SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 2 TO FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934 for the twelve months ended
December 31, 1996
Commission File No. 0-13829
PRECISION STANDARD, INC.
Colorado 84-0985295
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State or other jurisdiction of I.R.S. Employer Identification No.
Incorporation or organization
1225 17th Street
Suite 1800
Denver, CO 80202
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Address of principal executive offices Zip Code
Company's telephone number, including area code: (303) 292-6565
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 par value
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(Title of Class)
Indicate by check mark whether the Company (1) has filed all reports
required to be filed by section 13 or 14(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Company was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
The aggregate market value of the Common Stock held by non-affiliates
on February 28, 1997 was approximately $4,749,896.
The number of shares of the company's Common Stock outstanding as of
February 28, 1997 was 12,523,896.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive proxy statement to be filed
pursuant to Regulation 14A not later than 120 days after the end of the
fiscal year (December 31, 1996) are incorporated by reference in Part III.
Indicated by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Company's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. Yes X No
The undersigned Registrant hereby amends the following items,
financial statements, exhibits or other portions of its Form 10-K for the
period ended December 31, 1996 as set forth below:
PART I
ITEM 3. LEGAL PROCEEDINGS.
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On June 27, 1997, the Company's Pemco Aeroplex subsidiary was served with
a civil complaint filed by the United States of America in US District
Court for the Middle District of Alabama, Northern Division. The
complaint alleged violation of the False Claims Act ("FCA") and contract
claims based on mistake of fact and unjust enrichment with respect to the
1991 sale of certain C-130 aircraft wings by the U.S Government to Pemco,
and sought $1.5 million as the alleged value of the wings and treble
damages under the FCA. On July 25, 1997, Pemco filed a motion to dismiss
the complaint based on failure to allege facts which establish a cause of
action, and other grounds. The case was dismissed on September 3, 1997
for failure to state a claim under the FCA and lack of jurisdiction. The
Government has filed a notice of appeal. If the appeal is in fact
prosecuted, the Company intends to vigorously defend the district court's
judgment.
A purported class action was brought against the Company and its Pemco
Aeroplex subsidiary on behalf of those persons hired as replacement
workers during the strike by Pemco's United Auto Worker union employees
and who were terminated upon settlement of suck strike. On June 3, 1997,
Pemco was served with the complaint in Bradley v. Pemco Aeroplex, Inc.
filed in the Circuit Court of Jefferson County, Alabama. On July 9, 1997,
the plaintiff filed an amended complaint alleging fraud, breach of
contract, and civil conspiracy seeking damages and equitable relief
against Pemco and adding the Company as a defendant. The Company was
served with the amended complaint on July 16, 1997. Pemco and the Company
have filed their answers denying all allegations. The Company believes
the plaintiffs' claims have no factual basis and will vigorously defend
the case.
In GATX/Airlog Company, et al. v. Pemco Aeroplex, Inc., the owners of a
Supplementary Type Certificate ("STC") for Boeing 747 cargo conversion
sued the Company's Pemco Aeroplex subsidiary, successor to Hayes
International which had performed engineering for the STC development and
the FAA application for GATX/Airlog, seeking damages and indemnity for
claims arising from an Airworthiness Directive issued by the FAA in
January 1996 restricting the amounts of cargo aircraft converted pursuant
to the STC could carry. The complaint which was filed in US District
Court for the Northern District of California and served on July 14, 1997,
alleges fraudulent and negligent misrepresentation, professional
negligence, breach of contract, implied indemnity, equitable indemnity,
and contribution by Pemco Aeroplex with respect to GATX/Airlog's alleged
liability to owners of converted aircraft. The Company believes it has no
liability to the plaintiffs and that it will ultimately prevail.
On August 8, 1997, the Company's Pemco Aeroplex subsidiary was served as a
defendant in Tower Air, Inc v. GATX Capital Corporation, et al. The
action, which was brought by the owner of a Boeing 747 aircraft converted
under a STC for 747 cargo conversion, owned by GATX and others, sued a
number of defendants seeking damages. As a result of an Airworthiness
Directive issued by the FAA in January 1996, aircraft which had been so
converted were restricted to carrying reduced amounts of cargo. The
Company's Pemco Aeroplex subsidiary has been named as a defendant in the
case because of engineering work performed in the late 1980's by its
predecessor, Hayes International, and because the aircraft was allegedly
converted under the STC by Pemco. The complaint, which was filed in the
Supreme Court of the State of New York, County of New York, alleges fraud
and deceit, negligent misrepresentation, and negligence against Pemco and
seeks payment of damages. On September 29, 1997, Pemco failed a motion to
dismiss the case based on lack of jurisdiction and forum non conveniens.
Pemco also filed in U.S. District Court for the Northern District of
California a declaratory relief action seeking a declaration that Pemco
has no liability to Tower Air.
