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, 1998
PRECISION STANDARD, INC.
(Exact Name of Registrant as Specified in its Charter)
Colorado 84-0985295
- ------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
12000 East 47th Avenue
Suite 400
Denver, Colorado 80239
(Address of Principal Executive Offices)
(303) 371-6525
---------------------------------------------------
(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 3,878,413 shares
Common Shares Outstanding at August 6, 1998
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
June 30, December 31,
1998 1997
Unaudited)
---------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 391,849 $ 369,334
Accounts receivable, net 14,041,414 10,138,430
Inventories 17,551,964 17,047,983
Prepaid expenses and other 544,972 1,045,564
----------- -----------
Total current assets 32,530,199 28,601,311
----------- -----------
Property, plant and equipment,
at cost:
Leasehold improvements 10,885,531 10,826,369
Machinery and equipment 18,389,007 19,298,310
----------- -----------
29,274,538 30,124,679
Less accumulated depreciation (18,109,420) (17,991,714)
----------- -----------
Net property, plant and
equipment 11,165,118 12,132,965
----------- -----------
Other non-current assets:
Prepaid pension costs 3,497,547 4,106,609
Intangible assets, net of
accumulated amortization 731,971 741,241
Related party receivable 269,824 269,824
Deposits and other 483,924 480,593
----------- -----------
4,983,266 5,598,267
----------- -----------
Total assets $48,678,583 $46,332,543
=========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
</TABLE>
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
June 30, December 31,
1998 1997
(Unaudited)
----------- ------------
<S> <C> <C>
Current liabilities:
Current portion of debt $21,105,325 $24,784,318
Accounts payable and accrued
expenses 30,435,209 31,728,406
----------- -----------
Total current
liabilities 51,540,534 56,512,724
Workers' compensation reserve 3,631,734 3,631,734
Deferred income tax liability 2,525,231 2,525,231
----------- -----------
Total non-current
liabilities 6,156,965 6,156,965
----------- -----------
Total liabilities 57,697,499 62,669,689
Stockholders' equity:
Common stock, $.0001 par value,
300,000,000 shares authorized,
3,775,401 and 3,614,872 shares
issued and outstanding at
June 30, 1998 and December 31,
1997, respectively. 378 361
Additional paid-in capital 4,764,207 4,764,224
Accumulated deficit (13,543,120) (20,862,729)
Foreign currency translation
adjustments (240,381) (239,002)
----------- -----------
Total stockholders' deficit (9,018,916) (16,337,146)
----------- -----------
Total liabilities and
stockholders' deficit $48,678,583 $46,332,543
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
June 30, June 30,
1998 1997
------------ -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Net sales $39,219,256 $35,715,685
Cost of sales 30,703,666 34,443,050
----------- -----------
Gross profit 8,515,590 1,272,635
Selling, general and
administrative expenses (4,940,712) (5,388,449)
Bad debts recovery (expense) 250,000 (62)
Research and development expense (14) (248,285)
----------- -----------
Income (loss)
from operations 3,824,864 (4,364,161)
Other income (expense):
Interest expense (636,561) (324,697)
Other, net (380,878) (255,758)
----------- -----------
Income (loss) before
income taxes 2,807,425 (4,944,616)
Income tax expense (25,498) (45,000)
----------- -----------
Net income (loss) $ 2,781,927 $(4,989,616)
=========== ===========
Weighted average number of common
shares outstanding
Basic 3,748,234 3,195,481
=========== ===========
Diluted 3,920,617 3,195,481
=========== ===========
Net income (loss) per common share:
Basic $ 0.74 $ (1.56)
=========== ===========
Diluted $ 0.71 $ (1.56)
