<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[Mark One]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
Commission File No. 000-20068
PRECISION SYSTEMS, INC.
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 41-1425909
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS 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 capital
stock as of the latest practicable date.
Total number of shares of outstanding capital stock as of November
9, 1998:
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . 17,853,169<PAGE>
<TABLE>
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------------- ---------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues
Contract revenue . . . . . . . $ 995,428 $ 2,168,944 $ 3,324,227 $ 8,191,554
Service and support . . . . . 4,587,435 6,270,975 15,797,654 17,655,180
License fee revenue . . . . . . 3,235,405 2,880,284 5,798,695 7,615,266
------------- ------------- ------------- -------------
8,818,268 11,320,203 24,920,576 33,462,000
------------- ------------- ------------- -------------
Cost of Sales, exclusive of
depreciation and amortization
shown separately below . . . . 4,212,762 4,829,309 13,015,159 14,336,846
------------- ------------- ------------- -------------
4,605,506 6,490,894 11,905,417 19,125,154
------------- ------------- ------------- -------------
Operating Expenses
Selling, general, and
administrative . . . . . . . . 3,810,972 4,863,487 15,604,709 16,008,265
Research, engineering and
development . . . . . . . . . 581,723 1,312,268 2,815,430 3,547,634
Depreciation and amortization . 777,219 1,699,246 2,455,427 5,164,107
------------- ------------- ------------- -------------
5,169,914 7,875,001 20,875,566 24,720,006
------------- ------------- ------------- -------------
Operating loss . . . . . . . . . (564,408) (1,384,107) (8,970,149) 5,594,852)
Interest income (expense), net . (114,912) 53,102 (608,941) 20,891
------------- ------------- ------------- -------------
Loss before income taxes . . . . (679,320) (1,331,005) (9,579,090) (5,573,96)
Income taxes . . . . . . . . . . - - - -
------------- ------------- ------------- -------------
Net Loss . . . . . . . . . . . . (679,320) (1,331,005) (9,579,090) (5,573,961)
Preferred stock dividend
requirements . . . . . . . . . (178,462) (178,454) (525,920) (433,873)
------------- ------------- ------------- -------------
Net Loss Applicable to
Common Stock . . . . . . . . . $ (857,782) $ (1,509,459) $(10,105,010) $ (6,007,834)
============= ============= ============= =============
Basic and Diluted Loss Per Share:
Net loss . . . . . . . . . . . $ (.04) $ (.08) $ (.54) $ (.33)
============= ============= ============= =============
Net loss applicable to common
stock . . . . . . . . . . . $ (.05) $ (.09) $ (.57) $ (.35)
============= ============= ============= =============
</TABLE> <PAGE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1998 1997
ASSETS ---------------- ---------------
----------------------------------------- (unaudited)
Current Assets
Cash and cash equivalents . . . . . . .$ 2,338,418 $ 4,582,757
Accounts and contracts receivable,
net . . . . . . . . . . . . . . . . . 7,566,107 9,657,355
Supplies and other current assets . . . 2,791,603 1,980,451
Costs and earnings in excess of
billings on uncompleted contracts . . 2,283,496 3,333,339
---------------- ---------------
Total current assets . . . . . . . . 14,979,624 19,553,902
---------------- ---------------
Property, Plant and Equipment, Net . . . 7,670,638 8,869,177
Intangible Assets, Net . . . . . . . . . 42,419 52,474
---------------- ---------------
$ 22,692,681 $ 28,475,553
================ ===============
LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT)
-----------------------------------------
Current Liabilities
Current portion of long-term debt . . .$ 9,115,309 $ 294,375
Accounts payable . . . . . . . . . . . 4,757,192 5,505,996
Accrued expenses . . . . . . . . . . . 8,453,882 6,110,800
Billings in excess of costs and
earnings on uncompleted contracts . . 2,124,590 2,780,251
Deferred revenue . . . . . . . . . . . 1,050,367 1,270,825
---------------- ---------------
Total current liabilities . . . . . . 25,501,340 15,962,247
---------------- ---------------
Long-term Debt . . . . . . . . . . . . . 221,488 6,240,184
---------------- ---------------
The accompanying notes are an integral part of these
condensed consolidated financial statements.<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
September 30, December 31,
1998 1997
---------------- ---------------
(unaudited)
Commitments and Contingencies . . . . . .
