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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
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(MARK ONE)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED,
EFFECTIVE OCTOBER 7, 1996).
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM SEPTEMBER 1, 1996 TO DECEMBER
31, 1996
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PRECISION SYSTEMS, INC.
DELAWARE 41-1425909
11800 30TH COURT NORTH, ST.PETERSBURG, FLORIDA 33716
(813) 572-9300
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
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] [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 21, 1997, there were outstanding 17,537,634 shares of Common
Stock and 10,000 shares of Series A preferred stock. The aggregate market value
of the voting stock held by non-affiliates of the registrant as of March 21,
1997, was $73,447,611.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has
filed all documents and reports required to be filed by Section 12, 13 or 15 (d)
of the Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ]
DOCUMENTS INCORPORATED BY REFERENCE:
The registrant hereby incorporates by reference in this report the
information required by Part III appearing in the registrant's proxy statement
or information distributed in connection with the 1996 Annual Meeting of
Shareholders of the registrant.
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PRECISION SYSTEMS, INC.
FORM 10-K
TABLE OF CONTENTS
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PART I
Item 1 -- Business.................................................... 1
Item 2 -- Properties.................................................. 11
Item 3 -- Legal Proceedings........................................... 11
Item 4 -- Submission of Matters to a Vote of Security Holders......... 13
PART II
Item 5 -- Market Price of and Dividends on the Registrant's Common
Stock and Related Stockholder Matters....................... 13
Item 6 -- Selected Financial Data..................................... 14
Item 7 -- Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 15
Item 8 -- Financial Statements........................................ 25
PART III
Item 9 -- Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures................................... 49
Item 10 -- Directors and Executive Officers of the Registrant.......... 49
Item 11 -- Executive Compensation...................................... 49
Item 12 -- Security Ownership of Certain Beneficial Owners and
Management.................................................. 49
Item 13 -- Certain Relationships and Related Transactions.............. 49
PART IV
Item 14 -- Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 49
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PART I
ITEM 1. BUSINESS
GENERAL
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 and freephone services,
call center solutions, and service bureau services. Headquartered in St.
Petersburg, Florida, the Company has sales and support offices in 15 countries
worldwide.
The Company currently provides telecommunications solutions and services in
three primary areas:
- Network-based enhanced services for private and public telecommunications
operators, Regional Bell Operating Companies ("RBOCs"), and carriers;
- Multimedia interactive customer service platforms (advanced call centers)
for large corporate virtual private networks, with emphasis on the
financial, insurance, transportation, retail, and service bureau
industries; and
- Fully-automated Internet and telephony-based enhanced services on a
service bureau basis to government, quasi-governmental agencies, and
corporations (primarily software and technology companies).
On April 16, 1996, the Company acquired substantially all of the capital
stock of Vicorp N.V. ("Vicorp"). Vicorp provides advanced telephony and call
processing solutions to customers in the Americas, Europe, and the Asia/Pacific
regions through its offices worldwide.
On October 7, 1996, the Company acquired BFD Productions, Inc. ("BFD"), a
telecommunications and Internet service bureau that offers call processing in
the United States and Canada via 800, 888, 900, and local phone numbers.
THE COMPANY'S PRODUCTS
The Company's products consist of three key components: middleware software
(developed by the Company); applications software (developed by the Company);
and industry standard hardware with operating system software (provided by
outside vendors).
The Company's middleware consists of two primary platforms -- BETEX(TM)
Enhanced Services Platform ("BETEX-ESP") and UniPort(TM) Telephony Middleware
("UniPort"). The BETEX-ESP middleware product has an associated, user-friendly
toolkit -- BETEX QuickScript. See "Platforms".
In addition, the Company provides a third platform, the Enhanced Services
Platform ("ESP"). The Company provides ESP-related products and associated
services solely to MCI Communications and Home Shopping Network, Inc.
The Company markets the BETEX-ESP, UniPort, and ESP technology platforms to
the telecommunications and call center industries as "solution packages". These
solution packages have the Company's application software products bundled
together as features within the solutions. When combined with the Company's
middleware, two types of solution packages are created, namely
telecommunications enhanced services and customer connect (an intelligent call
center-based product).
In addition to providing the solutions packages, the Company has systems
integration expertise to provide specialized solutions which enable the
Company's customers to launch branded applications to their markets efficiently.
The Company coordinates with its partners starting at the design and development
phase to deliver proven solutions to customers who can't afford to lose valuable
time to market.
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The Company's experience in building voice response units (VRU) and
integrating enhanced interactive multimedia applications for telecommunications
enhanced services and customer connect solutions enables customers to install
the Company's system reliably. Minimizing downtime, supporting current and
future application requirements, and superior customer service are key features
of the Company's VRU product.
Solution Packages
The Company is focused on two primary solution packages known as
telecommunications enhanced services and customer connect. These two solution
packages are the key focus of the company's marketing, sales, and research and
development efforts.
The following is a description of these two solution packages and the
features that are included within each package.
Telecommunications Enhanced Services
The Company's telecommunications enhanced services has two main solution
packages -- (1) advanced calling solution and (2) enhanced toll-free and
freephone services. The following is a description of these solution packages.
Advanced Calling Solution
The Company's advanced calling solution includes a calling card and prepaid
product suite that may be expanded to meet customer demands. The suite currently
offers enhanced calling cards, prepaid cards, prepaid wireless services, and
international callback.
The Company's advanced calling solution provides wireline and wireless
telecommunications service providers with a solution that allows them to build
applications quickly and operate them reliably. More than ten of the world's
largest telecommunication service providers base their enhanced calling card and
prepaid services on advanced calling solutions.
The Company's advanced calling solution is based on the scalable BETEX-ESP
Enhanced Services Platform architecture enabling carriers to support high volume
applications. Carriers can also build and operate additional services, such as
enhanced toll-free/freephone, on the same platform.
The product suite runs on Tandem NonStop systems and UNIX(TM) systems from
Tandem and Hewlett-Packard, providing carriers with a robust, high-availability
card services platform. The product integrates Dialogic-based voice response
units from the Company, and switches from Excel and Summa Four.
The Company's advanced calling solution helps carriers create branded
services and finely-tuned marketing programs. The solution's table-structured
application database and graphical service creation environment allow carriers
to modify standard service scripts quickly and easily. For example, carriers can
create their own recordings to assist in establishing brand identity. In
addition, configurable options in the database let carriers target market
segments with new products such as "one destination number" cards; enhanced
features such as project accounting codes; and special pricing promotions.
The Company's Atlas product was used as a marketing test lab for market
trials to end-users and carriers on features for the advanced calling solution.
This experience has helped the Company develop improvements and enhanced
features for the advanced calling solution product suite for the calling card of
the future. The features that were developed in the Company's Atlas test product
are in the process of being incorporated into features of the advanced calling
solution to deliver innovative features that carriers can offer their end users.
The following is a description of advanced calling solution applications.
Calling Cards
This application allows card holders to charge national and international
telephone calls to a calling card account and to be billed for the calls at a
later date. Both full-featured and restricted calling cards can be
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offered. In order for customers to control calling card usage, restricted
calling cards can be limited to only dial a predetermined list of phone numbers.
The calling card application includes a variety of advanced calling and
messaging features that enhance the service providers' revenue-generating
potential.
Prepaid Calling Card
This application allows users to prepay long distance service by purchasing
a prepaid calling card. As minutes and services are used, the user's account is
debited automatically.
International Callback
This application provides reduced rate international calling by having the
caller dial a local number that is answered by a callback service. This service
sends a data message to a callback platform in the destination country. The
destination platform then dials the originating platform. The destination
platform also outdials the final called party. The platforms then connect the
called and calling parties.
Enhanced Toll-Free and Freephone Services
Enhanced toll-free and freephone services provided by the Company allow
telecommunications carriers to tailor 800/freephone services to the needs of
their customers. Callers to toll-free numbers, such as 800, 888, or freephone
numbers, can be routed to a specific destination based on information obtained
from the network, stored in a local database, or entered by the caller.
Network information may include such elements as the calling number, the
caller's location (area code or country), and the incoming trunk number.
Database information can include a wide variety of call routing criteria such as
time of day and day of week, subscriber entered routing, percentage call
allocation, and customized no answer/busy treatment. Caller entered data may
include response to a menu offering multiple destinations or services, a desired
extension number, or any other information elicited by a voice prompt played to
the calling party.
Other service features include: disconnect message referral with optional
call extension enabling the customer to be connected to an 800 number that's
been changed without having to hang up and re-dial; and, customized message
announcements enabling businesses to record unique messages in the network
without having to make any capital investment in premise equipment. The Company
has been a pioneer in the field of enhanced toll-free services with its first
installations at MCI and LDDS WorldCom in 1992.
The following is a description of other telecommunications enhanced
services applications available with the Company's solutions packages.
Voice Activated Dialing ("VAD")
This application allows users to dial telephone numbers by simply speaking
the number they would like to dial ("Dial 5-5-5-1-2-3-4") or by speaking the
name of the person they would like to dial ("Call John"). Voice Activated
Dialing increases convenience to subscribers by providing "hands-free" dialing
and eliminates the need to recall numbers for locations to be dialed.
Single Number Service ("SNS")
This application allows callers to locate a subscriber at any of several
locations by dialing a single phone number. When a caller dials the SNS number,
the SNS application dials different numbers to locate the subscriber based on
the time of day and a predetermined schedule or pattern. For service providers,
SNS allows maximum network call completions while providing significant
incremental service revenues. More importantly, SNS increases the loyalty of
high-revenue customers and provides the basis for a wide range of value-added
personal communication and mobile office service offerings.
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Information Services
This application provides callers access to information services such as
weather, sports, news, lottery, astrology, and stock quotes. System access time
is charged to the caller's calling card or prepaid card.
Call Message Delivery ("CMD")
The Call Message Delivery application initiates a call to the subscriber to
deliver messages in contrast to traditional voice mail in which the subscriber
must call to retrieve a recorded message. Call completion gives service
providers a way to capture revenue that would otherwise be lost due to
incomplete calls and allows additional revenue generation from subscribers who
do not have voice mailboxes.
Customer Connect
Customer connect solutions provided by the Company are based on the
Company's experience in helping customers plan, implement, and operate call
centers that improve customer service and call processing capabilities. The
Company's customer connect call center solutions are used in the financial,
insurance, airline, retail, telco, and service bureau industries.
Some of the benefits provided by the Company's customer connect intelligent
call center solutions include reduced training costs, streamlined maintenance
activities, system-wide performance tracking, system expandability, efficient
and intelligent transfer of calls from automated voice response applicants to
attendants, and more self-serve features for callers freeing up human and system
resources.
The Company's intelligent call center solutions encompass a range of
features and functionality designed to suit customer service needs. From
voice/data call association, intelligent skill-based routing, distributed call
center and remote agents, up to a fully integrated multi-media call center
offering the benefits of computer telephony integration, the Company offers a
range of call center solutions.
The customer connect solutions run on the BETEX-ESP platform and include
the advantages of reusable scripting logic using the Company's graphical service
creation environment, QuickScript, with a call center specific scripting
library. This enables the creation of inbound, outbound, CTI, agent assist, and
IVR services from one single environment.
The following two descriptions are of customer connect applications.
Software Automated Call Distribution ("ACD") (Skill-based Routing)
This application provides automatic call routing to certain individual(s)
in a bank of customer service representatives who either handle specific
accounts, are an expert in a specific area, or have skill sets necessary to
process the call. The call is routed based on the number dialed, time and/or
priority, or via a voice dialogue. The Software ACD is able to determine the
waiting time, call duration, and duration of call post-processing and workload,
based on the entire call path. Other features are available using Software ACD
that further enable call processing control.
AgentStation
AgentStation enables collected information to be forwarded to a customer
service agent, combining the input received from the caller with additional data
records relating to the customer account. The agent is driven from a
centrally-based script. The presentation and functionality available to an agent
may vary according to the customer's needs.
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PLATFORMS
The following is a description of the Company's three platform technology
products: BETEX-ESP, UniPort, and the ESP; and the graphical service creation
environment: BETEX QuickScript.
BETEX Enhanced Services Platform ("BETEX-ESP")
The Company's advanced calling solution and call center products run on
BETEX(TM)-ESP (Enhanced Services Platform) -- a robust, middleware software
platform for telecommunications service providers and large corporations who
want to implement large-scale enhanced services or call center applications. The
BETEX-ESP middleware provides application processing functions and controls
matrix switch resources and/or voice/media resources in a Services Node
architecture. The software includes network and device driver layers, an open
Application Programming Interface, and an SQL database for storing service data
such as application scripts and user profiles. The BETEX-ESP, which runs on
Tandem NonStop systems and UNIX(TM) systems from Tandem and Hewlett-Packard,
supports multiple applications on a single, scalable platform.
BETEX-ESP is the principal platform offered by the Company for companies
that want to offer calling cards, enhanced toll-free, freephone, call center,
and other interactive services to their customers.
The BETEX-ESP platform offers:
- A co-processing architecture supporting scalable, modular growth
- The ability to run multiple services on a common software and hardware
platform
- Support for integrated voice, data, and multi-media applications
- The ability to develop and integrate advanced consumer features with
advanced customer service interfaces using a single service creation
environment
- Support for more than 15 different languages
- Support for SS7, ISDN (national and international standards), E1, T1, R2
signalling
UniPort Telephony Middleware ("UniPort")
UniPort provides an environment for creating a multi-application call
processing platform that can be integrated into existing telephony networks.
Using UniPort, the Company's customers can build applications using an
application programming interface.
Enhanced Services Platform ("ESP")
Since the mid 1980s, the Company's original product has been a
comprehensive proprietary hardware and software system called ESP. One of the
advantages of the ESP is that it is able to perform in a network environment of
thousands of simultaneous calls, while accessing multiple scripts and
applications concurrently. A single system node is capable of processing up to
1,056 simultaneous calls; multiple nodes can be networked or combined to provide
for additional call processing during high volume bursts of telephone traffic.
The ESP is designed to facilitate customer revenue generation in an
environment where data throughput, manageability, and ease of application
delivery are required. Installations are scalable due to its modular node
configuration. The ESP incorporates a wide range of available technologies, from
interactive voice response ("IVR") to call processing. The hardware components
of the ESP are engineered for redundancy and system-level fault tolerance.
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BETEX QuickScript
BETEX QuickScript is a graphical, workstation-based service creation
environment (SCE) for rapid application development, prototyping, and deployment
of voice, data, and multimedia services that operate on Vicorp's BETEX-ESP
execution environment.
QuickScript enables customization of standard call flows providing
flexibility that enables the Company's customers to target markets or brand
applications using their own version of the call flows.
QuickScript simplifies application development by integrating voice, data,
switching, and customer contact functions into a single SCE. The ability to test
and run new services at the development workstation supports cost-effective
service deployment.
QuickScript enables fast development of new services as it is a complete
workstation environment offering the ease of a graphical interface and the power
of fully integrated custom programming. The prototyping tool provided by
QuickScript may be mastered by non-technical service people who have the market
knowledge to design call flows. QuickScript simplifies and speeds efficient
service deployment across widely distributed sites so that the company's
customers can create and deploy new services quickly.
BFD PRODUCTIONS, INC.
Services featured by BFD include BFD fax, voice recognition, conferencing,
prepaid debit cards, automated credit card verification, dealer locator, p.i.n.
code management, fraud control services, reverse directory, transcription and
fulfillment services. BFD also offers T-1 connectivity to the Internet along
with secure, non-credit card and credit card billing options for the Information
Superhighway
MARKETS
The market for the Company's products has grown due to worldwide changes in
the telecommunications industry. These changes include legislative reforms,
mergers, acquisitions, alliances, and a convergence of previously segmented
technologies. The global trends in telecommunications continue to promote the
use of enhanced services as a way for companies to differentiate themselves from
competition and possibly generate additional revenue. In addition, companies in
diverse industries worldwide are seeking ways to improve customer service
functions to expand their markets, sell more products or services, and improve
efficiency.
The global markets for the Company's telecommunications and call center
products include: private and public telecommunications operators, RBOCs, and
wireline and wireless carriers; and large corporate virtual private networks
(with an emphasis on the financial, insurance, retail, transportation, and
service bureau industries). While North America and Europe have the largest
installed customer base, Asia Pacific is the fastest growing market for the
Company's products. The Company continues to market its products worldwide with
accounts in Central and South America, the Middle East, and Africa.
The market for BFD's services is the United States and Canada and is
focused primarily on government, quasi-governmental agencies, and business
corporations (primarily software and technology companies). The growth in
automated free and fee-based customer support in the computer software game
industry, the information technology market, the tourism industry, and the
entrepreneurial market has increased the demand for BFD's service bureau
services.
It is the Company's opinion that the convergence of technologies such as
the Internet, computers, cable, and telephony will produce positive conditions
for expanded deployment of enhanced services and call centers.
Telephone companies typically need large capacity call processing systems
that adhere to stringent engineering requirements for telephone company central
office switching equipment. BETEX-ESP, UniPort, and the ESP have been designed
to meet these requirements. This market typically involves long sales cycles.
