SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
AMENDMENT NO. 2
TO
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) for the Fiscal Year Ended
December 31, 1997, of the Securities Exchange Act of 1934 [Fee
Required]
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________to______________
Commission File No. 000-20068
PRECISION SYSTEMS, INC.
-----------------------
(Exact name of registrant as specified in its charter)
Delaware 41-1425909
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11800 30th Court North, St. Petersburg, Florida 33716
(Address of registrant's principal executive offices, including zip code)
(813) 572-9300
(Registrant's telephone number, including area code)
---------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of Name of Exchange
Each Class Registered
---------- ----------
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K/A or any
amendment to this Form 10-K/A. [ ]
As of March 12, 1998, there were outstanding 17,779,537 shares of
Common Stock, 10,000 shares of Series A preferred stock and 4,500 shares of
Series B preferred stock. The aggregate market value of the voting stock held by
non-affiliates of the registrant as of March 12, 1998, was $25,566,974.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
------------------------
DOCUMENTS INCORPORATED BY REFERENCE:
Documents Form 10-K/A Reference
--------- ---------------------
The registrant hereby incorporates by reference in this report the
information required by Part III appearing in the registrant's proxy statement
or information distributed in connection with the 1998 Annual Meeting of
Shareholders of the registrant.
<PAGE>
<TABLE>
<CAPTION>
PRECISION SYSTEMS, INC.
Form 10-K/A
TABLE OF CONTENTS
PAGE NO.
<S> <C>
PART I
Item 1 Business........................................................................................1
Item 2 Properties.....................................................................................10
Item 3 Legal Proceedings..............................................................................10
Item 4 Submission of Matters to a vote of Security Holders............................................12
PART II
Item 5 Market Price of and Dividends on the Registrant's Common Stock and
Related Stockholder Matters..................................................................12
Item 6 Selected Financial Data........................................................................12
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................................13
Item 8 Financial Statements...........................................................................26
PART III
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures........................................................................51
Item 10 Directors and Executive Officers of the Registrant............................................51
Item 11 Executive Compensation........................................................................52
Item 12 Security Ownership of Certain Beneficial Owners and Management................................60
Item 13 Certain Relationships and Related Transactions................................................63
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K...............................64
</TABLE>
<PAGE>
PART I
Item 1 -- Business
GENERAL
Precision Systems, Inc. (the "Company" or "PSI"), is a global company that,
together with its subsidiaries, delivers telecommunications solutions to service
providers and corporations. The Company offers three categories of products: (1)
network-based telecommunications products; (2) customer premises equipment
products; and (3) service bureau transactional offerings. Headquartered in St.
Petersburg, Florida, the Company has sales and support offices worldwide.
On April 16, 1996, the Company acquired substantially all of the capital
stock of Vicorp N.V. ("Vicorp"). Vicorp provides advanced telephony and call
processing solutions to customers in the Americas, Europe, and the Asia-Pacific
regions through its offices worldwide.
On October 7, 1996, the Company acquired BFD Productions, Inc. ("BFD"), a
telecommunications service bureau that offers call processing in the United
States and Canada via 800, 888, 900, and local phone numbers.
The Company has chosen to use its Vicorp(TM) brand name to sell its
network-based platforms and its customer premises equipment products. The
Company uses its BFD Productions brand name to sell its service bureau products.
THE COMPANY'S PRODUCTS
The Company's products fall into three categories: network-based
telecommunications products, customer premises equipment products, and service
bureau transactional offerings. The Company supplies different combinations of
products to each of these three categories.
In each of the three categories mentioned above, the Company has a
different set of customers and uses its core technology to deliver unique
solutions.
<TABLE>
<CAPTION>
CATEGORY CUSTOMER SET PRODUCTS
-------- ------------ --------
<S> <C> <C>
1. Network-based Large Enhanced services including calling
telecommunications telecommunications cards, prepaid cards, prepaid wireless,
products carriers enhanced toll-free, and general
purpose service nodes
2. Customer premises Call centers and Multimedia interactive customer
equipment products customer contact service platforms that manage
centers in corporations call routing, present scripted
customer data on the terminals
of service representatives, and
provide management reporting
capabilities
3. Service bureau Government and Fully-automated telephony-based
transactional corporations enhanced services
offerings
</TABLE>
NETWORK-BASED TELECOMMUNICATIONS PRODUCTS
The Company's two primary network-based telecommunications products are an
enhanced calling suite, consisting of calling cards, prepaid cards, and prepaid
wireless; and enhanced toll-free routing.
1
<PAGE>
Enhanced Calling Suite. The Company refers to its enhanced calling suite as
Lydian(TM). In a typical Lydian calling card installation, the carrier would ask
their calling card customers to dial a toll-free number (800 or 888 in the
United States, standards vary per country internationally) and enter a secured
personal identification number ("PIN") to make calls. These toll-free calls
would be routed to a Lydian platform where the PIN would be processed and the
customer would be allowed to make outgoing calls.
Typically, calling card users are billed at month-end for all of the usage
they incur during the month. Lydian also supports prepaid calling for callers
with limited credit associated with specific PINs. These prepaid customers pay
in advance for long distance calling, and they are allowed to use their account
until the advance payment is exhausted. The Lydian prepaid calling card
application is available to wireline and wireless telecommunications companies.
Lydian is designed with built-in flexibility. This allows
telecommunications carriers to easily modify menus and prompts using the
Company's graphical service creation environment (see "QuickScript" under the
"Middleware" section below). In addition, configurable options in Lydian let
carriers add enhanced features, such as project accounting codes and special
pricing promotions.
Enhanced Toll-Free Routing. The Company's enhanced toll-free routing
application allows telecommunications carriers to tailor toll-free
(800/888/freephone) services to the needs of their customers. In a typical
example, a caller to an enhanced 800 number might be asked to press one to go to
sales or two to transfer to the service center.
The Company has been a pioneer in the field of enhanced toll-free services
with its first installations at MCI and LDDS WorldCom in 1992. In 1997, four of
the five largest long distance carriers in the United States used the Company's
technology in some portion of their enhanced toll-free solution.
CUSTOMER PREMISES EQUIPMENT PRODUCTS
The Company's intelligent call center solution encompasses a range of
features and functionality designed to fit customer service needs. The Company's
VACCS(TM) product is its call center offering. VACCS manages call routing and
matches the call to information from the corporate data warehouse, which can be
presented on the screen of the customer service representative. The VACCS
product also can perform intelligent skill-based routing, and can handle
distributed call centers and remote agents. The Company offers a range of call
center options, up to a fully integrated multimedia call center solution.
The Company's call center solutions are used in the financial, insurance,
airline, retail, telco, and service bureau industries. The benefits of the
Company's intelligent call center solutions include reduced training costs,
streamlined maintenance activities, system-wide performance tracking, system
expandability, intelligent call transfer to attendants, and more self-serve
features for callers freeing up human and system resources.
VACCS uses the Company's graphical service creation environment,
QuickScript, with a call center specific scripting library. This enables the
creation of inbound, outbound, CTI, agent assist, and IVR services from one
single environment. The flexibility of QuickScript allows companies to easily
develop custom scripts for their agents. Two key components of the VACCS
product, its software automated call distribution and AgentStation, are
described below.
Software Automated Call Distribution ("ACD") (Skill-based Routing). This
product provides automatic call routing to certain individual(s) in a bank of
customer service representatives who either handle specific accounts, are an
expert in a specific area, or have skill sets necessary to process the call.
AgentStation. AgentStation presents any necessary information about the
call to the terminal of the customer service agent. This information might
include data entered by the caller, such as an account number, and/or data
retrieved from a corporate database, such as account history. This allows the
customer service agent to modify the conversation according to the customers and
their needs.
2
<PAGE>
SERVICE BUREAU TRANSACTIONAL OFFERING
The Company's third product category, its service bureau, is sold through
its BFD Productions, Inc. subsidiary. BFD sells 800, 888, and 900 services
directly to corporations and other entities. BFD's customers include government
agencies and large software entertainment companies who use BFD to provide video
game hint lines.
BFD offers custom applications to customers, but it has also developed a
suite of standard products that customers can select. These standard products
include:
Info-line/Lead Generator. This application can provide product or service
information to callers, and allows the callers to leave addresses to receive
more information.
Teleconferencing/Digital Playback. The basic form of this application
digitally records conference calls while they are in progress. Later, the
conference can be played back for review.
Dealer Locator. This application uses the caller's area code (which is
captured with Automatic Number Identification) and locates the nearest retailer
in the caller's geographic region.
Tele-survey/Agent Testing. This application conducts automated surveys,
testing, and other related applications. Results are available immediately for
analysis.
Credit Card Transactions. BFD has the ability to process credit card
transactions over 900, 800, and Internet so they can be incorporated into any
type of application.
Polling. Polling applications, which usually ask simple yes or no
questions, are very prevalent within the television and cable markets and
demand higher capacity call capability, which BFD can offer.
Fundraising. BFD's fundraising applications generated 200,000 minutes in
1997.
Broadcast Fax. BFD can deliver up to 12,000 simultaneous faxes.
Authorized Access/Pin Codes. By encoding parameters within personal
identification numbers, access to an application can be controlled. Extensive
tracking is also available.
Voice Messaging/Agent Alert. These products provide instantaneous up-to-date
information via pagers, telephones, fax machines, and computers.
Summary of Products
As mentioned earlier, the Company's products are segmented into three main
categories: (1) Network-based telecommunications products, which include Lydian
Enhanced Calling and Enhanced Toll-Free Routing; (2) Customer premises equipment
products consisting of the VACCS(TM) suite of call center applications; and (3)
Service bureau transactional offerings that include Info-line/Lead Generator,
Teleconferencing/Digital Playback, Dealer Locator, Tele-survey/Agent Testing,
Credit Card Transactions, Polling, Fundraising, Broadcast Fax, Authorized
Access/PIN Codes, and Voice Messaging/Agent Alert.
COMPONENT TECHNOLOGIES
Underlying all of these products are telephony platforms that have three
key components: applications, middleware, and hardware. Applications are
software programs that provide specific product capabilities (such as prepaid
calling features), from basic telephony building blocks provided by the
middleware. The middleware is a software layer between the applications and the
underlying computer operating system. Middleware adds telephony features, such
as switch control, to these operating systems. The hardware, and its associated
operating system, are industry standard, non-proprietary solutions from third
parties.
3
<PAGE>
This underlying platform infrastructure can be illustrated through the use
of an example. The table below shows a typical Lydian prepaid platform.
<TABLE>
<CAPTION>
COMPONENT
TECHNOLOGIES EXAMPLE EXPLANATION
------------ ------- -----------
<S> <C> <C>
Application Lydian Prepaid Calling Software that combines basic
telephony features provided by
the middleware into sophisticated
end user features. For prepaid
calling this includes: rating, card
management, and call dialogues.
Middleware QuickScript, BETEX(TM)-ESP Adds basic telephony features,
such as switch control,
to an industry-standard
operating system,
such as UNIX(R).
Hardware Server The Tandem NSK, or UNIX
computer, that runs the software
(Middleware and Application).
The software is the brains that
tells the other components what to do.
Vicorp Voice Response Units Provides interactivity with the
user, stores voice prompts,
and recognizes user key
strokes.
Programmable Switch Server Connects platform to the
telephone network.
</TABLE>
MIDDLEWARE COMPONENTS
Middleware adds telephony control features to the basic features provided
by industry standard operating systems and hardware. The Company uses several
different variations of its middleware depending on the exact needs of the
customer and the application.
The Company's middleware solution is its BETEX(TM)-Enhanced Services
Platform ("ESP"). The BETEX-ESP middleware provides application processing
functions, controls matrix switch resources, and controls voice/media resources
in a service node architecture. Middleware software includes network and device
driver layers, an open application programming interface, and a SQL database for
storing service data such as application scripts and user profiles.
The BETEX-ESP platform offers:
o A co-processing architecture supporting scalable, modular growth
o The ability to run multiple services on a common software and hardware
platform
o Support for integrated voice, data, and multimedia applications
o The ability to develop and integrate advanced consumer features with
advanced customer service interfaces using a single service creation
environment
o Support for more than 15 different languages
o Support for SS7, ISDN (national and international standards), E1, T1,
and R2 signalling
BETEX-ESP applications are built using QuickScript, a graphical service
creation environment for building applications and creating automated call
dialogues.
4
<PAGE>
QuickScript's capabilities can be easily expanded using C or C++ to write
custom QuickScript icons. QuickScript allows for prototyping and rapid
application development of BETEX-ESP services.
The Company's Lydian enhanced calling suite and the VACCS call center
solution were both built using QuickScript. Customers using these products often
utilize QuickScript to build customized versions of the products. The customers
can perform the customization themselves, but in many cases they rely on the
Company's integration and development expertise to build the final application.
Customers also use the Company's middleware as a starting point for
creating their own applications. Some of these customers rely on the Company's
application and telephony expertise to build their custom applications. Others
purchase the Company's middleware and build the applications themselves.
The Company's UniPort(R) middleware product provides an environment for
creating a multi-application call processing platform that can be integrated
into existing telephony networks. Using UniPort, the Company's customers can
build applications using an application programming interface.
HARDWARE COMPONENTS
In addition to applications and middleware, the third component to the
Company's platforms is the hardware. The hardware has three elements: (1) a
telephony network interface, (2) Voice Response Units (VRUs); and (3) a server.
The telephony network interface in many of the Company's applications is
provided by a programmable switch from either Summa Four or Excel Switching.
This switch provides highly reliable, large-scale interconnections at a
cost-effective price point. However, as circumstances require, the Company
utilizes VRUs to connect directly to the network, or develops interfaces for
connecting to a customer's existing switch hardware.
The VRUs, which are produced by the Company, provide many of the enhanced
features of the Company's solution platforms. They play and record prompts,
detect DTMF tones, and can even receive/send faxes or perform voice recognition.
The VRUs incorporate industry-standard hardware, including Pentium processors
and standard backplanes. The Company's VRUs are available in high-availability
configurations that include redundant, hot-pluggable power supplies and disk
drives.
The servers in the Company's platforms run the actual application code.
They contain the instructions that tell the programmable network interfaces and
VRUs what to do: what prompts to play, when to record input from callers, and
where to route the calls. They can also act as application processors. The exact
configuration depends upon the demand of the application. The Company supports
servers that run UNIX and fault-tolerant servers, such as NonStop servers from
Tandem.
