UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended September 30, 1997
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to __________________.
Commission File No. 000-20068
PRECISION SYSTEMS, INC.
(Exact name of registrant as specified in the charter)
DELAWARE 41-1425909
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11800 30TH COURT NORTH, ST. PETERSBURG, FLORIDA 33716
(Address of principal executive offices)
(813) 572-9300
(registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO REGISTRANTS TO CORPORATE ISSUERS: Indicate the number
of shares outstanding of each of the issuer's classes of common stock as of the
latest practicable date.
Total number of shares of outstanding common stock as of November 14, 1997:
Common Stock........................................ 17,773,088
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Precision Systems, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Contract revenue $ 2,168,944 $ 1,331,105 $ 8,191,554 $ 8,350,448
Service and support 6,270,975 5,342,503 17,655,180 11,311,939
License fees 2,880,284 2,025,544 7,615,266 4,800,932
------------ ------------ ------------ ------------
11,320,203 8,699,152 33,462,000 24,463,319
------------ ------------ ------------ ------------
COST OF SALES 3,832,281 2,626,727 11,580,591 7,587,339
------------ ------------ ------------ ------------
GROSS MARGIN 7,487,922 6,072,425 21,881,409 16,875,980
------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling, general and administrative 6,438,515 9,062,036 20,168,057 21,145,524
Research, engineering and development 734,268 1,434,505 2,144,097 3,369,071
Depreciation and amortization 1,699,246 1,469,419 5,164,107 4,505,883
Purchased research and development -- 19,500,000 -- 19,500,000
Goodwill write-down -- 3,829,424 -- 3,829,424
------------ ------------ ------------ ------------
8,872,029 35,295,384 27,476,261 52,349,902
------------ ------------ ------------ ------------
Operating loss (1,384,107) (29,222,959) (5,594,852) (35,473,922)
Interest income (expense), net 53,102 (31,973) 20,891 265,031
Gain on sale of marketable equity securities -- -- -- 371,218
------------ ------------ ------------ ------------
Loss before income taxes (1,331,005) (29,254,932) (5,573,961) (34,837,673)
Income taxes -- -- -- --
------------ ------------ ------------ ------------
NET LOSS (1,331,005) (29,254,932) (5,573,961) (34,837,673)
Preferred stock dividend requirements (178,454) (87,715) (433,873) (261,238)
------------ ------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON STOCK $ (1,509,459) $(29,342,647) $ (6,007,834) $(35,098,911)
============ ============ ============ ============
LOSS PER SHARE
Net loss $ (.08) $ (1.71) $ (.32) $ (2.20)
============ ============ ============ ============
Net loss applicable to common stock $ (.09) $ (1.72) $ (.34) $ (2.22)
============ ============ ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
2
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Precision Systems, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,722,594 $ 4,601,818
Accounts and contracts receivable, net 8,732,168 12,400,000
Supplies and other current assets 2,694,425 1,685,874
Costs and earnings in excess of billings on uncompleted contracts 6,933,157 3,064,978
------------- -------------
Total current assets 25,082,344 21,752,670
------------- -------------
PROPERTY, PLANT AND EQUIPMENT, NET 8,483,781 8,824,858
INTANGIBLE ASSETS, NET 15,354,846 18,616,847
------------- -------------
$ 48,920,971 $ 49,194,375
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 543,526 $ 2,374,287
Accounts payable 5,058,967 4,395,128
Accrued expenses 6,066,512 8,152,294
Billings in excess of costs and earnings on uncompleted contracts 2,885,000 3,753,132
Deferred revenue 1,824,478 2,689,044
------------- -------------
Total current liabilities 16,378,483 21,363,885
------------- -------------
LONG-TERM DEBT 6,256,766 369,377
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Non-redeemable preferred stock - $.01 par value; authorized 50,000 shares:
Series A 6 percent Cumulative Convertible Preferred Stock; convertible
at $4.76 per share, issued and outstanding 10,000 shares; liquidation preference
$5,800,000 100 100
Series B 8 percent Cumulative Convertible Preferred Stock; convertible
at $4.47 per share, issued and outstanding 4,500 shares; liquidation preference
$4,500,000 45 --
Common stock - $.01 par value; authorized 30,000,000 shares, issued
17,831,025 and 17,696,367 shares, respectively 178,311 176,964
Additional paid-in capital 113,950,471 109,643,293
Deficit (88,809,350) (83,235,389)
Treasury stock (132,937 shares) - at cost (422,360) (422,360)
Accumulated preferred stock dividends 1,496,747 1,062,874
Cumulative foreign currency translation adjustment (108,242) 355,748
Unearned compensation -- (120,117)
------------- -------------
Total stockholders' equity 26,285,722 27,461,113
------------- -------------
$ 48,920,971 $ 49,194,375
============= =============
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
</TABLE>
<PAGE>
Precision Systems, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS - OPERATING ACTIVITIES:
Net loss $ (5,573,961) $(34,837,673)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 5,164,107 4,505,883
Purchased research and development -- 19,500,000
Goodwill write-down -- 3,829,424