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------------
<TABLE>
<CAPTION>
Six Six
Months Ended Months Ended
June 30, June 30,
1998 1997
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
Net sales $73,673,172 $70,733,415
Cost of sales 58,517,088 66,244,958
----------- -----------
Gross profit 15,156,084 4,488,457
Selling, general and
administrative expenses (9,464,268) (10,424,239)
Bad debts recovery (expense) 250,000 (62)
Research and development
expense (124,999) (493,729)
----------- -----------
Income (loss)
from operations 5,816,817 (6,429,573)
Other income (expense):
Interest expense (1,304,033) (650,091)
Other, net 2,857,323 (326,334)
----------- -----------
Income (loss) before
income taxes 7,370,107 (7,405,998)
Income tax expense (50,498) (111,000)
----------- -----------
Net income (loss) $ 7,319,609 $(7,516,998)
=========== ===========
Weighted average number of common
shares outstanding
Basic 3,707,371 3,185,169
=========== ===========
Diluted 3,917,531 3,185,169
=========== ===========
Net Income (loss) per common share
Basic $ 1.97 $ (2.36)
=========== ============
Diluted $ 1.87 $ (2.36)
=========== ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
--------------------------------
<TABLE>
<CAPTION>
Six Six
Months Ended Months Ended
June 30, 1998 June 30, 1997
(Unaudited) (Unaudited)
------------- -------------
<S> <C> <C>
Cash flows from operating
activities:
Net loss $ 7,319,609 $(7,516,998)
Adjustments to reconcile
net income (loss) to net cash
provided (used in) from operating
activities:
Depreciation and amortization 1,026,016 1,239,771
Pension cost in excess of
funding 0 725,003
Gain on sale of division (3,135,940) 0
Changes in assets and liabilities:
Accounts receivable (4,670,170) (1,155,705)
Inventories (2,132,380) (2,593,280)
Prepaid expenses and
other assets 412,147 (722,461)
Prepaid pension costs 609,062 0
U.S. Government request for
equitable adjustment, net 0 (238,743)
Deposits and other (3,332) 1,201,115
Accounts payable and
accrued expenses (490,522) 8,731,977
Accrued warranty expense 0 (200,403)
Self-insured workers'
compensation reserve 0 (66,167)
----------- --------------
Net cash (used in) operating
activities (1,065,510) (595,891)
----------- --------------
Cash flows from investing activities:
Proceeds from sale
of division 5,000,000 0
Capital expenditures (232,982) (238,310)
----------- --------------
Net cash provided by (used in)
investing activities $4,767,018 $(238,310)
----------- --------------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
------------------------------
<TABLE>
<CAPTION>
Six Six
Months Ended Months Ended
June 30, June 30,
1998 1997
(Unaudited) (Unaudited)
------------ ------------
<S> <C> <C>
Cash flows from financing activities:
Net repayments under short-term
obligations $ (3,678,993) $ 0
Principal payments under
long-term obligations 0 (311,255)
------------ -----------
Net cash (used in)
financing activities (3,678,993) (311,255)
------------ -----------
Effect of exchange rate
changes on cash 0 (37,744)
------------ -----------
Net increase (decrease) in cash
and cash equivalents 22,515 (1,183,200)
Cash and cash equivalents
beginning of period 369,334 1,183,200
----------- -----------
Cash and cash equivalents
end of period $ 391,849 $ 0
============ ==========
Supplemental disclosure of cash
flow information:
Cash paid during the period for:
Interest $ 1,260,669 $ 557,236
Income taxes 0 159,000
Supplemental disclosure of
non-cash investing activities:
Capital lease obligations incurred
for new equipment $ 0 $ 28,674
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
PRECISION STANDARD, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED 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, 1998 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 1997 Form 10-K.
