SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended Commission File No. 0-13829
September 30, 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 3,977,596 shares
Common Shares Outstanding at November 9, 1998
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
1998 1997
(Unaudited)
Current assets:
Cash and cash equivalents $ 295,764 $ 369,334
Accounts receivable, net 17,876,027 10,138,430
Inventories 17,357,342 17,047,983
Prepaid expenses and other 472,438 1,045,564
Total current assets 36,001,571 28,601,311
Property, plant and equipment,
at cost:
Leasehold improvements 10,883,469 10,826,369
Machinery and equipment 18,996,768 19,298,310
29,880,237 30,124,679
Less accumulated depreciation (18,704,139) (17,991,714)
Net property, plant and
equipment 11,176,098 12,132,965
Other non-current assets:
Prepaid pension costs 3,193,015 4,106,609
Intangible assets, net of
accumulated amortization 727,336 741,241
Related party receivable 269,824 269,824
Deposits and other 483,537 480,593
4,673,712 5,598,267
Total assets $51,851,381 $46,332,543
The accompanying notes are an integral part of
these consolidated financial statements.
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
1998 1997
(Unaudited)
Current liabilities:
Current portion of debt $23,872,122 $24,784,318
Accounts payable and accrued
expenses 29,322,519 31,728,406
Total current liabilities 53,194,641 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 59,351,606 62,669,689
Stockholders' equity:
Common stock, $.0001 par value,
300,000,000 shares authorized,
3,877,777 and 3,614,872 shares
issued and outstanding at
September 30, 1998 and December 31,
1997, respectively. 378 361
Additional paid-in capital 4,764,207 4,764,224
Accumulated deficit (12,024,429) (20,862,729)
Foreign currency translation
adjustments (240,381) (239,002)
Total stockholders' deficit (7,500,225) (16,337,146)
Total liabilities and
stockholders' deficit $51,851,381 $46,332,543
The accompanying notes are an integral part of
these consolidated financial statements.
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Three
Months Ended Months Ended
September 30, September 30,
1998 1997
(Unaudited) (Unaudited)
Net sales $32,091,484 $28,742,054
Cost of sales (26,003,071) (29,122,479)
Gross profit 6,088,413 (380,425)
Selling, general and
administrative expenses (3,925,239) (4,939,046)
Bad debts recovery (expense) 100,000 2,936
Research and development expense 0 (250,977)
Income (loss) from operations 2,263,174 (5,567,512)
Other income (expense):
Interest expense (990,922) (351,919)
Other, net 215,696 (44,005)
Income (loss) before income taxes 1,487,948 (5,963,436)
Income tax benefit (expense) 30,743 (38,308)
Net income (loss) $ 1,518,691 $(6,001,744)
Weighted average number of common
shares outstanding
Basic 3,852,973 3,147,527
Diluted 3,967,126 3,147,527
Net income (loss) per common share:
Basic $ 0.39 $ (1.91)
Diluted $ 0.38 $ (1.91)
The accompanying notes are an integral part of
these consolidated financial statements.
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Nine
Months Ended Months Ended
September 30, September 30,
1998 1997
(Unaudited) (Unaudited)
Net sales $105,764,656 $ 99,475,469
Cost of sales (84,520,159) (95,367,437)
Gross profit 21,244,497 4,108,032
Selling, general and
administrative expenses (13,389,507) (15,363,285)
Bad debts recovery (expense) 350,000 2,873
Research and development expense (124,999) (744,706)
Income (loss) from operations 8,079,991 (11,997,086)
Other income (expense):
Interest expense (2,294,955) (1,002,010)
Other, net 3,073,019 (370,339)
Income (loss) before income taxes 8,858,055 (13,369,435)
Income tax expense (19,755) (149,308)
Net income (loss) $ 8,838,300 $(13,518,743)
Weighted average number of common
shares outstanding
Basic 3,764,355 3,185,169
Diluted 3,942,512 3,185,169
Net Income (loss) per common share
Basic $ 2.35 $ (4.24)
Diluted $ 2.24 $ (4.24)
The accompanying notes are an integral part of
these consolidated financial statements.
