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
June 30, 1996
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 12,471,080 shares
Common Shares Outstanding at June 30, 1996
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
1996 1995
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ $ 1,411,929
Accounts receivable, net 12,155,506 14,312,946
U.S. Government request for
equitable adjustment, net 8,144,522
Inventories 23,867,910 21,753,009
Prepaid expenses and other 1,453,957 981,197
Deferred taxes 5,038,205 5,038,205
Total current assets 42,515,578 51,641,808
Property, plant and equipment,
at cost:
Leasehold improvements 10,738,483 10,322,638
Machinery and equipment 17,929,031 17,933,717
Less accumulated depreciation (14,556,435) (13,298,748)
Net property and equipment 14,111,079 14,957,607
Other assets:
Intangible assets, net of
accumulated amortization 4,397,398 4,334,662
Related party receivable 269,824 269,824
Deposits and other 1,344,050 841,498
U.S. Government request for
equitable adjustment, net 9,796,000 4,100,000
Deferred taxes 4,210,131 4,825,129
20,017,403 14,371,113
Total assets $76,644,060 $80,970,528
<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
June 30, December 31,
1996 1995
(Unaudited)
<S> <C> <C>
Current liabilities:
Current maturities of long-term
debt $28,208,307 $ 955,155
Accounts payable and accrued
expenses 25,806,375 28,181,810
Accrued warranty expenses 1,053,477 1,178,636
Estimated losses on contracts
in progress 100,000 203,922
Total current liabilities 55,168,159 30,519,523
Long-term debt, net of current
maturities 539,283 25,787,030
Long-term portion of self-insured
workers' compensation reserve 3,717,703 3,717,703
Unfunded accumulated benefit
obligation 7,072,103 7,072,103
Total liabilities 66,497,248 67,096,359
Stockholders' equity:
Common stock, $.0001 par value,
300,000,000 shares authorized,
12,471,080 and 12,455,955
issued and outstanding at
June 30, 1996 and December 31,
1995, respectively. 1,282 1,280
Additional paid-in capital 4,598,460 4,584,394
Deferred compensation on
restricted shares (43,750) (87,500)
Retained earnings 12,266,617 16,246,824
Translation adjustments 146,466 146,202
Minimum pension liability adjustment (6,822,263) (7,017,031)
Total stockholder's equity 10,146,812 13,874,169
Total liabilities and stock-
holders' equity $76,644,060 $80,970,528
<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
June 30, June 30,
1996 1995
(Unaudited) (Unaudited)
<S> <C> <C>
Net sales $35,808,708 $42,205,228
Cost of sales 31,822,496 36,317,027
Gross profit 3,986,212 5,888,201
Selling, general and
administrative expenses (4,474,576) (4,717,694)
Bad debts recovery (expense) 54,385 (49,311)
Research and development expense (75,949) (118,562)
Income (loss) from operations (509,928) 1,002,634
Other expense:
Interest expense (808,536) (849,610)
Other, net 42,276 38,979
Income (loss) before income taxes (1,276,188) 192,003
Income tax expense (662,151) (1,867,610)
Net loss $(1,938,339) $(1,675,607)
Loss per common share:
Primary:
Before extraordinary item $ (.16) $ (.13)
Extraordinary item
Total $ (.16) $ (.13)
Fully diluted:
Before extraordinary item $ (.16) $ (.13)
Extraordinary item
Total $ (.16) $ (.13)
Weighted average number of common
shares outstanding 12,471,080 12,442,850
<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
Six Six
Months Ended Months Ended
June 30, June 30,
1996 1995
(Unaudited) (Unaudited)
<S> <C> <C>
Net sales $62,356,113 $83,351,408
Cost of sales 55,946,973 70,356,062
Gross profit 6,409,140 12,995,346
Selling, general and
administrative expenses (7,944,677) (8,955,119)
Bad debts recovery (expense) 54,385 (238,366)
Research and development expense (228,479) (335,347)
Income (loss) from operations (1,709,631) 3,466,514
Other expense:
Interest expense (1,679,039) (1,629,443)
Other, net 117,348 106,788
Income (loss) before income taxes (3,271,322) 1,943,859
Income tax expense (708,885) (2,021,610)
Net loss $(3,980,207) $ (77,751)
Loss per common share:
Primary:
Before extraordinary item $ (.32) $ (.01)
Extraordinary item
Total $ (.32) $ (.01)
Fully diluted:
Before extraordinary item $ (.32) $ (.01)
Extraordinary item
Total $ (.32) $ (.01)
Weighted average number of common
shares outstanding 12,467,629 12,393,571
<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
Six Six
Months Ended Months Ended
June 30, 1996 June 30, 1995
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,980,208) (77,751)
Adjustments to reconcile
net loss to net cash
provided (used) from operating
activities:
Depreciation and amortization 1,463,705 1,344,752
Pension cost in excess of
funding 194,768 827,497
Provision for losses on
receivables 249,118 238,366
Provision for warranty expense 77,000