The Company also markets its products through companies with which it has
partner relationships. See "Sales", "Customers", "Backlog", and "Partner
Relationships."
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THE U.S. MARKET
The Telecommunications Act of 1996 has changed the landscape of the
communications industry in the United States. This legislation allows vendors in
different industries (e.g. cable) to compete outside of their traditional
service offerings thereby increasing competition. With service providers looking
for ways to become more competitive, the capability to add new services and
enhancements for their customers has become a priority. The Company believes
that its products enable service providers to offer enhanced telecommunications
services.
Another factor affecting the U.S. market is the continued development of
the wireless network infrastructure. The projected growth of the wireless market
and the associated demand for additional technologies is expected to create
continued demand for enhanced telecommunication services.
The Company plans to begin offering its customer connect products to the
call center marketplace in the United States. The advanced call center solutions
that have had success in the Company's European, Asia/Pacific, and other
international markets are suitable for introduction into the U.S. market.
According to industry sources, the installation of call centers in the U.S. is
growing rapidly especially in the financial services, telecom, technical
support, and retail banking sectors. The Company believes that many companies
view call centers as a strategic business asset, as opposed to a back office
function, replacing the face-to-face customer service that many companies can no
longer afford to offer. The Company considers its expertise and experience in
developing and delivering custom solutions for advanced call centers
internationally as a major benefit for introducing this solution in the United
States.
THE INTERNATIONAL MARKETS
With the acquisition of Vicorp, the Company expanded its market to a
worldwide reach. As in the U.S. market, changes in national legislation,
mergers, acquisitions, alliances, and technology convergence have created new
companies that are offering enhanced communications services to their corporate
and consumer markets in order to differentiate themselves from their
competition.
The deregulation that is underway or proposed in many countries will have
an impact on the Company's success in marketing its products in these countries.
While some countries have adopted a more liberal approach that is opening up
markets to several telecom providers, other countries are proceeding forward at
a slower pace.
The Company's current international product offerings primarily consist of
solution packages and middleware for the telecommunications industry,
intelligent call center solutions, voice response systems, and videotext. Growth
trends for the Company are projected to be in wireline and wireless applications
and advanced call center applications. See "Partner Relationships" and "Sales".
EUROPEAN REGION
The European Union has targeted January 1, 1998 as the date that member
countries will open their markets to competition. In advance of that target
date, some countries have already moved towards deregulation including the
United Kingdom, Finland, and Sweden. Other countries moving in the direction of
more liberal deregulation, albeit at a slightly slower pace, include Germany and
Denmark. In addition, the Netherlands, France, Switzerland, Spain, and Italy are
expected to permit varying levels of competition prior to the 1998 target date.
Countries that have not shown a strong commitment to introducing deregulation
include Belgium, Portugal, Greece, Ireland, and Austria. Currently, the Company
is focusing its marketing efforts toward all Western European countries.
ASIA/PACIFIC REGION
In the Asia/Pacific region deregulation is being introduced to varying
degrees. Some countries within the Asia/Pacific region have restructured their
state-owned monopolies and invited competitors into their markets. Developing
countries in the process of building out their telecommunications
infrastructures have found that one of the primary factors for success is
capital investment. These infrastructure investments often
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come from outside interests, including many Western companies with expertise and
experience in setting up Asia/Pacific telecom companies.
LATIN AMERICA REGION
In Latin America, the Company is primarily marketing in Brazil, Chile, and
Argentina. These countries are in various stages of deregulation and have taken
steps towards privatization.
COMPETITION
The worldwide telecommunications industry is highly competitive. The
Company believes that the features and functionalities of its products coupled
with its distribution capability, system reliability, service, support, and
pricing, position the Company to compete in the telecommunications industry
worldwide. In addition, the Company is committed to ongoing research and
development ("R&D") efforts and is dedicated to developing new products and
strengthening existing products. The Company views its R&D efforts as essential
to maintaining a competitive position in the industry. See "Research and New
Product Development".
One of the most important competitive advantages for the Company is its
multi-application platform. It is the Company's view that the majority of
service providers purchasing enhanced services now consider it a necessity to
have the ability to run multiple applications on a single platform. If a service
provider introduces an enhanced service that does not deliver the expected
subscriber acceptance, the Company's platform will be able to add-on or replace
the service with a different application which can run on the same installed
platform. A multi-application platform diffuses the risk associated with the
investment required to run enhanced services. In addition, the Company's
multi-application platform enables a layered, open architecture design to
support the most widely used hardware solutions (including media servers,
switches, voice response units, and network standards).
The Company's system integration expertise is demonstrated in the Company's
advanced call center solutions that have primarily been sold in the European and
Asia Pacific markets. This ability to provide customized solutions distinguishes
the Company from many of its competitors who are not delivering flexible
platforms.
Internationally, it is the Company's view that the deregulation underway or
proposed in many countries will continue to increase the opportunities for
expansion of markets for the Company's products. The acquisition of Vicorp was a
major factor in establishing an international presence for the Company as Vicorp
is a European-based company that has an existing customer base and strong
partner relationships. See "Markets" and "Sales".
The Company expects to continue to face substantial competition from
existing and new competitors including other companies with considerably greater
financial, technical, marketing and sales resources. The Company also
anticipates that a number of its competitors will be introducing new or enhanced
products during the next several years. See "Competitors".
Competitors
The Company believes its primary worldwide competition for Vicorp to be
Access Line, Brite Voice Systems, Boston Technology, Centigram, Comverse
Technology, Digital Equipment Corporation, Early Cloud, Ericsson, Genesys, IBM,
IMA, Glenayre, Intellivoice, Intervoice, Nortel, Octel, Open Development
Corporation, Periphonics, Priority Call Management, Rockwell, Siemens, Stratus,
Tecnomen, Telsys, Unisys, and Wildfire. There are also business opportunities
that the Company pursues in partnership with some of these same companies,
either directly or through channel sales. See "Sales".
The Company believes its primary United States and Canadian competition for
BFD in the telco market to be Ameritech, AT&T, MCI, Sprint, Pacific Bell; and in
IVR call centers to be Call Interactive, Sheerers, ICG, ICN, Ideal Dial,
Infoworks, and West Interactive.
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Sales
The Company principally markets to the telecommunications and call center
industries through direct sales and through business partners, including
international telecommunications and computer equipment providers. The Company
currently utilizes a direct sales force of approximately 20 sales and technical
sales support professionals, each of whom has technical expertise to explain the
operating and architectural advantages of the Company's products. In addition,
the Company has signed joint marketing and teaming arrangements with leading
telecommunications equipment manufacturers including Tandem and Hewlett-Packard.
Basic terms of these agreements include a one-to-three year non-exclusive
arrangement whereby the Company licenses its software for integration into these
companies' telecommunications products. In addition, such agreements may require
joint sales and marketing efforts and an open exchange of information regarding
potential customers and technology developments.
The Company's Original Equipment Manufacturers ("OEM") Partners Program
enables telco manufacturers to augment their current product offerings by
incorporating the Company's applications into their own enhanced services
platforms. The Company's OEM teams work with its telco partners to determine
program goals, application strategy, market positioning, and program support
requirements. Applications may be delivered via a the Company's middleware
solution or through OEM specific APIs. Basic terms of these agreements include a
one-to-three year non-exclusive arrangement whereby the company licenses its
software for integration into these companies' telecommunications products. In
addition, such agreements may require joint sales and marketing efforts and an
open exchange of information regarding potential customers and technology
developments. The Company's current OEM partners include AG Communication
Systems, Motorola, and Northern Telecom.
BFD primarily markets to high technology, software, telecommunications and
call center industries. The company utilizes a direct sales force of 5 account
executives. In addition, the company utilizes teaming arrangements and alternate
distribution channels existing of lead programs, independent sales agents and
broker arrangements with leading telecommunications companies and specialty
solution entities.
CUSTOMER SUPPORT
The Company services and supports its customers through customer service
centers ("CSCs") that monitor customer systems and provide first-level telephone
support for customer-deployed systems. The CSCs also have service engineering
and field engineering resources that can be dispatched for additional levels of
in-field support. A configuration management group provides periodic software
releases and updates. Additionally, the Company provides customer and employee
training, as well as documentation for all installed systems.
For those carriers whose product installations require more extensive
system integration, the Company offers product support through local offices in
North America, Europe, and the Asia-Pacific region. The Company's teams of
experienced software and network engineers are available to assist customers
with application development, deployment, and system maintenance.
The Company's products are generally covered by three-month to one-year
warranties. Such warranties include parts and labor and support for software and
hardware components supplied by the Company to its customers. Warranty service
is provided at the customer's site or from one of the Company's service
locations. Generally, the Company recovers such costs through post-installation
customer support agreements. See "Customers".
BFD provides 24 X 7 support (24 hours per day, 7 days per week) to its
customers through customer service professionals, a team of project managers,
and after hours on-call personnel.
CUSTOMERS
During the four month period ended December 31, 1996 and the year ended
August 31, 1996, MCI and HSN represented approximately 9 and 50 percent,
respectively, of the Company's revenue. Historically, the Company primarily sold
customized ESP products and provided support services to MCI and HSN. During the
four months ended December 31, 1996 and for the year ended August 31, 1996,
revenue generated by ESP product sales to MCI was $229,590 and $10,339,053,
respectively, as compared to $9,722,768 and $2,925,160,
9
<PAGE> 12
respectively, for the years ended August 31, 1995 and 1994. Service and support
revenue from MCI and HSN was $1,125,499 and $3,041,006, respectively, for the
four months ended December 31, 1996 and for the year ended August 31, 1996, as
compared to $5,703,090 and $4,587,908, respectively, for the years ended August
31, 1995 and 1994. The Company continues to market to MCI and expects to
generate revenue from this source. However, there is no assurance that any such
negotiation will result in an order from MCI. The Company does expect to
continue providing MCI with service and support for their ESP products.
UniPort sales represented approximately 7.6 percent and 8 percent,
respectively, of the Company's revenue for the four months ended December 31,
1996 and the year ended August 31, 1996. Customers include large multinational
telecommunication service and equipment providers, both domestic and
international. The Company expects additional revenue from the sale of UniPort
products during 1997.
BETEX sales represented approximately 80 percent and 42 percent,
respectively, of the Company's revenue for the four months ended December 31,
1996 and the year ended August 31, 1996. Customers include large multinational
telecommunication service and equipment providers, both domestic and
international. The Company expects the revenue generated from the sale of BETEX
products to increase during fiscal 1997, both in gross terms and as a percentage
of total revenue for the Company.
Because the Vicorp acquisition was accounted for as a purchase, the
Company's consolidated statements of operations for the year ended August 31,
1996 include the operations of Vicorp from the acquisition date of April 16,
1996 through August 31, 1996.
BACKLOG
The Company's backlog, including service and support agreements, at
December 31, 1996, was approximately $15,000,000, compared with approximately
$11,000,000 at August 31, 1996. Such amounts include all purchase orders and
signed contracts with scheduled shipments and deliverables.
MANUFACTURING PRODUCT AUDIT
The Company's manufacturing product audit operations consist of integrated
testing and quality assurance. In order to achieve a high standard of quality,
the Company maintains complete control of integrated quality assurance testing.
Subassemblies, supplied by local vendors, are frequently tested. The Company
strives to use standard parts and equipment for many of its products that are
readily available through multiple external sources. Proprietary processing
boards used in the ESP are manufactured by several external vendors to the
Company's specified quality control standards. To date, the Company has been
able to obtain adequate supplies of essential components in a timely manner.
Approximately 20,000 square feet of space at the Company's 50,000 square foot
headquarters is dedicated to system testing, quality control, inventory storage,
and other assembly activities.
The Company has established worldwide "partner" relationships that expand
its ability to market software products. These partners package the Company's
software with their telecommunication hardware to market comprehensive solutions
to telecom carriers and major corporations.
RESEARCH AND NEW PRODUCT DEVELOPMENT
Following the Vicorp acquisition, the Company has consolidated its research
and new product development efforts into two main areas:
- The Systems Level Product Development Group is responsible for product
enhancements that will generate revenue over the 12 to 18 month life cycle
of each product. Each release represents a continuum of product updates
and improvements designed to extend and enhance the comprehensive life of
the product.
- The Solutions Products Group is responsible for long term development of
value-added tools and subsystems to enhance solutions packages such as
telecommunications enhanced services and customer connect.
10
<PAGE> 13
In addition to active research and development, the Company also integrates
external technology within its platforms. During the past year, the Company has
integrated new switches, processors, and communications equipment. Part of the
Company's research and development activities also include ongoing efforts to
keep abreast of technical developments in the industry. This is a crucial factor
in keeping the Company in step with current and emerging trends as customers
require the integration of solutions and network standard technology. During the
four months ended December 31, 1996 and the fiscal years ended August 31, 1996,
1995, and 1994, the company spent approximately $2.0 million, $5.2 million, $3.2
million, and $3.9 million, respectively, on research and development activities.
PRODUCT PROTECTION
The Company relies on a combination of trade secret and copyright laws,
patents, licenses, nondisclosure agreements, and technical measures to protect
its rights in its products. However, there can be no assurance that these
measures will fully protect the Company from the wrongful disclosure or
misappropriation of its proprietary information.
TECHNOLOGY LICENSES
The Company licenses the design for certain components used in BETEX-ESP,
UniPort, and the ESP from third parties. Standard operating system software
utilized in the Company's products is licensed from the manufacturer of the
subsystem. The Company, in turn, assigns or sub-licenses the rights granted by
these third parties to the Company's customers as part of the software license
that accompanies the sale of the product.
EMPLOYEES
As of February 20, 1997, the Company employed 280 people on a full-time
basis and 20 people as independent contractors. The Company believes that its
future growth and success are dependent, in large part, upon its ability to
continue to attract and retain highly qualified personnel.
The Company believes that it offers attractive compensation packages,
including competitive salaries, bonus programs, and health benefits. There has
never been a work stoppage; employee relations are considered to be excellent.
None of the Company's employees are represented by a labor union.
ITEM 2. PROPERTIES
The Company's worldwide headquarters consists of approximately 50,000
square feet in St. Petersburg, Florida (USA), that includes administrative,
research, engineering, assembling, and marketing functions. This property was
acquired in November 1990. In addition, the Company leases approximately 5,000
square feet in Campbell, California (for sales, research, and engineering),
approximately 20,000 square feet in Boston, Massachusetts (for sales, research,
engineering, and marketing), approximately 15,000 square feet in Ratingen,
Germany (for sales, research, and engineering), approximately 20,000 square feet
in Utrecht, The Netherlands (for sales, marketing, and administrative), and
approximately 10,000 square feet in Las Vegas, Nevada (for sales, research,
engineering, marketing, and administrative).
In addition, the Company maintains other offices in Dallas, Texas; St.
Cloud, Minnesota; Atlanta, Georgia; Brussels, Belgium; Copenhagen, Denmark;
Stockholm, Sweden; Helsinki, Finland; Windsor, United Kingdom; Paris, France;
Madrid, Spain; Milan, Italy; and Singapore.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to certain legal proceedings in the ordinary course
of business. The discussion below summarizes the most material of such
proceedings. In the opinion of management, these and other legal proceedings
will not have a material adverse effect on the operations or the financial
condition of the Company and, therefore, the Company did not accrue for losses
for any such actions as of December 31, 1996.
Intervoice, Inc. v. Precision Systems, Inc. and Vicorp Interactive Systems,
Inc. On April 11, 1996 Intervoice, Inc. ("INTV") filed suit against Precision
Systems, Inc. ("PSI") in the Federal District Court for
11
<PAGE> 14
the Northern District of Texas (Dallas) alleging infringement of various U.S.
Patents owned by INTV, namely Patents 5,469,500, 5,255,305, and 5,243,643. These
Patents encompass certain call processing methods and technologies. The suit
prays for an unspecified amount of damages and for injunctive relief. On August
20, 1996, Vicorp Interactive System, Inc. ("VIS"), a wholly-owned subsidiary of
Vicorp, was joined in the suit as a co-defendant as to Patent 5,469,500 only,
and an additional claim of breach of confidentiality was asserted by INTV
against VIS. On February 21, 1997, INTV further amended its complaint to remove
PSI's Uniport 6.1 from, and to include VIS into, the lawsuit with respect to the
"305" and "643" patents. In this second amended complaint, INTV also asserted a
Lanham Act ("false advertising") claim against both PSI and VIS. The Company
notified Alta Investissements, S.A. ("Alta") of the claims against VIS for
purposes of indemnification of PSI under the terms of the Share Exchange
Agreement of April 13, 1996 between the Company and Alta relating to the
purchase of a controlling interest in Vicorp. The parties to the suit are
currently in discovery and the matter has been rescheduled for trial in
December, 1997. The Company has defenses and will vigorously defend.
