<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 June 30, 1997
[ ] 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 the 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 REGISTRANTS TO CORPORATE ISSUERS: Indicate the number of
shares outstanding of each of the issuer's classes of common stock as of the
latest practicable date.
Total number of shares of outstanding common stock as of August 11, 1997:
Common Stock............................................. 17,596,059
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------------- ---------------------------------
1997 1996 1997 1996
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
REVENUES
Contract revenue $ 4,211,557 $ 2,673,360 $ 6,022,610 $ 7,019,343
Service and support 5,100,162 5,082,008 11,384,205 5,969,436
License fees 2,774,787 2,145,018 4,734,982 2,775,388
------------ ------------ ------------ ------------
12,086,506 9,900,386 22,141,797 15,764,167
------------ ------------ ------------ ------------
COST OF SALES 4,174,608 3,103,981 7,748,310 4,960,612
------------ ------------ ------------ ------------
GROSS MARGIN 7,911,898 6,796,405 14,393,487 10,803,555
------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling, general and administrative 7,162,703 8,663,593 13,729,542 12,083,488
Research, engineering and development 727,001 1,036,080 1,409,829 1,934,566
Depreciation and amortization 1,708,456 2,435,758 3,464,861 3,036,464
------------ ------------ ------------ ------------
9,598,160 12,135,431 18,604,232 17,054,518
------------ ------------ ------------ ------------
Operating loss (1,686,262) (5,339,026) (4,210,745) (6,250,963)
Interest income (expense), net 55,542 152,595 (32,211) 297,004
Gain on sale of marketable equity securities -- -- -- 371,218
------------ ------------ ------------ ------------
Loss before income taxes (1,630,720) (5,186,431) (4,242,956) (5,582,741)
Income taxes -- -- -- --
------------ ------------ ------------ ------------
NET LOSS (1,630,720) (5,186,431) (4,242,956) (5,582,741)
Preferred stock dividend requirements (169,611) (86,762) (255,419) (173,523)
------------ ------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON STOCK $ (1,800,331) $ (5,273,193) $ (4,498,375) $ (5,756,264)
============ ============ ============ ============
LOSS PER SHARE
Net loss $ (.09) $ (.31) $ (.24) $ (.37)
============ ============ ============ ============
Net loss applicable to common stock $ (.10) $ (.32) $ (.26) $ (.38)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE> 3
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- -------------
(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 3,027,485 $ 4,601,818
Accounts and contracts receivable, net 9,174,854 12,400,000
Supplies and other current assets 1,688,546 1,685,874
Costs and earnings in excess of billings on uncompleted contracts 5,551,359 3,064,978
-------------- -------------
Total current assets 19,442,244 21,752,670
-------------- -------------
PROPERTY, PLANT AND EQUIPMENT, NET 8,311,070 8,824,858
INTANGIBLE ASSETS, NET 16,374,601 18,616,847
-------------- -------------
$ 44,127,915 $ 49,194,375
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 604,974 $ 2,374,287
Accounts payable 3,871,443 4,395,128
Accrued expenses 6,222,440 8,152,294
Billings in excess of costs and earnings on uncompleted contracts 3,191,063 3,753,132
Deferred revenue 2,171,707 2,689,044
------------- -------------
Total current liabilities 16,061,627 21,363,885
------------- -------------
LONG-TERM DEBT 275,443 369,377
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Non-redeemable preferred stock -- $.01 par value; authorized 50,000 shares:
Series A 6 percent Cumulative Convertible Preferred Stock; convertible
at $4.76 per share, issued and outstanding 10,000 shares; liquidation preference
$5,800,000 100 100
Series B 8 percent Cumulative Convertible Preferred Stock; convertible at
$4.47 per share, issued and outstanding 4,500 shares; liquidation preference
$4,500,000 45 --
Common stock-- $.01 par value; authorized 30,000,000 shares, issued
17,712,295 and 17,696,367 shares, respectively 174,825 176,964
Additional paid-in capital 113,971,375 109,643,293
Deficit (87,478,345) (83,235,389)
Treasury stock (132,937 shares)-- at cost (422,360) (422,360)
Accumulated preferred stock dividends 1,318,293 1,062,874
Cumulative foreign currency translation adjustment 347,029 355,748
Unearned compensation (120,117) (120,117)
------------- -------------
Total stockholders' equity 27,790,845 27,461,113
------------- -------------
$ 44,127,915 $ 49,194,375
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 4
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------
1997 1996
----------- --------------
<S> <C> <C>
CASH FLOWS -- OPERATING ACTIVITIES:
Net loss $ (4,242,956) $ (5,582,741)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 3,464,861 3,036,464
Provision for losses on accounts receivable 81,528 598,189
Amortization of unearned compensation -- 80,940
Realization of deferred revenue -- (669,865)
Change in current assets and liabilities, net of business acquisitions:
Accounts and contracts receivable 3,179,619 1,899,792
