<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[MARK ONE]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________________ TO _________________
COMMISSION FILE NO. 000-20068
PRECISION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 41-1425909
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11800 30TH COURT NORTH, ST. PETERSBURG, FLORIDA 33716
(Address of principal executive offices)
(813) 572-9300
(registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of capital stock as of the latest
practicable date.
Total number of shares of outstanding capital stock as of July 12,
1996:
<TABLE>
<S> <C>
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,160,220
Series A Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
</TABLE>
===============================================================================
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------------------------ ------------------------------------
May 31, May 31, May 31, May 31,
1996 1995 1996 1995
----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
REVENUE
Contract revenue . . . . . . . . . . . . . $ 6,395,463 $ 4,103,652 $ 15,283,553 $ 10,050,260
Service and support . . . . . . . . . . . . 3,328,721 1,510,941 4,597,806 4,170,589
License fee . . . . . . . . . . . . . . . 1,202,040 - 1,202,040 436,800
----------------- ------------------ ----------------- -----------------
10,926,224 5,614,593 21,083,399 14,657,649
COSTS AND EXPENSES
Contract . . . . . . . . . . . . . . . . . 3,841,307 1,751,934 7,218,361 5,079,233
Selling, general, and administrative . . . . 9,509,702 3,045,717 16,243,379 9,772,013
Research, engineering and development . . . 1,887,551 706,791 3,816,398 2,312,669
----------------- ------------------ ----------------- -----------------
15,238,560 5,504,442 27,278,138 17,163,915
----------------- ------------------ ----------------- -----------------
Operating income (loss) . . . . . . . . . . . . . (4,312,336) 110,151 (6,194,739) (2,506,266)
Gain on marketable equity securities . . . . . . - - 1,262,414 -
Interest income (expense), net . . . . . . . . . 107,717 3,056 264,052 (93,762)
----------------- ------------------ ----------------- -----------------
Income (loss) from continuing operations
before income taxes . . . . . . . . . . . . (4,204,619) 113,207 (4,668,273) (2,600,028)
Income taxes (foreign affiliates) . . . . . . . . 210,000 - 210,000 -
----------------- ------------------ ----------------- -----------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS . . . . . . . . . . . . . . . . . (4,414,619) 113,207 (4,878,273) (2,600,028)
Discontinued operations:
Loss from operations of Interactive
Services, Inc. . . . . . . . . . . . . . - (93,586) - (188,831)
Gain on disposal of Interactive
Services, Inc. . . . . . . . . . . . . . - 56,276 - 56,276
----------------- ------------------ ----------------- -----------------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . (4,414,619) 75,897 (4,878,273) (2,732,583)
Preferred stock dividend requirement . . . . . . 87,715 109,221 257,646 283,967
----------------- ------------------ ----------------- -----------------
Net loss applicable to common stock . . . . . . . $ (4,502,334) $ (33,324) $ (5,135,919) $ (3,016,550)
================= ================== ================= -----------------
NET INCOME (LOSS) PER SHARE
Continuing operations . . . . . . . . . . . $ (.29) $ (.01) $ (.35) $ (.24)
================= ================== ================= =================
Discontinued operations . . . . . . . . . . $ - $ - $ - $ (.01)
================= ================== ================= =================
Net loss applicable to common stock . . . . $ (.29) $ - $ (.37) $ (.28)
================= ================== ================= =================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
<PAGE> 3
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
May 31, August 31,
1996 1995
----------------- -----------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,501,454 $ 7,702,535
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,426,385 5,618,496
Supplies and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . 1,322,303 1,164,511
----------------- -----------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,250,142 14,485,542
PROPERTY, PLANT AND EQUIPMENT, NET . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,344,666 6,428,568
INTANGIBLE ASSETS, NET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,130,625 6,458,815
----------------- -----------------
$ 84,725,433 $ 27,372,925
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . $ 483,000 $ -
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,445,537 1,331,784
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,512,338 526,394
Accrued payroll and related liabilities . . . . . . . . . . . . . . . . . . . . . . 2,963,818 651,401
Customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119,772 99,772
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,253,177 1,329,580
----------------- -----------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,777,642 3,938,931
----------------- -----------------
LONG-TERM LIABILITIES
Deferred revenue - non-current . . . . . . . . . . . . . . . . . . . . . . . . . . . - 471,895
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 492,000 -
----------------- -----------------
Total long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 492,000 471,895
----------------- -----------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Non-redeemable preferred stock - $.01 par value; Series A 6% Cumulative
Convertible Preferred Stock; convertible at $4.76 per share; authorized 50,000
shares, issued 10,000 shares; liquidation preference $5,800,000 . . . . . . . . 100 100
Common stock - $.01 par value; authorized 30,000,000 shares, issued
14,708,275 and 9,733,525 shares, respectively . . . . . . . . . . . . . . . . . . 147,083 97,335
Class B - convertible common stock - $.01 par value; authorized, issued and
outstanding 2,415,945 shares . . . . . . . . . . . . . . . . . . . . . . . . . . 24,159 24,159
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106,559,211 67,740,805
Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (49,952,886) (45,074,613)
Treasury stock (132,937 shares) - at cost . . . . . . . . . . . . . . . . . . . . . (422,360) (422,360)
Accumulated preferred stock dividend . . . . . . . . . . . . . . . . . . . . . . . . 857,888 596,673
Cumulative foreign currency translation adjustment . . . . . . . . . . . . . . . . . 405,000 -
Unearned compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (162,404) -
----------------- -----------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,455,791 22,962,099
----------------- -----------------
$ 84,725,433 $ 27,372,925
================= =================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE> 4
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
--------------------------------------
May 31, May 31,
1996 1995
----------------- -----------------
<S> <C> <C>
Cash flows - operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (4,878,273) $ (2,732,583)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . 2,946,546 2,903,345
Gain on disposal of discontinued operations . . . . . . . . . . . . . . . . . . - (56,276)
Change in current assets and liabilities, net of business acquisitions:
(Increase) decrease in accounts receivable . . . . . . . . . . . . . . . . . 1,958,111 (3,000,431)
(Increase) decrease in supplies and other current assets . . . . . . . . . . 688,208 920,376
Increase (decrease) in accounts payable . . . . . . . . . . . . . . . . . . . (1,322,489) (2,311,853)
Increase (decrease) in accrued expenses . . . . . . . . . . . . . . . . . . . (1,442,364) 85,616
Increase (decrease) in deferred revenue . . . . . . . . . . . . . . . . . . . (788,298) 322,300
Increase (decrease) in customer deposits . . . . . . . . . . . . . . . . . . 20,000 (246,879)
Discontinued operations, non-cash charges, and working capital changes . . . . . - (70,846)
----------------- -----------------
NET CASH USED IN OPERATING ACTIVITIES . . . . . . . . . . . . . . . . . . (2,818,559) (4,187,231)
----------------- -----------------
Cash flows - investing activities:
Cash acquired - Vicorp acquisitions . . . . . . . . . . . . . . . . . . . . . . . . 7,314,000 -
Purchase of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . (1,304,314) (1,185,014)
Proceeds from disposal of discontinued operations . . . . . . . . . . . . . . . . . - 1,025,000
----------------- -----------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES . . . . . . . . . . . . . . 6,009,686 (160,014)
----------------- -----------------
Cash flows - financing activities:
Repayment of note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (2,952,933)
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . 9,607,792 5,814,934
----------------- -----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES . . . . . . . . . . . . . . . . . . . 9,607,792 2,862,001
----------------- -----------------
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . 12,798,919 (1,485,244)
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . . . . . . 7,702,535 9,190,764
----------------- -----------------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . . . . . . $ 20,501,454 $ 7,705,520
================= =================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 5
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Non-
Redeemable Common Class B
Preferred Stock Convertible Additional
Stock $.01 $.01 Par Common Paid-in Treasury
Par Value Value Stock Capital Deficit Stock