In American International Airway, Inc. v. GATX Capital Corporation, et
al., U.S.D.C., N.D. Cal., the owner of two aircraft converted under an STC
for 747 cargo conversions owned by GATX and others, sued GATX and various
other defendants seeking damages. As a result of an Airworthiness
Directive issued by the FAA in January 1996, aircraft which had been so
converted were restricted to carrying reduced payloads. The Company's
Pemco Aeroplex subsidiary has been named as one of seven defendants in the
case because of allegedly improper engineering work performed in the
1980's by its predecessor, Hayes International. The complaint, which was
served on Pemco on February 5, 1997, alleges violations of the Racketeer
Influenced and Corrupt Organization Act (RICO), conspiracy, and negligence
against Pemco. Pemco has filed a motion to dismiss the complaint which
was denied in part and granted in part by the U.S. District Court,
Northern District of California on October 15, 1997. The Court granted
the motion with respect to the claim for civil conspiracy, but granted the
plaintiff leave to amend the complaint. Pemco believes the allegations
made against have no factual basis and intends to vigorously defend this
claim.
In Birmingham Airport Authority v. Pemco Aeroplex, Inc., filed October 7,
1997 in Circuit Court, Jefferson County, Alabama, the Birmingham Airport
Authority ("BAA") is seeking a declaratory judgment. (In its complaint,
BAA seeks a declaratory judgment that no agreement regarding the extension
of the base has been reached by the parties.) Pemco operates an aircraft
service facility at the Birmingham Airport on land leased from BAA. It is
the Company's position that Pemco and BAA have negotiated a 20-year
extension of the lease which otherwise would expire on September 30, 2000
and agreed to by both parties. The Company believes that the lease has
been extended and will vigorously defend the case.
On October 28, 1997, the Company was served with a complaint filed by the
Birmingham Airport Authority in the Probate Court of Jefferson County,
Alabama seeking condemnation of a portion of the Pemco Aeroplex leasehold
in Birmingham, Alabama. The property involved in such condemnation
proceeding is approximately 4 acres. The Airport Authority has
commissioned an appraisal of the property at issue. Prior to actual
inspection of the property, the Airport Authority offered Pemco
approximately $20,000 in compensation for the impacts due to condemnation.
Pemco estimates that the impact to its operation resulting from
condemnation of such property would be substantially in excess of $20,000
and is in the process of determining the cost to Pemco.
On November 3, 1997, the jury in Stevenson v. Pemco Aeroplex, Inc. and
Rick Windsor returned a verdict against the Company's Pemco Aeroplex
subsidiary in the amount of $1 million compensatory and $3 million
punitive damages. The case was filed in the Circuit Court of Jefferson
County, Alabama by an employee who alleged a supervisor had engaged in
tortious conduct under Alabama law by making sexual advances against her.
Pemco was sued under the theory of respondeat superior which holds an
employer liable for the actions of its employees undertaken in the course
of employment and theories of negligent supervision and training.
However, the jury found in favor of the supervisor and discharged him from
any liability. It is the Company's position that Pemco's liability is
derivative of the supervisor's and thus if he is not liable to the
plaintiff, Pemco likewise has no liability. Post-trial motions seeking to
vacate the verdict or, alternatively, to obtain a new trial will be filed.
On November 11, 1997, a supplier filed a request for bankruptcy against
Pemco World Air Services A/S (PWAS), the Company's Danish subsidiary. The
Maritime and Commercial Court in Copenhagen, Denmark heard the request on
November 20, 1997 and the petition was granted. Trustees have been
appointed to operate the facility. The Company has guaranteed certain
obligations of PWAS.
Various other claims alleging employment discrimination, including race,
sex, age and disability, have been made against the Company and its
subsidiary, Pemco Aeroplex, Inc., by current and former employees at its
Birmingham and Dothan, Alabama facilities in proceedings before the Equal
Employment Opportunity Commission and before state and federal courts in
Alabama. Workers' compensation claims brought by employees of Pemco
Aeroplex, Inc. are also pending in Alabama state court. The Company
believes that no one of these claims is material to the Company as a whole
and that such claims are more reflective of the general increase in
employment-related litigation in the U.S. and Alabama than of any actual
discriminatory employment practices by the Company or any subsidiary.
Except for workers' compensation benefits as provided by statute, the
Company believes these claims have no factual basis and intends to
vigorously defend itself in all litigation arising therefrom.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS.
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INTRODUCTION
The following discussion should be read in conjunction with the
Company's consolidated financial statements and notes thereto included
herein as Item 8.
RESULTS OF OPERATIONS
KC-135 Contract
The Company first performed Programmed Depot Maintenance (PDM) on KC-135
aircraft in 1968 and has since processed approximately 2,114 such
aircraft. In 1994, the Company was awarded a new, seven year PDM contract
and is currently performing work under the third of those seven years.
Prior to this new contract, the Company had performed PDM on KC-135
aircraft under a five year contract awarded in 1990. The Company's KC-135
contract with the U.S. Government accounted for approximately 42% of the
Company's total revenues in 1996, 41% in 1995 and 49% in 1994.
