<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 NOVEMBER 30, 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
incorporation or organization) Identification No.)
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 January 13,
1997:
Common Stock . . . . . . . . . . . . . . . . . . . . . . . 17,667,393
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . 10,000
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRECISION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended November 30,
------------------------------------
1996 1995
---------------- ---------------
<S> <C> <C>
REVENUE
Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,585,221 $ 2,938,616
Service and support . . . . . . . . . . . . . . . . . . . . . . . . 4,671,159 1,320,335
License fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,330,600 -
----------------- ---------------
7,586,980 4,258,951
COSTS AND EXPENSES
Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,051,379 1,862,087
Selling, general, and administrative . . . . . . . . . . . . . . . . 7,501,846 2,434,825
Research, engineering and development . . . . . . . . . . . . . . . 1,363,872 828,796
Depreciation and amortization . . . . . . . . . . . . . . . . . . . 1,841,076 571,836
----------------- ---------------
11,758,173 5,697,544
----------------- ---------------
Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,171,193) (1,438,593)
Unrealized holding gain on marketable equity securities . . . . . . . . . - 891,196
Interest income (expense), net . . . . . . . . . . . . . . . . . . . . . (144,190) 57,978
----------------- ---------------
Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . . (4,315,383) (489,419)
Income taxes expense . . . . . . . . . . . . . . . . . . . . . . . . . . - -
----------------- ---------------
NET LOSS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,315,383) (489,419)
Preferred stock dividend requirements . . . . . . . . . . . . . . . . . . 86,762 86,762
----------------- ---------------
Net loss applicable to common stock . . . . . . . . . . . . . . . . . . . $ (4,402,145) $ (576,181)
================= ===============
EARNINGS (LOSS) PER SHARE:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (.25) $ (.04)
================= ===============
Net loss applicable to common stock . . . . . . . . . . . . . . . . $ (.25) $ (.04)
================= ===============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
<PAGE> 3
PRECISION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
November 30, August 31,
1996 1996
-------------- ---------------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,820,409 $ 12,174,250
Billed and unbilled accounts receivable . . . . . . . . . . . . . . . 9,709,101 9,536,321
Supplies and other current assets . . . . . . . . . . . . . . . . . . 1,309,845 1,491,020
-------------- ---------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . 15,839,355 23,201,591
Property, Plant and Equipment, Net . . . . . . . . . . . . . . . . . . . 8,922,819 8,518,542
INTANGIBLE ASSETS, NET . . . . . . . . . . . . . . . . . . . . . . . . . 18,718,993 15,837,213
-------------- ---------------
$ 43,481,167 $ 47,557,346
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt . . . . . . . . . . . . . . . . . . $ 2,405,190 $ 2,845,598
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,212,354 3,295,066
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,299,107 8,176,301
Customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . 99,772 99,772
Billings in excess of costs and earnings on uncompleted contracts . . 2,408,399 2,896,178
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,991,918 2,114,896
-------------- ---------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 17,416,740 19,427,811
-------------- ---------------
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 611,093 280,727
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Non-redeemable preferred stock -- $.01 par value; Series A
6 percent Cumulative Convertible Preferred Stock; convertible at
$4.76 per share, authorized 50,000 shares, issued and outstanding
10,000 shares; liquidation preference $5,800,000 . . . . . . . . . 100 100
Common stock -- $.01 par value; authorized 30,000,000 shares,
issued 17,667,393 and 17,266,382 shares, respectively . . . . . . . 176,673 172,667
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 108,614,645 106,884,212
Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (84,083,957) (79,768,574)
Treasury stock (132,937 shares) -- at cost . . . . . . . . . . . . . . (422,360) (422,360)
Accumulated preferred stock dividend . . . . . . . . . . . . . . . . . 1,033,318 946,556
Cumulative foreign currency translation adjustment . . . . . . . . . . 396,493 355,416