Costs and estimated earnings in excess of billings (2,486,381) 1,507,781
Supplies and other current assets 33,507 1,557,218
Accounts payable (523,685) (5,050,949)
Accrued expenses (1,460,629) 319,919
Billings in excess of earnings on incomplete contracts (562,069) 359,655
Deferred revenue (517,337) 163,023
------------- -------------
Net cash used in operating activities (3,033,542) (1,780,574)
------------- -------------
CASH FLOWS -- INVESTING ACTIVITIES:
Purchase of property, plant and equipment (1,062,061) (1,251,137)
Cash aquired in aquisition -- 4,403,000
------------- -------------
Net cash (used in) provided by investing activities (1,062,061) 3,151,863
------------- -------------
CASH FLOWS -- FINANCING ACTIVITIES:
Repayment of note payable (1,892,955) (45,000)
Capital contributions, net 4,400,000 --
Proceeds from issuance of capital stock 14,225 240,330
------------- -------------
Net cash provided by financing activities 2,521,270 195,330
------------- -------------
Net (decrease) increase in cash (1,574,333) 1,566,619
Cash at beginning of period 4,601,818 14,639,111
------------- -------------
Cash at end of period $ 3,027,485 $ 16,205,730
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 four month
transition period ended December 31, 1996 and for the 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 1997 presentation.
2. LOSS PER SHARE
Loss per share for the three and six months ended June 30, 1997 and 1996,
have been computed based upon the weighted average common shares outstanding of
17,584,453 and 17,578,167 and 16,555,945 and 15,160,491, respectively. The loss
per share calculation does not include convertible securities and stock options,
which are common stock equivalents, as their inclusion would be anti-dilutive.
3. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------- -------------
(UNAUDITED)
<S> <C> <C>
Goodwill $ 24,275,032 $ 24,275,032
Developed technology value 3,090,000 3,090,000
Assembled work force value 890,000 890,000
Software licenses 306,412 306,412
------------- -------------
28,561,444 28,561,444
Less accumulated amortization 12,186,843 9,944,597
------------- -------------
$ 16,374,601 $ 18,616,847
============= =============
</TABLE>
4. LONG-TERM DEBT
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
Note payable to shareholder, interest at 6 percent, unsecured
and due on demand $ 250,199 $ 698,127
Note payable, interest at 5 percent, repaid during February, 1997 -- 1,269,475
Capital lease obligation, interest rates varying from 6 percent to
9 percent; collateralized by assets with net book value of approximately $500,000 630,218 776,062
------------- -------
880,417 2,743,664
Less current portion (604,974) (2,374,287)
------------- ----------
$ 275,443 $ 369,377
============= =============
</TABLE>
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 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.
5
<PAGE> 6
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
The purchase price allocation among the assets acquired and liabilities assumed in the acquisition of Vicorp are as follows:
<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
Goodwill ............................................................... 8,423,985
------------
Total purchase price ................................................ $ 32,434,985
============
</TABLE>
The Company acquired BFD Productions, Inc. ("BFD") in October 1996 in
exchange for cash and approximately 272,000 shares of newly-issued common
stock for a total purchase price of approximately $3,400,000 in exchange for
all of the capital stock of BFD. The acquisition has been 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 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)
Goodwill ............................................................... 3,594,749
--------------
Total purchase price ................................................. $ 3,394,749
==============
</TABLE>
6. STOCKHOLDERS' EQUITY
During April, 1997, the Company completed a $4,500,000 financing with three
of its existing shareholders, RMS Limited Partnership, Vulcan Ventures, Inc. and
Primwest Holding N.V. ("the Shareholders"). In connection with the financing,
each shareholder invested $1,500,000 and received 1,500 shares of a newly
designated class of preferred stock. The Series B Preferred Stock carries a
cumulative 8% dividend and may be converted, at the Company's option at any time
prior to December 31, 1997, into new securities on the same terms as such
securities may be offered to third parties. In the event the Company does not
effect a conversion of the securities, each shareholder will be entitled to
convert the Series B Preferred Stock into common stock after December 31, 1998,
at approximately $4.47 per share. In addition to the Series B Preferred Stock,
each of the Shareholders received a warrant to purchase 150,000 shares of common
stock. The warrants will be exercisible for a five year period beginning April,
1998 at approximately $6.09. The Company granted the Shareholders certain
registration and anti-dilution rights in connection with the transaction.
