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, 1995
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 12,451,915 shares
Common Shares Outstanding at September 30, 1995
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
1995 1994
(Unaudited)
<S> <C> <C>
Current assets:
Accounts receivable, net of
allowance for doubtful accounts $14,372,758 $15,266,539
U.S. Government request for
equitable adjustment, net 8,008,777
Inventories 25,882,936 27,713,937
Prepaid expenses and other 1,262,150 814,548
Deferred tax asset, net 6,245,783 8,147,544
Total current assets 55,772,404 51,942,568
Property, plant and equipment,
at cost:
Leasehold improvements 10,311,092 9,784,364
Machinery and equipment 17,104,686 14,992,089
27,415,778 24,776,453
Less accumulated depreciation and
amortization (12,648,772) (10,837,428)
Net property and equipment 14,767,006 13,939,025
Other assets:
Intangible assets, net of
accumulated amortization 4,919,155 5,053,837
Related party receivables 269,824 269,824
Deposits and other 867,050 1,004,501
Insurance proceeds receivable 482,858 129,930
U.S. Government request for
equitable adjustment, net 1,000,000 3,510,271
Deferred tax 4,926,250 4,926,250
12,465,137 14,894,613
Total assets $83,004,547 $80,776,206
<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,
1995 1994
(Unaudited)
<S> <C> <C>
Current liabilities:
Current maturities of long-term
debt $25,473,267 $13,889,790
Accounts payable and accrued
expenses 26,568,755 20,912,352
Accrued warranty expenses 1,247,484 1,518,679
Estimated losses on contracts
in progress 1,007,188 1,345,176
Total current liabilities 54,296,694 37,665,997
Long-term debt, net of current
maturities 907,751 14,924,602
Long-term portion of self-insured
workers' compensation reserve 3,477,036 3,642,384
Unfunded accumulated benefit
obligation 7,828,431 7,828,431
Total liabilities 66,509,912 64,061,414
Common stock purchase warrant -0- 4,200,000
Stockholders' equity:
Common stock, $.0001 par value,
300,000,000 shares authorized,
12,789,175 and 12,787,208
shares issued, 12,451,915 and
12,344,291 outstanding at
September 30, 1995 and December 31,
1994, respectively. 1,280 1,279
Additional paid-in capital 5,139,068 937,784
Deferred compensation on
restricted shares (109,375) (175,000)
Retained earnings 18,543,618 20,058,166
Translation adjustments 143,236
Minimum pension liability adjustment (6,664,605) (7,748,850)
17,053,222 13,073,379
Less cost of treasury shares
(337,260 shares) (558,587) (558,587)
Total stockholder's equity 16,494,635 12,514,792
Total liabilities and stock-
holders' equity $83,004,547 $80,776,206
<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,
1995 1994
(Unaudited) (Unaudited)
<S> <C> <C>
Net sales $29,070,599 $36,569,978
Cost of sales (25,718,549) (30,076,435)
Gross profit 3,352,050 6,493,543
Selling, general and
administrative expenses (3,849,532) (4,792,054)
Bad debts recovery (expense) 51,256 (36,945)
Research and development expense (108,387) (170,756)
Income (loss) from operations (554,613) 1,493,788
Other expense:
Interest expense (826,228) (799,909)
Other, net (36,881) 9,477
Income (loss) before income taxes (1,417,722) 703,356
Net income tax (expense)/refund (19,075) 11,184
Net income (loss) $(1,436,797) $ 714,540
Earnings (loss) per common share and
common equivalent share* Note (4):
Income (loss) before extraordinary
item $(.12) $.04
Extraordinary item
Net income (loss) $(.12) $.04
Earnings (loss) per common share -
assuming full dilution* (Note 4):
Income (loss) before extraordinary
item $(.12) $.04
Extraordinary item
Net income (loss) $(.12) $.04
Weighted average number of
common shares outstanding 12,451,577 16,559,482
<FN>
*See basis of computation in Note 4 to the
Consolidated Financial Statements.
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,
1995 1994
(Unaudited) (Unaudited)
<S> <C> <C>
Net sales $112,422,007 $107,683,556
Cost of sales (95,536,109) (91,101,836)
Gross profit 16,885,898 16,581,720
Selling, general and
administrative expenses (13,085,528) (11,855,924)
Bad debts recovery (expense) (187,110) 45,946
Research and development expense (443,735) (685,530)
Income from operations 3,169,525 4,086,212
Other expense:
Interest expense (2,455,671) (2,469,813)
Other, net (187,717) (72,880)
Income before income taxes 526,137 1,543,519
Income tax expense (2,040,685) (105,579)
Net income (loss) $ (1,514,548) $ 1,437,940
Earnings (loss) per common share and
common equivalent share* (Note 4):
Income (loss) before extraordinary
item $(.12) $.09
Extraordinary item .
Net income (loss) $(.12) $.09
Earnings (loss) per share - assuming
full dilution* (Note 4):
Income (loss) before extraordinary
item $(.12) $.09
Extraordinary item .
Net income (loss) $(.12) $.09
Weighted average number of
common shares outstanding 12,412,906 16,609,695
<FN>
*See basis of computation in Note 4 to the
Consolidated Financial Statements.