Provision for deferred taxes 615,000 1,901,761
Provision for losses on
contracts in progress 1,561,918
(Gain) loss on disposition
of equipment 63,343 (5,500)
Changes in assets and liabilities:
Accounts receivable 1,845,118 (2,933,215)
Inventories (2,182,939) 1,239,910
Prepaid expenses and
other assets (491,241) (472,133)
Intangible assets (125,490) (64,645)
U.S. Government request for
equitable adjustment, net 2,448,522 (2,101,729)
Deposits and other (496,884) 22,279
Accounts payable and
accrued expenses 48,878 3,298,498
Accrued warranty expense (125,159) (272,400)
Estimated losses on
contracts in progress (103,922) (882,850)
Self-insured workers'
compensation reserve (300,830)
Total adjustments 3,402,817 3,478,679
Net cash provided (used) by
operating activities (577,391) 3,400,928
Cash flows from investing activities:
Capital expenditures (929,617) (1,432,144)
Insurance proceeds receivable (242,000)
Proceeds from sale of equipment 393,395 5,500
Net cash used in
investing activities $ (536,222) $(1,668,644)
<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)
Six Six
Months Ended Months Ended
June 30, June 30,
1996 1995
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of
common stock $ 1,735 $ 837
Borrowings under revolving
credit facility 1,500,000 22,100,000
Repayments under revolving
credit facility (1,500,000) (20,300,000)
Principal payments under
long-term obligations (265,297) (3,329,717)
Change in cash overdraft -0- (176,120)
Net cash used in
financing activities (263,562) (1,705,000)
Effect of exchange rate changes
on cash and cash equivalents (34,754) (27,284)
Net decrease in cash
and cash equivalents (1,411,929) -0-
Cash and cash equivalents
beginning of period 1,411,929 -0-
Cash and cash equivalents
end of period $ -0- $ -0-
Supplemental disclosure of cash
flow information:
Cash paid during the period for:
Interest $ 407,151 $1,497,115
Income taxes 50,000 123,950
Supplemental disclosure of
non-cash investing activities:
Capital lease obligations incurred
for new equipment $ 62,903 $ 743,460
Capitalization of accrued
interest $ 2,207,799
<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 June
30, 1996 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 1995
10-K. Certain reclassifications have been made to the 1995
financial statements included herein to conform with the
presentation used in 1996.
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
of $1,286,827 at June 30, 1996 which is included in accounts
payable. Amounts are 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:
June 30, December 31,
1996 1995
(Unaudited)
<S> <C> <C>
Work in-process $38,111,008 $31,050,937
Finished goods 3,708,547 3,858,325
Raw materials and supplies 5,943,945 5,019,629
Total $47,763,500 $39,928,891
Less progress payments (22,496,688) (16,901,206)
Less reserve for estimated
losses on contracts in
progress (1,398,902) (1,274,676)
$23,867,910 $21,753,009
</TABLE>
<TABLE>
4. NOTES PAYABLE
June 30, December,31,
1996 1995
<S> <C> <C>
Short-term debt consists of
the following:
Term Credit facility $ 9,207,799
Senior Subordinated Loan 10,000,000
Revolving Credit facility 8,000,000
Note due to individual, bears 447,173 $ 447,173
interest at 10% collateralized
by a security interest in
certain equipment
Other obligations 553,335 507,982
collateralized by security
interests in certain
equipment
$28,208,307 $ 955,155
Long term debt consists of
the following:
Term Credit facility 7,000,000
Senior Subordinated Loan 10,000,000
Revolving Credit facility 8,000,000
Other obligations, 539,283 787,030
collateralized by security
interests in certain
equipment
$ 539,283 $25,787,030
Total short term and long term $28,747,590 $26,742,185
debt
</TABLE>
On April 15, 1996, the Company and its primary lender executed
the Eighth Amendment to the Amended and Restated Credit
Agreement and the Sixth Amendment to the Amended and Restated
Senior Subordinated Loan Agreement (the "Amendments"). The
Amendments provided for the maturity dates of the Revolving
Credit facility, the Term Credit facility and the Senior
Subordinated Loan to be extended until March 31, 1997 and a
waiver was given for all of the Company's covenant violations
through March 31, 1996. Additionally, the amendments provided
that all interest accrued and unpaid as of April 1, 1996, less
$100,000 which was paid at the time the Amendments were
executed, be capitalized and added to the principal of the
Company's Term Credit facility. The amount of deferred
interest capitalized in April of 1996 was $2,207,799. Also,
the expiration date of the warrant, which was granted to the
Company's primary lender in conjunction with the original
making of the loans in 1988, was extended from September 9,
1998 to September 9, 2000.
