operations in May of 1994 and due
to the redelivery of five 727 conversions in the third quarter of
1994 versus four such conversions in 1993. This increase in sales
was partially offset by lower revenues experienced as a result of
actions taken at its Clearwater, Florida facility, during the second
quarter of 1994.
The ratio of cost of sales ($31.2 million in 1994; $36.2 million in
1993) to net sales ($36.6 million in 1994; $42.2 million in 1993)
decreased slightly from 86% in 1993 to 85% in 1994. In the third
quarter of the previous year, the Company made a provision of $1.4
million for future losses on a commercial contract in progress and
recorded losses on its 727 and 737 commercial contract redeliveries
due to labor and material cost overruns. These events increased the
gross margin to 86% in the third quarter of 1993 as compared to 80%
in the second quarter of 1993. In the third quarter of 1994, the
gross margin showed a slight improvement over the third quarter of
1993. The third quarter of 1994 was negatively impacted by the
aforementioned reduction in U.S. Government sales and increased
labor costs on the KC-135 contract due principally to the disruption
of scheduled work flow which occurred as a result of the lack of
government furnished material. The quarter was also affected by
recorded losses on 727 conversion redeliveries, a provision for
anticipated losses for 727 conversion ships under contract and
recorded losses incurred at the Company's aircraft maintenance
facility in Copenhagen, which began operations in May of 1994. The
negative impact of these events was partially offset by the
aforementioned additional $1.4 million of claim revenue recorded in
the third quarter.
Selling, general and administrative expense decreased slightly from
the third quarter of 1993 to the third quarter of 1994 but increased
as a percentage of sales from 9.0% in 1993 to 10.0% in 1994.
Research and development expense increased approximately $0.1
million from the third quarter of 1993 to the third quarter of 1994,
as efforts were increased on both aircraft modification and aerial
tow target programs.
Interest expense decreased $0.7 million from $1.5 million in 1993 to
$0.8 million in 1994. In 1993, the value of the common stock
purchase warrant held by Bank of America was deemed to have
increased $0.5 million in the third quarter which resulted in a $0.5
million increase to interest expense. The deemed value of the
common stock purchase warrant remained constant in the third quarter
of 1994. Aside from the valuation of the stock warrant, other
interest expense declined $0.2 million as a result of the pay down
of outstanding debt, offset by an increase in interest rates. The
Company paid $2.0 million in principal against its Term Credit
facility in the third quarter of 1994. The effective average
interest rate in the third quarter of 1994 on the Term Credit
facility and the Revolving Credit facility was 7.17% versus 6.12%
for the third quarter of 1993.
The Company booked $0.1 million of state and federal income tax
expense in the third quarter of 1994 which was offset by a $0.1
million 1993 state refund.
Nine months ended September 30, 1994
Versus nine months ended September 30, 1993
Revenues for the first nine months of 1994 decreased 16%, from
$128.7 million for 1993 to $107.7 million for 1994. Government
sales decreased 16% in the first nine months, from $88.0 million in
1993 to $73.7 million in 1994. Commercial sales also decreased 16%
in the first nine months, from $40.7 million in 1993 to $34.0
million in 1994.
The decrease in government sales was due primarily to a decrease in
the redelivery of KC-135 and C-130 aircraft. There were fifty-one
KC-135 redeliveries in the first nine months of 1993 versus forty
redeliveries in 1994. Three of the forty redeliveries in 1994 were
partial redeliveries and they have been accounted for on a
percentage of completion basis. The aircraft were partially
redelivered due to work stoppage which occurred as a result of the
lack of government furnished material.
Thirty C-130 drop-in aircraft and twelve C-130 PDM aircraft were
redelivered in the first nine months of 1993 compared with twenty-
four drop-in aircraft and six PDM aircraft redeliveries in 1994.
Additionally, government sales declined due to reduced volumes under
the KC-135 boom contract, reductions on the U.S. Navy H-2 helicopter
contract and the cessation of the Bergstrom AFB GO-CO contract in
June of 1994.
As noted above, these decreases in government sales were partially
offset by $3.5 million of revenue recorded in the first nine months
of the year in anticipation of settlement of a contract claim (see
Note 5 to the Consolidated Financial Statements). The claim, which
has been certified by the Company and submitted to the U. S.
Government, is for equitable adjustment of the cost effect of late
delivery of government-furnished materials on the KC-135 PDM
program. The Company recorded $2.1 million of claim revenue in the
second quarter and an additional $1.4 million of revenue in the
third quarter due to refinement of the cost data supporting the
original claim as well as inclusion of ships redelivered in July of
1994. The Company's position, based on advice of outside legal
counsel specializing in government procurement law and independent
management consultants, is that the grounds for the claim are
legally and factually sound and that recovery is substantially
probable. The Company has recorded appropriate reserves against the
claim, and has only considered the cost impact of ships redelivered
to the government through July 31, 1994. At this time, the Company
cannot estimate the length of time that will be required to resolve
the claim. Should the Company not ultimately receive an equitable
adjustment from the claim, which event the Company deems unlikely,
the Company would realize a pre-tax reduction of revenue of $3.5
million.