MARKETS
The market for the Company's products has grown primarily due to worldwide
changes in the telecommunications industry. These changes include legislative
reforms, mergers, acquisitions, alliances, and a convergence of previously
segmented technologies. The global trends in telecommunications continue to
promote the use of enhanced services as a way for companies to differentiate
themselves from competition and possibly generate additional revenue. In
addition, companies in diverse industries worldwide are seeking ways to improve
customer service functions to expand their markets, sell more products or
services, and improve efficiency.
The global markets for the Company's products include: private and public
telecommunications operators, RBOCs, and wireline and wireless carriers; and
large corporate virtual private networks (with an emphasis on the financial,
insurance, retail, transportation, and service bureau industries). An emerging
class of carriers, the Competitive Local Exchange Carriers (CLECs), is providing
new markets for the Company's products, while increasing the market's interest
in services that lead to differentiation.
It is the Company's opinion that the convergence of technologies such as
the Internet, computers, cable, and telephony will produce positive conditions
for expanded deployment of enhanced services and call centers.
5
<PAGE>
Telephone companies typically need large capacity call processing systems
that adhere to stringent engineering requirements for telephone company central
office switching equipment. The Company's platforms have been designed to meet
these requirements. This market typically involves long sales cycles. The
Company also markets its products through companies with which it has partner
relationships. See "Sales", "Customers", "Backlog", and "Partner Relationships."
The market for BFD's service bureau transactional offerings is currently
the United States and Canada and is focused primarily on government,
quasi-governmental agencies, and business corporations (primarily software and
technology companies). The growth in automated free and fee-based customer
support in the computer software game industry, the information technology
market, the tourism industry, and the entrepreneurial market has increased the
demand for BFD's service bureau services.
The U.S. Market
The Telecommunications Act of 1996 has changed the landscape of the
communications industry in the United States. This legislation allows vendors in
different industries (e.g. cable) to compete outside of their traditional
service offerings thereby increasing competition. With service providers looking
for ways to become more competitive, the capability to add new services and
enhancements for their customers has become a priority. The Company believes
that its products enable service providers to offer enhanced telecommunications
services.
Another factor affecting the U.S. market is the continued development of
the wireless network infrastructure. The projected growth of the wireless market
and the associated demand for additional technologies is expected to create
continued demand for enhanced telecommunication services.
The Company's call center solutions that have had success in international
markets are suitable for introduction into the U.S. market. According to
industry sources, the installation of call centers in the U.S. is growing
rapidly especially in the financial services, telecom, technical support, and
retail banking sectors. The Company believes that many companies view call
centers as a strategic business asset, as opposed to a back office function,
replacing the face-to-face customer service that many companies can no longer
afford to offer. The Company considers its expertise and experience in
developing and delivering solutions for call centers internationally as a major
benefit for introducing this solution in the United States.
The International Markets
As in the U.S. market, changes in national legislation, mergers,
acquisitions, alliances, and technology convergence have created new companies
that are offering enhanced communications services to their corporate and
consumer markets in order to differentiate themselves from their competition.
In 1997, a new international General Agreement on Trade and Tariff ("GATT")
treaty was passed that the Company believes will lead to deregulation of over 95
percent of the world's telecommunications markets. The FCC has forecasted that
this treaty will lead to an 80 percent drop in international telecommunications
rates. Based on information released by the Clinton Administration in 1997, the
Company believes that this increased deregulation will open markets worldwide.
However, just as is the case with the U.S. Telecommunications Act of 1996, the
impact of GATT will occur gradually over the next two to five years with the
rate of change differing by country.
International growth trends for the Company are projected to be in wireline
and wireless applications and advanced call center applications. See "Partner
Relationships" and "Sales."
European Region
The European Union targeted January 1, 1998, as the date that member
countries will open their markets to competition. Some countries, most notably
the United Kingdom, Finland, and Sweden have shown more aggressive moves to open
their markets. Other countries moving in the direction of more liberal
deregulation, albeit at a slightly slower pace, include Germany and Denmark.
Currently, the Company is focusing its marketing efforts toward the Western
European countries.
6
<PAGE>
Asia-Pacific Region
In the Asia-Pacific region deregulation is being introduced in varying
degrees. Some countries within the Asia-Pacific region have restructured their
state-owned monopolies and invited competitors into their markets. Developing
countries in the process of building out their telecommunications
infrastructures have found that one of the primary factors for success is
capital investment. These infrastructure investments often come from outside
interests, including many Western companies with expertise and experience in
setting up Asia-Pacific telecom companies. The wireless marketplace in
Asia-Pacific is a hotbed of activity and competition. In 1997, the Company had
several successes in the Asia-Pacific wireless market, including its first
prepaid wireless product sale (part of the Lydian application suite). Prepaid
wireless is expected to be an important application for the Company.
Latin America Region
In Latin America, the Company is primarily marketing in Brazil, Chile, and
Argentina. These countries are in various stages of deregulation and have taken
steps towards privatization of their telephone networks.
COMPETITION
The worldwide telecommunications industry is highly competitive. The
Company believes that its main strengths include its worldwide reach, the
flexibility of its solutions, its network-grade platforms, and its innovative
approach. In addition, the Company is committed to ongoing research and
development ("R&D") efforts to strengthen existing products and develop new
products. The Company views its R&D efforts as essential to maintaining a
competitive position in the industry. See "Research and New Product
Development."
Worldwide Reach: The Company's worldwide reach includes product support for
international languages and interconnection standards, as well as the Company's
international sales and support organizations.
Flexibility: The flexibility of the Company's products, as embodied by its
QuickScript service creation environment, allows its customers to develop custom
applications that are built on the core of a reliable product.
Network Grade: The Company's customers have looked for highly reliable
products, and the Company's network-grade approach is apparent from the
reliability of its software to the fault-tolerant Tandem servers that are
available options in the Company's platforms.
Innovative: The flexibility of the Company's solutions allows its customers
to build custom solutions that address their emerging business needs.
Furthermore, since the Company uses open, off-the-shelf hardware, not
proprietary solutions, the Company is able to adapt its platforms to keep up
with emerging technology.
It is the Company's view that the deregulation underway or proposed in many
countries will continue to increase the opportunities for expansion of markets
for the Company's products.
Competitors
The Company believes its primary worldwide competition for Vicorp to be
Brite Voice Systems, Centigram, Comverse Technology, Digital Equipment
Corporation, Early Cloud, Ericsson, Genesys, IBM, IMA, Glenayre, Intellivoice,
InterVoice, Magellan, Nortel, Octel, Periphonics, Priority Call Management,
Rockwell, Siemens, Stratus, Tecnomen, Telsys, and Unisys. There are also
business opportunities that the Company pursues in partnership with some of
these same companies, either directly or through channel sales. See "Sales."
The Company believes its primary United States and Canadian competition for
BFD in the telco market to be Ameritech, AT&T, MCI, Sprint, Pacific Bell; and in
IVR call centers to be Call Interactive, Sheerers, ICG, ICN, Ideal Dial,
Infoworks, and West Interactive.
The Company expects to continue to face substantial competition from
existing and new competitors including other companies with considerably greater
financial, technical, marketing and sales resources. The Company also
anticipates that a number of its competitors will be introducing new or enhanced
products during the next several years.
7
<PAGE>
SALES
The Company principally markets to the telecommunications and call center
industries through direct sales and through business partners, including
international telecommunications and computer equipment providers. The Company
currently utilizes both a direct sales force and technical sales support
professionals, each of whom has technical expertise to explain the operating and
architectural advantages of the Company's products. In addition, the Company has
signed joint marketing and teaming arrangements with leading telecommunications
equipment manufacturers including Tandem Computers, Inc., and Hewlett-Packard.
Basic terms of these agreements include a one-to-three year non-exclusive
arrangement whereby the Company licenses its software for integration into these
companies' telecommunications products. In addition, such agreements may require
joint sales and marketing efforts and an open exchange of information regarding
potential customers and technology developments.
The Company's Original Equipment Manufacturers ("OEM") Partners Program
enables telco manufacturers to augment their current product offerings by
incorporating the Company's applications into their own enhanced services
platforms. The Company's OEM teams work with its telco partners to determine
program goals, application strategy, market positioning, and program support
requirements. Applications may be delivered via the Company's middleware
solution or through OEM specific APIs. Basic terms of these agreements include a
one-to-three year non-exclusive arrangement whereby the Company licenses its
software for integration into these companies' telecommunications products. In
addition, such agreements may require joint sales and marketing efforts and an
open exchange of information regarding potential customers and technology
developments. In 1997, the Company's OEM partners include Motorola, Northern
Telecom, and Summa Four, Inc.
BFD primarily markets to high technology, software, telecommunications and
call center industries.
CUSTOMER SUPPORT
The Company services and supports its customers through customer service
centers ("CSCs") that monitor customer systems and provide first-level telephone
support for customer-deployed systems. The CSCs also have service engineering
and field engineering resources that can be dispatched for additional levels of
in-field support. A configuration management group provides periodic software
releases and updates. Additionally, the Company provides customer and employee
training, as well as documentation for all installed systems.
For those carriers whose product installations require more extensive
system integration, the Company offers product support through local offices in
North America, Europe, and the Asia-Pacific region. The Company's teams of
experienced software and network engineers are available to assist customers
with application development, deployment, and system maintenance.
The Company's products are generally covered by three-month to one-year
warranties. Such warranties include parts and labor and support for software and
hardware components supplied by the Company to its customers. Warranty service
is provided at the customer's site or from one of the Company's service
locations. Generally, the Company recovers such costs through post-installation
customer support agreements. See "Customers."
BFD provides 24 x 7 support (24 hours per day, 7 days per week) to its
customers through customer service professionals, a team of project managers,
and after hours on-call personnel.
CUSTOMERS
During the year ended December 31, 1997, the four months ended December 31,
1996, and the year ended August 31, 1996, MCI and the Home Shopping Network
("HSN") combined represented approximately 6 percent, 9 percent, and 50 percent,
respectively, of the Company's revenue. Historically, the Company primarily sold
customized ESP products and provided support services to MCI and HSN. During the
year ended December 31, 1997, and the four months ended December 31, 1996,
revenue generated by ESP product sales to MCI was $0 and $229,590, respectively,
as compared to $10,339,053 and $9,722,768, respectively, for the years ended
August 31, 1996 and 1995. Service and support revenue from MCI and HSN was
$1,994,616 and $1,125,499, respectively, for the year ended December 31, 1997,
and the four months ended December 31, 1996, as compared to $3,041,006 and
$5,703,090, respectively, for the years ended August 31, 1996 and 1995. The
Company continues to market to MCI and expects to generate revenue from this
source. However, there is no assurance that any such negotiation will result in
an order from MCI. The Company does expect to continue providing MCI with
service and support for their ESP products.
8
<PAGE>
UniPort sales represented approximately 6 percent, 8 percent, and 8
percent, respectively, of the Company's revenue for the year ended December 31,
1997, the four months ended December 31, 1996, and the year ended August 31,
1996. Customers include large multinational telecommunication service and
equipment providers, both domestic and international. The Company expects
additional revenue from the sale of UniPort products during 1998.
BETEX sales represented approximately 80 percent, 80 percent, and 42
percent, respectively, of the Company's revenue for the year ended December 31,
1997, the four months ended December 31, 1996, and the year ended August 31,
1996. Customers include large multinational telecommunication service and
equipment providers, both domestic and international. The Company expects the
revenue generated from the sale of BETEX products to increase during fiscal
1998, both in gross terms and as a percentage of total revenue for the Company.
Because the Vicorp acquisition was accounted for as a purchase, the Company's
consolidated statements of operations include the operations for the year ended
August 31, 1996, of Vicorp from the acquisition date of April 16, 1996, through
August 31, 1996.
Service bureau sales represented approximately 8 percent and 2 percent,
respectively, of the Company's revenue for the year ended December 31, 1997, and
the four months ended December 31, 1996. Customers include governments,
quasi-governmental agencies, and corporations. The Company expects service
bureau revenue to increase during 1998. Because the BFD acquisition was
accounted for as a purchase, the Company's consolidated statements of operations
include the operations for the four months ended December 31, 1996, of BFD from
the acquisition date of October 1996 through December 31, 1996.
BACKLOG
The Company's backlog, including service and support agreements, at
December 31, 1997, was approximately $10,000,000 compared with approximately
$15,000,000 at December 31, 1996. Such amounts include all purchase orders and
signed contracts with scheduled shipments and deliverables.
MANUFACTURING PRODUCT AUDIT
The Company's manufacturing product audit operations consist of integrated
testing and quality assurance. In order to achieve a high standard of quality,
the Company maintains complete control of integrated quality assurance testing.
Sub-assemblies, supplied by local vendors, are frequently tested. The Company
strives to use standard parts and equipment for many of its products that are
readily available through multiple external sources. To date, the Company has
been able to obtain adequate supplies of essential components in a timely
manner. Approximately 20,000 square feet of space at the Company's 50,000 square
foot headquarters building is dedicated to system testing, quality control,
inventory storage, and other assembly activities.
RESEARCH AND NEW PRODUCT DEVELOPMENT
The Company has consolidated its research and new product development
efforts into two main areas:
o The Product Development Group is responsible for product enhancements
that will generate revenue over the 12 to 18 month life cycle of each
product. Each release represents a continuum of product updates and
improvements designed to extend and enhance the comprehensive life of
the product.
o The Core Products Group is responsible for long term development of
value-added tools and subsystems to enhance solutions packages such as
telecommunications enhanced services and customer connect.
In addition to active research and development, the Company also integrates
external technology within its platforms. During the past year, the Company has
integrated new switches, processors, and communications equipment. Part of the
Company's research and development activities also include ongoing efforts to
keep abreast of technical developments in the industry. This is a crucial factor
in keeping the Company in step with current and emerging trends as customers
require the integration of solutions and network standard technology. During the
year ended December 31, 1997, the four months ended December 31, 1996, and the
fiscal years ended August 31, 1996 and 1995, the Company spent approximately
$6.4 million, $2.0 million, $5.2 million, and $3.2 million, respectively, on
research and development activities.
9
<PAGE>
PRODUCT PROTECTION
The Company relies on a combination of trade secret, copyright, trademark
and patent laws; licenses; non-disclosure agreements; and technical measures to
protect its rights in its products. However, there can be no assurance that
these measures will fully protect the Company from the wrongful disclosure or
misappropriation of its proprietary information or rights.