Daniel Schultz v. Precision Systems, Inc. et al. On October 8, 1996,
Daniel Schultz, a holder of Vicorp shares and options (the "plaintiff"), filed a
three-count complaint against the Company; Russell I. Pillar; John Loewenberg;
Alta Investissements, S.A. ("Alta"); Didier Primat; Primwest Holding N.V.; and
Ian Dalziel, in a civil action in the United States District Court for the
Middle District of Florida, Tampa Division (the "Federal Action"). In count one,
the plaintiff alleges that the Company and Messrs. Pillar and Loewenberg
fraudulently induced him to assist the Company in its acquisition of Vicorp by
representing to him that he would receive an executive position with Vicorp if
the acquisition was successful. In counts two and three, the plaintiff alleges
that all the defendants intentionally interfered with his prospective economic
advantage, and conspired to do so, by impairing his ability to exercise his
Vicorp options and his ability to convert his Vicorp shares into shares of the
stock of the Company. The complaint alleges that the plaintiff has suffered
damages in excess of $2 million, and requests compensatory and punitive damages.
On October 28, 1996, a motion was filed by the Company and Mr. Pillar seeking
the dismissal of the action on the grounds that the United States District Court
lacks jurisdiction over the subject matter of the action, and on December 2,
1996, the plaintiff's counsel filed a notice of non-opposition to the motion. As
a result, the Federal Action was dismissed. On December 4, 1996, plaintiff filed
a complaint in the Circuit Court of the Sixth Judicial Circuit in and for
Pinellas County, Florida (the "Florida Action") asserting the same claims as set
forth in the Federal Action. The Company has not yet responded to the Complaint
in the Florida Action. Management has not undertaken a full evaluation of the
merits of the plaintiff's claims. The Company has notified Alta of its claim for
indemnification pursuant to the terms of the Share Exchange Agreement dated
April 13, 1996 between the Company and Alta.
Daniel Gilbert Schultz v. Vicorp et al. This action was initiated in the
Court of First Instance, Curacao, Netherlands Antilles ("Court"), on March 29,
1996. The plaintiff filed a petition denominated a "complaint in summary
process" against Vicorp and Alta. The Company is not a party to this proceeding.
In this action, the plaintiff alleged that Vicorp had denied him access to the
books and records of Vicorp, and that Alta (as the then controlling shareholder
in Vicorp) had both refused to provide him access to Vicorp's records and
refused to give him information on Alta's negotiations with third parties for
the sale of its shares of Vicorp stock. The plaintiff further alleged that these
actions impaired his ability to exercise certain put and call options that he
held with respect to certain shares of the stock of Vicorp. The plaintiff sought
various court orders requiring Alta and Vicorp to provide certain financial data
to him, to record in the Vicorp share register the option he held, and to accept
and pay for certain of the Plaintiff's shares that were the subject of a put
option. The plaintiff also sought an order prohibiting Alta from reducing its
ownership interest in Vicorp. On May 17, 1996, the Court dismissed all of the
plaintiff's claims. The plaintiff appealed to the Court of Appeals of the
Netherlands Antilles and Aruba. The appeal has been fully briefed and argued.
Under the terms of the Share Exchange Agreement dated April 13, 1996 between the
Company and Alta (the "Exchange Agreement"), Alta has agreed to indemnify the
Company against any losses arising in connection with pending or future
litigation relating to Schultz' employment with Vicorp including the actions
pending in the Netherlands Antilles.
12
<PAGE> 15
Daniel Gilbert Schultz v. Alta Investissements, S.A. et al. This action
was initiated in the Court of First Instance, Curacao, Netherlands Antilles on
April 23, 1996. The plaintiff filed a petition denominated a petition "on an
abbreviated term" against Alta, the Company, and Vicorp. In his petition, the
plaintiff sought a court order nullifying both the transfer by Alta to the
Company of Alta's shares of Vicorp stock and the transfer by the Company to Alta
of certain shares of the Company's stock, both of which transfers were carried
out pursuant to the Share Exchange Agreement between the Company and Alta dated
April 13, 1996. The plaintiff alleges that insufficient notice was given to him
of a Vicorp shareholders' meeting at which a resolution approving the share
exchange was adopted, and that consequently the defendants breached a duty of
good faith towards him. The plaintiff seeks court orders annulling the two share
transfers, and prohibiting Vicorp from acting on any instructions received from
the Company. Subsequently, on August 19, 1996, Alta and Vicorp filed a
counterclaim against the plaintiff, seeking damages incurred by each of them as
a result of having to resist the plaintiff's efforts in Curacao to obtain
nullification of the share transfer; Alta and Vicorp claim that the plaintiff's
actions constitute violations of various agreements between him and them, as
well as violations of the principles of good faith. The action has been fully
briefed and argued and is awaiting decision by the Court. We have been advised
by local counsel in Curacao that no definitive evaluation of the likely outcome
can be made at this time. Under the terms of the Exchange Agreement, Alta has
agreed to indemnify the Company against any losses arising in connection with
pending or future litigation relating to Schultz' employment with Vicorp
including the actions pending in the Netherlands Antilles.
Daniel Gilbert Schultz v. Vicorp France S. A. et al. This action was
initiated in the French Labor Court (the "Conseil de Prud'hommes") on March 7,
1996. The Plaintiff filed claims against both Vicorp France S.A. and Vicorp Asia
Holding arising out of his employment relationships with companies in the Vicorp
Group. The Company is not a party to this proceeding. The Plaintiff has alleged
that the two defendants are liable to him, under provisions of French law, for
damages for dismissal without real and serious cause, for damages for abusive
indemnity, for dismissal indemnities, and for a paid vacation indemnity. A
hearing was held on March 20, 1997 at which time the presiding official raised a
jurisdictional issue to which Mr. Schultz must respond. Under the terms of the
Share Exchange Agreement between the Company and Alta, Alta has agreed to
indemnify the Company and Vicorp against any damages or liability imposed
against Vicorp in connection with this action.
Claim of Robert Maube. On March 13, 1997 Mr. Maube, a former employee of
Vicorp N.V., initiated an action in the Labour Court of Brussels, Belgium
against the Belgian, Dutch and Swiss subsidiaries of Vicorp N.V. In the action,
Mr. Maube is seeking 34,166,134 Belgian Francs (approximately $979,900) in
connection with the termination of his employment. Such amount includes claims
for gross payments as indemnity in lieu of notice, holiday payments, year end
premium payments, damages for an alleged abusive dismissal, additional
compensation and a prorated bonus. The Introductory Hearing will be held on May
13, 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1996
From September 1, 1995 to November 30, 1995................. $13.840 $ 9.840
From December 1, 1995 to February 28, 1996.................. 13.000 9.630
From March 1, 1996 to May 31, 1996.......................... 14.960 11.130
From June 1, 1996 to August 31, 1996........................ 11.540 6.630
From September 1, 1996 to December 31, 1996................. 9.130 4.500
</TABLE>
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<PAGE> 16
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1995
From September 1, 1994 to November 30, 1994................. $ 3.125 $ 2.000
From December 1, 1994 to February 28, 1995.................. 3.750 2.000
From March 1, 1995 to May 31, 1995.......................... 5.625 2.750
From June 1, 1995 to August 31, 1995........................ 8.625 4.500
</TABLE>
The bid prices reported for these periods reflect inter-dealer prices
without retail markup, markdown, or commissions, and may not represent actual
transactions. The Company's closing trading price was $4.188 on March 21, 1997.
The total number of shareholders of record as of December 31, 1996, was
approximately 6,000.
The Company has paid no cash dividends on its Common Stock to date. Any
payments of future dividends and the amounts thereof will be dependent upon the
Company's earnings, financial requirements, and other factors deemed relevant by
the Board of Directors.
The terms of the Company's Series A Preferred Stock precludes the
declaration of dividends on Common Stock for so long as dividends (and any
interest accrued on unpaid dividends) with respect to such preferred stock
remain unpaid. On July 1, 1996, RMS Limited Partnership, the sole owner of the
Company's Class B Common Stock, elected to convert all of its Class B Common
Stock into an equal number of shares of the Company's Common Stock. The Class B
Common Stock converted was retired and is not subject to reissue.
ITEM 6. SELECTED FINANCIAL DATA
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 and freephone services,
call center solutions, and service bureau services. In addition, the Company
supports its products through maintenance contracts.
As discussed in Note 1 to the Consolidated Financial Statements, on
September 30, 1996, the Company elected to change its year end from August 31 to
December 31. This change was effective December 31, 1996. The selected
historical financial data for all fiscal years presented has been derived from
the audited financial statements of the Company. This historical data may not
necessarily reflect the results of operations or financial position had the
Company been a separate stand-alone company for the year ended August 31, 1992.
The Company's historical revenue and net loss activity has shown
significant fluctuations due primarily to the Company's reliance on a limited
customer base and to the large amount of funds expended on research and
development activities.
<TABLE>
<CAPTION>
FOUR MONTHS
ENDED YEARS ENDED AUGUST 31,
DECEMBER 31, ----------------------------------------------------------------
1996 1996 1995 1994
------------ ------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
Statements of operations:
Revenues................... $14,862,023 $26,702,827 $21,521,733 $ 8,890,595
Loss from continuing
operations............... (3,466,815) (34,693,961) (2,515,789) (17,656,211)
Net loss................... (3,466,815) (34,693,961) (2,648,344) (18,640,263)
Loss from continuing
operations per share..... (.20) (2.36) (.23) (1.98)
Net loss per share......... (.20) (2.36) (.24) (2.09)
Balance sheet data at year
end:
Net working capital........ 355,645 3,773,780 10,074,716 3,579,444
Total assets............... 49,194,375 47,557,346 27,372,925 30,410,378
Long-term debt............. 369,377 280,727 -- --
Stockholders' equity....... 27,461,113 27,848,808 22,962,099 19,439,897
<CAPTION>
YEARS ENDED AUGUST 31,
-------------------------------------------
1993 1992
-------------------- --------------------
<S> <C> <C>
Statements of operations:
Revenues................... $18,352,502 $18,645,081
Loss from continuing
operations............... (6,012,189) (2,697,517)
Net loss................... (6,231,906) (2,697,517)
Loss from continuing
operations per share..... (.68) (.31)
Net loss per share......... (.71) (.31)
Balance sheet data at year
end:
Net working capital........ 14,827,434 20,779,413
Total assets............... 32,282,062 38,146,099
Long-term debt............. -- --
Stockholders' equity....... 28,976,438 35,589,678
</TABLE>
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The net loss of $34,693,961 for the year ended August 31, 1996, includes
large write-offs for purchased in-process technology relating to the Vicorp
acquisition ($19,500,000), goodwill write-down ($3,829,000), and certain
restructuring changes ($1,093,000). The net loss for fiscal 1995 decreased
dramatically when compared to fiscal 1994 due to higher revenue streams from
both the UniPort and the ESP products and to successful efforts by the Company
to manage and control costs. The net loss of $18,640,263 for the year ended
August 31, 1994, includes the effects of the Company's changing its estimated
average useful lives used to compute depreciation for its computer equipment
from five to six years to three years. The effect of this change in estimate was
to increase the Company's net loss by approximately $4,000,000, or $.45 per
share. The change did not affect cash flow.
Net loss per share for the four months ended December 31, 1996 and for the
years ended August 31, 1996, 1995 and 1994, is based upon the weighted average
common and common equivalent shares outstanding. Loss per share for the year
ended August 31, 1992, has been computed based upon 8,779,471 shares of Common
Stock outstanding; this represents the number of shares issued on the
Distribution Date (as defined below) outstanding as of August 31, 1992, the date
the Company was spun-off from HSN. The net loss per share calculation does not
include stock options, convertible securities and warrants, which are Common
Stock equivalents, as their inclusion would be anti-dilutive.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In July 1987, HSN purchased and retired 100 percent of the issued and
outstanding stock of Precision Software, Inc., which was originally purchased by
HSN for the technology it created to support voice response units developed for
use in the operations of Home Shopping Club, Inc., a wholly-owned subsidiary of
HSN. The Company's name was subsequently changed to Precision Systems, Inc. This
original product line was the predecessor to the ESP.
In June 1990, the Company was awarded a contract for approximately
$15,600,000 by MCI to adapt the ESP for use in the carrier's long-distance
network. The contract was subsequently amended to increase the contract price to
approximately $34,000,000.
On July 31, 1992 (the "Distribution Date"), HSN distributed 100 percent of
the stock of Precision Systems, Inc., to its existing shareholders on a pro-rata
basis.
During fiscal 1996, the Company's business strategy included focusing on
core products and technologies, developing strategic business relationships with
several international telecommunications and computer equipment providers,
improving marketing and sales efforts, and realigning cost structures to improve
cash flow. The Company also pursued opportunities for additional growth through
acquisitions and/or strategic investments. The Company acquired Vicorp during
fiscal 1996 and, since the Vicorp acquisition was accounted for as a purchase,
the Company's statements of operations include the operations of Vicorp since
the acquisition date of April 16, 1996. Therefore, the Company's past financial
performance should not be considered a reliable indication of future
performance.
A number of uncertainties exist that could have an impact on the Company's
future operating results, and financial condition including:
- 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
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<PAGE> 18
- 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 of the Company 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. 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 a reliable indication of future
performance and investors should not use historical trends to anticipate results
or trends in future periods. See "Financial Position, Liquidity and Capital
Resources."
FOUR MONTHS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995 (UNAUDITED)
Contract Revenues and Costs
Contract revenues were $3,729,171 during the four months ended December 31,
1996 compared to $4,110,355 during the same period in 1995. Correspondingly,
contract costs were $3,442,705 during the four months ended December 31, 1996
compared to $2,013,379 during the same period in 1995. The decrease in contract
revenue during the four months ended December 31, 1996 versus 1995 is primarily
due to certain ESP product sales to MCI completed in 1995 which did not recur
during the same period in 1996.
Contract revenues associated with Vicorp's BETEX products were
approximately $2,717,818 for the four months ended December 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. The Company expects the revenue generated from the sale of BETEX products
to increase during 1997. Contract revenues and associated contract costs for the
four months ended December 31, 1995 represented certain ESP product sales to MCI
which did not recur during the same period in 1996.
Service and Support
Service and support revenue increased to $7,959,984 for the four months
ended December 31, 1996, compared to $956,539 for the four months ended December
31, 1995.
Service and support provided to MCI increased to $643,733 for the four
months ended December 31, 1996, compared to $497,582 for the four months ended
December 31, 1995. Maintenance revenue generated from MCI regarding its ESP
equipment increased to $519,648 for the four months ended December 31, 1996,
compared to $335,920 for the same period in 1995. The increase in maintenance
revenue primarily relates to additional ESP equipment delivered to MCI during
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 $0 for the four months ended December 31,
1996, from $683,385 for the same period in 1995. The decrease is due to certain
non-recurring development projects delivered to MCI, which occurred during the
last four months of 1995. The Company expects the service and support revenue
generated through its relationship with MCI to increase during the next year.
Service and support provided to HSN increased to $481,766 for the four
months ended December 31, 1996, in comparison to $478,958 for the four months
ended December 31, 1995.
Service and support revenue for Vicorp BETEX products was $6,035,449 for
the four months ended December 31, 1996. Vicorp's service and support revenue
includes maintenance and custom development services provided to its customers.
16
<PAGE> 19
Service and support revenue for BFD was $789,035 from the acquisition date
to December 31, 1996. BFD's service and support revenue primarily includes
interactive voice response service bureau activity.
License Fees
License fee revenue for the four months ended December 31, 1996 was
$3,172,868 compared to $124,721 for the four months ended December 31, 1995.
License fee revenue for the four months ended December 31, 1996, relating to its
UniPort product line was $69,600 and $3,103,268 for the BETEX product line. The
Company anticipates generating future license fee revenue for its UniPort 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 $10,899,572 for
the four months ended December 31, 1996, compared to $3,474,272 for the four
months ended December 31, 1995. The increase in selling, general and
administrative expenses for the four months ended December 31, 1996 is primarily
due to the following:
- Selling, general and administrative expenses associated with the
acquisition of Vicorp was approximately $5,771,270.
- Selling, general and administrative expenses associated with the BFD
acquisition was approximately $606,197 from the acquisition date to
December 31, 1996.
Although overall selling, general and administrative expenses from
continuing operations increased during the four months ended December 31, 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. Considering the impact of the Vicorp and BFD
acquisitions, the Company expects its selling, general and administrative
expenses will increase in the future.
Research, Engineering and Development
Research, engineering and development expenses increased to $1,964,284 for
the four months ended December 31, 1996, compared to $1,258,439 for the four
months ended December 31, 1995. The increase in research, engineering and
development expenses primarily relates to further development work associated
with the Company's UniPort 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.
Depreciation and Amortization
Depreciation and amortization was $2,265,126 for the four months ended
December 31, 1996, compared to $770,506 for the four months ended December 31,
1995. The increase is primarily due to amortization expenses 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
17
<PAGE> 20
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 four months ended December 31, 1995, the Company's unrealized
investment gain of $891,196 relates to its purchase of marketable equity
securities. No such transaction occurred during the same period in 1996.
Interest Income (Expense)
For the four months ended December 31, 1996, net interest income was
$124,561 compared to $90,124 during the same period in 1995.