6
<PAGE> 7
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Precision Systems, Inc. ("PSI"), is a global company which together with its
direct and indirect wholly-owned and controlled subsidiaries (the "Company"),
collectively delivers proven solutions to telecommunications service providers
and major corporations. The Company's software and hardware products support
calling cards, prepaid cards, enhanced toll-free /freephone services, call
center solutions, and service bureau services. In addition, the Company supports
its products through maintenance contracts.
The following table sets forth for the periods indicated (i) the percentage
of total revenues represented by certain items in the financial statements of
the Company, and (ii) the percentage change in the dollar amount of such items
from period to period.
<TABLE>
<CAPTION>
PERCENTAGE INCREASE
(DECREASE)
THREE SIX
PERCENTAGE OF REVENUE PERCENTAGE OF REVENUE MONTHS MONTHS
THREE MONTHS ENDED SIX MONTHS ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
--------------------- --------------------- -------------------
1997 1997
VS. VS.
1997 1996 1997 1996 1996 1996
--------------------- --------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Contract revenue 34.8 % 27.0 % 27.2 % 44.5 % 57.5 % (14.2)%
Service and support 42.2 % 51.3 % 51.4 % 37.9 % .4 % 90.7 %
License fee 23.0 % 21.7 % 21.4 % 17.6 % 29.4 % 70.6 %
----- ----- ----- -----
Total revenues 100.0 % 100.0 % 100.0 % 100.0 % 22.1 % 40.5 %
Cost of sales 34.5 % 31.4 % 35.0 % 31.5 % 34.5 % 56.2 %
Gross margin 65.5 % 68.6 % 65.0 % 68.5 % 16.4 % 33.2 %
Operating expenses:
Selling, general, and administrative expenses 59.3 % 87.5 % 62.0 % 76.7 % (17.3)% 13.6)%
Research, engineering and development 6.0 % 10.5 % 6.4 % 12.3 % (29.8)% (27.1)%
Depreciation and amortization 14.1 % 24.6 % 15.6 % 19.3 % (29.9)% 14.1 %
----- ----- ---- -----
Operating Loss (14.0)% (53.9)% (19.0)% (39.7)% (68.4)% (32.6)%
Interest income (expense) 0.5 % 1.5 % (0.1)% 1.9 % (63.6)% (100.8)%
Gain on sale of marketable equity securities 0.0 % 0.0 % 0.0 % 2.4 % 0.0 % (100.0)%
--- ----- ----- -----
Loss before income taxes (13.5)% (52.4)% (19.2)% (35.4)% (68.6)% (24.0)%
Net Loss (13.5)% (52.4)% (19.2)% (35.4)% (68.6)% (24.0)%
</TABLE>
Since the Vicorp and the BFD acquisitions were accounted for as purchases,
the Company's consolidated statements of operations include the operations of
Vicorp since its acquisition date in April, 1996, and the operations of BFD
since its acquisition date in October, 1996. Consequently, most of the increases
shown above for the three and six month periods ended June 30, 1997, compared to
the same periods in 1996, are due to these acquisitions.
THREE MONTHS ENDED JUNE 30, 1997, COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
TOTAL REVENUES
Total revenues increased to $12,086,506 for the three months ended June 30,
1997 compared to $9,900,386 for the three months eneded June 30, 1996. The
various components of revenue fluctuated as explained below.