TECHNOLOGY LICENSES
The Company acquires licenses from third parties for certain components
used in its middleware. Standard operating system software utilized in the
Company's products is licensed from various manufacturers. The Company, in turn,
assigns or sub-licenses the rights granted by these third parties to the
Company's customers as part of the software license that accompanies the sale of
the product.
EMPLOYEES
As of March 12, 1998, the Company employed 293 people on a full-time basis
and 15 people as independent contractors. The Company believes that its future
growth and success are dependent, in large part, upon its ability to continue to
attract and retain highly qualified personnel.
The Company believes that it offers attractive compensation packages,
including competitive salaries, bonus programs, and health benefits. There has
never been a work stoppage; employee relations are considered to be excellent.
None of the Company's employees are represented by a labor union.
Item 2 -- Properties
The Company's worldwide headquarters consists of approximately 50,000
square feet in St. Petersburg, Florida (USA), that includes administrative,
research, engineering, assembling, and marketing functions. This property was
acquired in November 1990. In addition, the Company leases approximately 5,000
square feet in Campbell, California (for sales, research, and engineering),
approximately 20,000 square feet in Boston, Massachusetts (for sales, research,
engineering, and marketing), approximately 15,000 square feet in Ratingen,
Germany (for sales, research, and engineering), approximately 20,000 square feet
in Utrecht, The Netherlands (for sales, marketing, and administrative), and
approximately 10,000 square feet in Las Vegas, Nevada (for sales, research,
engineering, marketing, and administrative).
In addition, in 1997 the Company maintained other offices in Dallas, Texas;
San Antonio, Texas; LaJolla, California; New York, New York; Brussels, Belgium;
Copenhagen, Denmark; Stockholm, Sweden; Helsinki, Finland; Windsor, United
Kingdom; Paris, France; Madrid, Spain; Milan, Italy; and Singapore.
Item 3 -- Legal Proceedings
The Company is subject to certain legal proceedings in the ordinary course
of business. The discussion below summarizes the most material of such
proceedings. In the opinion of management, these and other legal proceedings
will not have a material adverse effect on the operations or the financial
condition of the Company.
Rachael Lefkovits v. Hector Acalde, Bert Kolde, Kwang-I Yu, Willem Huisman,
Ian Dalziel, Francis R. Santangelo, and Precision Systems, Inc. On March 11,
1998, a class action lawsuit was filed in the Court of Chancery of the State of
Delaware in and for New Castle County, alleging breach of fiduciary duty by the
Directors of Precision Systems, Inc. in regard to the Exchange Transaction
proposed by Speer Communication Limited Partnership and Speer Virtual Media
Limited Partnership. The Complaint alleges, in part, that because the majority
shareholders of the Company (RMS, Alta, and Vulcan) will benefit from the
proposed transaction, and that because the proposal indicates that Directors
will be assured of continuation in office, that the Directors cannot, therefore,
fairly and independently act upon the proposal in the best interests of all
public shareholders. The Complaint seeks preliminary and permanent injunctive
relief, as well as compensatory damages. The Company believes these claims to be
without merit and will vigorously defend.
10
<PAGE>
InterVoice, Inc. v. Precision Systems, Inc. and Vicorp Interactive Systems,
Inc. On April 11, 1996 InterVoice, Inc. ("INTV") filed suit against the Company
in the Federal District Court for the Northern District of Texas (Dallas)
alleging infringement of various U.S. Patents owned by INTV and false
advertising. The parties settled this lawsuit on December 1, 1997. Under the
terms of the settlement, all counts were dismissed with prejudice, and the
Company is licensed to sell systems that practice the InterVoice patents. The
patents relate to the implementation of applications and services in the
Intelligent Network architecture that are capable of providing dual Intelligent
Peripheral and Service Node functionality. The InterVoice patents covered by the
license are U.S. Patents 5,469,500; 5,644,631; and 5,572,581. The settlement has
no material adverse financial impact on the Company.
Daniel Schultz v. Precision Systems, Inc. et al. On December 13, 1996,
following the dismissal of his federal court action alleging similar claims,
Daniel Schultz, a holder of Vicorp shares and options, filed a three-count
complaint against the Company; Russell I. Pillar; John Loewenberg; Alta; Didier
Primat; Primwest Holding, N.V.; and Ian Dalziel, in a civil action in the
Circuit Court of the Sixth Judicial Circuit In and For Pinellas County, Florida.
The complaint was later amended to allege seven counts. In Counts One and Two,
the plaintiff alleges that the Company and Messrs. Pillar and Loewenberg
fraudulently induced him to assist the Company in its acquisition of Vicorp by
representing to him that he would receive an executive position with Vicorp if
the acquisition was successful. In Counts Three through Six, the plaintiff
alleges that all the defendants intentionally interfered with his prospective
economic advantage and contractual relationships, and conspired to do so, by
impairing his ability to exercise his Vicorp options and his ability to convert
his Vicorp shares into shares of the stock of the Company. In Count Seven,
plaintiff alleges that the Company and Messrs. Pillar and Loewenberg breached an
oral contract to employ the plaintiff in an executive position. The case is in
discovery. The Company has defenses and will vigorously defend.
Daniel Gilbert Schultz v. Vicorp et al. This action was initiated in the
Court of First Instance, Curacao, Netherlands Antilles ("Court"), on March 29,
1996. The plaintiff filed a petition denominated a "complaint in summary
process" against Vicorp and Alta. The Company is not a party to this proceeding.
In this action, the plaintiff alleged that Vicorp had denied him access to the
books and records of Vicorp, and that Alta (as the then controlling shareholder
in Vicorp) had both refused to provide him access to Vicorp's records and
refused to give him information on Alta's negotiations with third parties for
the sale of its shares of Vicorp stock. The plaintiff further alleged that these
actions impaired his ability to exercise certain put and call options that he
held with respect to certain shares of the stock of Vicorp. The plaintiff sought
various court orders requiring Alta and Vicorp to provide certain financial data
to him, to record in the Vicorp share register the option he held, and to accept
and pay for certain of the Plaintiff's shares that were the subject of a put
option. The plaintiff also sought an order prohibiting Alta from reducing its
ownership interest in Vicorp. On May 17, 1996, the Court dismissed all of the
plaintiff's claims. The plaintiff appealed to the Court of Appeals of the
Netherlands Antilles and Aruba on June 3, 1996, and this appeal was dismissed on
September 23, 1997.
Daniel Gilbert Schultz v. Alta Investissements, S.A. et al. This action was
initiated in the Court of First Instance, Curacao, Netherlands Antilles on April
23, 1996. The plaintiff filed a petition denominated a petition "on an
abbreviated term" against Alta, the Company, and Vicorp. In his petition, the
plaintiff sought a court order nullifying both the transfer by Alta to the
Company of Alta's shares of Vicorp stock and the transfer by the Company to Alta
of certain shares of the Company's stock, both of which transfers were carried
out pursuant to the Share Exchange Agreement between the Company and Alta dated
April 13, 1996. The plaintiff alleged that insufficient notice was given to him
of a Vicorp shareholders' meeting at which a resolution approving the share
exchange was adopted, and that consequently the defendants breached a duty of
good faith towards him. The plaintiff seeks court orders annulling the two share
transfers, and prohibiting Vicorp from acting on any instructions received from
the Company. The Court has ruled in favor of the defendants and dismissed all
the plaintiff's claims. The plaintiff's time to appeal has expired without an
appeal being taken.
Daniel Gilbert Schultz v. Vicorp France S.A. et al. This action was
initiated in the French Labor Court (the "Conseil de Prud'hommes") on March 7,
1996. The plaintiff filed claims against both Vicorp France S.A. and Vicorp Asia
Holding arising out of his employment relationships with companies in the Vicorp
Group. The Company is not a party to this proceeding. The Plaintiff has alleged
that the two defendants are liable to him, under provisions of French law, for
damages for dismissal without real and serious cause, for damages for abusive
indemnity, for dismissal indemnities, and for a paid vacation indemnity. The
French Labor Court dismissed the plaintiff's claims, and the plaintiff has
appealed. Under the terms of the Share Exchange Agreement between the Company
and Alta, Alta has agreed to indemnify the Company and Vicorp against any
damages or liability imposed against Vicorp in connection with this action.
11
<PAGE>
Claim of Robert Maube. On March 13, 1997, Mr. Maube, a former employee of
Vicorp N.V., initiated an action in the Labour Court of Brussels, Belgium,
against the Belgian, Dutch and Swiss subsidiaries of Vicorp N.V. In the action,
Mr. Maube is seeking 34,166,134 Belgian Francs (approximately $979,900) in
connection with the termination of his employment. Such amount includes claims
for gross payments as indemnity in lieu of notice, holiday payments, year-end
premium payments, damages for an alleged abusive dismissal, additional
compensation and a prorated bonus. Mr. Maube has requested the Court to set a
briefing and oral argument schedule, but no such schedule has yet been
established. The Company has defenses and will defend vigorously.
Item 4 -- Submission of Matters to a Vote of Securities Holders
None.
PART II
Item 5 -- Market Price of and Dividends on the Registrant's Common Stock and
Related Stockholder Matters
<TABLE>
<CAPTION>
1997 High Low
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
From January 1, 1997, to March 31, 1997....................................... $ 5.875 $ 3.875
From April 1, 1997, to June 30, 1997.......................................... 5.125 2.688
From July 1, 1997, to September 30, 1997...................................... 4.375 2.313
From October 1, 1997, to December 31, 1997.................................... 5.063 2.000
1996 High Low
- -----------------------------------------------------------------------------------------------------------
From September 1, 1995, to November 30, 1995.................................. $ 13.840 $ 9.840
From December 1, 1995, to February 28, 1996................................... 13.000 9.630
From March 1, 1996, to May 31, 1996........................................... 14.960 11.130
From June 1, 1996, to August 31, 1996......................................... 11.540 6.630
From September 1, 1996, to December 31, 1996.................................. 9.130 4.500
</TABLE>
The Company's common stock trades on the Nasdaq Stock Market's SmallCap
Market(sm) under the symbol "PSYS" and trades on the Boston Stock Exchange
under the symbol "PNS." "The Nasdaq Stock Market's SmallCap Market" or "Nasdaq"
is a highly-regulated electronic securities market comprised of competing Market
Makers whose trading is supported by a communications network linking them to
quotation dissemination, trade reporting, and order execution systems. The
Company's closing trading price was $1.438 on March 12, 1998. The total number
of shareholders of record as of December 31, 1997, was approximately 5,500.
The Company has paid no cash dividends on its Common Stock to date. Any
payments of future dividends and the amounts thereof will be dependent upon the
Company's earnings, financial requirements, and other factors deemed relevant by
the Board of Directors.
The terms of the Company's Series A and Series B preferred stock precludes
the declaration of dividends on Common Stock for so long as dividends (and any
interest accrued on unpaid dividends) with respect to such preferred stock
remain unpaid. On July 1, 1996, RMS Limited Partnership, the sole owner of the
Company's Class B Common Stock, elected to convert all of its Class B Common
Stock into an equal number of shares of the Company's Common Stock. The Class B
Common Stock converted was retired and is not subject to reissue.
Item 6 -- Selected Financial Data
Precision Systems, Inc. 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.
12
<PAGE>
As discussed in Note 1 to the Consolidated Financial Statements, on
September 30, 1996, the Company elected to change its year end from August 31 to
December 31. This change was effective December 31, 1996. The selected
historical financial data for all fiscal years presented has been derived from
the audited financial statements of the Company. This historical data may not
necessarily reflect the results of operations or financial position had the
Company been a separate stand-alone company for the year ended August 31, 1992.
The Company's historical revenue and net loss activity has shown
significant fluctuations due primarily to the Company's reliance on a limited
customer base and to the large amount of funds expended on research and
development activities.
<TABLE>
<CAPTION>
Four
Year Months
Ended Ended
December 31, December 31, Years ended August 31,
1997 1996 1996 1995 1994 1993
--------------- --------------- ------------- -------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Statements of operations:
Revenues................... $ 40,612,387 $ 14,862,023 $ 26,702,827 $ 21,521,733 $ 8,890,595 $ 18,352,502
Loss from continuing
operations............... (26,058,716) (3,466,815) (34,693,961) (2,515,789) (17,656,211) (6,012,189)
Net loss................... (26,058,716) (3,466,815) (34,693,961) (2,648,344) (18,640,263) (6,231,906)
Basic and diluted loss from
continuing operations per
share.................... (1.48) (.20) (2.36) (.23) (1.98) (.68)
Basic and diluted net loss per
share.................... (1.48) (.20) (2.36) (.24) (2.09) (.71)
Balance sheet data at year end:
Net working capital........ 3,591,655 355,645 3,773,780 10,074,716 3,579,444 14,827,434
Total assets............... 28,475,553 49,194,375 47,557,346 27,372,925 30,410,378 32,282,062
Long-term debt............. 6,240,184 369,377 280,727 - - -
Stockholders' equity....... 6,273,122 27,461,113 27,848,808 22,962,099 19,439,897 28,976,438
</TABLE>
The net loss of $26,058,716 for the year ended December 31, 1997, includes
intangible asset write-downs of $14,285,907 and restructuring charges of
$654,722 associated with certain office closings and employee-related layoffs.
The net loss of $34,693,961 for the year ended August 31, 1996, includes large
write-offs for purchased in-process technology relating to the Vicorp
acquisition ($19,500,000), goodwill write-down ($3,829,000), and certain
restructuring charges ($1,093,000). The net loss for the year ended August 31,
1995, decreased dramatically when compared to the year ended December 31, 1994,
due to higher revenue streams from both the UniPort and the ESP products and to
successful efforts by the Company to manage and control costs. The net loss of
$18,640,263 for the year ended August 31, 1994, includes the effects of the
Company's changing its estimated average useful lives used to compute
depreciation for its computer equipment from five to six years to three years.
The effect of this change in estimate was to increase the Company's net loss by
approximately $4,000,000, or $.45 per share. The change did not affect cash
flow.
Basic and diluted net loss per share is based upon the weighted average
common and common equivalent shares outstanding. The diluted net loss
per share calculation does not include stock options, convertible securities and
warrants, which are Common Stock equivalents, as their inclusion would be
anti-dilutive.
Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations
In July 1987, HSN purchased and retired 100 percent of the issued and
outstanding stock of Precision Software, Inc., which was originally purchased by
HSN for the technology it created to support voice response units developed for
use in the operations of Home Shopping Club, Inc., a wholly-owned subsidiary of
HSN. The Company's name was subsequently changed to Precision Systems, Inc. This
original product line was the predecessor to the ESP.
In June 1990, the Company was awarded a contract for approximately
$15,600,000 by MCI to adapt the ESP for use in the carrier's long-distance
network. The contract was subsequently amended to increase the contract price to
approximately $34,000,000.
13
<PAGE>
On July 31, 1992 (the "Distribution Date"), HSN distributed 100 percent of
the stock of Precision Systems, Inc., to its existing shareholders on a pro-rata
basis.
During 1996, the Company's business strategy included focusing on core
products and technologies, developing strategic business relationships with
several international telecommunications and computer equipment providers,
improving marketing and sales efforts, and realigning cost structures to improve
cash flow. The Company also pursued opportunities for additional growth through
acquisitions and/or strategic investments. The Company acquired Vicorp and BFD
during 1996. Since the Vicorp and BFD acquisitions were accounted for as
purchases, the Company's 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. Therefore, the Company's past financial
performance should not be considered a reliable indication of future
performance.
A number of uncertainties exist that could have an impact on the Company's
future operating results, and financial condition including:
o 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.
o The various markets into which the Company sells its products are
undergoing significant changes with increasing demands for product
innovations.
o The Company must be successful in competing against many competitors,
many of which have significantly greater financial, technical,
marketing, and sales resources than the Company.
o The Company will be required to properly estimate costs under fixed
price contracts.
o Increased risk of litigation in the Company's industry resulting from
aggressive prosecutions of intellectual property claims.
o The Company's ability to retain its larger customers, including MCI.
o Availability of certain hardware and software components which are
incorporated with the Company's products and are purchased from a
limited number of vendors.
o The Company's ability to hire and retain qualified personnel.
o Legislative changes affecting the Company's markets, including the
Telecommunications Act of 1996.
o Given the Company's acquisition of Vicorp and its large presence in
international markets, regulatory, monetary and inflationary factors
can negatively impact the Company's operations in the future.
o The Company's reliance on large sales orders that increase the risk of
significant revenue fluctuations, from quarter to quarter and year to
year.
o 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. These
uncertainties, therefore, can affect the Company's ability to sell, deliver, and
install its products in a consistent manner. Consequently, the Company's past
financial performance should not be considered a reliable indication of future
performance and investors should not use historical trends to anticipate results
or trends in future periods. See "Financial Position, Liquidity and Capital
Resources."
14
<PAGE>
Fiscal Years Ended December 31, 1997 and December 31, 1996 (unaudited)
Total Revenues
Total revenues increased to $40,612,387 in fiscal 1997 compared to
$36,372,805 in fiscal 1996. The various components of revenue fluctuated as
explained below:
Contract Revenue
Contract revenue, consisting primarily of telecommunications equipment
hardware sales, decreased to $6,203,229 in fiscal 1997 compared to $11,055,923
in fiscal 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 $5,419,591 in fiscal 1997
compared to $3,797,166 in fiscal 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 1998.
Service and Support
Service and support revenue, consisting primarily of custom development
services, maintenance services, and service bureau services, increased to
$23,813,564 in fiscal 1997 compared to $17,539,456 in fiscal 1996.
Service and support provided to MCI decreased to $1,994,616 in fiscal 1997
compared to $2,097,900 in fiscal 1996. While total 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 in fiscal 1996.
Service and support provided to HSN decreased to $0 in fiscal 1997 compared
to $1,450,896 in fiscal 1996. The Company's HSN maintenance agreement ended
December 31, 1996.
Service and support revenue for Vicorp BETEX products was $18,480,724 in
fiscal 1997 compared to $12,988,430 in fiscal 1996. Vicorp's service and support
revenue includes maintenance and custom development services provided to its
customers.
Service and support revenue for BFD was $3,338,224 in fiscal 1997 compared
to $789,035 in fiscal 1996. Since the BFD acquisition was accounted for as a
purchase, the Company's consolidated statements of operations include the
operations of BFD since its acquisition date in October 1996. BFD's service and
support revenue primarily includes interactive voice response service bureau
activity.
License Fee Revenue
License fee revenue increased to $10,595,594 in fiscal 1997 compared to
$7,777,426 in fiscal 1996. License fee revenue for fiscal 1997, relating to its
BETEX product line, was $8,358,077 and $2,237,517 for the UniPort product line.
The primary reason for the increase in license fee revenue for fiscal 1997
relates to a higher level of BETEX products 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
Cost of sales increased to $15,152,116 in fiscal 1997 compared to
$11,529,527 in fiscal 1996. Additionally, the Company's gross margin increased
to $25,460,271 (63 percent of revenue) in fiscal 1997 compared to $24,843,278
(68 percent of revenue) in fiscal 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 in fiscal 1997 related to lower margin service and support services
versus the same period in 1996.
15
<PAGE>
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased to $23,421,901 in
fiscal 1997 compared to $27,164,205 in fiscal 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 the following:
o In the U.S. market, the Company decreased its payroll and related costs
due to consolidation and elimination of certain functions (i.e., sales
and marketing, product management, customer service), which generated
approximately $550,000 in savings.
o The Company improved its controls and accountability for use of third
party professional vendors (legal, public relations, management
consultants, etc.), which generated approximately $650,000 in
savings.
o The Company had a marketing partnership in 1997 where the partner
helped fund approximately $215,000 of the Company's marketing. In
addition, the Company had a more targeted marketing approach in 1997
that allowed for a reduction in broad-based advertising and tradeshow
expenditures of approximately $280,000.
o The Company reduced its bad debt expense by approximately $550,000 due
to improved results of receivable collection efforts.
o Although the Company has separate restructuring charges in both 1997
and 1996, the most recent year's charges were $450,000 less than 1996
due to a smaller number of headcount reductions.
o The Company eliminated certain lab and development equipment, which
reduced the related maintenance contract expense by approximately
$250,000.
The decrease in selling, general and administrative expenses is offset by
the increase relating to the acquisition of BFD. Selling, general and
administrative expenses associated with the acquisition of BFD was approximately
$3,335,433 in fiscal 1997 compared to $606,197 for the period in 1996 that BFD
was included in the Company's consolidated statement of operations.
Research, Engineering and Development
Research, engineering and development expenses increased to $6,416,539 in
fiscal 1997 compared to $5,988,089 in fiscal 1996. The increase in research,
engineering and development expenses primarily relates to further development
work associated with the Company's BETEX product. Resources will continue to be
directed toward product improvements and enhancements for future purchased
releases of the Company's products.
The Company believes it operates in a highly competitive market; and, in
order to maintain a competitive position, the Company's existing products must
be continually improved and new products must be developed. The amount and
timing of future research, engineering and development expenditures will depend
upon, among other factors, future new contract revenue and the Company's ability
to fund these costs from future operating cash flow and bank or other forms of
financing.
Depreciation and Amortization
Depreciation and amortization increased to $7,042,929 in fiscal 1997
compared to $6,208,328 in fiscal 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 in fiscal 1996
represents the purchase price allocation to in-process research and development
acquired through the Company's acquisition of Vicorp that had not yet reached
technological feasibility and had no alternative future use.
In April, 1996, the Company acquired substantially all the common stock of
Vicorp N.V. by issuing 3,135,467 shares of newly issued common stock. In
addition, the Company assigned certain outstanding obligations of Vicorp N.V.
and converted options issued to Vicorp employees into options to purchase the
Company's common stock. The Company originally allocated the excess purchase
price over the fair value of net tangible assets acquired to identifiable
intangible assets. In performing this allocation, the Company considered, among
other factors, the operating performance of Vicorp N.V.'s technologies being
sold to its customer base, and the research and development projects in-process
at the date of the acquisition. With regard to the in-process research and
development projects, the Company considered, among other factors, the stage of
development of in-process projects at the time of the acquisition, the
business-related importance of each project to the overall research and
development plan, and the projected incremental cash flows from the in-process
projects when completed and any associated risks. Associated risks include the
inherent difficulties and uncertainties in completing each project and thereby
achieving technological feasibility and risks related to the impact of potential
changes in future target markets.
The Company intended to incur in excess of $5 million, relating to payroll
and related costs, to develop the in-process technology into commercially viable
products from the acquisition date to 1999. The Company expected to benefit from
the purchased in-process research and development by 1999.
If these projects were not successfully developed, the Company might not
realize the value assigned to the in-process research and development projects.
In addition, the value of other acquired intangible assets might also become
impaired. The unsuccessful completion of these in-process research and
development efforts might have a material adverse effect on the Company's
financial position and operations.
From the April, 1996 acquisition date through December, 1997, the Company's
efforts at completing such in-process research and development projects were
unsuccessful and produced negative cash flows that significantly impacted the
Company's financial position and operations. Additionally, due to the Company's
continued negative results from operations, the remaining acquired intangible
assets were written-off in full during the fourth quarter of 1997.
16
<PAGE>
Impairment of Intangible Assets
In 1997, the Company reevaluated the recoverability of its recorded
intangible assets associated with its 1996 acquisitions of Vicorp and BFD. Based
on a review of the expected future discounted cash flows of the Company, it was
determined that a permanent impairment of the Vicorp and BFD associated
intangible assets existed. Consequently, the Company recorded a provision of
$14,285,907 to write off the net book value of all intangible assets associated
with these acquisitions.
In fiscal 1996, the Company reevaluated the realizability of the goodwill
associated with its fiscal 1994 acquisition of The Renaissance Group ("TRG").
Based on a review of the expected future discounted cash flows of TRG, the
Company determined that a material impairment of the TRG associated goodwill
existed. Consequently, a $3,829,424 write-down of the goodwill balance was
recorded in fiscal 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
In fiscal 1996, the Company had an investment gain of $371,218 relating to
its sale of marketable equity securities. No such gain occurred in fiscal 1997.
Interest (Expense) Income
In fiscal 1997, net interest expense was ($351,711) compared to $658,468 in
fiscal 1996. The increase in net interest expense 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 issued three
promissory notes of $2,000,000 each in September 1997, which bear interest at
8 percent.
Four Months Ended December 31, 1996 and December 31, 1995 (unaudited)
Total Revenues
Total revenues increased to $14,862,023 for the four months ended December
31, 1996, compared to $5,191,615 for the four months ended December 31, 1995.
The primary reason for the increase in revenue was that the Company acquired
Vicorp and BFD during 1996. Since the Vicorp and BFD acquisitions were accounted
for as purchases, the Company's statements of operations include the operations
of Vicorp since the acquisition date in April 1996 and the operations of BFD
since its acquisition date in October 1996. The various components of revenue
fluctuated as explained below:
Contract Revenue
Contract revenue, consisting primarily of telecommunications equipment
hardware sales, was $3,729,171 during the four months ended December 31, 1996,
compared to $4,110,355 for the four months ended December 31, 1995. The decrease
in contract revenue during the four months ended December 31, 1996, compared to
the four months ended December 31, 1995, is primarily due to certain ESP product
sales to MCI completed in 1995 that did not recur during the same period in
1996.
Contract revenue associated with Vicorp's BETEX products was approximately
$2,717,818 for the four months ended December 31, 1996. Since the Vicorp
acquisition was accounted for as a purchase, the Company's consolidated
statements of operations include the operations of Vicorp since the acquisition
date. The Company expects the revenue generated from the sale of BETEX products
to increase during 1997. Contract revenue for the four months ended December 31,
1995, represented certain ESP product sales to MCI that did not recur during the
same period in 1996.
17
<PAGE>
Service and Support
Service and support revenue, consisting primarily of custom development
services, maintenance services, and service bureau services, increased to
$7,959,984 for the four months ended December 31, 1996, compared to $956,539 for
the four months ended December 31, 1995.
Service and support provided to MCI increased to $643,733 for the four
months ended December 31, 1996, compared to $497,582 for the four months ended
December 31, 1995. Maintenance revenue generated from MCI regarding its ESP
equipment increased to $519,648 for the four months ended December 31, 1996,
compared to $335,920 for the four months ended December 31, 1995. The increase
in maintenance revenue primarily relates to additional ESP equipment delivered
to MCI during 1996 that is subject to the Company's maintenance services. In
addition, the Company's service and support revenue relating to its software
development services provided to MCI decreased to $0 for the four months ended
December 31, 1996, compared to $683,385 for the four months ended December 31,
1995. The decrease is due to certain non-recurring development projects
delivered to MCI, which occurred during the last four months of 1995. The
Company expects the service and support revenue generated through its
relationship with MCI to increase during the next year.
Service and support provided to HSN increased to $481,766 for the four
months ended December 31, 1996, compared to $478,958 for the four months ended
December 31, 1995.
Service and support revenue for Vicorp BETEX products was $6,035,449 for
the four months ended December 31, 1996. Vicorp's service and support revenue
includes maintenance and custom development services provided to its customers.
Service and support revenue for BFD was $789,035 from the acquisition date
to December 31, 1996. BFD's service and support revenue primarily includes
interactive voice response service bureau activity.
License Fee Revenue
License fee revenue for the four months ended December 31, 1996 was
$3,172,868 compared to $124,721 for the four months ended December 31, 1995.
License fee revenue for the four months ended December 31, 1996, relating to its
UniPort product line was $69,600 and $3,103,268 for the BETEX product line. The
Company anticipates generating future license fee revenue for its UniPort and
BETEX products, although no assurance can be given for such future revenue.
Cost of Sales
Cost of sales increased to $3,442,705 during the four months ended December
31, 1996, compared to $2,013,379 during the four months ended December 31, 1995.
Additionally, the Company's gross margin increased to $11,419,318 (77 percent of
revenue) for the four months ended December 31, 1996, compared to $3,178,236 (61
percent of revenue) for the four months ended December 31, 1995. The primary
reason for the increase in the Company's gross margin dollar amount is an
increase in the Company's total revenue. The increase 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 four months ended December 31,
1995, related to lower margin hardware sales compared to the four months ended
December 31, 1996.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $10,899,572 for
the four months ended December 31, 1996, compared to $3,474,272 for the four
months ended December 31, 1995. The increase in selling, general and
administrative expenses for the four months ended December 31, 1996 is primarily
due to the following:
o Selling, general and administrative expenses associated with the
acquisition of Vicorp was approximately $5,771,270.
o Selling, general and administrative expenses associated with the BFD
acquisition was approximately $606,197 from the acquisition date to
December 31, 1996.