Provision for losses on accounts receivable 105,515 956,411
Amortization of unearned compensation 120,117 197,772
Realization of deferred revenue -- (1,031,553)
Change in current assets and liabilities,
net of business acquisitions:
Accounts and contracts receivable 3,601,397 4,653,251
Costs and estimated earnings in excess of billings (3,868,179) (88,893)
Supplies and other current assets (972,372) 731,736
Accounts payable 663,839 1,026,766
Accrued expenses (1,968,743) (3,489,226)
Billings in excess of earnings on incomplete contracts (868,132) 482,290
Deferred revenue (864,566) 409,091
------------ ------------
Net cash used in operating activities (4,460,978) (3,154,721)
------------ ------------
CASH FLOWS - INVESTING ACTIVITIES:
Purchase of property, plant and equipment (1,969,522) (1,576,809)
Cash acquired in acquisition -- 4,403,000
------------ ------------
Net cash (used in) provided by investing activities (1,969,522) 2,826,191
------------ ------------
CASH FLOWS - FINANCING ACTIVITIES
Proceeds from notes payable, net 5,974,130 --
Repayment of notes payable (1,998,116) (90,000)
Capital contributions, net 4,400,000 --
Proceeds from issuance of capital stock 175,262 522,934
------------ ------------
Net cash provided by financing activities 8,551,276 432,934
------------ ------------
Net increase in cash 2,120,776 104,404
Cash at beginning of period 4,601,818 14,639,111
------------ ------------
Cash at end of period $ 6,722,594 $ 14,743,515
============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
1. BASIS OF PRESENTATION
The interim condensed consolidated financial statements of Precision Systems, Inc. (the
"Company") are unaudited and should be read in conjunction with the audited financial statements and
notes thereto as of and for the four month transition period ended December 31, 1996 and for the
years ended August 31, 1996 and 1995.
In the opinion of the Company, all adjustments necessary for a fair presentation of such
financial statements have been included. Such adjustments consist only of normal recurring items.
Interim results are not necessarily indicative of results for a full year. The interim financial
statements and notes thereto are presented as permitted by the Securities and Exchange Commission
and do not contain information included in the Company's annual financial statements and notes
thereto.
Certain amounts for previous periods have been reclassified to conform with the 1997
presentation.
2. LOSS PER SHARE
Loss per share for the three and nine months ended September 30, 1997 and 1996, have been
computed based upon the weighted average common shares outstanding of 17,599,755 and 17,585,442 and
17,089,298 and 15,808,120, respectively. The loss per share calculation does not include convertible
securities and stock options, which are common stock equivalents, as their inclusion would be
anti-dilutive.
3. LONG-TERM DEBT
September 30, December 31,
1997 1996
------------ -----------
(unaudited)
<S> <C> <C>
Note payable to shareholder, interest at 6 percent, repaid during October, 1997 $ 250,199 $ 698,127
Notes payable to shareholders, interest at 8 percent, unsecured and due January, 1999 6,000,000 --
Notes payable, interest at 5 percent, repaid during February, 1997 -- 1,269,475
Capital lease obligations, interest rates varying from 6 percent to 9 percent;
collateralized by assets with net book value of approximately $500,000 550,093 776,062
------------ -----------
6,800,292 2,743,664
Less current portion (543,526) (2,374,287)
------------ -----------
$ 6,256,766 $ 369,377
============ ===========
On September 30, 1997, the Company completed a $6,000,000 financing with RMS Limited
Partnership ("RMS"), Vulcan Ventures, Inc. ("Vulcan"), and Mr. Didier Primat ("the Shareholders").
RMS and Vulcan are existing shareholders of the Company and Mr. Primat is the beneficial owner of
shares of the Company's stock held by Alta Investissements SA. In connection with the financing,
each Shareholder invested $2,000,000 and received a promissory note ("Note") for $2,000,000 and a
warrant to purchase 275,000 shares of common stock. The Notes will mature on January 1, 1999 and
bear interest from the issuance date on the unpaid principal amount until such amount is paid at a
rate per annum equal to 8%. Interest will be paid on September 30, 1998, and on the maturity date.
4. BUSINESS ACQUISITIONS
The Company acquired substantially all of the capital stock of Vicorp, N.V. ("Vicorp") in
April 1996 by issuing 3,135,467 shares of newly issued common stock. In addition, the Company
assumed certain outstanding obligations of Vicorp and converted options issued to Vicorp employees
into options to purchase the Company's stock.
Vicorp shareholders received 29.46 shares of the Company's common stock for each share of
Vicorp stock they owned. The discounted exchange value of the shares issued to Vicorp holders and
the value of options issued to Vicorp employees, together with an agreement to pay certain
obligations of Vicorp, equaled approximately $31,000,000. The acquisition was accounted for by the
purchase method of accounting. The purchase price of $32,434,985 was comprised of Company common
stock valued at $29,521,577, Company stock options with in-the-money value of $1,469,321, and other
direct acquisition costs totaling $1,444,087.