Stockholders' Equity (Deficit)
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 45
Common stock $.01 par value;
authorized 30,000,000 shares, issued
17,986,106 and 17,906,025 shares,
respectively . . . . . . . . . . . . . 179,861 179,061
Additional paid-in capital . . . . . . 113,728,453 114,000,071
Accumulated deficit . . . . . . . . . . (118,873,195) (109,294,105)
Treasury stock (132,937 shares) -
at cost . . . . . . . . . . . . . . . (422,360) (422,360)
Accumulated preferred stock
dividends . . . . . . . . . . . . . . 2,201,121 1,675,201
Cumulative foreign currency translation
adjustment . . . . . . . . . . . . . . 169,578 312,609
Unearned compensation . . . . . . . . . (13,750) (177,500)
---------------- ---------------
Total stockholders' equity (deficit) . (3,030,147) 6,273,122
---------------- ---------------
$ 22,692,681 $ 28,475,553
================ ===============
The accompanying notes are an integral part of these
condensed consolidated financial statements.<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine months ended
September 30,
--------------------------------
1998 1997
---------------- ---------------
Cash Flows Operating Activities:
Net loss . . . . . . . . . . . . . . .$ (9,579,090) $ (5,573,961)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization . . . . 2,455,427 5,164,107
Provision for losses on accounts
receivable . . . . . . . . . . . . . 46,479 105,515
Amortization of unearned
compensation . . . . . . . . . . . . 88,750 120,117
Loss on sale of property, plant and
equipment . . . . . . . . . . . . . 109,179 -
Change in current assets and
liabilities:
Accounts and contracts receivable . 2,047,805 3,601,397
Costs and estimated earnings in
excess of billings . . . . . . . . 1,049,843 (3,868,179)
Supplies and other current assets . (826,677) (972,372)
Accounts payable . . . . . . . . . . (748,804) 663,839
Accrued expenses . . . . . . . . . . 2,451,752 (1,968,743)
Billings in excess of earnings on
incomplete contracts . . . . . . . (655,661) (868,132)
Deferred revenue . . . . . . . . . . (220,458) (864,566)
---------------- ---------------
Net cash used in operating
activities . . . . . . . . . . . (3,781,455) (4,460,978)
---------------- ---------------
Cash Flows Investing Activities:
Purchase of property, plant and
equipment . . . . . . . . . . . . . . (1,363,277) (1,969,522)
Proceeds from sale of property,
plant and equipment . . . . . . . . . 112,358 -
---------------- ---------------
Net cash used in investing
activities . . . . . . . . . . . (1,250,919) (1,969,522)
---------------- ---------------
The accompanying notes are an integral part of these
condensed consolidated financial statements.<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited)
Nine months ended
September 30,
--------------------------------
1998 1997
---------------- ---------------
Cash Flows Financing Activities:
Proceeds from issuance of promissory
notes, net . . . . . . . . . . . . . . 3,000,000 5,974,130
Repayment of note payable . . . . . . . (228,869) (1,998,116)
Capital contributions, net . . . . . . - 4,400,000
Proceeds from issuance of common
stock . . . . . . . . . . . . . . . . 16,904 175,262
---------------- ---------------
Net cash provided by financing
activities . . . . . . . . . . . 2,788,035 8,551,276
---------------- ---------------
Net increase (decrease) in cash
and cash equivalents . . . . . . . . . (2,244,339) 2,120,776
Cash and cash equivalents at
beginning of period . . . . . . . . . . 4,582,757 4,601,818
---------------- ---------------
Cash and cash equivalents at
end of period . . . . . . . . . . . . .$ 2,338,418 $ 6,722,594
================ ===============
The accompanying notes are an integral part of these
condensed consolidated financial statements.<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The interim condensed consolidated financial statements of Precision
Systems, Inc. (the "Company") are unaudited and should be read in
conjunction with the audited financial statements and notes thereto as of
and for the year ended December 31, 1997, the four month transition
period ended December 31, 1996, and 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 1998 presentation.
2. BASIC AND DILUTED LOSS PER SHARE
Basic and diluted loss per share for the three and nine months ended
September 30, 1998 and 1997, have been computed based upon the weighted
average common shares outstanding of 17,846,796 and 17,599,755, and
17,815,650 and 17,089,298, respectively. The diluted 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.
