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, 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 latest practicable date:
Class of Securities Outstanding Securities
$.0001 Par Value 3,978,137 shares
Common Shares Outstanding at November 11, 1999
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED AND CONDENSED BALANCE SHEETS
ASSETS
(In Thousands)
September 30, December 31,
1999 1998
(Unaudited)
Current assets:
Cash and cash equivalents $ 1,753 $ 193
Accounts receivable, net 19,554 17,434
Inventories 20,182 15,286
Prepaid expenses and other 1,197 995
Total current assets 42,686 33,908
Property, plant and equipment,
at cost:
Leasehold improvements 11,937 11,242
Machinery and equipment 20,184 18,656
32,121 29,898
Less accumulated depreciation (20,975) (19,252)
Net property, plant and
equipment 11,146 10,646
Other non-current assets:
Prepaid pension costs 1,975 2,888
Intangible assets, net 289 483
Related party receivable 270 270
Deposits and other 1,392 1,274
3,926 4,915
Total assets $57,758 $ 49,469
The accompanying notes are an integral part of
these consolidated and condensed financial statements.
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED AND CONDENSED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
(In Thousands)
September 30, December 31,
1999 1998
(Unaudited)
Current liabilities:
Current portion of debt $ 360 $ 1,454
Accounts payable and accrued
expenses 33,742 29,168
Total current liabilities 34,102 30,622
Long-term debt 20,109 21,824
Other long-term liabilities 3,021 3,063
Total liabilities 57,232 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
September 30, 1999 and December 31,
1998, respectively 1 1
Additional paid-in capital 4,768 4,768
Accumulated deficit (4,243) (10,809)
Total stockholders' equity 526 (6,040)
Total liabilities and
stockholders' deficit $57,758 $ 49,469
The accompanying notes are an integral part of
these consolidated and condensed financial statements.
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
Three Three
Months Ended Months Ended
September 30, September 30,
1999 1998
(Unaudited) (Unaudited)
Net sales $45,891 $ 32,091
Cost of sales 36,944 26,003
Gross profit 8,947 6,088
Selling, general and
administrative expenses 5,484 3,925
Bad debt recovery (expense) 0 (100)
Research and development expense 0 0
Income from operations 3,463 2,263
Other (income) expense:
Interest expense 825 991
Other, net 801 (216)
Income before income taxes 1,837 1,488
Provision for income taxes 50 (31)
Net income $ 1,787 $ 1,519
Net income per common share:
Basic $ 0.45 $ 0.39
Diluted $ 0.43 $ 0.38
The accompanying notes are an integral part of
these consolidated financial statements.
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
Nine Nine
Months Ended Months Ended
September 30, September 30,
1999 1998
(Unaudited) (Unaudited)
Net sales $125,494 $105,765
Cost of sales 100,048 84,520
Gross profit 25,446 21,245
Selling, general and
administrative expenses 14,860 13,390
Bad debt expense (recovery) 0 (350)
Research and development expense 0 125
Income from operations 10,586 8,080
Other (income) expense:
Interest expense 2,447 2,295
Other, net 1 343 (3,073)
Income before income taxes 6,796 8,858
Provision for income taxes 230 20
Net income $ 6,566 $ 8,838
Net Income per common share
Basic $ 1.65 $ 2.35
Diluted $ 1.61 $ 2.24
The accompanying notes are an integral part of
these consolidated financial statements.