The Company's cash resources continued to be strained during
the second quarter of 1996 primarily from excessive costs on
its KC-135 program due to the need to perform structural
repairs far in excess of levels anticipated in government
solicitation documents at the time the new contract was bid
and the lingering effect of the late receipt of government
furnished material. Liquidity also was constrained as a
result of the delayed redelivery of KC-135 aircraft (see "KC-
135 Contract", under Results of Operations, for a detailed
discussion) as well as from losses incurred under various
commercial aircraft maintenance contracts performed at the
Company's Dothan and Copenhagen, Denmark facilities. As a
consequence, the Company was unable to meet its interest
obligations beginning in June of 1996, for interest accrued
in May of 1996. Additionally, the Company was in violation of
three financial ratio requirements of its loan agreements with
its primary lender as of June 30, 1996. As a result of these
delinquencies and violations, 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. While
the Company recognizes that its primary lender could attempt
to enforce the remedies available to it for an event of
default, including its right 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.
In April of 1996, the Company also arranged a standby
financing commitment with its principal shareholder which
provided for the extension by the principal shareholder of up
to $2.0 million in short-term advances upon demonstration of
certain need factors by the Company. As of June 30, 1996, no
advances had been made under this commitment.
5. CONTINGENCIES
The Company has recorded a total long term Request for
Equitable Adjustment (REA) receivable of $9.8 million, net of
reserves. The reserves are deemed necessary by the Company
due to uncertainties inherent in the process of negotiating
such adjustments. The Company recorded $4.1 million of the
receivable in 1995, $0.8 million in the first quarter of 1996,
and $4.9 million in the second quarter of 1996. In May of
1996, the Company submitted two REAs associated with this
receivable aggregating $2.8 million for increased costs
resulting from the government's failure to supply certain
government-furnished materials in a timely manner under both
its new (1995) and old (1990) KC-135 contracts. The Company
and the U.S. Government are in the process of negotiating
these REAs. The Company and the government are also in the
process of negotiating the cost impacts of excessive levels of
major structural repairs, other late government furnished
material (GFM) and all additional directed and constructive
changes to the contract that have impacted aircraft
redelivered through June 30, 1996, though no formal REA has
yet been presented to the government for these impacts. The
Company recorded the REA receivable based upon the two filed
REAs aggregating $2.8 million and a preliminary rough order of
magnitude assessment determined by the Company's independent
management consultant. The Company has obtained an opinion
from outside legal counsel specializing in government
procurement law which documents that the Company is entitled
to compensation for the additional costs associated with
excess major structural repairs, late receipt of GFM and other
directed and constructive changes to the contract.
The Company firmly believes that the evidence in support of
the recorded revenue is objective and verifiable and the costs
associated with the recorded revenue are reasonable in view of
the work performed and not the result of any deficiencies in
the Company's performance. However, 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 $9.8
million. The Company cannot reasonably predict when a
settlement will be reached with the U.S. Government or the
timing of the cash proceeds therefrom.
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 June 30, 1996
Versus three months ended June 30, 1995
Revenues for the second quarter of 1996 decreased 15%, from $42.2
million in 1995 to $35.8 million in 1996. Government sales
decreased 6%, from $24.2 million in 1995 to $22.8 million in 1996.
Commercial sales decreased 28%, from $18.0 million in 1995 to $13.0
million in 1996. The Company's mix of business between government
and commercial customers shifted to 36% commercial and 64%
government in 1996 from 43% commercial and 57% government in 1995.
A decrease in government sales of approximately $6.5 million in the
second quarter of 1996 was due primarily to a reduction in the
number of KC-135 Programmed Depot Maintenance (PDM) aircraft
redeliveries. Eight such aircraft were redelivered in 1996 versus
twelve aircraft in 1995. Approximately twelve aircraft that were
scheduled to redeliver by the end of the second quarter of 1996
were delayed, primarily due to an unprecedented number of major
structural problems on the aircraft and the lingering effect of the
late receipt of government furnished material (GFM).
Government sales in the second quarter of 1996 reflect $4.9 million
of revenue recorded in anticipation of the negotiation and
settlement with the U.S. Government of the Company's formal and
informal Requests for Equitable Adjustment (REA). Government sales
in the second quarter of 1995 reflected $2.1 million of revenue
recorded for a REA that was subsequently settled in February, 1996
(see below, under the heading "KC-135 Contract", for a detailed
discussion). Additionally, the Company realized increases in sales
of $1.8 million under the Company's H-3 helicopter program, which
is worked at its Dothan facility, and $0.7 million at the Company's
Hayes Targets division.
The Company's commercial sales decreased primarily due to a
reduction in the number of B-727 cargo conversion redeliveries (no
redeliveries in 1996 versus four redeliveries in 1995), B-737 cargo
conversion redeliveries (no redeliveries in 1996 versus one
redelivery in 1995) and B-727 Combi conversion redeliveries (no
redeliveries in 1996 versus one redelivery in 1995). The Company
believes that the decline in cargo conversion sales is a result, at
least in part, of a shortage in aircraft available for conversion
due to increased passenger traffic volumes. Partially offsetting
this decline in sales was an increase in volume of $0.9 million at
the Company's Pemco Air Support Services facility (PASS) located in
Copenhagen, Denmark.