The following table provides information on the weighted average
shares of dilutive securities which are not included in the diluted loss
per share calculation because their inclusion would be anti-dilutive:
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Preferred convertible
securities . . . . 3,500,198 2,675,198 3,500,198 2,114,925
Stock options and
restricted stock . 1,432,068 2,285,560 1,403,419 1,994,316
----------- ----------- ----------- -----------
4,932,266 4,960,758 4,903,617 4,109,241
=========== =========== =========== ===========<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. LONG-TERM DEBT
September 30, December 31,
1998 1997
---------------- ---------------
(unaudited)
Notes payable to shareholders,
interest at 8 percent, unsecured,
and due January 1999 . . . . . . . .$ 6,000,000 $ 6,000,000
Note payable to shareholder, interest
at 9.5 percent, unsecured and due on
demand; on August 31, 1998, the
Company increased the available
funding for this note payable to
$5,000,000, of which an additional
$750,000 was borrowed subsequent to
September 30, 1998 . . . . . . . . . 3,000,000 -
Capital lease obligation, interest
rates varying from 6 percent to 9
percent; collateralized by assets
with net book value of approximately
$400,000 and maturing through the
year 2001 . . . . . . . . . . . . . 336,797 534,559
---------------- ---------------
9,336,797 6,534,559
Less current portion . . . . . . . . (9,115,309) (294,375)
---------------- ---------------
$ 221,488 $ 6,240,184
================ ===============
4. RESTRUCTURING CHARGES
During the nine months ended September 30, 1998, in an effort to
reduce overhead and cut costs, the Company terminated the employment of
approximately 58 individuals and closed several offices world-wide. The
effect of the restructuring charges associated with these headcount
reductions and office closings was to increase the Company's selling,
general and administrative expenses by approximately $2,500,000. As of
September 30, 1998, approximately $2,011,000 of such charges are included
in accrued expenses on the Company's balance sheet.<PAGE>
ITEM 2 - Management's Discussion And Analysis of
Financial Condition and Results of Operations
Precision Systems, Inc. (the "Company" or "PSI") is a global company
that, together with its subsidiaries, Vicorp N.V. and BFD Productions,
Inc., delivers telecommunications solutions to service providers and
corporations. Vicorp's software and hardware products support enhanced
calling and prepaid services, toll-free services, and advanced call
center applications. BFD Productions is a service bureau specializing in
audiotext and Internet applications. Headquartered in St. Petersburg,
Florida (USA), Precision Systems meets the needs of customers in more
than thirty countries.
The following table sets forth for the periods indicated (i) the
percentage of total revenues represented by certain items in the
financial statements of the Company, and (ii) the percentage change in
the dollar amount of such items from period to period.
<TABLE>
<CAPTION>
Percentage Increase
(Decrease)
----------------------
Percentage of Percentage of
Revenue Revenue Three Nine
Three Months Nine Months Months Months
Ended Ended Ended Ended
September 30, September 30, September September
----------------- ----------------- 30, 1998 30, 1998
1998 1997 1998 1997 vs. 1997 vs. 1997
-------- -------- -------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Contract revenue . . . . 11.3% 19.2% 13.3% 24.4% (54.1%) (59.4%)
Service and support . . . 52.0% 55.4% 63.4% 52.8% (26.8%) (10.5%)
License fee revenue . . . 36.7% 25.4% 23.3% 22.8% 12.3% (23.9%)
-------- -------- -------- --------
100.0% 100.0% 100.0% 100.0% (22.1%) (25.5%)
-------- -------- -------- --------
Cost of Sales, exclusive
of depreciation and
amortization shown
separately below . . . . 47.8% 42.7% 52.2% 42.8% (12.8%) (9.2%)
-------- -------- -------- --------
52.2% 57.3% 47.8% 57.2% (29.0%) (37.7%)
-------- -------- -------- --------
Operating Expenses:
Selling, general and
administrative . . . . . 43.2% 43.0% 62.6% 47.8% (21.6%) (2.5%)
Research, engineering
and development . . . . 6.6% 11.6% 11.2% 10.7% (55.7%) (20.6%)
Depreciation and
amortization . . . . . . 8.8% 15.0% 9.9% 15.4% (54.3%) (52.5%)
-------- -------- -------- --------
Operating loss . . . . . . (6.4%) (12.3%) (35.9%) (16.7%) (59.2%) 60.3%
Interest income
(expense), net . . . . . (1.3%) 0.5% (2.5%) 0.0% (316.4%) (3014.8%)
-------- -------- -------- --------<PAGE>
Loss before income
taxes . . . . . . . . . . (7.7%) (11.8%) (38.4%) (16.7%) (49.0%) 71.9%
Net Loss . . . . . . . . . (7.7%) (11.8%) (38.4%) (16.7%) (49.0%) 71.9%
/TABLE
<PAGE>
Three Months Ended September 30, 1998, Compared to
Three Months Ended September 30, 1997
Total Revenues
Effective January 1, 1998, the Company adopted the American Institute
of Certified Public Accountants ("AICPA") Statement of Position ("SOP")
97-2, "Software Revenue Recognition." Adoption of SOP 97-2 did not have a
material impact on the financial condition or the results of operations
of the Company.