Unearned compensation . . . . . . . . . . . . . . . . . . . . . . . . (261,578) (319,209)
-------------- ---------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . 25,453,334 27,848,808
-------------- ---------------
$ 43,481,167 $ 47,557,346
============== ===============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE> 4
PRECISION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended November 30,
---------------------------------
1996 1995
-------------- ---------------
<S> <C> <C>
Cash flows - operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (4,315,383) $ (489,419)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . 1,841,076 571,836
Amortization of unearned compensation . . . . . . . . . . . . . . . 57,631 -
Unrealized gain on marketable equity securities . . . . . . . . . . - (891,196)
Purchase of marketable equity services . . . . . . . . . . . . . . - (7,296,054)
Change in current assets and liabilities, net of business
acquisitions:
Decrease in accounts receivable . . . . . . . . . . . . . . . . 434,441 382,801
(Increase) decrease in supplies and other current assets . . . . 218,172 (339,800)
Increase (decrease) in accounts payable . . . . . . . . . . . . (1,043,518) 246,317
Decrease in accrued expenses . . . . . . . . . . . . . . . . . . (1,239,860) (147,110)
Decrease in billings in excess of earnings on uncompleted
contracts . . . . . . . . . . . . . . . . . . . . . . . . . . (487,779) -
Decrease in deferred revenue . . . . . . . . . . . . . . . . . . (122,978) (320,695)
-------------- ---------------
NET CASH USED IN OPERATING ACTIVITIES . . . . . . . . . . . . (4,658,198) (8,283,320)
-------------- ---------------
Cash flows - investing activities:
Purchase of property, plant and equipment . . . . . . . . . . . . . . (700,117) (376,105)
Purchase of consolidated subsidiary, net of cash acquired . . . . . . (1,447,466) -
-------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES . . . . . . . . . . . . . . . (2,147,583) (376,105)
-------------- ---------------
Cash flows - financing activities:
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . 165,368 8,968,096
Repayments on debt outstanding . . . . . . . . . . . . . . . . . . . . (713,428) -
-------------- ---------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES . . . . . . . . (548,060) 8,968,096
-------------- ---------------
NET INCREASE (DECREASE) IN CASH . . . . . . . . . . . . . . . . . . . . . (7,353,841) 308,671
Cash at beginning of period . . . . . . . . . . . . . . . . . . . . . . . 12,174,250 7,702,535
-------------- ---------------
Cash at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,820,409 $ 8,011,206
============== ===============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 5
PRECISION SYSTEMS, INC.
CONDENSED CONSOLIDATED STOCKHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Non- Cumulative
Redeemable Common Foreign
Preferred Stock Additional Accumulated Currency
Stock $.01 $.01 Par Paid-in Treasury Preferred Translation
Par Value Value Capital Deficit Stock Dividends Adjustment
----------- -------- ---------- ------------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
SEPTEMBER 1, 1996 . . . $ 100 $ 172,667 $ 106,884,212 $ (79,768,574) $(422,360) $ 946,556 $ 355,416
Issuance of common stock
upon acquisition of
BFD Productions . . . . - 2,723 1,653,110 - - - -
Issuance of common stock
upon exercise of stock
options . . . . . . . . - 1,283 164,085 - - - -
Net loss for the three
months ended
November 30, 1996 . . . - - - (4,315,383) - - -
Foreign currency
translation adjustment . - - - - - - 41,077
Amortization of unearned
compensation . . . . . . - - - - - - -
Dividends on preferred
stock . . . . . . . . . - - (86,762) - - 86,762 -
-------- --------- ------------- ------------- --------- ---------- ----------
BALANCE AT
NOVEMBER 30, 1996 . . . $ 100 $ 176,673 $ 108,614,645 $ (84,083,957) $(422,360) $1,033,318 $ 396,493
======== ========= ============= ============= ========= ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Unearned
Compensation Total
------------- -------------
<S> <C> <C>
BALANCE AT
SEPTEMBER 1, 1996 . . . $ (319,209) $ 27,848,808
Issuance of common stock
upon acquisition of
BFD Productions . . . . - 1,655,833
Issuance of common stock
upon exercise of stock
options . . . . . . . . - 165,368
Net loss for the three
months ended
November 30, 1996 . . . - (4,315,383)
Foreign currency
translation adjustment . - 41,077
Amortization of unearned
compensation . . . . . . 57,631 57,631
Dividends on preferred
stock . . . . . . . . . - -
----------- -------------
BALANCE AT
NOVEMBER 30, 1996 . . . $ (261,578) $ 25,453,334
=========== =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 6
PRECISION SYSTEMS, INC.