FISCAL YEARS ENDED AUGUST 31, 1996, 1995, AND 1994
Contract Revenues and Costs
Contract revenues were $13,724,228 in fiscal 1996 compared to $15,337,054
in fiscal 1995 and $2,925,160 in fiscal 1994. Correspondingly, contract costs
were $6,023,989 in fiscal 1996 compared to $7,824,646 in fiscal 1995, and
$3,092,445 in fiscal 1994. The decrease in contract revenue during fiscal 1996
versus 1995 is primarily due to lower ESP product related sales to MCI and to
lower UniPort product sales in total. The decrease in ESP product sales for
fiscal 1996 was due to a sale to MCI in fiscal 1995 that did not recur in fiscal
1996. The decrease in UniPort product related contract revenue ($2,122,874 for
fiscal 1996 versus $5,614,286 for fiscal 1995) was due to lower customer
deliveries for the product. Contract revenue and costs for fiscal 1994 related
primarily to a contract with MCI (the "MCI Contract"). Revenues under this
contract for the year ended August 31, 1994, were $2,925,160. Costs under this
contract for the same period were $3,092,445.
Contract revenues associated with Vicorp's BETEX products were
approximately $1,839,859 for the period from the acquisition date to August 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. The Company expects the revenue generated from the
sale of BETEX products to increase during 1997.
Revenues from MCI represented 44 percent, 60 percent, and 64 percent of the
Company's fiscal 1996, 1995, and 1994 revenues, respectively. See "Customers."
Service and Support
Revenues from service and support were $9,220,291, $5,741,646, and
$4,587,908 in fiscal 1996, 1995, and 1994, respectively. During fiscal 1994, the
Company entered into a joint development agreement with MCI relating to the ESP.
This agreement generated $2,863,000 and $1,352,000 of service and support
revenue for fiscal 1995 and 1994, respectively. In addition, beginning in fiscal
1993, the Company began earning maintenance fees on the ESP products delivered
to MCI. For the years ended August 31, 1996, 1995 and 1994, MCI maintenance fees
were approximately $1,249,000, $930,000 and $824,000, respectively. Service and
support revenue relating to this maintenance increased during fiscal 1996 and
1995 as additional ESP nodes were delivered to MCI and these nodes required
maintenance services. Service and support provided to HSN decreased to
$1,448,088 in fiscal 1996 compared to $1,909,354 for fiscal 1995. HSN's service
and support contract was renegotiated in fiscal 1995, which resulted in a
reduction of both the level of maintenance services and the revenue earned.
UniPort service and support revenue for each of fiscal 1996 and fiscal 1995 was
less than $100,000. Such service and support revenue for UniPort customers is
expected to increase during fiscal 1997 as additional products, which will
require maintenance support, are delivered.
Service and support revenue for Vicorp's BETEX products was $6,523,638 from
the acquisition date to August 31, 1996. Vicorp's service and support revenue
includes maintenance and custom software development services provided to its
customers.
18
<PAGE> 21
License Fees
Revenues from license fees were $3,758,308, $436,800, and $914,510 in
fiscal 1996, 1995 and 1994, respectively. Under the terms of the MCI Contract,
the Company charged MCI a software license fee for use of its proprietary
software. During fiscal 1996, 1995 and 1994, the Company recognized license fee
revenues from this source of $0, $316,800 and $782,510, respectively. The
Company does not anticipate generating future license fee revenue for its ESP
equipment. License fees for fiscal 1996 relating to its UniPort product line
were $921,911 and $2,836,397 for the BETEX product line. The Company anticipates
generating future license fee revenue for its BETEX and UniPort products,
although no assurance can be given that such future revenue will be generated.
Other Income
Other income represents miscellaneous hardware, software, and service
activity charged to customers.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased to $23,849,385, in
fiscal 1996 from $9,034,490 in fiscal 1995 and $12,304,191 in fiscal 1994. As a
percentage of revenues, these expenses were 89 percent, 61 percent, and 222
percent in fiscal 1996, 1995, and 1994, respectively.
During the year ended August 31, 1996, selling, general, and administrative
expenses increased for several reasons:
- The Company increased its sales and marketing force in order to generate
additional revenue opportunities.
- The Company increased its advertising and trade show expenditures by
approximately $700,000 in order to increase market awareness of the
Company's products and to announce the Vicorp acquisition.
- The Company increased its bad debt reserve by approximately $1,000,000
during the year ended August 31, 1996, relating to uncollectible
receivables.
- Selling, general and administrative expense in connection with the
acquisition of Vicorp was $9,297,164 from the acquisition date to August
31, 1996.
- As of August 31, 1996, the Company accrued $1,093,341 in restructuring
charges (the "Restructuring"), which relate primarily to termination
benefits, including severance pay. The total number of employees
terminated was approximately 55.
During fiscal 1995 and 1994, the Company's selling, general and
administrative expenses were impacted by the following:
- During fiscal 1995, the Company continued managing and controlling costs
in order to improve the alignment of cost outlays against potential
revenue opportunities.
- During fiscal 1995, the Company renegotiated all major maintenance
agreements for its development and test facility, thereby generating
approximately $200,000 in savings.
- During fiscal 1995, the Company improved its controls and accountability
for use of third party professional vendors (legal, public relations,
management consultants, etc.), which generated approximately $450,000 in
savings.
- During fiscal 1994, the Company recorded a reserve for obsolescence on
its materials inventory. The effect of this reserve was to increase the
Company's selling, general, and administrative expenses by approximately
$890,000.
- During December 1993, Vernon Troupe, Chairman of the Board, and
Jacqueline Soechtig, President/Chief Executive Officer and Board member,
resigned from the Company. John D. Loewenberg was named Chairman of the
Board and Russell I. Pillar, a director, was named President and Chief
19
<PAGE> 22
Executive Officer. In connection with her resignation, Ms. Soechtig and
the Company entered into a Settlement Agreement and Mutual General Release
which provides for, among other things, severance of $442,500, legal fees
of $25,000, accelerated vesting of 20,000 restricted shares of Common
Stock, accelerated vesting of options to purchase 110,000 shares of Common
Stock, and the transfer of a country club membership. Likewise, the
Company entered into a Settlement Agreement and Mutual General Release
with Mr. Troupe, the terms of which provide for severance of $200,000,
accelerated vesting of 10,000 restricted shares of Common Stock, and
accelerated vesting of options to purchase 75,000 shares of Common Stock.
The effect of these settlement agreements was to increase the Company's
selling, general, and administrative expenses by approximately $770,000
for fiscal 1994.
- During the first three quarters of fiscal 1994, the Company terminated
the employment of approximately 100 individuals. The effect of severance
charges associated with these terminations was to increase the Company's
selling, general, and administrative expenses by approximately $1,000,000.
Considering the impact of Vicorp operations, the Company expects that its
selling, general and administrative expenses will increase in the future.
Research, Engineering, and Development
Research, engineering, and development expenses increased to $5,249,377 in
fiscal 1996 from $3,172,185 in fiscal 1995, and $3,876,413 in fiscal 1994. As a
percentage of revenues, these expenses were 20 percent, 15 percent, and 44
percent in fiscal 1996, 1995, and 1994, respectively. The increase in research
engineering and development expenses in 1996 versus 1995 relates to further
development work associated with the Company's UniPort and BETEX products.
Resources will continue to be directed toward product improvements and
enhancements for future product releases of the Company's products. The Company
expects its research, engineering, and development costs for fiscal 1997 to be
higher than that expended in fiscal 1996.
The Company believes that it operates in a highly competitive market and,
in order to maintain a competitive position, that its existing products must be
continually improved and new products must be developed. See "Competition." The
amount and timing of future research, engineering, and development expenditures
will depend upon, among other factors, future new contract activity and the
Company's ability to fund these costs from future operating cash flow and bank
or other forms of financing. See "Financial Position, Liquidity, and Capital
Resources."
Purchased Research and Development
Purchased research and development expense of $19,500,000 for the year
ended August 31, 1996, represents the purchase price allocation to in-process
research and development acquired through the Company's acquisition of Vicorp.
Goodwill Write-down
During fiscal 1996, the Company reevaluated the realizability of the
goodwill associated with its fiscal 1994 acquisition of The Renaissance Group
("TRG"). Based on a review of the expected future discounted cash flows of TRG,
the Company determined that a material impairment of the TRG associated goodwill
existed. Consequently, a $3,829,424 write-down of the goodwill balance was
recorded during fiscal 1996.
Depreciation and Amortization
Depreciation and amortization was $4,714,227 in fiscal 1996 compared to
$4,007,208 in fiscal 1995 and $7,458,928 in fiscal 1994. The increase in fiscal
1996 relates primarily to the amortization expense associated with recorded
goodwill from the Vicorp acquisition, which closed during the third quarter of
the year. During fiscal 1994, the Company changed its estimated average useful
lives used to compute depreciation for its computer equipment as the change
better aligns the allocation of equipment costs with its expected use and
results in useful lives more consistent with industry practice for this type of
equipment. The effect of this
20
<PAGE> 23
change was to increase the Company's depreciation and amortization expenses by
approximately $4,000,000 in fiscal 1994.
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 bought and sold
during fiscal 1996. The investment gains associated with these securities are
included in the Company's consolidated statements of operations.
Interest Income (Expense)
For the year ended August 31, 1996, net interest income was $507,200
compared to $1,007 in fiscal 1995 and $185,171 in fiscal 1994. Net interest
income increased in fiscal 1996 due to the increase in the Company's interest
bearing cash balances.
Discontinued Operations
Effective April 30, 1995, certain assets, liabilities, and the business of
Interactive Services, Inc., were sold for approximately $1,000,000 in cash and
the assumption of certain liabilities. The gain on disposition of such activity
has been accounted for as a gain from sales of discontinued operations.
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.
Litigation
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. See "Legal Proceedings."
Financial Position, Liquidity, and Capital Resources
At December 31, 1996, the Company had net working capital of $355,645
versus $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. The Company expects that with the acquisition of Vicorp and BFD, as
described below, 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 through the use of its current working capital,
including the collection of existing accounts receivables, the generation of
future revenues and additional debt or equity financing.
The Company's accounts and contracts receivable increased to $12,400,000 as
of December 31, 1996, from $6,275,370 as of August 31, 1996. The increase is
primarily associated with the Company's increase in revenue and to the BFD
acquisition.
The Company's supplies and other current assets increased to $1,629,373 as
of December 31, 1996, from $1,491,020 as of August 31, 1996. The increase is
primarily due to the Vicorp acquisition.
The Company's costs and earnings in excess of billings on uncompleted
contracts decreased to $3,064,978 as of December 31, 1996, from $3,232,534 as of
August 31, 1996. The decrease is primarily associated with certain of Vicorp's
software development contracts in process for its customers. Such amounts as of
December 31, 1996, are expected to be fully billed by Vicorp by June 30, 1997.
21
<PAGE> 24
The Company's current portion of long-term debt decreased to $2,374,287 as
of December 31, 1996, from $2,845,598 as of August 31, 1996. The Company's
long-term debt increased to $369,377 as of December 31, 1996, from $280,727 as
of August 31, 1996. The decrease in the current portion is primarily due to
certain debt re-paid by the Company during the four months ended December 31,
1996. The increase in long-term debt is primarily due to the BFD acquisition.
The Company's accounts payable increased to $4,395,128 as of December 31,
1996, from $3,295,066 as of August 31, 1996. The increase is primarily due to
the BFD acquisition and the higher associated operating expenses.
The Company's accrued expenses increased to $5,557,759 as of December 31,
1996, from $3,511,764 as of August 31, 1996. The increase is primarily due to
the BFD acquisition.
The Company's accrued payroll and related expenses decreased to $2,494,763
from $4,664,537 as of August 31, 1996, primarily due to repayment of certain
restructuring accruals associated with the Company's fiscal 1996's head count
reduction.
The Company's billings in excess of costs and earnings on uncompleted
contracts increased to $3,753,132 as of December 31, 1996, from $2,896,178 as of
August 31, 1995. The increase is primarily associated with certain of Vicorp's
software development contracts in process for its customers.
The Company's deferred revenue balance increased to $2,689,044 as of
December 31, 1996, from $2,114,896 as of August 31, 1996. The Company's deferred
revenue balance primarily represents prepaid maintenance contracts for services
to be provided to its customers.
During the four months ended December 31, 1996, cash used by operations was
$5,906,816. The Company funded this cash flow usage primarily through its cash
funds. During fiscal 1996, cash used by operations was $7,112,438. The Company
funded this cash flow usage primarily through the proceeds generated through
issuance of Common Stock. During fiscal 1995, cash used by operations was
$4,201,123. The Company funded this cash flow usage primarily through the
proceeds generated through issuance of Common Stock.
During fiscal 1994, cash used by operations was $3,045,087. In addition,
the Company utilized $3,750,000 in cash when it purchased TRG during July 1994.
These cash flow usages were primarily funded through the issuance of $5,800,000
of Preferred Stock and to the draw-down of $5,000,000 on a line of credit with
HSN. The $5,000,000 line of credit with HSN was repaid during fiscal 1995.
During April 1995, Vulcan purchased 1,250,000 shares of the Company's
Common Stock, par value $.01, in exchange for $5,000,000 ($4.00 per share).
Vulcan also acquired warrants to purchase 500,000 shares of Common Stock at
$5.00 per share; 500,000 shares of Common Stock at $6.00 per share; and 500,000
shares of Class B Common Stock at $7.00 per share. The issuance of additional
shares of Class B Common Stock was subject to shareholder approval; if such
approval was not obtained, Vulcan had the ability to purchase Common Stock in
lieu of Class B Common Stock for $6.25 per share. During November 1995, Vulcan
exercised these warrants and purchased 1,500,000 shares of the Company's Common
Stock, generating additional capital to the Company of $8,625,000.
Management is actively involved in discussions with several potential
sources of capital investment and believes that additional equity financing of
up to $4.5 million will be concluded. The Company is also exploring
opportunities for additional 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 any such discussion will
result in additional capital sources for the Company.
The Company incurred approximately $513,597 in expenditures for capital
assets for the four months ended December 31, 1996. 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
22
<PAGE> 25
be available to the Company upon acceptable terms and conditions. Management
expects that expenditures for fiscal 1997 will approximate the balance expended
for fiscal 1996, which were approximately $2,000,000.
As of December 31, 1996, the Company had net operating loss carryforwards
of approximately $33,000,000 for federal income tax purposes expiring through
2010 and $10,100,000 for foreign tax purposes expiring through 2011.
On September 30, 1996, the Company elected to change its year end from
August 31 to December 31. The change is effective December 31, 1996.
New Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("FAS No. 121") effective for fiscal years beginning after December 15, 1995.
FAS No. 121 requires that long-lived assets and certain identifiable intangibles
to be held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The adoption of FAS No. 121 did not have a material impact on
the financial condition or the results of operations of the Company.
In October 1995, FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("FAS No. 123") effective for
transactions entered into after December 15, 1995. FAS No. 123 provides
alternatives for the methods used by entities to record compensation expense
associated with its stock-based compensation plans. Additionally, FAS 123
provides further guidance on the disclosure requirements relating to stock-based
compensation plans that are effective for fiscal years beginning after December
15, 1995. The adoption of FAS No. 123 did not have a material impact on the
financial condition or the results of operations of the Company.
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 of the Company to hire and retain qualified
personnel
- Legislative changes affecting the Company's markets, including the
Telecommunications Act of 1996
23
<PAGE> 26
- 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.
24
<PAGE> 27
ITEM 8. FINANCIAL STATEMENTS
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................ 26
Independent Auditors' Report................................ 27
Consolidated Balance Sheets................................. 28
Consolidated Statements of Operations....................... 29
Consolidated Statements of Stockholders' Equity............. 30
Consolidated Statements of Cash Flows....................... 31
Notes to Consolidated Financial Statements.................. 32
</TABLE>
25
<PAGE> 28
INDEPENDENT AUDITORS' REPORT
Board of Directors
Precision Systems, Inc.
We have audited the accompanying consolidated balance sheets of Precision
Systems, Inc. and subsidiaries (the "Company") as of December 31, 1996, August
31, 1996 and 1995, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the four months ended December 31, 1996
and for each of the three years in the period ended August 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the consolidated
financial statements of Vicorp N.V. (a consolidated subsidiary), which
statements reflect total assets constituting 33 percent and 41 percent,
respectively, of consolidated total assets as of December 31, 1996 and August
31, 1996, and total revenues constituting 80 percent and 42 percent,
respectively, of consolidated total revenues for the four months ended December
31, 1996 and for the year ended August 31, 1996. The financial statements of
Vicorp N.V. were audited by other auditors whose report has been furnished to
us, and our opinion, insofar as it relates to the amounts included for Vicorp
N.V., is based solely on the report of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, such
consolidated financial statements present fairly, in all material respects, the
financial position of the Company at December 31, 1996, August 31, 1996 and
1995, and the results of its operations and its cash flows for the four months
ended December 31, 1996 and for each of the three years in the period ended
August 31, 1996, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Tampa, Florida
March 27, 1997
26
<PAGE> 29
INDEPENDENT AUDITORS' REPORT
To the Shareholder and Directors of Vicorp Group
1. We have audited the accompanying Vicorp Group consolidated reporting
packages comprising the consolidated balance sheets as of December 31, and
August 31, 1996, the consolidated profit and loss accounts for the four month
period ended December 31, 1996 and the eight month period ended August 31, 1996
and supporting schedules, including a schedule showing the split of the results
for the three months ended March 31, 1996 and the five months ended August 31,
1996, respectively. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
2. We conducted our audits in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial presentations. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial presentation. We
believe that our audits provide a reasonable basis for our opinion.