5
<PAGE>
Precision Systems, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The purchase price allocation among the assets acquired and liabilities assumed in the
acquisition of Vicorp are as follows:
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
============
The Company acquired BFD Productions, Inc. ("BFD") in October 1996 in exchange for cash and
approximately 272,000 shares of newly issued common stock for a total purchase price of
approximately $3,400,000 in exchange for all of the capital stock of BFD. The acquisition has been
accounted for using the purchase method of accounting. This purchase price of $3,394,749 was
comprised of $1,500,000 in cash, Company common stock valued at $1,655,833, and other direct
acquisition costs totaling $238,916.
The purchase price allocation among the assets acquired and liabilities assumed in the
acquisition of BFD are as follows:
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
===========
5. STOCKHOLDERS' EQUITY
During April, 1997, the Company completed a $4,500,000 financing with three of its
shareholders, RMS Limited Partnership, Vulcan Ventures, Inc. and Primwest Holding N.V. ("the
Shareholders"). In connection with the financing, each Shareholder invested $1,500,000 and received
1,500 shares of a newly designated class of preferred stock. The Series B Preferred Stock carries a
cumulative 8% dividend. Each Shareholder will be entitled to convert the Series B Preferred Stock
into common stock after December 31, 1998, at approximately $4.47 per share. In addition to the
Series B Preferred Stock, each of the Shareholders received a warrant to purchase 150,000 shares of
common stock. The warrants will be exercisable for a five year period beginning April, 1998 at
approximately $6.09. The Company granted the Shareholders certain registration and anti-dilution
rights in connection with the transaction.
6
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Precision Systems, Inc. ("PSI"), is a global company which together with its direct and
indirect wholly-owned and controlled subsidiaries (the "Company"), collectively delivers proven
solutions to telecommunications service providers and major corporations. The Company's software and
hardware products support calling cards, prepaid cards, enhanced toll-free /freephone services, call
center solutions, and service bureau services. In addition, the Company supports its products
through maintenance contracts.
The following table sets forth for the periods indicated (i) the percentage
of total revenues represented by certain items in the financial statements of
the Company, and (ii) the percentage change in the dollar amount of such items
from period to period.
Percentage
Increase
(Decrease)
Three Nine
Percentage of Revenue Percentage of Revenue Months Months
Three Months Ended Nine Months Ended Ended Ended
September 30, September 30, September 30,
--------------------- ------------------ --------------------
1997 1997
vs. vs.
1997 1996 1997 1996 1996 1996
--------------------- ------------------ --------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Contract revenue 19.2% 15.3% 24.4% 34.1% 62.9% (1.9)%
Service and support 55.4% 61.4% 52.8% 46.2% 1.3% 56.1%
License fee 25.4% 23.3% 22.8% 19.7% 42.2% 58.6%
----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0% 30.1% 36.8%
Cost of sales 33.9% 30.2% 34.6% 31.0% 45.9% 52.6%
Gross margin 66.1% 69.8% 65.4% 69.0% 23.3% 29.7%
Operating expenses:
Selling, general, and administrative expenses 56.9% 104.2% 60.3% 86.4% (29.0)% (4.6)%
Research, engineering and development 6.5% 16.5% 6.4% 13.8% (48.8)% (36.4)%
Depreciation and amortization 15.0% 16.9% 15.4% 18.4% 15.6 % 14.6%
Purchased research and development 0.0% 224.2% 0.0% 79.7% (100.0)% (100.0)%
Goodwill write-down 0.0% 44.0% 0.0% 15.7% (100.0)% (100.0)%
----- ----- ----- -----
Operating Loss (12.3)% (336.0)% (16.7)% (145.1)% (95.3)% (84.2)%
Interest income (expense) 0.5% (0.3)% 0.0% 1.1% (266.1)% (92.1)%
Gain on sale of marketable equity securities 0.0% 0.0% 0.0% 1.6% 0.0% (100.0)%
----- ----- ----- -----
Loss before income taxes (11.8)% (336.3)% (16.7)% (142.4)% (95.5)% (84.0)%
Net Loss (11.8)% (336.3)% (16.7)% (142.4)% (95.5)% (84.0)%
Since the Vicorp and the BFD acquisitions were accounted for as purchases, the Company's
consolidated statements of operations include the operations of Vicorp since its acquisition date in
April, 1996, and the operations of BFD since its acquisition date in October, 1996. Consequently,
some of the increases shown above for the three and nine month periods ended September 30, 1997,
compared to the same periods in 1996, are due to these acquisitions.
THREE MONTHS ENDED SEPTEMBER 30, 1997, COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1996
TOTAL REVENUES
Total revenues increased to $11,320,203 for the three months ended September 30, 1997 compared
to $8,699,152 for the three months ended September 30, 1996. The various components of revenue
fluctuated as explained below.