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, 1996 and 1995.
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 COMMON SHARE
Loss per common share for the three months ended November 30, 1996 and
1995, have been computed based upon the weighted average common shares
outstanding of 17,396,836 and 13,646,982, respectively. The loss per share
calculation does not include common stock equivalents as their inclusion would
be anti-dilutive.
NOTE 3 - INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
November 30, August 31,
1996 1996
------------------ -----------------
(unaudited)
<S> <C> <C>
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,911,582 $ 20,316,703
Developed technology value . . . . . . . . . . . . . . . . . . 3,090,000 3,090,000
Assembled work force value . . . . . . . . . . . . . . . . . . 890,000 890,000
Software licenses . . . . . . . . . . . . . . . . . . . . . . . 312,443 312,443
----------------- ----------------
28,204,025 24,609,146
Less accumulated amortization . . . . . . . . . . . . . . . . . 9,485,032 8,771,933
----------------- ---------------
$ 18,718,993 $ 15,837,213
================= ================
</TABLE>
5
<PAGE> 7
PRECISION SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
November 30, August 31,
1996 1996
---------------- -----------------
(unaudited)
<S> <C> <C>
Note payable to shareholder, interest at 6 percent,
unsecured and due January 1997 . . . . . . . . . . . . . . . $ 698,127 $ 1,148,127
Note payable, interest at 5 percent, and due
February 1997 . . . . . . . . . . . . . . . . . . . . . . . 1,269,475 1,269,475
Capital lease obligations, interest rates varying from 6
percent to 12 percent; collateralized by certain assets . . . 1,048,681 708,723
----------------- ----------------
3,016,283 3,126,325
Less current portion . . . . . . . . . . . . . . . . . . . . . (2,405,190) (2,845,598)
----------------- ----------------
$ 611,093 $ 280,727
================= ================
</TABLE>
NOTE 5 - BUSINESS ACQUISITIONS
The Company acquired substantially all of the capital stock of Vicorp,
N.V. ("Vicorp") in April 1996 by issuing 3,135,467 shares of newly issued
common stock. In addition, the Company assumed certain outstanding obligations
of Vicorp and converted options issued to Vicorp employees into options to
purchase the Company's stock.
Vicorp shareholders received 29.46 shares of the Company's common
stock for each share of Vicorp stock they owned. The discounted exchange value
of the shares issued to Vicorp holders and the value of options issued to
Vicorp employees, together with an agreement to pay certain obligations of
Vicorp, equaled approximately $31,000,000. The agreement includes a lock-up
provision and a right of first refusal back to the Company on certain shares of
the Company' stock that, as a result of this transaction, will be held by
certain current Vicorp shareholders. The acquisition was accounted for by the
purchase method of accounting. The 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.
6
<PAGE> 8
PRECISION SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The preliminary purchase price allocation among the assets acquired
and liabilities assumed in the acquisition of Vicorp are as follows:
<TABLE>
<S> <C>
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,403,000
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . 10,766,000
Other current assets . . . . . . . . . . . . . . . . . . . . . 846,000
-----------------
Total current assets . . . . . . . . . . . . . . . . . . . 16,015,000
-----------------
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . 5,367,000
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . 6,514,000
Other current liabilities . . . . . . . . . . . . . . . . . . . 5,240,000
-----------------
Total current liabilities . . . . . . . . . . . . . . . . 17,121,000
-----------------
Net current liabilities . . . . . . . . . . . . . . . . . (1,106,000)
-----------------
Long-term assets . . . . . . . . . . . . . . . . . . . . . . . 5,386,000
Long-term liabilities . . . . . . . . . . . . . . . . . . . . . (3,749,000)
Developed technology value . . . . . . . . . . . . . . . . . . 3,090,000
Assembled work force value . . . . . . . . . . . . . . . . . . 890,000
Purchased research and development . . . . . . . . . . . . . . 19,500,000
Residual goodwill . . . . . . . . . . . . . . . . . . . . . . . 8,423,985
-----------------
Total purchase price . . . . . . . . . . . . . . . . . . . $ 32,434,985
=================
</TABLE>
On October 2, 1996, the Company acquired BFD Productions, Inc.