3. These consolidated reporting packages have been prepared for
consolidation purposes into the consolidated financial statements of Precision
Systems Inc., St. Petersburg, Florida, USA for the four month period ended
December 31, 1996 and the year ended August 31, 1996 and include only the
information necessary for that purpose. These consolidated reporting packages
have been drawn up on the basis of International Accounting Standards (IAS), and
in accordance with Vicorp Group Accounting Policies. The Vicorp Group Accounting
Policies do not lead to material departure from US GAAP.
4. In our opinion, except as noted in the preceding paragraph, the
consolidated reporting packages prepared for consolidation purposes presents
fairly, in all material respects, the consolidated financial position of Vicorp
Group as of December 31, and August 31, 1996, and the results for the four month
period ended December 31, 1996 and for the three month period ended March 31,
1996 and the five month period ended August 31, 1996, in conformity with
International Accounting Standards and Vicorp Group Accounting Policies.
/s/ COOPERS & LYBRAND N.V.
--------------------------------------
Coopers & Lybrand N.V.
Utrecht, February 28, 1997
27
<PAGE> 30
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31,
DECEMBER 31, -------------------------
1996 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash...................................................... $ 4,601,818 $12,174,250 $ 7,702,535
Accounts and contracts receivable, net.................... 12,400,000 6,275,370 4,427,583
Due from employees........................................ 23,361 28,417 51,664
Supplies and other current assets......................... 1,629,373 1,491,020 1,164,511
Costs and earnings in excess of billings on uncompleted
contracts............................................... 3,064,978 3,232,534 1,139,249
----------- ----------- -----------
Total current assets................................ 21,719,530 23,201,591 14,485,542
----------- ----------- -----------
Property, plant and equipment, at cost
Land and improvements..................................... 1,134,955 1,134,955 1,134,955
Buildings and improvements................................ 3,017,121 2,871,896 2,597,712
Computer equipment........................................ 25,674,512 24,685,816 17,298,890
Furniture and office equipment............................ 3,478,035 3,183,309 1,914,323
----------- ----------- -----------
33,304,623 31,875,976 22,945,880
Less accumulated depreciation............................. (24,479,765) (23,357,434) (16,517,312)
----------- ----------- -----------
8,824,858 8,518,542 6,428,568
----------- ----------- -----------
Intangible Assets, net...................................... 18,649,987 15,837,213 6,458,815
----------- ----------- -----------
$49,194,375 $47,557,346 $27,372,925
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt....................... $ 2,374,287 $ 2,845,598 $ --
Accounts payable........................................ 4,395,128 3,295,066 1,331,784
Accrued expenses........................................ 5,557,759 3,511,764 526,394
Accrued payroll and related liabilities................. 2,494,763 4,664,537 651,401
Customer deposits....................................... 99,772 99,772 99,772
Billings in excess of costs and earnings on uncompleted
contracts............................................. 3,753,132 2,896,178 --
Deferred revenue........................................ 2,689,044 2,114,896 1,329,580
----------- ----------- -----------
Total current liabilities........................... 21,363,885 19,427,811 3,938,931
----------- ----------- -----------
Deferred Revenue -- Non-Current............................. -- -- 471,895
----------- ----------- -----------
Long-term debt.............................................. 369,377 280,727 --
----------- ----------- -----------
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
of Preferred Stock, issued and outstanding 10,000
shares; liquidation preference $5,800,000............... 100 100 100
Common stock -- $.01 par value; authorized 30,000,000
shares, issued 17,696,367, 17,266,382 and 9,733,525
shares, respectively.................................... 176,964 172,664 97,335
Class B -- convertible common stock -- $.01 par value,
2,415,945 shares authorized, issued and outstanding 0, 0
and 2,415,945 shares, respectively...................... -- -- 24,159
Additional paid-in capital................................ 109,643,293 106,884,215 67,740,805
Deficit................................................... (83,235,389) (79,768,574) (45,074,613)
Treasury stock (132,937 shares) -- at cost................ (422,360) (422,360) (422,360)
Accumulated preferred stock dividends..................... 1,062,874 946,556 596,673
Cumulative foreign currency translation adjustment........ 355,748 355,416 --
Unearned compensation..................................... (120,117) (319,209) --
----------- ----------- -----------
Total stockholders' equity.......................... 27,461,113 27,848,808 22,962,099
----------- ----------- -----------
$49,194,375 $47,557,346 $27,372,925
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE> 31
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOUR MONTHS
ENDED YEAR ENDED AUGUST 31,
DECEMBER 31, -----------------------------------------
1996 1996 1995 1994
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenues
Contract revenues....................... $ 3,729,171 $ 13,724,228 $15,337,054 $ 2,925,160
Service and support..................... 7,959,984 9,220,291 5,741,646 4,587,908
License fees............................ 3,172,868 3,758,308 436,800 914,510
Other income............................ -- -- 6,233 463,017
----------- ------------ ----------- ------------
14,862,023 26,702,827 21,521,733 8,890,595
----------- ------------ ----------- ------------
Cost and Expenses
Contract costs.......................... 3,442,705 6,023,989 7,824,646 3,092,445
Selling, general and administrative..... 10,899,572 23,849,385 9,034,490 12,304,191
Research, engineering and development... 1,964,284 5,249,377 3,172,185 3,876,413
Depreciation and amortization........... 2,265,126 4,714,227 4,007,208 7,458,928
Purchased research and development...... -- 19,500,000 -- --
Goodwill write-down..................... -- 3,829,424 -- --
----------- ------------ ----------- ------------
18,571,687 63,166,402 24,038,529 26,731,977
----------- ------------ ----------- ------------
Operating loss............................ (3,709,664) (36,463,575) (2,516,796) (17,841,382)
Interest income, net...................... 124,561 507,200 1,007 185,171
Gain on sale of marketable equity
securities.............................. -- 1,262,414 -- --
----------- ------------ ----------- ------------
Loss before income taxes.................. (3,585,103) (34,693,961) (2,515,789) (17,656,211)
Income tax benefit........................ 118,288 -- -- --
----------- ------------ ----------- ------------
Loss from Continuing Operations........... (3,466,815) (34,693,961) (2,515,789) (17,656,211)
----------- ------------ ----------- ------------
Loss from discontinued operations:
Loss from operations of discontinued
subsidiary........................... -- -- (661,974) (984,052)
Gain from sale of discontinued
subsidiary........................... -- -- 529,419 --
----------- ------------ ----------- ------------
-- -- (132,555) (984,052)
----------- ------------ ----------- ------------
Net Loss.................................. (3,466,815) (34,693,961) (2,648,344) (18,640,263)
Preferred stock dividend requirements..... (116,318) (349,883) (347,048) (249,625)
----------- ------------ ----------- ------------
Net Loss Applicable to Common Stock....... $(3,583,133) $(35,043,844) $(2,995,392) $(18,889,888)
=========== ============ =========== ============
Loss Per Share
Loss from continuing operations......... $ (.20) $ (2.36) $ (.23) $ (1.98)
=========== ============ =========== ============
Loss from discontinued operations....... $ -- $ -- $ (.01) $ (.11)
=========== ============ =========== ============
Net loss applicable to common stock..... $ (.21) $ (2.39) $ (.27) $ (2.12)
=========== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
29
<PAGE> 32
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NON-
REDEEMABLE
PREFERRED COMMON CLASS B ACCUMULATED
STOCK STOCK CONVERTIBLE ADDITIONAL PREFERRED
$.01 PAR $.01 PAR COMMON PAID-IN TREASURY STOCK
VALUE VALUE STOCK CAPITAL DEFICIT STOCK DIVIDENDS
---------- -------- ----------- ------------ ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at August 31,
1993....................... $ -- $ 63,882 $ 24,159 $ 53,243,385 $(23,786,006) $(454,140) $ --
Adjustment of common stock
and compensation related
to restricted stock
grants................... -- 600 -- (83,100) -- -- --
Amortization of unearned
compensation............. -- -- -- -- -- -- --
Issuance of common stock
upon exercise of stock
options.................. -- 530 -- 92,220 -- -- --
Issuance of preferred
stock.................... 100 -- -- 5,799,900 -- -- --
Issuance of common stock
upon acquisition of The
Renaissance Group........ -- 13,986 -- 3,132,864 -- -- --
Net loss for the year ended
August 31, 1994.......... -- -- -- -- (18,640,263) -- --
Dividends on preferred
stock.................... -- -- -- (249,625) -- -- 249,625
Treasury stock contribution
to retirement plan....... -- -- -- -- -- 31,780 --
--- -------- -------- ------------ ------------ --------- ----------
Balance at August 31,
1994....................... 100 78,998 24,159 61,935,644 (42,426,269) (422,360) 249,625
Issuance of common stock
upon exercise of stock
options.................. -- 5,837 -- 1,202,221 -- -- --
Issuance of common stock
upon exercise of stock
options.................. -- 12,500 -- 4,987,500 -- -- --
Legal expenses associated
with issuance of common
stock.................... -- -- -- (37,512) -- -- --
Dividends on preferred
stock.................... -- -- -- (347,048) -- -- 347,048
Net loss for the year ended
August 31, 1995.......... -- -- -- -- (2,648,344) -- --
--- -------- -------- ------------ ------------ --------- ----------
Balance at August 31,
1995....................... 100 97,335 24,159 67,740,805 (45,074,613) (422,360) 596,673
Issuance of common stock
upon exercise of stock
options.................. -- 5,152 -- 922,714 -- -- --
Conversion of Class B
Common Stock............. -- 24,159 (24,159) -- -- -- --
Issuance of common stock
upon acquisition of
Vicorp................... -- 31,018 -- 29,490,559 -- -- --
Foreign currency
translation adjustment... -- -- -- -- -- -- --
Unearned compensation
relating to restricted
stock grants............. -- -- -- 470,020 -- -- --
Amortization of unearned
compensation............. -- -- -- -- -- -- --
Issuance of common stock... -- 15,000 -- 8,610,000 -- -- --
Dividends on preferred
stock.................... -- -- -- (349,883) -- -- 349,883
Net loss for the year ended
August 31, 1996.......... -- -- -- -- (34,693,961) -- --
--- -------- -------- ------------ ------------ --------- ----------
Balance at August 31,
1996....................... 100 172,664 -- 106,884,215 (79,768,574) (422,360) 946,556
Issuance of common stock
upon exercise of stock
options.................. -- 1,577 -- 1,222,286 -- -- --
Issuance of common stock
upon acquisition of BFD
Productions, Inc......... -- 2,723 -- 1,653,110 -- -- --
Foreign currency
translation adjustment... -- -- -- -- -- -- --
Amortization of unearned
compensation............. -- -- -- -- -- -- --
Dividends on preferred
stock.................... -- -- -- (116,318) -- -- 116,318
Net loss for the four
months ended December 31,
1996..................... -- -- -- -- (3,466,815) -- --
--- -------- -------- ------------ ------------ --------- ----------
Balance at December 31,
1996....................... $100 $176,964 -- $109,643,293 $(83,235,389) $(422,360) $1,062,874
=== ======== ======== ============ ============ ========= ==========
<CAPTION>
CUMULATIVE
FOREIGN
CURRENCY
TRANSACTION UNEARNED
ADJUSTMENT COMPENSATION TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
Balance at August 31,
1993....................... $ -- $(114,842) $ 28,976,438
Adjustment of common stock
and compensation related
to restricted stock
grants................... -- 82,500 --
Amortization of unearned
compensation............. -- 32,342 32,342
Issuance of common stock
upon exercise of stock
options.................. -- -- 92,750
Issuance of preferred
stock.................... -- -- 5,800,000
Issuance of common stock
upon acquisition of The
Renaissance Group........ -- -- 3,146,850
Net loss for the year ended
August 31, 1994.......... -- -- (18,640,263)
Dividends on preferred
stock.................... -- -- --
Treasury stock contribution
to retirement plan....... -- -- 31,780
-------- --------- ------------
Balance at August 31,
1994....................... -- -- 19,439,897
Issuance of common stock
upon exercise of stock
options.................. -- -- 1,208,058
Issuance of common stock
upon exercise of stock
options.................. -- -- 5,000,000
Legal expenses associated
with issuance of common
stock.................... -- -- (37,512)
Dividends on preferred
stock.................... -- -- --
Net loss for the year ended
August 31, 1995.......... -- -- (2,648,344)
-------- --------- ------------
Balance at August 31,
1995....................... -- -- 22,962,099
Issuance of common stock
upon exercise of stock
options.................. -- -- 927,866
Conversion of Class B
Common Stock............. -- -- --
Issuance of common stock
upon acquisition of
Vicorp................... -- -- 29,521,577
Foreign currency
translation adjustment... 355,416 -- 355,416
Unearned compensation
relating to restricted
stock grants............. -- (470,020) --
Amortization of unearned
compensation............. -- 150,811 150,811
Issuance of common stock... -- -- 8,625,000
Dividends on preferred
stock.................... -- -- --
Net loss for the year ended
August 31, 1996.......... -- -- (34,693,961)
-------- --------- ------------
Balance at August 31,
1996....................... 355,416 (319,209) 27,848,808
Issuance of common stock
upon exercise of stock
options.................. -- -- 1,223,863
Issuance of common stock
upon acquisition of BFD
Productions, Inc......... -- -- 1,655,833
Foreign currency
translation adjustment... 332 -- 332
Amortization of unearned
compensation............. -- 199,092 199,092
Dividends on preferred
stock.................... -- -- --
Net loss for the four
months ended December 31,
1996..................... -- -- (3,466,815)
-------- --------- ------------
Balance at December 31,
1996....................... $355,748 $(120,117) $ 27,461,113
======== ========= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
30
<PAGE> 33
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOUR
MONTHS
ENDED YEAR ENDED AUGUST 31,
DECEMBER 31, -----------------------------------------
1996 1996 1995 1994
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Cash Flows -- Operating Activities:
Net loss.......................................... $(3,466,815) $(34,693,961) $(2,648,344) $(18,640,263)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization................... 2,265,126 4,714,227 4,007,208 7,458,928
Purchased research and development.............. -- 19,500,000 -- --
Goodwill write-down............................. -- 3,829,424 -- --
Provision for losses on accounts receivable..... 278,687 1,196,412 159,387 37,335
Provision for materials obsolescence............ -- -- -- 885,002
Gain from sale of discontinued subsidiary....... -- -- (529,419) --
Amortization of unearned compensation........... 199,092 150,811 -- 32,342
Realization of deferred revenue................. (481,272) (1,448,588) (539,821) --
Treasury stock activity......................... -- -- -- 31,780
Change in current assets and liabilities, net of
business acquisitions:
(Increase) decrease in accounts and contracts
receivable................................. (5,796,096) 7,745,048 (1,012,144) (1,056,632)
(Increase) decrease in costs and estimated
earnings in excess of billings............. 167,556 (2,093,285) (1,139,249) 5,817,184
(Increase) decrease in supplies and other
current assets............................. (129,440) 519,491 568,160 218,527
Increase (decrease) in accounts payable....... 139,256 (3,403,718) (1,706,670) 1,720,600
Increase (decrease) in accrued expenses....... (937,652) (2,546,486) (577,440) 293,095
Increase (decrease) in customer deposits...... -- -- (355,991) 299,772
Increase in billings in excess of earnings on
incomplete contracts....................... 856,954 2,896,178 -- --
Increase (decrease) in deferred revenue....... 1,055,420 (3,477,991) (426,800) (142,757)
----------- ------------ ----------- ------------
Net cash used in operating activities...... (5,849,184) (7,112,438) (4,201,123) (3,045,087)
----------- ------------ ----------- ------------
Cash Flows -- Investing Activities:
Purchase of property, plant and equipment......... (513,598) (1,995,353) (1,514,475) (2,305,220)
Purchase of other assets.......................... -- (226,685) -- --
Purchase of consolidated subsidiaries, net of cash
acquired........................................ (1,447,466) -- -- (3,346,913)
Cash acquired in acquisition...................... 4,403,000 -- --
Proceeds from sale of discontinued subsidiary..... -- -- 1,009,756 --
----------- ------------ ----------- ------------
Net cash provided by (used in) investing
activities............................... (1,961,064) 2,180,962 (504,719) (5,652,133)
----------- ------------ ----------- ------------
Cash Flows -- Financing Activities:
Proceeds from note payable........................ -- -- -- 5,000,000
Repayment of note payable......................... (986,047) (149,675) (2,952,933) (97,820)
Proceeds from issuance of capital stock........... 1,223,863 9,552,866 6,170,546 5,892,750
----------- ------------ ----------- ------------
Net cash provided by financing
activities............................... 237,816 9,403,191 3,217,613 10,794,930
----------- ------------ ----------- ------------
Net increase (decrease) in cash................... (7,572,432) 4,471,715 (1,488,229) 2,097,710
Cash at beginning of period....................... 12,174,250 7,702,535 9,190,764 7,093,054
----------- ------------ ----------- ------------
Cash at end of period............................. $ 4,601,818 $ 12,174,250 $ 7,702,535 $ 9,190,764
=========== ============ =========== ============
Supplemental Non-Cash Information:
Accrued dividends on preferred stock.............. $ 116,318 $ 349,883 $ 347,048 $ 249,625
Issuance of stock for purchase of subsidiary...... 1,655,833 29,521,577 -- 3,146,850
Conversion of note payable to deferred revenue.... -- -- 2,047,067 --
Issuance of common stock as compensation.......... -- 470,020 33,726 --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
31
<PAGE> 34
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
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 and freephone services,
call center solutions, and service bureau services. In addition, the Company
supports its products through maintenance contracts.