EFFECTED FOR RECLASSES
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
Nine Nine
Months Ended Months Ended
September 30, September 30,
1999 1998
(Unaudited) (Unaudited)
Cash flows from operating
activities:
Net income $ 6,566 $ 8,838
Adjustments to reconcile net
income to net cash used in
operating activities:
Depreciation and amortization 1,917 1,625
Loss (gain) on sale of equipment 0 (3,137)
Changes in assets and liabilities:
Accounts receivable, trade (2,120) (8,505)
Inventories (4,896) (1,938)
Prepaid expenses and other (202) 485
Deposits and other (118) (3)
Prepaid pension cost 913 914
Accounts payable and accrued
expenses 4,532 (1,358)
Total adjustments 26 (11,917)
Net cash provided by (used in)
operating activities 6,592 (3,079)
Cash flows from investing
activities:
Proceeds from sale of division 0 4,790
Capital expenditures (2,223) (872)
Net cash provided by
(used in) investing
activities (2,223) 3,918
Cash flows from financing
activities:
Net borrowings (repayments)
under revolving credit
facility (1,715) 0
Net repayments under
short-term obligations (1,094) (912)
Net cash provided by
(used in) financing
activities (2,809) (912)
Net increase in cash
and cash equivalent 1,560 (73)
Cash and cash equivalents,
beginning of period 193 369
Cash and cash equivalents,
end of period $ 1,753 $ 296
Supplemental disclosure of
cash flow information:
Cash paid during the year
for:
Interest $2,447 $ 1,818
Income taxes $ 230 $ 20
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 September 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:
September 30, December 31,
1999 1998
($ thousands) ($ thousands)
Work in-process $31,094 $30,185
Finished goods 3,395 3,324
Raw materials and supplies 5,142 2,967
Total $39,631 $36,476
Less progress payments
and customer deposits (19,449) (20,708)
Less allowance for
estimated losses on
work in process 0 (482)
$20,182 $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 nine months ended
September 30, 1999 and 1998:
For the three and nine months ended September 30:
(All numbers in thousands except Income Per Share)
Three Months Nine Months
Ended Ended
September 30 September 30
1999
Net Income $1,787 $ 6,566
Weighted Average Shares 3,978 3,978
Basic Net Income Per Share $ 0.45 $ 1.65
Dilutive securities:
Options 174 110
Diluted Weighted Average Shares 4,152 4,088
Diluted Net Income Per Share $ 0.43 $ 1.61
1998
Net income $1,519 $ 8,838
Weighted Average Shares 3,853 3,764
Basic Net Income Per Share $ 0.39 $ 2.35
Dilutive Securities:
Options 13 6
Warrants 101 172
Diluted Weighted Average shares 3,967 3,943
Diluted Net Income Per Share $ 0.38 $ 2.24
5. NOTES PAYABLE
September 30, December 31,
1999 1998
($ Thousands) ($ Thousands)
(Unaudited)
Revolving credit facility $13,212 $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 1,107 1,580
Total debt $20,469 $23,278
Less portion reflected
as current 360 1,454
Long term debt, net of
current portion $20,109 $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 third quarter of 1999 the Company generated $6,592 in
cash from operations.
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.
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. The Company has been informed by trustees of the
bankruptcy estate that 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.
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.
On October 13, 1998, the Company filed a complaint in the U.S.
District Court, Northern District of Alabama seeking to compel
the United States Air Force to reopen for competition a KC-135
PDM contract awarded to the McDonnell Douglas subsidiary of
Boeing and to enforce the General Accounting Office (GAO)
decision in favor of the Company which stated that the manner
in which the contract was put up for bids violated the
Competition in Contracting Act by unduly restricting
competition. On October 5, 1999, the Court issued a summary
judgement in favor of McDonnell Douglas. The Company
continues to believe that the GAO correctly decided the issue,
and plans to pursue its appeal rights.
On September 17, 1999 the Alabama Supreme Court unanimously
reversed and rendered the November 3, 1997 verdict of a
Jefferson County Alabama jury against the Company's Pemco
Aeroplex subsidiary. The November 3, 1997 verdict was in the
amount of $1 million compensatory and $3 million punitive
damages, but was subsequently reduced by post-trial motions to
$1 million in compensatory damages. The plaintiff has filed
a petition for a re-hearing. In light of the unanimous
decision by the Supreme Court, the Company believes that a re-
hearing of the case is unlikely.
In September 1999, the Company's Pemco Aeroplex subsidiary was
served with a complaint filed by Sun Country Airlines in the
Superior Court of the State of California for the County of
San Bernardino, alleging various claims including breach of
contract and negligence relating to maintenance services
performed by the Company's Victorville operation on one of Sun
Country's aircraft. The complaint seeks damages in excess of
$800,000. Based on information currently available, the
Company believes the plaintiff's claims have no factual basis
and will vigorously defend this case.
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 any such
litigation will have a material adverse effect on the
Company's consolidated financial position or results of
operations.