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,
1995 1994
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,514,548) $ 1,437,940
Adjustments to reconcile
net income (loss) to net cash
provided from operating
activities:
Depreciation and amortization 2,024,212 2,120,073
Pension cost in excess of
funding 1,396,743 83,200
Provision for warranty expense 131,000 32,000
Provision for losses on
contracts in progress 1,567,536 1,532,116
Provision for losses on
receivables 187,109 86,945
Recognition of deferred 65,625
compensation on restricted
shares
Loss on disposition
of equipment 2,651 336
Changes in assets and liabilities:
Accounts receivable 819,585 2,474,260
Inventories 1,912,713 1,693,338
Prepaid expenses (404,529) (684,395)
Intangible assets (64,645) (248,875)
U.S. Government request for
equitable adjustment, net (5,498,506) (3,510,271)
Deferred taxes 1,901,761
Deposits and other 136,971 (30,540)
Accounts payable and
accrued expenses 5,162,238 2,532,593
Accrued warranty expense (402,195)
Estimated losses on
contracts in progress (1,906,894) (386,316)
Self-insured workers'
compensation reserve (165,348) 293,747
Total adjustments 6,866,027 5,988,211
Net cash provided by
operating activities 5,351,479 7,426,151
Cash flows from investing activities:
Capital expenditures (1,902,549) (1,579,554)
Insurance proceeds receivable (352,928)
Proceeds from sale of equipment 550
Net cash used in
investing activities $(2,254,927) $(1,579,554)
<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,
1995 1994
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of
common stock $ 1,285 $ 3,072
Net repayments
under short-term obligations (84,139) (10,398)
Borrowings under revolving
credit facility 25,400,000 43,900,000
Repayments under revolving
credit facility (24,100,000) (43,200,000)
Principal payments under
long-term obligations (4,392,693) (6,270,771)
Net cash used in
financing activities (3,175,547) (5,578,097)
Effect of exchange rate changes
on cash and cash equivalents 78,995
Net increase in cash
and cash equivalents -0- 268,500
Cash and cash equivalents
beginning of period -0- -0-
Cash and cash equivalents
end of period $ -0- $ 268,500
Supplemental disclosure of cash
flow information:
Cash paid during the period for:
Interest $ 1,834,233 $2,010,277
Income taxes 144,855 290,719
Supplemental disclosure of
non-cash investing activities:
Capital lease obligations incurred
for new equipment $ 743,460 $ 424,559
Reclassification of common stock
purchase warrant to additional
paid in capital 4,200,000
<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. The results of operations for the period ended
September 30, 1995 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 1994 10-K. Certain reclassifications have been made
to the 1994 financial statements included herein to conform
with the presentation used in 1995.
2. SIGNIFICANT ACCOUNTING POLICIES
Cash - Under the Company's cash management system, certain
divisions' and subsidiaries' cash accounts reflect credit
balances to the extent checks written have not been presented
for payment. The Company had a net cumulative credit balance
in the amount of $49,730 at September 30, 1995 and $176,120 at
December 31, 1994 which is included in accounts payable. Such
credit balances were classified as Bank Overdrafts in the
Company's 1994 10-K. In subsequent financial presentations,
amounts will be classified as Bank Overdrafts only to the
extent that funds are actually borrowed from the Company's
financial institutions which equates to the Company having
insufficient funds.
Translation of Non-U.S. Currency Amounts - Assets and
liabilities of non-U.S. subsidiaries that operate in a local
currency environment are translated to U.S. dollars at the
exchange rate for the end of the accounting period. Income
and expenses are translated at average rates of exchange.
Translation adjustments are accumulated in a separate
component of stockholders' equity.
3. INVENTORIES
<TABLE>
Inventories consist of the following:
September 30, December 31,
1995 1994
(Unaudited)
<S> <C> <C>
Work in-process $35,058,177 $26,018,727
Finished goods 3,611,987 3,012,119
Raw materials and supplies 6,402,152 5,038,428
Total $45,072,316 $34,069,274
Less progress payments (18,661,473) (6,194,184)
Less reserve for estimated
losses on contracts in
progress (527,907) (161,153)
$25,882,936 $27,713,937
</TABLE>
4. EARNINGS PER COMMON SHARE
The computation of the loss per common share in 1995 is based
on the weighted average number of outstanding common shares.
The inclusion of stock options and stock warrants would be
antidilutive. The computation of the earnings per common
share in 1994 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 the Company's primary lender 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.
5. NOTES PAYABLE
<TABLE>
September 30, December,31,
1995 1994
<S> <C> <C>
Short-term debt consists of
the following:
Term Credit facility $ 7,000,000 $ 8,000,000
Senior Subordinated Loan 10,000,000 5,000,000
Revolving Credit facility 7,500,000
Note due to individual, bears 447,173 447,173
interest at 10% collateralized
by a security interest in
certain equipment
Other obligations 526,094 442,617
collateralized by security
interests in certain
equipment
$25,473,267 $13,889,790
Long term debt consists of
the following:
Term Credit facility 3,000,000
Senior Subordinated Loan 5,000,000
Revolving Credit facility 6,200,000
Other obligations, 907,751 724,602
collateralized by security
interests in certain
equipment
$ 907,751 $14,924,602
Total short term and long term $26,381,018 $28,814,392
debt
</TABLE>
As noted in prior reports, the Company has been under severe
cash constraints due to the adverse cost effects resulting
from the failure of its largest customer to deliver critical
parts in a timely fashion, that customer's failure to make
timely payments to the Company and the cost impact of the
start-up and operation of the Company's European facility.
As a consequence of these cash flow problems, the Company was
in violation of two financial ratio requirements of its loan
agreements with its primary lender as of June 30 and September
30, 1995, was late in the fulfillment of $2.0 million
principal repayment obligation on its Term Credit facility due
June 30, 1995, and has been unable to meet its principal and
interest obligations during the third quarter and thereafter.