18
<PAGE>
Although overall selling, general and administrative expenses from
continuing operations increased during the four months ended December 31, 1996,
in comparison to previous periods, the Company has made efforts at managing and
controlling costs in order to improve the alignment of cost outlays against
potential revenue opportunities. Considering the impact of the Vicorp and BFD
acquisitions, the Company expects its selling, general and administrative
expenses will increase in the future.
Research, Engineering and Development
Research, engineering and development expenses increased to $1,964,284 for
the four months ended December 31, 1996, compared to $1,258,439 for the four
months ended December 31, 1995. The increase in research, engineering and
development expenses primarily relates to further development work associated
with the Company's UniPort and BETEX products. Resources will continue to be
directed toward product improvements and enhancements for future purchased
releases of the Company's products. Additionally, the Company will continue to
evaluate its different product lines to maximize the impact of the research,
engineering and development expenditures.
The Company believes it operates in a highly competitive market; and, in
order to maintain a competitive position, the Company's existing products must
be continually improved and new products must be developed. The amount and
timing of future research, engineering, and development expenditures will depend
upon, among other factors, future new contract revenue and the Company's ability
to fund these costs from future operating cash flow and bank or other forms of
financing.
Depreciation and Amortization
Depreciation and amortization was $2,265,126 for the four months ended
December 31, 1996, compared to $770,506 for the four months ended December 31,
1995. The increase is primarily due to amortization expenses associated with
intangible assets acquired during the Vicorp and BFD acquisitions.
Income Tax Expense
The Company uses the asset and liability method to account for deferred
income taxes. Under the asset and liability method, deferred income taxes are
recognized for the tax consequences of "temporary differences" by applying
enacted statutory tax rates applicable to future years to differences between
the financial statement carrying amounts and the tax basis of existing assets
and liabilities. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
Investment Gain on Marketable Equity Securities
For the four months ended December 31, 1995, the Company's unrealized
investment gain of $891,196 relates to its purchase of marketable equity
securities. No such gain occurred during the same period in 1996.
Interest Income
For the four months ended December 31, 1996, net interest income was
$124,561 compared to $90,124 during the four months ended December 31, 1995.
Fiscal Years Ended August 31, 1996 and August 31, 1995
Total Revenues
Total revenues increased to $26,702,827 for the year ended August 31, 1996,
compared to $21,521,733 for the year ended August 31, 1995. The various
components of revenue fluctuated as explained below:
Contract Revenue
Contract revenue, consisting primarily of telecommunications equipment
hardware sales, was $13,724,228 for the year ended August 31, 1996, compared to
$15,337,054 for the year ended August 31, 1995. The decrease in contract revenue
during the year ended August 31, 1996, compared to the year ended August 31,
1995, is primarily
19
<PAGE>
due to lower ESP product related sales to MCI and to lower UniPort product sales
in total. The decrease in ESP product sales for the year ended August 31, 1996,
was due to a sale to MCI for the year ended August 31, 1995, that did not recur
in 1996. The decrease in UniPort product related contract revenue ($2,122,874
for the year ended August 31, 1996, compared to $5,614,286 for the year ended
August 31, 1995) was due to lower customer deliveries for the product.
Contract revenue associated with Vicorp's BETEX products was approximately
$1,839,859 for the period from the acquisition date to August 31, 1996. Since
the Vicorp acquisition was accounted for as a purchase, the Company's
consolidated statements of operations include the operations of Vicorp since the
acquisition date. The Company expects the revenue generated from the sale of
BETEX products to increase during 1997.
Service and Support
Revenues from service and support, consisting primarily of custom
development services, maintenance services, and service bureau services, were
$9,220,291 and $5,741,646 for the years ended August 31, 1996 and 1995,
respectively. During 1994, the Company entered into a joint development
agreement with MCI relating to the ESP. This agreement generated $2,863,000 of
service and support revenue for the year ended August 31, 1995. In addition,
beginning in 1993, the Company began earning maintenance fees on the ESP
products delivered to MCI. For the years ended August 31, 1996 and 1995, MCI
maintenance fees were approximately $1,249,000 and $930,000, respectively.
Service and support revenue relating to this maintenance increased for the years
ended August 31, 1996 and 1995, as additional ESP nodes were delivered to MCI
and these nodes required maintenance services. Service and support provided to
HSN decreased to $1,448,088 for the year ended August 31, 1996, compared to
$1,909,354 for the year ended August 31, 1995. HSN's service and support
contract was renegotiated in 1995, which resulted in a reduction of both the
level of maintenance services and the revenue earned. UniPort service and
support revenue for each of the years ended August 31, 1996 and 1995, was less
than $100,000. Such service and support revenue for UniPort customers is
expected to increase during fiscal 1997 as additional products, which will
require maintenance support, are delivered.
Service and support revenue for Vicorp's BETEX products was $6,523,638 from
the acquisition date to August 31, 1996. Vicorp's service and support revenue
includes maintenance and custom software development services provided to its
customers.
License Fee Revenue
License fee revenue was $3,758,308 and $436,800, for the years ended August
31, 1996 and 1995, respectively. Under the terms of the MCI Contract, the
Company charged MCI a software license fee for use of its proprietary software.
During the years ended August 31, 1996 and 1995, the Company recognized license
fee revenue from this source of $0 and $316,800, respectively. The Company does
not anticipate generating future license fee revenue for its ESP equipment.
License fee revenue for the year ended August 31, 1996, relating to its UniPort
product line was $921,911 and $2,836,397 for the BETEX product line. The Company
anticipates generating future license fee revenue for its BETEX and UniPort
products, although no assurance can be given that such future revenue will be
generated.
Other Income
Other income represents miscellaneous hardware, software, and service
activity charged to customers.
Cost of Sales
Cost of sales decreased to $6,023,989 for the year ended August 31, 1996,
compared to $7,824,646 for the year ended August 31, 1995. Additionally, the
Company's gross margin increased to $20,678,838 (77 percent of revenue) for the
year ended August 31, 1996, compared to $13,697,087 (64 percent of revenue) for
the year ended August 31, 1995. The primary reason for the increase in the
Company's gross margin dollar amount is an increase in the Company's total
revenue. The increase 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 year ended August 31, 1995, related to lower margin hardware
sales compared to the year ended August 31, 1996.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses increased to $23,849,385 for
the year ended August 31, 1996, from $9,034,490 for the year ended August 31,
1995. As a percentage of revenue, these expenses were 89 percent and 61 percent
for the years ended August 31, 1996 and 1995, respectively.
20
<PAGE>
During the year ended August 31, 1996, selling, general, and administrative
expenses increased for several reasons:
o The Company increased its sales and marketing force in order to
generate additional revenue opportunities.
o The Company increased its advertising and trade show expenditures by
approximately $700,000 in order to increase market awareness of the
Company's products and to announce the Vicorp acquisition.
o The Company increased its bad debt reserve by approximately $1,000,000
during the year ended August 31, 1996, relating to uncollectible
receivables.
o Selling, general and administrative expense in connection with the
acquisition of Vicorp was $9,297,164 from the acquisition date to
August 31, 1996.
o As of August 31, 1996, the Company accrued $1,093,341 in restructuring
charges (the "Restructuring"), which relate primarily to termination
benefits, including severance pay. The total number of employees
terminated was approximately 55.
During the year ended August 31, 1995, the Company's selling, general and
administrative expenses were impacted by the following:
o The Company continued managing and controlling costs in order to
improve the alignment of cost outlays against potential revenue
opportunities.
o The Company renegotiated all major maintenance agreements for its
development and test facility, thereby generating approximately
$200,000 in savings.
o The Company improved its controls and accountability for use of third
party professional vendors (legal, public relations, management
consultants, etc.), which generated approximately $450,000 in savings.
Considering the impact of Vicorp operations, the Company expects that its
selling, general and administrative expenses will increase in the future.
Research, Engineering, and Development
Research, engineering, and development expenses increased to $5,249,377 for
the year ended August 31, 1996, compared to $3,172,185 for the year ended August
31, 1995. As a percentage of revenues, these expenses were 20 percent and 15
percent for the years ended August 31, 1996 and 1995, respectively. The increase
in research engineering and development expenses in 1996 versus 1995 relates to
further development work associated with the Company's UniPort and BETEX
products. Resources will continue to be directed toward product improvements and
enhancements for future product releases of the Company's products. The Company
expects its research, engineering, and development costs for 1997 to be higher
than that expended in 1996.
The Company believes that it operates in a highly competitive market and,
in order to maintain a competitive position, that its existing products must be
continually improved and new products must be developed. See "Competition." The
amount and timing of future research, engineering, and development expenditures
will depend upon, among other factors, future new contract activity and the
Company's ability to fund these costs from future operating cash flow and bank
or other forms of financing. See "Financial Position, Liquidity, and Capital
Resources."
Purchased Research and Development
Purchased research and development expense of $19,500,000 for the year
ended August 31, 1996, represents the purchase price allocation to in-process
research and development acquired through the Company's acquisition of Vicorp
that had not yet reached technological feasibility and had no alternative future
use.
21
<PAGE>
In April, 1996, the Company acquired substantially all the common stock of
Vicorp N.V. by issuing 3,135,467 shares of newly issued common stock. In
addition, the Company assigned certain outstanding obligations of Vicorp N.V.
and converted options issued to Vicorp employees into options to purchase the
Company's common stock. The Company originally allocated the excess purchase
price over the fair value of net tangible assets acquired to identifiable
intangible assets. In performing this allocation, the Company considered, among
other factors, the operating performance of Vicorp N.V.'s technologies being
sold to its customer base, and the research and development projects in-process
at the date of the acquisition. With regard to the in-process research and
development projects, the Company considered, among other factors, the stage of
development of in-process projects at the time of the acquisition, the
business-related importance of each project to the overall research and
development plan, and the projected incremental cash flows from the in-process
projects when completed and any associated risks. Associated risks include the
inherent difficulties and uncertainties in completing each project and thereby
achieving technological feasibility and risks related to the impact of potential
changes in future target markets.
The Company intended to incur in excess of $5 million, relating to payroll
and related costs, to develop the in-process technology into commercially viable
products from the acquisition date to 1999. The Company expected to benefit from
the purchased in-process research and development by 1999.
If these projects were not successfully developed, the Company might not
realize the value assigned to the in-process research and development projects.
In addition, the value of other acquired intangible assets might also become
impaired. The unsuccessful completion of these in-process research and
development efforts might have a material adverse effect on the Company's
financial position and operations.
Impairment of Intangible Assets
During the year ended August 31, 1996, the Company reevaluated the
realizability of the goodwill associated with its 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 year ended August 31, 1996.
Depreciation and Amortization
Depreciation and amortization was $4,714,227 for the year ended August 31,
1996, compared to $4,007,208 for the year ended August 31, 1995. The increase in
1996 relates primarily to the amortization expense associated with recorded
goodwill from the Vicorp acquisition, which closed during the third quarter of
the year.
Investment Gain on Marketable Equity Securities
The Company's investment gain of $1,262,414 relates to its $7,296,034
purchase of marketable equity securities. Such securities were bought and sold
during the year ended August 31, 1996. The investment gains associated with
these securities are included in the Company's consolidated statements of
operations.
Interest Income
For the year ended August 31, 1996, net interest income was $507,200
compared to $1,007 for the year ended August 31, 1995. Net interest income
increased in 1996 due to the increase in the Company's interest bearing cash
balances.
Discontinued Operations
Effective April 30, 1995, certain assets, liabilities, and the business of
Interactive Services, Inc., were sold for approximately $1,000,000 in cash and
the assumption of certain liabilities. The gain on disposition of such activity
has been accounted for as a gain from sales of discontinued operations.
Income Tax Expense
The Company uses the asset and liability method to account for deferred
income taxes. Under the asset and liability method, deferred income taxes are
recognized for the tax consequences of "temporary differences" by applying
enacted statutory tax rates applicable to future years to differences between
the financial statement carrying amounts and the tax basis of existing assets
and liabilities. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
Litigation
The Company is subject to certain legal actions arising in the normal
course of business. After taking into consideration legal counsel's evaluation
of such actions, management is of the opinion that their final resolution will
not have any significant adverse effect upon the Company's business or its
consolidated financial statements. See "Legal Proceedings."
Financial Position, Liquidity, and Capital Resources
At December 31, 1997, the Company had net working capital of $3,591,655
compared to $388,785 at December 31, 1996. The increase in net working capital
is primarily due to the net equity and debt funding of $4,400,000 and
$5,974,130, respectively, 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, as described below, its working capital
requirements will increase significantly over prior periods. In addition, 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:
22
<PAGE>
o Retained an investment banking firm to assist in the development and
evaluation of future strategic initiatives, including potential
financing opportunities;
o Analyzing opportunities to sell certain non-core assets, including
real estate; and
o 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
("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 million 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
million shares of Precision Systems' common stock.
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 $3 million line of
credit to be made available by Speer upon signing of the agreement for operating
capital requirements. After the transaction, Mr. Speer will control over eighty
percent (80%) 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.
The Company's accounts and contracts receivable decreased to $9,657,355 as
of December 31, 1997, compared to $12,400,000 as of December 31, 1996. The
decrease is primarily due to the collection of certain large receivables
outstanding at December 31, 1996.
The Company's supplies and other current assets increased to $1,970,407 as
of December 31, 1997, compared to $1,662,513 as of December 31, 1996. The
increase is primarily due to the replenishment of inventory that is expected to
be sold in the first quarter of 1998.
The Company's costs and earnings in excess of billings on uncompleted
contracts increased to $3,333,339 as of December 31, 1997, compared to
$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 December 31, 1997, are expected to be fully billed by Vicorp
by June 30, 1998.
The Company's current portion of long-term debt decreased to $294,375 as of
December 31, 1997, compared to $2,374,287 as of December 31, 1996. The Company's
long-term debt increased to $6,240,184 as of December 31, 1997, compared to
$369,377 as of December 31, 1996. The decrease in the current portion is
primarily due to certain debt re-paid by the Company during the year ended
December 31, 1997. The increase in long-term debt 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 $5,505,996 as of December 31,
1997, compared to $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 $3,531,249 as of December 31,
1997, compared to $5,557,759 as of December 31, 1996. The decrease is primarily
due to payments made during 1997.