On September 30, 1996, the Company elected to change its year end from
August 31 to December 31. This change was made effective December 31, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies of the
Company consistently applied in the preparation of the accompanying consolidated
financial statements:
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and commercial paper with
original maturities at time of acquisition of three months or less.
CONSOLIDATION
The accompanying consolidated financial statements include the consolidated
operations of PSI and its subsidiaries. All significant intercompany
transactions and accounts have been eliminated.
ESTIMATES AND ASSUMPTIONS
The preparation of the consolidated financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues, and expenses. Examples include provisions for bad
debts, depreciable lives for property, plant, and equipment, amortization period
for intangible assets, and costs and profits associated with long-term
contracts. Actual results may differ from these estimates.
LONG-TERM CONTRACT
Certain of the Company's contract revenues and anticipated profits are
recognized using the percentage-of-completion method, based on contract costs
incurred to date compared with the Company's estimate of total contract costs
and profit. Contract costs include all direct materials and labor costs and
those indirect costs related to contract performance such as indirect labor,
supplies and depreciation. Revisions in estimated profits are made in the month
in which the circumstances requiring the revision become known. Should a loss on
the contract become anticipated, the entire amount of estimated loss on the
contract would be recorded in the period in which it becomes known.
32
<PAGE> 35
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation on
property and equipment is provided for in amounts sufficient to allocate the
costs of depreciable assets to operations over their estimated service lives as
follows:
<TABLE>
<CAPTION>
YEARS
--------
<S> <C>
Land improvements........................................... 18
Building and improvements................................... 10 to 30
Computer equipment.......................................... 3 to 4
Furniture and office equipment.............................. 5 to 10
</TABLE>
For income tax reporting purposes, certain of these assets are depreciated
using accelerated methods.
PRODUCT WARRANTY
The Company warrants its products for between three-month to one-year
periods of time after the initial sale. Estimated costs related to such
warranties are accrued when the products are sold.
REVENUE RECOGNITION
Revenues, other than from long-term contracts, generally are recognized
when the products are delivered or the service has been rendered. Revenue from
long-term contracts are recognized under the percentage-of-completion method on
the basis of physical completion to date. This method is used because management
considers physical completion to be the best available measure of the progress
on these contracts. Related contract costs include all direct material and labor
costs and those indirect costs related to contract performance and are included
in contract costs in the consolidated statements of operations. Revenue from
post-contract customer support is recognized ratably over the service period.
Revenue from software licenses is recognized upon delivery of the software.
FOREIGN CURRENCIES
Assets and liabilities recorded in foreign currencies on the books of
foreign subsidiaries are translated at the exchange rate on the balance sheet
date. Translation adjustments resulting from this process are charged or
credited to stockholders' equity. Revenue, costs, and expenses are translated at
average rates of exchange prevailing to the applicable period. Gains and losses
on foreign currency transactions are included in non-operating expenses.
CREDIT RISK
Financial instruments which potentially expose the Company to concentration
of credit risk consist primarily of cash investments and accounts receivable.
The Company places its cash investments with a high-credit quality financial
institution. For its accounts receivable, the Company extends unsecured credit
to both domestic and international customers. While the Company does have a
concentration of credit with respect to these cash investments and accounts
receivable, the Company does not feel that it is exposed to significant risk of
loss from such.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's cash and long-term debt approximates
their fair values at December 31, 1996, August 31, 1996 and 1995.
33
<PAGE> 36
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
The Company uses the asset and liability method of accounting for 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 income taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred.
LOSS PER SHARE
Loss per share for the four months ended December 31, 1996 and the fiscal
years ended August 31, 1996, 1995, and 1994, has been computed based upon the
weighted average common shares outstanding of 17,428,861, 14,677,220,
10,965,640, and 8,936,003, respectively. The loss per share calculation does not
include preferred convertible securities and stock options, which are common
stock equivalents, as their inclusion would be anti-dilutive.
RESTRUCTURING CHARGES
During fiscal 1996, in an effort to reduce overhead and cut costs, the
Company terminated the employment of approximately 55 individuals. The effect of
the severance charges associated with these terminations was to increase the
Company's selling, general and administrative expenses by approximately
$1,100,000. As of December 31, 1996 and August 31, 1996, approximately $77,500
and $1,100,000, respectively, of such charges are included in accrued payroll
and related liabilities on the Company's balance sheet.
RECLASSIFICATIONS
Certain amounts for previous years have been reclassified to conform with
the December 31, 1996 presentation.
3. ACCOUNTS AND CONTRACTS RECEIVABLE
<TABLE>
<CAPTION>
AUGUST 31,
DECEMBER 31, ------------------------
1996 1996 1995
------------ ----------- ----------
<S> <C> <C> <C>
Accounts and contracts receivable........................ $13,932,134 $ 7,528,717 $4,581,144
Allowance for doubtful accounts.......................... (1,532,134) (1,253,347) (153,561)
----------- ----------- ----------
$12,400,000 $ 6,275,370 $4,427,583
=========== =========== ==========
</TABLE>
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
<TABLE>
<CAPTION>
AUGUST 31,
DECEMBER 31, ------------------------
1996 1996 1995
------------ ----------- ----------
<S> <C> <C> <C>
Expenditures on uncompleted contracts.................... $ 2,418,226 $ 2,979,877 $ 854,437
Estimated earnings on uncompleted contracts.............. 646,752 252,657 284,812
----------- ----------- ----------
3,064,978 3,232,534 1,139,249
Less actual and allowable billings on uncompleted
contracts.............................................. (3,753,132) (2,896,178) --
----------- ----------- ----------
$ (688,154) $ 336,356 $1,139,249
=========== =========== ==========
</TABLE>
34
<PAGE> 37
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. SUPPLIES AND OTHER CURRENT ASSETS
Supplies and other current assets consist of the following:
<TABLE>
<CAPTION>
AUGUST 31,
DECEMBER 31, ------------------------
1996 1996 1995
------------ ----------- ----------
<S> <C> <C> <C>
Materials to be used in fulfilling contracts..... $ 553,424 $ 550,067 $ 999,846
Prepaid expenses................................. 1,075,949 940,953 164,665
----------- ----------- ----------
$ 1,629,373 $ 1,491,020 $1,164,511
=========== =========== ==========
</TABLE>
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
AUGUST 31,
DECEMBER 31, ------------------------
1996 1996 1995
------------ ----------- ----------
<S> <C> <C> <C>
Goodwill (see Note 16)........................... $24,308,172 $20,316,703 $6,981,714
Developed technology value....................... 3,090,000 3,090,000 --
Assembled work force value....................... 890,000 890,000 --
Software licenses................................ 306,412 312,443 --
Patents.......................................... -- -- 49,862
----------- ----------- ----------
28,594,584 24,609,146 7,031,576
Less accumulated amortization.................... 9,944,597 8,771,933 572,761
----------- ----------- ----------
$18,649,987 $15,837,213 $6,458,815
=========== =========== ==========
</TABLE>
Goodwill associated with acquired subsidiaries is amortized over five to
fifteen-year periods. At each balance sheet date, the Company evaluates the
realizability of goodwill based on expectations of future discounted cash flows.
The Company determined that a material impairment of goodwill related to its
purchase of The Renaissance Group existed at August 31, 1996 and recorded a
provision of $3,829,424 to write down such goodwill to its realizable value.
Software licenses and patent costs are recorded at cost and amortized over the
expected useful lives of the assets, varying from two to five years.
Amortization expenses associated with intangible assets were $1,225,708,
$2,389,848, $551,607, and $188,486 for the four months ended December 31, 1996
and the years ended August 31, 1996, 1995, and 1994, respectively.
7. INCOME TAXES
The components of income tax (benefit) are as follows:
<TABLE>
<CAPTION>
FOUR MONTHS YEARS ENDED
ENDED AUGUST 31,
DECEMBER 31, ------------------
1996 1996 1995 1994
------------ ---- ---- ----
<S> <C> <C> <C> <C>
Current payable (receivable)............................. $(118,288) $-- $-- $--
Deferred................................................. -- -- -- --
--------- -- -- --
$(118,288) $-- $-- $--
========= == == ==
</TABLE>
35
<PAGE> 38
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of total income tax expense (benefit) to amounts computed
by applying the statutory federal income tax rate to losses before income taxes
is as follows:
<TABLE>
<CAPTION>
FOUR MONTHS
ENDED YEARS ENDED AUGUST 31,
DECEMBER 31, ------------------------------------------------------------------
1996 1996 1995 1994
------------------- -------------------- ----------------- -------------------
AMOUNTS % AMOUNTS % AMOUNTS % AMOUNT %
----------- ----- ------------ ----- --------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income tax benefit at the
federal statutory rate...... $(1,293,014) (35.0)% $(12,129,302) (35.0)% $(880,526) (35.0)% $(6,524,092) (35.0)%
Amortization and write-off of
goodwill and other acquired
intangibles................. 333,012 9.0 8,868,990 26.0 -- -- -- --
Increase in valuation
allowance................... 760,166 20.6 4,200,372 12.0 880,526 35.0 6,524,092 35.0
State income taxes, net of
federal tax benefit......... -- -- (344,910) (1.0) -- -- -- --
Other......................... 81,548 2.2 (595,150) (2.0)% -- -- -- --
----------- ----- ------------ ----- --------- ----- ----------- -----
$ (118,288) (3.2)% $ -- --% $ -- --% $ -- --%
=========== ===== ============ ===== ========= ===== =========== =====
</TABLE>
At December 31, 1996, the Company had net operating loss carryforwards of
approximately $35,000,000 for U.S. federal income tax purposes expiring through
2011 and $9,200,000 for foreign tax purposes of which $4,400,000 is expiring
through 2005 and $4,800,000 is available indefinitely. The Company intends to
continue to indefinitely reinvest earnings of its foreign subsidiaries, which
reflect full provision for non-U.S. income taxes, to expand its international
operations. Accordingly, no provision has been made for U.S. income taxes that
might be payable upon repatriation of such earnings. In the event any earnings
of non-U.S. subsidiaries are repatriated, the Company will provide U.S. income
taxes upon repatriation of such earnings which will be offset by applicable
foreign tax credits, subject to certain limitations.
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes and (b)
operating loss carryforwards. The tax effects of significant items comprising
the Company's deferred tax asset are as follows:
<TABLE>
<CAPTION>
AUGUST 31,
DECEMBER 31, ---------------------------
1996 1996 1995
------------ ----------- ------------
<S> <C> <C> <C>
Tax loss carryforwards.................... $ 15,924,000 $15,457,000 $ 9,920,000
Depreciation.............................. (173,000) 639,000 345,000
Reserves not currently deductible......... 704,000 566,000 415,000
Stock option compensation................. 1,138,000 787,000 --
Other..................................... 407,000 331,000 131,000
------------ ----------- ------------
Total gross deferred tax asset............ 18,000,000 17,780,000 10,811,000
Less: valuation allowance................. (18,000,000) (17,780,000) (10,811,000)
------------ ----------- ------------
$ -- $ -- $ --
============ =========== ============
</TABLE>
A portion of the deferred tax asset in the amount of $1,138,000 is related
to the tax effects of stock option compensation. This benefit, when recognized,
will be classified in the stockholders' equity section of the balance sheet.
Pursuant to the Distribution (see Note 13), the Company and HSN have
entered into a Tax Sharing Agreement ("Tax Sharing Agreement"). The Tax Sharing
Agreement provides that if, as a result of adjustments to HSN's tax position for
periods prior to the Distribution, caused by a tax audit or otherwise, there
would have been a corresponding increase or decrease in the deferred tax
liability account of the Company as of the date of Distribution, then the
Company will receive a cash payment from HSN (or make a cash payment to HSN) in
the amount of such increase (or decrease).
36
<PAGE> 39
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
AUGUST 31,
DECEMBER 31, --------------------------
1996 1996 1995
------------ ----------- ------------
<S> <C> <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 obligation, interest rates
varying from 6 percent to 9 percent;
collateralized by assets with net book value
of approximately $500,000.................... 776,062 708,723 --
----------- ----------- ------------
2,743,664 3,126,325 --
Less current portion........................... (2,374,287) (2,845,598) --
----------- ----------- ------------
$ 369,377 $ 280,727 $ --
=========== =========== ============
</TABLE>
Annual principal maturities for years subsequent to December 31, 1996, are
as follows:
<TABLE>
<S> <C>
1997........................................................ $2,374,287
1998........................................................ 332,955
1999........................................................ 30,012
2000........................................................ 6,410
----------
$2,743,664
==========
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
The Company has annual commitments under non-cancelable operating leases
for years subsequent to December 31, 1996 (rental expense of $382,508,
$1,279,622, $375,662 and $211,261 for the four months ended December 31, 1996
and for the years ended August 31, 1996, 1995, and 1994, respectively) as
follows:
<TABLE>
<S> <C>
1997........................................................ $1,343,501
1998........................................................ 786,924
1999........................................................ 228,420
2000........................................................ 100
2001 and thereafter......................................... --
----------
$2,358,945
==========
</TABLE>
10. STOCKHOLDERS' EQUITY
The Company's amended Certificate of Incorporation provides that the
holders of both classes of common stock are entitled to receive ratably such
dividends, if any, as may be declared by the Board of Directors out of funds
legally available for the payment of dividends. During July 1996, RMS Limited
Partnership, the sole owner of the Company's Class B Common Stock, elected to
convert 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 converted was
retired and is not subject to 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 votes as a single
class on a one vote per share basis on all matters submitted to shareholders.
37
<PAGE> 40
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pursuant to the Company's Stock Option and Restricted Stock Plan, 100,000
and 50,000 shares of restricted stock were granted in October 1992 to the
Company's former Chairman of the Board and to the President and Chief Executive
Officer, respectively. In connection therewith, the Company recorded $140,625 of
unearned compensation and a corresponding amount to additional paid-in capital
based on the price of the shares at the grant dates. The shares vest in five
equal installments beginning July 13, 1993. The amount amortized relating to the
unearned compensation was $32,342 for the year ended August 31, 1994. In
connection with the resignation of certain officers of the Company, 90,000
shares of restricted stock were retired during the year ended August 31, 1994.
As a result, unearned compensation of $82,500 was eliminated and restored to
additional paid-in capital, along with the par value of $600. During the year
ended August 31, 1995, the restriction on the remaining 60,000 shares was
rescinded by the Company's Board of Directors.
During the year ended August 31, 1996, the Company issued 27,450 shares of
restricted stock to three of its executive officers. In connection therewith,
the Company recorded $243,618 of unearned compensation and a corresponding
amount to additional paid-in capital based on the price of the shares at the
grant date. The shares originally vested in three equal installments beginning
February 1996. In connection with the resignation of certain officers of the
Company, 11,764 shares of the restricted stock became automatically fully
vested. As a result, compensation expense of $150,811 was recognized during the
year ended August 31, 1996, in connection with such restricted stock grants.
During the year ended August 31, 1996, certain management personnel of the
Company agreed to 15 percent pay reductions in exchange for the grant of
restricted stock. In connection with such Salary Exchange Program, the Company
recorded $226,402 of unearned compensation and a corresponding amount to
additional paid-in capital based on the price of the shares at the grant date.
The shares vest in two equal installments beginning August 1997.
In November 1992, the Board of Directors authorized the Company to proceed
with a program to purchase odd lot shareholdings of common stock from
shareholders holding less than 100 shares. In connection therewith, the Board of
Directors authorized the purchase of up to 250,000 shares of common stock at
prevailing market prices. The Program was consummated in January 1993 with
142,940 shares being purchased at $2.50 per share. The purchased shares along
with acquisition costs are recorded as treasury stock.
During the year ended August 31, 1994, the Company issued 10,003 shares of
treasury stock to The Precision Systems, Inc. Retirement Savings plan.
Accordingly, $31,780 of compensation expense and a corresponding reduction in
the treasury stock balance was recorded during the year ended August 31, 1994.