("BFD"), a Nevada corporation. In the transaction, the Company paid $1,500,000
in cash and issued approximately 275,000 shares of Common Stock for all the
issued and outstanding stock of BFD. The acquisition was accounted for
using the purchase method of accounting. This purchase price of $3,394,749 was
comprised of $1,500,000 in cash, Company common stock valued at $1,655,833, and
other direct acquisition costs totaling $238,916.
The preliminary purchase price allocation among the assets acquired
and liabilities assumed in the acquisition of BFD are as follows:
<TABLE>
<S> <C>
Current assets . . . . . . . . . . . . . . . . . . . . . . . . $ 697,000
Current liabilities . . . . . . . . . . . . . . . . . . . . . . 1,392,000
-----------------
Net current liabilities . . . . . . . . . . . . . . . . . (695,000)
-----------------
Long-term assets . . . . . . . . . . . . . . . . . . . . . . . 832,000
Long-term liabilities . . . . . . . . . . . . . . . . . . . . . 337,000
Residual goodwill . . . . . . . . . . . . . . . . . . . . . . . 3,594,749
-----------------
Total purchase price . . . . . . . . . . . . . . . . . . . $ 3,394,749
=================
</TABLE>
7
<PAGE> 9
PRECISION SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro-forma summary presents the Company's
results of operations as if the BFD acquisition had occurred at the beginning
of the periods 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 that 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 BFD were combined from
the effective date of the acquisition forward, with no retroactive restatement.
<TABLE>
<CAPTION>
Pro-Forma Pro-Forma
Unaudited Unaudited
Three Months Three Months
Ended Ended
November 30, November 30,
1996 1995
------------------ ------------------
<S> <C> <C>
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,844,487 $ 5,012,677
================== ==================
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (4,358,583) $ (539,893)
================== ==================
Net loss per common share . . . . . . . . . . . . . . . . . . . $ (.25) $ (.04)
================== ==================
</TABLE>
NOTE 6 - OTHER MATTERS
On September 30, 1996, the Company elected to change its year end from
August 31 to December 31. The change will be effective January 1, 1997.
On October 25, 1996, Russell I. Pillar resigned as the Company's
President and Chief Executive Officer. In connection with his resignation from
the Company, Mr. Pillar will receive a lump sum payment of one year's salary
($230,000), a six-month consulting agreement for $19,167 per month and the
right to reimbursement of health insurance premiums for up to one year past
employment. Additionally, Mr. Pillar received automatic advance vesting on
certain fiscal 1996 restricted stock grants (approximately 10,000 shares).
8
<PAGE> 10
PRECISION SYSTEMS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Precision Systems, Inc. ("PSi" or the "Company") provides solutions
that simplify and personalize telecommunications. The Company's range of
software-based products are used by global wireless, wireline and private
network providers to deploy a wide range of voice, data and video-based
enhanced services on a common hardware and software platform. In addition, the
Company supports its products through maintenance contracts.
Since both the Vicorp and the BFD acquisitions were accounted for by
using the purchase method of accounting, the Company's consolidated statements
of operations include the operations of Vicorp and BFD since the acquisition
dates (Vicorp - April 1996; BFD - October 1996). The Company's "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
relating to the November 30, 1996 Form 10-Q are structured as such.