CONTRACT REVENUE
Contract revenue increased to $4,211,557 for the three months ended June
30, 1997 compared to $2,673,360 during the same period in 1996. The increase in
contract revenue during the three months ended June 30, 1997 versus 1996 is
primarily due to increased Vicorp BETEX product activity, which is partially
offset by certain ESP product sales to MCI completed in 1996 which did not recur
during the same period in 1997.
SERVICE AND SUPPORT
Service and support revenue increased to $5,100,162 for the three months
ended June 30, 1997, compared to $5,082,008 for the three months ended June 30,
1996.
Service and support provided to MCI increased to $507,097 for the three
months ended June 30, 1997, compared to $340,146 for the three months ended June
30, 1996. The increase in revenue primarily relates to additional MCI ESP
equipment that is subject to the Company's maintenance services.
7
<PAGE> 8
Service and support provided to HSN decreased to $0 for the three months
ended June 30, 1997, in comparison to $362,115 for the three months ended June
30, 1996. The Company's HSN maintenance agreement ended December 31, 1996.
Service and support revenue for Vicorp BETEX products was $3,667,648 for
the three months ended June 30, 1997, compared to $4,246,000 for the three
months ended June 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 $950,792 for the three months ended
June 30, 1997. BFD's service and support revenue primarily includes
interactive voice response service bureau activity.
LICENSE FEES
License fee revenue increased to $2,774,787 for the three months ended June
30, 1997, compared to $2,145,018 for the three months ended June 30, 1996.
License fee revenue for the three months ended June 30, 1997, relating to its
BETEX product line was $2,314,346 and $460,441 for the UniPort product line. The
primary reason for the increase in license fee revenue for the three months
ended June 30, 1997 relates to a higher level of BETEXproducts sold in the
European market versus previous periods. The Company anticipates generating
future license fee revenue for its UniPort and BETEX products, although no
assurance can be given for such future revenue.
COST OF SALES AND GROSS MARGIN
Cost of sales increased to $4,174,608 for the three months ended June 30,
1997, compared to $3,103,981 for the three months ended June 30, 1996.
Additionally, the Company's gross margin increased to $7,911,898 (65% of
revenue) for the three months ended June 30, 1997, compared to $6,796,405 (69%
of revenue) for the three months ended June 30, 1996. The primary reason for the
increase in the Company's gross margin dollar amount is an increase in the
Company's total revenue. The decrease in the Company's gross margin percentage
is primarily associated with a change in product mix. A greater portion of the
Company's revenue for the three months ended June 30, 1997 related to lower
margin hardware sales versus the same period in 1996. The Company anticipates
that its hardware sales will continue to increase during the remainder of 1997,
as compared to previous years activity.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased to $7,162,703 for the
three months ended June 30, 1997, compared to $8,663,593 for the three months
ended June 30, 1996. The decrease in selling, general and administrative
expenses for the three months ended June 30, 1997 is primarily due to the
Company's efforts at managing and controlling costs in order to improve the
alignment of cost outlays against potential revenue opportunities. Specific cost
savings include payroll and related costs due to consolidation and elimination
of certain functions and advertising and trade show expenditures. Offsetting
these decreases were the selling, general and administrative expenses associated
with the BFD acquisition of approximately $891,000. Considering the impact of
the Vicorp and BFD acquisitions, the Company expects its total selling, general
and administrative expenses to increase in the future.
RESEARCH, ENGINEERING AND DEVELOPMENT
Research, engineering and development expenses decreased to $727,001 for the
three months ended June 30, 1997, compared to $1,036,080 for the three months
ended June 30, 1996. The decrease in research, engineering and development
expenses primarily relates to the reduction in required development work
associated with the Company's UniPort product. However, 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.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased to $1,708,456 for the three months
ended June 30, 1997, compared to $2,435,758 for the three months ended June 30,
1996. The decrease is primarily due to amortization expenses incurred during the
three months ended June 30, 1996 relating to intangible assets acquired with the
Vicorp acquisition that were written off subsequent to June 30, 1996 and,
therefore, created no amortization during the 1997 period. The decrease is
partially offset by 1997 amortization expenses associated with intangible
assets acquired with the BFD acquisition.
8
<PAGE> 9
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. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
INTEREST INCOME
For the three months ended June 30, 1997, net interest income decreased to
$55,542 compared to $152,595 during the same period in 1996. The decrease in net
interest income is primarily due to the decrease in the Company's interest
bearing cash and cash equivalent amounts.
