PRECISION STANDARD, INC.
1,303,939 Shares
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This Prospectus relates to the offer and sale of 1,303,939 shares
(the "Shares") of the common stock, $.0001 par value per share (the
"Common Stock") of Precision Standard, Inc. (the "Company") by certain
shareholders of the Company (the "Selling Shareholders"). The Shares may
be sold from time to time by the Selling Shareholders, through ordinary
brokerage transactions in negotiated transactions or otherwise, at fixed
prices which may be changed, at market prices prevailing at the time of
sale or at negotiated prices. The Shares represent 33% of the outstanding
Common Stock of the Company. See - "Selling Shareholders" and "Plan of
Distribution."
Matthew L. Gold, who serves as President, Chief Executive Officer and
Chairman of the Board of the Company, has effective voting control over
2,184,158 shares, or 53%, of the outstanding Common Stock on a fully
diluted basis. Accordingly, Mr. Gold could control the outcome of all
matters requiring a vote, including the election of directors. There are
no other executive officers of the Company, nor do any insiders own more
than 1% of the Company's outstanding shares of Common Stock. Bank of
America National Trust and Savings Association has voting control over
349,836 shares, or 9% of the outstanding Common Stock.
The Company will not receive any of the proceeds from the sale of the
Shares. The Company has agreed to bear certain expenses in connection
with the registration of the Shares being offered and sold by the Selling
Shareholders. See "Use of Proceeds." The opinion of independent public
accountants with respect to the Company's audited financial statements is
qualified subject to the effects, if any, on the financial statements of
the outcome of the uncertainty regarding the Company's continuation as a
going concern. See "Risk Factors".
The Company's Common Stock is traded on The Nasdaq Stock Market --
SmallCap Market under the symbol "PCSN". On December 18, 1998, the last
reported sale price of the Company's Common Stock was $4.00.
THESE ARE SPECULATIVE SECURITIES.
SUCH SECURITIES INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" AT PAGE 4.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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No person has been authorized to give any information or to make any
representation other than those contained in the Prospectus in connection
with the offering made hereby, and if given or made, such information or
representation must not be relied upon as having been authorized by the
Company or by the Selling Shareholders. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances
create any implication that the information herein is correct as of any
time subsequent to the date hereof.
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THE DATE OF THIS PROSPECTUS IS DECEMBER 4, 1998
AVAILABLE INFORMATION
Precision Standard, Inc. (the "Company") has filed with the
Securities and Exchange Commission (the "Commission") a Registration
Statement on Form S-3 (the "Registration Statement" ) under the Securities
Act of 1933, as amended (the "Securities Act"), with respect to the Common
Stock offered hereby. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth
in the Registration Statement and the exhibits and schedules thereto or
incorporated by reference therein. Such information, including exhibits
and schedules to the Registration Statement incorporated by reference
therein, can be inspected and copied at the Public Reference Section of
the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street N.W.,
Washington, D.C. 20549. Statements made in this Prospectus as to the
contents of any contract or any other document referred to are not
necessarily complete, and, in each instance, reference is made to the copy
of such contract or document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and in
accordance therewith files reports, proxy statements and other information
with the Commission. All such information may be inspected and copied at
the public reference facilities maintained by the Commission at its
principal office at Room 1024, Judiciary Plaza, 450 Fifth Street N.W.,
Washington, D.C. 20549, and at the following regional offices of the
Commission: 1801 California Street, Suite 4800, Denver, Colorado 80202-
2648; Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511; and 7 World Trade Center, Suite 1300, New
York, New York 10048. Copies of such material can also be obtained from
the Public Reference Section of the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission also maintains a site on the World Wide Web at
http://www.sec.gov/edgarhp.htm that contains reports, proxy and
information statements and other information concerning registrants that
file electronically with the Commission. The Common Stock is traded on
the Nasdaq SmallCap Market. Information filed by the Company with Nasdaq
may be inspected at the offices of The Nasdaq Stock Market at 1735 K
Street, N.W., Washington, D.C. 20006.
This Prospectus incorporates by reference documents which are not
presented herein or delivered herewith. Copies of these documents (other
than exhibits to such documents unless such exhibits are specifically
incorporated by reference) are available to any person, including any
beneficial owner, to whom this Prospectus is delivered, on written or oral
request, without charge, directed to Matthew L. Gold, President, Precision
Standard, Inc., 12000 E. 47th Avenue, Suite 400, Denver, Colorado 80239,
telephone number 303/371-6525.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by the Company with the Commission
pursuant to the Exchange Act are incorporated herein by reference
(Commission File No. 0-13829):
1. Annual Report on Form 10-K for the year ended December 31, 1997,
filed April 15, 1998; together with the Report of Independent Public
Accountants which includes an explanatory paragraph that describes the
Company's ability to continue as a going concern as described in Note 19
to the financial statements.
2. Quarterly Reports on Form 10-Q for the quarter ended March 31, 1998,
filed May 19, 1998, for the quarter ended June 30, 1998, filed August 17,
1998, and for the quarter ended September 30, 1998, filed November 18,
1998;
3. Form 8-A (Commission File No. 0-13829) filed on August 26, 1985
pursuant to Section 12(g) of the Exchange Act; and
4. Current Reports on Form 8-K dated January 29, 1998, filed February
13, 1998, Amendment No. 1 to Form 8-K dated January 29, 1998, on Form 8-
K/A filed March 2, 1998, and Form 8-K dated March 23, 1998, filed March
27, 1998.
All reports and other documents subsequently filed by the Company
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after
the date of this Prospectus and prior to the termination of the offering
shall be deemed to be incorporated by reference herein and to be a part
hereof from the date of filing of such reports and documents. Any
statement contained in a document incorporated or deemed to be
incorporated by reference herein prior to the date hereof shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent
that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference
herein, modifies or supersedes such statement. Any statement so modified
or superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
A copy of the documents incorporated by reference other than exhibits
to such documents (unless such exhibits are specifically incorporated by
reference in the information contained in this Prospectus), may be
obtained upon request without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus has been delivered
upon the written or oral request of such person. Requests for such copies
should be made to Precision Standard, Inc., 12000 E. 47th Avenue, Suite
400, Denver, Colorado 80239, Attention: Matthew L. Gold, President,
telephone number 303/371-6525. In addition, such materials filed
electronically by the Company with the Commission are available at the
Commission's World Wide Web site at http://www.sec.gov/edgarhp.htm.