Contract Revenue and Costs
Contract revenue decreased to $1,585,221 for the three months ended
November 30, 1996, compared to $2,938,616 for the three months ended November
30, 1995. Contract costs decreased to $1,051,379 for the three months ended
November 30, 1996, compared to $1,862,087 for the three months ended November
30, 1995. Consequently, gross margin generated by contract revenue for the
three months ended November 30, 1996, was $533,842 (34 percent of contract
revenue) compared to $1,076,529 (37 percent of contract revenue). Contract
revenue related to ESP product sales to MCI was approximately $165,000 for the
three months ended November 30, 1996, compared to approximately $2,500,000 for
three months ended November 30, 1995. The decrease in ESP-related product
sales was due to a sale to MCI in the first quarter of fiscal 1996 that did not
recur in the first quarter of fiscal 1997.
Contract revenue associated with the Vicorp's BETEX product were
$1,335,812 for the three months ended November 30, 1996. The Company expects
the revenue generated from the sale of BETEX products to increase during the
next year.
Service and Support
Service and support revenue increased to $4,671,159 for the three
months ended November 30, 1996, compared to $1,320,335 for the three months
ended November 30, 1995.
Service and support provided to MCI decreased to $458,736 for the
three months ended November 30, 1996, compared to $935,325 for the three months
ended November 30, 1995. Maintenance revenue generated from MCI regarding its
ESP equipment increased to $389,731 for the three months ended November 30,
1996, compared to $251,940 for the same period in fiscal 1995. The increase in
maintenance revenue primarily relates to additional ESP equipment delivered to
MCI during fiscal 1996 that is subject to the Company's maintenance services.
In addition, the Company's service and support revenue relating to its software
development services provided to MCI decreased to $68,750 for the three months
ended November 30, 1996, from $683,385 for the same period in fiscal 1995. The
decrease is due to certain non-recurring development projects delivered to MCI,
which occurred during the first quarter of fiscal 1996. The Company expects
the service and support revenue generated through its current relationship with
MCI to increase during the next year.
9
<PAGE> 11
PRECISION SYSTEMS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Service and support provided to HSN decreased to $361,398 for the
three months ended November 30, 1996, in comparison to $362,031 for the three
months ended November 30, 1995.
Service and support revenue for Vicorp's BETEX products were
$3,309,153 for the three months ended November 30, 1996. Vicorp's service and
support revenue includes maintenance and custom development services provided
to its customers.
Service and support revenue for BFD was $542,120 from the acquisition
date to November 30, 1996. BFD's service and support revenue primarily
includes interactive voice response service bureau activity.
License Fee
License fee revenue for the three months ended November 30, 1996, was
$1,330,600 compared to $0 for the three months ended November 30, 1995.
License fee revenue for the three months ended November 30, 1996, relating to
its UniPort product line was $69,600 and $1,261,000 for the BETEX product line.
The Company anticipates generating future license fee revenue for its
UniPort(TM) and BETEX products, although no assurance can be given for such
future revenue.
Selling, General, and Administrative Expenses
Selling, general and administrative expenses increased to $7,501,846
for the three months ended November 30, 1996, compared to $2,434,825 for the
three months ended November 30, 1995. The increase in selling, general and
administrative expenses for the three months ended November 30, 1996, is
primarily due to the following:
o Selling, general and administrative expenses associated with
the operations of Vicorp were approximately $4,500,000.
o Selling, general and administrative expenses associated with
the BFD acquisition were approximately $450,000 from the
acquisition date to November 30, 1996.
Although overall selling, general, and administrative expenses from
continuing operations increased during the three months ended November 30,
1996, in comparison to previous periods, the Company has made efforts at
managing and controlling costs in order to improve the alignment of cost
outlays against potential revenue opportunities.
Research, Engineering and Development
Research, engineering and development expenses increased to $1,363,872
for the three months ended November 30, 1996, compared to $828,796 for the
three months ended November 30, 1995. The increase in research, engineering,
and development expenses primarily relates to further development work
associated with the Company's UniPort(TM) and BETEX products. Resources will
continue to be directed toward product improvements and enhancements for future
purchased releases of the Company's products. Additionally, the Company will
continue to evaluate its different product lines to maximize the impact of the
research, engineering and development expenditures.