The ratio of cost of sales ($31.8 million in 1996; $36.3 million in
1995) to net sales ($35.8 million in 1996; $42.2 million in 1995)
increased from 86% in the second quarter of 1995 to 89% in 1996.
The resultant decrease in gross profit is primarily due to losses
incurred under various commercial aircraft maintenance contracts
performed at the Company's Dothan facility and a lack of
redeliveries under the Company's B-737 cargo conversion program.
The Company also incurred further losses at its Pemco World Air
Services aircraft facility in Copenhagen, Denmark. However, the
Company reduced those losses at the Copenhagen facility by $1.2
million or 65% for the second quarter of 1996 versus 1995, while
second quarter revenues remained relatively constant.
Selling, general and administrative expense decreased from $4.7
million in the second quarter of 1995 to $4.5 million in 1996 but
increased as a percentage of sales from 11% in 1995 to 12% in 1996.
The Company recorded a $0.3 million recovery of bad debt in the
second quarter of 1996, which was partially offset by a $0.2
million increase to bad debt expense. The Company recorded $0.3
million of a potential $0.5 million recovery, based on its
customer's plan of reorganization which was filed with the
Bankruptcy Court and became effective July of 1996.
Interest expense was $0.8 million in both the second quarter of
1996 and 1995, and the total amount of principal owed by the
Company to its primary lender remained constant for the two
periods, at approximately $27.0 million. The effective average
interest rate in the second quarter of 1996 on the Term Credit
facility and the Revolving Credit facility was 10.05% versus 9.33%
in the second quarter of 1995.
The Company recorded $0.7 million of state and federal income tax
expense in the second quarter of 1996 and reduced its long term
deferred tax asset by $0.6 million. The change in the deferred tax
asset resulted primarily from an increase in the valuation
allowance for certain state net operating loss carryforwards which
have been disallowed based on the findings of a state tax audit.
The state tax audit involves tax years prior to the Company's
acquisition of Hayes International Corporation (now Pemco Aeroplex,
Inc.) and thus, while the Company intends to vigorously defend its
position with the state, the valuation allowance has been increased
due to the uncertainty of a successful resolution. In the second
quarter of 1995, the Company recorded $1.9 million of state and
federal income tax expense 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.
KC-135 Contract
In 1996, the Company's KC-135 contract with the U.S. Government
accounted for approximately 66% of the Company's sales to the U.S.
Government and 41% of the Company's total revenues. The adverse
cost effects of an unprecedented number of major structural
problems on the KC-135 aircraft, the effect of late receipt of GFM,
other directed and constructive changes to the contract and the
resulting delay in redelivery of aircraft have continued to have a
significantly negative impact on the Company's profitability and
cash flow during 1996. The Company has recorded a total long term
Request for Equitable Adjustment (REA) receivable of $9.8 million,
net of reserves, for the aforementioned adverse cost effects, based
upon two filed REAs aggregating $2.8 million and a preliminary
rough order of magnitude assessment determined by the Company's
independent management consultant. The reserves were deemed
necessary by the Company due to uncertainties inherent in the
process of negotiating such adjustments. The Company has obtained
an opinion from outside legal counsel specializing in government
procurement law which documents that the Company is entitled to
compensation for each of the aforementioned adverse cost impacts.
As a result of a number of factors, including a lack of critical
government furnished equipment resulting from the disruption of the
Company's production, the government has temporarily reduced the
level of KC-135 aircraft input for PDM work.
The Company recorded $4.1 million of the $9.8 million receivable in
1995, $0.8 million in the first quarter of 1996 and $4.9 million in
the second quarter of 1996. The revenue recorded is for cost
impacts to the Company under both its new (1995) and old (1990) KC-
135 contracts. In May of 1996, the Company submitted two REAs
associated with this receivable aggregating $2.8 million for
increased costs resulting from the government's failure to supply
certain government-furnished materials in a timely manner under
both KC-135 contracts. The Company and the government are in the
process of negotiating these REAs. The Company and the government
are also in the process of negotiating the cost impacts of
excessive levels of major structural repairs, other late government
furnished material (GFM) and all additional directed and
constructive changes to the contract that have impacted aircraft
redelivered through June 30, 1996, though no formal REA has yet
been presented to the government for these impacts. Additionally,
the Company and the government are in the process of negotiating
the aforementioned cost impacts to the aircraft in work in process
at June 30, 1996 and have begun discussions regarding appropriate
contract pricing for revised work scope to be performed under the
second option year of the seven year contract. The Company is
currently working aircraft from the first year and first option
year of the contract. The government's decision as to award of the
second option year of the contract is expected to be made in
September of 1996.