RISK FACTORS
An investment in the Company involves a high degree of risk. In
addition to the other information set forth in this Prospectus,
prospective investors should carefully consider the following risk factors
when evaluating an investment in the Company.
POTENTIAL ADVERSE IMPACT ON TRADING MARKET. Until February 13, 1998,
the Company's Common Stock was traded on The Nasdaq National Market
("National Market"). On that date The Nasdaq Stock Market ("Nasdaq")
moved the Company to The Nasdaq SmallCap Market ("SmallCap Market").
While the Company's Common Stock is traded on the SmallCap Market, there
has recently been a relatively low volume of trading in those shares.
Consequently, the price at which the shares trade may be highly volatile.
The Shares being offered hereby represent 33% of the Company's outstanding
Common Stock. Given the historic low volume of trading, sale of these
Shares in the market could materially and adversely affect the market
price of the Company's securities. In addition, because the Company does
not presently meet all of the requirements for continued listing on the
SmallCap Market, the Company has been granted an exception to those
listing requirements until March 31, 1999. While the Nasdaq Listing
Qualifications Panel did grant the exception, there is no guarantee that
the Company will meet the terms of the exception or that the Common Stock
will continue to be traded on the SmallCap Market in the future. If
delisting occurs, the Company's Common Stock could be considered a "penny
stock" under federal securities laws and would be traded on the over-the-
counter market. This change would likely lower the liquidity of the
Company's Common Stock which, in turn, may result in the loss of effective
trading markets for the shares. Further, additional regulatory
requirements apply to trading by broker-dealers of penny stocks. See
"Potential Applicability of Penny Stock Rules and Regulations" below.
POTENTIAL APPLICABILITY OF PENNY STOCK RULES AND REGULATIONS. If the
Company's Common Stock is no longer traded on Nasdaq, it may become a
"penny stock" and thereby be subject to an additional set of various
restrictions on its offer and sale. Brokers and dealers, prior to
effecting any penny stock transactions, must provide customers with a
document that discloses the risks of investing in the penny stock market.
The document must contain a description of the nature and level of risk
involved in the penny stock market; fully describe the duties of the
broker-dealer to the customer and the rights and remedies available;
explain the nature of "bid" and "ask" prices in the penny stock market;
supply a toll-free telephone number to provide information on disciplinary
histories; describe all significant terms used in the risk disclosure
document; and provide certain other information prescribed by the
Securities and Exchange Commission. Prior to the transaction the broker-
dealer must obtain from the customer a manually signed and dated written
acknowledgement of receipt of the disclosure document. Further, brokers
and dealers must disclose to potential purchasers the bid and ask prices
for penny stocks, the number of shares to which the prices apply and the
amount and description of any compensation received by the broker or
dealer. In addition, brokers and dealers must provide each customer whose
account contains penny stocks with a monthly statement indicating the
market value of those stocks. Should the Company's Common Stock become a
"penny stock", these requirements may adversely effect the trading market,
price and liquidity of the shares.
DEPENDENCE ON KEY PERSONNEL. The success of the Company is highly
dependent upon the efforts and active participation of Matthew L. Gold.
The loss of the services of Mr. Gold could adversely affect the Company
and its business. The Company may also require the services of additional
executive personnel in the future. There can be no assurance that the
Company will be able to retain these individuals or to attract qualified
individuals to replace the loss of any key personnel or to satisfy
additional executive personnel requirements. The Company does not carry
key man life insurance on any of its personnel.
COMPETITION. The aircraft maintenance and modification services
industry is highly competitive. The Company competes with a large number
of other aircraft maintenance and modification services companies as well
as other companies which design and manufacture rocket launch vehicles and
guidance systems, aircraft cargo handling systems and precision springs
and components. Many of these competitors have far greater financial and
other resources and more established reputations than the Company. There
can be no assurance that the Company's services and products will
successfully compete with the services and products of others.
Competitive factors include quality, marketing strategy, price, bidding on
government contracts, design, and customer service.
LIQUIDITY AND CAPITAL RESOURCES. In February 1996, the Company
received $8.1 million from the U.S. Government as settlement of the
Request for Equitable Adjustment ("REA") related to specific late
government furnished material on the Company's 1990 KC-135 contract. In
October 1996, the Company reached an agreement with the U.S. Government
with respect to all outstanding Requests for Equitable Adjustment on both
its 1990 and 1995 KC-135 contracts. The Company and the Government
negotiated to resolve all disputes associated with the Government's
untimely provision of government furnished material, the incidence of
major structural repair work greatly in excess of that contemplated at the
time of the contract formation, post contract increases in inspection
requirements, consequent delay and disruption costs and other associated
costs. The Company believes that the factors cited above caused the
Company to incur at least $34.8 million in additional costs up to the date
of the settlement with the Government. Pursuant to the terms of the
settlement agreement, the Company received $25.0 million in cash from the
U.S. Government in October of 1996. In March 1997, the Company and Bank
of America National Trust and Saving Association ("Bank of America")
negotiated the terms and conditions of amendments to the credit and
warrant agreements between them. See "Selling Shareholders." Further, in
August 1997, the Company obtained a new revolving credit facility which
provides for borrowing by the Company of up to $20 million. Currently,
the total amount which the Company can borrow from all sources of third
party credit agreements is $17 million, the availability of which varies
according to the Company's level of certain liquid assets, including
accounts receivable and inventory. As of September 30, 1998, the Company
has drawn $16.3 million on this credit facility. Because there can be no
assurance that the Company will be able to increase the availability under
this facility in the future, the Company may continue to experience cash
flow and liquidity problems. See "Selling Shareholders."
RISKS FROM OPERATING LOSSES. During 1997, the Company continued to
incur substantial losses from operations. The losses were the result of
various factors, including losses on aircraft that did not benefit from
the price adjustments and cost-sharing provisions subsequently provided
under the KC-135 contract, and the inefficiencies and costs associated
with the work stoppage by union workers at the Company's Birmingham and
Dothan facilities. While the Company has resolved the work stoppages,
entered into a debt financing agreement with a new lender, renegotiated
certain terms of its debt agreement and warrant agreement, amended its KC-
135 government contracts and is proceeding with overhead reductions,
additional capital resources may still be required. Moreover, there can
be no assurance that such additional capital resources will be available
to the Company.
