SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended Commission File No. 0-13829
March 31, 2000
PRECISION STANDARD, INC.
(Exact Name of Registrant as Specified in its Charter)
Colorado 84-0985295
(State of Incorporation) (I.R.S. Employer Identification No.)
1943 North 50th Street
Birmingham, Alabama 35212
(Address of Principal Executive Offices)
(205) 592-0011
(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 4,018,570 shares
Common Shares Outstanding at May 9, 2000
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
------
(In Thousands)
March 31, December 31,
2000 1999
(Unaudited)
---------- -----------
Current assets:
Cash and cash equivalents $ 0 $ 527
Accounts receivable, net 19,156 21,131
Inventories 23,892 17,035
Prepaid expenses and other 4,001 3,763
Total current assets 47,049 42,456
-------- -------
Property, plant and equipment,
at cost:
Leasehold improvements 11,982 12,634
Machinery and equipment 21,957 19,780
-------- --------
33,939 32,414
Less accumulated depreciation (21,527) (20,858)
-------- --------
Net property, plant
and equipment 12,412 11,556
-------- --------
Other non-current assets:
Prepaid pension costs 1,476 1,780
Intangible assets, net 160 225
Deposits and other 1,425 1,386
-------- --------
3,061 3,391
-------- --------
Total assets $ 62,522 $ 57,403
======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
(In Thousands)
March 31, December 31,
2000 1999
(Unaudited)
---------- -------------
Current liabilities:
Current portion of debt $15,748 $15,104
Accounts payable and accrued
expenses 35,281 34,970
------- -------
Total current liabilities 51,029 50,074
Long-term debt 4,131 4,168
Other long-term liabilities 3,287 3,023
Total liabilities 58,447 57,265
------- --------
Stockholders' equity:
Common stock, $.0001 par value,
300,000,000 shares authorized,
4,010,815 and 3,978,137 shares
issued and outstanding at
March 31, 2000 and December 31,
1999, respectively 1 1
Additional paid-in capital 4,990 4,769
Accumulated deficit (916) (4,632)
------- --------
Total stockholder's equity 4,075 138
------- --------
Total liabilities and
stockholders' equity $62,522 $ 57,403
======= ========
The accompanying notes are an integral part of
these consolidated financial statements.
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
Three Three
Months Ended Months Ended
March, 31 March 31,
2000 1999
------------ ------------
Net sales $40,523 $39,885
Cost of sales 31,788 30,547
------- -------
Gross profit 8,735 9,338
Selling, general and
administrative expenses 4,251 5,917
------- -------
Income from operations 4,484 3,421
Other expense:
Interest expense 407 962
Other, net 72 424
------- -------
Income before income
taxes 4,005 2,035
Provision for income taxes 290 85
------- -------
Net income $ 3,715 $ 1,950
======= =======
Net income per common share:
Basic $0.93 $0.49
Diluted $0.90 $0.49
The accompanying notes are an integral part of
these consolidated financial statements.
PRECISION STANDARD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
----------------------------------
Three Three
Months Ended Months Ended
March 31, March 31,
2000 1999
------------ -----------
Cash flows from operating
activities:
Net income $ 3,715 $ 1,950
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation and amortization 669 433
Pension cost in excess of
funding 304 305
Intangible asset amortization 65 0
Changes in assets and liabilities:
Accounts receivable, trade 1,976 (2,590)
Inventories (6,857) (2,885)
Prepaid expenses and other (238) 158
Deposits and other (39) 779
Accounts payable and accrued
expenses 575 325
------- -------
Total adjustments (3,545) (3,475)
------- -------
Net cash provided by
operating activities 170 (1,525)
------- -------
Cash flows from investing
activities:
Capital expenditures (1,525) (305)
------- -------
Net cash (used in)
Investing activities (1,525) (305)
------- -------
Cash flows from financing
activities:
Net borrowings under
revolving credit
facility 607 2,717
Proceeds from exercise of
stock options 221 0
Net cash provided by
Financing activities 828 2,717
------- -------
Net increase (decrease) in
cash and cash equivalents (527) 887
Cash and cash equivalents,
beginning of period 527 193
------- -------
Cash and cash equivalents,
end of period $ 0 $ 1,080
======= =======
Supplemental disclosure of
cash flow information:
Cash paid during the year
for:
Interest $ 407 $ 754
Income taxes $ 290 $ 85
The accompanying notes are an integral part
of these consolidated 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 March 31, 2000 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 1999 Form 10-K.