As a result of these violations and delinquencies, the Company
may be deemed to be in default of its loan agreements with its
primary lender and of those of its other obligations which
contain cross-default provisions to the Company's principal
loan agreements.
The Company's Term Credit facility provided for a final
payment of $7.0 million on September 30, 1995, $2.0 million of
which could have been extended to December 31, 1995 and $3.0
million extended to March 31, 1996 by payment of an extension
fee on September 30 had the Company not been deemed to be in
default on that date. Similarly, the Revolving Credit
facility, which had a balance of approximately $7.5 million on
its September 30, 1995 maturity date, otherwise could have
been extended to March 31, 1996. The Company did not make the
payments of principal due under these facilities on September
30, 1995 and did not pay any extension fee to its primary
lender on that date. In addition, the Company did not pay the
$5.0 million installment of principal for its Senior
Subordinated Loan due on September 30, 1995 (for which no
extension was available) and its unpaid interest obligations
total approximately $1.0 million. The Company's failure to
make these payments may have constituted events of default
under the Amended and Restated Credit Agreement and Senior
Subordinated Loan Agreement.
The Company's failure to make its required debt payments was
attributable primarily to the failure of the Company's largest
customer to make timely payments due under its contracts with
the Company and the costs incurred by the Company on account
of that customer's late delivery of critical parts to the
Company. Nevertheless the Company believes that it will
receive substantial reimbursement for these costs as a result
of the Request for Equitable Adjustment ("REA") it has filed
with the government and that its cash flow problems will be
greatly alleviated by such reimbursement. (See, also, Note 6,
Contingencies).
On September 30, 1995, the Company and its primary lender
further amended their Amended and Restated Credit Agreement to
provide for a higher interest rate, additional reporting
requirements and an amendment to the stock purchase warrant
held by its primary lender to permit cashless, or "net issue,"
exercises thereof. The primary lender also agreed to forbear
from pursuing collection of the indebtedness owed by the
Company under the Restated Credit Agreement and the Senior
Subordinated Loan Agreement until October 30, 1995 so long as
certain interim steps were taken by the Company with respect
to the management of its cash flow. The Company has since
received another offer of forbearance to January 31, 1996,
which offer it anticipates to close shortly.
The Company is continuing to negotiate with its primary lender
with a view toward restructuring the Company's indebtedness
upon receipt of the proceeds of the REA and, based on the
discussions to date, believes that its primary lender remains
willing to negotiate toward that end. In addition, the
Company has been actively investigating a variety of
refinancing options with its investment bankers.
While the Company recognizes that its primary lender could
attempt to enforce the remedies available to it for an event
of default, including its rights to foreclose on the Company's
assets as a secured creditor, the Company does not believe
that any such attempt is likely in the foreseeable future.
Moreover, in the unlikely event that such an action is brought
against the Company, the Company believes that it may have
valid defenses to such claims and would vigorously defend
itself.
6. CONTINGENCIES
The Company recorded $4.5 million of revenue and other income
in the first nine months of 1995, versus $3.5 million in 1994,
in anticipation of settlement of a Request for Equitable
Adjustment (REA) for the cost effect of late delivery of
government furnished material (GFM) associated with the 1990
KC-135 contract. Of the $4.5 million booked in 1995,
approximately $2.3 million relates to ships redelivered prior
to 1995. The total REA that has been submitted to the U.S.
Government reflects approximately $10.3 million for ships
redelivered to the government through September 30, 1995 and
the Company has recorded a receivable of $8.0 million. The
Company has reclassed its REA receivable related to the 1990
KC-135 contract from long-term to short-term, as it
anticipates receiving payment from the government for the REA
on or before December 31, 1995. Should the Company not
ultimately receive an equitable adjustment from the U.S.
Government, which event the Company deems unlikely, the
Company would realize a pre-tax reduction of revenue of $8.0
million.
The Company also recorded $1.0 million of revenue and a long
term unbilled receivable in 1995 in anticipation of the
submittal and settlement of another request for equitable
adjustment relating to the late delivery of GFM to be filed in
respect of certain aircraft under the 1994 KC-135 PDM contract
and under the 1990 KC-135 PDM contract. Two ships under the
1990 KC-135 contract were excluded from the REA that has
previously been submitted to the U.S. Government, due to the
fact that these ships were impacted by more than one type of
late GFM. The two ships were redelivered to the U.S.
Government prior to 1995. The Company anticipates submitting
a REA to the U.S. Government in the first quarter of 1996.
Should the Company not ultimately receive an equitable
adjustment from the REA, which event the Company deems
unlikely, the Company would realize a pre-tax reduction of
revenue of $1.0 million.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the
Company's consolidated financial statements and notes thereto
included herein.
RESULTS OF OPERATIONS
Three months ended September 30, 1995
Versus three months ended September 30, 1994
Revenues for the third quarter of 1995 decreased 20%, from $36.6
million in 1994 to $29.1 million in 1995. Government sales
decreased 36% in the third quarter, from $24.4 million in 1994 to
$15.5 million in 1995. Commercial sales increased 12% in the third
quarter, from $12.2 million in 1994 to $13.6 million in 1995. The
Company's mix of business between government and commercial
customers shifted from 33% commercial and 67% government in the
third quarter of 1994 to 47% commercial and 53% government in the
third quarter of 1995.