Total revenues decreased to $8,818,268 for the three months ended
September 30, 1998, compared to $11,320,203 for the three months ended
September 30, 1997. The various components of revenue fluctuated as
explained below.
Contract Revenue
Contract revenue, consisting primarily of telecommunications
equipment hardware sales, decreased to $995,428 for the three months
ended September 30, 1998 compared to $2,168,944 during the same period in
1997. The decrease in contract revenue during the three months ended
September 30, 1998 versus 1997 is primarily due to certain BETEX product
sales by Vicorp completed during the three months ended September 30,
1997, which did not recur during the same period in 1998. In addition,
certain ESP product sales to MCI were completed in 1997 which did not
recur during the same period in 1998.
Service and Support
Service and support revenue, consisting primarily of custom
development services, maintenance services, and service bureau services,
decreased to $4,587,435 for the three months ended September 30, 1998,
compared to $6,270,975 for the three months ended September 30, 1997.
Service and support provided to MCI decreased to $331,007 for the
three months ended September 30, 1998, compared to $498,383 for the three
months ended September 30, 1997. Maintenance revenue generated from MCI
regarding its ESP equipment decreased to $331,007 for the three months
ended September 30, 1998, compared to $471,294 for the same period in
1997. In addition, the Company generated no service and support revenue
relating to its software development services provided to MCI during the
three months ended September 30, 1998, compared to $27,089 generated
during the same period in 1997.
Service and support revenue for Vicorp BETEX products de7. Vicorp's
service and support revenue includes maintenance and custom development
services provided to its customers.<PAGE>
Service and support revenue for BFD increased to $919,006 for the
three months ended September 30, 1998, compared to $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 Fee Revenue
License fee revenue increased to $3,235,405 for the three months
ended September 30, 1998, compared to $2,880,284 for the three months
ended September 30, 1997. License fee revenue for the three months ended
September 30, 1998, relating to the Company's BETEX product line was
$1,146,638 and $88,767 for the UniPort product line. The Company
anticipates generating future license fee revenue for its BETEX and
UniPort products, although no assurance can be given for such future
revenue.
The Company recognized $2,000,000 in license fee revenue during the
three months ended September 30, 1998, relating to the sale of a computer
software program (the "Sale") developed by the Company to a third-party
computer manufacturer, including the transfer of certain Company
personnel and development and laboratory equipment.
Cost of Sales
Cost of sales decreased to $4,212,762 (48 percent of revenue) for the
three months ended September 30, 1998, compared to $4,829,309 (43 percent
of revenue) for the three months ended September 30, 1997. Additionally,
the Company's gross margin decreased to $4,605,506 (52 percent of
revenue) for the three months ended September 30, 1998, compared to
$6,490,894 (57 percent of revenue) for the three months ended September
30, 1997. The primary reason for the decrease in the Company's gross
margin dollar amount is a decrease in the Company's total revenue. The
decrease in the Company's gross margin percentage for the three months
ended September 30, 1998, relates to lower margin service and support
sales versus the same period in 1997.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased to $3,810,972
for the three months ended September 30, 1998, compared to $4,863,487 for
the three months ended September 30, 1997. The decrease in selling,
general and administrative expenses for the three months ended September
30, 1998, 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 office closings, with related headcount reductions of
approximately 58 individuals during 1998. The Company also improved its
controls and accountability for the use of third party professional
vendors (legal, public relations, management consultants, etc.) and
independent contractors.<PAGE>
Research, Engineering and Development
Research, engineering and development expenses d68 for the three
months ended September 30, 1997. The decrease in research, engineering
and development expenses primarily relates to the reduction in
development work associated with the Company's BETEX and UniPort
products. However, resources will continue to be directed toward product
improvements and enhancements for future purchased releases of the
Company's products. Additionally, the Company will continue to evaluate
its different product lines to maximize the impact of the research,
engineering and development expenditures.
The Company believes it operates in a highly competitive market; and,
in order to maintain a competitive position, the Company's existing
products must be continually improved and new products must be developed.
The amount and timing of future research, engineering, and development
expenditures will depend upon, among other factors, future new contract
revenue and the Company's ability to fund these costs from future
operating cash flow and bank or other forms of financing.
