February 12, 1999
PERCEPTRONICS INC (PCTR)
Quarterly Report (SEC form 10QSB)
Management's discussion and analysis of financial condition and results of operations.
GENERAL
Perceptronics , Inc., (the "Company") designs, develops and manufactures computer-based simulation systems for training and decision support. These systems include both hardware and software. The Company's simulators are used to train personnel in the use of various military and commercial equipment, including weapons, vehicles and aircraft. In the decision support area, the Company's computer software systems are used to enhance command and control operations, for process modeling and simulation, and for management of concurrent engineering activities in product development and manufacturing. Much of the Company's business is in the foreign defense industry where the Company has built an international reputation. The following discussion is based on the unaudited consolidated financial statements contained elsewhere in this report. The unaudited financial statements have been prepared in conformity with generally accepted accounting principals, which contemplate continuation of the Company as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of the liabilities that may result from the possible inability of the Company to continue as a going concern. See Note B of Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
NET SALES. Net sales for the nine months ended December 31, 1998 increased by $989,000 or 38% compared to the comparable nine-month period in the prior fiscal year. Sales of training simulator systems increased $661,000 or 36% as a result of the current contract in process with the Government of Egypt for TOW PGTS simulator systems. The Egyptian contract represented 68% of the sales for the 1998 nine month period. This contract will be completed by March 31, 1999. During the nine months ended December 31, 1997, the Company had completed an export contract during the first three months and in the second three months started another subcontract for TOW PGTS simulator systems, being built for a foreign customer. Net sales on those contracts during the 1997 nine-month period were not as strong as this fiscal year. Simulation network technology sales increased $374,000 or 64% as a result of U.S. Government contracts that are providing the funding for the development and commercialization of network software products for on-line, multi-user applications involving complex 3D environments.
Net sales for the three months ended December 31, 1998 increased by $228,000 or 22% compared to the comparable three-month period in the prior fiscal year. Sales of training simulator systems increased $45,000 or 6% as a result of the current contract in process with the Government of Egypt for TOW PGTS simulator systems. Simulation network technology sales increased $212,000 or 98% as a result of the U.S. Government contracts described in the previous paragraph.
COST OF SALES. Cost of sales for the nine months ended December 31, 1998 increased 34% as a result of the 38% increase in sales discussed above and improved profit margins on the TOW PGTS simulator system sales. Cost of sales as a percentage of sales during the nine months ended December 31, 1998 was 66% compared to 68% during the nine-month period ended December 31, 1997.
Cost of sales for the three months ended December 31, 1998 increased 20% as a result of the 22% increase in sales discussed above and improved profit margins on the TOW PGTS simulator system sales. Cost of sales as a percentage of sales during the three months ended December 31, 1998 was 67% compared to 69% during the three-month period ended December 31, 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $249,000 or 43% in the nine-month period ended December 31, 1998 compared to the comparable nine-month period in the prior fiscal year. This increase was primarily due to the cost of
the year-end audit, financial consulting fees associated with the development of commercialized networking software products for on-line multi-user 3D applications and increased foreign marketing expense. The Company's management continues to pursue cost reduction measures consistent with the level of business wherever opportunities can be identified.
Selling, general and administrative expenses increased $74,000 or 35% in the three-month period ended December 31, 1998 compared to the comparable three-month period in the prior fiscal year. The increase was primarily due to increased foreign marketing expense.
RESEARCH AND DEVELOPMENT EXPENSES. During the current fiscal year, the Company plans to incur research and development expenses associated with the development and commercialization of network software products for on-line, multi-user applications involving complex 3D environments. During the nine month period ended December 31, 1998, the Company incurred $14,000 of internally funded research and development costs.
INTEREST EXPENSE. Interest expense increased 65% or $94,000 in the nine-month period ended December 31, 1998 compared to the comparable nine-month period in the prior fiscal year due to increased usage of the export credit facility. In the three month period ended December 31, 1998, interest expense increased $8,000 or 13% compared to the comparable three-month period in the prior fiscal year.
BACKLOG. The Company's firm contract backlog was $999,000 at December 31, 1998, compared to $3.8 million at December 31, 1997. The term "firm contract backlog" refers to the aggregate revenue remaining under contracts held by the Company and includes both funded and unfunded amounts. At December 31, 1998 all backlog was funded. The backlog at December 31, 1997 included the $3.0 million contract with the Government of Egypt for TOW PGTS training systems. The contract was awarded and signed in July 1997, but was subject to review by the U. S. Government who is involved with funding the contract; therefore at December 31, 1997 the contract was classified as unfunded backlog.
Certain of the Company's contracts extend to customers the option to buy additional products and services at specified prices over a specified period of time. There is no assurance that any contract option will be exercised. At December 31, 1998, the option backlog was $ 4.3 million.
CONTINGENCIES. On October 30, 1998, a California Limited Partnership reasserted its claim that the Company is liable for material monetary amounts in connection with a real estate lease. In August 1993, the Company forfeited the lease and returned possession to the Partnership, but the Company was not released from its obligation, if any, for money damages or rent. The Company disputes their claim and believes that legal defenses exist should the Partnership decide to litigate. A committee has been formed consisting of two officers and two directors of the Company to handle the matter. The Company's Chairman and a director each has an ownership interest in the Limited Partnership.
LIQUIDITY AND CAPITAL RESOURCES.