The Company firmly believes that the evidence in support of the
$9.8 million recorded receivable is objective and verifiable and
the cost associated with the receivable are reasonable in view of
the work performed and not the result of any deficiencies in the
Company's performance. However, 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 $9.8 million. The Company cannot
reasonably predict when a settlement will be reached with the U.S.
Government or the timing of the cash proceeds therefrom.
Six months ended June 30, 1996
Versus six months ended June 30, 1995
Revenues for the first six months of 1996 decreased 25%, from $83.4
million for 1995 to $62.4 million for 1996. Government sales
decreased 23%, from $50.4 million in 1995 to $38.6 million in 1996.
Commercial sales decreased 28%, from $32.9 million in 1995 to $23.7
million in 1996. The Company's mix of business between government
and commercial customers shifted to 38% commercial and 62%
government in 1996 from 40% commercial and 60% government in 1995.
A decrease in government sales of approximately $15.2 million in
the first six months of 1996 was due to a reduction in the number
of KC-135 Programmed Depot Maintenance (PDM) aircraft redeliveries.
Sixteen such aircraft were redelivered in 1996 versus twenty-six
aircraft in 1995. Approximately twelve aircraft that were
scheduled to redeliver by the end of the second quarter of 1996
were delayed, primarily due to an unprecedented number of major
structural problems on the aircraft and the lingering effect of the
late receipt of government furnished material (GFM). Additionally,
government sales decreased $2.6 million due to reduced redeliveries
under the Company's C-130 contract. The Company redelivered three
C-130 PDM aircraft in 1996 versus eight C-130 PDM aircraft and 7
drop-in aircraft in 1995.
Government sales in the first six months of 1996 reflect $5.7
million of revenue recorded in anticipation of the negotiation and
settlement with the U.S. Government of the Company's formal and
informal Requests for Equitable Adjustment (REA). Government sales
in the second quarter of 1995 reflected $2.1 million of revenue
recorded for a REA that was subsequently settled in February, 1996
(see above, under the heading "KC-135 Contract", for a detailed
discussion). Additionally, the Company realized increases in sales
of $1.9 million under the Company's H-3 helicopter program, which
is worked at its Dothan facility, and $0.5 million at the Company's
Hayes Targets division.
The Company's commercial sales decreased primarily due to a
reduction in the number of B-737 cargo conversion redeliveries (no
redeliveries in 1996 versus three redeliveries in 1995), B-727
cargo conversion redeliveries (one redelivery in 1996 versus six
redeliveries in 1995) and B-727 Combi conversion redeliveries (no
redeliveries in 1996 versus one redelivery in 1995). The Company
believes that the decline in cargo conversion sales is a result, at
least in part, of a shortage in aircraft available for conversion
due to increased passenger traffic volumes. Partially offsetting
this decline in sales was an increase in volume of approximately
$1.6 million at the Company's Pemco World Air Services facility in
Copenhagen, Denmark and an increase of $1.0 million at the
Company's Pemco Air Support Services facility (PASS) also located
in Copenhagen, Denmark.
The ratio of cost of sales ($55.9 million in 1996; $70.4 million in
1995) to net sales ($62.4 million in 1996; $83.4 million in 1995)
increased from 84% in 1995 to 90% in 1996. The resultant decrease
in gross profit is primarily due to the aforementioned adverse cost
impacts on the KC-135 contract (see above, under the heading "KC-
135 Contract", for a detailed discussion), losses recorded under
various commercial aircraft maintenance contracts performed at the
Company's Dothan facility and a lack of redeliveries under the
Company's B-737 cargo conversion program. The Company also
incurred losses at its Pemco World Air Services aircraft facility
in Copenhagen, Denmark. However, the Company reduced those losses
at the Copenhagen facility by $1.8 million or 66% for the first six
months of 1996 versus 1995, while revenues for the period increased
approximately 42%.
Selling, general and administrative expense decreased from $9.0
million in the first six months of 1995 to $7.9 million in 1996 but
increased as a percentage of sales from 11% in 1995 to 13% in 1996.
The Company recorded a $0.3 million recovery of bad debt in the
first six months of 1996, which was partially offset by a $0.2
million increase to bad debt expense. The Company recorded $0.3
million of a potential $0.5 million recovery, based on its
customer's plan of reorganization which was filed with the
Bankruptcy Court and became effective July of 1996. The Company
recorded bad debt expense of $0.2 million in the first six months
of 1995.
Interest expense was $1.7 million in the first six months of 1996
versus $1.6 million in 1995 while the total amount of principal
owed by the Company to its primary lender remained relatively
constant. The effective average interest rate in the first six
months of 1996 on the Term Credit facility and the Revolving Credit
facility was 11.00% versus 8.99% in 1995.
The Company recorded $0.7 million of state and federal income tax
expense in the first six months of 1996 and reduced its long term
deferred tax asset by $0.6 million. The change in the deferred tax
asset resulted primarily from an increase in the valuation
allowance for certain state net operating loss carryforwards which
have been disallowed based on the findings of a state tax audit.