------------ --------- ----------- -------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 1, 1995 . . . $ 100 $ 97,335 $ 24,159 $ 67,740,805 $ (45,074,613) $ (422,360)
Net loss for the nine months
ended May 31, 1996 . . . . . . . - - - - (4,878,273) -
Issuance of common stock upon
exercise of warrants . .. . . . - 15,000 - 8,610,000 - -
Issuance of common stock upon
exercise of stock options . . . - 3,393 - 979,399 - -
Issuance of common stock in
connection with The Vicorp Group
acquisition . . . . . . . . . . - 31,355 - 29,490,222 - -
Unearned compensation . . . . . . . - - - - - -
Cumulative foreign currency
translation adjustment . . . . - - - - - -
Dividend on preferred stock . . . . - - - (261,215 - -
------------ --------- ----------- -------------- --------------- ------------
BALANCE AT MAY 31, 1996 . . . . . . $ 100 $ 147,083 $ 24,159 $ 106,559,211 $ (49,952,886) $ (422,360)
============ ========= =========== ============== =============== ============
Cumulative
Accumulated Foreign
Preferred Currency
Stock Translation Unearned
Dividend Adjustment Compensation Total
------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 1, 1995 . . . $ 596,673 $ - $ - $ 22,962,099
Net loss for the nine months
ended May 31, 1996 . . . . . . . - - - (4,878,273)
Issuance of common stock upon
exercise of warrants . . . . . - - - 8,625,000
Issuance of common stock upon
exercise of stock options . . . - - - 982,792
Issuance of common stock in
connection with The Vicorp Group
acquisition . . . . . . . . . . - - - 29,521,577
Unearned compensation . . . . . . . - - (162,404) (162,404)
Cumulative foreign currency
translation adjustment . . . . - 405,000 - 405,000
Dividend on preferred stock . . . . 261,215 - - -
------------- ------------ -------------- --------------
BALANCE AT MAY 31, 1996 . . . . . . $ 857,888 $ 405,000 $ (162,404) $ 57,455,791
============= ============ ============== ==============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 6
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The interim condensed consolidated financial statements of Precision
Systems, Inc. (the "Company") are unaudited and should be read in conjunction
with the audited financial statements and notes thereto as of and for the
fiscal years ended August 31, 1995 and 1994.
In the opinion of the Company, all adjustments necessary for a fair
presentation of such financial statements have been included. Such adjustments
consist only of normal recurring items. Interim results are not necessarily
indicative of results for a full year. The interim financial statements and
notes thereto are presented as permitted by the Securities and Exchange
Commission and do not contain information included in the Company's annual
financial statements and notes thereto.
Certain amounts for previous periods have been reclassified to conform
with the 1996 presentation.
NOTE 2 - LOSS PER SHARE
Loss per share for the three- and nine-month periods ended May 31,
1996 and 1995, have been computed based upon the weighted average common and
common equivalent shares outstanding of 15,470,880 and 13,827,612 and
11,475,123 and 10,760,991, respectively. The loss per share calculation does
not include common stock equivalents as their inclusion would be anti-dilutive.
NOTE 3 - ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
May 31, August 31,
1996 1995
----------------- ------------------
(unaudited)
<S> <C> <C>
Contract and trade, net . . . . . . . . . . . . . . . . . 14,198,507 $ 4,479,247
Unbilled receivables . . . . . . . . . . . . . . . . . . . 227,878 1,139,249
---------------- ------------------
$ 14,426,385 $ 5,618,496
================= ==================
</TABLE>
Unbilled receivables represent sale of software-based products that
have been delivered and will be billed in accordance with the underlying
agreements.
NOTE 4 - STOCKHOLDERS' EQUITY
During November 1995, Vulcan Ventures, Incorporated ("Vulcan")
exercised warrants to purchase 500,000 shares of the Company's common stock at
$5.00 per share, 500,000 shares of common stock at $6.00 per share, and 500,000
shares of common stock at $6.25 per share, thereby generating additional
capital to the Company of $8,625,000. Vulcan's third tier warrants for the
purchase of 500,000 shares originally were for Class B Common Stock at $7.00
per share or, if an amendment to the Certificate of Incorporation of the
Company increasing the authorized number of shares of Class B Common Stock had
not been effected by the date of exercise, then the warrants to purchase
500,000 of the Company's Common Stock were to be exercised at $6.25 per share.
5
<PAGE> 7
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - BUSINESS ACQUISITION
On April 16, 1996, the Company acquired Vicorp N.V., a Netherlands
Antilles corporation ("Vicorp"). In the transaction, the Company issued
3,135,467 shares of Common Stock for all the issued and outstanding stock of
Vicorp.