In February of 1996, the Company received $8.1 million from the Government
as settlement for a Request for Equitable Adjustment (REA) related to
specific late government furnished material (GFM) on the Company's 1990 KC-
135 contract. The Company recognized $3.5 million of revenue in 1994,
$4.2 million of revenue in 1995 and $0.4 million of interest income in
1995, associated with the $8.1 million settlement. The Company believes
that it has incurred costs of $10.3 million related to the factors cited
in this settlement. In October of 1996, the Company received $25.0
million under an agreement with the U.S. Government with respect to all
outstanding REAs on both its 1990 and 1994 KC-135 contracts. The Company
and the Government negotiated to resolve all disputes associated with the
Government's untimely provision of GFM, the incidence of major structural
repair work greatly in excess of that contemplated at the time of contract
formation, post contract increases in inspection requirements, consequent
delay and disruption costs and other associated costs. The Company
recognized $4.1 million of revenue in 1995, $17.6 million of revenue in
1996 and $3.3 million of other income in 1996, associated with the $25.0
million settlement. The $25.0 million settlement was based upon a
universal agreement between the Government and the Company and did not
necessarily take into account associated costs per individual impacted
ship and their respective redelivery dates. The Company believes that it
has incurred costs of $31.5 million related to the factors cited in this
settlement.
In October 1996, the Company also reached an agreement with the U.S.
Government for additional pricing in respect of aircraft in work at the
time of the settlement, and the Government exercised its option for PDM of
the KC-135 aircraft for the 1997 fiscal year, beginning on October 1,
1996. The Company's contract for this option year was amended to include
additional pricing for the aforementioned directed and constructive
changes to the contract and incorporated a fixed-price incentive provision
to the contract, which contains limited cost/benefit sharing provisions.
The Company is still working with the government to provide concurrent
engineering and other related provisions of the settlement.
The U.S. Government delivered forty-five aircraft to the Company under the
first year of the 1994 contract and thirty-four aircraft under the first
option year. To date, the Government has scheduled twenty aircraft to be
delivered for PDM work under the second option year of the contract, which
began on October 1, 1996.
TWELVE MONTHS ENDED DECEMBER 31, 1996
VERSUS TWELVE MONTHS ENDED DECEMBER 31, 1995
Revenues for the year ended 1996 decreased 16% from $154.7 million in 1995
to $130.9 million in 1996. Government sales decreased 8% in 1996, from
$91.7 million in 1995 to $84.1 million in 1996. Commercial sales
decreased 26% in 1996, from $63.0 million in 1995 to $46.8 million in
1996. The Company's mix of business between government and commercial
customers shifted from 41% commercial and 59% government in 1995 to 36%
commercial and 64% government in 1996.
A decrease in government sales in 1996 of $20.4 million was due primarily
to a reduction in the number of KC-135 PDM aircraft redeliveries. Twenty-
eight aircraft were redelivered in 1996 versus forty-five aircraft in
1995. The reduction in aircraft redeliveries in 1996 was caused by
disruption to the Company's operations by the factors cited in the
Company's REAs (see "KC-135 Contract", above), disruption due to a
contract dispute and ensuing work stoppage of the Company's United Auto
Worker (UAW) employees and a reduction in the number of aircraft input to
the Company for PDM work.
The above decrease in government sales was partially offset by revenue
recorded in 1996 in conjunction with the universal settlement agreement
with the Government in October of 1996 (see "KC-135 Contract", above).
The Company realized increases in government sales of $2.5 million under
the Company's H-3 helicopter program, which is worked at its Dothan
facility, and $2.3 million at its Space Vector Division, while it realized
a decrease of $5.0 million in revenue related to its C-130 PDM contract.
Commercial aircraft maintenance sales increased $3.7 million at the
Company's operations in Dothan, Alabama; however, lower aircraft
conversion revenue, resulting at least in part from a shortage of aircraft
available due to high passenger traffic volumes, caused overall commercial
sales to decline. There were three B-727 conversion redeliveries in 1996
versus fifteen redeliveries in 1995; no B-737 conversion redeliveries in
1996 versus four redeliveries in 1995; no B-727 Combi redeliveries in 1996
versus one redelivery in 1995.
The ratio of cost of sales ($115.7 million in 1996; $132.5 million in
1995) to net sales ($130.9 million in 1996; $154.7 million in 1995)
increased from 86% in 1995 to 88% in 1996. The resultant decrease in
gross profit is attributable primarily to a reduction in profit realized
under the Company's KC-135 program due to the escalation and accumulation
of the cost factors cited in the Company's REAs (see "KC-135 Contract",
above) and the disruption caused by the work stoppage of the Company's
United Auto Worker (UAW) employees. (All of the Company's approximately
900 UAW employees stopped work on July 22, 1996 and remained on strike
until March 31, 1997). This increase in costs under the KC-135 program
was largely offset by revenue recorded in conjunction with the universal
settlement with the Government in October of 1996 (see "KC-135 Contract",
above).
The Company reduced the losses at its Copenhagen aircraft facility by $1.5
million, or 29%, in 1996 versus 1995, while revenues remained relatively
constant. The Company was able to reduce losses by lowering overhead
expenses at the facility and by continuing to improve its work processes
in performing aircraft conversions. The Company also improved the profit
margin and increased the volume of sales for its Space Vector and Targets
product lines in 1996. Additionally, the Company recorded significantly
lower pension expense in 1996 compared to 1995. Pension cost decreased
from $2.3 million in 1995 to $1.0 million in 1996 primarily because plan
experience, including changes in participant data and plan assets, was
different from that expected and due to an increase in the expected return
on assets. However, gross profit was negatively impacted in 1996 as
compared to 1995 due to losses recorded under various commercial aircraft
contracts performed at the Company's Dothan facility, including
recognition of costs incurred in excess of those estimated to be
recoverable relating to the Company's new B-727 quick-change conversion
contract with UPS, and due to the lack of redeliveries under the Company's
B-737 and B-727 cargo conversion programs.
