SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended Commission File No. 0-13829
June 30, 1999
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 3,978,137 shares
Common Shares Outstanding at June 30, 1999
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(In Thousands)
June 30, December 31,
1999 1998
(Unaudited)
Current assets:
Cash and cash equivalents $ 1,473 $ 193
Accounts receivable, net 22,055 17,434
Inventories 21,434 15,286
Prepaid expenses and other 1,404 995
Total current assets 46,366 33,908
Property, plant and equipment,
at cost:
Leasehold improvements 11,732 11,242
Machinery and equipment 19,346 18,656
31,078 29,898
Less accumulated depreciation (20,172) (19,252)
Net property, plant and
equipment 10,906 10,646
Other non-current assets:
Prepaid pension costs 2,279 2,888
Intangible assets, net 354 483
Related party receivable 270 270
Deposits and other 1,349 1,274
4,252 4,915
Total assets $61,524 $ 49,469
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
(In Thousands)
June 30, December 31,
1999 1998
(Unaudited)
Current liabilities:
Current portion of debt $ 237 $ 1,454
Accounts payable and accrued
expenses 34,440 29,168
Total current liabilities 34,677 30,622
Long-term debt 25,086 21,824
Other long-term liabilities 3,022 3,063
Total liabilities 62,785 55,509
Stockholders' equity:
Common stock, $.0001 par value,
300,000,000 shares authorized,
3,978,137 and 3,977,721 shares
issued and outstanding at
June 30, 1999 and December 31,
1998, respectively 1 1
Additional paid-in capital 4,768 4,768
Accumulated deficit (6,030) (10,809)
Total stockholders' deficit (1,261) (6,040)
Total liabilities and
stockholders' deficit $61,524 $ 49,469
The accompanying notes are an integral part of
these consolidated financial statements.
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
Three Three
Months Ended Months Ended
June 30, June 30,
1999 1998
(Unaudited) (Unaudited)
Net sales $39,718 $39,219
Cost of sales 32,557 30,703
Gross profit 7,161 8,516
Selling, general and
administrative expenses 3,459 4,941
Bad debt expense (recovery) 0 (250)
Research and development expense 0 0
Income from operations 3,702 3,825
Other (income) expense:
Interest expense 660 637
Other, net 118 381
Income before income
taxes 2,924 2,807
Provision for income taxes 95 25
Net income $ 2,829 $ 2,782
Net income per common share:
Basic $ 0.71 $ 0.74
Diluted $ 0.70 $ 0.71
The accompanying notes are an integral part of
these consolidated financial statements.
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
Six Six
Months Ended Months Ended
June 30, June 30,
1999 1998
(Unaudited) (Unaudited)
Net sales $79,603 $73,673
Cost of sales 63,104 58,517
Gross profit 16,499 15,156
Selling, general and
administrative expenses 9,376 9,464
Bad debt expense (recovery) 0 (250)
Research and development expense 0 125
Income from operations 7,123 5,817
Other (income) expense:
Interest expense 1,622 1,304
Other, net 542 (2,857)
Income before income
taxes 4,959 7,370
Provision for income taxes 180 50
Net income $ 4,779 $ 7,320
Net Income per common share
Basic 1.20 $ 1.97
Diluted 1.18 $ 1.87
The accompanying notes are an integral part of
these consolidated financial statements.
EFFECTED FOR CLIENT RECLASSES
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
Six Six
Months Ended Months Ended
June 30, 1999 June 30, 1998
(Unaudited) (Unaudited)
Cash flows from operating
activities:
Net income $ 4,779 $ 7,320
Adjustments to reconcile net
income to net cash used in
operating activities:
Depreciation and amortization 920 977
Pension cost in excess of
funding 609 0
Loss (gain) on sale of equipment 0 (3,124)
Changes in assets and liabilities:
Accounts receivable, trade (4,621) (4,695)
Inventories (6,148) (2,132)
Prepaid expenses and other (409) 1,021
Deposits and other (75) (3)
Accounts payable and accrued
expenses 4,014 (234)
Total adjustments (5,710) (8,190)
Net cash provided by (used in)
operating activities (931) (870)
Cash flows from investing
activities:
Proceeds from sale of division 0 4,790
Capital expenditures (1,051) (218)
Net cash provided by
(used in) investing
activities (1,051) 4,572
Cash flows from financing
activities:
Net borrowings (repayments)
under revolving credit
facility 3,262 (3,679)
Net cash provided by
(used in) financing
activities 3,262 (3,679)
Net increase in cash
and cash equivalent 1,280 23
Cash and cash equivalents,
beginning of period 193 369
Cash and cash equivalents,
end of period 1,473 392
Supplemental disclosure of
cash flow information:
Cash paid during the year
for:
Interest $1,622 $ 1,261
Income taxes $ 180 $ 50
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 have been
prepared by the Company without audit. In the opinion of
management, all adjustments necessary for a fair presentation
are reflected in the interim financial statements. Such
adjustments are of a normal and recurring nature. The results
of operations for the period ended June 30, 1999 are not
necessarily indicative of the operating results expected 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 1998 Form 10-K.