The Company's consolidated financial statements for the year
ended December 31, 1997 has been adjusted to deconsolidate the
financial results of Pemco World Air Services A/S, the Company's
Danish subsidiary. In November 1997, the Danish subsidiary was
closed and placed in involuntary bankruptcy. However, the 1997
interim quarterly statement of operations for the second quarter
has not been adjusted and includes the financial results of the
Danish subsidiary for such period. (See Note 7)
2. INVENTORIES
Inventories consist of the following:
June 30, December 31,
1998 1997
(Unaudited)
----------- ------------
Work in-process $21,305,018 $25,385,996
Finished goods 3,034,287 3,125,830
Raw materials and supplies 4,469,096 5,987,419
----------- -----------
Total $28,808,401 $34,499,245
Less progress payments
and customer deposits (11,256,437) (17,451,262)
----------- -----------
$17,551,964 $17,047,983
=========== ===========
3. EARNINGS PER COMMON SHARE
Net Income (Loss) per Common Share - In February 1997, the
Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 128, EARNINGS PER
SHARE. SFAS No. 128 revises the methodology to be used in
computing earnings per share ("EPS") such that the computations
required for primary and fully diluted EPS are to be replaced
with "basic" and "diluted" EPS. Basic EPS is computed by
dividing net income by the weighted average number of shares
outstanding during the period. Diluted EPS is computed in the
same manner as fully diluted EPS, except that, among other
changes, the average share price for the period is used in all
cases when applying the treasury stock method to potentially
dilutive securities. All share and per share information
included in these financial statements have been restated to give
effect to the adoption of SFAS No. 128.
The following table represents the net income (loss) per
share calculations for the six months ended June 30, 1998 and
1997:
1998
Net income $ 7,319,609
Weighted Average Shares 3,707,371
Basic Net Income Per Share 1.97
-----------
Dilutive Securities:
Options 2,412
Warrants 207,748
Diluted Weighted Average shares 3,917,531
Diluted Net Income Per Share 1.87
-----------
1997
Net Loss (7,516,998)
Weighted Average Shares 3,185,169
Basic Net Loss Per Share (2.36)
-----------
Dilutive securities:
*Options -
*Warrants -
Diluted Weighted Average Shares 3,185,169
Diluted Net Loss Per Share (2.36)
----------
*Potentially dilutive securities outstanding for 1997 were
excluded from EPS because they were antidilutive. Potentially
dilutive securities at June 30, 1997, were 263,485 warrants and
39,254 options. (See Note 6)
4. NOTES PAYABLE
June 30, December 31,
1998 1997
(Unaudited)
----------- ------------
Revolving credit facility $13,515,712 $16,427,130
Senior Subordinated Loan 6,200,000 6,700,000
Note due to individual repaid
in 1st quarter, 1998 1,202 277,202
Other obligations:
collateralized by security
interests in certain equipment 1,388,411 1,379,986
----------- -----------
Total debt $21,105,325 $24,784,318
=========== ===========
On August 8, 1997, the Company entered into a three-year
revolving credit facility with a new lender. The amount of funds
available to borrow under the new $20 million revolving credit
facility is tied to percentages of accounts receivables and
inventory and, as a result of certain subordination provisions,
may not exceed $17 million. Therefore, available funds will
fluctuate on a daily basis.
All scheduled principal amortization for the Senior
Subordinated loan has been deferred for the three-year term of
the new revolving credit facility. The Senior Subordinated loan
will be repaid over five installments commencing on August 31,
2000, due each subsequent quarter through June 30, 2001.
The above loans are collateralized by substantially all of
the assets of the Company and have various loan covenants. At
June 30, 1998, the Company may be deemed to have been in
violation of certain financial ratio tests required by its loan
agreements. No debt service obligations are at issue, and no
default notice has been received. Although the Company's primary
lender continues to fund, there is no assurance that the Company
will not be in violation of its debt covenants in the future,
that the Company will have sufficient availability under its
revolving credit facility to fund operations or that the bank
will continue to fund under the current arrangements.
5. CONTINGENCIES
United States Government Contracts - The Company, as a U.S.
Government contractor, is subject to audits, reviews, and
investigations by the government related to its negotiation and
performance of government contracts and its accounting for such
contracts. Failure to comply with applicable U.S. Government
standards by a contractor may result in suspension from
eligibility for award of any new government contract and a guilty
plea or conviction may result in debarment from eligibility for
awards. The government may, in certain cases, also terminate
existing contracts, recover damages, and impose other sanctions
and penalties. The Company believes, based on all available
information, that the outcome of the U.S. Government's audits,
reviews, and investigations will not have a materially adverse
effect on the Company's consolidated results of operations,
financial position, or cash flows.