Selling, general and administrative expenses decreased from $19.1 million
in 1995 to $17.1 million in 1996 but increased as a percentage of sales
from 12% in 1995 to 13% in 1996.
Interest expense was $2.5 million in 1996 versus $3.3 million in 1995.
Interest expense was favorably impacted in 1996 by the forgiveness of $1.3
million of interest by the Company's primary lender, $0.6 million of which
was recorded in 1996 and $0.7 million of which will be recorded subsequent
to 1996. Interest expense was also favorably impacted by the payment of
$15.0 million of principal to the Company's primary lender in October of
1996. Payment of the $15.0 million was not required under the terms of
the loan but was paid as part of an agreement reached between the Company
and its primary lender that was formalized in March 1997 when the Credit
Agreement, Senior Subordinated Loan Agreement and Warrant were modified.
A portion of the consideration for the $15.0 million principal payment was
forgiveness of the $1.3 million in interest. The effective average
interest rate on the Term Credit facility was 10.52% in 1996, versus 9.88%
in 1995. The effective interest rate for the Revolving Credit facility
was 10.45% in 1996 versus 10.04% in 1995.
The Company recorded a net of $3.2 million of other income in 1996 versus
$0.3 million of other expense in 1995. Approximately $3.3 million of the
Company's settlement with the U.S. Government in October of 1996 was
classified as other income; $1.8 million as reimbursement for payroll tax
penalties and $1.5 million for excessive interest costs, both of which
were incurred by the Company due to the cash constraints caused by the
cost impacts cited in the Company's REAs (see "KC-135 Contract, above).
The Company recorded approximately $0.4 million of payroll tax penalties
in 1996. The primary components of other expense in 1995 are $1.2 million
of penalties for the late payment of federal payroll taxes stemming from
timing issues related to the Company's cash flow, offset by $0.6 million
of interest income which was primarily associated with the REA that was
settled in February of 1996.
The Company recorded $2.3 million of state and federal income tax expense
in 1996 versus $2.7 million in 1995 and reduced its deferred tax assets by
$4.1 million in 1996 versus $3.2 million in 1995. The change in deferred
tax assets in 1996 is primarily due to the reduction of the Company's
pension minimum liability and an increase in the valuation allowance for
certain state net operating loss carryforwards, some of which have been
disallowed based on the findings of an Alabama state tax audit. The
change in deferred tax assets in 1995 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 believes that future
levels of taxable income will be sufficient to realize its deferred tax
assets.
TWELVE MONTHS ENDED DECEMBER 31, 1995
VERSUS TWELVE MONTHS ENDED DECEMBER 31, 1994
Revenues for the year ended 1995 increased 4% from $148.5 million in 1994
to $154.7 million in 1995. Government sales decreased 7% in 1995, from
$98.1 million in 1994 to $91.7 million in 1995. Commercial sales
increased 25% in 1995, from $50.4 million in 1994 to $63.0 million in
1995. The Company's mix of business between government and commercial
customers shifted from 34% commercial and 66% government in 1994 to 41%
commercial and 59% government in 1995.
The decrease in government sales in 1995 was due primarily to a reduction
in the number of KC-135 Programmed Depot Maintenance (PDM) aircraft
redeliveries. Fifty-two aircraft were redelivered in 1994 versus forty-
five aircraft in 1995. Approximately eleven aircraft that were scheduled
to redeliver by the end of 1995 were delayed, primarily due to late
receipt of government furnished material (GFM) and an unprecedented number
of major structural problems on the aircraft. (See "KC-135 Contract",
above). In addition to the reduction in the number of KC-135 PDM
redeliveries in 1995, the Company recorded approximately $0.1 million less
in revenue for each aircraft redelivered under the 1994 (or "new") KC-135
contract due to a restructuring of the work package on the new contract
versus the 1990 (or "old") contract. Twenty-four of the forty-five
aircraft redelivered in 1995 were worked under the new KC-135 contract.
The increase in the Company's commercial sales was due primarily to an
increase in aircraft maintenance and modification services, other than
cargo conversion aircraft. These services, which included a contract with
a major airline, were performed at the Pemco World Air Service facilities
in Dothan, Alabama and Copenhagen, Denmark. Commercial sales also
increased due to an increase in the number of redeliveries on the
Company's B-727 program, fifteen redeliveries in 1995 compared to thirteen
redeliveries in 1994. The Company also recognized revenue in 1995 for the
first ship converted under the Company's B-727 "combi" conversion program.
Partially offsetting the above increases was a reduction in the number of
B-737 cargo conversion aircraft redeliveries (four redeliveries in 1995
versus six redeliveries in 1994).
The ratio of cost of sales ($132.5 million in 1995; $125.8 million in
1994) to net sales ($154.7 million in 1995; $148.5 million in 1994)
increased from 85% in 1994 to 86% in 1995. The resultant decrease in
gross profit was attributable primarily to a reduction in profit realized
under the Company's KC-135 PDM program, losses incurred at the Company's
Pemco World Air Services operations in Copenhagen, Denmark, and losses
incurred and accrued under the Company's C-130 PDM contract.