FINANCING RISKS AND LEVERAGE. The Company's losses have resulted in
serious cash liquidity issues for the Company. Both the losses and
liquidity issues will place the Company in breach of substantially all of
the financial covenants associated with its debt. These loan covenants
require, among other things, that the Company maintain various financial
ratios and minimum net worth amounts. As a result of its losses from
operations, the Company was in violation of substantially all of such
covenants. Although the Company's primary lender has waived the financial
debt covenant violations through September 30, 1998, 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 its lender will
continue to fund under the current arrangements if the Company remains in
violation of its covenants subsequent to September 30, 1998. Any
declaration of a default by the Company's lenders would have a seriously
adverse effect on the Company. The Company's recent losses have also
caused the Company's capital structure to become debt heavy and the
Company is therefore now highly leveraged. To the extent the Company is
unable to generate sufficient revenue from operations to fund its future
operations, the Company will have to obtain additional debt or equity
financing. While the Company is continuing to explore various financing
alternatives, there can be no assurance that the Company will be able to
obtain such additional financing.
CASH POSITION As of September 30, 1998, the Company had $295,764 in
cash and cash equivalents. The Company is currently relying on continuing
advances under its revolving credit facility, which may be deemed to be in
default (see "Liquidity and Capital Resources" above), and on customer
payments, including progress payments it receives from the U.S. Government
under various contracts, such as the KC-135 contract, to fund operations.
Because of its heavy dependence on these government contracts and limited
financing resources, the Company has experienced severe cash flow problems
over the last several years. While these cash flow problems have improved
somewhat due to the renegotiation of the terms of its KC-135 contract and
the redeliveries of aircraft at a profit, there is no reason to believe
that the Company's cash shortage will be alleviated any time soon. In
addition, the imposition of a large, unanticipated cash demand (such as
may result from the enforcement of the jury verdict in Stevenson v. Pemco
Aeroplex, Inc., et al. for $1 million in compensatory damages) could
exhaust the Company's cash resources. See "Litigation".
EFFECT OF CONTINUING LOSSES. The Company experienced large and
previously unanticipated losses in 1997. The Company's cash resources
continue to be strained primarily due to additional costs incurred in
connection with the work stoppages of the Company's United Auto Workers
and International Association of Machinists employees at the Birmingham
and Dothan, Alabama facilities during 1997, excessive costs on the KC-135
program, delayed redelivery of KC-135 aircraft, and losses incurred on
various commercial aircraft maintenance contracts performed at the
Company's Dothan, Alabama facility and its former Copenhagen, Denmark
facility. While the Company has returned to profitability in the first
part of 1998 by reducing overhead expenses and staff, renegotiation of KC-
135 contract terms and the sale of its Hayes Targets division for cash,
there can be no assurance that the Company will continue to be profitable
in the future.
RAW MATERIALS. The Company purchases a variety of raw materials,
including aluminum sheets and plates, extrusion, alloy steel and forgings.
Except as noted below with respect to materials supplied by the U.S.
Government, the Company has not recently experienced any significant
shortages of raw material essential to its business and does not
anticipate any shortages of critical commodities over the longer term;
although this is difficult to assess because many factors causing such
possible shortages are outside its control. The Company procures many
components, parts and equipment items from various domestic companies.
The Company faces some dependence on suppliers for certain types of parts
involving highly technical processes; however, this risk has lessened in
the past few years as additional high technology suppliers have entered
the market. The Company does not believe this dependence has significance
for its business as a whole; rather, any adverse consequence that might
result from a failure of a sole supplier to provide a particular part
would be felt on an individual contract basis.
A significant portion of the equipment and components used by the
Company in the fulfillment of its services under U.S. Government contracts
is furnished without charge to the Company by the Government. The Company
is dependent upon Government Furnished Material ("GFM") to meet delivery
schedules, and untimely receipt of such material adversely affects
production schedules and contract profitability. The Company encountered
late delivery of GFM in 1993, 1994, 1995, 1996 and 1997 and as a result,
experienced a disruption in scheduled work and severely diminished
profitability. This led to the Company making Requests for Equitable
Adjustment from the Government. See "Liquidity and Capital Resources"
above. The Company and the Government are working on ways to minimize the
likelihood of a repetition of such delays in the future, but there can be
no assurances that such delays will not recur.
STCS, PMAS, PATENTS AND COPYRIGHTS. The Company holds 120 FAA-issued
Supplementary Type Certificates ("STCs") which authorize it to perform
certain modifications to aircraft. The modifications include air-stair
installation, the conversion of commercial aircraft from passenger-to-
freight or passenger-to-Quick Change configurations and ground proximity
and wind shear warning systems. STCs are not patentable; rather, they
indicate a procedure that is acceptable to the FAA to perform a given air-
worthiness modification. The Company develops its STCs either internally
or under licensing agreements with the original equipment manufacturer.
The Company also holds FAA-issued Parts Manufacturing Approvals ("PMAs")
which give it authorization to manufacture parts of its own design or that
of other manufacturers related to its cargo handling system. The Company
holds numerous other PMAs which give the Company authority to manufacture
certain parts used in the conversion of aircraft from passenger-to-
freighter and passenger-to-Quick Change configurations. During 1996, the
Company obtained a U.S. design patent for a permanent door sill designed
for use in cargo configurations. Although the Company does not believe
that the expiration or invalidation of any or all of these intellectual
property rights would have a material adverse impact upon its financial
condition, there is no assurance that the Company will be able to protect
its STCs, PMAs or patent from conflicting uses or claims of ownership.
The Company holds copyrights to the computer software developed in-house
for the operation of the Power Drive Unit System and Cargo Door Electro-
Mechanical System used in the conversion of commercial aircraft. These
copyrights are not registered and will begin to expire after the year
2028.
ENVIRONMENTAL COMPLIANCE. The Company is required to comply with
environmental regulations at the federal, state and local levels. The
regulations apply especially to the stripping, cleaning and painting of
aircraft. Complying with environmental regulations has not had a material
effect on the Company's capital expenditures, earnings and competitive
position. However, there can be no assurance that the cost of compliance
will not become material in the future.