The decrease in government sales in the third quarter of 1995 was
due primarily to a reduction in the number of KC-135 Programmed
Depot Maintenance (PDM) aircraft redeliveries. Twelve aircraft
were redelivered in the third quarter of 1994 versus three aircraft
in the third quarter of 1995. Redelivery was delayed on
approximately eleven aircraft in the third quarter of 1995 due to
a combination of factors, including the late delivery of government
furnished material (GFM) as well as an unprecedented number of
major structural problems on the aircraft. One of the eleven
aircraft has been fully redelivered and nine have been partially
redelivered to the government thus far in the fourth quarter. Five
of the nine partially redelivered aircraft are expected to be fully
redelivered during the balance of the fourth quarter. An
additional six aircraft, scheduled to be redelivered in the fourth
quarter, are also expected to be fully redelivered on time.
In addition to the reduction in the number of KC-135 PDM
redeliveries in the third quarter of 1995, the Company has noted a
decline in revenue of approximately $0.1 million for each aircraft
redelivered under the 1994 KC-135 contract, due to a restructuring
of the work package on the new KC-135 contract. The three aircraft
redelivered in the third quarter of 1995 were worked under the new
KC-135 contract.
The Company recorded revenue in both the third quarter of 1995 and
1994 in anticipation of settlement of a Request for Equitable
Adjustment (REA) for the cost effect of late delivery of GFM
associated with the 1990 KC-135 contract. The Company recorded
$2.3 million in the third quarter of 1995 versus $1.4 million in
the third quarter of 1994. Of the $2.3 million booked in the third
quarter of 1995, approximately $1.9 million relates to ships
redelivered prior to the third quarter of 1995. The total REA
associated with the 1990 KC-135 contract that has been submitted to
the U.S. Government reflects approximately $10.3 million for ships
redelivered to the government through September 30, 1995 and the
Company has recorded a receivable of $8.0 million. The Company has
reclassed its REA receivable related to the 1990 KC-135 contract
from long-term to short-term, as it anticipates receiving payment
for the REA from the U.S. Government on or before December 31,
1995. Should the Company not ultimately receive an equitable
adjustment from the U.S. Government, which event the Company deems
unlikely, the Company would realize a pre-tax reduction of revenue
of $8.0 million.
The Company also recorded $0.8 million of revenue and a long term
unbilled receivable in the third quarter of 1995 in anticipation of
the submittal and settlement of another request for equitable
adjustment relating to the late delivery of GFM to be filed in
respect of certain aircraft under the 1994 KC-135 PDM contract and
under the 1990 KC-135 PDM contract. Two ships under the 1990 KC-
135 contract were excluded from the REA that has previously been
submitted to the U.S. Government, due to the fact that these ships
were impacted by more than one type of late GFM. The two ships
were redelivered to the U.S. Government prior to 1995. The Company
had previously recorded $0.2 million in the second quarter of 1995
and thus has recorded a $1.0 million long term receivable
associated with this REA, which the Company anticipates submitting
to the U.S. Government in the first quarter of 1996. Should the
Company not ultimately receive an equitable adjustment from the
REA, which event the Company deems unlikely, the Company would
realize a pre-tax reduction of revenue of $1.0 million.
The increase in the Company's commercial sales was due to an
increase in aircraft maintenance and modification services which
includes revenue recognized under a maintenance services contract
with a major airline and an increase in the number of 727 cargo
conversion redeliveries (six redeliveries in the third quarter of
1995 versus five redeliveries in 1994). Partially offsetting the
above increases is a reduction in the number of 737 cargo
conversion aircraft redeliveries (one redelivery in the third
quarter of 1994 versus no redeliveries in 1995).
The ratio of cost of sales ($25.7 million in the third quarter of
1995; $30.1 million in 1994) to net sales ($29.1 million in the
third quarter of 1995; $36.6 million in 1994) increased from 82% in
the third quarter of 1994 to 88% in 1995. However, exclusive of
approximately $2.6 million of revenue recorded in anticipation of
settlement of the Company's requests for equitable adjustment that
relate to ships redelivered prior to the third quarter of 1995, the
ratio of cost of sales to net sales in 1995 is 97%. The resultant
decrease in gross profit in the third quarter of 1995 is
attributable primarily to the aforementioned reduction of revenue
on the KC-135 program which is mainly due to a reduction in
redeliveries, twelve in the third quarter of 1994 versus three in
the third quarter of 1995. Additionally, the Company experienced
a decline in revenue for each of the three aircraft redelivered in
the third quarter of 1995 under the 1994 KC-135 contract, due to a
restructuring of the work package on the new KC-135 contract. The
Company also incurred increased cost due to inefficiencies
associated with the late delivery of GFM and an unprecedented
number of major structural problems on the aircraft.
Also negatively impacting gross profit were losses incurred under
the Company's C-130 PDM contract, losses on aircraft maintenance
and modification services, other than cargo conversion aircraft,
and losses incurred, due to low volume, in conjunction with the
nacelle overhaul and repair service. Additionally, the Company
recorded significantly higher pension expense in the third quarter
of 1995 compared to 1994. Pension expense increased due to higher
interest cost on the projected benefit obligation and lower than
anticipated returns on plan assets in 1994. Partially offsetting
these unfavorable impacts on gross profit was an increase in
efficiency on the Company's 727 cargo conversion program.
Selling, general and administrative expense decreased from $4.8
million in the third quarter of 1994 to $3.8 million in 1995 and
was a constant 13% of sales for both periods.
The Company has undertaken a number of actions in response to these
lower margins including cost cutting and containment and changes in
its production processes, the benefits of which it believes will
begin to be realized in 1996.
Interest expense remained at $0.8 million for both the third
quarter of 1995 and 1994. Total consolidated indebtedness was
$26.4 million at September 30, 1995 versus $32.2 million at
September 30, 1994. The effective average interest rate in the
third quarter of 1995 on the Term Credit facility and the Revolving
Credit facility was 9.09% versus 7.17% in the third quarter of
1994.