As indicated under the heading "KC-135 Contract", the reduced profit
realized under the KC-135 contract was primarily attributable to late
receipt of GFM and an unprecedented number of major structural problems,
both of which formed the basis of requests for equitable adjustment of
contract pricing.
The Company incurred a loss of $5.1 million in 1995 at its aircraft
facility in Copenhagen, Denmark, compared to a loss of $1.9 million for
approximately six months of operation in 1994. The facility experienced a
lower than anticipated sales volume as well as initial ship learning
expense in 1995 on the facility's first-ever B-727 cargo conversions.
The Company incurred a loss of approximately $1.0 million in 1995 under
its C-130 PDM contract versus a profit of approximately $1.0 million in
1994. The Company also recorded a $0.5 million reserve for losses
anticipated from the remaining ships in work and to be worked under the
contract, which expires in September 1996. The profitability of the
contract has suffered due to a reduction in the number of drop-in aircraft
(twenty-three in 1995 versus thirty-two in 1994) and a higher than
anticipated concentration of PDM ships requiring extensive repairs. The
Company also believes the C-130 contract suffered from the continuing and
escalating disruption of work on the KC-135 contract which resulted in the
continuous reshuffling of the Company's labor force (see "KC-135
Contract", above).
The Company also incurred losses in conjunction with its nacelle overhaul
and repair operations which suffered reduced volumes during its relocation
to the Company's Clearwater facility. Additionally, the Company incurred
initial ship learning expense on the launch of its B-727 "combi"
conversion project at its Dothan, Alabama facility.
The Company also recorded significantly higher pension expense in 1995
compared to 1994. Pension expense increased due to higher interest cost
on the projected benefit obligation and due to the fact that lower than
anticipated returns on plan assets in 1994 adversely impacted actuarial
assumptions for plan expense in 1995. Partially offsetting these
unfavorable impacts on gross profit was an increase in efficiency on the B-
727 cargo conversion program performed at the Company's Dothan, Alabama
facility.
Selling, general and administrative expense increased from $15.0 million
in 1994 to $19.1 million in 1995 and increased as a percent of sales from
10% in 1994 to 12% in 1995. Selling, general and administrative expense
increased primarily due to the operation of the aircraft maintenance
facility in Copenhagen, Denmark which began in May of 1994, the
establishment of an office in Denver, Colorado, relocation and addition of
staff associated with the nacelle product line and increased royalty fees
resulting from increased sales associated with the aircraft cargo handling
systems product line.
Interest expense was $3.3 million in 1995 and 1994. Total consolidated
indebtedness was $26.7 million at December 31, 1995 versus $28.8 million
at December 31, 1994. However, the effective average interest rate in
1995 on the term Credit facility was 9.88% versus 6.99% in 1994 and the
effective interest rate in 1995 on the Revolving Credit facility was
10.04% versus 6.97% in 1994. The effective interest rate was higher in
1995 partially due to increased interest rates in the financial markets
and partially due to the additional interest charged by the Company's
primary lender as a result of the Company's failure to make certain of its
required debt payments.
Other expense decreased from $0.5 million in 1994 to $0.3 million in 1995.
The primary components of other expense in 1995 were $1.2 million of
penalties for the late payment of federal payroll taxes stemming from
timing issues related to the Company's cash flow problems, offset by $0.6
million of interest income which was primarily associated with the REA
that was settled in February of 1996. The Company's cash resources were
severely strained during 1995 by periodic late payments of its largest
customer, the cost effect of late receipt of GFM and an unprecedented
number of major structural problems on the KC-135 aircraft program (see
"KC-135 Contract", above) and the cost impact of the start-up and
operation of the Company's Copenhagen aircraft maintenance facility.
The Company booked $2.7 million of state and federal income tax expense in
1995 and reduced its current deferred tax asset by $3.1 million. The
change in the deferred tax asset in 1995 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 recorded an
income tax benefit of $8.2 million in 1994 which related primarily to the
change in the Company's deferred tax asset valuation allowance. In
assessing the change in its valuation allowance and the likelihood of
realization of its deferred tax assets, the Company considered 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
versus $25.0 million at December 31, 1993).
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash resources in 1996 were significantly bolstered by the
settlement of its Requests for Equitable Adjustment (REAs) with the U.S.
Government. In February of 1996, the Company received $8.1 million
related to specific late government furnished material (GFM) on the
Company's 1990 KC-135 contract. In October of 1996, the Company received
$25.0 million under an agreement with the U.S. Government with respect to
all outstanding REAs on both its 1990 and 1995 KC-135 contracts (see also
Part 1, Item 7. "Management's Discussion and Analysis - KC-135 Contract").
The Company initially borrowed funds from its primary lender, Bank of
America National Trust and Saving Association ("Bank of America"),
beginning in 1988 pursuant to a Credit Agreement that provides for a term
credit facility and a revolving credit facility (the "Credit Agreement"),
and a Senior Subordinated Loan Agreement (the "Subordinated Agreement").