The Company has been designated as a potentially responsible party
under the Comprehensive Environmental Response, Compensation and Liability
Act for contamination associated with a site near its Clearwater, Florida
facility. It is difficult to estimate the total clean-up costs and to
predict the method that will be used to allocate such costs among the
responsible parties. While the Company does not believe that the
resolution of this matter will have a material adverse effect on the
Company's financial position, results of operations or cash flows, there
can be no assurance that this will be the case. In April 1998, as a
result of an inspection in June 1997, the Company was notified of
potential violations of the Toxic Substances Control Act ("TCSA") related
to electrical transformers containing PCBs located at the Birmingham,
Alabama facility. The cost to complete clean-up of all PCBs is estimated
to be $25,000 or less, plus Environmental Protection Agency ("EPA")
penalties. On September 29, 1998, the EPA commenced an administrative
proceeding seeking $144,000 in civil penalties against the Company's Pemco
Aeroplex subsidiary for the alleged TCSA violations.
Separately, in December 1997, the Company received an inspection
report from the EPA which cited certain other violations at the Birmingham
facility, including violations of the federal Resource Conservation and
Recovery Act ("RCRA") environmental regulations due to discharges from the
floor of a hangar in which the Company's paint stripping activities are
conducted. The Company has taken action to correct items raised by the
inspection and is in the process of doing an assessment of the paint
stripping hanger. On April 2, 1998, the Company received a complaint and
compliance order from the EPA covering these matters proposing penalties
of $225,256. The Company 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. The Company has estimated
the cost of remediating the paint stripping floor problem at $500,000. In
August of 1998, the Company implemented use of an alternative paint
stripping material which is not subject to regulation under RCRA.
HEAVY RELIANCE ON GOVERNMENT CONTRACTS. In 1996, 64% of the Company's
business consisted of U.S. Government contracts, including the KC-135
contract which accounted for approximately 42% of the Company's 1996
revenues. In 1997, 61% of the Company's business consisted of U.S.
Government contracts, and it was down to approximately 55% in the first
part of 1998. As a Government contractor, the Company 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 contracts awards.
The Government may, in certain cases, also terminate existing contracts,
recover damages and impose other sanctions and penalties. The loss of the
KC-135 contract or other Government contracts could have a materially
adverse effect on the Company. Recent U.S. budget constraints, combined
with a shift in the nation's national security objectives, have resulted
in a downsizing of the U.S. defense industry. However, since fewer
Government funds have been made available for the acquisition of new
equipment, the demand for maintenance, modification, and life extension
programs (such as the type of services provided by the Company) for U.S.
Government aircraft has continued, and, therefore, the Company has not
been adversely impacted by this trend.
On March 20, 1998, the U.S. Government released a request for
proposal ("RFP") for the workload performed by the Sacramento Air
Logistics Center, including work related to its KC-135 aircraft. The
Company's Pemco Aeroplex subsidiary currently performs a portion of the
programmed depot maintenance of the KC-135 workload included in the RFP.
On June 17, 1998, the Company submitted a protest to the General
Accounting Office ("GAO") challenging the combination, or "bundling," of
the KC-135 workload with other unrelated workloads in the RFP. On
September 25, 1998, the GAO found in favor of the protest filed by Pemco.
The GAO recommended that the Air Force resolicit the contract to comply
with the requirements of federal laws and regulations, and awarded the
Company its protest costs and attorneys' fees.
Notwithstanding the GAO decision, the Air Force announced its award
of the bundled workload to Ogden Air Logistics Center on October 9, 1998,
stating that it was proceeding with the award. If the Air Force's action
stands, the KC-135 workload could be included in the contract awarded to
Ogden ALC upon expiration of the Company's contract. On October 13, 1998,
Pemco filed a complaint in the U.S. District Court, Northern District of
Alabama against the Air Force seeking declaratory relief, an injunction,
and an order requiring the Air Force to comply with applicable federal
laws as recommended by the GAO. This action was voluntarily dismissed by
Pemco, without prejudice, on November 25, 1998. On November 30, 1998,
Pemco filed a complaint in the Federal Court of Claims against the Air
Force seeking declaratory relief, an injunction, and an order requiring
the Air Force to comply with applicable federal laws as recommended by the
GAO. The Company's KC-135 contracts are discussed in the Company's Form
10-K filed for the year ended December 31, 1997.
LEGAL PROCEEDINGS. The Company is involved in a wide variety of
legal proceedings in the ordinary course of its business. The enforcement
of a significant judgment against the Company, such as the jury verdict in
Stevenson v. Pemco Aeroplex, Inc. discussed below, could have a material
adverse effect on the Company's business, financial condition and future
prospects. The Company is currently a party to various legal proceedings
which have arisen in the ordinary course of business. No assurance can be
given with respect to the outcome of these legal proceedings and the
effect such outcomes may have on the Company. See "Litigation."
CONTROL BY INSIDERS. Matthew L. Gold, who serves as President, Chief
Executive Officer and Chairman of the Board of the Company, has effective
voting control over 2,184,158 shares, or 53% of the outstanding Common
Stock of the Company on a fully diluted basis. Accordingly, Mr. Gold
could control the outcome of all matters requiring a vote, including the
election of directors. Currently, there are no other executive officers
of the Company, nor do any other insiders own more than 1% of the
Company's outstanding shares of Common Stock. Bank of America National
Trust and Savings Association has voting control over 349,836 shares, or
9% of the outstanding Common Stock.
DIVIDENDS. The Company has never paid cash dividends on its Common
Stock and currently intends to continue its policy of retaining its
earnings to support the growth and development of its business.
Furthermore, pursuant to the Company's Second Amended and Restated Credit
Agreement dated December 31, 1996 and the Company's Second Amended and
Restated Senior Subordinated Loan Agreement dated December 31, 1996, as
amended August 7, 1997, with Bank of America, the Company is prohibited
from paying any dividends other than stock dividends. Pursuant to the
Company's Accounts Receivable Management and Security Agreement dated
August 8, 1997 with the Company's new primary lender, the Company is
prohibited from declaring dividends of any kind. See "The Company".
FOREIGN 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
December 31, 1997 and 1998 consolidated financial statement presentation.