Other expense increased marginally in the third quarter of 1995
versus 1994. However, the Company recorded approximately $0.4
million of penalties for the late payment of federal payroll taxes
as necessitated by the Company's continuing cash flow problems
which are detailed below in the Liquidity and Capital resources
paragraphs. The Company's cash resources have been severely
strained by the persistent late payments made by its largest
customer, the cost effect of late delivery of government furnished
materials on the KC-135 aircraft program and the cost impact of the
start-up and operation of the Company's Copenhagen aircraft
maintenance facility. The Company also recorded approximately $0.3
million of accrued interest income recorded in conjunction with the
REA for the cost effect of late delivery of GFM associated with the
1990 KC-135 contract. The settlement with the U.S. Government for
the REA is expected to include an appropriate provision for the
time value of money.
Nine months ended September 30, 1995
Versus nine months ended September 30, 1994
Revenues for the first nine months of 1995 increased 4%, from
$107.7 million in 1994 to $112.4 million in 1995. Government sales
decreased 10%, from $73.7 million in 1994 to $66.0 million in 1995.
Commercial sales increased 36%, from $34.0 million in 1994 to $46.4
million in 1995. The Company's mix of business between government
and commercial customers shifted from 32% commercial and 68%
government in the first nine months of 1994 to 41% commercial and
59% government in 1995.
The decrease in government sales in the first nine months of 1995
was due primarily to a reduction in the number of KC-135 PDM
aircraft redeliveries. Forty aircraft were redelivered in the
first nine months of 1994 versus twenty-nine aircraft in 1995.
Redelivery was delayed on approximately eleven aircraft in the
third quarter of 1995 due to a combination of factors, including
the late delivery of GFM and an unprecedented number of major
structural problems on the aircraft. One of these eleven aircraft
has been fully redelivered and nine have been partially redelivered
to the government thus far in the fourth quarter. Five of the nine
partially redelivered aircraft are expected to be fully redelivered
during the balance of the fourth quarter. An additional six
aircraft, scheduled to be redelivered in the fourth quarter, are
also expected to be fully redelivered on time.
In addition to the reduction in the number of KC-135 PDM
redeliveries in the first nine months of 1995, the Company has also
noted a decline in revenue of approximately $0.1 million for each
aircraft redelivered under the 1994 KC-135 contract, due to a
restructuring of the work package on the new KC-135 contract.
Eleven of the twenty-nine aircraft redelivered in 1995 were worked
under the new contract.
The Company recorded $4.2 million of revenue in the first nine
months of 1995, versus $3.5 million in 1994, in anticipation of
settlement of a REA for the cost effect of late delivery of GFM
associated with the 1990 KC-135 contract. Of the $4.2 million
booked in 1995, approximately $2.3 million relates to ships
redelivered prior to 1995. The total REA that has been submitted
to the U.S. Government reflects approximately $10.3 million for
ships redelivered to the government through September 30, 1995 and
the Company has recorded a receivable of $8.0 million. The Company
has reclassed its REA receivable related to the 1990 KC-135
contract from long-term to short-term, as it anticipates receiving
payment from the Government for the REA on or before December 31,
1995. Should the Company not ultimately receive an equitable
adjustment from the U.S. Government, which event the Company deems
unlikely, the Company would realize a pre-tax reduction of revenue
of $8.0 million.
The Company also recorded $1.0 million of revenue and a long term
unbilled receivable in the first nine months of 1995 in
anticipation of the submittal and settlement of another request for
equitable adjustment relating to the late delivery of GFM to be
filed in respect of certain aircraft under the 1994 KC-135 PDM
contract and under the 1990 KC-135 contract. Two ships under the
1990 KC-135 contract were excluded from the REA that has previously
been submitted to the U.S. Government, due to the fact that these
ships were impacted by more than one type of late GFM. The two
ships were redelivered to the U.S. Government prior to 1995. The
Company anticipates submitting an REA to the U.S. Government in the
first quarter of 1996. Should the Company not ultimately receive
an equitable adjustment from the REA, which event the Company deems
unlikely, the Company would realize a pre-tax reduction of revenue
of $1.0 million.
The increase in the Company's commercial sales was due to (a) an
increase in aircraft maintenance and modification services which
includes revenue recognized under a maintenance services contract
with a major airline, (b) an increase in the number of 727 cargo
conversion redeliveries (twelve redeliveries in 1995 versus five
redeliveries in 1994), (c) the recognition of revenue for the first
ship converted under the Company's B-727 "Combi" conversion program
and (d) revenue generated at the Company's aircraft maintenance
facility in Copenhagen, Denmark, which began operations in May of
1994. The above increases in commercial sales are partially offset
by a reduction in the number of 737 cargo conversion redeliveries,
(three redeliveries in the first nine months of 1995 versus five
redeliveries in 1994).
The ratio of cost of sales ($95.5 million in the first nine months
of 1995; $91.1 million in 1994) to net sales ($112.4 million in the
first nine months of 1995; $107.7 million in 1994) remained at 85%
in both 1995 and 1994. However, exclusive of approximately $3.0
million of revenue recorded in anticipation of settlement of the
Company's requests for equitable adjustment that relate to ships
redelivered prior to 1995, the ratio of cost of sales to net sales
in 1995 is 87%. The resultant decrease in gross profit in 1995 is
attributable primarily to the aforementioned reduction of revenue
on the KC-135 program which is mainly due to a reduction in
redeliveries, forty in 1994 versus twenty-nine in 1995.