In connection with these agreements, the Company issued to Bank of America
a warrant to purchase shares of the Company's Common Stock (the
"Warrant"). On August 8, 1997, the Company executed an agreement with a
new primary lender for a revolving credit facility that is expected to
provide the Company with greater flexibility. As part of this
transaction, the Company repaid the term credit facility under the Credit
Agreement and a portion of the Subordinated Agreement. The Subordinated
Agreement was amended on August 8, 1997 to provide that all scheduled
principal amortization for the portion of the Subordinated Loan that
remains in place has been deferred for the three-year term of the new
revolving credit facility. The Subordinated Loan will be repaid over five
installments commencing on August 31, 2000, due each subsequent quarter
through June 30, 2001.
In October of 1996, the Company paid $15.0 million of principal to Bank of
America from the proceeds of the settlement with the U.S. Government, with
$2.8 million applied to the Subordinated Agreement, $4.2 million to the
term credit facility and $8.0 million to fully repay the revolving credit
facility. In March of 1997, the Credit Agreement, the Subordinated
Agreement and the Warrant were each amended, effective as of December 31,
1996. At the time of such amendments, no funds were outstanding under the
revolving credit facility and $5.0 million of principal was outstanding
under the term loan facility. As amended, the Credit Agreement provided
for 6 installments of $100,000 to be paid against the principal amount
during 1997 with the $4.4 million balance due January 31, 1998. The rates
of interest on the Credit Agreement were variable, depending upon the
general level of interest rates and the timing and nature of elections
which the Company is entitled to make in respect to renewals of
outstanding debts or increments of additional debt. For the years ended
December 31, 1996 and 1995, the effective interest rates for the term
credit facility were 10.52% and 9.88%, respectively. The Subordinated
Agreement, as amended, provided that the $7.2 million principal balance be
repaid in sixteen equal quarterly installments commencing September 30,
1997 and ending on June 30, 2001. The Credit Agreement and the
Subordinated Agreement also provided for the forgiveness of approximately
$1.3 million of accrued but unpaid interest in 1996. The Company
recognized approximately $0.6 million of the forgiven interest in 1996 and
anticipates recognizing the remaining $0.7 million over the years 1997
through 2001. During 1997, the Company will recognize $.3 million
allocated equally to each quarter. The balance of the $.4 million will be
taken pro-rata over the period 1998 through 2001.
The Warrant, as amended, permits Bank of America to purchase from the
Company 4,215,753 shares of the Company's Common Stock at an aggregate
purchase price of $0.237205492 per share, subject to certain adjustments
for changes in the Company's Common Stock and for dilutive issuances
dating back to 1988, any time before September 9, 2000. The Company
believes that no events that would trigger a material adjustment in the
number of shares issuable upon exercise of the Warrant have occurred.
The Company is required to repurchase the Warrant over a period of six
quarters beginning August 31, 1997 with cash or by the issuance of Common
Stock with a value equal to the redemption price. The redemption price
for three-eighths of the total Shares which was due on August 31, 1997 and
all future installments is the higher of (i) $1.1135 per Share, such
amount being equal to the difference between the average market price of
the Common Stock for the 30 trading days following the date which was 15
trading days prior to the date the Company filed its financial results for
the third quarter of 1996 and the exercise price, or (ii) the difference
between the average market price of the Common Stock for the 25 trading
days preceding the date which is five trading days prior to the date on
which the redemption is actually paid. In addition, interest accrues on
the unpaid installments in the form of cash and shares of Common Stock.
The amount of interest is equal to the sum of (i) $75,000 in cash (or the
number of shares which is the result of dividing $75,000 by the average
market price of the Common Stock for the 25 trading days immediately
preceding the date which is five trading days prior to August 31, 1997, or
$1.4537 per share), payable immediately, plus (ii) .0004 of a share of
Common Stock per unredeemed Warrant share per day from the respective
installment date until the redemption is made. Such interest is paid
quarterly 10 days after the last day of each calendar quarter. Such
interest may be paid in the form of Common Stock only if such stock is
then registered and freely tradable; otherwise, the cash equivalent must
be paid, calculated as the market value of the stock as of the last day of
the calendar quarter. The Company may exercise its right to repurchase
the Warrant with shares of Common Stock, only if the Shares when issued
are the subject of an effective registration statement and immediately
publicly tradeable. While the Company presently intends to exercise its
right to repurchase the warrant with shares of common stock, it may elect
to repurchase all or a portion of the Warrant with cash. The first
installment of the repurchase due August 31, 1997 has not yet been paid.
Matthew L. Gold has been Chairman of the Board, President and Chief
Executive Officer of the Company since January 1987. In connection with
the Warrant, Mr. Gold agreed that he would not sell any Shares or other
securities of the Company held by him or any affiliate during any of the
periods beginning 35 trading days prior to each installment date and
ending on each installment date unless such transaction does not exceed
1,000 Shares or an equivalent number of other securities of the Company on
each trading day.
The Company intends to replace its outdated, multi-type financial
information systems with enterprise-wide systems from Oracle. The
hardware, software and implementation costs will be approximately $2.5
million to be incurred over a two year period. The costs of the system
are being financed by various vendors over periods of three to five years.
The Company does not anticipate making any other capital expenditures in
the foreseeable future.
Although the Company's cash position was significantly strengthened by the
settlements negotiated with the U.S. Government, the Company's cash
resources continued to be strained in 1996 primarily due to excessive
costs on its KC-135 program, additional costs incurred for the
procurement, housing and transportation of contract labor necessitated by
the work stoppage of the Company's United Auto Worker (UAW) employees,
delayed redelivery of KC-135 aircraft and losses incurred on various
commercial aircraft maintenance contracts performed at the Company's
Dothan, Alabama and Copenhagen, Denmark facilities including up-front
costs associated with the Company's new B-727 quick-change conversion
contract with UPS.