Related to the deconsolidation, the Company continues to maintain a
liability of $1.3 million related to its basis in the Company at the time
of bankruptcy for claims which may be made against the Company. The
Company sells to customers in foreign countries but no longer maintains
any overseas facilities. At December 31, 1997, eleven percent of the
Company's revenues were attributable to foreign sales. While fluctuations
in the currency exchange rates could have an impact on the Company's
revenues from foreign sales, there are limited intercompany currency
transactions from which exposure to currency conversion gains or losses
could arise. To date, the Company has not experienced significant losses
from currency conversion gains or losses even though the Company does not
have a currency hedging program in place. Although the Company could
experience losses in the future due to the lack of a currency hedging
program, the Company does not believe that the scope of its currency risk
would justify the effort and expense of a hedging program and therefore
has no plans to implement such a program in the foreseeable future.
DILUTION FROM WARRANT EXERCISE. In 1988, Bank of America was issued
a warrant to purchase 1,053,939 shares of Common Stock (the "Warrant").
These shares, or shares to be utilized by the Company to redeem the
Warrant, comprise a portion of the shares being registered herein. The
Company believes the market value of the Common Stock already reflects the
dilution that occurred upon redemption of the Warrant. Moreover, the sale
of such shares by the Warrant holder or its assignees could have an
adverse impact on the market price of the Company's stock on Nasdaq. With
the final redemption of the Warrant, on October 31, 1998, the Company has
issued 825,399 shares of Common Stock for redemption of all 1,053,939
Warrant shares.
QUALIFICATION OF AUDITOR'S OPINION. The opinion of independent
public accountants with respect to the Company's audited financial
statement is qualified subject to the effects, if any, on the financial
statements of the outcome of the uncertainty regarding the Company's
continuation as a going concern. While the Company believes that it can
overcome the numerous difficulties it has faced over the past few years
and continue its operations in the future, there can be no assurance that
it will be able to do so.
FORWARD LOOKING STATEMENTS. Statements contained herein concerning
anticipated results of operations, awards 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.
THE COMPANY
Precision Standard, Inc., a Colorado corporation (the "Company"), is
a diversified aviation and aerospace company with executive offices in
Denver, Colorado. The Company is composed of three operating groups: the
Government Services Group, located primarily in Birmingham, Alabama; the
Commercial Services Group, located in Dothan, Alabama and Victorville,
California; and the Manufacturing and Overhaul Group with facilities in
California and Florida. The Company's offices are located at 12000 E.
47th Avenue, Suite 400, Denver, Colorado 80239. The Company's telephone
number is 303/371-6525.
The Company provides aircraft maintenance and modification services
for the government and military customers through its Government Services
Group. These services include complete airframe inspection, maintenance,
repair and custom airframe design and modification. For its military
customers, the Company specializes in providing Programmed Depot
Maintenance and Scheduled Depot Level Maintenance on large transport
aircraft and helicopters. The Company has a long, successful history of
providing high-quality maintenance, modification, and integration work on
a broad range of military aircraft including the KC-135, C-130, C-9, P-3,
T-34, A-10, F-16, and U.S. Navy helicopters.
The Commercial Services Group provides aircraft maintenance and
modification services on a contract basis to the owners and operators of
large commercial aircraft. The Company has broad experience in commercial
aircraft maintenance varying in scope from a single aircraft serviced over
a few days to multi-aircraft contracts lasting several years. The Company
is able to offer full range maintenance support services to airlines
coupled with the related engineering and technical services required by
these customers. The Company also provides commercial aircraft
modifications and value-added technical solutions and holds numerous,
proprietary STCs (Supplemental Type Certificates).
The Company's Manufacturing and Overhaul Group designs and
manufactures a wide array of proprietary aerospace products; various space
systems, such as guidance control systems and launch vehicles; aircraft
cargo-handling systems; and precision parts and components for aircraft.
In addition, the Manufacturing and Overhaul Group provides engine nacelle
overhaul and repair and operates an aircraft parts distribution company.
Stated below is the percentage of revenues attributable to Government
Services, Commercial Services, and Manufacturing and Overhaul for the last
four years.
1994 1995 1996 1997
------ ------ ------ ------
Government Services 55% 48% 49% 51%
Commercial Services 26% 33% 26% 26%
Manufacturing and Overhaul 19% 19% 25% 23%
The KC-135 and C-130(1) Program Depot Maintenance and drop-in maintenance
contracts accounted for the following percentage of revenues during the
last four fiscal years:
1994 1995 1996 1997
------ ------ ------ ------
KC-135 49% 41% 42% 44%
C-130(1) 6% 7% 4% 4%
(1) The C-130 contract was re-solicited by the Government and was awarded
to another service provider in April 1997. Therefore, the Company's
subsidiary, Pemco Aeroplex, Inc., is no longer the service provider for C-
130 Programmed Depot Maintenance.
FINANCING ARRANGEMENTS
Bank of America National Trust and Savings Association ("Bank of
America") had been the Company's primary lender since 1988, making funds
available to the Company through a Credit Agreement, providing for a term
credit facility and a revolving credit facility (the "Credit Agreement"),
and a Senior Subordinated Loan Agreement (the "Loan 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").
1,053,939 of the shares being registered herein could have been issued for
exercise of the Warrant by Bank of America or, in the alternative,
redemption of the Warrant by the Company. On August 8, 1997, the Company
entered into a three-year revolving credit facility with a new primary
lender that allows the Company to borrow up to $20 million. This new loan
is expected to provide the Company with greater flexibility. As part of
this transaction, the Company fully repaid the Credit Agreement with Bank
of America and a portion of its Senior Subordinated Loan under the Loan
Agreement. Approximately $6.2 million of the Senior Subordinated Loan
under the Loan Agreement currently remains outstanding.
The loans from both lenders are collateralized by substantially all
of the Company's assets and have various financial covenants. The amount
of funds available to borrow under the new revolving credit facility is
tied to percentages of accounts receivables and inventory of domestic
operations only. Interest on the new revolving credit facility accrues at
the prime rate plus 1.5% with provisions for reductions in the interest
rate based on specific operating performance targets.