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Nine
Months Ended Months Ended
September 30, September 30,
1998 1997
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income (loss) $ 8,838,300 $ (13,518,743)
Adjustments to reconcile
net income (loss) to net cash
provided (used in) from operating
activities:
Depreciation and amortization 1,625,370 1,827,240
Pension cost in excess of
funding 0 1,085,669
Gain on sale of division (3,137,319) 0
Changes in assets and liabilities:
Accounts receivable (8,504,783) (3,312,037)
Inventories (1,937,758) 2,127,578
Prepaid expenses and
other assets 484,680 (1,590,570)
Prepaid pension costs 913,594 0
Intangible assets 0 (645,631)
U.S. Government request for
equitable adjustment, net 0 (283,743)
Deposits and other (2,944) 536,031
Accounts payable and
accrued expenses (1,358,153) 4,580,654
Accrued warranty expense 0 (238,721)
Estimated losses on
contracts in progress 0 (108,775)
Self-insured workers'
compensation reserve 0 (66,167)
Net cash (used in) operating
activities (3,079,013) (9,607,215)
Cash flows from investing activities:
Capital Expenditures (872,361) (386,725)
Proceeds from sale of division 4,790,000 0
Net cash provided by (used in)
investing activities $3,917,639 $ (386,725)
The accompanying notes are an integral part of
these consolidated financial statements.
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
Nine Nine
Months Ended Months Ended
September 30, September 30,
1998 1997
(Unaudited) (Unaudited)
Cash flows from financing activities:
Borrowings under revolving
credit facility $ 0 $ 27,704,941
Net repayments under short-term
obligations (912,196) (12,932,702)
Principal payments under
long-term obligations 0 (5,960,857)
Net cash provided by (used in)
financing activities (912,196) 8,811,382
Effect of exchange rate
changes on cash 0 (642)
Net increase (decrease) in cash
and cash equivalents (73,570) (1,183,200)
Cash and cash equivalents
beginning of period 369,334 1,183,200
Cash and cash equivalents
end of period $ 295,764 $ 0
Supplemental disclosure of cash
flow information:
Cash paid during the period for:
Interest $1,817,856 $ 1,597,188
Income taxes 0 159,000
Supplemental disclosure of
non-cash investing activities:
Capital lease obligations incurred
for new equipment $ 143,135 $ 28,674
The accompanying notes are an integral part of
these consolidated financial statements.
PRECISION STANDARD, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated interim financial statements included in this
report have been prepared by the Company without audit. In
the opinion of management, all adjustments necessary for a
fair presentation are reflected in the interim financial
statements. Such adjustments are of a normal and recurring
nature. The results of operations for the period ended
September 30, 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.
2. INVENTORIES
Inventories consist of the following:
September 30, December 31,
1998 1997
(Unaudited)
Work in-process $23,235,243 $25,385,996
Finished goods 3,032,172 3,125,830
Raw materials and supplies 4,645,845 5,987,419
Total $30,913,260 $34,499,245
Less progress payments
and customer deposits (13,555,918) (17,451,262)
$17,357,342 $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 nine months ended September 30, 1998 and
1997:
1998
Net income $ 8,838,300
Weighted Average Shares 3,764,355
Basic Net Income Per Share 2.35
Dilutive Securities:
Options 6,008
Warrants 172,150
Diluted Weighted Average shares 3,942,512
Diluted Net Income Per Share 2.24
1997
Net Loss (13,518,743)
Weighted Average Shares 3,185,169
Basic Net Loss Per Share (4.24)
Dilutive securities:
*Options 0
*Warrants 0
Diluted Weighted Average Shares 3,185,169
Diluted Net Loss Per Share (4.24)
The following table represents the net income (loss) per share
calculations for the three months ended September 30, 1998 and
1997:
1998
Net Income $ 1,518,691
Weighted Average Shares 3,852,973
Basic Net Income Per Share 0.39
Dilutive Securities:
Options 13,199
Warrants 100,955
Diluted Weighted Average Shares 3,967,126
Diluted Net Income Per Share 0.38
1997
Net Loss (6,001,744)
Weighted Average Shares 3,147,527
Basic Net Loss Per Share (1.91)
Dilutive Securities:
*Options 0
*Warrants 0
Diluted Weighted Average Shares 3,147,527
Diluted Net Loss Per Share (1.91)
*Potentially dilutive securities outstanding for 1997 were
excluded from EPS because they were antidilutive.