The Company is currently in the process of refinancing its debt. The
Company has entered into discussions with a number of other institutional
lenders that have expressed interest in providing debt replacement
financing in the form of a term loan and a revolving line of credit in an
aggregate amount sufficient to repay the Company's existing debt,
including the Company's primary lender, and to provide working capital.
The Company anticipates completion of the refinancing during the second
quarter of 1997.
The following is a discussion of the significant items in the Company's
Consolidated Statement of Cash Flows for the years ending December 31,
1996, 1995 and 1994.
The Company increased the valuation allowance associated with its deferred
tax asset $2.5 million in 1996, primarily due to losses incurred at the
Company's Denmark facility and for certain state net operating loss
carryforwards, some of which have been disallowed based on the findings of
an Alabama state tax audit. The valuation allowance was increased $2.4
million in 1995, primarily due to losses incurred at the Company's Denmark
facility. In 1994, the valuation allowance was reduced $10.5 million as
the Company considered the increase in its firm but unfunded backlog
associated with the follow-on years of its government contracts ($206
million at December 31, 1994; $25 million at December 31, 1993). The
decrease in deferred tax assets in 1996 is primarily due to the reduction
of the Company's pension minimum liability. The decrease in deferred tax
assets in 1995 and 1994 was due primarily to the usage of net operating
loss carryforwards.
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
funded its pension $0.9 million in 1996 versus $1.3 million in 1995.
The Company provides for warranty expense based on its warranty claim
history and the warranty terms and conditions of each specific contract.
The Company's warranty provision relates primarily to its commercial
aircraft conversion programs. The Company decreased its warranty reserve
$0.5 million in 1996, $0.5 million in 1995 and $0.3 million in 1994 due to
the expiration of warranties and the fulfillment of warranty obligations.
The Company also provided for future warranty expenditures of $0.2 million
in 1996 and 1995 and $1.3 million in 1994, related to new deliveries and
the modification of terms on certain outstanding warranties.
The Company recorded a $0.3 million, $0.7 million and $1.5 million
provision for reductions in the valuation of its inventory in 1996, 1995
and 1994, respectively. The Company recorded the provision in order to
state its inventory at the lower of cost or market and to account for
obsolescence in it commercial aircraft finished goods inventory due to
engineering and design changes.
The Company's accounts receivable decreased in 1996 primarily due to fewer
redeliveries under the Company's KC-135 program in December of 1996 as
compared to December of 1995, and the timing of such deliveries.
The Company received from the Government $8.1 million in February of 1996
and $25.0 million in October of 1996 as settlement for its Requests for
Equitable Adjustment related to its 1990 and 1994 KC-135 contracts. The
Company had a short term receivable of $8.1 million and a long term
receivable of $4.1 million related to these settlements as of December 31,
1995. At December 31, 1994, the Company had a $3.5 million receivable
related to these settlements.
Net inventory increased $3.1 million in 1996, decreased $4.1 million in
1995 and increased $2.0 million in 1994. Progress payment balances on
U.S. Government contracts and net commercial customer deposits were $27.9
million, $16.9 million and $6.2 million and work in process was $43.6
million, $31.0 million and $26.0 million at December 31, 1996, 1995 and
1994, respectively. Progress payment balances and net customer deposits
as a percent of gross work in process for each of the three years were
64%, 55% and 24%, respectively. The fluctuation in the percentages
relates mainly to the Company's U.S. Government aircraft maintenance
contracts. Progress payments on these contracts are based on costs
incurred, and thus the level of payments received is inversely related to
the level of profitability of the Company's contracts. Cost increased on
the KC-135 contract primarily due to the cost factors cited in the
Company's REAs (see also Part 1, Item 7. "Management's Discussion and
Analysis - KC-135 Contract").
The increase of $0.8 million in 1996 in the Company's deposits relates
primarily to a security guarantee with a financial institution in
conjunction with the Company's Copenhagen, Denmark facility lease
agreement.
Accounts payable and accrued expenses were $26.5 million at December 31,
1996 versus $28.2 million at December 31, 1995. In April of 1996, the
Company capitalized $2.2. million of interest accrued and unpaid to its
primary lender from July of 1995 through April 1, 1996, in conjunction
with the Eighth Amendment to the Amended and Restated Credit Agreement and
the Sixth Amendment to the Amended and Restated Senior Subordinated Loan
Agreement. This transaction is reflected as a non-cash financing
activity. At December 31, 1996, the Company had accrued interest of $0.9
million, after reflecting the forgiveness of $0.6 million of interest by
its primary lender for interest accrued but unpaid for the period of May
through September of 1996.
Accounts payable and accrued expenses increased in 1995 due to an increase
of $5.4 million to the Company's vendors and due to the Company's failure
to timely remit $2.3 million of federal payroll tax payments. The Company
used part of the proceeds of the $8.1 million REA settlement received in
February of 1996 to satisfy all outstanding federal payroll tax
obligations (which then approximately $4.2 million). Accrued interest
payments at December 31, 1995 were $1.5 million, representing a $1.2
million increase over that due at December 31, 1994. Partially offsetting
these increases to accounts payable and accrued expenses, but negatively
impacting cash flow in 1995, was a reduction of $1.9 million in customer
deposits.