The Credit Agreement, the Loan Agreement and the Warrant were each amended
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. The Loan
Agreement was amended on August 8, 1997, in connection with the Company
obtaining the revolving credit facility with its new primary lender. As
amended all scheduled principal amortization for the portion of the Senior
Subordinated Loan that remains in place 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 Warrant, as amended, permitted the Bank to purchase from the
Company 1,053,939 shares of the Company's Common Stock at an aggregate
purchase price of $0.948821 per share, subject to certain adjustments for
changes in the Company's Common Stock and for dilutive issuances dating
back to 1988. The Company believes that no events that would trigger a
material adjustment in the number of shares issuable upon exercise of the
Warrant occurred prior to the redemption of the Warrant. Certain
compensation related stock transactions have occurred, but all such
transactions have been made at not less than the fair market value on the
date of the transaction. Although the Company's determination of fair
market value in accordance with its option plans may not be exactly equal
to the average market value specified in the Warrant for determining
dilutive issuances, it is unlikely that there was any material difference.
The Company was 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 was the higher of (i) $4.454 per Share,
such amount being equal to the difference between the exercise price and
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 exercise price and the average
market price of the Common Stock for the 25 trading days preceding the
date which was five trading days prior to the date on which the redemption
was actually paid. In addition, interest accrued on the unpaid
installments in the form of cash and shares of Common Stock. The amount
of interest was equal to the sum of (i) $75,000 in cash (or the number of
shares which was 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 was five trading days prior to August 31, 1997, or $5.8148
per share), payable immediately, plus (ii) .0001 of a share of Common
Stock per unredeemed Warrant share per day from the respective installment
date until the redemption was made. Such interest was to be paid
quarterly 10 days after the last day of each calendar quarter. Such
interest was to be paid in the form of Common Stock only if such stock was
then registered and freely tradable; otherwise, the cash equivalent must
have been paid, calculated as the market value of the stock as of the last
day of the calendar quarter. The Company had the right to repurchase the
Warrant with shares of Common Stock, only if the Shares when issued were
the subject of an effective registration statement and immediately
publicly tradeable. By registering for sale hereunder the 1,053,939
Shares underlying the Warrant, the Company was prepared to repurchase the
Warrant with Common Stock; however, the Company also had the option to
elect to repurchase any portion of the Warrant with cash. The Company
exercised its right to repurchase the Warrant with shares of Common Stock
only. All six (6) installments of the repurchase due August 31, 1997,
October 31, 1997, January 31, 1998, April 30, 1998, July 31, 1998, and
October 31, 1998, representing the redemption of the entire Warrant and
accrued interest, have been paid with 825,399 shares of Common Stock.
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 did not exceed
1,000 Shares or an equivalent number of other securities of the Company on
each trading day. Mr. Gold has effective voting control over 2,184,158
shares, or 53%, of the outstanding Common Stock on a fully diluted basis.
Accordingly, Mr. Gold could control the outcome of all matters requiring a
vote, including the election of directors. There are no other executive
officers of the Company, nor do any insiders own more than 1% of the
Company's outstanding shares of Common Stock. Bank of America National
Trust and Savings Association has voting control over 349,836 shares, or
9% of the outstanding Common Stock.
The number of Shares and the prices per Share herein have been
adjusted to reflect the Company's April 15, 1998 4-for-1 reverse stock
split.
LITIGATION
On June 27, 1997, the Company's Pemco Aeroplex subsidiary was served
with a civil complaint filed by the United States of America in U.S.
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 appealed, briefs have been filed and the Company is
awaiting the court's decision.
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 such 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 is
vigorously defending the case.
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 a
Supplementary Type Certificate 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 five defendants in the case because of allegedly improper engineering
work performed in the 1980's by its predecessor, Hayes International. On
March 4, 1998, Pemco was served with a first amended complaint which seeks
damages from Pemco based on allegations of fraud and intentional
misrepresentation, failure to disclose, negligence, breach of contract,
and violations of state law prohibiting unfair competition. On March 27,
1998, Pemco filed its motion to dismiss. Pemco disputes the allegations
and intends to vigorously defend this case.
In May 1998, the Company's Pemco Aeroplex subsidiary was served with
a complaint filed by National Union Fire Insurance Company, the Company's
current insurer, seeking a declaration that the policies issued by such
insurer between 1987 and 1996 are not required to provide defense costs or
indemnity payments with respect to the litigation arising out of the
Supplementary Type Certificates for 747 cargo conversions owned by GATX
and others. The complaint, filed in the U.S. District Court for the
Northern District of California, also names American International Airway,
Inc., a plaintiff in one of the underlying cases, as a defendant.
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. On January 9, 1998, the Court
denied Pemco's motion to dismiss the complaint. The Company believes that
the claims have no factual basis and is vigorously defending the case.
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. Pemco filed a motion to dismiss the case which
was granted by the Court and that decision was not appealed.
On March 4, 1998, the Company's Pemco Aeroplex subsidiary was served
with a first amended complaint in The Bank of New York v. GATX/Airlog
Company, et al., U.S.D.C., N.D. Cal., filed by the owner of an aircraft
converted under a STC for 747 cargo conversions owned by GATX and others.
As a result of an Airworthiness Directive issued by the FAA in January
1996, aircraft which has been so converted were restricted to carrying
reduced payloads. The Company's Pemco Aeroplex subsidiary has been named
as one of five defendants in the case because of allegedly improper
engineering work performed in the 1980s by its predecessor, Hayes
International, Inc. The first amended complaint seeks damages from
misrepresentation, failure to disclose, negligence, breach of contract,
and violations of state law prohibiting unfair competition. Pemco
disputes the allegations and intends to vigorously defend this case.
The lawsuits previously filed in October, 1997, by the Birmingham Airport
Authority against the Company's Pemco Aeroplex subsidiary relating to the
lease of the Birmingham facility were settled in February, 1998. As part
of the settlement, the Airport Authority acknowledged the 20 year lease
extension with Pemco and provided certain financial incentives to Pemco
for its release of 3.8 acres from the leasehold.
On January 29, 1998, the Court in STEVENSON V. PEMCO AEROPLEX, INC.
and Rick Windsor granted Pemco Aeroplex's motion to vacate the verdict and
remanded the case for a new trial. However, in response to a motion for
reconsideration of that decision filed by the plaintiff, the Court issued
an order on February 27, 1998 vacating its order for a new trial on the
condition that the plaintiff accepts a reduction of the verdict to $1
million in compensatory damages. The jury verdict in favor of the
individual defendant supervisor was affirmed by the trial court, as was
the court's order granting summary judgment and dismissing the Company
from the case. On March 3, 1998, the plaintiff accepted the reduced
verdict. The Company filed an additional motion for reconsideration which
was denied on March 27, 1998. On April 2, 1998, the Company filed its
notice of appeal to the Alabama Supreme Court. The appeal argues, among
other issues, that the jury's exoneration of the individual supervisor
means that Pemco cannot have any liability to the plaintiff for the
alleged wrongdoing by such individual. The Company intends to vigorously
pursue reversal of this decision. On July 31, 1998, the Alabama Supreme
Court denied Pemco's motion for the issuance of a stay of execution
pending appeal of the judgment entered in the case.