2. PENDING ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and
Hedging Activities. This Statement establishes accounting and
reporting standards for derivative instruments embedded in
other contracts (collectively referred to as derivatives) and
for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments
at fair value. This Statement is effective as of the
beginning of fiscal years ending after June 15, 1999.
Management does not believe that the Statement will have a
significant impact on the presentation of the Company's
financial condition or results of operation.
In June 1999, the FASB issued SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133 from fiscal
quarters of all fiscal years beginning after June 15, 1999,
with earlier application encouraged to fiscal quarters of all
fiscal years beginning after June 15, 2000.
3. INVENTORIES
Inventories consist of the following:
June 30, December 31,
1999 1998
($ thousands) ($ thousands)
(Unaudited)
Work in-process $31,978 $30,185
Finished goods 3,404 3,324
Raw materials and supplies 4,845 2,967
Total $40,227 $36,476
Less progress payments
and customer deposits (18,366) (20,708)
Less allowance for
estimated losses on
work in process (427) (482)
$21,434 $15,286
4. NET INCOME PER SHARE
Basic EPS was computed by dividing net income by the weighted
average number of shares of common stock outstanding during
the periods. Dilution was computed by dividing net income by
the weighted average number of shares of common stock and the
dilutive effects of the shares awarded under the Stock Option
plan and stock warrants, based on the treasury stock method
using an average fair market value of the stock during the
respective periods.
The following table represents the net income per share
calculations for the three months and six months ended June
30, 1999 and 1998:
For the three and six months ended June 30:
(All numbers in thousands except Income Per Share)
Three Months Six Months
Ended Ended
June 30 June 30
1999
Net Income $2,829 $ 4,779
Weighted Average Shares 3,978 3,978
Basic Net Income Per Share .71 1.20
Dilutive securities:
Options 58 72
Warrants 0 0
Diluted Weighted Average Shares 4,036 4,050
Diluted Net Income Per Share .70 1.18
1998
Net income 2,782 $ 7,320
Weighted Average Shares 3,748 3,707
Basic Net Income Per Share .74 1.97
Dilutive Securities:
Options 2 2
Warrants 171 208
Diluted Weighted Average shares 3,921 3,918
Diluted Net Income Per Share .71 1.87
5. NOTES PAYABLE
June 30, December,31,
1999 1998
($ Thousands) ($ Thousands)
(Unaudited)
Revolving credit facility $17,874 $15,548
Senior Subordinated Loan
interest at 13.5% 6,150 6,150
Other obligations: interest
from 6 to 18%, collateralized
by security interests in
certain equipment 1,299 1,580
Total debt $25,323 $23,278
Less portion reflected
as current 237 1,454
Long term debt, net of
current portion $25,086 $21,824
On August 8, 1997, the Company entered into a three-year
revolving credit facility with a 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 fluctuate on a daily basis. Interest on the revolving
credit facility accrues at prime rate plus 1.5% with
provisions for both reductions in the interest rate based on
specific operating performance targets and increases related
to certain events of default. Interest is accrued and charged
to the loan balance on a monthly basis.
From time to time the lender has allowed the Company to exceed
the $17 million cap due to the Company having funds in excess
of the cap in its lockbox which had not been drawn down and
applied to the revolving credit facility by the lender. The
lender is not required to permit the Company to exceed the cap
at any time in the future.
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 covenants which limit
or prohibit the Company from incurring additional
indebtedness, disposing of assets, merging with other
entities, declaring dividends, or making capital expenditures
in excess of certain amounts in any fiscal year.
Additionally, the Company is required to maintain various
financial ratios and minimum net worth amounts.