Cash provided from operating activities funded capital improvements of
$1.3 million, $2.9 million and $2.1 million in 1996, 1995 and 1994,
respectively. Additionally, the Company funded principal payments to its
primary lender of $15.0 million, $4.0 million and $8.0 million in 1996,
1995 and 1994, respectively, as well as $0.6 million, $0.4 million and
$0.4 million on various capital leases.
CONTINGENCIES
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 contracts, and the results of financing efforts.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
- ----------------------------------------------------
ARTHUR
ANDERSEN
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Precision Standard, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of PRECISION
STANDARD, INC. ( Colorado corporation)and SUBSIDIARIES as of December 31,
1996 and the related consolidated statements of operations, stockholders'
equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audit. The financial statements of the Company as of
December 31, 1995, were audited by other auditors whose report dated March
31, 1996 (except for Notes 6, 7 and 13 as to which is dated April 15,
1996), expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Precision
Standard, Inc. and Subsidiaries as of December 31, 1996 and the
consolidated results of their operations and their cash flows for the year
ended December 31, 1996 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note 18 to the
financial statements, the Company has experienced continuing losses from
operations resulting in significant reductions in stockholders' equity
which will cause a breach of substantially all of its financial debt
covenants. The losses have also caused continued cash liquidity issues
for the Company. These matters raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 18. The financial
statements do not include any adjustments relating to the recoverability
and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be
unable to continue as a going concern.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Denver, Colorado
March 31, 1997 (except with respect to
The matter discussed in Note 18, as to
which the date is November 11, 1997)
18. UNCERTAINTIES
GOING CONCERN
During 1997, the Company has continued to incur losses from
operations resulting in significant reductions in stockholders'
equity. These losses have been the result of incremental strike
related costs from the UAW work stoppage at the Company's Birmingham
facility, revenue shortfalls resulting from down time associated with
the July work stoppage by the International Machinist Union at the
Company's Dothan facility, and continued throughput problems
associated with its KC-135 contract for the U.S. Government. The
losses have also caused continued cash liquidity issues for the
Company. The continued losses and liquidity issues will cause a
breach of substantially all of the Company's financial debt
covenants. While the Company has renegotiated certain of its debt
agreements and the warrant agreement, amended its KC-135 Government
contract and is proceeding with staff reductions to reduce overhead,
additional capital resources may be required before December 31,
1997. While the Company believes these matters will result in a
return to profitability, management nonetheless has continued to
explore additional sources of capital.
LITIGATION
On November 3, 1997, the jury in STEVENSON VS. PEMCO AEROPLEX, INC.
AND RICK WINDSOR returned a verdict against the Company's Pemco
Aeroplex subsidiary in the amount of $1 million compensatory and $3
million punitive damages. The case was filed in the Circuit Court of
Jefferson County, Alabama by an employee who alleged a supervisor had
engaged in tortious conduct under Alabama law by making sexual
advances against her. Pemco was sued under the theory of respondeat
superior which holds an employer liable for the actions of its
employees undertaken in the course of employment and theories of
negligent supervision and training. However, the jury found in favor
of the supervisor and discharged him from any liability. It is the
Company's position that Pemco's liability is derivative of the
supervisor's and thus if he is not liable to the plaintiff, Pemco
likewise has no liability. Post-trial motions seeking to vacate the
verdict or, alternatively, to obtain a new trial will be filed. This
verdict could have a material adverse effect on the Company's
financial position and liquidity if the Company is not successful in
asserting its no liability position. No provision for any liability
that might result was made in the accompanying consolidated financial
statements.
Additionally, on November 11, 1997, a supplier filed a request for
bankruptcy against Pemco World Air Services A/S (PWAS), the Company's
Danish subsidiary. The Maritime Commercial Court on Copenhagen,
Denmark heard the request on November 20, 1997 and the petition was
granted. Trustees have been appointed to operate the facility. The
Company has guaranteed certain obligations of PWAS. No provision for
any liability that might result was made in the accompanying
consolidated financial statements.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
10.14 Settlement Agreements for Requests for Equitable Adjustments
between the Company and the U.S. Government relating to the 1990 and 1994
KC-135 Contracts. A request for confidential treatment has been requested
from the Commission in connection with these documents.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PRECISION STANDARD, INC.
Date: November 24, 1997 By: /s/ Matthew L. Gold
Matthew L. Gold, President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of
the Company and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
/s/Matthew L. Gold
Matthew L. Gold Chairman, President, November 24, 1997
Chief Executive Officer
and Director
(Principal Executive Officer)
/s/Richard J. Hendricks
Richard J. Hendricks Vice President-Finance November 24, 1997
(Principal Financial and
Accounting Officer)
/s/Donald C. Hannah
Donald C. Hannah Director November 24, 1997
/s/George E.R. Kinnear II
George E. R. Kinnear II Director November 24, 1997
/s/J. Ben Shapiro, Jr.
J. Ben Shapiro, Jr. Director November 24, 1997
/s/Thomas C. Richards
Thomas C. Richards Director November 24, 1997