On March 20, 1998, the U.S. Government released a request
for proposal (RFP) seeking proposals for all work related to its
KC-135 aircraft. The Company's Pemco Aeroplex subsidiary
currently performs the airframe maintenance portion of the KC-135
workload, which is included in the RFP. Although the Company
intends to aggressively pursue this workload, there can be no
assurance that it will be successful.
Litigation - 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 ("UAW") union employees and who were
terminated upon settlement of such strike. The complaint alleges
fraud, breach of contract, and civil conspiracy and seeks both
compensatory and punitive damages. The Company believes the
plaintiffs' claims have no factual basis and will vigorously
defend the case.
The Company's Pemco Aeroplex subsidiary, successor to Hayes
International, is a defendant in several suits seeking damages
and indemnity for claims arising from an Airworthiness Directive
issued by the FAA. That Directive restricts the cargo capacity
of Boeing 747 aircraft converted pursuant to an STC for such
conversions. Hayes International had performed engineering for
the development of the STC. Certain of the suits also allege
fraud, misrepresentation and violations of the Racketeer
Influenced and Corrupt Organizations Act.
On November 3, 1997, a Jefferson County, Alabama jury
returned a verdict against the Company's Pemco Aeroplex
subsidiary in the amount of $1 million compensatory and $3
million punitive damages. The case involved an employee who
alleged a supervisor had made sexual advances against her. Pemco
was sued for the actions of its employee undertaken in the course
of employment. However, the jury found in favor of the
supervisor and against Pemco. Various post-trial motions
resulted in the trial court reducing the verdict to $1 million in
compensatory damages. Pemco and the plaintiff have appealed this
decision. The Company believes it will successfully reverse the
decision upon appeal as the supervisor was not found liable.
However, an accrual was established in the fourth quarter of 1997
for the compensatory damage award pending outcome of the appeal.
In addition to the above, the Company is involved in various
legal proceedings arising in the normal course of business.
Management does not believe the ultimate outcome of all such
litigation will have a material adverse effect on the
consolidated financial position or results of operations.
Environmental Compliance - In December, 1997, the Company
received an inspection report from the Environmental Protection
Agency ("EPA") which cited certain violations. The Company has
taken action to correct items raised by the inspection. On April
2, 1998, the Company received a complaint and compliance order
from EPA proposing penalties of $225,256. The Company disagrees
with the citations and intends to contest the citations and
penalties, but has recorded an accrual in the fourth quarter of
1997 for the above penalties and certain other related charges.
6. STOCKHOLDERS' EQUITY
At June 30, 1998 the Company had 300,000,000 authorized
shares of $.0001 par value common stock, with 3,775,401 shares
outstanding.
At a special meeting held on April 15, 1998 and effective on
that date, the Company's shareholders approved a 1-for-4 reverse
stock split of the common shares. There was no change in the
number of authorized shares or par value of the common stock.
Each four issued shares of the common stock were automatically
converted to one share of Common Stock and fractional shares were
exchanged for one full share. As of April 15, 1998, 3,692,993
shares of Common Stock were issued and outstanding.
All per share data herein have been restated to reflect the
reverse stock split.
7. TRANSACTIONS AFFECTING SUBSIDIARY OPERATIONS
On November 11, 1997, a supplier filed a request for
bankruptcy against Pemco World Air Services A/S ("PWAS"), the
Company's Danish subsidiary. On November 20, 1997, the Maritime
and Commercial Court in Copenhagen granted that supplier's
request and appointed trustees to operate the facility. The
Company has guaranteed certain obligations of PWAS. As a result
of the subsidiary being placed in involuntary bankruptcy, PWAS
has been excluded from the Company's 1998 consolidated financial
statement presentation. Related to the deconsolidation, the
Company continues to maintain a reserve of $1.3 million for
potential claims which may be made against the Company.