2. INVENTORIES
Inventories consist of the following:
March 31, December 31,
2000 1999
($ thousands) ($ thousands)
(Unaudited)
----------- -------------
Work in-process $36,121 $31,335
Finished goods 3,165 3,365
Raw materials and supplies 1,985 2,704
------- -------
Total $41,271 $37,404
Less progress payments
and customer deposits (17,379) (20,369)
------- -------
23,892 17,035
======= =======
3. 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. Diluted 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 ended March 31, 2000 and 1999:
For the three months ended March 31:
(All numbers in thousands except Income Per Share)
2000
Net Income $ 3,715
Weighted Average Shares 3,979
Basic Net Income Per Share .93
-------
Dilutive securities:
Options 148
Diluted Weighted Average Shares 4,127
Diluted Net Income Per Share .90
-------
1999
Net income $ 1,950
Weighted Average Shares 3,978
Basic Net Income Per Share .49
-------
Dilutive Securities:
Options 31
Diluted Weighted Average shares 4,009
Diluted Net Income Per Share .49
-------
Options to purchase approximately 168,533 and 437,000 shares
of common stock related to March 31, 2000 and 1999,
respectively, were excluded from the computation of diluted
income per share because the option exercise price was greater
than the average market price of the shares.
4. NOTES PAYABLE
March 31, December,31,
2000 1999
($ Thousands) ($ Thousands)
(Unaudited)
------------- -------------
Revolving credit facility $13,025 $11,779
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 704 1,343
------- -------
Total debt $19,879 $19,272
======= =======
Less portion reflected
as current 15,748 15,104
Long term debt, net of
current portion $ 4,131 $ 4,168
The Company maintains a $20 million revolving credit facility
which matures in August of 2000. Borrowing availability under
the facility is tied to percentages of accounts receivables and
inventory and, as a result of certain subordination provisions,
cannot exceed $17 million. There was $4.0 million available
under the credit facility at March 31, 2000, based on the
calculation which defines the borrowing base. 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.
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. As a result of its net worth and capital
expenditures made during 1999, the Company was in violation of
such covenants at March 31, 2000. However, the Company's
primary lender waived the financial debt covenant violations at
March 31, 2000.
5. CONTINGENCIES
UNITED STATES GOVERNMENT CONTRACTS - The Company, as a U.S.
Government contractor, is subject to audits, reviews, and
investigations by the government related to its negotiation and
performance of government contracts and its accounting for such
contracts. Failure to comply with applicable U.S. Government
standards by a contractor may result in suspension from
eligibility for award of any new government contract and a
guilty plea or conviction may result in debarment from
eligibility for awards. The government may, in certain cases,
also terminate existing contracts, recover damages, and impose
other sanctions and penalties. The Company believes, based on
all available information, that the outcome of the U.S.
Government's audits, reviews, and investigations will not have a
materially adverse effect on the Company's consolidated results
of operations, financial position, or cash flows.
LITIGATION
Pemco World Air Services A/S Bankruptcy and Sterling Lawsuit
In November 1997, the Maritime and Commercial Court in
Copenhagen, Denmark granted the request of a supplier to place
the Company's Danish subsidiary, Pemco World Air Services A/S,
in bankruptcy. Trustees were appointed to operate the Danish
subsidiary's facility. 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 trustees based this claim on certain
undertakings entered into by the Company in favor of the Danish
subsidiary in 1996 and 1997. The trustees allege that pursuant
to these undertakings the Company guaranteed the obligations of
the Danish subsidiary. The Company was subsequently informed
that additional claims were filed by creditors against the
bankruptcy estate and that the aggregate amount of claims filed
against the bankruptcy estate exceeds $15 million.
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 alleges that the
Company expressly guaranteed certain payments for parts and
materials supplied by Sterling to the Danish subsidiary. The
complaint seeks damages of approximately $1.4 million plus costs
and interest. On November 2, 1998, the Company filed a motion
to dismiss the complaint which was denied by the court on
January 13, 1999. On January 24, 2000, Sterling filed a motion
for summary judgment on liability and partial damages which was
denied by the court on March 23, 2000.