Additionally, the Company experienced a decline in revenue for
eleven of the twenty-nine aircraft redelivered in 1995 under the
1994 KC-135 contract, due to a restructuring of the work package on
the new KC-135 contract. The Company also incurred increased cost
due to inefficiencies associated with the late delivery of GFM and
an unprecedented number of major structural problems on the
aircraft.
Additionally, losses were incurred at the Company's aircraft
maintenance facility in Copenhagen, Denmark. These losses were due
to lower than anticipated volume at the facility and due to initial
ship learning expense on the facility's first-ever 727 cargo
conversions. The Company also incurred initial ship learning
expense on the launch of its B-727 "combi" conversion project at
its Dothan facility. Losses incurred under the Company's C-130 PDM
contract, losses on aircraft maintenance and modification services,
other than cargo conversion aircraft, and losses incurred, due to
low volume, in conjunction with the nacelle overhaul and repair
service also negatively impacted gross profit. Additionally, the
Company recorded significantly higher pension expense in 1995 as
compared to 1994. Pension expense increased due to higher interest
cost on the projected benefit obligation and lower than anticipated
returns on plan assets in 1994. Partially offsetting these
unfavorable impacts on gross profit was an increase in efficiency
on the Company's 727 cargo conversion program and 737 cargo
conversion program.
Selling, general and administrative expense increased from $11.9
million in the first nine months of 1994 to $13.1 million in 1995
and increased as a percentage of sales from 11% in 1994 to 12% in
1995. Selling, general and administrative expense increased due to
the operation of the aircraft maintenance facility in Copenhagen,
Denmark which began in May of 1994, the establishment of a sales
and marketing office in Denver, Colorado and increased royalty fees
due to increased sales, associated with the aircraft cargo handling
systems product line.
The Company has undertaken a number of actions in response to these
lower margins including cost cutting and containment and changes in
its production processes, the benefits of which it believes will
begin to be realized in 1996.
The Company recorded bad debt expense of $0.2 million in 1995
versus a bad debt recovery of $0.1 million in 1994. Research and
development expense decreased from $0.7 million in 1994 to $0.4
million in 1995.
Interest expense remained constant at $2.5 million for both 1995
and 1994. Total consolidated indebtedness was $26.4 million at
September 30, 1995 versus $32.2 million at September 30, 1994. The
effective average interest rate in the first nine months of 1995 on
the Term Credit facility and the Revolving Credit facility was
9.02% versus 6.80% in 1994.
Other expense increased marginally in the first nine months of 1995
versus 1994. However, the Company recorded approximately $0.6
million of penalties for the late payment of federal payroll taxes
as necessitated by the Company's continuing cash flow problems
which are detailed below in the Liquidity and Capital Resources
paragraphs. The Company's cash resources have been severely
strained by the persistent late payments made by its largest
customer, the cost effect of late delivery of government furnished
materials on the KC-135 aircraft program and the cost impact of the
start-up and operation of the Company's Copenhagen aircraft
maintenance facility. The Company also recorded approximately $0.3
million of accrued interest income recorded in conjunction with the
REA for the cost effect of late delivery of GFM associated with the
1990 KC-135 contract. The settlement with the U.S. Government for
the REA is expected to include an appropriate provision for the
time value of money.
The Company booked $2.0 million of state and federal income tax
expense in 1995 and reduced its current deferred tax asset by $1.9
million. The change in the deferred tax asset resulted primarily
from a reduction of percentage of completion based profits in work
in process and the usage of net operating loss carryforwards. The
Company's effective tax rate in 1995, considering book income
adjusted for losses incurred at the Copenhagen, Denmark facility
and permanent tax item adjustments, was approximately 41.2%. The
Company recorded $0.1 million of tax expense in 1994. The
Company's effective tax rate in 1994, considering book income
adjusted for losses incurred at the Copenhagen, Denmark facility
and permanent tax item adjustments, was approximately 4%. The
effective tax rate increased significantly in 1995 due to the $10.5
million reduction of the Company's deferred tax asset valuation
allowance at December 31, 1994. The Company reduced its valuation
allowance in 1994 due to the increase in its firm but unfunded
backlog associated with the follow-on years of its government
contracts ($206.5 million at December 31, 1994; $25.0 million at
December 31, 1993), whereby the realization of certain deferred tax
assets became more likely than not.
LIQUIDITY AND CAPITAL RESOURCES
The following is a discussion of the significant items in the
Company's Consolidated Statement of Cash Flows for the period ended
September 30, 1995 and September 30, 1994.
Pension cost in excess of funding increased in 1995 as compared to
1994 because the Company recorded significantly higher pension
expense in the first nine months of 1995 compared to 1994 and
because the Company did not fund its pension in the second and
third quarters of 1995. The Company funded its pension $0.3
million in the first quarter 1995 and $0.3 million in each quarter
of 1994. It is the Company's intent to fund the pension in 1995
at a level equivalent to 1994, but the Company has been unable to
do so thus far, due to its strained cash resources.
A provision of $1.6 million for losses on contracts in progress was
recorded for the first 727 conversion contract to be worked at the
Company's Copenhagen aircraft maintenance facility. The provision
was required due to an anticipated higher cost associated with the
facility's first aircraft conversions and unfavorable movements in
the kroner/dollar exchange rate. Two of the three aircraft to be
worked under this contract have been redelivered to the customer as
of September of 1995 and approximately $1.1 million of the reserve
has been relieved. The Company also relieved all of its $0.7
million reserve related to a certain contract for which the loss
reserve depended on the number of aircraft delivered to the Company
prior to December 31, 1995. Management does not anticipate any
ships to be delivered under this contract prior to December 31,
1995.