In connection with the transaction, the Company, Alta Investissements,
S.A. ("Alta"), Primwest Holding, S.A. ("Primwest"), and certain shareholders
of the Company entered into a Shareholders' Agreement pursuant to which
Primwest, the controlling shareholder of Alta, shall be entitled to certain
registration rights and to nominate one member of the Company's Board of
Directors for so long as Primwest owns at least 10 percent of the Company's
Common Stock. Subject to certain limitations, the Company will have a right of
first refusal with respect to the sale of shares of Common Stock issued to
Alta in the transaction. Primwest also agreed not to transfer shares of
Precision System, Inc.'s stock for a twelve-month period.
The acquisition was accounted for using the purchase method of
accounting. This purchase price of $32,434,985 was comprised of Company common
stock valued at $29,521,577, Company stock options with in-the-money value of
$1,469,321, and other direct acquisition costs totaling $1,444,087.
The preliminary purchase price allocation among the assets acquired
and liabilities assumed in the acquisition of Vicorp are as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
<S> <C>
Current assets . . . . . . . . . . . . . . . . . . . . . . . . $ 18,926,000
Current liabilities . . . . . . . . . . . . . . . . . . . . . (21,301,000)
-----------------
Net current liabilities . . . . . . . . . . . . . . . . . (2,375,000)
-----------------
Long-term assets . . . . . . . . . . . . . . . . . . . . . . . 5,386,000
Long-term liabilities . . . . . . . . . . . . . . . . . . . . (2,480,000)
Residual goodwill . . . . . . . . . . . . . . . . . . . . . . 31,903,985
-----------------
Total purchase price $ 32,434,985
=================
</TABLE>
The following unaudited pro-forma summary presents the Company's
results of operations as if the acquisition had occurred at the beginning of
the period presented. This summary does not purport to be indicative of what
would have occurred had the acquisition been made as of this date or of results
which may occur in the future. This method of combining the companies is for
the presentation of unaudited pro-forma summary results of operations. Actual
statements of operations of the Company and of Vicorp were combined from the
effective date of the acquisition forward, with no retroactive restatement.
<TABLE>
<CAPTION>
Pro-forma
Unaudited
Nine Months
Ended
(Dollars in thousands, except per share data) May 31, 1996
--------------------------------------------- -----------------
<S> <C>
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 48,220
=================
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (6,423)
=================
Net loss per common share . . . . . . . . . . . . . . . . . . $ (.39)
=================
</TABLE>
6
<PAGE> 8
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - SUBSEQUENT EVENT
During July 1996, RMS Limited Partnership, the sole owner of the
Company's Class B Common Stock, converted all of its Class B Common
Stock into an equal number of shares of the Company's regular Common Stock in
accordance with the provisions of the Company's Certificate of Incorporation.
The Class B Common Stock possessed "super voting" rights to vote ten
to one on most matters submitted for stockholder approval under the Delaware
General Corporation Law, including the election of directors. The Class B
Common Stock also voted as a separate class and effectively had veto rights on
major corporate actions such as mergers, recapitalizations, and the sale of
assets, among other events. The Class B shares, which have been converted in
their entirety, have been retired and are not available for reissue.
As a consequence of the conversion, all of the Company's common stock
currently outstanding or eligible to be issued under the Company's restated
Certificate of Incorporation now vote as a single class on an one vote per
share basis on all matters submitted to shareholders.
NOTE 7 - OTHER MATTERS
On June 29, 1996, the Company, under Form 8-K, filed with the
Securities and Exchange Commission audited consolidated financial statements of
Vicorp N.V. and its subsidiaries ("Vicorp") and unaudited pro forma financial
statements of the Company and Vicorp giving effect to the purchase by the
Company of substantially all of the capital stock of Vicorp. The Board of
Directors of the Company is in the process of evaluating its strategic plans for
the integration of Vicorp's technology with the existing technology of the
Company in conjunction with a continuing review of the Company's long-term
development plans. As a result, the Company is in the process of revising the
unaudited pro forma financial statements filed under Form 8-K to adjust its
preliminary purchase price allocation for such acquisition.