On December 13, 1993, RMS Limited Partnership ("RMS") purchased 10,000
shares of the Company's non-voting Series A Preferred Stock, par value $.01 per
share with a liquidation preference of $580 per share (the "Stated Value") from
PSi for $5,800,000. The preferred shares are convertible into Common Stock of
the Company at the election of the holders at any time following December 31,
1994, at a conversion price of $4.76 per share. A cumulative dividend of 6
percent per year is payable quarterly on the preferred shares prior to the
payment of any other dividends. Interest accrues on accumulated but unpaid
dividends at the rate of 6 percent yearly compounded quarterly. The Series A
Preferred Stock is redeemable, in whole or part, at the option of the Company
following December 31, 1994, at 100 percent of the Stated Value plus accrued
dividends and interest. The designation of preferences relating to the Series A
Preferred Stock include restrictions relating to the issuance of any shares
senior to the preferred shares, the increase in the authorized number of
preferred shares, the payment of dividends on junior classes of stock and the
incurrence of indebtedness.
The Company acquired The Renaissance Group, Inc. ("TRG") in July 1994 in
exchange for $3,750,000 in cash, 1,398,600 shares of PSI common stock and
options to acquire 101,400 shares of PSI common stock (see Note 16).
38
<PAGE> 41
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
The Company acquired Vicorp, N.V. ("Vicorp") in April 1996 in exchange for
3,135,467 shares of newly issued common stock in exchange for substantially all
of the outstanding shares of Vicorp. 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. The discounted exchange value of the shares to be
issued to Vicorp holders and the value of options to be issued to Vicorp
employees, together with an agreement to pay certain obligations of Vicorp,
equaled approximately $32,000,000. The agreement includes a lock-up provision
and a right of first refusal back to the Company on certain shares of the
Company's stock that, as a result of this transaction, are held by certain
current Vicorp shareholders. The acquisition has been accounted for using the
purchase method of accounting.
The Company acquired BFD Productions, Inc. ("BFD") in October 1996 for
approximately $1,500,000 in cash and approximately 272,000 shares of
newly-issued Common Stock for a total purchase price of approximately $3,200,000
in exchange for all of the capital stock of BFD. The acquisition was accounted
for using the purchase method of accounting.
11. STOCK OPTIONS AND RESTRICTED STOCK
The Stock Option and Restricted Stock Plan (the "Employee Plan") provides
for the grant to key employees of options to purchase Common stock at prices as
established by the Compensation/Benefits Committee (the "Committee") of the
Board of Directors. The options generally become exercisable with respect to
one-fifth of the shares covered by each option each year over a five-year period
beginning one year from the date of grant. In most cases, the options expire
five years from the date they vest and become exercisable. The Employee Plan
also allows the Committee to grant shares of restricted stock to key employees
subject to such terms and conditions as may be established from time to time by
the Committee.
The Stock Option Plan for Outside Directors (the "Directors' Plan")
provides for the grant of options to outside directors. The exercise price of
options granted under the Directors' Plan will be the fair market value on the
date of grant. The options vest and become exercisable equally over three years
beginning on the date of grant. All of the options expire five years from the
date they vest and become exercisable.
39
<PAGE> 42
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has granted options to purchase common stock under option plans
as follows:
<TABLE>
<CAPTION>
WEIGHTED
STOCK OPTION PLAN AVERAGE
--------------------------------------------- EXERCISE
EMPLOYEE PLAN DIRECTORS' PLAN TOTAL PRICE
--------------- --------------- --------- --------
<S> <C> <C> <C> <C>
Authorized..................... 4,500,000 500,000 5,000,000
--------------- --------------- ---------
Outstanding -- August 31,
1993......................... 899,000 50,000 949,000 $ 1.73
Granted...................... 1,521,450 50,000 1,571,450 2.25
Exercised ($.01 to $1.75 per
share).................... (53,000) -- (53,000) 1.04
Canceled (645,934) -- (645,934) 1.33
--------------- --------------- ---------
Outstanding -- August 31,
1994......................... 1,721,516 100,000 1,821,516 2.29
Granted...................... 544,988 50,000 594,988 3.78
Exercised ($.01 to $4.88 per
share).................... (667,749) (25,000) (692,749) 2.07
Canceled..................... (184,239) -- (184,239) 3.01
--------------- --------------- ---------
Outstanding -- August 31,
1995......................... 1,414,516 125,000 1,539,516 2.76
Granted...................... 1,426,356 125,000 1,551,356 8.89
Exercised ($.01 to $15.50 per
share).................... (348,470) (25,000) (373,470) 2.14
Canceled..................... (158,636) -- (158,636) 4.97
--------------- --------------- ---------
Outstanding -- August 31,
1996......................... 2,333,766 225,000 2,558,766 6.26
--------------- --------------- ---------
Granted...................... 397,000 -- 397,000 6.73
Exercised ($.01 to $9.0 per
share).................... $ (112,154) $ -- (112,154) 1.52
Canceled..................... (236,964) -- (236,964) 10.31
--------------- --------------- ---------
Outstanding -- December 31,
1996......................... 2,381,648 225,000 2,606,648 6.17
=============== =============== =========
Number exercisable............. 1,234,241 121,665 1,355,906
=============== =============== =========
Exercise price at August 31,
1994......................... $.875 -- $4.875 $1.98 -- $3.2125
Exercise price at August 31,
1995......................... $.010 -- $7.50 $1.98 -- $7.375
Exercise price at August 31,
1996......................... $.010 -- $14.625 $1.98 -- $14.500
Exercise price at December 31,
1996......................... $.010 -- $14.625 $1.98 -- $15.750
</TABLE>
The Company applies Accounting Principles Board Opinion 25 and related
Interpretations in accounting for its stock option and restricted stock plans.
Had compensation costs for the Company's stock option and restricted stock plans
been determined based on the fair value at the grant dates for awards under
these plans consistent with the method prescribed by Financial Accounting
Standard Board Statement 123, the Company's net loss and earnings per share on a
pro forma basis would have been:
<TABLE>
<CAPTION>
FOUR MONTHS
ENDED YEAR ENDED
DECEMBER 31, 1996 AUGUST 31, 1996
----------------- ---------------
<S> <C> <C>
Net loss..................................... $(4,288,000) $(36,407,000)
Loss per share from continuing operations.... $ (.25) $ (2.48)
</TABLE>
The fair value of each stock option and restricted stock grant was
estimated using the Black-Scholes options-pricing model. The following
assumptions were used for the four months ended December 31, 1996
40
<PAGE> 43
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and for the year ended August 31, 1996, respectively: (1) risk-free interest
rates of 5.7% and 6.0%; (2) volatility of 68.4% and 68.8% and (3) expected lives
of 2.6 and 2.9 years. Results can vary materially depending on the assumptions
applied within the model and the resulting compensation expense may not be
representative of compensation expense to be incurred on a pro forma basis in
the future.
12. BENEFITS PLANS
The Company's Board of Directors authorized the establishment of the
Precision Systems, Inc. Retirement Savings Plan pursuant to Internal Revenue
Code Section 401(k) covering substantially all employees. Matching employer
contributions are set at the discretion of the Board of Directors. Matching
employer contributions made during the four months ended December 31, 1996 and
for the years ended August 31, 1996, 1995 and 1994 were $0, $0, $0 and $31,780,
respectively.
In association with the Vicorp acquisition, certain United States based
employees are covered by the Vicorp Interactive Systems ("VIS") Retirement
Savings Plan pursuant to Internal Revenue Code Section 401(k). Under such plan,
participating employees may defer a certain percent of their pre-tax salary but
not more than statutory limits. VIS contributes $.25 for each $1.00 a
participant contributes within a maximum contribution of 3 percent of a
participant's earnings. Matching employer contributions made during the four
months ended December 31, 1996 and for the year ended August 31, 1996 were
approximately $26,000 and $40,000, respectively.
Additionally, the Company's Board of Directors authorized adoption of the
Employee Stock Ownership Plan which provides for contributions of shares of
common stock to the plan in amounts as authorized by the Board of Directors. To
date, no common stock has been contributed to the plan.
13. RELATED PARTY TRANSACTIONS
During the year ended August 31, 1995, the Company issued 7,596 shares of
restricted stock (exercise price of $4.44 per share) to one of the members of
the Company's Board of Directors. The effect of this issuance was to increase
the Company's compensation expense by $33,726.
Historically, activity with Home Shopping Network, Inc. ("HSN") had been
presented as affiliate transactions. Due to ownership interest changes of former
common shareholders, HSN is no longer considered a related party and all amounts
of disclosures relating to the change have been reclassified and/or modified.
The following information relates to certain historical relationships between
the Company and HSN.
DISTRIBUTION AGREEMENT
The Company and HSN entered into the Distribution Agreement (the
"Distribution"), which provides for, among other things, the principal corporate
transaction required to effect the Distribution, the division between HSN and
the Company of certain liabilities, and certain other agreements governing the
relationship between HSN or its subsidiaries and the Company following the
Distribution. The Distribution Agreement provides for cooperation between HSN
and the Company in obtaining initial insurance coverage for the Company after
the Distribution and provides for allocation of benefits under existing
insurance policies between HSN and the Company. To date, no claim has resulted
which would be governed by the Distribution Agreement.
Moreover, the Distribution Agreement provides for each party to indemnify
the other against certain liabilities that may arise in connection with the
Distribution or from the Company's business prior to or following the
Distribution. In particular, HSN will indemnify the Company against losses from
existing or future claims relating to the Company's voice processing business
prior to the Distribution other than warranty or contract claims of the
Company's customers arising in connection with the sale, lease or license of
VRUs or the Enhanced Services Platform ("ESP") prior to or following the
Distribution. The Company will indemnify
41
<PAGE> 44
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
HSN, however, against certain liabilities including any claims to contractual,
warranty or indemnification obligations of the Company arising in connection
with the sale, lease or license of VRUs or the ESP and against any claims that
may be asserted that any hardware manufactured or assembled by the Company's
customers relating to the service bureau business conducted by the Company prior
to the Distribution, and each party will indemnify the other against claims
relating to misstatements or omissions of material facts provided by such party
in the Information Statement or in the Form 10 of which it is a part, filed
pursuant to the Distribution.
To date, certain situations have occurred in the ordinary course of
business that were covered under the Distribution Agreement. In particular, in
1993 the Company received $222,500 from HSN pursuant to the indemnification
provisions of the Distribution Agreement. This related to certain claims and
actions brought against the Company while a wholly-owned subsidiary of HSN.
These claims and actions have been settled.
SOFTWARE LICENSE AGREEMENT
The Company licensed certain software and patented technology used in the
ESP to HSN. The license is non-transferable, perpetual and HSN is the exclusive
licensee of the software and patented technology for use in the televised
electronic retail industry.
Additionally, HSN also licensed from the Company the proprietary operating
and application software used in the VRUs developed by the Company for HSN.
During fiscal 1994, $132,000 was paid to the Company under this agreement. HSN
is also the exclusive licensee of this software in the televised electronic
retail industry.
SYSTEMS MAINTENANCE AND SUPPORT AGREEMENT
The Company and HSN have also entered into an agreement pursuant to which
the Company will complete the final modifications of HSN's ESP platform and
provide maintenance and support services for the platform. The maintenance
agreement has an initial term of one year that is automatically extended for
additional one-year terms at the discretion of both parties. The maintenance
agreement is terminable if the Company fails to provide the maintenance services
specified by the agreement or, with prior notice, at the end of the initial term
of any subsequent extension.
CREDIT AGREEMENT
The Company entered into an unsecured line of credit agreement with HSN in
the amount of $5,000,000. The interest rate was prime plus 1 percent. Principal
and interest were due on July 31, 1995, or one year from the date of the first
draw, whichever is earlier. Restrictions contained in the agreement include, but
are not limited to, the payment of dividends, certain redemption of capital
stock of the Company, and the incurrence of senior debt. The Company received
$5,000,000 from HSN during August 1994 relating to this line of credit agreement
and such amounts were repaid during fiscal 1995.
42
<PAGE> 45
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SEGMENT INFORMATION
<TABLE>
<CAPTION>
FOUR MONTHS
ENDED YEARS ENDED AUGUST 31,
DECEMBER 31, -----------------------------------------
1996 1996 1995 1994
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenues:
U.S. operations........................ $ 5,651,027 $ 18,275,706 $21,521,733 $ 8,890,595
European operations.................... 8,617,025 15,359,123 -- --
Other international operations......... 856,896 326,454 -- --
Eliminations........................... (262,925) (7,258,456) -- --
------------ ------------ ----------- ------------
Total.......................... $ 14,862,023 $ 26,702,827 $21,521,733 $ 8,890,595
============ ============ =========== ============
Operating loss:
U.S. operations........................ $ (3,430,521) $(14,581,367) $(2,516,796) $(17,841,382)
European operations.................... (693,560) (21,768,987) -- --
Other international operations......... 414,417 (113,221) -- --
Eliminations........................... -- -- -- --
------------ ------------ ----------- ------------
Total.......................... $ (3,709,664) $(36,463,575) $(2,516,796) $(17,841,382)
============ ============ =========== ============
Identifiable assets:
U.S. operations........................ $ 25,802,225 $ 16,876,684 $27,327,925 $ 30,410,378
European operations.................... 21,904,526 29,193,442 -- --
Other international operations......... 2,115,000 1,487,220 -- --
Eliminations........................... (627,376) -- -- --
------------ ------------ ----------- ------------
Total.......................... $ 49,194,375 $ 47,557,346 $27,327,925 $ 30,410,378
============ ============ =========== ============
</TABLE>
15. SIGNIFICANT CUSTOMERS
During the four months ended December 31, 1996 and for the years ended
August 31, 1996, 1995 and 1994 a substantial portion of the Company's revenues
have come from MCI and HSN and its various affiliates. The dollar and percentage
amounts are as follows:
<TABLE>
<CAPTION>
AUGUST 31,
DECEMBER 31, ------------------------------------------------------------------------------
1996 1996 1995 1994
------------------------ ------------------------ ------------------------ ------------------------
DOLLARS PERCENTAGE DOLLARS PERCENTAGE DOLLARS PERCENTAGE DOLLARS PERCENTAGE
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MCI.................. $ 873,324 5.9% $11,875,428 44.5% $13,683,303 63.6% $ 6,238,601 70.2%
HSN.................. 481,766 3.2 1,504,632 5.6 1,909,354 8.9 2,544,032 28.6
Other customers...... 13,506,933 90.9 13,322,767 49.9 5,929,076 27.5 107,962 1.2
----------- ----- ----------- ----- ----------- ----- ----------- -----
Total $14,862,023 100% $26,702,827 100.0% $21,521,733 100.0% $ 8,890,595 100.0%
=========== ===== =========== ===== =========== ===== =========== =====
</TABLE>
16. BUSINESS ACQUISITIONS/DISPOSALS
On June 30, 1993, the Company acquired Active Designs Inc. for
approximately $150,000 in cash, assumption of $150,000 in accounts payable and a
$100,000 non-interest bearing note due January 1, 1994. Subsequent to the
acquisition, Active Designs, Inc. was renamed Interactive Services, Inc.
Effective April 30, 1995, certain assets, liabilities, and the business of
Interactive Services, Inc., were sold to EarthCall Communications Corporation
for approximately $1,000,000 in cash and the assumption of certain liabilities.
The gain on disposition of such activity in the amount of $529,419 has been
accounted for as a gain from sale of discontinued subsidiary. Revenues of
Interactive Services, Inc., for the four months ended December 31, 1996 and for
the years ended August 31, 1996, 1995 and 1994, were $0, $0, $1,607,100, and
$789,555, respectively.
43
<PAGE> 46
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company acquired The Renaissance Group, Inc. in July 1994 in exchange
for $3,750,000 in cash, 1,398,600 shares of PSI common stock with a market value
of $3,375,000 and options to acquire 101,400 shares of PSI common stock for $.01
per share, which collectively is a purchase price of $7,125,000. Additionally,
during the year ended August 31, 1995, PSI paid state and federal income taxes
of $138,547 relating to the operation of TRG for the period from January 1,
1994, through July 24, 1994. TRG provides enhanced services for network based
platforms and applications. This acquisition has been accounted for using the
purchase method of accounting and, accordingly, the purchase price has been
allocated to the assets acquired (approximately $638,000) and the liabilities
assumed ($363,817) based on the estimated fair values at the date of
acquisition. The purchase price associated with the acquisition exceeded the net
assets of TRG by approximately $6,900,000 which was assigned to goodwill. The
operating results of TRG for the period from July 25, 1994 to August 31, 1994
are included in the Company's consolidated results of operations for the year
ended August 31, 1994.
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's 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.
The 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
Goodwill.................................................... 8,423,985
-----------
Total purchase price.............................. $32,434,985
===========
</TABLE>
44
<PAGE> 47
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company acquired BFD in October 1996 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 will
be 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>
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 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 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.