Depreciation and Amortization
Depreciation and amortization was $777,219 for the three months ended
September 30, 1998, compared to $1,699,246 for the three months ended
September 30, 1997. The decrease is primarily due to amortization
expenses incurred during the three months ended September 30, 1997,
relating to intangible assets acquired with The Renaissance Group,
Vicorp, and BFD acquisitions that were written off during the fourth
quarter of 1997 and, therefore, created no amortization during the 1998
period.
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 liabi the period that includes the
enactment date.
Interest Income (Expense)
For the three months ended September 30, 1998, net interest (expense)
income was ($114,912) compared to $53,102 during the same period in 1997.
The increase in net interest expense is primarily due to the decrease in
the Company's interest bearing cash and cash equivalent amounts, the
issuance of promissory notes of $6,000,000 on September 30, 1997 that
bear interest at 8 percent, and the issuance of notes of $3,000,000
during 1998 that bear interest at 9.5 percent.<PAGE>
Nine Months Ended September 30, 1998, Compared
to Nine Months Ended September 30, 1997
Total Revenues
Effective January 1, 1998, the Company adopted the American Institute
of Certified Public Accountants ("AICPA") Statement of Position ("SOP")
97-2, "Software Revenue Recognition." Adoption of SOP 97-2 did not have a
material impact on the financial condition or the results of operations
of the Company.
Total revenues decreased to $24,920,576 for the nine months ended
September 30, 1998, compared to $33,462,000 for the nine months ended
September 30, 1997. The various components of revenue fluctuated as
explained below.
Contract Revenue
Contract revenue, consisting primarily of telecommunications
equipment hardware sales, decreased to $3,324,227 for the nine months
ended September 30, 1998, compared to $8,191,554 during the same period
in 1997. The decrease in contract revenue during the nine months ended
September 30, 1998 versus 1997 is primarily due to certain BETEX product
sales by Vicorp completed during the nine months ended September 30,
1997, which did not recur during the same period in 1998. Additionally,
certain ESP product sales to MCI were completed in 1997 which did not
recur during the same period in 1998.
Service and Support
Service and support revenue, consisting primarily of custom
development services, maintenance services, and service bureau services,
decreased to $15,797,654 for the nine months ended September 30, 1998,
compared to $17,655,180 for the nine months ended September 30, 1997.
Service and support provided to MCI decreased to $1,157,938 for the
nine months ended September 30, 1998, compared to $1,519,207 for the nine
months ended September 30, 1997. Maintenance revenue generated from MCI
regarding its ESP equipment decreased to $1,152,075 for the nine months
ended September 30, 1998, compared to $1,375,362 for the same period in
1997. In addition, the Company's service and support revenue relating to
its software development services provided to MCI decreased to $5,863 for
the nine months ended September 30, 1998, from $143,845 for the same
period in 1997.
Service and support revenue for Vicorp BETEX products decreased
toport revenue includes maintenance and custom development services
provided to its customers.<PAGE>
Service and support revenue for BFD increased to $2,824,316 for the
nine months ended September 30, 1998, compared to $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 Fee Revenue
License fee revenue decreased to $5,798,695 for the nine months ended
September 30, 1998, compared to $7,615,266 for the nine months ended
September 30, 1997. License fee revenue for the nine months ended
September 30, 1998, relating to its BETEX product line was $3,404,853 and
$2,393,842 for the UniPort product line. The Company anticipates
generating future license fee revenue for its BETEX and UniPort products,
although no assurance can be given for such future revenue.
The Company recognized $2,000,000 in license fee revenue during the
three months ended September 30, 1998, relating to the sale of a computer
software program (the "Sale") developed by the Company to a third-party
computer manufacturer, including the transfer of certain Company
personnel and development and laboratory equipment.
Cost of Sales
Cost of sales decreased to $13,015,159 (52 percent of revenue) for
the nine months ended September 30, 1998, compared to $14,336,846 (43
percent of revenue) for the nine months ended September 30, 1997.