7
<PAGE> 9
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Precision Systems, Inc. sells and supports solutions that simplify and
personalize communications for the customers of nearly 600 wireless, wireline,
and large virtual private network installations in more than 35 countries
around the world.
Contract Revenue and Costs
For the three and nine months ended May 31, 1996, contract revenue
increased to $6,395,463 and $15,283,553, respectively, compared to $4,103,652
and $10,050,260 for the same periods in fiscal 1995. Contract cost increased
for the three months ended May 31, 1996, to $3,841,307 compared to $1,751,934
for the same period in fiscal 1995. Contract cost for the nine months ended
May 31, 1996, increased to $7,218,361 compared to $5,079,233 for the nine
months ended May 31, 1995. Gross margin for the three and nine months ended
May 31, 1996, was $2,554,156 (40 percent of contract revenue) and $8,065,192,
respectively (53 percent of contract revenue) compared to $2,351,718 (57
percent of contract revenue) and $4,971,027, respectively (49 percent of
contract revenue) for fiscal 1995. The Company's gross margin percentage for
the three months ended May 31, 1996, decreased as compared to the same period
in fiscal 1995 primarily due to a higher amount of lower margin equipment
revenue in the contract revenue mix.
Contract revenue related to Enhanced Service Platforms ("ESP")
product sales to MCI was approximately $2,500,000 and $9,500,000 for the three
and nine months ended May 31, 1996, compared to approximately $3,700,000 and
$6,100,000, respectively, for the same periods in fiscal 1995. The overall
decrease in ESP-related product sales was due to MCI's lower purchasing volume
for its network traffic requirements.
Contract revenue associated with the UniPort(TM) product was
approximately $469,000 and $1,600,000 the three and nine months ended May 31,
1996, compared to approximately $421,000 and $4,000,000 for the same periods in
fiscal 1995. The first three quarters of fiscal 1995 included UniPort(TM)
sales that did not recur in fiscal 1996.
The Company currently is marketing UniPort(TM) and ESP products to
MCI. Although the Company anticipates generating revenue during the remainder
of fiscal 1996 by selling such products to MCI, no assurance can be given that
any such discussions will result in additional equipment orders from MCI. In
addition, with the acquisition of The Renaissance Group, the Company acquired
several customers with field trial systems in place. Formal contract
discussions are still in progress with certain of these customers, and
management feels that several of these trial systems will pass customer
specifications and requirements. Consequently, revenue generating
opportunities may be created from these efforts. However, there is no
assurance that these opportunities will result in a formal order for
products and/or services.
Contract revenue associated with Vicorp's Betex product was
approximately $3,300,000 for the period from the acquisition date to
May 31, 1996. Since the Vicorp acquisition was accounted for as a purchase,
the Company's consolidated statements of operations include the operations of
Vicorp since the acquisition date April 16, 1996. The Company expects the
revenue generated from the sale of Betex products to increase during the
remainder of fiscal 1996.
8
<PAGE> 10
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Service and Support
For the three and nine months ended May 31, 1996, service and support
revenue increased to $3,328,721 and $4,597,806, respectively, compared to
$1,510,941 and $4,170,589 for the corresponding periods in fiscal 1995.
Certain of the Company's, service and support revenue represents maintenance
services provided to MCI and the Home Shopping Network, Inc. ("HSN") for
certain Enhanced Service Platforms ("ESP") sold to both companies and to
certain software development services provided to MCI. Service and support
provided to MCI decreased to $314,000 and $1,579,000, respectively, for the
three and nine months ended May 31, 1996, compared to $1,130,000 and $2,593,000
for the same period in fiscal 1995. The decrease primarily is due to certain
non-recurring development projects delivered to MCI in fiscal 1995.
Service and support provided to HSN decreased to $362,000 and
$1,086,000 for the three and nine months ended May 31, 1996, respectively, in
comparison to $374,000 and $1,547,000 for the three and nine months ended may
31, 1995. HSN's service and support contract was renegotiated in fiscal 1995,
thereby reducing both the level of maintenance services and the revenue earned.
Service and support revenue for Vicorp's Betex product was
approximately $2,700,000 from the acquisition date to May 31, 1996. Vicorp's
service and support revenue includes maintenance and custom software
development services provided to its customers.