Inventory decreased in the first nine months of both 1995 and 1994
primarily due to an increase in customer financed progress payment
balances. Progress payment balances increased $12.5 million in
1995, work in process increased $9.0 million and raw materials and
finished goods increased $2.0 million. In 1994, progress payment
balances increased $3.2 million, work in process increased $2.8
million and raw materials decreased $1.2 million.
In 1995, the Company recorded revenue and other income of $5.5
million associated with the anticipated settlement of the
aforementioned U.S. Government Requests for Equitable Adjustment,
versus $3.5 million recorded in 1994. The Company reclassed $8.0
million of its $9.0 million REA receivable from long-term to short-
term in the third quarter of 1995 because it anticipates receiving
payment of $8.0 million from the U.S. Government on or before
December 31, 1995.
The Company booked $2.0 million of state and federal income tax
expense in 1995 and reduced its current deferred tax asset by $1.9
million. The change in the deferred tax asset resulted primarily
from a reduction of percentage of completion based profits in work
in process and the usage of net operating loss carryforwards. The
Company's effective tax rate in 1995, considering book income
adjusted for losses incurred at the Copenhagen, Denmark facility
and permanent tax item adjustments, was approximately 41.2%. The
Company recorded $0.1 million of tax expense in 1994. The
Company's effective tax rate in 1994, considering book income
adjusted for losses incurred at the Copenhagen, Denmark facility
and permanent tax item adjustments, was approximately 4%. The
effective tax rate increased significantly in 1995 due to the $10.5
million reduction of the Company's deferred tax asset valuation
allowance at December 31, 1994. The Company reduced its valuation
allowance in 1994 due to the increase in its firm but unfunded
backlog associated with the follow-on years of its government
contracts ($206.5 million at December 31, 1994; $25.0 million at
December 31, 1993), whereby the realization of certain deferred tax
assets became more likely than not.
Accounts payable and accrued expenses increased in the first nine
months of 1995 and 1994 primarily due to an increase in vendor
payables. The Company increased its insurance proceeds receivable
and recorded income of $0.2 million in the first quarter of 1995
due to an additional anticipated insurance recovery for damages
incurred during the January, 1994 California earthquake. The
Company recorded $0.1 million of insurance proceeds receivable in
the third quarter of 1995 associated with a fire at its facility in
Clearwater, Florida.
The Company utilized $7.5 million of its Revolving Credit facility
at September 30, 1995 versus $6.2 million at December 31, 1994. In
the first nine months of 1995, the Company used funds of $5.4
million provided from operating activities and $1.3 million
borrowed through the Revolving Credit facility to provide for $4.0
million in principal payments on the Term Credit facility, $1.9
million for capital items and $0.5 million in principal payments on
various capital leases. In the first nine months of 1994, the
Company used funds of $7.4 million 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, $0.3 million for payments on various capital leases and
$1.6 million for capital items.
For a discussion of the Company's principal debt obligations and
banking relationship, please refer to Note 5 to the Company's
interim unaudited financial statements in Part I, Item 1 and to
Part II, Item 3 of this Report.
BACKLOG
<TABLE>
The following table presents the Company's backlog (in thousands of
dollars) at September 30, 1995 and 1994:
1995 1994
<S> <C> <C>
U.S. Government $143,923 $125,680
Commercial 33,114 58,181
$177,037 $183,861
</TABLE>
As of September 30, 1995, 81% of the Company's backlog was for the
U.S. Government versus 68% for the period ended September 30, 1994.
The Company's U.S. Government backlog increased primarily due to an
increase in backlog under the Company's KC-135 contract. In
September of 1995, the U.S. Air Force exercised its option for the
second year of its seven year contract for KC-135 PDM aircraft.
The Company's KC-135 backlog in 1995 was $106.9 million versus
$94.0 million in 1994. Also in September of 1995, the U.S. Air
Force exercised its option for the fifth and final year of its
contract for C-130 PDM aircraft. The Company's C-130 backlog in
1995 was $13.7 million versus $8.1 million in 1994. Other changes
in the Company's U.S. Government backlog include an increase of
$4.0 million for the targets product line, an increase of $2.3
million associated with the H-3 Helicopter contract, and a decrease
of $7.4 million under the Company's HERA contract, due to
performance of work over the past twelve months.
The Company's commercial backlog at September 30, 1995 is down from
prior year primarily due to a reduction of $25.7 million under the
Company's 737 cargo conversion program. Approximately $20.7
million of the reduction is due to the elimination of assumed
option ships under contracts approaching their expiry. The Company
believes at least some of these ships eventually will be converted
under new or renegotiated contracts. Approximately $5.0 million of
the reduction is due to revenues recognized over the past twelve
months. Other changes in the Company's commercial backlog include
an increase of $4.0 million for backlog at the Company's Copenhagen
facility, an increase of $1.8 million related to 747 cargo
conversion kits, offset by a $5.9 million decrease in 727 cargo
conversion backlog.
Approximately $16.3 million of commercial backlog at September 30,
1995 (compared to $19.6 million at September 30, 1994) may not be
considered as firm as it includes maintenance and modification work
to be performed on optional aircraft. Additionally, the Company
has approximately $205 million of firm but unfunded backlog
associated with the five follow-on years of the KC-135 contract,
which is not included in the figures cited above.
While the Company considers its backlog position to be strong, the
Company continues to maintain its fight for 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 exists to increase the Company's share of this
business.