The state tax audit involves tax years prior to Company's
acquisition of Hayes International Corporation (now Pemco Aeroplex,
Inc.) and thus, while the Company intends to vigorously defend its
position with the state, the valuation allowance has been increased
due to the uncertainty of a successful resolution. In the first
six months of 1995, the Company recorded $2.0 million of state and
federal income tax expense 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.
LIQUIDITY AND CAPITAL RESOURCES
On April 15, 1996, the Company and its primary lender executed the
Eighth Amendment to the Amended and Restated Credit Agreement and
the Sixth Amendment to the Amended and Restated Senior Subordinated
Loan Agreement (the "Amendments"). The Amendments provided for the
maturity dates of the Revolving Credit facility, the Term Credit
facility and the Senior Subordinated Loan to be extended until
March 31, 1997 and a waiver was given for all of the Company's
covenant violations through March 31, 1996. Additionally, the
amendments provided that all interest accrued and unpaid as of
April 1, 1996, less $100,000 which was paid at the time the
Amendments were executed, be capitalized and added to the principal
of the Company's Term Credit facility. The amount of deferred
interest capitalized in April of 1996 was $2,207,799. Also, the
expiration date of the warrant, which was granted to the Company's
primary lender in conjunction with the original making of the loans
in 1988, was extended from September 9, 1998 to September 9, 2000.
The Company's cash resources continued to be strained during the
second quarter of 1996 primarily from excessive costs on its KC-135
program due to the need to perform structural repairs far in excess
of levels anticipated in government solicitation documents at the
time the new contract was bid and the lingering effect of the late
receipt of government furnished material. Liquidity also was
constrained as a result of the delayed redelivery of KC-135
aircraft (see "KC-135 Contract", under Results of Operations, for
a detailed discussion) as well as from losses incurred under
various commercial aircraft maintenance contracts performed at the
Company's Dothan and Copenhagen, Denmark facilities. As a
consequence, the Company was unable to meet its interest
obligations beginning in June of 1996, for interest accrued in May
of 1996. Additionally, the Company was in violation of three
financial ratio requirements of its loan agreements with its
primary lender as of June 30, 1996. As a result of these
delinquencies and violations, 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. While the Company
recognizes that its primary lender could attempt to enforce the
remedies available to it for an event of default, including its
right 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.
In April of 1996, the Company also arranged a standby financing
commitment with its principal shareholder which provided for the
extension by the principal shareholder of up to $2.0 million in
short-term advances upon demonstration of certain need factors by
the Company. As of June 30, 1996, no advances had been made under
this commitment.
The Company has recorded a total long term Request for Equitable
Adjustment (REA) receivable of $9.8 million, net of reserves. The
reserves are deemed necessary by the Company due to uncertainties
inherent in the negotiation of such equitable adjustments. In May
of 1996, the Company submitted two REAs associated with this
receivable aggregating $2.8 million for increased costs resulting
from the government's failure to supply certain government
furnished materials in a timely manner under both its new and old
KC-135 contracts. The Company and the government are in the
process of negotiating these REAs. The Company and the government
are also in the process of negotiating the cost impacts of
excessive levels of major structural repairs, other late government
furnished material (GFM) and all additional directed and
constructive changes to the contract that have impacted aircraft
redelivered through June 30, 1996, though no formal REA has yet
been presented to the government for these impacts. Additionally,
the Company and the government are in the process of negotiating
the aforementioned cost impacts to the aircraft in work in process
at June 30, 1996 and have begun discussions regarding appropriate
contract pricing for the revised work scope to be performed under
the second option year of the seven year contract. The Company is
currently working aircraft from the first year and first option
year of the contract (see "KC-135 Contract", under Results of
Operations, for a more detailed discussion). The government's
decision as to award of the second option year of the contract is
expected to be made in September of 1996.
The following is a discussion of the significant items in the
Company's Consolidated Statement of Cash Flows for the years ending
June 30, 1996 and 1995.
The Company's pension expense as determined by its actuary for the
year 1996 is $1.0 million as compared to $2.3 million in 1995. The
Company intends to fund its pension $1.3 million in 1996, which is
the same as was funded in 1995. The Company funded $0.3 million by
the first quarter of 1996 and 1995 but due to its strained cash
resources, was unable to contribute funds in the second quarter of
either 1996 or 1995.
The Company increased its valuation allowance associated with
certain state net operating loss carryforwards $0.6 million based
on the findings of a state tax audit. The state tax audit involves
tax years prior to Company's acquisition of Hayes International
Corporation (now Pemco Aeroplex, Inc.) and thus, while the Company
intends to vigorously defend its position with the state, the
valuation allowance has been increased due to the uncertainty of a
successful resolution. In the second quarter of 1995, the Company
reduced its current deferred tax asset by $1.9 million primarily
from a reduction of percentage of completion based profits in work
in process and the usage of net operating loss carryforwards.