On March 28, 2000, the Company entered into a settlement
agreement with Sterling and the Danish subsidiary's bankruptcy
trustees pursuant to which the Company agreed to pay a total of
$3.5 million by May 31, 2000 in settlement of the Sterling
litigation and all claims the trustees may have against the
Company under the undertakings. Of the $3.5 million settlement
amount, $2.25 million will be placed in an escrow account and
can only be released to the trustees upon their satisfaction of
certain conditions. These conditions include, among other
things, that the trustees must obtain releases from all of the
Danish subsidiary's unsecured creditors that are asserting
claims in excess of $100,000 on or before October 5, 2000. If
the trustees are unable to obtain these releases or certain
other events occur, the Company may, at its option, terminate
the settlement agreement as to the Danish subsidiary's
bankruptcy trustees and obtain a refund of the $2.25 million
held in the escrow account. In such an event, the portion of
the settlement payment not placed in the escrow account ($1.25
million) would be applied to settle the Sterling litigation and
the Danish subsidiary's trustees and creditors would retain any
and all claims they may have against the Company. The Company
would vigorously defend any such claims and, in any event,
intends to vigorously defend any claim brought by creditors of
the Danish subsidiary that do not release their claims in
connection with the settlement agreement.
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 of results of operations.
6. 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 quarters ended March 31, 2000 and March 31,
1999.
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,
Colorado 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 an other segment. These additional segments perform
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 table presents information about segment profit or loss
for the quarter ending March 31, 2000:
(In $ Thousands)
Mfg. and Consoli-
Government Commercial Overhaul Other dated
---------- ---------- -------- ----- -------
Revenues from
external,
domestic
customers $25,682 $ 8,885 $ 5,209 $ 0 $ 39,776
Revenues from
external
foreign
customers 0 747 0 0 747
Intersegment
revenues 7 0 11 0 18
------- ------- ------- ------- --------
Total
Segment
Revenues $25,689 $ 9,632 $ 5,220 $ 0 $ 40,541
Elimination (18)
--------
Total Revenues $ 40,523
========
Gross Profit 6,148 1,394 1,193 0 8,735
Segment Op
Inc. 3,776 620 88 0 4,484
Interest
Expense 407
Other 72
Income taxes 290
--------
Net Income $ 3,715
========
Assets $33,291 $15,521 $11,655 $1,981 $ 62,448
Deprec/Amort 302 88 67 63 520
Cap. Additions 1,452 66 7 0 1,525
The following table presents information about segment profit or loss
for the quarter ending March 31, 1999:
(In $ Thousands)
Mfg. and Consoli-
Government Commercial Overhaul Other dated
---------- ---------- -------- ------ --------
Revenues from
external,
domestic
customers $22,422 $ 7,268 $ 7,173 $ 182 $ 37,045
Revenues from
external
foreign
customers 0 2,840 0 0 2,840
Intersegment
revenues 15 0 30 0 45
------- ------- ------- ------ --------
Total
Segment
Revenues $22,437 $10,108 $ 7,203 $ 182 $ 39,930
Elimination (45)
--------
Total Revenues $ 39,885
========
Gross Profit 7,470 934 927 7 9,338
Segment Op
Inc. 3,691 325 400 (95) 4,321
Interest
Expense 962
Other 1,324
Benefit
for income
taxes 85
--------
Net Income $ 1,950
========
Assets $31,015 $14,701 $ 6,487 $1,194 $ 53,397
Deprec/Amort 366 95 84 1 546
Cap. Additions 187 94 24 0 305
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 first quarter of 2000, the Company reported operating
income of approximately $4.5 million, an increase of $1.0 million
over the same period of 1999. Total income before taxes for the
first quarter of 2000 was approximately $4.0 million vs $2.0 million
for the same period in 1999.
RESULTS OF OPERATIONS
Three months ended March 31, 2000
versus three months ended March 31, 1999
Revenues from operations for the first quarter of 2000 grew slightly
from the first quarter of 1999, increasing 1.5% from $39.9 million in
1999 to $40.5 million in 2000. Government segment sales increased
approximately 14.7% from $22.4 million in 1999 to $25.7 million in
2000. Commercial sales decreased 4.9% from $10.1 million in 1999
to $9.6 million in 2000. Sales in the Manufacturing and Overhaul
segment decreased 27.8% from $7.2 million in 1999 to $5.2 million in
2000. The Company's mix of business between government and
commercial customers moved from 43.7% commercial and 56.3%
government in 1999 to 36.6% commercial and 63.4% government in 2000.
Government segment sales in the first quarter of 2000 increased
approximately $3.3 million due primarily to increases in sales under
the Birmingham facility's KC-135 and C-130 contracts.
Commercial segment sales in the first quarter of 2000 decreased $0.5
million under aircraft maintenance/modification contracts at the
Dothan and Victorville facilities.