CONTRACT REVENUE
Contract revenue increased to $2,168,944 for the three months ended September 30, 1997
compared to $1,331,105 during the same period in 1996. The increase in contract revenue during the
three months ended September 30, 1997 versus 1996 is primarily due to increased hardware sales,
which is partially offset by certain ESP product sales to MCI completed in 1996 which did not recur
during the same period in 1997.
SERVICE AND SUPPORT
Service and support revenue increased to $6,270,975 for the three months ended September 30,
1997, compared to $5,342,503 for the three months ended September 30, 1996.
Service and support provided to MCI decreased slightly to $498,383 for the three months ended
September 30, 1997, compared to $526,767 for the three months ended September 30, 1996.
7
<PAGE>
Service and support provided to HSN decreased to $0 for the three months ended September 30,
1997, in comparison to $364,388 for the three months ended September 30, 1996. The Company's HSN
maintenance agreement ended December 31, 1996.
Service and support revenue for Vicorp BETEX products was $4,965,929 for the three months
ended September 30, 1997, compared to $4,422,527 for the three months ended September 30, 1996.
Vicorp's service and support revenue includes maintenance and custom development services provided
to its customers.
Service and support revenue for BFD was $785,207 for the three months ended September 30,
1997. BFD's service and support revenue primarily includes interactive voice response service bureau
activity.
LICENSE FEES
License fee revenue increased to $2,880,284 for the three months ended September 30, 1997,
compared to $2,025,544 for the three months ended September 30, 1996. License fee revenue for the
three months ended September 30, 1997, relating to its BETEX product line was $2,670,559 and
$209,725 for the UniPort product line. The primary reason for the increase in license fee revenue
for the three months ended September 30, 1997 relates to a higher level of BETEX products sold in
the European market versus previous periods. The Company anticipates generating future license fee
revenue for its UniPort and BETEX products, although no assurance can be given for such future
revenue.
COST OF SALES AND GROSS MARGIN
Cost of sales increased to $3,832,281 for the three months ended September 30, 1997, compared
to $2,626,727 for the three months ended September 30, 1996. Additionally, the Company's gross
margin increased to $7,487,922 (66% of revenue) for the three months ended September 30, 1997,
compared to $6,072,425 (70% of revenue) for the three months ended September 30, 1996. The primary
reason for the increase in the Company's gross margin dollar amount is an increase in the Company's
total revenue. The decrease in the Company's gross margin percentage is primarily associated with a
change in product mix. A greater portion of the Company's revenue for the three months ended
September 30, 1997 related to lower margin hardware sales versus the same period in 1996. The
Company anticipates that its hardware sales will continue to increase during the remainder of 1997,
as compared to the previous year's activity.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased to $6,438,515 for the three months
ended September 30, 1997, compared to $9,062,036 for the three months ended September 30, 1996. The
decrease in selling, general and administrative expenses for the three months ended September 30,
1997 is primarily due to the Company's efforts at managing and controlling costs in order to improve
the alignment of cost outlays against potential revenue opportunities. Specific cost savings include
payroll and related costs due to consolidation and elimination of certain functions and reduction in
advertising and trade show expenditures. Also, during August 1996, the Company accrued $1,093,341 in
restructuring charges which related primarily to termination benefits, including severance pay.
Offsetting these decreases were the selling, general and administrative expenses associated with the
BFD acquisition of approximately $858,000. Considering the impact of the Vicorp and BFD
acquisitions, the Company expects its total selling, general and administrative expenses to increase
in the future.
RESEARCH, ENGINEERING AND DEVELOPMENT
Research, engineering and development expenses decreased to $734,268 for the three months
ended September 30, 1997, compared to $1,434,505 for the three months ended September 30, 1996. The
decrease in research, engineering and development expenses primarily relates to the reduction in
required development work associated with the Company's UniPort product. However, resources will
continue to be directed toward product improvements and enhancements for future purchased releases
of the Company's products. Additionally, the Company will continue to evaluate its different product
lines to maximize the impact of the research, engineering and development expenditures.
The Company believes it operates in a highly competitive market; and, in order to maintain a
competitive position, the Company's existing products must be continually improved and new products
must be developed. The amount and timing of future research, engineering, and development
expenditures will depend upon, among other factors, future new contract revenue and the Company's
ability to fund these costs from future operating cash flow and bank or other forms of financing.
8
<PAGE>
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased to $1,699,246 for the three months ended September 30,
1997, compared to $1,469,419 for the three months ended September 30, 1996. The increase is
primarily due to amortization expense associated with intangible assets acquired with the BFD
acquisition.
PURCHASED RESEARCH AND DEVELOPMENT
Purchased research and development expense of $19,500,000 for the three months ended September
30, 1996, represents the purchase price allocation to in-process research and development acquired
through the Company's acquisition of Vicorp.
GOODWILL WRITE-DOWN
During the three months ended September 30, 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 the three months ended September 30, 1996.
INCOME TAX EXPENSE
The Company uses the asset and liability method to account for deferred income taxes. Under
the asset and liability method, deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable to future years to
differences between the financial statement carrying amounts and the tax basis of existing assets
and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in
the period that includes the enactment date.