Net sales, expenses, and net loss of PWAS which are included
in the consolidated statements of operations for the six months
ended June 30, 1997 are as follows:
1997
Net Sales $5,645,000
Expenses 7,046,000
Net Loss (1,401,000)
On January 29, 1998, the Company completed the sale of the
net assets of its Hayes Targets division in Leeds, Alabama. The
sale yielded net proceeds of approximately $5,000,000 and
resulted in a gain of $3.2 million, after adjustments.
Net sales and operating income contributed by the Hayes
operation for six months ended June 30, 1998 was not material and
for six months ended June 30, 1997 was as follows:
1997
Net Sales $772,000
Operating Income 8,000
8. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130 on January 1, 1998, which establishes
standards for reporting and display of comprehensive income and
its components. Comprehensive income is a measure of all
nonowner changes in equity of an enterprise that result from
transactions and other economic events of the period. The
Company did not have any material differences in net income and
comprehensive income for the quarters ended June 30, 1998 or
1997.
9. PENDING ACCOUNTING PRONOUNCEMENTS
The AICPA has issued Statements of Position 98-1, ACCOUNTING
FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR
INTERNAL USE. This statement requires capitalization of external
direct cost of materials and services; payroll and payroll-
related costs for employees directly associated; and interests
costs during development of computer software for internal use
(planning and preliminary costs should be expensed). Also,
capitalized costs of computer software developed or obtained for
internal use should be amortized on a straight-line basis unless
another systematic and rational basis is more representative of
the software's use.
This statement is effective for financial statements for
fiscal years beginning after December 15, 1998 (prospectively)
and is not expected to have a material effect on the consolidated
financial statements.
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.
During the second quarter of 1998, the Company continued its
return to profitability. The Company reported operating income
of $3.8 million for the three months ended June 30, 1998 and a
combined operating income of $5.8 million for the first six
months of 1998. Total income before taxes for the first and
second quarters of 1998 was $4.6 million and $2.8 million,
respectively, for a combined total income before taxes of $7.4
million. This includes additional profits of $2.9 million from
the sale of Hayes Targets division in the first quarter of 1998,
after adjustments for other expenses.
RESULTS OF OPERATIONS
Three months ended June 30, 1998
versus three months ended June 30, 1997
Revenues for the second quarter of 1998 improved from the second
quarter of 1997, increasing approximately 10% from $35.7 million
in 1997 to $39.2 million in 1998. Both government and commercial
sales increased during the second quarter of 1998. Government
sales increased approximately 16% from $18.2 million in 1997 to
$21.1 million in 1998, and commercial sales increased 3% from
$17.5 million in 1997 to $18.1 million in 1998. The Company's
mix of business between government and commercial customers moved
from 49% commercial and 51% government in 1997 to 46% commercial
and 54% government in 1998.
Government sales in the second quarter of 1998 increased
approximately $1.5 million due to increased sales volume under
government contracts at the Dothan and Birmingham facilities.
Commercial sales increased approximately $3.3 million in the
second quarter of 1998 due to increased sales volume under
commercial contracts at the Dothan facility.
The ratio of cost of sales ($30.7 million in 1998; $34.4 million
in 1997) to net sales ($39.2 million in 1998; $35.7 million in
1997) decreased from 96% in the second quarter of 1997 to 78% in
1998. The decrease in the cost of sales was the result of
restructuring efforts undertaken during 1997 and 1998, and strike-
related costs recognized in the first six months of 1997.
Selling, general and administrative expenses decreased from $5.4
million in the second quarter of 1997 to $4.9 million in 1998,
and decreased as a percentage of sales from 15% in 1997 to 13% in
1998. These decreases resulted primarily due to the Company's
reduction of overhead expenses and corporate management changes.
Interest expense was $0.6 million in first quarter 1998 versus
$0.3 million in 1997.
Six months ended June 30, 1998
Versus six months ended June 30, 1997
Revenues in the first six months of 1998 increased from $70.7
million in 1997 to $73.7 million in 1998. Government sales
increased 6% from $38.4 million in 1997 to $40.7 million in 1998.
Commercial sales remained fairly constant, increasing 2% from
$32.3 in 1997 to $33.0 million in 1998. The Company's mix of
business between government and commercial customers remained
consistent at 46% commercial and 54% government in 1997 and 45%
commercial and 55% government in 1998.