The aforementioned decrease in government sales was also partially
offset by an increase in revenue generated by the Company's Space
Vector Corporation, which develops and manufactures rocket launch
vehicles and guidance systems for the U.S. Government and foreign
and commercial customers.
The decline in commercial sales was due primarily to a decrease in
the redelivery of 737 cargo conversion aircraft and to lower
revenues from the Clearwater, Florida facility, which resulted from
actions taken in the second quarter of 1994. There were ten 737
redeliveries in the first nine months of 1993 compared with five
such redeliveries in the same period of 1994. The decrease in
commercial sales was partially offset by revenue generated at the
Company's aircraft maintenance facility in Copenhagen, which began
operations in May of 1994 and by the redelivery of five 727
conversions in 1994 versus four such conversions in 1993.
The ratio of cost of sales ($92.3 million in 1994; $106.8 million in
1993) to net sales ($107.7 million in 1994; $128.7 million in 1993)
increased from 83% in 1993 to 86% in 1994. The resultant decrease
in gross profit is attributable to the aforementioned reduction in
government sales, increased labor costs on the KC-135 contract due
principally to the disruption of scheduled work flow which occurred
as a result of the lack of government furnished material and an
increase in overhead costs as a percentage of sales. Further, the
Company recorded losses on its 727 conversion redeliveries, provided
for anticipated losses on 727 conversion ships under contract and
recorded losses incurred at the Company's aircraft maintenance
facility in Copenhagen which began operations in May of 1994. The
negative impact of these events was partially offset by the
aforementioned $3.5 million of claim revenue recorded in the first
nine months of the year.
Selling, general and administration expense decreased from the first
nine months of 1993 to the first nine months of 1994 but increased
as a percentage of sales from 9.0% in 1993 to 10.0% in 1994.
Research and development expense increased approximately $0.4
million from the first nine months in 1993 to the first nine months
in 1994 as efforts were increased on both aircraft modification and
aerial tow target programs.
Interest expense decreased $2.0 million from $4.5 million in 1993 to
$2.5 million in 1994. In 1993, the value of the common stock
purchase warrant held by Bank of America was deemed to have
increased $1.5 million which resulted in a $1.5 million increase to
interest expense. The deemed value of the common stock purchase
warrant remained constant in the first nine months of 1994. Aside
from the valuation of the stock warrant, other interest expense
declined $0.6 million as a result of the pay down of outstanding
debt, offset by an increase in interest rates. The Company paid
$6.0 million in principal against its Term Credit facility in the
first nine months of 1994. The effective average interest rate in
1994 on the Term Credit facility and the Revolving Credit facility
was 6.80% versus 6.23% for 1993.
The Company booked $0.2 million of state and federal income tax
expense in the first nine months of 1994 which was offset by $0.1
million of 1993 state refunds versus $0.2 million of state and
federal income tax expense in the first nine months of 1993. A net
deferred tax asset of $2.8 million was recorded in the fourth
quarter of 1993 as a result of the net change in the valuation
allowance related to benefits arising from loss carryforwards.
Approximately $8.2 million of future taxable income will have to be
generated to realize the deferred tax asset. The Company believes
that future levels of pretax earnings for financial reporting
purposes will be sufficient to generate $8.2 million of future
taxable income.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital decreased $12.1 million in the first nine months
of 1994, from $23.1 million at December 31, 1993 to $11.0 million at
September 30, 1994, principally due to the pending maturity of the
first installment of principal due on the Company's Senior
Subordinated Loan equal to $5.0 million (see Note 4 to the
Consolidated Financial Statements). Additionally, accounts
receivable decreased $2.6 million, inventories decreased $2.1
million and accounts payable and accrued expenses increased $3.3
million. As a result, the current ratio decreased from 1.85 at
December 31, 1993 to 1.31 at September 30, 1994.
Net income decreased $2.6 million for the first nine months of 1994
as compared to the first nine months of 1993. However, net cash
provided from operating activities increased $2.4 million, from a
net cash provided position of $5.8 million in 1993 to a net cash
provided position of $8.2 million in 1994. This disparity in net
income versus net cash primarily resulted from the change in
accounts receivable, inventory and accounts payable and accrued
expenses for each year.