The Company's accrued payroll and related expenses decreased to $2,579,551
compared to $2,594,533 as of December 31, 1996.
23
<PAGE>
The Company's billings in excess of costs and earnings on uncompleted
contracts decreased to $2,780,251 as of December 31, 1997, compared to
$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 $1,270,825 as of
December 31, 1997, compared to $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.
During the year ended December 31, 1997, cash used by operations was
$5,098,537. The Company funded this cash flow usage primarily through the net
equity and debt funding of $4,400,000 and $5,974,130, respectively, that was
received from shareholders during the second and third quarters of 1997,
respectively. During the four months ended December 31, 1996, cash used by
operations was $5,849,184. The Company funded this cash flow usage primarily
through its cash funds. During the year ended August 31, 1996, cash used by
operations was $7,112,438. The Company funded this cash flow usage primarily
through the proceeds generated through issuance of Common Stock. During the year
ended August 31, 1995, cash used by operations was $4,201,123. The Company
funded this cash flow usage primarily through proceeds generated through
issuance of Common Stock.
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 percent 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 S.A. In connection with the financing, each
Shareholder invested $2,000,000 and received a promissory note (the "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 percent. 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.
The Company incurred $3,203,564 in expenditures for capital assets for the
year ended December 31, 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. Management
expects that expenditures for fiscal 1998 will be approximately $2,000,000.
As of December 31, 1997, the Company had net operating loss carryforwards
of approximately $45,000,000 for federal income tax purposes expiring through
2012 and $9,300,000 for foreign tax purposes, of which $5,400,000 is expiring
through 2006 and $3,900,000 is available indefinitely.
On September 30, 1996, the Company elected to change its year end from
August 31 to December 31. The change became effective December 31, 1996.
24
<PAGE>
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No.128, "Earnings per Share" ("SFAS
No. 128"), effective for periods ending after December 15, 1997. SFAS No. 128
establishes new standards for computing and presenting earnings per share
("EPS"). The adoption of SFAS No. 128 did not have a material impact on the
financial condition or the results of operations of the Company.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 becomes
effective for the Company's fiscal year 1998 and requires reclassification of
earlier financial statements for comparative purposes. SFAS No. 130 requires
that changes in the amounts of certain items, including foreign currency
translation adjustments and gains and losses on certain securities, be shown in
the financial statements. SFAS No. 130 does not require a specific format for
the financial statement in which comprehensive income is reported; however, it
does require that an amount representing total comprehensive income be reported
in that statement. The Company believes the adoption of SFAS No. 130 will not
have a material effect on the financial condition or the results operations of
the Company.
Also in June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). SFAS No. 131 will change the way public companies
report information about segments of their business in annual financial
statements and requires them to report selected segment information in their
quarterly reports issued to stockholders. It also requires entity-wide
disclosures about the products and services an entity provides, the material
countries in which it holds assets and reports revenues, and its major
customers. SFAS No. 131 is effective for the Company's fiscal year 1998. The
Company believes the adoption of SFAS No. 131 will not have a material effect on
the financial condition or the results of operations of the Company.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 97-2, "Software Revenue
Recognition." SOP 97-2 supercedes SOP 91-1, "Software Revenue Recognition" and
provides guidance on when and in what amounts revenue should be recognized for
the licensing, selling, leasing or marketing of computer software. SOP 97-2 is
effective for transactions entered into in fiscal years beginning after December
15, 1997. The Company believes that the adoption of SOP 97-2 will not have a
material impact on the financial condition or the results of operations of the
Company.
Readiness for Year 2000
The Company has taken actions to understand the nature and extent of the
work required to make its systems, products and infrastructure Year 2000
compliant. The Company continues to evaluate the estimated costs associated with
this work as actual information becomes available. Based on available
information, the Company believes that it will be able to manage its total Year
2000 transition without any material adverse effect on its business operations,
products, operating results or financial condition.
Forward-looking Information
Certain statements in this report are forward-looking statements within the
meaning of the federal securities laws. Such forward-looking statements reflect
management's current views with respect to future events and the financial
performance and condition of the Company. However, such statements involve risks
and uncertainties, and there are certain important factors that could cause
actual results to differ materially from those anticipated. Some of the
important factors that could cause actual results to differ materially from
those anticipated include:
o 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
o The various markets into which the Company sells its products are
undergoing significant changes with increasing demands for product
innovations
o The Company must be successful in competing against many competitors,
many of which have significantly greater financial, technical,
marketing, and sales resources than the Company
o The Company will be required to properly estimate costs under fixed
price contracts
o Increased risk of litigation in the Company's industry resulting from
aggressive prosecutions of intellectual property claims
o The Company's ability to retain its larger customers, including MCI
25
<PAGE>
o Availability of certain hardware and software components which are
incorporated with the Company's products and are purchased from a
limited number of vendors
o The Company's ability to hire and retain qualified personnel
o Legislative changes affecting the Company's markets, including the
Telecommunications Act of 1996
o Given the Company's acquisition of Vicorp and its large presence in
international markets, regulatory, monetary and inflationary factors
can negatively impact the Company's operations in the future
o The Company's reliance on large sales orders that increase the risk of
significant revenue fluctuations, from quarter to quarter and year to
year
o 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.
Item 8 -- Financial Statements
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Accountants..........................................27
Report of Independent Accountants..........................................28
Report of Independent Accountants..........................................29
Consolidated Balance Sheets................................................30
Consolidated Statements of Operations......................................31
Consolidated Statements of Stockholders' Equity............................32
Consolidated Statements of Cash Flows......................................33
Notes to Consolidated Financial Statements.................................34
26
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Precision Systems, Inc.
We have audited the accompanying consolidated balance sheet of Precision
Systems, Inc. and subsidiaries (the "Company") as of December 31, 1997, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the year ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
Since the date of completion of our audit of the accompanying consolidated
financial statements and initial issuance of our report dated February 19, 1998,
except for the information in Note 19, for which the date is March 11, 1998,
which report contained an explanatory paragraph regarding the Company's ability
to continue as a going concern, the Company, as discussed in Note 19, has
executed a Definitive Agreement (Agreement) with the Speer entities (as defined
in Note 19). Concurrent with the Agreement, the Speer entities provided a
$3,000,000 line of credit. Therefore, the conditions that raised substantial
doubt about whether the Company will continue as a going concern no longer
exist.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 1997, and the results of its operations and its cash flows for the
year ended December 31, 1997, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Tampa, Florida
February 19, 1998, except for the information
in Note 19, for which the date is April 22, 1998
27
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Precision Systems, Inc.
We have audited the accompanying consolidated balance sheets of Precision
Systems, Inc. and subsidiaries (the "Company") as of December 31, 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the four months ended December 31, 1996, and for each of the two years
in the period ended August 31, 1996. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits. We
did not audit the consolidated financial statements of Vicorp N.V. (a
consolidated subsidiary), which statements reflect total assets constituting 33
percent of consolidated total assets as of December 31, 1996, and total revenues
constituting 80 percent and 42 percent of consolidated total revenues for the
four months ended December 31, 1996, and for the year ended August 31, 1996,
respectively. The financial statements of Vicorp N.V. were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for Vicorp N.V., is based solely on the report
of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, such
consolidated financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 1996, and the results of
its operations and its cash flows for the four months ended December 31, 1996,
and for each of the two years in the period ended August 31, 1996, in conformity
with generally accepted accounting principles.
Deloitte & Touche L.L.P.
Tampa, Florida
March 27, 1997
28
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Precision Systems, Inc.
Board of Directors
Vicorp N.V.
We have audited the consolidated balance sheet of Vicorp N.V. and its
subsidiaries as of December 31, 1996, and the related consolidated statements of
earnings, stockholders' equity, and cash flows for the four months ended
December 31, 1996 and the year ended August 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Vicorp N.V.
and its subsidiaries as of December 31, 1996, and the consolidated results of
their operations and consolidated cash flows for the four months ended
December 31, 1996 and the year ended August 31, 1996, in conformity with
generally accepted accounting principles in the United States.
COOPERS & LYBRAND N.V.
Utrecht
Holland
March 27, 1997
29
<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
ASSETS 1997 1996
---------------- ----------
Current Assets
<S> <C> <C>
Cash and cash equivalents...................................................... $ 4,582,757 $ 4,601,818
Accounts and contracts receivable, net......................................... 9,657,355 12,400,000
Due from employees............................................................. 10,044 23,361
Supplies and other current assets.............................................. 1,970,407 1,662,513
Costs and earnings in excess of billings on uncompleted contracts.............. 3,333,339 3,064,978
---------------- ---------------
Total current assets......................................................... 19,553.902 21,752,670
---------------- ---------------
Property, Plant and Equipment, at Cost
Land and improvements.......................................................... 1,134,955 1,134,955
Buildings and improvements..................................................... 3,083,401 3,017,121
Computer equipment............................................................. 28,078,975 26,029,490
Furniture and office equipment................................................. 3,237,280 3,123,057
---------------- ---------------
35,534,611 33,304,623
Less accumulated depreciation.................................................. (26,665,434) (24,479,765)
---------------- ----------------
8,869,177 8,824,858
--------------- ---------------
Intangible assets, net............................................................ 52,474 18,616,847
---------------- ---------------
$ 28,475,553 $ 49,194,375
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt.............................................. $ 294,375 $ 2,374,287
Accounts payable............................................................... 5,505,996 4,395,128
Accrued expenses............................................................... 3,531,249 5,557,759
Accrued payroll and related liabilities........................................ 2,579,551 2,594,535
Billings in excess of costs and earnings on uncompleted contracts.............. 2,780,251 3,753,132
Deferred revenue............................................................... 1,270,825 2,689,044
---------------- ---------------
Total current liabilities.................................................... 15,962,247 21,363,885
---------------- ---------------
Long-term debt.................................................................... 6,240,184 369,377
---------------- ---------------
Commitments and Contingencies (Note 9 and 19)
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
17,906,025 and 17,696,367, respectively...................................... 179,061 176,964
Additional paid-in capital..................................................... 114,000,071 109,643,293
Accumulated deficit............................................................ (109,294,105) (83,235,389)
Treasury stock (132,937 shares)-- at cost...................................... (422,360) (422,360)
Accumulated preferred stock dividends.......................................... 1,675,201 1,062,874
Cumulative foreign currency translation adjustment............................. 312,609 355,748
Unearned compensation ......................................................... (177,500) (120,117)
---------------- ----------------
Total stockholders' equity................................................... 6,273,122 27,461,113
---------------- ---------------
$ 28,475,553 $ 49,194,375
================ ===============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
30
<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Four
Year Months
Ended Ended
December 31, December 31, Years Ended August 31,
1997 1996 1996 1995
---- ---- ---- ----
Revenues
<S> <C> <C> <C> <C>
Contract revenues............................. $ 6,203,229 $ 3,729,171 $ 13,724,228 $ 15,337,054
Service and support........................... 23,813,564 7,959,984 9,220,291 5,741,646
License fee revenue........................... 10,595,594 3,172,868 3,758,308 436,800
Other income.................................. - - - 6,233
---------------- ----------------- ---------------- ---------------
40,612,387 14,862,023 26,702,827 21,521,733
---------------- ----------------- ---------------- ---------------
Cost of sales, exclusive of depreciation and
amortization shown separately below........... 15,152,116 3,442,705 6,023,989 7,824,646
---------------------------------- ---------------- ---------------
25,460,271 11,419,318 20,678,838 13,697,087
---------------------------------- ---------------- ---------------
Operating Expenses
Selling, general and administrative........... 23,421,901 10,899,572 23,849,385 9,034,490
Research, engineering and development......... 6,416,539 1,964,284 5,249,377 3,172,185
Depreciation and amortization................. 7,042,929 2,265,126 4,714,227 4,007,208
Purchased research and development............ - - 19,500,000 -
Impairment of intangible assets............... 14,285,907 - 3,829,424 -
---------------- ----------------- ---------------- -----------
51,167,276 15,128,982 57,142,413 16,213,883
---------------- ----------------- ---------------- ---------------
Operating loss................................... (25,707,005) (3,709,664) (36,463,575) (2,516,796)
Interest income (expense), net................... (351,711) 124,561 507,200 1,007
Gain on sale of marketable equity securities..... - - 1,262,414 -
---------------- ----------------- ---------------- -----------
Loss before income taxes......................... (26,058,716) (3,585,103) (34,693,961) (2,515,789)
Income tax benefit............................... - 118,288 - -
---------------- ----------------- ---------------- -----------
Loss from Continuing Operations.................. (26,058,716) (3,466,815) (34,693,961) (2,515,789)
---------------- ----------------- ---------------- ----------------
Loss from Discontinued Operations
Loss from operations of discontinued
subsidiary.................................. - - - (661,974)
Gain from sale of discontinued subsidiary..... - - - 529,419
---------------- ----------------- ---------------- ---------------
- - - (132,555)
---------------- ----------------- ---------------- ----------------