INTEREST INCOME (EXPENSE)
For the three months ended September 30, 1997, net interest income increased to $53,102
compared to $(31,973) during the same period in 1996. The increase in net interest income is
primarily due to a lower level of interest expense associated with the Company's debt due to certain
repayments of such debt.
NINE MONTHS ENDED SEPTEMBER 30, 1997, COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1996
TOTAL REVENUES
Total revenues increased to $33,462,000 for the nine months ended September 30, 1997 compared
to $24,463,319 for the nine months ended September 30, 1996. The various components of revenue
fluctuated as explained below.
CONTRACT REVENUE
Contract revenue decreased to $8,191,554 for the nine months ended September 30, 1997 compared
to $8,350,448 during the same period in 1996. The decrease is primarily due to certain ESP product
sales to MCI completed in 1996 which did not recur during the same period in 1997. Offsetting the
overall decrease in ESP product sales is an increase in contract revenues associated with Vicorp's
BETEX products of $6,030,221 for the nine months ended September 30, 1997 compared to $1,463,569 for
the same period in 1996. Since the Vicorp acquisition was accounted for as a purchase, the Company's
consolidated statements of operations include the operations of Vicorp since the acquisition date,
in April, 1996. The Company expects the revenue generated from the sale of BETEX products to
increase during 1997.
SERVICE AND SUPPORT
Service and support revenue increased to $17,655,180 for the nine months ended September 30,
1997, compared to $11,311,939 for the nine months ended September 30, 1996.
Service and support provided to MCI decreased to $1,519,218 for the nine months ended
September 30, 1997, compared to $1,698,036 for the nine months ended September 30, 1996. While
maintenance revenue increased due to additional MCI ESP equipment that is subject to the Company's
maintenance services, the overall decrease is due to certain non-recurring development projects
delivered to MCI which occurred during the first nine months of 1996.
9
<PAGE>
Service and support provided to HSN decreased to $0 for the nine months ended September 30,
1997, in comparison to $1,092,294 for the nine months ended September 30, 1996. The Company's HSN
maintenance agreement ended December 31, 1996.
Service and support revenue for Vicorp BETEX products was $13,399,798 for the nine months
ended September 30, 1997, compared to $8,668,527 for the same period in 1996. Vicorp's service and
support revenue includes maintenance and custom development services provided to its customers.
Service and support revenue for BFD was $2,675,461 for the nine months ended September 30,
1997. BFD's service and support revenue primarily includes interactive voice response service
bureau activity.
LICENSE FEES
License fee revenue increased to $7,615,266 for the nine months ended September 30, 1997
compared to $4,800,932 for the nine months ended September 30, 1996. License fee revenue for the
nine months ended September 30, 1997, relating to its BETEX product line was $6,237,450 and
$1,377,816 for the UniPort product line. The primary reason for the increase in license fee revenue
for the nine months ended September 30, 1997 relates to a higher level of BETEX product sold in the
American and European markets versus prior periods. The Company anticipates generating future
license fee revenue for its UniPort and BETEX products, although no assurance can be given for such
future revenue.
COST OF SALES AND GROSS MARGIN
Cost of sales increased to $11,580,591 for the nine months ended September 30, 1997, compared
to $7,587,339 for the nine months ended September 30, 1996. Additionally, the Company's gross margin
increased to $21,881,409 (65% of revenue) for the nine months ended September 30, 1997, compared to
$16,875,980 (69% of revenue) for the nine months ended September 30, 1996. The primary reason for
the increase in the Company's gross margin dollar amount is an increase in the Company's total
revenue. The decrease in the Company's gross margin percentage is primarily associated with a change
in product mix. A greater portion of the Company's revenue for the nine months ended September 30,
1997 related to lower margin hardware sales versus the same period in 1996. The Company anticipates
that its hardware sales will continue to increase during the remainder of 1997, as compared to the
previous year's activity.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased to $20,168,057 for the nine months
ended September 30, 1997, compared to $21,145,524 for the nine months ended September 30, 1996. The
decrease is primarily due to the Company's efforts at managing and controlling costs in order to
improve the alignment of cost outlays against potential revenue opportunities. Specific cost savings
include payroll and related costs due to consolidation and elimination of certain functions (i.e.
sales and marketing, product management, customer service) and reduction in advertising and trade
show expenditures. Also, during August 1996, the Company accrued $1,093,341 in restructuring
charges, which related primarily to termination benefits, including severance pay. The decrease in
selling, general and administrative expenses is offset by the following increases:
* Selling, general and administrative expenses associated with the acquisition of Vicorp
was approximately $12,093,000 for the nine months ended September 30, 1997 compared to
$9,279,812 for the period in 1996 that Vicorp was included in the Company's consolidated
statement of operations.
* Selling, general and administrative expenses associated with the BFD acquisition was
approximately $2,426,000.