License Fee
For the three and nine months ended May 31, 1996, license fee revenue
was $1,202,040 and $1,202,040, respectively, compared to $0 and $436,800,
respectively, for the corresponding periods in fiscal 1995. License fee
revenue for fiscal 1996 primarily relates to the sale of Vicorp's Betex
products. During fiscal 1995, the Company charged MCI a fee for the use of its
proprietary software. The Company does not anticipate generating any material
future license fee revenue for its ESP equipment. However, the Company does
anticipate generating future license fee revenue for its Betex and UniPort(TM)
products, although no assurance can be given for such future revenue.
Selling, General, and Administrative Expenses
For the three and nine months ended May 31, 1996, selling, general,
and administrative expenses increased by $6,463,985 to $9,509,702 and increased
by $6,471,366 to $16,243,379, respectively, compared to the same periods in
fiscal 1995. The increase in selling, general and administrative expenses for
the three months ended May 31, 1996, primarily is due to the following:
- Vicorp's expenditures were approximately $4,400,000 subsequent to
the acquisition date, primarily relating to its numerous offices
throughout its European operations and the effect of such on its
overhead costs.
- Non-cash amortization expense relating to the intangible assets
acquired through the Vicorp transaction was approximately $800,000
from the acquisition date to May 31, 1996.
9
<PAGE> 11
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Selling, General, and Administrative Expenses (continued)
- The Company increased its allowance for doubtful accounts reserve
for estimated uncollectible receivables by approximately
$400,000 during the three months ended May 31, 1996.
- The Company also increased its expenditures in the marketing area
for items such as personnel, trade shows, advertising, and market
research in order to competitively market its products and to
increase future revenue.
As the Company's global strategy is implemented over the coming
fiscal quarters, the Company may, at its discretion, accrue for charges
necessary to organize its business to meet emerging market requirements and
opportunities.
Research, Engineering, and Development
For the three and nine months ended May 31, 1996, research,
engineering, and development expenses increased to $1,887,551 and $3,816,398,
respectively, compared to $706,791 and $2,312,669, respectively, in the same
periods in fiscal 1995. The increase in research, engineering, and development
expenses primarily relates to the increase in the research and development
staff in order to maintain customer needs and future expectations. In
addition, Vicorp's research, engineering and development expenses from the
acquisition date to May 31, 1996, were approximately $1,100,000. Management
does believe that it operates in a highly competitive business environment and,
in order to maintain a competitive position, the Company will continue to
expend funds to improve its core products and to develop new products.
Investment Gain on Marketable Equity Securities
The Company's investment gain of $1,262,414 relates to its $7,296,034
purchase of marketable equity securities. Such securities were sold prior to
May 31, 1996. The investment gains associated with these securities are
included in the Company's statements of earnings.
Interest Income (Expense)
For the three and nine months ended May 31, 1996, net interest income
increased to $107,717 and $264,052, respectively, compared to net interest
income (expense) of $3,056 and ($93,762), respectively, in the same periods in
fiscal 1995. The increase in net interest income primarily is due to the
effects of the $8,625,000 capital infusion from Vulcan and the related interest
income earned on such funds.
Discontinued Operations
Effective April 30, 1995, the Company disposed of its debit card
service operations in exchange for approximately $1,025,000 in cash and the
assumption of certain liabilities.
10
<PAGE> 12
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Income Taxes
For the three and nine months ended May 31, 1996, income taxes were
$210,000 and $210,000, respectively, and represent the amounts due for certain
of Vicorp's profitable operations in Europe.
Factors That May Affect Future Results
A number of uncertainties exist that could have an impact on the
Company's future operating results, including economic conditions,
technological issues, and competitive factors; many of such uncertainties are
outside the Company's control and could postpone, delay, or eliminate potential
sales opportunities. These uncertainties, therefore, can affect the Company's
ability to sell, deliver, and install its products in a consistent manner.
Consequently, the Company's past financial performance should not be considered
to be a reliable indication of future performance and investors should not use
historical trends to anticipate results or trends in future periods.
Litigation
The Company is subject to certain legal actions arising in the
course of business. After taking into consideration legal counsel's evaluation
of such actions, management is of the opinion that their final resolution will
not have any significant adverse effect upon the Company's business or its
consolidated financial statements.