In the second quarter of 1999 the Company used cash in
operations primarily due to delays in progress payments for
amounts billed to the U.S. Government and increased workloads
under government contracts resulting in an increase in both
accounts receivable and work in process. Most of the delays
in progress payments were corrected in the third quarter.
6. CONTINGENCIES
United States Government Contracts - The Company, as a U.S.
Government contractor, is subject to audits, reviews, and
investigations by the government related to its negotiation
and performance of government contracts and its accounting for
such contracts. Failure to comply with applicable U.S.
Government standards by a contractor may result in suspension
from eligibility for award of any new government contract and
a guilty plea or conviction may result in debarment from
eligibility for awards. The government may, in certain cases,
also terminate existing contracts, recover damages, and impose
other sanctions and penalties. The Company believes, based on
all available information, that the outcome of the U.S.
Government's audits, reviews, and investigations will not have
a materially adverse effect on the Company's consolidated
results of operations, financial position, or cash flows.
Litigation - The purported class action brought against the
Company and its Pemco Aeroplex subsidiary on behalf of those
persons hired as replacement workers during the strike by
Pemco's United Auto Worker ("UAW") union employees who were
terminated upon settlement of such strike was dismissed in the
third quarter. However, a new action was filed by
approximately 28 individuals shortly thereafter. The Company
continues to believe the plaintiffs' claims have no factual
basis and will vigorously defend the case.
The Company's Pemco Aeroplex subsidiary, successor to Hayes
International, is a defendant in several suits seeking damages
and indemnity for claims arising from an Airworthiness
Directive issued by the FAA. That Directive restricts the
cargo capacity of Boeing 747 aircraft converted pursuant to an
STC for such conversions. Hayes International had performed
engineering for the development of the STC. Certain of the
suits also allege fraud, misrepresentation and violations of
the Racketeer Influenced and Corrupt Organization Act.
Management believes that Pemco has no liability under the
claims.
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
STCs for Boeing 747 cargo conversions owned by GATX and
others. The complaint filed in U.S. District Court of the
Northern District of California, also names American
International Airways, Inc., a plaintiff in one of the
underlying cases, as a defendant. Pemco Aeroplex has filed a
motion to stay the action pending resolution of the underlying
cases.
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 has appealed this decision. The Company
believes the decision will be reversed upon appeal.
Nevertheless, 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 which was denied by the court on January 13, 1999.
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. Based on the
information currently available, the Company believes that
such claims may or may not be assertive against the Company.
The Company has not made any additional reserves related to
these claims.
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.
Year 2000 Compliance
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.
Internal Infrastructure
The Company's assessment of its existing computer systems
revealed that a portion of its software programs and hardware
were 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.
Based on information gathered to date, the Company has taken
steps to address the potential impacts of year 2000 compliance
on its financial accounting, manufacturing, and production
systems. For most operating units the primary focus in
achieving year 2000 compliance will be relatively minor
upgrades to existing systems.
The Company has determined that one of its operating units
will require a major system replacement. Implementation was
begun during the first quarter of 1999 and is currently
scheduled for completion at the end of the fourth quarter,
with cut over to the new system during the last two weeks of
the quarter. The new system is Oracle based and runs on a
Hewlett Packard server.
In addition to addressing the Y2K issue, the new system
substantially improves the Maintenance Repair & Overhaul (MRO)
process and the Company anticipates improved efficiencies.
The Company does not presently exchange data electronically
with outside entities and its production capability does not
rely on systems such as Just In Time Inventory. The Company
has determined that its production and manufacturing
operations could continue through the use of a combination of
automated and manual systems, if necessary, and therefore, the
impact, if any, of Year 2000 failures by outside entities
should not be material to the Company's operations or
financial condition.
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 written assurances of compliance,
it has requested 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. Although it
is not possible to quantify the effects Year 2000 compliance
will have on the Company's customers or suppliers, the Company
does not anticipate related material adverse effects on its
financial condition, liquidity or results of operations.
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.
Total hardware, software, networking, and implementation costs
for the Company's year 2000 compliance efforts are estimated
at approximately $4.5 million which will be incurred over a
one year period. The costs are expected to be financed by
various vendors over periods of 36 to 42 months.
During July, two of the Company's operating units achieved
Year 2000 compliance with their main production software and
hardware servers. One of the operating units is 100%
compliant with the other needing only to order and install a
relatively small number of personal computers to finalize its
compliance project.
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.
7. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130 on January 1, 1998, which
establishes standards for reporting and display of
comprehensive income and its components. Comprehensive income
is a measure of all nonowner changes in equity of an
enterprise that result from transactions and other economic
events of the period. The Company did not have any material
differences in net income and comprehensive income for the
quarters ended June 30, 1999 or 1998.
8. SEGMENT AND RELATED INFORMATION
The Company adopted SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, at December 31, 1998
which changes the way the Company reports information about
its operating segments. The Company has provided this segment
information for the period ended June 30, 1999; however, the
Company has not provided such information for the prior year
as it is not practical to capture the relevant information for
the prior year.
The Company has three reportable segments: Government Services
Group, Commercial Services Group, and Manufacturing and
Overhaul Group. The Government Services Group, located
primarily in Birmingham, Alabama, provides aircraft
maintenance and modification services for the government and
military customers. The Commercial Services Group, located in
Dothan, Alabama, and Victorville, California provides
commercial aircraft maintenance and modification services on
a contract basis to the owners and operators of large
commercial aircraft. The Manufacturing and Overhaul Group,
located in California and Florida, designs and manufactures a
wide array of proprietary aerospace products including various
space systems, such as guidance control systems and launching
vehicles; aircraft cargo-handling systems; and precision parts
and components for aircraft. For reporting purposes, segments
other than government, commercial and manufacturing and
overhead are combined as another segment. These additional
segments perform engineering and support services for the
three main business segments.
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies.
The Company evaluates performance based on total (external and
intersegment) revenues, gross profits and operating income.
The Company accounts for intersegment sales and transfers as
if the sales or transfers were to third parties, that is at
current market prices. The Company does not allocate income
taxes, interest income and interest expense to segments. The
amount of intercompany profit is not material.
The Company's reportable segments are strategic business units
that offer different products and services. They are managed
separately because each business requires different operating
and marketing strategies. However, the Commercial and
Manufacturing and Overhaul segments may generate sales to
Governmental entities and the Government segment may generate
sales to commercial entities.
The following tables present information about segment profit or loss:
Second Quarter 1999
(In $ Thousands)
Mfg. and Consoli-
Government Commercial Overhaul Other dated
Revenues from
external,
domestic
customers $18,861 $11,610 $ 6,085 $ 18 $ 36,575
Revenues from
external
foreign
customers 0 3,144 0 0 3,144
Intersegment
revenues 20 0 95 0 115
Total
Segment
Revenues $18,881 $14,754 $ 6,180 $ 18 $ 39,833
Elimination (115)
Total Revenues $ 39,718
Gross Profit 2,486 3,237 1,746 (308) 7,161
Segment Op
Inc. 2,240 801 5 (244) 2,802
Interest
Expense 660
Other (782)
Benefit
for Income
Taxes 95
Net Income $ 2,829
Assets $30,113 $16,265 $ 14,537 $ 609 $ 61,524
Deprec/Amort 71 163 140 0 374
Cap. Additions 248 141 357 0 746
Six Months Ending June 30, 1999
(In $ Thousands)
Mfg. and Consoli-
Government Commercial Overhaul Other dated
Revenues from
external,
domestic
customers $41,283 $18,878 $13,258 $ 200 $ 73,619
Revenues from
external
foreign
customers 0 5,984 0 0 5,984
Intersegment
revenues 35 0 125 0 160
Total
Segment
Revenues $41,318 $24,862 $13,383 $ 200 $ 79,763
Elimination (160)
Total Revenues $ 79,603
Gross Profit 9,956 4,171 2,673 (301) 16,499
Segment Op
Inc. 5,931 1,126 405 (339) 7,123
Interest
Expense 1,622
Other 542
Benefit
for Income
Taxes 180
Net Income $ 4,779
Assets $30,113 $16,265 $ 14,537 $ 609 $ 61,524
Deprec/Amort 437 258 224 1 920
Cap. Additions 426 232 393 0 1,051
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the
Company's consolidated financial statements and notes thereto
included herein.
During the second quarter of 1999, the Company continued its return
to profitability. The Company reported operating income of $3.7
million for the three months ended June 30, 1999 and a combined
operating income of $7.1 million for the first six months of 1999.
Total income before taxes for the first and second quarters of 1999
was $2.1 million and $2.9 million, respectively, for a combined
total income before taxes of $5.0 million. This includes non-
recurring income of $.2 million resulting from the return of 12
acres of property to the Birmingham Airport Authority.