Sales of the Manufacturing and Overhaul segment in the first quarter
of 2000 decreased $2.0 million principally due to lower sales in the
Space Vector and Pemco Nacelle operating units.
Cost of sales increased during the first quarter from $30.5 million
in 1999 to $31.8 million in 2000. The ratio of cost of sales to net
sales increased from 76.6% in the first quarter of 1999 to 78.4% in
2000.
Selling, general and administrative expenses decreased from $5.9
million in the first quarter of 1999 to $4.2 million in 2000.
Selling, general and administrative expenses decreased as a
percentage of revenue going from 14.8% in its first quarter of 1999
to 11.5% during the same period of 2000.
Interest expense was $0.4 million in first quarter 2000 versus $1.0
million in 1999. The average interest rate in the first quarter of
2000 on the Revolving Credit facility was 12.19% as compared to
11.25% during the first quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash resources showed significant improvement over the
first quarter of 1999. In the first quarter of 2000 the Company
generated cash from operations of $0.2 million vs. using cash of $1.5
million during the first quarter of 1999.
The following is a discussion of the significant items in the
Company's Consolidated Statement of Cash Flows for the quarters
ending March 31, 2000 and 1999.
The Company's pension expense as determined by its actuary for the
year 2000 is $1.1 million as compared to $1.1 million in 1999. In
the first quarter of 2000, the Company made no contributions to the
pension plan and expensed approximately $0.3 million. In the first
quarter of 1999, the Company made no contributions to the pension
plan and expensed approximately $0.3 million.
Accounts payable and accrued expenses increased by $0.3 million from
$35.0 million at December 31, 1999 to $35.3 million at the end of the
first quarter of 2000. Accrued interest payments at March 31, 2000
were $0.2 million representing no increase over that due at March 31,
1999.
Accounts receivable decreased $2.0 million in the first quarter of
2000 while net inventories increased $6.9 million. The increase in
inventories is primarily related to increases in work-in-process
under the Government segment's KC-135 contract and various contracts
in the Commercial segment.
During the first quarter of 2000, the Company used $1.5 million in
investing activities vs. $0.3 million in the same period of 1999.
At the end of the first quarter of 2000, the Company had open
borrowing capacity under its lines of credit of $4.0 million vs.
being over its borrowing capacity by $0.7 million at March 31, 1999.
During 1999 and 2000, 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 March 31, 2000 and 1999:
2000 1999
---- ----
U.S. Government $147,565 $172,644
Commercial 10,588 28,691
-------- ---------
$158,153 $201,335
As of March 31, 2000, 93% of the Company's backlog related to work
for the U.S. Government versus 86% for the period ending March 31,
1999. The Company's U.S. Government backlog decreased $25.0 million
primarily related to increased deliveries of aircraft under the KC-
135 contract coupled with a lower level of aircraft input during the
quarter under the same contract and a lower government backlog in the
Manufacturing & Overhaul segment.
CONTINGENCIES
See Note 5 to the Consolidated Financial Statements.
FORWARD LOOKING STATEMENTS
Some of the information under the caption Item 2, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations", and elsewhere in this Quarterly Report on Form 10-Q are
forward-looking statements. These forward-looking statements
include, but are not limited to, statements about the Company's
plans, objectives, expectations and intentions, award of contracts,
the outcome of pending or future litigation, estimates of backlog and
other statements contained in this Quarterly Report that are not
historical facts. When used in this Quarterly Report, the words
"expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates" and similar expressions are generally intended to
identify forward-looking statements. Because these forward-looking
statements involve risks and uncertainties, there are important
factors that could cause actual results to differ materially from
those expressed or implied by these forward-looking statements.
These factors are discussed in greater detail under the caption,
"Factors that may affect future performance", in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999.
ITEM 3.
QUANTATIVE 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 4 to the
Consolidated Financial Statements and bears interest at prime plus
1.5% (12.3% at March 31, 2000). If the prime rate increased 100
basis points, the effect on net income would approximate a $130,000
reduction in net income on an annual basis, $33,000 for the quarter.
PRECISION STANDARD,INC.
OTHER INFORMATION
PART II.
Item 6 Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
27.1 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: 05/15/00 By: /s/ Ronald A. Aramini
Ronald A. Aramini, President
and Chief Executive Officer
(Principal Executive Officer)
Date: 05/15/00 By: /s/ Richard G. Godin
Richard G. Godin
Vice President Finance
(Principal Finance
& Accounting Officer)
EXHIBIT INDEX
Exhibit No. Description Method of Filing
27 Financial Data Schedule Filed herewith electronically
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