Additionally, the Company's gross margin decreased to $11,905,417 (48
percent of revenue) for the nine months ended September 30, 1998,
compared to $19,125,154 (57 percent of revenue) for the nine months ended
September 30, 1997. The primary reason for the decrease in the Company's
gross margin dollar amount is a decrease 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, 1998, related
to lower margin service and support sales versus the same period in 1997.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased to $15,604,709
for the nine months ended September 30, 1998, compared to $16,008,265 for
the nine months ended September 30, 1997. The decrease in selling,
general and administrative expenses for the nine months ended September
30, 1998, 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 office closings, with related headcount reductions of
approximately 58 individuals during 1998. The Company also improved its
controls and accountability for the use of third party professional
vendors (legal, public relations, management consultants, etc.) and
independent contractors. Offsetting these cost saf 1998 of approximately
$2,500,000 relating to the office closings and associated headcount
reductions.<PAGE>
Research, Engineering and Development
Research, engineering and development expenses decreased to
$2,815,430 for the nine months ended September 30, 1998, compared to
$3,547,634 for the nine months ended September 30, 1997. The decrease in
research, engineering and development expenses primarily relates to the
reduction in development work associated with the Company's BETEX and
UniPort products. However, resources will continue to be directed toward
product improvements and enhancements for future purchased releases of
the Company's products. Additionally, the Company will continue to
evaluate its different product lines to maximize the impact of the
research, engineering and development expenditures.
The Company believes it operates in a highly competitive market; and,
in order to maintain a competitive position, the Company's existing
products must be continually improved and new products must be developed.
The amount and timing of future research, engineering, and development
expenditures will depend upon, among other factors, future new contract
revenue and the Company's ability to fund these costs from future
operating cash flow and bank or other forms of financing.
Depreciation and Amortization
Depreciation and amortization was $2,455,427 for the nine months
ended September 30, 1998, compared to $5,164,107 for the nine months
ended September 30, 1997. The decrease is primarily due to amortization
expenses incurred during the nine months ended September 30, 1997,
relating to intangible assets acquired with The Renaissance Group, Vicorp
and BFD acquisitions that were written off during the fourth quarter of
1997 and, therefore, created no amortization during the 1998 period.
Income Tax Expense
The Company uses the asset and liability method to account for
deferred income tmporary 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 nine months ended September 30, 1998, net interest (expense)
income was ($608,941) compared to $20,891 during the same period in 1997.
The increase in net interest expense is primarily due to the decrease in
the Company's interest-bearing cash and cash equivalent amounts and the
issuance of promissory notes of $6,000,000 on September 30, 1997, that
bear interest at 8 percent and notes of $3,000,000 issued during 1998
that bear interest at 9.5 percent.<PAGE>
Litigation
Reference is made to the legal proceedings described at Part 1, Item
3, in the Company's December 31, 1997, Form 10-K. The Company is subject
to certain legal actions arising in the normal course of business. After
taking into consideration legal counsel's evaluation of such actions,
management is of the opinion that their final resolution will not have
any significant adverse effect upon the Company's business or its
consolidated financial statements.
Financial Position, Liquidity, and Capital Resources
At September 30, 1998, the Company had working capital deficiency of
$10,521,716 compared to net working capital of $3,591,655 at December 31,
1997. The decrease in net working capital is due in part to notes
maturing in January 1999 issued to the Company's shareholders in
September 1997. The Company expects that in 1998, as in 1997, the Company
will require additional external sources of capital to fund its
operations, including working capital needs. The Company's Board of
Directors formed a special committee for the purpose of analyzing
additional external sources of capital that may be available to the
Company and that can be accessed during 1998. The Company has already
taken steps regarding the improvement of its cash flow and cash position,
including:
* Retained an investment banking firm to assist in the development
and evaluation of future strategic initiatives, including
potential financing opportunities;
* Analyzing opportunities to sell certain non-core assets, including
real estate; and
* Implemented a restructuring plan to reduce operating expenses.
In April 1998, Precision Systems, Inc. announced that its Board of
Directors approved and the Company entered into a definitive agreement
(the "Agreement") with various privately held entities controlled by Roy
M. Speer to acquire a controlling interest in the Company. The
transaction is valued at approximately $100 million and is subject to
shareholder and certain antitrust and regulatory approvals and other
customary conditions.