The increase in government sales was primarily due to increased
sales under government contracts at the Dothan and Birmingham
facilities, offset, in part, by a reduction in sales at the
Company's Space Vector subsidiary.
The ratio of cost of sales ($58.5 million in 1998; $66.2 million
in 1997) to net sales ($73.7 million in 1998; $70.7 million in
1997) decreased from 94% in 1997 to 79% in 1998. The decrease in
the cost of sales was the result of restructuring efforts
undertaken during 1997 and 1998 and strike related costs
recognized in the first six months of 1997.
Selling, general and administrative expense (SG&A) decreased from
$10.4 million in the first six months of 1997 to $9.5 million in
1998, and decreased as a percentage of sales from 15% in 1997 to
13% in 1998. These decreases were primarily due to the Company's
reduction of overhead expenses and corporate management changes.
Interest expense was $1.3 million in the first six months of 1998
versus $0.7 million in 1997 due to increased borrowing under the
Revolving Credit agreement.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash resources continued to be strained in 1998
primarily due to delays and reductions in progress payments for
amounts billed to the U.S. Government, increased workloads under
government contracts, and costs associated with the strikes at
the Birmingham and Dothan facilities which were resolved in 1997.
The following is a discussion of the significant items in the
Company's Consolidated Statement of Cash Flows for the six months
ended June 30, 1998 and 1997.
Accounts payable and accrued expenses decreased from $31.7
million to $30.4 million in the first six months of 1998. The
decrease primarily reflects the sale of the Hayes Targets
division's net assets in the first quarter of 1998. Accrued
interest payments at June 30, 1998 were $0.3 million representing
a $0.6 million decrease from that due at June 30, 1997. This
decrease was primarily due to a reduction in the amounts due
under the Senior Subordinated Loan and repayment in full of the
Term Loan, which was partially offset by borrowings under the
Revolving Credit facility.
Accounts receivable increased $4.0 million in the first six
months of 1998, after adjustments for the sale of Hayes Targets
assets, due to increased amounts that the Company is allowed to
bill under new cost/benefit sharing provisions on the KC-135
contract that became effective October 1, 1997 and increased
billings under the Company's commercial contracts at the Dothan
facility.
Net inventories increased slightly by $0.5 million in the first
six months of 1998 primarily due to a reduction in progress
payments. (See Note 2 to Financial Statements).
During the first six months of 1998, the Company's operating
activities used $1.1 million in cash. In addition, investing
activities provided net cash of $4.8 million and $3.7 million was
used for financing activities. In the first six months of 1997,
$0.6 million of cash was used for operating activities, $0.2
million was used for investing activities, and $0.3 million was
applied to financing activities under various capital leases.
During 1996, 1997 and 1998, inflation and changing prices have
had no significant impact on the Company's net sales or revenues
or on income from continuing operations.
BACKLOG
The following table presents the Company's backlog (in thousands
of dollars) at June 30, 1998 and 1997:
1998 1997
---- ----
U.S. Government $137,067 $121,895
Commercial 20,346 14,404
-------- --------
$157,413 $136,299
The above numbers for 1997 have been adjusted to exclude backlog
related to the Hayes Targets division sold in January 1998, and
the Danish subsidiary closed in November 1997. Based on this
adjustment, as of June 30, 1998, 87% of the Company's backlog
related to work for the U.S. Government versus 89% for the period
ended June 30, 1997. The Company's Government backlog increased
$21 million primarily related to additional aircraft input under
the Company's government contracts at the Birmingham facility.
1998 1997
---- ----
Firm, unfunded Backlog $45.1 million $40.1 million
Estimated sales to be
derived from backlog
contracts $181 million $211 million
The $181 million of estimated backlog is associated with option
periods and new government contracts.
CONTINGENCIES
See Note 5 to the Consolidated Financial Statements.