SIX MONTHS ENDED JUNE 30, 1997, COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
TOTAL REVENUES
Total revenues increased to $22,141,797 for the three months ended June 30,
1997 compared to $15,764,167 for the three months ended June 30, 1996. The
various components of revenue fluctuated as explained below.
CONTRACT REVENUE
Contract revenue decreased to $6,022,610 for the six months ended June 30,
1997 compared to $7,019,343 during the same period in 1996. The decrease is
primarily due to certain ESP product sales to MCI completed in 1996 which did
not recur during the same period in 1997. Offsetting the overall decrease in ESP
product sales is an increase due to contract revenues associated with Vicorp's
BETEX products of $4,781,978 for the six months ended June 30, 1997 compared to
$397,000 for the same period in 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, in April, 1996. The Company
expects the revenue generated from the sale of BETEX products to increase during
1997.
SERVICE AND SUPPORT
Service and support revenue increased to $11,384,205 for the six months ended
June 30, 1997, compared to $5,969,436 for the period in 1996 that Vicorp was
included in the Company's consolidated statement of operations.
Service and support provided to MCI decreased to $1,020,821 for the six
months ended June 30, 1997, compared to $1,171,269 for the six months ended June
30, 1996. While maintenance revenue increased due to additional MCI ESP
equipment that is subject to the Company's maintenance services, the overall
decrease is due to certain non-recurring development projects delivered to MCI
which occurred during the first six months of 1996.
Service and support provided to HSN decreased to $0 for the six months
ended June 30, 1997, in comparison to $727,956 for the six months ended June 30,
1996. The Company's HSN maintenance agreement ended December 31, 1996.
Service and support revenue for Vicorp BETEX products was $8,420,103 for
the six months ended June 30, 1997, compared to $4,246,000 for the same period
in 1996. Vicorp's service and support revenue includes maintenance and custom
development services provided to its customers.
Service and support revenue for BFD was $1,890,254 for the six months ended
June 30, 1997. BFD's service and support revenue primarily includes interactive
voice response service bureau activity.
LICENSE FEES
License fee revenue increased to $4,734,982 for the six months ended June 30,
1997 compared to $2,775,388 for the six months ended June 30, 1996. License fee
revenue for the six months ended June 30, 1997, relating to its BETEX product
line was $3,566,891 and $1,168,091 for the UniPort product line. The primary
reason for the increase in license fee revenue for the six months ended June 30,
1997 relates to a higher level of BETEX product sold in the American and
European markets versus prior periods. The Company anticipates generating future
license fee revenue for its UniPort and BETEX products, although no assurance
can be given for such future revenue.
COST OF SALES AND GROSS MARGIN
Cost of sales increased to $7,748,310 for the six months ended June 30, 1997,
compared to $4,960,612 for the six months ended June 30, 1996. Additionally, the
Company's gross margin increased to $14,393,487 (65% of revenue) for the six
9
<PAGE> 10
months ended June 30, 1997, compared to $10,803,555 (69% of revenue) for the six
months ended June 30, 1996. The primary reason for the increase in the Company's
gross margin dollar amount is an increase in the Company's total revenue. The
decrease in the Company's gross margin percentage is primarily associated with a
change in product mix. A greater portion of the Company's revenue for the six
months ended June 30, 1997 related to lower margin hardware sales versus the
same period in 1996. The Company anticipates that its hardware sales will
continue to increase during the remainder of 1997, as compared to previous
years activity.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $13,729,542 for
the six months ended June 30, 1997, compared to $12,083,488 for the six months
ended June 30, 1996. The increase in selling, general and administrative
expenses is primarily due to the following:
- Selling, general and administrative expenses associated with the
acquisition of Vicorp was approximately $8,353,384 for the six months
ended June 30, 1997 compared to $4,641,535 for the period in 1996 that
Vicorp was included in the Company's consolidated statement of
operations.
- Selling, general and administrative expenses associated with the BFD
acquisition was approximately $1,567,626.
Offsetting these increases was a decrease of approximately $3,600,000 due
to the Company's efforts at managing and controlling costs in order to improve
the alignment of cost outlays against potential revenue opportunities. Specific
cost savings include payroll and related costs due to consolidation and
elimination of certain functions (i.e. sales and marketing, product management,
customer service) and advertising and trade show expenditures.