PRO-FORMA UNAUDITED FOUR MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Revenue..................................................... $15,119,530
===========
Net loss.................................................... (3,510,055)
===========
Net loss per common share................................... (.20)
===========
</TABLE>
17. OTHER MATTERS
Effective August 31, 1996, John Hindman, Chief Operating Officer, Mike
Felix, Vice President of Marketing, and Alan Donahue, Vice President of Sales,
resigned or were terminated from the Company.
The Company entered into a settlement agreement with Mr. Hindman, the terms
of which provide for severance pay of $50,000 and a six-month consulting
agreement for approximately $87,000. A consulting agreement was also entered
into with Mr. Felix for three months for $37,500. Additionally, the Company
automatically fully vested certain restricted stock originally granted to Mr.
Hindman and Mr. Felix (See Note 10).
On October 25, 1996 Russell I. Pillar resigned as the Company's President
and Chief Executive Officer. On December 10, 1996, Mr. Pillar resigned from the
Company's Board of Directors.
John D. Loewenberg did not stand for reelection as Chairman of the Board of
the Company. Richard T. Liebhaber was elected as the Company's new Chairman of
the Board of the Company as of June 1996. During February 1997, Mr. Liebhaber
resigned as Chairman of the Board and was replaced by Willem Huisman.
45
<PAGE> 48
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. LEGAL PROCEEDINGS
The Company is subject to certain legal proceedings in the ordinary course
of business. The discussion below summarizes the most material of such
proceedings. In the opinion of management, these and other legal proceedings
will not have a material adverse effect on operations or the financial condition
of the Company.
Intervoice, Inc. v. Precision Systems, Inc. and Vicorp Interactive Systems,
Inc. On April 11, 1996 Intervoice, Inc. ("INTV") filed suit against Precision
Systems, Inc. ("PSI") in the Federal District Court for the Northern District of
Texas (Dallas) alleging infringement of various U.S. Patents owned by INTV,
namely Patents 5,469,500, 5,255,305, and 5,243,643. These Patents encompass
certain call processing methods and technologies. The suit prays for an
unspecified amount of damages and for injunctive relief. On August 20, 1996,
Vicorp Interactive System, Inc. ("VIS"), a wholly-owned subsidiary of Vicorp,
was joined in the suit as a co-defendant as to Patent 5,469,500 only, and an
additional claim of breach of confidentiality was asserted by INTV against VIS.
On February 21, 1997, INTV further amended its complaint to remove PSI's Uniport
6.1 from, and to include VIS into, the lawsuit with respect to the "305" and
"643" patents. In this second amended complaint, INTV also asserted a Lanham Act
("false advertising") claim against both PSI and VIS. The Company notified Alta
Investissements, S.A. ("Alta") of the claims against VIS for purposes of
indemnification of PSI under the terms of the Share Exchange Agreement of April
13, 1996 between the Company and Alta relating to the purchase of a controlling
interest in Vicorp. The parties to the suit are currently in discovery and the
matter has been rescheduled for trial in December, 1997. The Company has
defenses and will vigorously defend.
Daniel Schultz v. Precision Systems, Inc. et al. On October 8, 1996,
Daniel Schultz, a holder of Vicorp shares and options (the "plaintiff") filed a
three-count complaint against the Company; Russell I. Pillar; John Loewenberg;
Alta Investissements, S.A. ("Alta"), Didier Primat; Primwest Holding N.V.; and
Ian Dalziel, in a civil action in the United States District Court for the
Middle District of Florida, Tampa Division (the "Federal Action"). In count one,
the plaintiff alleges that the Company and Messrs. Pillar and Loewenberg
fraudulently induced him to assist the Company in its acquisition of Vicorp by
representing to him that he would receive an executive position with Vicorp if
the acquisition was successful. In counts two and three, the plaintiff alleges
that all the defendants intentionally interfered with his prospective economic
advantage, and conspired to do so, by impairing his ability to exercise his
Vicorp options and his ability to convert his Vicorp shares into shares of the
stock of the Company. The complaint alleges that the plaintiff has suffered
damages in excess of $2 million, and requests compensatory and punitive damages.
On October 28, 1996, a motion was filed by the Company and Mr. Pillar seeking
the dismissal of the action on the grounds that the United States District Court
lacks jurisdiction over the subject matter of the action, and on December 2,
1996, the plaintiff's counsel filed a notice of non-opposition to the motion. As
a result, the Federal Action was dismissed. On December 4, 1996, plaintiff filed
a complaint in the Circuit Court of the Sixth Judicial Circuit in and for
Pinellas County, Florida (the "Florida Action") asserting the same claims as set
forth in the Federal Action. The Company has not yet responded to the Complaint
in the Florida Action. Management has not undertaken a full evaluation of the
merits of the plaintiff's claims. The Company has notified Alta of its claim for
indemnification pursuant to the terms of the Share Exchange Agreement dated
April 13, 1996 between the Company and Alta.
Daniel Gilbert Schultz v. Vicorp et al. This action was initiated in the
Court of First Instance, Curacao, Netherlands Antilles ("Court"), on March 29,
1996. The plaintiff filed a petition denominated a "complaint in summary
process" against Vicorp and Alta. The Company is not a party to this proceeding.
In this action, the plaintiff alleged that Vicorp had denied him access to the
books and records of Vicorp, and that Alta (as the then controlling shareholder
in Vicorp) had both refused to provide him access to Vicorp's records and
refused to give him information on Alta's negotiations with third parties for
the sale of its shares of Vicorp stock. The plaintiff further alleged that these
actions impaired his ability to exercise certain put and call options that he
held with respect to certain shares of the stock of Vicorp. The plaintiff sought
various court
46
<PAGE> 49
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
orders requiring Alta and Vicorp to provide certain financial data to him, to
record in the Vicorp share register the option he held, and to accept and pay
for certain of the Plaintiff's shares that were the subject of a put option. The
plaintiff also sought an order prohibiting Alta from reducing its ownership
interest in Vicorp. On May 17, 1996, the Court dismissed all of the plaintiff's
claims. The plaintiff appealed to the Court of Appeals of the Netherlands
Antilles and Aruba. The appeal has been fully briefed and argued. Under the
terms of the Share Exchange Agreement dated April 13, 1996 between the Company
and Alta (the "Exchange Agreement"), Alta has agreed to indemnify the Company
against any losses arising in connection with pending or future litigation
relating to Schultz' employment with Vicorp including the actions pending in the
Netherlands Antilles.
Daniel Gilbert Schultz v. Alta Investissements, S.A. et al. This action
was initiated in the Court of First Instance, Curacao, Netherlands Antilles on
April 23, 1996. The plaintiff filed a petition denominated a petition "on an
abbreviated term" against Alta, the Company, and Vicorp. In his petition, the
plaintiff sought a court order nullifying both the transfer by Alta to the
Company of Alta's shares of Vicorp stock and the transfer by the Company to Alta
of certain shares of the Company's stock, both of which transfers were carried
out pursuant to the Share Exchange Agreement between the Company and Alta dated
April 13, 1996. The plaintiff alleges that insufficient notice was given to him
of a Vicorp shareholders' meeting at which a resolution approving the share
exchange was adopted, and that consequently the defendants breached a duty of
good faith towards him. The plaintiff seeks court orders annulling the two share
transfers, and prohibiting Vicorp from acting on any instructions received from
the Company. Subsequently, on August 19, 1996, Alta and Vicorp filed a
counterclaim against the plaintiff, seeking damages incurred by each of them as
a result of having to resist the plaintiff's efforts in Curacao to obtain
nullification of the share transfer; Alta and Vicorp claim that the plaintiff's
actions constitute violations of various agreements between him and them, as
well as violations of the principles of good faith. The action has been fully
briefed and argued and is awaiting decision by the Court. The Company has been
advised by local counsel in Curacao that no definitive evaluation of the likely
outcome can be made at this time. Under the terms of the Exchange Agreement,
Alta has agreed to indemnify the Company against any losses arising in
connection with pending or future litigation relating to Schultz' employment
with Vicorp including the actions pending in the Netherlands Antilles.
Daniel Gilbert Schultz v. Vicorp France S. A. et al. This action was
initiated in the French Labor Court (the "Conseil de Prud'hommes") on March 7,
1996. The Plaintiff filed claims against both Vicorp France S.A. and Vicorp Asia
Holding arising out of his employment relationships with companies in the Vicorp
Group. The Company is not a party to this proceeding. The Plaintiff has alleged
that the two defendants are liable to him, under provisions of French law, for
damages for dismissal without real and serious cause, for damages for abusive
indemnity, for dismissal indemnities, and for a paid vacation indemnity. A
hearing was held on March 20, 1997 at which time the presiding official raised a
jurisdictional issue to which Mr. Schultz must respond. Under the terms of the
Share Exchange Agreement between the Company and Alta, Alta has agreed to
indemnify the Company and Vicorp against any damages or liability imposed
against Vicorp in connection with this action.
Claim of Robert Maube. On March 13, 1997 Mr. Maube, a former employee of
Vicorp N.V., initiated an action in the Labour Court of Brussels, Belgium
against the Belgian, Dutch and Swiss subsidiaries of Vicorp N.V. In the action,
Mr. Maube is seeking 34,166,134 Belgian Francs (approximately $979,900) in
connection with the termination of his employment. Such amount includes claims
for gross payments as indemnity in lieu of notice, holiday payments, year end
premium payments, damages for an alleged abusive dismissal, additional
compensation and a prorated bonus. The Introductory Hearing will be held on May
13, 1997.
47
<PAGE> 50
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. TRANSITION PERIOD INFORMATION (UNAUDITED)
The Company's unaudited results for the four months ended December 31, 1995
have been summarized as follows (in thousands, except for per share
information):
<TABLE>
<S> <C>
Revenue..................................................... $ 5,192
=======
Gross margin................................................ $ 3,179
=======
Income taxes................................................ $ 0
=======
Loss from continuing operations............................. $(1,344)
=======
Net loss.................................................... $(1,344)
=======
Loss Per Share:
Loss from continuing operations........................... $ (.12)
=======
Net loss applicable to common stock....................... $ (.13)
=======
</TABLE>
48
<PAGE> 51
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the Company's 1997 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the Company's 1997 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to the Company's 1997 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference as made to the Company's 1997 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of Documents filed as part of this Report
(1) FINANCIAL STATEMENTS
Independent Auditors' Report -- Deloitte & Touche LLP
Independent Auditors' Report -- Coopers & Lybrand N.V.
Consolidated Balance Sheets as of December 31, 1996, August 31, 1996 and 1995
Consolidated Statements of Operations for the four months ended December 31,
1996 and for the years ended August 31, 1996, 1995, and 1994
Consolidated Statements of Stockholders' Equity for the four months ended
December 31, 1996 and for the years ended August 31, 1996, 1995, and 1994
Consolidated Statements of Cash Flows for the four months ended December 31,
1996 and for the years ended August 31, 1996, 1995, and 1994
Notes to Consolidated Financial Statements
(2) FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
SCHEDULE PAGE
NUMBER NUMBER
- -------- ------
<C> <C> <S> <C>
II -- Valuation and Qualifying Accounts........................... S-1
</TABLE>
The report of the Company's independent auditors with respect to the above
listed financial statement schedules appears on page 52 hereof.
All other financial statements and schedules not listed have been omitted
since the required information is included in the financial statements or the
notes thereto or is not applicable or required.
49
<PAGE> 52
(3) EXHIBITS (NUMBERED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-K)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<C> <S> <C>
2.0 -- Merger Agreement and Plan of Reorganization between the
Registrant and The Renaissance Group filed in Exhibit 99.1
to the Company's Form 8-K, as amended, is incorporated
herein by reference
2.1 -- Share Exchange Agreement between the Registrant and Alta
Investissements S.A. filed in Exhibit 99.1 to the Company's
Form 8-K, as amended, is incorporated herein by reference
3.1 -- Restated Certificate of Incorporation of the Registrant
filed as Exhibit 3.1 to the Company's Registration Statement
on Form 10, as amended, is incorporated herein by reference
3.2 -- Restated bylaws of the Registrant filed as Exhibit 3.2 to
the Company's Registration Statement on Form 10, as amended,
is incorporated herein by reference
21 -- Subsidiaries of the Registrant
22 -- Proxy Statement of the Registrant dated June 13, 1996 is
incorporated herein by reference
27 -- Financial Data Schedule (for SEC use only)
</TABLE>
50
<PAGE> 53
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
March 31, 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 March 31, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ WILLEM HUISMAN Chairman of the Board, Director 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
/s/ KWANG-I YU Director
- -----------------------------------------------------
Kwang-I Yu
/s/ HECTOR ALCADE Director
- -----------------------------------------------------
Hector Alcade
/s/ BERT KOLDE Director
- -----------------------------------------------------
Bert Kolde
/s/ IAN DALZIEL Director
- -----------------------------------------------------
Ian Dalziel
/s/ FRANCIS SANTANGELO Director
- -----------------------------------------------------
Francis Santangelo
</TABLE>
51
<PAGE> 54
INDEPENDENT AUDITORS' REPORT
Board of Directors
Precision Systems, Inc.
We have audited the consolidated financial statements of Precision Systems, Inc.
and subsidiaries (the "Company") as of December 31, 1996, August 31, 1996 and
1995, and for the four months ended December 31, 1996 and for each of the three
years in the period ended August 31, 1996, and have issued our report thereon
dated March 27, 1997; such consolidated financial statements are included
herein. Our audits also included the consolidated financial statement schedule
of the Company as of December 31, 1996, August 31, 1996 and 1995, listed in Item
14, and for the four months ended December 31, 1996 and for each of the three
years in the period ended August 31, 1996. The consolidated financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. We did not audit the consolidated
financial statements of Vicorp N.V. (a consolidated subsidiary), which
statements reflect total assets constituting 33 percent and 41 percent,
respectively, of consolidated total assets as of December 31, 1996 and August
31, 1996, and total revenues constituting 80 percent and 42 percent,
respectively, of consolidated total revenues for the four months ended December
31, 1996 and for the year ended August 31, 1996. Such financial statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Vicorp N.V., is based
solely on the report of such other auditors. In our opinion, based on our audits
and the report of other auditors, such consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Deloitte & Touche LLP
Tampa, Florida
March 27, 1997
52
<PAGE> 55
SCHEDULE II
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts
Four months ended December 31,
1996....................... $1,253,347 $ 278,787 $ -- $ -- $1,532,134
Year ended August 31, 1996.... 153,561 1,196,412 -- (96,626)(1) 1,253,347
Year ended August 31, 1995.... 37,335 116,226 -- -- 153,561
Year ended August 31, 1994.... -- 37,335 -- -- 37,335
Obsolescence reserve
Four months ended December 31,
1996....................... $ -- $ -- $ -- $ -- $ --
Year ended August 31, 1996.... -- -- -- -- --
Year ended August 31, 1995.... 885,002 -- -- (885,002)(2) --
Year ended August 31, 1994.... -- 885,002 -- -- 885,002
</TABLE>
- ---------------
(1) Represents write-off of uncollectible accounts.
(2) Represents write-off of obsolete inventory.
53
<PAGE> 1
EXHIBIT 21
List of Subsidiaries of Precision Systems, Inc. as of December 31, 1996:
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY STATE OR COUNTRY OF INCORPORATION
- ------------------ ---------------------------------
<S> <C>
Interactive Services Inc.................................. Delaware
The Renaissance Group..................................... Delaware
Vicorp, N.V............................................... The Netherlands Antilles
Vicorp Europe Holding B.V................................. The Netherlands
Vicorp Benelux B.V........................................ The Netherlands
Vicorp International Services Nederland B.V............... The Netherlands
Vicorp International Services S.A......................... Belgium
Vicorp France S.A......................................... France
Vicorp Scandinavia A/S.................................... Denmark
Vicorp Scandinavia A.B.................................... Sweden
Vicorp U.K. Limited....................................... England
Vicorp Finland OY......................................... Finland
Vicorp Interactive Systems, Inc........................... Massachusetts
Vicorp Deutschland GmbH................................... Germany
Vicorp Asia Holding Limited............................... Hong Kong
Vicorp Asia-Pacific Services Pte Ltd...................... Singapore
Vicorp Geminus GmbH....................................... Germany
Belle System Networking ApS............................... Denmark
</TABLE>
54
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> SEP-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,601,818
<SECURITIES> 0
<RECEIVABLES> 13,932,134
<ALLOWANCES> 1,532,134
<INVENTORY> 0
<CURRENT-ASSETS> 21,719,530
<PP&E> 33,304,623
<DEPRECIATION> 24,479,765
<TOTAL-ASSETS> 49,194,375
<CURRENT-LIABILITIES> 21,363,885
<BONDS> 0
0
100
<COMMON> 176,964
<OTHER-SE> 27,284,049
<TOTAL-LIABILITY-AND-EQUITY> 49,194,375
<SALES> 3,729,171
<TOTAL-REVENUES> 14,862,023
<CGS> 3,442,705
<TOTAL-COSTS> 3,442,705
<OTHER-EXPENSES> 15,128,982
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,585,103)
<INCOME-TAX> (118,288)
<INCOME-CONTINUING> (3,466,815)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,466,815)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</TABLE>