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 September 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 September 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:
Three months ending September 30, 1999
(In $ Thousands)
Mfg. and Consoli-
Government Commercial Overhaul Other dated
Revenues from
external,
domestic
customers $23,379 $12,543 $ 6,624 $ 23 $ 42,569
Revenues from
external
foreign
customers 0 3,322 0 0 3,322
Intersegment
revenues 16 0 175 191
Total
Segment
Revenues $23,395 $15,865 $ 6,799 $ 23 $ 46,082
Elimination (191)
Total Revenues $ 45,891
Gross Profit 5,287 2,762 1,329 (431) 8,947
Segment Op
Inc. 2,771 845 245 (398) 3,463
Interest
Expense 825
Other 801
Benefit
for Income
Taxes 50
Net Income $ 1,787
Assets $27,964 $14,509 $ 14,874 $ 411 $ 57,758
Deprec/Amort 273 187 161 376 997
Cap. Additions 781 109 153 0 1,043
Nine Months Ending September 30, 1999
(In $ Thousands)
Mfg. and Consoli-
Government Commercial Overhaul Other dated
Revenues from
external,
domestic
customers $64,662 $31,421 $19,882 $ 224 $116,189
Revenues from
external
foreign
customers 0 9,305 0 0 9,305
Intersegment
revenues 51 0 299 350
Total
Segment
Revenues $64,713 $40,726 $20,181 $ 224 $125,844
Elimination (350)
Total Revenues $125,494
Gross Profit 15,243 6,932 4,002 (731) 25,446
Segment Op
Inc. 8,691 1,999 654 (758) 10,586
Interest
Expense 2,447
Other 1,343
Benefit
for Income
Taxes 230
Net Income $ 6,566
Assets $27,964 $14,509 $ 14,874 $ 411 $ 57,758
Deprec/Amort 742 460 397 318 1,917
Cap. Additions 1,259 369 594 0 2,223
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 1999, the Company continued its return
to profitability. The Company reported operating income of $3.5
million for the three months ended September 30, 1999 and a
combined operating income of $10.6 million for the first nine
months of 1999. Total income before taxes for these periods was
$1.8 million and $6.8 million, respectively.
RESULTS OF OPERATIONS
Three months ended September 30, 1999
versus three months ended September 30, 1998
Revenues from operations for the third quarter of 1999 grew from
the third quarter of 1998, increasing 43.0% from $32.1 million in
1998 to $45.9 million in 1999. Government sales increased
approximately 50% from $18.8 million in 1998 to $28.1 million in
1999. Commercial sales increased 34% from $13.3 million in 1998 to
$17.8 million in 1999. The Company's mix of business between
government and commercial customers moved from 41% commercial and
59% government in 1998 to 39% commercial and 61% government in 1999
during the same period.
Government sales in the third quarter of 1999 increased
approximately $9.3 million due primarily to increases in sales of
$6.7 million under the Birmingham facility's KC-135 & C-130
contracts, $1.9 million under the H-3 Helicopter contract at the
Dothan facility, and $0.7 million under contracts at the Space
Vector facility.
Commercial sales increased $4.3 million under aircraft
maintenance/modification contracts at the Dothan facility, and $0.2
million in other commercial operations.
Cost of sales increased from $26.0 million in 1998 to $36.9 million
in the third quarter of 1999. The ratio of cost of sales to net
sales decreased from 81.0% in the third quarter of 1998 to 80.5% in
1999.
Selling, general and administrative expenses increased from $3.9
million in the third quarter of 1998 to $5.5 million in 1999.
However, SG&A as a percentage of sales decreased from 12.2% in 1998
to 12.0% in 1999.
Interest expense decreased from $1.0 million in the third quarter
of 1998 to $0.8 million in the third quarter of 1999.
Nine months ended September 30, 1999
versus nine months ended September 30, 1998
Revenues from operations for the first nine months of 1999 grew
from the same period of 1998, increasing 18.7% from $105.8 million
in 1998 to $125.5 million in 1999. Government sales increased
approximately 29.3% from $59.5 million in 1998 to $76.9 million in
1999. Commercial sales increased by 5% from $46.3 million in 1998
to $48.6 million in 1999. The Company's mix of business between
government and commercial customers moved from 44% commercial and
56% government in 1998 to 39% commercial and 61% government in 1999
during the same period.
Government sales on a year to date basis at the end of the third
quarter of 1999 increased $17.4 million due primarily to increases
in sales of $14.5 million under the Birmingham facility's KC-135
and C-130 contracts, $2.7 million under contracts at Space Vector,
and $0.2 million under contracts at the Dothan facility.
Commercial sales increased $3.8 million under aircraft
maintenance/modification contracts at the Dothan and Victorville
facilities, and decreased by $1.5 million in other commercial
operations.
Cost of sales increased from $84.5 million in 1998 to $100.0
million in 1999. The ratio of cost of sales to net sales decreased
slightly from 79.9% in 1998 to 79.7% in 1999.