Financial Position, Liquidity, and Capital Resources
At May 31, 1996, the Company had working capital of $9,472,500
compared to $10,546,611 at August 31, 1995. The Company expects to be able to
fund its operating and investing activities through fiscal 1996 through the use
of its current working capital, including the collection of existing accounts
receivables and the generation of future revenues.
The Company's account and contracts receivable increased to
$14,426,385, as of May 31, 1996, from $5,618,496 as of August 31, 1995. The
increase primarily relates to an increase in revenue volume associated with the
acquisition of the operations of Vicorp.
The Company's accounts payable increased to $12,445,537 as of May 31,
1996, from $1,331,784 as of August 31, 1995. The increase primarily relates to
an increase in revenue volume associated with the acquisition of the operations
of Vicorp.
The Company's deferred revenue increased to $6,253,177 as of May 31,
1996, from $1,801,475 as of August 31, 1995, primarily due to the acquisition
of Vicorp.
The Company incurred approximately $1,300,000 in expenditures for
capital assets for the nine months ended May 31, 1996.
On April 16, 1996, the Company acquired Vicorp N.V., a Netherlands
Antilles corporation ("Vicorp"). In the transaction, the Company issued
3,135,467 shares of Common Stock for the issued and outstanding stock of
Vicorp.
11
<PAGE> 13
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Financial Position, Liquidity, and Capital Resources (continued)
In connection with the transaction, the Company, Alta Investissements,
S.A. ("Alta"), Primwest holding, S.A. ("Primwest"), and certain shareholders
of the Company entered into a Shareholders' Agreement pursuant to which
Primwest, the controlling shareholder of Alta, shall be entitled to certain
registration rights and to nominate one member of the Company's Board of
Directors for so long as Primwest owns at least 10 percent of the Company's
Common Stock. Subject to certain limitations, the Company will have a right of
first refusal with respect to shares of Common Stock issued to Alta in the
transaction. Primwest also agreed not to transfer shares of Precision System,
Inc.'s stock for a twelve-month period.
Inflation
Inflation has not had a significant impact on the Company's
operations. Given the Company's recent acquisition of Vicorp and its large
presence in international markets, inflationary factors could have a larger
impact on the Company's operations in the future.
Seasonality
Seasonality does not impact the Company's business at this time.
Other Matters
On June 29, 1996, the Company, under Form 8-K, filed with the
Securities and Exchange Commission audited consolidated financial statements of
Vicorp N.V. and its subsidiaries ("Vicorp") and unaudited pro forma financial
statements of the Company and Vicorp giving effect to the purchase by the
Company of substantially all of the capital stock of Vicorp. The Board of
Directors of the Company is in the process of evaluating its strategic plans for
the integration of Vicorp's technology with the existing technology of the
Company in conjunction with a continuing review of the Company's long-term
development plans. As a result, the Company is in the process of revising the
unaudited pro forma financial statements filed under Form 8-K to adjust its
preliminary purchase price allocation for such acquisiton.
Forward-looking Information
The foregoing discussion in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contains forward-looking
statements which reflect management's current views with respect to future
events and financial performance. Such statements involve risks and
uncertainties and there are certain important factors that could cause actual
results to differ materially from those anticipated. Some of the important
factors which could cause actual results to differ materially from those
anticipated include, but are not limited to economic conditions, technological
issues and competitive factors, and other uncertainties, all of which are
difficult to predict and many of which are beyond the control of the Company.
Due to such uncertainties and risks, readers are cautioned not to place undue
reliance on such forward-looking statements, which speak only as of the date
hereof.
12
<PAGE> 14
PART II - OTHER INFORMATION
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
None
13
<PAGE> 15
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 SYSTEMS, INC.
Date: July 22, 1996 /s/ Russell I. Pillar
------------------- --------------------------------------------------
Russell I. Pillar, President and Chief Executive
Officer
Date: July 22, 1996 /s/ John R. Hindman
------------------- --------------------------------------------------
John R. Hindman, Senior Vice President and
Chief Financial Officer
Date: July 22, 1996 /s/ Kenneth M. Clinebell
------------------- ---------------------------------------------------
Kenneth M. Clinebell, Vice President and Controller
(Principal Accounting Officer)
14