FORWARD LOOKING STATEMENTS
With the exception of historical facts, statements contained in
Management's Discussion and Analysis are forward looking
statements. Statements contained herein concerning anticipated
results of operations, award of contracts, the outcome of pending
and future litigation, the outcome of audits, reviews and
investigations by the U.S. Government, the outcome of claims
filed with the U.S. Government, estimates of backlog, the outcome
of claims related to the Copenhagen facility, and the Company's
intent to take certain action 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.
PRECISION STANDARD, INC.
OTHER INFORMATION
PART II.
Item 1 Legal Proceedings
In General Electric Capital Corporation et al. v.
GATX/Airlog Company, et al., the plaintiffs, who own four 747
aircraft converted under a Supplementary Type Certificate 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. The
complaint, which was filed in U.S. District Court for the
Northern District of California and served on June 23, 1998,
alleges fraud, conspiracy, negligent misrepresentation, and
violations of the Racketeer Influenced and Corrupt Organizations
Act against Pemco. Pemco intends to vigorously defend this
claim.
The Company has been notified of a claim by the
Bankruptcy Estate of Sterling Airways A/S (the "Sterling Estate")
for the payment of parts and materials supplied to the Company's
Danish subsidiary Pemco World Air Services A/S, which was placed
in bankruptcy in November 1997. The Company guaranteed certain
obligations to the Sterling Estate. The claim, for approximately
$1.4 million, is under investigation. The Company has previously
accrued a reserve of $1.3 million for claims arising out of the
Copenhagen operation.
On July 31, 1998, the Alabama Supreme Court denied the
motion of the Company's Pemco Aeroplex subsidiary for the
issuance of a stay of execution pending appeal of the judgment
entered in Stevenson v. Pemco Aeroplex, Inc.
In response to an inspection conducted by the
Environmental Protection Agency in June 1997, the Company has
entered into informal discussions regarding the alleged
violations under the Toxic Substances Control Act (TSCA). No
release to the environment has been alleged and all issues raised
during the inspection have been fully addressed. In August,
1998, EPA indicated that it may seek penalties for the alleged
violations, although an amount has not been specified.
Item 2 Changes in Securities
(See Note 6 of the Consolidated Financial Statements)
Item 3 Defaults Upon Senior Securities
(See Note 4 of the Consolidated Financial Statements)
Item 4 Submission of Matters to a Vote of Security Holders
On April 15, 1998, the Company held a special meeting
of shareholders at which the shareholders approved a 1-for-4
reverse stock split of the Company's stock, effective as of the
meeting date.
The number of votes* cast for, against and abstentions
of the reverse stock split proposal were as follows:
For Against Abstain
13,799,612 310,186 10,650
Because the approval of a reverse stock split is
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 Company's annual meeting of shareholders was held
on May 9, 1998. At the meeting, Matthew L. Gold, Donald C.
Hannah, Admiral George E.R. Kinnear II and General Thomas C.
Richards were elected as directors. Also ratified at the
meeting was the selection of Arthur Andersen LLP as the
independent public accountants for the Company for the calendar
year ending December 31, 1998.
The number of votes* cast for or withheld for each
director nominee was as follows:
Nominee For Withheld
Matthew L. Gold 14,059,758 307,500
Donald C. Hannah 14,087,658 279,600
Adm. George E.R. Kinnear II 14,088,258 279,000
Gen. Thomas C. Richards 14,088,258 279,000
The number of votes* cast for, against and abstentions
for ratification of the selection of Arthur Andersen LLP as the
Company's independent auditors for the calendar year ending
December 31, 1998 was as follows:
For Against Abstain
14,313,758 26,600 26,900
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.
*Number of votes cast are stated pre-reverse stock
split.
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
a) Exhibits
None
27 Financial Data Schedule
b) 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: 8/14/98 By:/s/ Matthew L. Gold
Matthew L. Gold
Chairman, President and
Chief Executive Officer
and Director
(Principal Executive Officer
and Principal Financial and
Accounting Officer)
EXHIBIT INDEX
No. Description Method of Filing
27 Financial Data Schedule Filed herewith electronically
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
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<COMMON> 378
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