The anticipated general 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, a denial of the Company's requests 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 $9.0 million.
The Company, as a U.S. Government contractor, is routinely subject
to audits, reviews and investigations by the government related to
its negotiation and performance of government contracts and its
accounting for such contracts. Under certain circumstances, a
contractor can be suspended or debarred from eligibility for
government contract awards. The government may, in certain cases,
also terminate existing contracts, recover damages and impose other
sanctions and penalties. The Company believes, based on all
available information, that the outcome of the U.S. Government's
audits, reviews and investigations will not have a materially
adverse effect on the Company's consolidated results of operation,
financial position or cash flows.
PRECISION STANDARD,INC.
OTHER INFORMATION
PART II.
Item 1 Legal Proceedings
None
Item 2 Changes in Securities
None
Item 3 Defaults Upon Senior Securities
As noted in prior reports, the Company has been under
severe cash constraints due to the adverse cost effects
resulting from the failure of its largest customer to
deliver critical parts in a timely fashion, that
customer's failure to make timely payments to the Company
and the cost impact of the start-up and operation of the
Company's European facility.
As a consequence of these cash flow problems, the Company
was in violation of two financial ratio requirements of
its loan agreements with its primary lender as of June 30
and September 30, 1995, was late in the fulfillment of
$2.0 million principal repayment obligation on its Term
Credit facility due June 30, 1995, and has been unable to
meet its principal and interest obligations during the
third quarter and thereafter. As a result of these
violations and delinquencies, the Company may be deemed
to be in default of its loan agreements with its primary
lender and of those of its other obligations which
contain cross-default provisions to the Company's
principal loan agreements.
The Company's Term Credit facility provided for a final
payment of $7.0 million on September 30, 1995, $2.0
million of which could have been extended to December 31,
1995 and $3.0 million extended to March 31, 1996 by
payment of an extension fee on September 30 had the
Company not been deemed to be in default on that date.
Similarly, the Revolving Credit facility, which had a
balance of approximately $7.5 million on its September
30, 1995 maturity date, otherwise could have been
extended to March 31, 1996. The Company did not make the
payments of principal due under these facilities on
September 30, 1995 and did not pay any extension fee to
its primary lender on that date. In addition, the
Company did not pay the $5.0 million installment of
principal for its Senior Subordinated Loan due on
September 30, 1995 (for which no extension was available)
and its unpaid interest obligations total approximately
$1.0 million. The Company's failure to make these
payments may have constituted events of default under the
Amended and Restated Credit Agreement and Senior
Subordinated Loan Agreement.
The Company's failure to make its required debt payments
was attributable primarily to the failure of the
Company's largest customer to make timely payments due
under its contracts with the Company and the costs
incurred by the Company on account of that customer's
late delivery of critical parts to the Company.
Nevertheless the Company believes that it will receive
substantial reimbursement for these costs as a result of
the Request for Equitable Adjustment ("REA") it has filed
with the government and that its cash flow problems will
be greatly alleviated by such reimbursement. (See, also,
Note 6, Contingencies).
On September 30, 1995, the Company and its primary
lender further amended their Amended and Restated Credit
Agreement to provide for a higher interest rate,
additional reporting requirements and an amendment to the
stock purchase warrant held by its primary lender to
permit cashless, or "net issue," exercises thereof. The
primary lender also agreed to forbear from pursuing
collection of the indebtedness owed by the Company under
the Restated Credit Agreement and the Senior Subordinated
Loan Agreement until October 30, 1995 so long as certain
interim steps were taken by the Company with respect to
the management of its cash flow. The Company has since
received another offer of forbearance to January 31,
1996, which offer it anticipates to close shortly.
The Company is continuing to negotiate with its primary
lender with a view toward restructuring the Company's
indebtedness upon receipt of the proceeds of the REA and,
based on the discussions to date, believes that its
primary lender remains willing to negotiate toward that
end. In addition, the Company has been actively
investigating a variety of refinancing options with its
investment bankers.
While the Company recognizes that its primary lender
could attempt to enforce the remedies available to it for
an event of default, including its rights to foreclose on
the Company's assets as a secured creditor, the Company
does not believe that any such attempt is likely in the
foreseeable future.
Moreover, in the unlikely event that such an action is
brought against the Company, the Company believes that it
may have valid defenses to such claims and would
vigorously defend itself.
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: 11/8/95 By: /s/ Matthew L. Gold
Matthew L. Gold
Chairman, President and
Chief Executive Officer
Date: 11/16/95 By: /s/ Walter M. Moede
Walter M. Moede
Executive Vice President
& Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 15,407,526
<ALLOWANCES> 1,034,768
<INVENTORY> 25,882,936
<CURRENT-ASSETS> 55,772,404
<PP&E> 27,415,778
<DEPRECIATION> 12,648,772
<TOTAL-ASSETS> 83,004,547
<CURRENT-LIABILITIES> 54,296,694
<BONDS> 0
<COMMON> 1,280
0
0
<OTHER-SE> 16,493,355
<TOTAL-LIABILITY-AND-EQUITY> 83,004,547
<SALES> 112,422,007
<TOTAL-REVENUES> 112,422,007
<CGS> 95,536,109
<TOTAL-COSTS> 109,065,372
<OTHER-EXPENSES> 187,717
<LOSS-PROVISION> 187,110
<INTEREST-EXPENSE> 2,455,671
<INCOME-PRETAX> 526,137
<INCOME-TAX> 2,040,685
<INCOME-CONTINUING> (1,514,548)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,514,548)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