4. NOTES PAYABLE
September 30, December 31,
1998 1997
(Unaudited)
Revolving credit facility $16,340,352 $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 1,330,569 1,379,986
Total debt $23,872,123 $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 $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 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
September 30, 1998, the Company may be deemed to have been in
violation of certain financial ratio tests required by its
loan agreements; however, no debt service obligations are at
issue and the Company has received a waiver from its lender
for any such violations of its covenants. 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 any such
audits, reviews or investigations of the Company by the
Government 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) for the workload performed by the Sacramento
Air Logistic 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. October 13, 1998, Pemco
filed a complaint in 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. The
Company's KC-135 contracts are discussed in the Company's Form
10-K filed for the year ending December 31, 1997.
Litigation - A purported class action was brought against the
Company and its Pemco Aeroplex subsidiary in May, 1997 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 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.
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. Various post-trial motions resulted in the trial
court reducing the verdict to $1 million in compensatory
damages. Pemco and the plaintiff have both appealed this
decision. An accrual was established in the fourth quarter of
1997 for the compensatory damage award pending outcome of the
appeal.
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
involuntary 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.
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 of
environmental laws. 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 nevertheless recorded an accrual in the fourth quarter of
1997 for the above penalties and certain other related
charges.
Other - The Company has received a demand from the assignee of
a supplier of computer software and support services seeking
payment of approximately $700,000 under a contract for
computer software and support services. The Company has never
installed or utilized any of this software and has never
received any support services. The Company has contacted the
software provider in an attempt to determine whether
alternative software useful to the Company can be provided and
this matter resolved in a mutually satisfactory manner.
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.
The Company has previously accrued a reserve of $1.3 million
for claims arising out of the Denmark operation.
6. STOCKHOLDERS' EQUITY
At September 30, 1998 the Company had 300,000,000 authorized
shares of $.0001 par value common stock, with 3,877,777 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. 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 nine
months ended September 30, 1997 are as follows:
1997
Net Sales $8,924,111
Expenses 11,302,348
Net Loss (2,378,237)
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 $4,790,000 and
resulted in a gain of $3.1 million, after adjustments.
Net sales and operating income contributed by the Hayes
operation for nine months ended September 30, 1998 was not
material and for nine months ended September 30, 1997 was as
follows:
1997
Net Sales $1,541,000
Operating Income 201,000
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 September 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 third quarter of 1998, the Company continued its return
to profitability. The Company reported operating income of $1.5
million for the three months ended September 30, 1998 and a
combined operating income of $8.8 million for the first nine months
of 1998. Total income before taxes for the first, second and third
quarters of 1998 was $4.6 million, $2.8 million, and $1.5 million,
respectively, for a combined total income before taxes of $8.8
million. This includes profits of $3.1 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 September 30, 1998
versus three months ended September 30, 1997
Revenues for the third quarter of 1998 improved from the third
quarter of 1997, increasing approximately 12% from $28.7 million in
1997 to $32.1 million in 1998. Both government and commercial
sales increased during the third quarter of 1998. Government sales
increased approximately 3% from $18.2 million in 1997 to $18.8
million in 1998, and commercial sales increased 27% from $10.5
million in 1997 to $13.3 million in 1998. The Company's mix of
business between government and commercial customers moved from 36%
commercial and 64% government in 1997 to 41% commercial and 59%
government for the corresponding period in 1998.
Government sales in the third quarter of 1998 increased
approximately $600,000 due to increased workload under government
contracts at the Birmingham facility. Commercial sales increased
approximately $2.8 million in the third quarter of 1998 due
primarily to increased workload under commercial contracts at the
Dothan facility.
The ratio of cost of sales ($26.0 million in 1998; $29.1 million in
1997) to net sales ($32.1 million in 1998; $28.7 million in 1997)
decreased from 101% in the third quarter of 1997 to 81% in 1998.
The decrease in the cost of sales was the result of restructuring
efforts undertaken during 1997 and 1998, increased operating
efficiency, and strike-related costs recognized in the third
quarter of 1997.
Selling, general and administrative expenses ("SG&A") decreased
from $4.9 million in the third quarter of 1997 to $3.9 million in
1998, and decreased as a percentage of sales from 17% in 1997 to
12% in 1998. These decreases were primarily due to the Company's
reduction of overhead expenses and corporate management changes.