The Company's unrestricted cash balances were $261,000 at December 31, 1998, resulting from the collection of receivables applicable to the TOW PGTS contract with the Government of Egypt and increased billings on U.S. Government development contracts. The Company's principal source of liquidity continues to be the Company's export credit facility, vendor credit and cash flow generated from operations. The Company had positive working capital of $57,000 at December 31, 1998, compared to negative working capital of $500,000 at March 31, 1998. In the past the Company has experienced severe liquidity problems and continues to have difficulty in meeting all of its obligations as they come due. With respect to foreign contracts for TOW PGTS simulator systems, an export credit facility is in place to provide the cash flow required to perform on these contracts. Payment terms with vendors for materials needed for the contracts are generally in advance or on delivery terms
and are being funded through the credit facility. At December 31, 1998, vendor accounts totaling $300,000 are past due and are being liquidated as positive cash flow permits. The Company is making good progress in reducing this balance, however the lack of sufficient working capital continues to restrict the Company's ability to expand its revenue base. See Note B of the Notes to Consolidated Financial Statements, which is hereby incorporated herein by reference.
The Company's short-term strategy is to increase its domestic and foreign defense contract revenue base in order to generate sufficient cash flow from operations and to reduce current liabilities. A major part of the Company's long-term strategy will be to focus on the development of commercial products derived from the Company's defense related technology and expertise in order to reduce the Company's dependence on defense contracts. The SBIR InterGame software contract, and the recently awarded California Technology Investment Partnership contract will enable the Company to use it's defense related technology to develop commercial software products. The Company was successful in obtaining commitments for the required equity funding of approximately $375,000, of which $346,000 has been funded, to satisfy the self funding requirements of the SBIR contract. The Company's ability to pursue its long-term strategy will depend on generating sufficient cash flow from operations to finance new product development. There can be no assurance that this strategy will be successful. The Company is exploring alternative sources for financing as well as potential business combinations in order to meet the short and long-term objectives.
The export credit facility mentioned above was obtained in October 1997 from a commercial lender and enables the Company to borrow up to $1,666,000 to be used in conjunction with it's export contracts. The credit facility is guaranteed by the U.S. Small Business Administration (SBA) and the California Export Finance Office (CEFO). The borrowings bear interest at 3.0 points above prime rate and are secured by a lien placed on the Company's general assets. Borrowings occur on the credit facility as work progresses on the contract. The borrowings are repaid with proceeds received from the delivery of finished units. At December 31, 1998, borrowings outstanding against the line totaled $1,396,000. On January 8, 1999 the company repaid $930,000 of export debt leaving a current balance owed of $466,000, which the Company plans to repay in March 1999. The Company is currently using the export credit facility and funds generated from operations to finance the production of TOW PGTS simulator systems for the Government of Egypt. The final shipment against the contract was made on January 22, 1999.
The Company currently has a $200,000 note payable with a bank that is guaranteed by SBA. At December 31, 1998 the principal balance outstanding was $163,000. The note bears interest at prime rate plus 2.75 percentage points with principal and interest payable monthly amortizing over five years. The Company also had a $200,000 note payable with an export customer. In April 1998, the Company repaid $51,032 of the outstanding balance and in August 1998 the Company paid the remaining balance of $148,968 off using proceeds from the final payment on a $1.5 million TOW PGTS export contract. The Company also has a 24-month note payable with a starting principal of $100,000 that bears interest at 8% per annum. At December 31, 1998, the outstanding balance on this note payable was $68,000.
The Company's operating activities provided cash of $224,000 during the nine-month period ended December 31, 1998. During the nine months ended December 31, 1998, the cash provided was primarily the result of profitability resulting from increased sales of TOW PGTS simulator systems to the Government of Egypt and increased sales of simulation network technology as previously discussed. During the nine-month period ended December 31, 1997, the Company completed a large foreign contract and was paid by the customer resulting in a net cash inflow of $569,000.
The Company's investing activities used cash of $8,000 during the nine-month period ended December 31, 1998 associated with capital expenditures for equipment. Capital expenditures during the nine-month period ended December 31, 1997 was $48,000 for leasehold improvements associated with the move to a new manufacturing facility.
The Company's financing activities provided cash of $252,000 during the nine-month period ended December 31, 1998. A warrant holder exercised a warrant for 50,000 shares of common stock for an exercise price of $16,000 and employee stock options were exercised contributing $3,000. The sale of common stock brought in $328,000. Net proceeds from the export credit facility provided $165,000 of cash and the Company used $258,000 to repay debt. During the nine months ended December 31, 1997, the Company's financing activities used $557,000 to repay the export credit facility, settle a note payable and repay long term debt.
During June 1998, the Company entered into stock purchase subscription agreements with several investors for the purchase of up to 979,445 shares of common stock for a purchase price of $375,000 and the release from a $20,050 liability. The subscription agreements also provide for the issuance of warrants to the investors for the purchase of up to 873,056 shares of common stock at exercise prices that range from $.50 to $.75. The subscription agreements provide for the payment for the common shares over several months starting in July 1998. During the period of July 1998 through January 1999, the Company received payments from investors of $330,000.
YEAR 2000 COMPLIANCE
The year 2000 issue results from computer programs that do not differentiate between the year 1900 and the year 2000 because they were written using two digits rather than four to define the applicable year; accordingly computer systems that have time-sensitive calculations may not properly recognize the year 2000. The Company has conducted an initial review of its computer system to identify whether the system is year 2000 compliant. The computer equipment and software currently used by the Company is an older generation and will be effected by the year 2000 problem. The Company has purchased a current generation system and plans to replace the existing computer system. The implementation of the new system will start in February 1999 and will be completed in several months. The cost of the new system is not a material expense. However, there can be no assurance that software incompatibility with the year 2000 issue on the part of the Company's customers and suppliers will not cause an interruption of operations or that the Company will not have to incur substantial cost to avoid such occurrences.
FORWARD LOOKING STATEMENTS
The Company hereby incorporates by reference "Forward Looking Statements" contained in the "Management's Discussion And Analysis Of Financial Condition And Results Of Operations" of the Company's Form 10-KSB dated March 31, 1998.
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