RESULTS OF OPERATIONS
Three months ended June 30, 1999
versus three months ended June 30, 1998
Revenues from operations for the second quarter of 1999 grew from
the second quarter of 1998, increasing 1.3% from $39.2 million in
1998 to $39.7 million in 1999. Government sales increased
approximately 28% from $18.2 million in 1998 to $23.4 million in
1999. Commercial sales decreased 22% from $21 million in 1998 to
$16.3 million in 1999. The Company's mix of business between
government and commercial customers moved from 54% commercial and
46% government in 1998 to 41% commercial and 59% government in 1999
during the same period.
Government sales in the second quarter of 1999 increased
approximately $5.2 million due primarily to increases in sales of
$3.9 million under the Birmingham facility's KC-135 contract and
$1.3 million under contracts at the Space Vector facility.
Commercial sales decreased $4.1 million under aircraft
maintenance/modification contracts at the Dothan and Victorville
facilities, and $.6 million in other commercial operations.
This decrease in commercial sales was anticipated by the Company as
the second quarter of 1998 contained an unusually large volume of
commercial sales. Approximately 63% of the year to date sales for
Dothan and Victorville were made in the second quarter of 1998.
Cost of sales increased from $30.7 million in 1998 to $32.6 million
in the second quarter of 1999. The ratio of cost of sales to net
sales increased from 78.3% in the second quarter of 1998 to 82.0%
in 1999.
There were two strike related KC-135 aircraft delivered during the
quarter which contributed to this increase in cost of goods sold.
As of June 30, 1999, one additional aircraft remains in work in
process from the time of the strike which occurred between 1996 and
1997 at the Company's Birmingham facility.
Selling, general and administrative expenses decreased from $4.9
million in the second quarter of 1998 to $3.5 million in 1999.
Interest expense was relatively constant at $0.6 million in the
second quarters of 1998 and 1999.
Six months ended June 30, 1999
versus six months ended June 30, 1998
Revenues from operations for the first six months of 1999 grew from
the same period of 1998, increasing 8.1% from $73.7 million in 1998
to $79.6 million in 1999. Government sales increased approximately
26% from $37.9 million in 1998 to $47.9 million in 1999.
Commercial sales decreased 11% from $35.7 million in 1998 to $31.7
million in 1999. The Company's mix of business between government
and commercial customers moved from 49% commercial and 51%
government in 1998 to 40% commercial and 60% government in 1999
during the same period.
Government sales in the first half of 1999 increased approximately
$10.0 million due primarily to increases in sales of $8.0 million
under the Birmingham facility's KC-135 contract and $2.0 million
under contracts at the Space Vector facility.
Commercial sales decreased $2.2 million under aircraft
maintenance/modification contracts at the Dothan and Victorville
facilities, and by $1.8 million in other commercial operations,
primarily at the Pemco Nacelles operating unit.
Cost of sales increased from $58.5 million in 1998 to $63.1 million
in the first half of 1999. The ratio of cost of sales to net sales
decreased slightly from 79.4% in the first half of 1998 to 79.3% in
1999.
Selling, general and administrative expenses decreased from $9.5
million in the first half of 1998 to $9.4 million in 1999.
Interest expense was $1.6 million in first half 1999 versus $1.3
million in 1998.
LIQUIDITY AND CAPITAL RESOURCES
In the first half of 1999 the Company used cash in operations
primarily due to increases in the amounts billed to the U.S.
Government, additional workloads under government contracts, and in
a lengthened collection period of several large commercial invoices
at the Company's Dothan facility. This resulted in an increase in
both accounts receivable and work in process. Most of the delays
in commercial payments were corrected early in the third quarter.
The following is a discussion of the significant items in the
Company's Consolidated Statement of Cash Flows for the six months
ending June 30, 1999 and 1998.
The Company's pension expense as determined by its actuary for the
year 1999 is $1.1 million as compared to $1.2 million in 1998. In
the second quarter of 1999, the Company made no contributions to
the pension plan and expensed approximately $.3 million. In the
second quarter of 1998, the Company made no contributions to the
pension plan and expensed approximately $0.08 million.
Accounts payable and accrued expenses increased from $29.2 million
at December 31, 1998 to $34.4 million at June 30, 1999. Accrued
interest payments at June 30, 1999 were $0.2 million representing
no increase over that due at December 31, 1998.
Accounts receivable increased $4.6 million in the first half of
1999 due to an increase in billings on the KC-135 contract and a
delay of payments from several commercial customers which was
corrected in the third quarter.