RESEARCH, ENGINEERING AND DEVELOPMENT
Research, engineering and development expenses decreased to $1,409,829 for
the six months ended June 30, 1997, compared to $1,934,566 for the six months
ended June 30, 1996. The decrease in research, engineering and development
expenses primarily relates to the reduction in required development work
associated with the Company's UniPort product. However, 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.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased to $3,464,861 for the six months
ended June 30, 1997, compared to $3,036,464 for the six months ended June 30,
1996. The increase is primarily due to amortization expenses associated with
intangible assets acquired with 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. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
INVESTMENT GAIN ON MARKETABLE EQUITY SECURITIES
For the six months ended June 30, 1996, the Company had an investment gain
of $371,218 relating to its sale of marketable equity securities. No such
transaction occurred during the same period in 1997.
INTEREST INCOME (EXPENSE)
For the six months ended June 30, 1997, net interest (expense) income was
$(32,211) compared to $297,004 during the same period in 1996. The increase in
net interest expense is primarily due to certain interest bearing debt assumed
by the Company in connection with the Vicorp and BFD acquisitions. Additionally,
the Company's interest bearing cash and cash equivalent amounts decreased.
10
<PAGE> 11
LITIGATION
Reference is made to the legal proceedings described at Part 1, Item 3, in
the Company's December 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.
FINANCIAL POSITION, LIQUIDITY, AND CAPITAL RESOURCES
At June 30, 1997, the Company had net working capital of $3,380,602
compared to $388,785 at December 31, 1996. The increase in net working capital
is primarily due to the net $4,400,000 of funding that was received from
shareholders during the second quarter of 1997. The Company expects that with
the acquisition of Vicorp and BFD, its working capital requirements will
increase significantly over prior periods and that it will be able to fund its
operating and investing activities for fiscal 1997.
The Company's accounts and contracts receivable decreased to $9,174,854 as
of June 30, 1997, from $12,400,000 as of December 31, 1996. The decrease is
primarily due to collection of certain large receivables outstanding at December
31, 1996.
The Company's supplies and other current assets increased slightly to
$1,688,546 as of June 30, 1997, from $1,685,874 as of December 31, 1996.
The Company's costs and earnings in excess of billings on uncompleted
contracts increased to $5,551,359 as of June 30, 1997, from $3,064,978 as of
December 31, 1996. The increase is primarily associated with certain of Vicorp's
product delivery contracts in process for its customers. Such amounts as of June
30, 1997, are expected to be fully billed by Vicorp by December 31, 1997.
The Company's current portion of long-term debt decreased to $604,974 as of
June 30, 1997, from $2,374,287 as of December 31, 1996. The Company's long-term
debt decreased to $275,443 as of June 30, 1997, from $369,377 as of December 31,
1996. The decrease is primarily due to certain debt re-paid by the Company
during the six months ended June 30, 1997.
The Company's accounts payable decreased to $3,871,443 as of June 30, 1997,
from $4,395,128 as of December 31, 1996. The decrease is primarily due to the
timing of certain vendor payments.
The Company's accrued expenses decreased to $6,222,440 as of June 30, 1997,
from $8,152,294 as of December 31, 1996. The decrease is primarily due to
payments made during the first and second quarters of 1997.
The Company's billings in excess of costs and earnings on uncompleted
contracts decreased to $3,191,063 as of June 30, 1997, from $3,753,132 as of
December 31, 1996. The decrease is primarily associated with the completion and
billing of certain of Vicorp's software development contracts.
The Company's deferred revenue balance decreased to $2,171,707 as of June
30, 1997, from $2,689,044 as of December 31, 1996. The Company's deferred
revenue balance primarily represents prepaid maintenance contracts for services
to be provided to its customers.
The Company incurred approximately $669,000 and $1,062,000 in expenditures
for capital assets during the three and six months ended June 30, 1997. Future
levels of capital expenditures will be dependent upon cash availability from
operating activities and additional sources of bank funding or other forms of
financing which may or may not be available to the Company upon acceptable terms
and conditions.