RESEARCH, ENGINEERING AND DEVELOPMENT
Research, engineering and development expenses decreased to $2,144,097 for the nine months
ended September 30, 1997, compared to $3,369,071 for the nine months ended September 30, 1996. The
decrease in research, engineering and development expenses primarily relates to the reduction in
required development work associated with the Company's UniPort product. However, resources will
continue to be directed toward product improvements and enhancements for future purchased releases
of the Company's products. Additionally, the Company will continue to evaluate its different product
lines to maximize the impact of the research, engineering and development expenditures.
The Company believes it operates in a highly competitive market; and, in order to maintain a
competitive position, the Company's existing products must be continually improved and new products
must be developed. The amount and timing of future research, engineering, and development
expenditures will depend upon, among other factors, future new contract revenue and the Company's
ability to fund these costs from future operating cash flow and bank or other forms of financing.
10
<PAGE>
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased to $5,164,107 for the nine months ended September 30,
1997, compared to $4,505,883 for the nine months ended September 30, 1996. The increase is primarily
due to amortization expense associated with intangible assets acquired with the Vicorp and BFD
acquisitions.
PURCHASED RESEARCH AND DEVELOPMENT
Purchased research and development expense of $19,500,000 for the nine months ended September
30, 1996, represents the purchase price allocation to in-process research and development acquired
through the Company's acquisition of Vicorp.
GOODWILL WRITE-DOWN
During the nine months ended September 30, 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 the nine months ended September 30, 1996.
INCOME TAX EXPENSE
The Company uses the asset and liability method to account for deferred income taxes. Under
the asset and liability method, deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable to future years to
differences between the financial statement carrying amounts and the tax basis of existing assets
and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in
the period that includes the enactment date.
INVESTMENT GAIN ON MARKETABLE EQUITY SECURITIES
For the nine months ended September 30, 1996, the Company had an investment gain of $371,218
relating to its sale of marketable equity securities. No such transaction occurred during the same
period in 1997.
INTEREST INCOME
For the nine months ended September 30, 1997, net interest income was $20,891 compared to
$265,031 during the same period in 1996. The decrease in net interest income is primarily due to
certain interest expense associated with debt assumed by the Company in connection with the Vicorp
and BFD acquisitions. Additionally, the Company's interest bearing cash and cash equivalent amounts
decreased.
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. Reference is made to the legal proceedings
described at Part 1, Item 3, in the Company's December 31, 1996, Form 10-K. The following represents
an update of certain of these proceedings.
INTERVOICE, INC. V. PRECISION SYSTEMS, INC. AND VICORP INTERACTIVE SYSTEMS, INC. On June 13,
1997, the Company filed a Motion for Summary Judgment of Patent Invalidity and Non Infringement of
the Intervoice '305, '643 and '500 Patents, and a Partial Motion for Summary Judgment on
Intervoice's allegation of False Advertising by the Company. A hearing on these Motions is pending.
On August 27, 1997, Intervoice filed a new Complaint against the Company in the Federal District
Court for the Northern District of Texas (Dallas) alleging infringement of U.S. Patent No.
5,644,631. This Patent was awarded to Intervoice on July 1, 1997 and is a continuation of its
earlier '500 Patent. Upon Agreed Motion, this new action has been consolidated into the original
action, and the trial date on all counts has been extended to March 2, 1998, so as to allow the
parties time to conduct additional discovery.
DANIEL SCHULTZ V. PRECISION SYSTEMS, INC., ET AL. The company has filed its Answer and
Affirmative Defenses with the Circuit Court of the Sixth Judicial Circuit in and for Pinellas
County, Florida, and is vigorously defending this action.
DANIEL GILBERT SCHULTZ V. ALTA INVESTISSEMENTS, S.A. ET AL. The Court of First Instance,
Curacao, Netherlands Antilles has ruled against Mr. Schultz on all Claims. Mr. Schultz did not
appeal this judgment, and the time for appeal has expired.
FINANCIAL POSITION, LIQUIDITY, AND CAPITAL RESOURCES
At September 30, 1997, the Company had net working capital of $8,703,861 compared to $388,785
at December 31, 1996. The increase in net working capital is primarily due to the net $4,400,000 and
$5,974,130 of funding that was received from shareholders during the second and third quarters of
1997, respectively. The Company expects that with the acquisition of Vicorp and BFD, its working
capital requirements will increase significantly over prior periods and that it will be able to fund
its operating and investing activities for the remainder of 1997.
11
<PAGE>
The Company's accounts and contracts receivable decreased to $8,732,168 as of September 30,
1997, from $12,400,000 as of December 31, 1996. The decrease is primarily due to collection of
certain large receivables outstanding at December 31, 1996.
The Company's supplies and other current assets increased to $2,694,425 as of September 30,
1997, from $1,685,874 as of December 31, 1996. The increase is primarily due to the replenishment of
inventory which was sold prior to the end of 1996.
The Company's costs and earnings in excess of billings on uncompleted contracts increased to
$6,933,157 as of September 30, 1997, from $3,064,978 as of December 31, 1996. The increase is
primarily associated with certain of Vicorp's product delivery contracts in process for its
customers. Such amounts as of September 30, 1997, are expected to be fully billed by Vicorp by March
31, 1998.