Net inventories increased in the first six months of 1996 primarily
due to an increase of $7.1 million of work in process, offset by a
$5.6 million increase in progress payment balances. Net work in
process increased primarily as a result of the aforementioned
delayed redelivery of KC-135 aircraft. Additionally, raw materials
increased approximately $0.9 million.
The Company received $8.1 million in the first quarter of 1996 as
settlement of its $10.3 million REA for the direct and indirect
cost impact of the disruption of scheduled work flow which occurred
as a result of the late receipt of government furnished material on
its old KC-135 contract. The Company recorded $5.7 million of
revenue and a long term unbilled receivable in the first six months
of 1996 for additional costs associated with excess major
structural repairs, late receipt of GFM, and other directed and
constructive changes to its contract (see "KC-135 Contract", under
Results of Operations, for a detailed discussion).
The Company's accounts payable and accrued expenses were $25.8
million at June 30, 1996 versus $28.2 million at December 31, 1995.
Approximately $2.2 million of this reduction in accounts payable
and accrued expenses results from the capitalization of interest
accrued and unpaid to the Company's primary lender, as of April 1,
1996. The interest was capitalized and added to the Term Credit
facility in accordance with the aforementioned Amendments.
The Company's cash balance at December 31, 1995 of $1.4 million
funded $0.6 million used in the Company's operations, $0.5 million
for net capital improvements, and $0.3 million for payments on
various capital leases in the first six months of 1996. At June
30, 1996, the Company's cash accounts reflected $1.3 million in
credit balances. The credit balances, representing the extent that
checks written have not been presented for payment, have been
reclassed to accounts payable. In the first six months of 1995,
the Company used $3.4 million of cash provided from operating
activities and $1.8 million from the Revolving Credit facility to
fund $1.4 million for capital improvements, a $3.0 million
principal payment on its Term Credit facility and $0.3 million for
payments on various capital leases.
SUBSEQUENT EVENTS
In the third quarter of 1996, the Company's contract with the
United Auto Workers (UAW) at its Pemco Aeroplex, Inc. division in
Birmingham, Alabama and its Hayes Targets division in Leeds,
Alabama expired and the Company's UAW employees voted to stop work
at these facilities on July 22, 1996. The primary disagreement
between the Company and its UAW employees centered on consolidation
of job categories which the Company deems critical to its ability
to increase efficiency and remain competitive. Additionally, the
Company's UAW employees are seeking wage and benefit increases,
while the Company's position is to maintain wages and benefits at
their present levels and to continue cost of living increases. The
work stoppage continues to be in effect and negotiations have not
resulted in a settlement of the dispute. Production work and
shipments at the facilities have continued, though at significantly
reduced levels, primarily through the utilization of the Company's
non-union, management employees and outside replacement workers.
The Company cannot reasonably predict when a resolution to the work
stoppage will be reached or the impact of the work stoppage on
subsequent quarters.
BACKLOG
<TABLE>
The following table presents the Company's backlog (in thousands of
dollars) at June 30, 1996 and 1995:
1996 1995
<S> <C> <C>
U.S. Government $87,065 $ 69,484
Commercial 12,721 38,446
$99,786 $107,930
</TABLE>
As of June 30, 1996, 87% of the Company's backlog was for the U.S.
Government versus 64% for the period ending June 30, 1995. The
Company's U.S. Government backlog increased $13.5 million under the
Company's KC-135 contract primarily due to delayed redelivery of
aircraft resulting from the aforementioned unprecedented number of
major structural problems on the aircraft and the lingering effect
of late receipt of GFM. The Company's U.S. Government backlog also
increased due to additional work scheduled under the Company's
Targets, Space Vector and H-3 programs.
The Company's commercial backlog at June 30, 1996 changed from
prior year primarily due to a reduction of $21.1 million under the
Company's B-737 cargo conversion program and $9.1 million under the
Company's B-727 cargo conversion program. Partially offsetting
these reductions was a $5.0 million increase in backlog for
aircraft maintenance work under contracts with various customers.
Approximately $18.2 million of the $21.1 million reduction under
the Company's B-737 cargo conversion program resulted from the
elimination of assumed option ships under contracts that have
expired. The Company believes at least some of these ships
eventually will be converted under new or renegotiated contracts.
Additionally, the Company has approximately $203 million of firm
but unfunded backlog associated with the five follow-on years of
its KC-135 contract, which is not included in the figures cited
above.
CONTINGENCIES
As previously discussed, a denial of the Company's requests for
equitable adjustments from the U.S. Government for the cost impact
of excess major structural repairs, late receipt of GFM, and other
directed and constructive changes to its KC-135 PDM contract, which
event the Company deems unlikely, would cause a pre-tax reduction
of revenue of $9.8 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.