In November, 1997, the Company's Danish subsidiary, Pemco World Air
Services A/S, was placed in involuntary bankruptcy in Denmark. On
September 30, 1998, the Company received notice from the bankruptcy estate
that the trustees would assert a claim in the amount of approximately $2
million against the Company for the alleged negative equity of the Danish
subsidiary. Based on preliminary information provided to the Company in
October 1998, additional claims have been filed by creditors against the
bankruptcy estate. While these additional claims could be as much as $14
million, the Company believes, based on partial information, that $11
million of these additional claims is comprised of one or more claims by a
former customer of the Danish subsidiary seeking consequential damages.
Based on the information currently available, the Company believes that
such claims may or may not be assertable against the Company.
On October 9, 1998, the Company was served with a complaint filed by
Sterling Airways A/S in Bankruptcy ("Sterling") in the District Court for
the City and County of Denver, Colorado alleging breach of contract. The
complaint seeks payment for 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 complaint alleges that the Company
guaranteed certain obligations to Sterling and seeks damages of
approximately $1.4 million. On November 2, 1998, the Company filed a
motion to dismiss the complaint.
The Company has previously accrued a reserve of $1.3 million for
claims arising out of the Denmark operation.
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 carry 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
1980s 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 Influence and Corrupt
Organization Act against Pemco. Pemco intends to vigorously defend this
claim.
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 the 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.
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 in particular, than
of any actual discriminatory employment practices by the Company or any
subsidiary. Except for workers' compensation benefits as provided by
statute, the Company intends to vigorously defend itself in all litigation
arising therefrom.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Shares
of Common Stock offered by the Selling Shareholders. The Company has
agreed to bear certain expenses in connection with the registration of the
Shares offered and sold by the Selling Shareholders, estimated to be
$20,000. The Selling Shareholders have agreed to pay all commissions and
other compensation to any securities broker-dealers through whom they sell
any of the Shares.
THE SELLING SHAREHOLDERS
The following table sets forth certain information regarding the
Selling Shareholders and the Shares offered by the Selling Shareholders
pursuant to this Prospectus. None of the Selling Shareholders within the
past three years has had any material relationship with the Company or any
of its affiliates except as described below. The number of Shares and the
prices per Share have been adjusted to reflect the Company's April 15,
1998 4-for-1 reverse stock split.
<TABLE>
<CAPTION>
Shares to be Beneficially
Owned on Completion
Name of No. of Shares No. of Shares of the Offering
Selling Beneficially Being ---------------------
Shareholder Owned Offered Number % of Class
------------ ------------ --------- ------- ----------
<S> <C> <C> <C> <C>
Bank of America 1,053,939(1) 1,053,969 -0- -0-
National Trust and
Savings Association
Matthew L. Gold 2,184,158(2) 250,000 1,934,158(2) 47%
</TABLE>
(1) Represents Shares issued or issuable upon the exercise of a Warrant
to purchase Common Stock issued to Bank of America National Trust and
Savings Association, the Company's primary lender (the "Bank"). The
Shares may be sold by the Bank or any other wholly-owned subsidiary of
BankAmerica Corporation to which the Shares may be transferred prior to
public resale. Additional discussion of this affiliation with the Company
is described below.
(2) Includes options to purchase 130,000 Shares. Mr. Gold serves as
President, Chief Executive Officer and Chairman of the Board of the
Company.
Bank of America National Trust and Savings Association ("Bank of
America") had been the Company's primary lender since 1988, making funds
available to the Company through a Credit Agreement, providing for a term
credit facility and a revolving credit facility (the "Credit Agreement"),
and a Senior Subordinated Loan Agreement (the "Loan 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").
1,053,939 of the shares being registered herein could have been issued for
exercise of the Warrant by Bank of America or, in the alternative,
redemption of the Warrant by the Company. On August 8, 1997, the Company
entered into a three-year revolving credit facility with a new primary
lender that allows the Company to borrow up to $20 million. This new loan
is expected to provide the Company with greater flexibility. As part of
this transaction, the Company fully repaid the Credit Agreement with Bank
of America and a portion of its Senior Subordinated Loan under the Loan
Agreement. Approximately $6.2 million of the Senior Subordinated Loan
under the Loan Agreement currently remains outstanding.
The Credit Agreement, the Loan Agreement and the Warrant were each
amended 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. The Loan
Agreement was amended on August 8, 1997 in connection with the Company
obtaining the revolving credit facility with its new primary lender. As
amended all scheduled principal amortization for the portion of the Senior
Subordinated Loan that remains in place 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 Warrant, as amended, permitted the Bank to purchase from the
Company 1,053,939 shares of the Company's Common Stock at an aggregate
purchase price of $0.948821 per share, subject to certain adjustments for
changes in the Company's Common Stock and for dilutive issuances dating
back to 1988. The Company believes that no events that would trigger a
material adjustment in the number of shares issuable upon exercise of the
Warrant occurred prior to the redemption of the Warrant. Certain
compensation related stock transactions have occurred, but all such
transactions have been made at not less than the fair market value on the
date of the transaction. Although the Company's determination of fair
market value in accordance with its option plans may not be exactly equal
to the average market value specified in the Warrant for determining
dilutive issuances, it is unlikely that there was any material difference.