The Company believes it operates in a highly competitive market; and,
in order to maintain a competitive position, the Company's existing products
must be continually improved and new products must be developed. The amount
and timing of future research, engineering, and development expenditures will
depend upon, among other factors, future new contract revenue and the Company's
ability to fund these costs from future operating cash flow and bank or other
forms of financing.
10
<PAGE> 12
PRECISION SYSTEMS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Depreciation and Amortization
Depreciation and amortization was $1,841,076 for the three months
ended November 30, 1996, compared to $571,836 for the three months ended
November 30, 1995. The increase is primarily due to amortization expense
associated with intangible assets acquired during the Vicorp and BFD
acquisitions.
Income Tax Expense
The Company uses the asset and liability method to account for
deferred income taxes. Under the asset and liability method, deferred income
taxes are recognized for the tax consequences of "temporary differences" by
applying enacted statutory tax rates applicable to future years to differences
between the financial statement carrying amounts and the tax basis of existing
assets and liabilities. Under FAS No. 109, the effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Unrealized Holding Gain on Marketable Equity Securities
The Company's unrealized holding gain of $891,196 for the three months
ended November 30, 1995, relates to its $7,296,034 purchase of marketable
equity securities which were classified as trading securities and, therefore,
were carried at fair value. The unrealized holding gain associated with these
securities were included in the Company's statement of operations for the three
months ended November 30, 1995.
Interest Income (Expense)
For the three months ended November 30, 1996, net interest income
(expense) was $(144,190) compared to $57,978 during the same period in fiscal
1995. The decrease in net interest income for the quarter ended November 30,
1996, primarily is due to the effects of the debt assumed by the Company as a
part of the Vicorp and BFD acquisitions.
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.
Financial Position, Liquidity and Capital Resources
At November 30, 1996, the Company had working capital deficiency of
$1,577,385 compared to working capital of $3,773,780 at August 31, 1996. The
decrease in net working capital is primarily due to the cash required to fund
the Company's net loss from operations and to the payment of $1,500,000 in cash
relating to the BFD acquisition. The Company expects that, with the
acquisition of Vicorp and BFD, its working capital requirements will increase
significantly over prior periods and it will be able to fund its operating and
investing activities for fiscal 1997 through the use of its current working
capital, including the collection of existing accounts receivables and the
generation of future revenues. In the event that such sources prove to be
insufficient, the Company may be required to seek additional debt or equity
financing.
11
<PAGE> 13
PRECISION SYSTEMS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
During November 1995, 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.
The Company's billed and unbilled accounts receivable increased to
$9,709,101 as of November 30, 1996, from $9,536,321 as of August 31, 1996. The
increase primarily relates to the increase in the Company's revenue during the
three months ended November 30, 1996.
The Company's supplies and other current assets decreased to
$1,309,845 as of November 30, 1996, from $1,491,020 as of August 31, 1996. The
decrease is due to the sale of certain inventory prior to November 30, 1996,
that was not replenished until subsequent to quarter end.
The Company's current portion of long-term debt decreased to
$2,405,190 as of November 30, 1996, from $2,845,598 as of August 31, 1996. The
Company's long-term debt increased to $611,093 as of November 30, 1996, from
$280,727 as of August 31, 1996. The decrease in total debt is primarily due to
repayment of certain debt originally assumed through the Vicorp acquisition.
The Company's accounts payable decreased to $3,212,354 as of November
30, 1996, from $3,295,066, as of August 31, 1996, due to the timing of certain
vendor payments.
The Company's accrued expenses decreased to $7,299,107 as of November
30, 1996, from $8,176,301 as of August 31, 1996, primarily due to the timing of
the Company's payroll process in relation to the November 1996 month-end.