During April, 1997, the Company completed a $4,500,000 financing with three
of its shareholders, RMS Ltd. Partnership, Vulcan Ventures, Inc. and Primwest
Holding N.V. ("the Shareholders"). In connection with the financing, each
shareholder invested $1,500,000 and received 1,500 shares of a newly designated
class of preferred stock. The Series B Preferred Stock carries a cumulative 8%
dividend and may be converted, at the Company's option at any time prior to
December 31, 1997, into new securities on the same terms as such securities may
be offered to third parties. In the event the Company does not effect a
conversion of the securities, each shareholder will be entitled to convert the
Series B Preferred Stock into common stock after December 31, 1998, at
approximately $4.47 per share. In addition to the Series B Preferred Stock, each
of the Shareholders received a warrant to purchase 150,000 shares of common
stock. The warrants will be exercisible for a five year period beginning April,
1998 at approximately $6.09. The Company granted the Shareholders certain
registration and anti-dilution rights in connection with the transaction.
Management is exploring additional opportunities for financing sources.
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 the
Company will be able to obtain additional financing on acceptable terms and
conditions or that its existing working capital will be sufficient to fund its
operating and investing activities for fiscal 1997.
11
<PAGE> 12
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:
- The Company competes in an industry marked by frequent technological
changes which will force the Company to expend funds to develop new
products and implement new technologies
- The various markets into which the Company sells its products are
undergoing significant changes with increasing demands for product
innovations
- The Company must be successful in competing against many competitors,
many of which have significantly greater assets than the Company
- The Company will be required to properly estimate costs under fixed
price contracts
- Increased risk of litigation in the Company's industry resulting from
aggressive prosecutions of intellectual property claims
- The Company's ability to retain its larger customers, including MCI
- Availability of certain hardware and software components which are
incorporated with the Company's products and are purchased from a
limited number of vendors
- The Company's ability to hire and retain qualified personnel
- Legislative changes affecting the Company's markets, including the
Telecommunications Act of 1996
- 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 has not had a significant impact on the Company's operations.
12
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
Reference is made to the legal proceedings described at Part 1, Item 3, in
the Company's December 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.
ITEM 2 -- CHANGES IN SECURITIES
None
ITEM 3 -- DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 -- OTHER INFORMATION
None
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
On April 7, 1997, the Company filed a report on Form 8-K announcing the
issuance of 4,500 shares of Series B Preferred Stock and warrants to
purchase up to 450,000 shares of Common Stock to RMS Limited
Partnership, a Nevada limited partnership; Primwest Holding, N.V., a
corporation organized under the laws of the Netherlands Antilles; and
Vulcan Ventures Incorporated, a Washington corporation; for an aggregate
purchase price of $4,500,000.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, hereunto duly authorized.
PRECISION SYSTEMS, INC.
By: /s/ STEVEN H. GRANT
---------------------------
Steven H. Grant
Chief Financial Officer
August 11, 1997
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED ON AUGUST 11, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C>
/s/WILLEM HUISMAN Chairman of the Board, President and Chief Executive Officer
- --------------------------------------------
Willem Huisman
/s/ STEVEN H. GRANT Chief Financial Officer
- --------------------------------------------
Steven H. Grant
/s/ KENNETH M. CLINEBELL Vice President and Controller
- -------------------------------------------- (Principal Accounting Officer)
Kenneth M. Clinebell
</TABLE>
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,027,485
<SECURITIES> 0
<RECEIVABLES> 10,145,190
<ALLOWANCES> 970,336
<INVENTORY> 0
<CURRENT-ASSETS> 19,442,244
<PP&E> 33,823,578
<DEPRECIATION> 25,512,508
<TOTAL-ASSETS> 44,127,915
<CURRENT-LIABILITIES> 16,061,627
<BONDS> 0
0
145
<COMMON> 174,825
<OTHER-SE> 27,615,875
<TOTAL-LIABILITY-AND-EQUITY> 44,127,915
<SALES> 6,022,610
<TOTAL-REVENUES> 22,141,797
<CGS> 7,748,310
<TOTAL-COSTS> 7,748,310
<OTHER-EXPENSES> 18,604,232
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,211
<INCOME-PRETAX> (4,242,956)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,242,956)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,242,956)
<EPS-PRIMARY> (.24)
<EPS-DILUTED> (.26)
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