FORWARD LOOKING STATEMENTS
Statements herein concerning anticipated results of operations and
the Company's intent to take certain actions in the future are
forward looking statements, the accuracy of which cannot be
guaranteed by the Company. These forward looking statements are
subject to a variety of business risks and other uncertainties,
including but not limited to the effect of economic conditions, the
impact of competitive products and pricing, new product
development, the actual performance of work under contract,
customer contract awards and actions with respect to utilization
and renewal of their contracts and the results of financing
efforts.
PRECISION STANDARD,INC.
OTHER INFORMATION
PART II.
Item 1 Legal Proceedings
None
Item 2 Changes in Securities
None
Item 3 Defaults Upon Senior Securities
The Company was unable to meet its interest obligations
beginning in June of 1996, for interst accrued in May of
1996 and for the months thereafter. Additionally, the
Company was in violation of three financial ratio
requirements of its loan agreements with its primary
lender as of June 30, 1996. As a result of these
delinquencies and violations, 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. While the Company recognizes
that its primary lender could attempt to enforce the
remedies available to it for an event of default,
including its right 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
The Company's annual meeting of shareholders was held on
May 29, 1996. At the meeting, Matthew L. Gold, Donald C.
Hannah, Admiral George E.R. Kinnear II, Walter M. Moede,
General Thomas C. Richards and J. Ben Shapiro, Jr. were
elected as directors. Also ratified at the meeting was
the selection of Coopers & Lybrand as the independent
public accountants for the Company for the calendar year
ending December 31, 1996. In addition, the shareholders
approved the amendments to the Company's Amended and
Restated Nonqualified Stock Option Plan to (i) add a
provision for stock appreciation rights to be granted in
tandem with nonqualified stock options, (ii) add a
provision for stock grants, and (iii) increase the number
of shares reserved under the Nonqualified Plan from
1,000,000 to 1,500,000, and approved the amendment to the
Company's Amended and Restated Incentive Stock Option and
Appreciation Rights Plan to increase the number of shares
reserved under the Incentive Plan from 1,000,000 to
1,500,000 shares.
<TABLE>
The number of votes cast for or withheld for each
director nominee was as follows:
Nominee For Withheld
<S> <C> <C>
Matthew L. Gold 11,589,843 277,517
Donald C. Hannah 11,723,343 144,017
Adm. George E.R. Kinnear II 11,723,843 143,517
Walter M. Moede 11,586,643 280,717
Gen. Thomas C. Richards 11,723,843 143,517
J. Ben Shapiro, Jr. 11,723,843 143,517
</TABLE>
The number of votes cast for, against and abstentions for
ratification of the selection of Coopers & Lybrand as the
Company's independent auditors for the calendar year
ending December 31, 1996 was as follows:
For Against Abstain
11,838,005 21,529 7,826
The number of votes cast for, against, abstentions and
broker nonvotes for approval of the amendments to the
Nonqualified Plan was as follows:
Broker
For Against Abstain Nonvotes
9,369,956 629,768 52,550 1,815,086
The number of votes cast for, against, abstentions and
broker nonvotes for approval of the amendment to the
Incentive Plan was as follows:
Broker
For Against Abstain Nonvotes
9,364,076 634,868 53,330 1,815,086
Because the election of directors and ratification of
auditors were considered routine under applicable stock
exchange rules, all proxy shares held in the names of
brokers as nominees which were not voted at the meeting
by the beneficial holders thereof were voted by the
brokers at their discretion. The proposals to amend the
Nonqualified Plan and the Incentive Plan were considered
nonroutine, and therefore, the brokers did not have the
discretion to vote on those proposals.
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: 8/29/96 By: /s/ Matthew L. Gold
Matthew L. Gold
Chairman, President and
Chief Executive Officer
Date: 8/29/96 By: /s/ Walter M. Moede
Walter M. Moede
Executive Vice President
& Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 12,607,737
<ALLOWANCES> 452,231
<INVENTORY> 23,867,910
<CURRENT-ASSETS> 42,515,578
<PP&E> 28,667,514
<DEPRECIATION> 14,556,435
<TOTAL-ASSETS> 76,644,060
<CURRENT-LIABILITIES> 55,168,159
<BONDS> 0
0
0
<COMMON> 1,282
<OTHER-SE> 10,145,530
<TOTAL-LIABILITY-AND-EQUITY> 76,644,060
<SALES> 62,356,113
<TOTAL-REVENUES> 62,356,113
<CGS> 55,946,973
<TOTAL-COSTS> 64,120,129
<OTHER-EXPENSES> (117,348)
<LOSS-PROVISION> (54,385)
<INTEREST-EXPENSE> 1,679,039
<INCOME-PRETAX> (3,271,322)
<INCOME-TAX> 708,885
<INCOME-CONTINUING> (3,980,207)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,980,207)
<EPS-PRIMARY> (.32)
<EPS-DILUTED> (.32)
</TABLE>