The Company's deferred revenue decreased to $1,991,918 as of November
30, 1996, from $2,114,896 as of August 31, 1996, due to timing of maintenance
revenue from prepaid maintenance contracts.
The Company's common stock and additional paid-in capital increased to
$108,791,318 as of November 30, 1996, from $107,056,879 as of August 31, 1996,
primarily due to the issuance of 272,285 shares of the Company's common stock
relating to the BFD acquisition.
The Company incurred approximately $700,000 in expenditures for
capital assets for the three months ended November 30, 1996.
Management is actively involved in discussions with several potential
sources of capital investment. Although management feels that the Company will
be able to fund its operating and investing activities through fiscal 1997
through the use of its current working capital, including the collection of
existing accounts receivables and the generation of future revenues,
additional sources of capital are being investigated for future requirements.
However, there is no assurance that any such discussion will result in
additional capital sources for the Company.
Litigation
Reference is made to the legal proceedings described at Part 1, Item
3, in the Company's August 31, 1996, Form 10-K. The Company is subject to
certain legal actions arising in the normal 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.
12
<PAGE> 14
PRECISION SYSTEMS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-looking Information
The foregoing discussion in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contains forward-looking
statements that reflect management's current views with respect to future
events and the financial performance and condition of the Company. 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 that could cause actual results to
differ materially from those anticipated include:
o Technological changes and the requirement for the Company to
expend funds to develop new products
o Market changes and the ability of the Company to adapt its
products to such changes
o Intense competition
o Ability of the Company to properly estimate costs under fixed
price contracts
o Increased risk to patent infringement in the Company's industry
o Ability to retain its larger customers, including MCI
o Availability of certain hardware and software components that are
incorporated with the Company's products and are purchased from a
limited number of vendors
o Ability of the Company to hire and retain qualified personnel
o Legislative changes affecting the Company's markets, including the
Telecommunications Act of 1996
o Given the Company's acquisition of Vicorp and its large presence
in international markets, regulatory, monetary and inflationary
factors can negatively impact the Company's operations in the
future.
Many of such uncertainties are outside the Company's control and could
postpone, delay, or eliminate potential sales opportunities and, therefore,
affect the Company's operations. Due to such uncertainties and risk, readers
are cautioned not to place undue reliance on such forward-looking statements,
which speak only as of the date hereof.
Inflation
Inflation has not had a significant impact on the Company's
operations.
Seasonality
Seasonality does not impact the Company's business at this time.
13
<PAGE> 15
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. REPORTS ON FORM 8-K
None
EXHIBITS
27 Financial Data Schedule (for SEC use only)
14
<PAGE> 16
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: January 14, 1997 /s/ Willem Huisman
-----------------------------------
Willem Huisman, Chief Executive
Officer
Date: January 14, 1997 /s/ Steven H. Grant
-----------------------------------
Steve H. Grant, Chief Financial
Officer
Date: January 14, 1997 /s/ Kenneth M. Clinebell
-----------------------------------
Kenneth M. Clinebell, Vice
President and Controller
(Principal Accounting
Officer)
15
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<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> NOV-30-1996
<CASH> 4,820,409
<SECURITIES> 0
<RECEIVABLES> 9,709,101
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 15,839,355
<PP&E> 34,600,772
<DEPRECIATION> 25,677,953
<TOTAL-ASSETS> 43,481,167
<CURRENT-LIABILITIES> 17,416,740
<BONDS> 0
0
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<COMMON> 176,673
<OTHER-SE> 25,276,561
<TOTAL-LIABILITY-AND-EQUITY> 43,481,167
<SALES> 1,585,221
<TOTAL-REVENUES> 7,586,980
<CGS> 1,051,379
<TOTAL-COSTS> 1,051,379
<OTHER-EXPENSES> 10,706,794
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 144,190
<INCOME-PRETAX> (4,315,383)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,315,383)
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<EXTRAORDINARY> 0
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<NET-INCOME> (4,315,383)
<EPS-PRIMARY> (.25)
<EPS-DILUTED> (.25)
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