Net Loss......................................... (26,058,716) (3,466,815) (34,693,961) (2,648,344)
Preferred stock dividend requirements............ (612,327) (116,318) (349,883) (347,048)
---------------- ----------------- ---------------- ----------------
Net Loss Applicable to Common Stock.............. $ (26,671,043)$ (3,583,133) $ (35,043,844) $ (2,995,392)
================ ================ ================ ================
Basic and Diluted Loss Per Share
Loss from continuing operations............... $ (1.48)$ (.20) $ (2.36) $ (.23)
================ ================= ================ ================
Loss from discontinued operations............. $ - $ - $ - $ (.01)
================ ================= ================ ================
Net loss applicable to common stock........... $ (1.51)$ (.21) $ (2.39) $ (.27)
================ ================= ================ ================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
31
<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Non- Non-
Redeemable Redeemable
Series A Series B
Preferred Preferred Common Class B
Stock Stock Stock Convertible Additional
$.01 Par $.01 Par $.01 Par Common Paid-In Accumulated
Value Value Value Stock Capital Deficit
----- ----- ----- ----- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at August 31, 1994 $ 100 $ -- $ 78,998 $ 24,159 $ 61,935,644 $(42,426,269)
Issuance of common stock
upon exercise of stock
options -- -- 5,837 -- 1,202,221 --
Issuance of common stock -- -- 12,500 -- 4,987,500 --
Legal expenses associated
with issuance of common
stock -- -- -- -- (37,512) --
Dividends on preferred
stock -- -- -- -- (347,048) --
Net loss for the year ended
August 31, 1995 -- -- -- -- -- (2,648,344)
-------- -------- ---------- ---------- ------------ ------------
Balance at August 31, 1995 100 -- 97,335 24,159 67,740,805 (45,074,613)
Issuance of common stock
upon exercise of stock
options -- -- 5,152 -- 922,714 --
Conversion of Class B
common stock -- -- 24,159 (24,159) -- --
Issuance of common stock
upon acquisition of
Vicorp -- -- 31,018 -- 29,490,559 --
Foreign currency translation
adjustment -- -- -- -- -- --
Unearned compensation
relating to restricted stock
grants -- -- -- -- 470,020 --
Amortization of unearned
compensation -- -- -- -- -- --
Issuance of common stock -- -- 15,000 -- 8,610,000 --
Dividends on preferred
stock -- -- -- -- (349,883) --
Net loss for the year ended
August 31, 1996 -- -- -- -- -- (34,693,961)
--------- -------- ---------- ------------ ------------ ------------
Balance at August 31, 1996 100 -- 172,664 -- 106,884,215 (79,768,574)
Issuance of common stock
upon exercise of stock
options -- -- 1,577 -- 1,222,286 --
Issuance of common stock
upon acquisition of BFD
Productions, Inc. -- -- 2,723 -- 1,653,110 --
Foreign currency translation
adjustment -- -- -- -- -- --
Amortization of unearned
compensation -- -- -- -- -- --
Dividends on preferred stock -- -- -- -- (116,318) --
Net loss for the four months
ended December 31, 1996 -- -- -- -- -- (3,466,815)
--------- --------- --------- ------------ ------------ ------------
Balance at December 31,
1996 100 -- 176,964 -- 109,643,293 (83,235,389)
Issuance of common stock
upon exercise of stock
options -- -- 2,097 -- 467,577 --
Issuance of preferred stock -- 45 -- -- 4,499,955 --
Legal expenses associated
with issuance of preferred
stock -- -- -- -- (175,927) --
Foreign currency translation
adjustment -- -- -- -- -- --
Amortization of unearned
compensation -- -- -- -- -- --
Dividends on preferred
stock -- -- -- -- (612,327) --
Unearned compensation
relating to restricted stock
grants -- -- -- -- 177,500 --
Net loss for the year ended
December 31, 1997 -- -- -- -- -- (26,058,716)
--------- -------- ---------- ------------ ------------ ------------
Balance at December 31,
1997.................. $ 100 $ 45 $ 179,061 $ -- $114,000,071 $(109,294,105)
========= ======== ========== ============ ============ ============
Cumulative
Accumulated Foreign
Preferred Currency
Treasury Stock Translation Unearned
Stock Dividends Adjustment Compensation Total
----- --------- ---------- ------------ -----
(Restubbed-Table)
<S> <C> <C> <C> <C> <C>
Balance at August 31, 1994 $(422,360) $ 249,625 $ -- $ -- $ 19,439,897
Issuance of common stock
upon exercise of stock
options -- -- -- -- 1,208,058
Issuance of common stock -- -- -- -- 5,000,000
Legal expenses associated
with issuance of common
stock -- -- -- -- (37,512)
Dividends on preferred
stock -- 347,048 -- -- --
Net loss for the year ended
August 31, 1995 -- -- -- -- (2,648,344)
---------- ------------- ------------- ------------ ------------
Balance at August 31, 1995 (422,360) 596,673 -- -- 22,962,099
Issuance of common stock
upon exercise of stock
options -- -- -- -- 927,866
Conversion of Class B
common stock -- -- -- -- --
Issuance of common stock
upon acquisition of
Vicorp -- -- -- -- 29,521,577
Foreign currency translation
adjustment -- -- 355,416 -- 355,416
Unearned compensation
relating to restricted stock
grants -- -- -- (470,020) --
Amortization of unearned
compensation -- -- -- 150,811 150,811
Issuance of common stock -- -- -- -- 8,625,000
Dividends on preferred
stock -- 349,883 -- -- --
Net loss for the year ended
August 31, 1996 -- -- -- -- (34,693,961)
---------- ------------- -------------- ------------- -------------
Balance at August 31, 1996 (422,360) 946,556 355,416 (319,209) 27,848,808
Issuance of common stock
upon exercise of stock
options -- -- -- -- 1,223,863
Issuance of common stock
upon acquisition of BFD
Productions, Inc. -- -- -- -- 1,655,833
Foreign currency translation
adjustment -- -- 332 -- 332
Amortization of unearned
compensation -- -- -- 199,092 199,092
Dividends on preferred stock -- 116,318 -- -- --
Net loss for the four months
ended December 31, 1996 -- -- -- -- (3,466,815)
---------- ------------- -------------- ------------- -------------
Balance at December 31,
1996 (422,360) 1,062,874 355,748 (120,117) 27,461,113
Issuance of common stock
upon exercise of stock
options -- -- -- -- 469,674
Issuance of preferred stock -- -- -- -- 4,500,000
Legal expenses associated
with issuance of preferred
stock -- -- -- -- (175,927)
Foreign currency translation
adjustment -- -- (43,139) -- (43,139)
Amortization of unearned
compensation -- -- -- 120,117 120,117
Dividends on preferred
stock -- 612,327 -- -- --
Unearned compensation
relating to restricted stock
grants -- -- -- (177,500) --
Net loss for the year ended
December 31, 1997 -- -- -- -- (26,058,716)
----------- ------------- --------------- ------------ ------------
Balance at December 31,
1997 $(422,360) $1,675,201 $ 312,609 $ (177,500) $ 6,273,122
=========== ============= =============== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
32
<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Four Months
Ended Ended
December 31, December 31, Years ended August 31,
1997 1996 1996 1995
---- ---- ---- ----
Cash Flows -- Operating Activities:
<S> <C> <C> <C> <C>
Net loss...................................... $ (26,058,716)$ (3,466,815) $ (34,693,961) $ (2,648,344)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization............... 7,042,929 2,265,126 4,714,227 4,007,208
Purchased research and development.......... - - 19,500,000 -
Impairment of intangible assets............ 14,285,907 - 3,829,424 -
Provision for losses on accounts receivable. 926,689 278,687 1,196,412 159,387
Loss on sale of property, plant, and
equipment................................. 44,630 - - -
Gain from sale of discontinued subsidiary... - - - (529,419)
Amortization of unearned compensation....... 120,117 199,092 150,811 -
Realization of deferred revenue............. - (481,272) (1,448,588) (539,821)
Change in current assets and liabilities,
net of business acquisitions:
Accounts and contracts receivable....... 1,815,956 (5,796,096) 7,745,048 (1,012,144)
Costs and estimated earnings in excess
of billings........................... (268,361) 167,556 (2,093,285) (1,139,249)
Supplies and other current assets....... (268,707) (129,440) 519,491 568,160
Accounts payable........................ 1,110,868 139,256 (3,403,718) (1,706,670)
Accrued expenses........................ (1,458,749) (937,652) (2,546,486) (933,431)
Billings in excess of cost and earnings on
incomplete contracts.................. (972,881) 856,954 2,896,178 -
Deferred revenue........................ (1,418,219) 1,055,420 (3,477,991) (426,800)
----------------- ---------------- ---------------- ----------------
Net cash used in operating activities. (5,098,537) (5,849,184) (7,112,438) (4,201,123)
----------------- ---------------- ---------------- ----------------
Cash Flows -- Investing Activities:
Purchase of property, plant and equipment..... (3,203,564) (513,598) (1,995,353) (1,514,475)
Purchase of other assets...................... - - (226,685) -
Purchase of consolidated subsidiaries,
net of cash acquired........................ - (1,447,466) - -
Cash acquired in acquisition.................. - - 4,403,000 -
Proceeds from sale of property, plant, and
equipment................................... 24,742 - - -
Proceeds from sale of discontinued subsidiary. - - - 1,009,756
----------------- ---------------- ---------------- ---------------
Net cash (used in) provided by
investing activities............... (3,178,822) (1,961,064) 2,180,962 (504,719)
----------------- ---------------- ---------------- ----------------
Cash Flows -- Financing Activities:
Proceeds from notes payable, net.............. 5,974,130 - - -
Repayment of notes payable.................... (2,337,042) (986,047) (149,675) (2,952,933)
Proceeds from issuance of capital stock....... 4,621,210 1,223,863 9,552,866 6,170,546
----------------- ---------------- ---------------- ---------------
Net cash provided by financing
activities......................... 8,258,298 237,816 9,403,191 3,217,613
----------------- ---------------- ---------------- ---------------
Net (decrease) increase in cash and
cash equivalents............................ (19,061) (7,572,432) 4,471,715 (1,488,229)
Cash and cash equivalents at
beginning of period......................... 4,601,818 12,174,250 7,702,535 9,190,764
----------------- ---------------- ---------------- ---------------
Cash and cash equivalents at end
of period................................... $ 4,582,757 $ 4,601,818 $ 12,174,250 $ 7,702,535
================= ================ ================ ===============
Supplemental Non-Cash Information:
Accrued dividends on preferred stock.......... $ 612,327 $ 116,318 $ 349,883 $ 347,048
Issuance of stock for purchase of subsidiary.. $ - $ 1,655,833 $ 29,521,577 $ -
Conversion of note payable to deferred
revenue..................................... $ - $ - $ - $ 2,047,067
Issuance of common stock as compensation...... $ - $ - $ 470,020 $ 33,726
</TABLE>
The accompanying notes are an integral part of these consolidated
fiancial statements.
33
<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND DISTRIBUTION
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.
On September 30, 1996, the Company elected to change its year end from
August 31 to December 31. This change was made effective December 31, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies of the
Company consistently applied in the preparation of the accompanying consolidated
financial statements:
Consolidation
The accompanying consolidated financial statements include the consolidated
operations of PSI and its subsidiaries. All significant intercompany
transactions and accounts have been eliminated.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and commercial paper with
original maturities at time of acquisition of three months or less.
Estimates and Assumptions
The preparation of the consolidated financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues, and expenses. Examples include provisions for bad
debts, depreciable lives for property, plant, and equipment, amortization
periods for intangible assets, and costs and profits associated with long-term
contracts. Actual results may differ from these estimates.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation on
property and equipment is provided for in amounts sufficient to allocate the
costs of depreciable assets to operations over their estimated service lives as
follows:
Years
Land improvements................................................18
Building and improvements..................................10 to 30
Computer equipment...........................................3 to 4
Furniture and office equipment..............................5 to 10
For income tax reporting purposes, certain of these assets are depreciated
using accelerated methods. Depreciation expense for the year ended December 31,
1997, the four months ended December 31, 1996, and the years ended August 31,
1996 and 1995 approximated $3,055,000, $1,039,000, $2,369,000 and $3,330,000,
respectively.
34
<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Product Warranty
The Company warrants its products for between three-month to one-year
periods of time after the initial sale. Estimated costs related to such
warranties are accrued when the products are sold.
Revenue Recognition
Revenues, other than from long-term contracts, generally are recognized
when the products are delivered or the service has been rendered. Revenues from
long-term contracts are recognized under the percentage-of-completion method,
based on contract costs incurred to date compared with the Company's estimate of
total contract costs and profit. Related contract costs include all direct
material and labor costs and those indirect costs related to contract
performance and are included in contract costs in the consolidated statements of
operations. Software revenue is recognized in accordance with the American
Institute of Certified Public Accountants ("AICPA") Statement of Position
("SOP") 91-1, "Software Revenue Recognition." Revenue from post-contract
customer support is recognized ratably over the service period. Revenue from
software licenses is recognized upon delivery of the software.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 97-2, "Software Revenue
Recognition." SOP 97-2 supercedes SOP 91-1, "Software Revenue Recognition" and
provides guidance on when and in what amounts revenue should be recognized for
the licensing, selling, leasing or marketing of computer software. SOP 97-2 is
effective for transactions entered into in fiscal years beginning after December
15, 1997. The Company believes that the adoption of SOP 97-2 will not have a
material impact on the financial condition or the results of operations of the
Company.
Long-Term Contract
Certain of the Company's contract revenues and anticipated profits are
recognized using the percentage-of-completion method, based on contract costs
incurred to date compared with the Company's estimate of total contract costs
and profit. Contract costs include all direct materials and labor costs and
those indirect costs related to contract performance such as indirect labor,
supplies and depreciation. Revisions in estimated profits are made in the month
in which the circumstances requiring the revision become known. Should a loss on
the contract become anticipated, the entire amount of estimated loss on the
contract would be recorded in the period in which it becomes known.
Foreign Currencies
Assets and liabilities recorded in foreign currencies on the books of
foreign subsidiaries are translated at the exchange rate on the balance sheet
date. Translation adjustments resulting from this process are charged or
credited to stockholders' equity. Revenues, costs, and expenses are translated
at average rates of exchange prevailing to the applicable period. Gains and
losses on foreign currency transactions are included in non-operating expenses.
Credit Risk
Financial instruments which potentially expose the Company to concentration
of credit risk, consist primarily of cash investments and accounts receivable.
The Company places its cash investments with a high-credit quality financial
institution. For its accounts receivable, the Company extends unsecured credit
to both domestic and international customers. While the Company does have a
concentration of credit with respect to these cash investments and accounts
receivable, the Company does not feel that it is exposed to significant risk of
loss from such.
Fair Value of Financial Instruments
The carrying value of the Company's cash and long-term debt approximates
their fair values at December 31, 1997 and 1996.
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred income taxes are
recognized for the tax consequences of "temporary differences" by applying
enacted statutory tax rates applicable to future years to differences between
the financial statement carrying amounts and the tax basis of existing assets
and liabilities. The effect on deferred income taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
Research and Development
Research and development costs are charged to expense as incurred.
35
<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basic and Diluted Loss Per Share
Basic and diluted loss per share for the year ended December 31, 1997, the
four months ended December 31, 1996, and the fiscal years ended August 31, 1996
and 1995, has been computed based upon the weighted average common shares
outstanding of 17,630,068, 17,428,861, 14,677,220, and 10,965,640, 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 basic and diluted net loss per share
applicable to common stock for the year ended December 31, 1997, the four months
ended December 31, 1996, and the fiscal years ended August 31, 1996 and 1995,
has been computed based upon the preferred stock dividend requirements of
$612,327, $116,318, $349,883, and $347,048, respectively.