The Company's current portion of long-term debt decreased to $543,526 as of September 30,
1997, from $2,374,287 as of December 31, 1996. The decrease is primarily due to certain debt re-paid
by the Company during the nine months ended September 30, 1997. The Company's long-term debt
increased to $6,256,766 as of September 30, 1997, from $369,377 as of December 31, 1996. The
increase is primarily due to the Company's issuance of three promissory notes of $2,000,000 each in
September, 1997.
The Company's accounts payable increased to $5,058,967 as of September 30, 1997, from
$4,395,128 as of December 31, 1996. The increase is primarily due to the timing of certain vendor
payments.
The Company's accrued expenses decreased to $6,066,512 as of September 30, 1997, from
$8,152,294 as of December 31, 1996. The decrease is primarily due to payments made during the first
three quarters of 1997.
The Company's billings in excess of costs and earnings on uncompleted contracts decreased to
$2,885,000 as of September 30, 1997, from $3,753,132 as of December 31, 1996. The decrease is
primarily associated with the completion and billing of certain of Vicorp's software development
contracts.
The Company's deferred revenue balance decreased to $1,824,478 as of September 30, 1997, from
$2,689,044 as of December 31, 1996. The Company's deferred revenue balance primarily represents
prepaid maintenance contracts for services to be provided to its customers.
The Company incurred approximately $908,000 and $1,970,000 in expenditures for capital assets
during the three and nine months ended September 30, 1997. Future levels of capital expenditures
will be dependent upon cash availability from operating activities and additional sources of bank
funding or other forms of financing which may or may not be available to the Company upon acceptable
terms and conditions.
During April, 1997, the Company completed a $4,500,000 financing with three of its
shareholders, RMS Limited Partnership, Vulcan Ventures, Inc. and Primwest Holding N.V. ("the
Shareholders"). In connection with the financing, each Shareholder invested $1,500,000 and received
1,500 shares of a newly designated class of preferred stock. The Series B Preferred Stock carries a
cumulative 8% dividend. Each Shareholder will be entitled to convert the Series B Preferred Stock
into common stock after December 31, 1998, at approximately $4.47 per share. In addition to the
Series B Preferred Stock, each of the Shareholders received a warrant to purchase 150,000 shares of
common stock. The warrants will be exercisable for a five year period beginning April, 1998 at
approximately $6.09. The Company granted the Shareholders certain registration and anti-dilution
rights in connection with the transaction.
On September 30, 1997, the Company completed a $6,000,000 financing with RMS Limited
Partnership ("RMS"), Vulcan Ventures, Inc. ("Vulcan"), and Mr. Didier Primat ("the Shareholders").
RMS and Vulcan are existing shareholders of the Company and Mr. Primat is the beneficial owner of
shares of the Company's stock held by Alta Investissements SA. In connection with the financing,
each Shareholder invested $2,000,000 and received a promissory note ("Note") for $2,000,000. The
Notes will mature on January 1, 1999 and bear interest from the issuance date on the unpaid
principal amount until such amount is paid at a rate per annum equal to 8%. Interest will be paid on
September 30, 1998, and on the maturity date. In addition to the Notes, each of the Shareholders
received a warrant to purchase 275,000 shares of common stock. The warrants will be exercisable for
a five year period beginning October, 1998, at $4.00. The Company granted the Shareholders certain
registration rights with respect to the shares of common stock underlying the warrants.
12
<PAGE>
Management is exploring additional opportunities for financing sources. Although management
feels that the Company will be able to fund its operating and investing activities through 1997
through the use of its current working capital, including the collection of existing accounts
receivables and the generation of future revenues, additional sources of capital are being
investigated for future requirements. However, there is no assurance that the Company will be able
to obtain additional financing on acceptable terms and conditions or that its existing working
capital will be sufficient to fund its operating and investing activities for 1998.
FORWARD-LOOKING INFORMATION
The foregoing discussion in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains forward-looking statements that reflect management's current views
with respect to future events and the financial performance and condition of the Company. Such
statements involve risks and uncertainties, and there are certain important factors that could cause
actual results to differ materially from those anticipated. Some of the important factors that could
cause actual results to differ materially from those anticipated include:
* The Company competes in an industry marked by frequent technological changes which will
force the Company to expend funds to develop new products and implement new technologies
* The various markets into which the Company sells its products are undergoing significant
changes with increasing demands for product innovations
* The Company must be successful in competing against many competitors, many of which have
significantly greater assets than the Company
* The Company will be required to properly estimate costs under fixed price contracts
* Increased risk of litigation in the Company's industry resulting from aggressive
prosecutions of intellectual property claims
* The Company's ability to retain its larger customers, including MCI
* Availability of certain hardware and software components which are incorporated with the
Company's products and are purchased from a limited number of vendors
* The Company's ability to hire and retain qualified personnel
* Legislative changes affecting the Company's markets, including the Telecommunications
Act of 1996
* Given the Company's acquisition of Vicorp and its large presence in international
markets, regulatory, monetary and inflationary factors can negatively impact the
Company's operations in the future.