Under terms of the Agreement, which was initially proposed on March
6, 1998, the Speer entities (Speer Communication Holdings Limited
Partnership, Speer WorldWide Digital Transmission and Vaulting Limited
Partnership, Speer Virtual Media Limited Partnership, and Speer
Productions Limited Partnership) will contribute to Precision Systems
$15,000,000 in cash and their digital storage, audiovisual production and
telecommunications assets and businesses in Nashville, Tennessee, and
Washington, D.C., in exchange for approximately 105,000,000 shares of
Precision Systems' common stock (the "Property Contribution"). The
Agreement permits Speer, in its sole discretion, to consummate an
alternative transaction in lieu of the Property Contribution, whereby
Speer may elect to transfer all of the assets and liabilities of Speer
Virtual Media Limited Partnership, plus $36,000,000 in cash in exchange
for 41,000,000 shares of Common Stock of the Company(the "Cash
Contribution").<PAGE>
The Agreement further contemplates that all debt and preferred stock
of the Company held by its major stockholders will be converted into
common stock at the rate of $1.00 per share. The agreement provides for
a $5,000,000 line of credit to be made available by Speer upon signing of
the Agreement for operating capital requirements. As of November 13,
1998, the Company's outstanding balance owed on the line of credit was
$3,750,000. After the transaction, Mr. Speer will control over 80
percent of the outstanding stock of Precision Systems. Mr. Speer
currently controls RMS Limited Partnership, an entity that is one of
Precision Systems' major stockholders. RMS L.P. will also contribute
certain real estate in Nashville as part of the transaction. Due to the
"change in control" nature of the Agreement, the Company's shareholders
will vote, among other matters, by proxy statement regarding the
Agreement. As of November 13, 1998, the Company's preliminary proxy
statement has been filed with the Securities and Exchange Commission (the
"SEC") and is in the final stages of review. Once SEC approval has been
obtained, the Company will mail out the proxy statement to its
shareholders.
The Company's accounts and contracts receivable decreased to
$7,566,107 as of September 30, 1998, from $9,657,355 as of December 31,
1997. The decrease is primarily due to collection of certain receivables
outstanding at December 31, 1997, as well as an overall reduction in
revenue during the nine months ended September 30, 1998.
The Company's supplies and other current assets increased to
$2,791,603 as of September 30, 1998, from $1,980,451 as of December 31,
1997. The increase is primarily due to an increase in certain deferred
acquisition related costs relating to the pending Agreement with Speer.
The Company's costs and earnings in excess of billings on uncompleted
contracts decreasedciated with the completion of certain BETEX product
delivery contracts that were in process for its customers. Such amounts
as of September 30, 1998, are expected to be fully billed by March 31,
1999.
The Company's current portion of long-term debt increased to
$9,115,309 as of September 30, 1998, from $294,375 as of December 31,
1997. The Company's long-term debt decreased to $221,488 as of September
30, 1998, from $6,240,184 as of December 31, 1997. The increase in the
current portion of long-term debt and the decrease in long-term debt is
due to a reclassification of $6,000,000 in promissory notes maturing in
January 1999 and to the Company's borrowing of an additional $3,000,000
during 1998. If the Agreement with Speer is approved by the shareholders,
the $6,000,000 of debt and related accrued interest will be converted
into common stock at a rate of $1 per share. In addition, the repayment
of the $3,000,000 loan from Speer may be forgiven, and the amount of cash
required to be delivered by Speer on the closing date may be reduced by
an amount equal to the principal and unpaid interest on the loan.<PAGE>
The Company's accounts payable decreased to $4,757,192 as of
September 30, 1998, from $5,505,996 as of December 31, 1997. The decrease
is primarily due to the timing of certain vendor payments.
The Company's accrued expenses increased to $8,453,882 as of
September 30, 1998, from $6,110,800 as of December 31, 1997. The increase
is primarily due to accrued restructuring charges of approximately
$2,011,000 as of September 1998 and an increase in accrued interest on
shareholder notes. The accrued restructuring charges are expected to be
approximately $750,000 by December 31, 1998.
The Company's billings in excess of costs and earnings on uncompleted
contracts decreased to $2,124,590 as of September 30, 1998, from
$2,780,251 as of December 31, 1997. The decrease is primarily associated
with the completion of certain BETEX software development contracts in
process for its customers.
The Company's deferred revenue balance decreased to $1,050,367 as of
September 30, 1998, from $1,270,825 as of December 31, 1997. The
Company's deferred revenue balance primarily represents prepaid
maintenance contracts for services to be provided to its customers.
The Company incurred approximately $1,363,000 in expenditures for
capital assets during the nine months ended September 30, 1998. Future
levels of carms of financing which may or may not be available to the
Company upon acceptable terms and conditions.