Net inventories increased $6.1 million in the first half of 1999
primarily due to an increase in the total work in process.
During the first half of 1998, the Company's operating activities
used $0.9 million in cash. In the first half of 1999, a similar
amount of cash was used for operating activities.
During the second quarter of 1999, the Company allowed its
agreement with Houlihan, Lokey, Howard & Zukin to expire.
Notwithstanding the termination of that arrangement, the Company
continues to explore various strategic alternatives to enhance
shareholder value.
During 1997, 1998 and 1999, inflation and changing prices have had
no significant impact on the Company's net sales or revenues or on
income from continuing operations.
BACKLOG
The following table presents the Company's backlog (in thousands of
dollars) at June 30, 1999 and 1998:
1999 1998
U.S. Government $161,499 $137,067
Commercial 24,028 20,346
$185,527 $157,413
As of June 30, 1999, 87% of the Company's backlog related to work
for the U.S. Government. This percentage was identical for the
period ending June 30, 1998. The Company's Government backlog
increased $24.4 million primarily related to additional aircraft
input under the Company's KC-135 contract, a contract for the
painting of C-130 aircraft awarded to the Birmingham facility, and
an increase in NASA subcontract related work at the Company's Space
Vector operating unit.
1999 1998
Firm, unfunded Backlog $12.4 million $45.1 million
Additional estimated
sales to be derived
from backlog contracts $190.7 million $181.0 million
CONTINGENCIES
See Note 6 to the Consolidated Financial Statements.
FORWARD LOOKING STATEMENTS
With the exception of historical facts, statements contained in
Management's Discussion and Analysis are forward looking
statements. Statements contained herein concerning anticipated
results of operations, award of contracts, the outcome of pending
and future litigation, the outcome of audits, reviews and
investigations by the U.S. Government, the outcome of claims filed
with the U.S. Government, estimates of backlog, the outcome of
claims related to the 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
See Note 5 to Part I, Financial Statements
Item 2 Changes in Securities
None
Item 3 Defaults Upon Senior Securities
None
Item 4 Submission of Matters to a Vote of Security Holders
The Company's Annual meeting of shareholders was held on
June 1, 1999, after being adjourned from May 17, 1999. At the
meeting Matthew L. Gold, Donald C. Hannah, Admiral George E.R.
Kinnear II and General Thomas C. Richards were elected as
directors. The shareholders also ratified the appointment of
Arthur Andersen LLP as the Company's independent public accountants
for the year ending December 31, 1999 and approved amendments to
the Company's Nonqualified Stock Option Plan which included an
increase in the number of shares reserved under the Plan.
The number of votes cast for or withheld for each
director nominee was as follows:
Nominee For Withheld
Matthew L. Gold 2,575,042 137,676
Donald C. Hannah 2,577,917 134,801
Admiral George E.R. Kinnear II 2,578,067 134,651
General Thomas C. Richards 2,578,067 134,651
The number of votes cast for, against and abstentions for
ratification of auditors was as follows:
For Against Abstain
2,704,799 2,294 5,625
The number of votes cast for, against and abstentions for
approval of the amendments to the Company's Nonqualified Plan was
as follows:
For Against Abstain
2,481,759 219,667 11,292
The courier service utilized by the Company's stock
transfer agent delivered the proxy materials of certain brokers to
a wrong address. This error by the courier service was not
discovered for approximately one week at which time the materials
were sent to the appropriate brokers. The error resulted in a
lower than normal vote of proxy shares at the time of the
shareholders May 17, 1999 meeting. The shareholders meeting, which
did have a quorum, adjourned to June 1, 1999 to allow for the
possible receipt of additional proxy ballots. The Company did not
receive an appreciable increase in the proxy vote during the two
week adjournment. Accordingly, the election of directors,
ratification of auditors and approval of the amendments to the
Nonqualified Plan were considered nonroutine under applicable stock
exchange rules. Of the 1,730,132 proxy shares held in the names of
brokers as nominees which were not voted at the meeting by the
shareholders, only 548,472 were voted by the brokers at their
discretion.
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
PRECISION STANDARD, INC.
Date: 8/16/99 By: /s/ Matthew L. Gold
Matthew L. Gold
Chairman, President and
Chief Executive Officer
and Director
(Principal Executive Officer)
Date: 8/16/99 By: /s/ Richard G. Godin
Vice President Finance
(Principal Financial and
Accounting Officer)
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