Selling, general and administrative expenses increased from $13.4
million in 1998 to $14.9 million in 1999. As a percentage of sales
SG&A decreased from 12.7% in 1998 to 11.8% in 1999.
Interest expense was $2.4 million in the nine months ending
September 30, 1999 versus $2.3 million in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The following is a discussion of the significant items in the
Company's Consolidated Statement of Cash Flows for the nine months
ending September 30, 1999 and 1998.
During the nine months ending September 30, 1999, the Company
generated $6.6 million in cash from operating activities. In 1998,
$3.1 million was used for operating activities.
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 third quarter of 1999, the Company made no contributions to the
pension plan and expensed approximately $0.3 million. In the third
quarter of 1998, the Company made no contributions to the pension
plan and expensed approximately $0.3 million.
Accounts payable and accrued expenses increased from $29.2 million
at December 31, 1998 to $33.7 million at September 30, 1999.
Accrued interest payments at September 30, 1999 were $0.2 million
representing no increase over that due at December 31, 1998.
Accounts receivable increased from $17.4 million at December 31,
1998, to $19.6 million at the end of the third quarter of 1999.
Net inventories increased $4.9 million during 1999 primarily due to
an increase in the total work in process related to the KC-135
contract.
In October 1999 the government exercised its 5th and 6th option
years on the Company's KC-135 contract, extending the contract
through fiscal year 2001, with an estimated revenue value of $100
million.
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 September 30, 1999 and 1998:
1999 1998
U.S. Government $168,604 $144,012
Commercial 17,668 22,070
$186,272 $166,082
As of September 30, 1999, 91% of the Company's backlog related to
work for the U.S. Government vs. 87% for the period ending
September 30, 1998. The Company's Government backlog increased
$24.6 million primarily related to additional aircraft input under
the Company's KC-135 contract and a contract for the painting of C-
130 aircraft awarded to the Birmingham facility.
1999 1998
Firm, unfunded Backlog $39.5 million $45.1 million
Additional estimated
sales to be derived
from backlog contracts $260.1 million $264.0 million
CONTINGENCIES
See Note 6 to the Consolidated Financial Statements.
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 Company's "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 has
reviewed 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 by year end.
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 all 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 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 complete 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 Year 2000 issue, the new system is
expected to substantially improve the Maintenance Repair & Overhaul
(MRO) process resulting in greater efficiencies in MRO operations.
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 requiring direct computer
interface with customers or suppliers. 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
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 has outlined contingency plans to be implemented as
part of its efforts in correcting Year 2000 Problems affecting its
internal systems. Depending on the systems affected, these plans
include (1) short-to-medium-term use of backup software, (2)
increased work hours for Company personnel or the use of contract
personnel to correct any Year 2000 Problems which may arise, (3)
manual backup systems to forestall any interruption of operations
resulting from the failure of automated systems, and (4) 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. The Company has obtained a $1.5
million Letter of Credit which may, under certain specified
circumstances, be utilized for Year 2000 expenses that are not
otherwise financed.
FORWARD LOOKING STATEMENTS
With the exception of historical facts, statements contained in
this Form 10-Q are forward looking statements. Statements
contained herein concerning, among other things, 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. These risks and
uncertainties could cause actual results to differ materially from
those forecast or anticipated in such forward looking statements.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The Company is exposed to market risk from changes in interest
rates as part of its normal operations. The Company maintains
various debt instruments to finance its business operations. The
debt consists of fixed and variable rate debt. The variable rate
debt is related to the Company's revolving line of credit as noted
in Note 5 to the Consolidated Financial Statements and bears
interest at prime plus 3.5% (11.75% at September 30, 1999). If the
prime rate increased 100 basis points, the effect on net income
would approximate a $46,000 reduction in net income in the quarter
ending September 30, 1999 and an approximate $131,000 reduction in
net income for the nine month period ending September 30, 1999.
PART II. OTHER INFORMATION
Item 1 Legal Proceedings
See Note 6 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
None
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K dated September 7, 1999 under
Item 1 was filed with the Commission on September
8, 1999.
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: 11/15/99 By: /s/ Matthew L. Gold
Matthew L. Gold
President
and Chief Executive Officer
and Director
(Principal Executive Officer)
Date: 11/15/99 By: /s/ Richard G. Godin
Vice President Finance
(Principal Financial and
Accounting Officer)
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