Readiness for Year 2000
The Company is in the process of developing a plan to identify and
resolve all of its issues relating to the "Year 2000" problems relating
to its business. The Year 2000 problem is the result of computer programs
being written using two digits (rather than four) to define the
applicable year. Software programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in a major system failure or miscalculations. This
issue affects the Company's internal information systems and could impact
software systems sold and delivered to customers. Various task forces
have been formed to assess the scope of the Company's risks in this area
and bring applications into compliance. To date, the Company has
experienced very few problems relating to Year 2000 testing and those
identified have been fixed in the Company's day-to-day operating
environment. The Company has also started coordinating with vendors about
their progress in identifying and addressing problems that their computer
systems may face in correctly processing date information relating to the
Year 2000. The Company intends to continue its efforts to monitor the
Year 2000 compliance of vendors. In the event any third parties cannot
timely provide the Company with products that meet the Year 2000
requirements, then the Company's abilities to offer its products and
services could be materially adversely affected. The cost incurred by the
Company during 1998 to address Year 2000 compliance was less than
approximately $500,000. The Company estimates it will incur less than
approximately $500,000 in direct costs during 1999 to support its<PAGE>
compliance initiatives. Although the Company expects its systems to be
Year 2000 compliant on or before December 31, 1999, it cannot predict the
outcome or the success of its Year 2000 programs, or that third party
systems are or will be Year 2000 compliant, or that the costs required to
address the Year 2000 issue will not exceed its estimates, or that the
impact of a failure to achieve substantial Year 2000 compliance, will not
have a material adverse effect on the Company's businesses, financial
conditions, or results of operations. In addition, the Company's business
may be materially adversely affected in the event that its customers'
systems are not Year 2000 compliant to the extent that such (i)
customers' systems are not compatible with those products or services
offered by the Company or (ii) customers delay purchase of products or
services from the Company while such customers' systems are made Year
2000 compliant. The Company has not adopted a contingency plan to address
possible risks to its systems.
Other Matters
During the three months ended September 30, 1998, Willem Huisman
resigned as Chairman of the Board, President and Chief Executive Officer
and Gregory L. Baltzer resigned as Chief Opernneth M. Clinebell, the
Company's Chief Financial Officer, was appointed by the Board of
Directors as interim President and interim Chief Executive Officer.
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<PAGE>
* 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.
* The Company's reliance on large sales orders that increase the
risk of significant revenue fluctuations, from quarter to quarter
and year to year.
* The Company's ability to generate sufficient cash, from operations
or from external sources, to fund its global operations.
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.
<PAGE>
PART II OTHER INFORMATION
Item 1 - Legal Proceedings
Reference is made to the legal proceedings described at Part 1, Item
3, in the Company's December 31, 1997, Form 10-K. The Company is subject
to certain legal actions arising in the normal course of business. After
taking into consideration legal counsel's evaluation of such actions,
management is of the opinion that their final resolution will not have
any significant adverse effect upon the Company's business or its
consolidated financial statements.
Item 2 - Changes In Securities
None
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule (for SEC use only)<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
PRECISION SYSTEMS, INC.
By: /S/ KENNETH M. CLINEBELL
---------------------------
Kenneth M. Clinebell
President and Chief Financial Officer
November 13, 1998
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 13,
1998.
Signature Title
----------------------------- --------------------------------------
/s/ KENNETH M. CLINEBELL President and Chief Financial Officer
----------------------------- (Principal Financial Officer)
Kenneth M. Clinebell
/s/ CARLA K. NEWSOME Controller
----------------------------- (Principal Accounting Officer)
Carla K. Newsome<PAGE>
[ARTICLE] 5
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-END] SEP-30-1998
[CASH] $2,338,418
[SECURITIES] $0
[RECEIVABLES] $8,103,899
[ALLOWANCES] $537,792
[INVENTORY] $0
[CURRENT-ASSETS] $14,979,624
[PP&E] $36,625,430
[DEPRECIATION] $28,954,792
[TOTAL-ASSETS] $22,692,681
[CURRENT-LIABILITIES] $25,501,340
[BONDS] $0
[PREFERRED-MANDATORY] $0
[PREFERRED] $145
[COMMON] $179,861
[OTHER-SE] $(3,210,153)
[TOTAL-LIABILITY-AND-EQUITY] $22,692,681
[SALES] $3,324,227
[TOTAL-REVENUES] $24,920,576
[CGS] $13,015,159
[TOTAL-COSTS] $13,015,159
[OTHER-EXPENSES] $20,875,566
[LOSS-PROVISION] $0
[INTEREST-EXPENSE] $608,941
[INCOME-PRETAX] $(9,579,090)
[INCOME-TAX] $0
[INCOME-CONTINUING] $(9,579,090)
[DISCONTINUED] $0
[EXTRAORDINARY] $0
[CHANGES] $0
[NET-INCOME] $(9,579,090)
[EPS-PRIMARY] $(.54)
[EPS-DILUTED] $(.54)
</TABLE>