Interest expense was $1.0 million in third quarter 1998 versus $0.4
million in 1997. The increase is primarily due to increases in
borrowings required to support the increase in sales and workload
during the quarter.
Nine months ended September 30, 1998
Versus nine months ended September 30, 1997
Revenues in the first nine months of 1998 increased from $99.5
million in 1997 to $105.8 million in 1998. Both government and
commercial sales increased as compared to the nine month sales of
1997. Government sales increased 5% from $56.7 million in 1997 to
$59.5 million in 1998. Commercial sales increased 8% from $42.8 in
1997 to $46.3 million in 1998. The Company's mix of business
between government and commercial customers remained consistent at
43% commercial and 57% government in 1997 and 44% commercial and
56% 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 ($84.5 million in 1998; $95.4 million in
1997) to net sales ($105.8 million in 1998; $99.5 million in 1997)
decreased from 96% in 1997 to 80% in 1998. The decrease in the
cost of sales was the result of restructuring efforts undertaken
during 1997 and 1998, increased operating efficiency, and strike
related costs recognized in the first nine months of 1997.
SG&A decreased from $15.4 million in the first nine months of 1997
to $13.4 million in 1998, and decreased as a percentage of sales
from 16% 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 increased to $2.3 million in the first nine months
of 1998 versus $1.0 million in 1997 due to increased sales and
workload, which required additional borrowings under the Revolving
Credit facility.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash resources continued to be strained in 1998
primarily due to delays in progress payments for amounts billed to
the U.S. Government, increased workloads under government and
commercial 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 nine months
ended September 30, 1998 and 1997, after adjustments from the sale
of the Hayes Targets division's assets.
Accounts receivable increased $8.5 million in the first nine months
of 1998 due to increased workloads under the Company's government
and commercial contracts.
Net inventories increased by $1.9 million in the first nine months
of 1998 primarily due to a reduction in progress payments. (See
Note 2 to Financial Statements). Capital expenditures were $.9
million during the first nine months of 1998. The Company also
paid down its short term obligations by approximately $0.9 million
for the nine months ending September 30, 1998.
Accounts payable and accrued expenses decreased approximately $1.4
million in the first nine months of 1998. The decrease reflects
the Company's continued efforts to reduce trade debt.
In the first nine months of 1998, the Company's operating
activities used $3.1 million in cash. In addition, investing
activities provided net cash of $3.9 million and $0.9 million was
used for financing activities. In the first nine months of 1997,
$9.6 million of cash was used for operating activities, $0.4
million was used for investing activities, and $8.8 million was
generated by financing activities.
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 September 30, 1998 and 1997:
1998 1997
U.S. Government $144,012 $127,834
Commercial 22,070 20,930
$166,082 $148,764
The above numbers for 1998 and 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 September 30, 1998, 87% of the Company's backlog
related to work for the U.S. Government versus 86% for the period
ended September 30, 1997. The Company's government backlog
increased $16 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 $264.0 million $260.0 million
The $264 million of estimated backlog is associated with option
periods and new government contracts.
CONTINGENCIES
See Note 5 to the Consolidated Financial Statements.
YEAR 2000 ISSUES
Background
Some computers, software and other equipment include programming
code which abbreviates calendar year data using only two digits.
As a result, some equipment could fail to operate or fail to
produce correct results if "00" is interpreted to mean 1900, rather
than 2000. These problems are widely expected to increase in
frequency and severity as the year 2000 approaches and are commonly
referred to as the "Millennium Bug" or "Year 2000 Problem."
Assessment
The Year 2000 Problem could affect computers, software and other
equipment used by the Company. Accordingly, the Company is
reviewing its internal computer programs and systems to ensure that
such programs and systems will be Year 2000 compliant. The Company
presently believes that its computer systems will be Year 2000
compliant in a timely manner. However, while the Company has not
completed its Year 2000 compliance assessment, it presently
estimates that the cost of these efforts could exceed $1 million.
Such costs would be paid out of the Company's cash flow from
operations and/or through financing sources.