Accounts receivable, excluding the provision for losses on
receivables, decreased $2.5 million in the first nine months of 1994
compared to an increase of $2.4 million in 1993, due to the
reduction of aircraft redeliveries under both government and
commercial aircraft maintenance and modification programs in 1994.
Inventory, excluding reserves for estimated losses on contracts in
progress, decreased $1.7 million in the first nine months of 1994
due to an increase of $3.2 million in customer financed progress
payment balances, and a $1.2 million decrease in raw material,
offset by a $2.8 million increase in work in process. Inventory
increased $4.5 million in the first nine months of 1993 due to a
reduction of $11.5 million in customer financed progress payment
balances offset by a $6.7 million reduction in work in process. The
progress payment balance decreased in the first nine months of 1993
due to the large number of aircraft redeliveries on both government
and commercial contracts.
Accounts payable and accrued expenses increased $3.3 million in the
first nine months of 1994 primarily due to an increase in vendor
payables of $2.7 million and an increase of $0.7 million in accrued
holiday pay. Accounts payable and accrued expenses increased $1.9
million in the first nine months of 1993 primarily due to a $1.5
million increase in vendor payables, a $1.5 million increase in
accrued wages and a $1.0 million increase in holiday pay, offset by
a decrease in unearned customer deposits of $2.3 million.
The other principal components of cash flow from operating
activities in the first nine months of 1994 that had a favorable
impact on cash flow were a $2.1 million charge for depreciation and
amortization and a provision for contract losses of $1.5 million.
The charge for depreciation and amortization decreased $0.6 million
from the first nine months of 1993 due to a $2.7 million reduction
in intangibles that was recorded in the fourth quarter of 1993 in
accordance with SFAS No. 109 Accounting for Income Taxes (see note
8, Income Taxes, in the Company's 1993 10-K).
The principal components of cash flow from operating activities in
the first nine months of 1994 that had an unfavorable impact on cash
flow were the recording of a $3.5 million long term unbilled
receivable in connection with the aforementioned claim for the cost
effect of late delivery of GFM, a $0.7 million increase in prepaid
expenses, a $0.4 million utilization of contract loss reserves and a
$0.2 million increase in intangible assets.
The Company utilized $7.5 million of its $8.0 million Revolving
Credit facility at September 30, 1994 versus $6.8 million at
December 31, 1993. The Company used its cash provided from
operating activities and $0.7 million from the Revolving Credit
facility to fund $6.0 million in principal payments on the Term
Credit facility in the first nine months of 1994 as well $0.3
million for payments on various capital leases. The Company also
expended $1.6 million for capital items and reduced its cash
overdraft by $0.8 million.
Consolidated indebtedness at September 30, 1994 is $32.2 million
versus $37.4 million at December 31, 1993. Although the Company
remains highly-leveraged, management believes that, due to its
positive long-term business outlook and expected cash flows, it will
continue to have sufficient internal and external resources to meet
its current and future obligations and to accommodate growth in its
business. The company has applied for several operating and capital
lease lines of credit, and it is currently seeking
renewal/replacement financing for its Revolving Credit, Term
Credit and Senior Subordinated loan facilities. As addressed in
Note 4 to the Consolidated Financial Statements, the Company may
extend the final maturity date for its Revolving Credit facility and
Term Credit facility to March 31, 1996. The Company has assumed
such an extension in its classification of the maturity of its debt
at September 30, 1994.
At September 30, 1994, the Company may be deemed to have been in
violation of certain restrictive financial tests required by its
bank credit agreements with respect to its ratio of debt to net
worth. The Company has informed its lender of the violations and
will be negotiating with the lender for a waiver of these
violations. No default notice has been issued. Based upon the fact
that the Company has met all of its debt service obligations to
date, the Company expects the current violations to be waived.
Accordingly, the Company has classified indebtedness with stated
maturities, including extensions, of over one year, as long-term.
BACKLOG
The following table presents the Company's order backlog (in
thousands of dollars) at September 30, 1994 and 1993:
<TABLE>
1994 1993
<S> <C> <C>
U.S. Government $125,680 $129,780
Commercial $ 58,181 $ 59,735
Total $183,861 $189,515
</TABLE>
At both September 30, 1994 and September 30, 1993, U.S. Government
backlog accounted for approximately 68% of total backlog while
commercial backlog was approximately 32%. The backlog for the U.S.
Government decreased $4.1 million from the first nine months of 1993
to the first nine months of 1994, primarily due to a decrease of
$16.7 million in C-130 backlog and an $8.2 million decrease in
backlog for the Company's Space Vector subsidiary, offset by an
increase of $20.8 million in KC-135 orders. Commercial backlog
decreased slightly by $1.6 million. The primary changes in the
commercial backlog were an increase of $7.8 million in 727
conversion orders offset by a decrease of $3.6 million in the 737
conversion backlog and a decrease of $5.8 million on miscellaneous
maintenance and modification orders.