The Company was 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 was the higher of (i) $4.454 per Share,
such amount being equal to the difference between the exercise price and
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 exercise price and the average
market price of the Common Stock for the 25 trading days preceding the
date which was five trading days prior to the date on which the redemption
was actually paid. In addition, interest accrued on the unpaid
installments in the form of cash and shares of Common Stock. The amount
of interest was equal to the sum of (i) $75,000 in cash (or the number of
shares which was 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 was five trading days prior to August 31, 1997, or $5.8148
per Share), payable immediately, plus (ii) .0001 of a share of Common
Stock per unredeemed Warrant share per day from the respective installment
date until the redemption was made. Such interest was to be paid
quarterly 10 days after the last day of each calendar quarter. Such
interest was to be paid in the form of Common Stock only if such stock was
then registered and freely tradable; otherwise, the cash equivalent must
have been paid, calculated as the market value of the stock as of the last
day of the calendar quarter. The Company had the right to repurchase the
Warrant with shares of Common Stock, only if the Shares when issued were
the subject of an effective registration statement and immediately
publicly tradeable. By registering for sale hereunder the 1,053,939
Shares underlying the Warrant, the Company was prepared to repurchase the
Warrant with Common Stock; however, the Company also had the option to
elect to repurchase any portion of the Warrant with cash. The Company
exercised its right to repurchase the Warrant with shares of Common Stock
only. All six (6) installments of the repurchase due August 31, 1997,
October 31, 1997, January 31, 1998, April 30, 1998, July 31, 1998, and
October 31, 1998, representing the redemption of the entire Warrant and
accrued interest, have been paid with 825,399 shares of Common Stock.
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 did not exceed
1,000 Shares or an equivalent number of other securities of the Company on
each trading day. Mr. Gold has effective voting control over 2,184,158
shares, or 53%, of the outstanding Common Stock on a fully diluted basis.
Accordingly, Mr. Gold could control the outcome of all matters requiring a
vote, including the election of directors. There are no other executive
officers of the Company, nor do any insiders own more than 1% of the
Company's outstanding shares of Common Stock. Bank of America National
Trust and Savings Association has voting control over 349,836 shares, or
9% of the outstanding Common Stock.
PLAN OF DISTRIBUTION
All of the Shares offered hereby are being sold by the Selling
Shareholders. The Shares will be offered by the Selling Shareholders from
time to time (i) at market prices prevailing on the Nasdaq SmallCap Market
at the time of offer and sale, or at prices related to such prevailing
market prices and (ii) in negotiated transactions, or (iii) a combination
of such methods of sale. The Selling Shareholders may effect such
transactions by offering and selling the Shares directly to or through
securities broker-dealers, and such broker-dealers may receive
compensation in the form of discounts, concessions, or commissions from
the Selling Shareholders and/or the purchasers of the Shares for whom such
broker-dealers may act as agent or to whom the Selling Shareholders may
sell as principal, or both (which compensation as to a particular broker-
dealer might be in excess of customary commissions).
The Selling Shareholders and any broker-dealers who act in connection
with the sale of the Shares hereunder may be deemed to be "underwriters"
within the meaning of Section 2(11) of the Securities Act of 1933 (the
"Securities Act") and any commissions received by them and profit on any
resale of the Shares as principal might be deemed to be underwriting
discounts and commissions under the Securities Act. The Company has
agreed to indemnify the Selling Shareholders against certain liabilities,
including liabilities under the Securities Act as underwriters or
otherwise.
The Company has advised the Selling Shareholders that they and any
securities broker-dealers or others who may be deemed to be statutory
underwriters will be subject to the Prospectus delivery requirements under
the Securities Act. Under applicable rules land regulations under the
Securities and Exchange Act of 1934, as amended (the "Exchange Act") any
person engaged in a distribution of any of the Shares may not
simultaneously engage in market activities with respect to the Common
Stock for the applicable period under Regulation M prior to the
commencement of such distribution. In addition and without limiting the
foregoing, the Selling Shareholders will be subject to applicable
provisions of the Exchange Act and the rules and regulations thereunder,
including without limitation Rules 10b-5 and Regulation M, which
provisions may limit the timing of purchases and sales of any of the
Shares by the Selling Shareholders. All of the foregoing may affect the
marketability of the Common Stock.
In the absence of this Registration Statement, Mr. Gold who is an
executive officer, Director and an "affiliate" of the Company would be
able to sell his Shares only subject to the limitations of Rule 144
promulgated under the Securities Act of 1933 ("Rule 144"). The Bank, to
the extent that it may have acquired and retained more than 10% of the
Company's Common Stock pursuant to the redemption of the Warrant with
shares of Common Stock by the Company, may be deemed to be an "affiliate"
of the Company. In general, under Rule 144 as currently in effect, an
"affiliate" of the Company, or a person who has beneficially owned shares
which are "restricted securities" for at least one year, is entitled to
sell within any three-month period a number of shares that does not exceed
the greater of: (i) one percent (1%) of the then outstanding shares of
Common Stock of the Company, or (ii) the average weekly trading volume of
the Common Stock during the four calendar weeks preceding a sale by such
person. Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. Under Rule 144, however, a person who is
not, and for the three months prior to the sale of such shares has not
been, an affiliate of the Company is free to sell shares which are
"restricted securities" which have been held for at least two years
without regard to the limitations contained in Rule 144. Neither Mr. Gold
nor the Bank will be subject to the foregoing restrictions when selling
their Shares pursuant to this Prospectus.
Under Section 16 of the Exchange Act, executive officers, Directors,
and 10% or greater shareholders of the Company will be liable to the
Company for any profit realized from any purchase and sale (or any sale
and purchase) of Common Stock within a period of less than six months.
TRANSFER AGENT
The Transfer Agent and Registrar for the shares of Common Stock is
American Securities Transfer & Trust, Inc., 1825 Lawrence Street, Suite
444, Denver, Colorado 80202.
LEGAL MATTERS
The validity of the securities to be offered hereby will be passed
upon for the Company by Gorsuch Kirgis LLP, Denver, Colorado, counsel for
the Company.
EXPERTS
The financial statements and schedules incorporated by reference
herein and in the Registration Statement as of December 31, 1997 and 1996
and for the years then ended have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said reports. Reference is made to said reports
which include an explanatory paragraph that describes the going concern
issue discussed in Note 19 to the financial statements. The financial
statements of the Company as of December 31, 1995 and for the year ended
December 31, 1995 have been incorporated by reference herein and in the
Registration Statement in reliance upon the report of Coopers & Lybrand
LLP, independent public accountants, also incorporated by reference herein
and upon the authority of said firm as experts in accounting and auditing.
INDEMNIFICATION
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Securities Act") may be permitted to
directors, officers or persons controlling the Company pursuant to the
foregoing provisions, the Company has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