Many of such uncertainties are outside the Company's control and could postpone, delay, or
eliminate potential sales opportunities and, therefore, affect the Company's operations. Due to
such uncertainties and risk, readers are cautioned not to place undue reliance on such forward-
looking statements, which speak only as of the date hereof.
INFLATION
Inflation has not had a significant impact on the Company's operations.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
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. Reference is made to the legal proceedings
described at Part 1, Item 3, in the Company's December 31, 1996, Form 10-K. The following represents
an update of certain of these proceedings.
INTERVOICE, INC. V. PRECISION SYSTEMS, INC. AND VICORP INTERACTIVE SYSTEMS, INC. On June 13,
1997, the Company filed a Motion for Summary Judgment of Patent Invalidity and Non Infringement of
the Intervoice '305, '643 and '500 Patents, and a Partial Motion for Summary Judgment on
Intervoice's allegation of False Advertising by the Company. A hearing on these Motions is pending.
On August 27, 1997, Intervoice filed a new Complaint against the Company in the Federal District
Court for the Northern District of Texas (Dallas) alleging infringement of U.S. Patent No.
5,644,631. This Patent was awarded to Intervoice on July 1, 1997 and is a continuation of its
earlier '500 Patent. Upon Agreed Motion, this new action has been consolidated into the original
action, and the trial date on all counts has been extended to March 2, 1998, so as to allow the
parties time to conduct additional discovery.
DANIEL SCHULTZ V. PRECISION SYSTEMS, INC., ET AL. The company has filed its Answer and
Affirmative Defenses with the Circuit Court of the Sixth Judicial Circuit in and for Pinellas
County, Florida, and is vigorously defending this action.
DANIEL GILBERT SCHULTZ V. ALTA INVESTISSEMENTS, S.A. ET AL. The Court of First Instance,
Curacao, Netherlands Antilles has ruled against Mr. Schultz on all Claims. Mr. Schultz did not
appeal this judgment, and the time for appeal has expired.
ITEM 2 - CHANGES IN SECURITIES
On April 7, 1997, the Company issued 4,500 shares of Series B Convertible Redeemable Preferred
Stock and warrants to purchase up to 450,000 shares of common stock to RMS Limited Partnership,
Vulcan Ventures, Inc., and Primwest Holding N.V. ("the Shareholders") for aggregate consideration of
$4,500,000. The Company relied upon the Section 4 (2) exemption under the Securities Act of 1933.
The Series B Preferred Stock carries a cumulative 8% dividend. Each shareholder will be entitled to
convert the Series B Preferred Stock into common stock after December 31, 1998, at approximately
$4.47 per share. In addition to the Series B Preferred Stock, each of the Shareholders received a
warrant to purchase 150,000 shares of common stock. The warrants will be exercisable for a five year
period beginning April, 1998 at approximately $6.09. The Company granted the Shareholders certain
registration and anti-dilution rights in connection with the transaction.
On September 30, 1997, the Company issued promissory notes and warrants to purchase 825,000
shares of common stock to RMS Limited Partnership, Vulcan Ventures, Inc., and Mr. Didier Primat
("the Shareholders") for aggregate consideration of $6,000,000. The Company relied upon the Section
4 (2) exemption under the Securities Act of 1933. The warrants will be exercisable for a five year
period beginning October, 1998, at $4.00. The Company granted the Shareholders certain registration
rights with respect to the shares of common stock underlying the warrants.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
None
14
<PAGE>
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/ KENNETH M. CLINEBELL
---------------------------------
Kenneth M. Clinebell
Chief Financial Officer
November 14, 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
November 14, 1997.
Signature Title
--------- -----
/s/WILLEM HUISMAN Chairman of the Board, President and Chief Executive Officer
- --------------------------------
Willem Huisman
/s/ KENNETH M. CLINEBELL Chief Financial Officer
- -------------------------------- (Principal Accounting Officer)
Kenneth M. Clinebell
15
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PRECISION SYSTEMS, INC. FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 6,722,594
<SECURITIES> 0
<RECEIVABLES> 9,455,769
<ALLOWANCES> 723,601
<INVENTORY> 0
<CURRENT-ASSETS> 25,082,344
<PP&E> 34,598,085
<DEPRECIATION> 26,114,304
<TOTAL-ASSETS> 48,920,971
<CURRENT-LIABILITIES> 16,378,483
<BONDS> 0
0
145
<COMMON> 178,311
<OTHER-SE> 26,107,266
<TOTAL-LIABILITY-AND-EQUITY> 48,920,971
<SALES> 8,191,554
<TOTAL-REVENUES> 33,462,000
<CGS> 11,580,591
<TOTAL-COSTS> 11,580,591
<OTHER-EXPENSES> 27,476,261
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,573,961)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,573,961)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (5,573,961)
<EPS-PRIMARY> (.32)
<EPS-DILUTED> (.32)
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