Approximately $19.6 million of the 1994 commercial backlog and $22.1
million of the 1993 commercial backlog included above may not be
considered firm as it includes maintenance and modification work to
be performed on optional aircraft. Approximately $70.9 million of
1994 U.S. Government backlog and $72.3 million of 1993 U.S.
Government backlog included above are firm orders that have not yet
been funded. Of the $70.9 million firm but unfunded 1994 U.S.
Government backlog, $52.0 million is for the first year of the new
contract for programmed depot maintenance of KC-135 aircraft. The
KC-135 contract was awarded in August of 1994 and has six option
years with an estimated backlog value of $226.5 million which is not
included in the above figures. Approximately $18.2 million of the
$70.9 million of 1994 U.S. Government firm but unfunded backlog
relates to the Company's Space Vector subsidiary. Additionally, the
Company has approximately $11.0 million of firm but unfunded backlog
associated with follow-on years of the C-130 contract which is not
included in the figures cited above.
While the Company considers its backlog position to be strong, the
Company continues to make every effort to maintain market share.
Management believes that recent trends of declining air passenger
and cargo traffic volume have bottomed out and that the industry is
poised for positive growth in both passenger and cargo volume. As
cargo volume rises, and excess capacity is utilized, cargo carriers
will look for additional capacity which should have positive
implications for the Company's primary commercial businesses.
Recent negative financial results by commercial carriers in the air
passenger market are causing many carriers to re-evaluate their in-
house maintenance philosophy. Accordingly, management believes that
an opportunity also exists to increase the Company's share of this
business.
The decline in defense spending by the U.S. Government is expected
to have mixed implications for the Company. Reduced fleet size and
fewer new aircraft development projects will be offset by the need
to keep older aircraft in operation. Nevertheless, the competitive
nature of the Company's industry requires constant evaluation of
production efficiency and pricing in both the government and
commercial markets. The company knows of no current or foreseeable
trend which will diminish its market share for any of its principal
products or services.
CONTINGENCIES
As previously discussed above and in Note 5 to the Consolidated
Financial Statements, a denial of the Company's claim for equitable
adjustment from the U.S. Government for the cost impact of late
delivery of government furnished material on its KC-135 PDM
contract, which event the Company deems unlikely, would cause a pre-
tax reduction of revenue of $3.5 million.
Secondly, the Registrant has a defined benefit pension plan which
covers substantially all employees at its Birmingham, Dothan and
Leeds, Alabama facilities. Under FASB Statement of Financial
Accounting Standards (FAS) 87, Employers' Accounting for Pensions,
an additional liability is recognized when the unfunded accumulated
benefit obligation (the excess of accumulated benefits over the fair
value of plan assets) exceeds the balance sheet liability for
accrued pension costs. The offset to this additional liability is
an increase in intangibles to the extent of unrecognized prior
service cost and a reduction to stockholders' equity. The Company
recorded at December 31, 1993 a $9.8 million liability offset by a
$5.1 million intangible asset and a $4.7 million charge to
stockholder's equity. Depending primarily on the investment
performance of its pension plan assets and prevailing interest
rates, the Company could be required to record an additional minimum
liability and an additional charge to equity at December 31, 1994.
An evaluation to determine such adjustments cannot be accurately
performed until December 31, 1994.
PRECISION STANDARD,INC.
OTHER INFORMATION
Item 1 Legal Proceedings
None
Item 2 Changes in Securities
None
Item 3 Defaults Upon Senior Securities
None
(At September 30, 1994 the Company may be deemed to have
been in violation of certain restrictive financial tests
required by its bank credit agreements with respect to the
ratio of debt to net worth. The Company has informed its
lender of the violations and will be negotiating with the
lender for a waiver of these violations. No default
notice has been issued. Based upon the fact that the
Company has met all of its debt service obligations to
date, the Company expects the current violations to be
waived. Accordingly, the Company has classified
indebtedness with stated maturities, including extensions,
of over one year as long-term.)
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
PRECISION STANDARD, INC.
Date: 11/17/94 By: /s/ Matthew L. Gold
Matthew L. Gold
Chairman, President and
Chief Executive Officer
Date: 11/17/94 By: /s/ Walter M. Moede
Walter M. Moede
Executive Vice President
& Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000771729
<NAME> PRECISION STANDARD, INC.
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 268,500
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<RECEIVABLES> 17,421,793
<ALLOWANCES> 231,140
<INVENTORY> 25,234,965
<CURRENT-ASSETS> 46,750,734
<PP&E> 24,185,438
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<TOTAL-ASSETS> 70,859,963
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