Internal Infrastructure
Initial assessment of the Company's existing computer systems has
revealed that a portion of its existing software programs are not
Year 2000 compliant. The Company believes that it has identified
most of the major computers, software applications and related
equipment used in connection with its internal operations that must
be modified, upgraded or replaced to minimize the possibility of a
material disruption to its business. The Company anticipates
upgrading or replacing the necessary systems by the end of the
third quarter of 1999. While there is no guarantee that the
Company will reach Year 2000 compliance by such deadline, the
Company believes that it is applying the resources and effort
sufficient to do so.
Systems Other Than Information Technology Systems ("Non-IT
Systems")
In addition to computers and related systems, the operation of the
Company's office and facilities equipment, such as fax machines,
photocopiers, telephone switches, security systems, elevators and
other common devices, may be affected by the Year 2000 Problem.
The Company has been assessing the potential effect of the Year
2000 Problem on its office and facilities equipment. The Company
has relatively few date-sensitive systems in place, and most major
non-IT systems are the responsibility of landlords and other
service providers. It is currently estimated that any requirements
for replacement or modification to non-IT systems will not have a
material effect on the Company's business, financial condition or
results of operations.
Customers and Suppliers
The Company does not foresee any serious Year 2000 Problems
occurring with its vendors and customers. Although the Company has
not yet received any written assurances of compliance, it is
requesting statements of Year 2000 compliance from its vendors.
While it is not possible to predict all issues which could arise
relating to a supplier, the Company believes that it has multiple
sources for most of the materials and supplies it presently
procures from vendors or third party contractors. Unless a
national or global problem occurs, the Company believes it will be
able to continue production while it seeks to rectify any supplier
issues that may arise. Because the Company's primary customers
include the U.S. Government and large corporations with substantial
financial resources, the Company believes that these customers are
taking appropriate steps to protect themselves, and indirectly, the
Company from business losses resulting from Year 2000 issues.
Most Likely Consequences of Year 2000 Problems
The Company expects to identify and resolve all Year 2000 Problems
that could materially adversely affect its business, financial
condition or results of operations. However, the Company believes
that it is not possible to determine with complete certainty that
all Year 2000 Problems affecting the Company have been identified
or corrected. The number of devices that could be affected,
directly or indirectly, and the interactions among these devices
are simply too numerous to ensure 100% compliance. Accordingly,
the Company cannot accurately predict how many failures related to
the Year 2000 Problem will ultimately occur or the severity,
duration or financial consequences of such failures. As a result,
the Company expects that there is some risk of the following
consequences:
- A significant number of operational inconveniences and
inefficiencies for the Company and its customers that may
divert management's time and attention and financial and
human resources from its ordinary course of business
activities; and
- A number of serious system failures that may require
significant efforts by the Company or its customers to
prevent or alleviate material business disruptions.
Contingency Plans
The Company is currently developing contingency plans to be
implemented as part of its efforts to identify and correct Year
2000 Problems affecting its internal systems. Depending on the
systems affected, these plans could include (1) accelerated
replacement of affected equipment or software, (2) short-to-medium-
term use of backup equipment and software, (3) increased work hours
for Company personnel or the use of contract personnel to correct
any Year 2000 Problems which may arise, (4) manual backup systems
to forestall any interruption of operations resulting from the
failure of automated systems, (5) and other similar approaches. If
the Company is required to implement any of these contingency
plans, such plans could have a material adverse effect on the
Company's business, financial condition or results of operations.
As noted above, however, the Company does not presently believe
that the Year 2000 Problem will have a material adverse effect on
the Company's business, financial condition or results of
operations.
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 Danish subsidiary, the Company's intent to
take certain action in the future, the impact of Year 2000 issues
on the Company's operations, and the Company's ability to achieve
Year 2000 compliance 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, estimates of time and
money to assess and address Year 2000 issues, the continuing
availability of experienced personnel to deal with Year 2000
issues, the timely availability of software patches from existing
suppliers of software, the ability of third parties to complete
their own remediations of Year 2000 issues on a timely basis, the
ability to identify and implement contingency plans to deal with
Year 2000 issues, unanticipated problems identified in the
Company's ongoing Year 2000 compliance review, and actions with
respect to utilization and renewal of contracts.
PRECISION STANDARD,INC.
OTHER INFORMATION
PART II.
Item 1 Legal Proceedings
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 involuntary
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.
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
None.
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: 11/18/98 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)
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