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:
<TABLE>
<CAPTION>
Four
Year Months
Ended Ended Years Ended August 31,
December 31, December 31, --------------------------------
1997 1996 1996 1995
----------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Preferred convertible securities............ 2,460,098 1,218,487 1,530,815 1,826,706
Stock options and restricted stock.......... 1,502,496 2,087,561 1,724,584 1,497,113
----------------- ---------------- ---------------- ---------------
3,962,594 3,306,048 3,255,399 3,323,819
================= ================ ================ ===============
</TABLE>
Restructuring Charges
During the year ended December 31, 1997, in an effort to reduce overhead
and cut costs, the Company terminated the employment of approximately 30
individuals worldwide. During the year ended August 31, 1996, the Company
terminated the employment of approximately 55 individuals. The effect of the
severance charges associated with these terminations was to increase the
Company's selling, general and administrative expenses by approximately $650,000
and $1,100,000, respectively. As of December 31, 1997 and December 31, 1996,
approximately $650,000 and $77,500, respectively, of such charges are included
in accrued payroll and related liabilities on the Company's balance sheets.
Reclassifications
Certain amounts for previous periods have been reclassified to conform with
the December 31, 1997, presentation.
3. ACCOUNTS AND CONTRACTS RECEIVABLE
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Accounts and contracts receivables............................................ $ 10,896,552 $ 13,932,134
Allowance for doubtful accounts............................................... (1,239,197) (1,532,134)
---------------- ----------------
$ 9,657,355 $ 12,400,000
================ ===============
</TABLE>
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Expenditures on uncompleted contracts......................................... $ 2,869,480 $ 2,418,226
Estimated earnings on uncompleted contracts................................... 463,859 646,752
---------------- ---------------
3,333,339 3,064,978
Less actual and allowable billings on uncompleted
contracts.................................................................. (2,780,251) (3,753,132)
---------------- ----------------
$ 553,088 $ (688,154)
================ ================
</TABLE>
36
<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. SUPPLIES AND OTHER CURRENT ASSETS
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Materials to be used in fulfilling contracts.................................. $ 995,401 $ 553,424
Prepaid expenses.............................................................. 975,006 1,109,089
---------------- ---------------
$ 1,970,407 $ 1,662,513
---------------- ---------------
</TABLE>
Costs and estimated earnings on uncompleted contracts of $3,333,339 and
$3,064,978, not billed as of December 31, 1997, and December 31, 1996,
respectively, are comprised principally of revenue recognized on contracts for
which billings had not been presented to the customer because the amounts were
not billable at the balance sheet date. These amounts will be billable based on
the terms of the contract, generally including the attainment of certain project
milestones, installation of the product, the completion of certain performance
testing, and acceptance of the product by the customer. The receivables, as of
December 31, 1997, and December 31, 1996, are expected to be fully billed by
June 30, 1998, and June 30, 1997, respectively.
6. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
<S> <C> <C> <C>
Goodwill (see Note 16).........................................................$ 24,275,032 $ 24,275,032
Developed technology value..................................................... 3,090,000 3,090,000
Assembled work force value..................................................... 890,000 890,000
Software licenses.............................................................. 121,769 136,173
----------------- ---------------
28,376,801 28,391,205
Less accumulated amortization.................................................. 28,324,327 9,774,358
---------------- ---------------
$ 52,474 $ 18,616,847
================= ===============
</TABLE>
Goodwill associated with acquired subsidiaries is amortized over five-year
to fifteen-year periods. At each balance sheet date, the Company evaluates the
realizability of goodwill based on expectations of future discounted cash flows.
In 1997, the Company determined that, based on negative operating performance
and its effect on future operational performance, a permanent impairment of the
Vicorp and BFD intangible assets existed and recorded a provision of $14,285,907
to write off the net book value of all intangible assets associated with these
acquisitions. In August 1996, the Company determined that a material impairment
of goodwill related to its purchase of The Renaissance Group existed and
recorded a provision of $3,829,424 to write down such goodwill to its realizable
value. Software licenses and patent costs are recorded at cost and amortized
over the expected useful lives of the assets, varying from two to five years.
Amortization expenses associated with intangible assets were $3,987,964,
$1,225,708, $2,389,848, and $551,607, for the year ended December 31, 1997, for
the four months ended December 31, 1996, and the years ended August 31, 1996,
and 1995, respectively.
7. INCOME TAXES
The components of income tax benefit are as follows:
<TABLE>
<CAPTION>
Four
Months
Year Ended Ended
December 31, December 31, Years Ended August 31,
1997 1996 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Current payable (receivable)................. $ - $ (118,288) $ - $ -
Deferred..................................... - - - -
---------------- ---------------- ---------------- ------------
$ - $ (118,288) $ - $ -
================ ================ ================ ============
</TABLE>
37
<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of total income tax benefit to amounts computed by
applying the statutory federal income tax rate to losses before income taxes is
as follows:
<TABLE>
<CAPTION>
Four
Year Ended Months Ended
December 31, December 31, Years Ended August 31,
-----------------------------------
1997 1996 1996 1996 1995 1995
----------------------- ----------------------- -------------- -------- -------------- ------
Amounts % Amounts % Amounts % Amounts %
Income tax benefit at the
<S> <C> <C> <C> <C> <C> <C> <C> <C>
federal statutory rate $ (9,120,550) (35.0%) $ (1,293,014) (35.0%) $ (12,129,302) (35.0%) $ (880,526) (35.0%)
Amortization and write-off of
goodwill and other acquired
intangibles........... 5,511,582 21.2% 333,012 9.0% 8,868,990 26.0% - -
Increase in valuation
allowance............. 3,959,471 15.2% 760,166 20.6% 4,200,372 12.0% 880,526 35.0%
Foreign income tax rate
differential and other on
permanently reinvested
earnings.............. 744,063 2.9% - - - - - -
State income taxes, net of
federal tax benefit... (373,753) (1.4%) - - (344,910) (1.0%) - -
Other.................... (720,813) (2.9%) 81,548 2.2% (595,150) (2.0%) - -
-------------- -------- -------------- -------- -------------- -------- -------------- ----
$ - - % $ (118,288) (3.2%) $ - - % $ - - %
============== ======== ============== ======== ============== ======== ============== ========
</TABLE>
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $45,000,000 for U.S. federal income tax purposes expiring through
2012 and $9,300,000 for foreign tax purposes of which $5,400,000 is expiring
through 2006 and $3,900,000 is available indefinitely. The Company intends to
continue to indefinitely reinvest earnings of its foreign subsidiaries, which
reflect full provision for non-U.S. income taxes, to expand its international
operations. Accordingly, no provision has been made for U.S. income taxes that
might be payable upon repatriation of such earnings. In the event any earnings
of non-U.S. subsidiaries are repatriated, the Company will provide U.S. income
taxes upon repatriation of such earnings which will be offset by applicable
foreign tax credits, subject to certain limitations.
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes and (b)
operating loss carryforwards. The tax effects of significant items comprising
the Company's deferred tax asset are as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
---- ----
<S> <C> <C>
Tax loss carryforwards........................................................ $ 19,859,000 $ 15,924,000
Depreciation.................................................................. (232,000) (173,000)
Reserves not currently deductible............................................. 805,000 704,000
Stock option compensation..................................................... 1,358,000 1,138,000
Other......................................................................... 197,000 407,000
---------------- ---------------
Total gross deferred tax asset................................................ 21,987,000 18,000,000
Less: valuation allowance..................................................... (21,987,000) (18,000,000)
---------------- ----------------
$ - $ -
================ ================
</TABLE>
A portion of the deferred tax asset in the amount of $1,358,000 is related
to the tax effects of stock option compensation. This benefit, when recognized,
will be classified in the stockholders' equity section of the balance sheet.
38
<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to the Distribution (see Note 13), the Company and HSN have
entered into a Tax Sharing Agreement ("Tax Sharing Agreement"). The Tax Sharing
Agreement provides that if, as a result of adjustments to HSN's tax position for
periods prior to the Distribution, caused by a tax audit or otherwise, there
would have been a corresponding increase or decrease in the deferred tax
liability account of the Company as of the date of Distribution, then the
Company will receive a cash payment from HSN (or make a cash payment to HSN) in
the amount of such increase (or decrease).
8. LONG-TERM DEBT
<TABLE>
<CAPTION>
December 31,
1997 1996
---- ----
<S> <C> <C>
Notes payable to shareholders, interest at 8 percent, unsecured,
and due January 1999....................................................... $ 6,000,000 $ -
Note payable to shareholder, interest at 6 percent, unsecured,
and repaid during 1997..................................................... - 698,127
Note payable, interest at 5 percent, and repaid during 1997................... - 1,269,475
Capital lease obligation, interest rates varying from 6 percent to 9 percent;
collateralized by certain assets with net book value of $500,000 for 1997 and
1996 and maturing through the year 2001....................................... 534,559 776,062
---------------- ---------------
6,534,559 2,743,664
Less current portion.......................................................... (294,375) (2,374,287)
---------------- ----------------
$ 6,240,184 $ 369,377
================ ===============
</TABLE>
Annual principal maturities for years subsequent to December 31, 1997, are
as follows:
1998........................................................ $ 294,375
1999........................................................ 6,127,534
2000........................................................ 91,112
2001........................................................ 21,538
---------------
$ 6,534,559
===============
9. COMMITMENTS AND CONTINGENCIES
The Company has annual commitments under non-cancelable operating leases
for years subsequent to December 31, 1997 (rental expense of approximately
$2,121,000 $383,000, $1,280,000 and $376,000 for the year ended December 31,
1997, for the four months ended December 31, 1996, and for the years ended
August 31, 1996 and 1995, respectively) approximated as follows:
1998.........................................................$ 1,537,000
1999......................................................... 903,000
2000......................................................... 579,000
2001......................................................... 378,000
2002......................................................... 298,000
Thereafter...................................................$ 904,000
---------------
$ 4,599,000
===============
39
<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCKHOLDERS' EQUITY
The Company's amended Certificate of Incorporation provides that the
holders of both classes of common stock are entitled to receive ratably such
dividends, if any, as may be declared by the Board of Directors out of funds
legally available for the payment of dividends. During July 1996, RMS Limited
Partnership, the sole owner of the Company's Class B Common Stock, elected to
convert all of its Class B Common Stock into an equal number of shares of the
Company's regular Common Stock in accordance with the provisions of the
Company's Certificate of Incorporation. The Class B Common Stock converted was
retired and is not subject to reissue. As a consequence of the conversion, all
of the Company's Common Stock currently outstanding or eligible to be issued
under the Company's restated Certificate of Incorporation now votes as a single
class on a one vote per share basis on all matters submitted to shareholders.
Pursuant to the Company's Stock Option and Restricted Stock Plan, 100,000
and 50,000 shares of restricted stock were granted in October 1992 to the
Company's former Chairman of the Board and to the President and Chief Executive
Officer, respectively. In connection therewith, the Company recorded $140,625 of
unearned compensation and a corresponding amount to additional paid-in capital
based on the price of the shares at the grant dates. The shares vest in five
equal installments beginning July 13, 1993. The amount amortized relating to the
unearned compensation was $32,342 for the year ended August 31, 1994. In
connection with the resignation of certain officers of the Company, 90,000
shares of restricted stock were retired during the year ended August 31, 1994.
As a result, unearned compensation of $82,500 was eliminated and restored to
additional paid-in capital, along with the par value of $900. During the year
ended August 31, 1995, the restriction on the remaining 60,000 shares was
rescinded by the Company's Board of Directors.
During the year ended August 31, 1996, the Company issued 27,450 shares of
restricted stock to three of its executive officers. In connection therewith,
the Company recorded $243,618 of unearned compensation and a corresponding
amount to additional paid-in capital based on the price of the shares at the
grant date. The shares originally vested in three equal installments beginning
February 1996. In connection with the resignation of certain officers of the
Company, 11,764 and 15,686 shares of the restricted stock became automatically
fully vested during the year ended August 31, 1996, and the four months ended
December 31, 1996, respectively. As a result, compensation expense of $150,811
and $92,807 was recognized during the year ended August 31, 1996, and the four
months ended December 31, 1996, respectively, in connection with such restricted
stock grants.
During the year ended August 31, 1996, certain management personnel of the
Company agreed to 15 percent pay reductions in exchange for the grant of
restricted stock. In connection with such Salary Exchange Program, the Company
recorded $226,402 of unearned compensation and a corresponding amount to
additional paid-in capital based on the price of the shares at the grant date.
The shares originally vested in two equal installments beginning August 1997. In
connection with the resignation of certain officers of the Company, 9,688 shares
of the restricted stock became automatically vested. As a result, compensation
expense of $59,324 was recognized during the four months ended December 31,
1996, in connection with such restricted stock grants. In connection with the
resignation of certain management personnel of the Company, 7,670 shares of
restricted stock were retired during the four months ended December 31, 1996. As
a result, unearned compensation of $46,961 was eliminated and restored to
additional paid-in-capital, along with the par value of $77. During the year
ended December 31, 1997, the restriction on the remaining 19,617 shares was
rescinded by the Company's Board of Directors. As a result, compensation expense
of $120,117 was recognized during the year ended December 31, 1997.
During the year ended December 31, 1997, the Company issued 44,375 shares
of restricted stock to three of its executive officers. In connection therewith,
the Company recorded $177,500 of unearned compensation and a corresponding
amount to additional paid-in capital based on the price of the shares at the
grant date. The shares vest in two equal installments beginning February 1998.
40
<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In November 1992, the Board of Directors authorized the Company to proceed
with a program to purchase odd lot shareholdings of common stock from
shareholders holding less than 100 shares. In connection therewith, the Board of
Directors authorized the purchase of up to 250,000 shares of common stock at
prevailing market prices. The Program was consummated in January 1993 with
142,940 shares being purchased at $2.50 per share. The purchased shares along
with acquisition costs are recorded as treasury stock.
During the year ended August 31, 1994, the Company issued 10,003 shares of
treasury stock to The Precision Systems, Inc. Retirement Savings Plan.
Accordingly, $31,780 of compensation expense and a corresponding reduction in
the treasury stock balance was recorded during the year ended August 31, 1994.
On December 13, 1993, RMS Limited Partnership ("RMS") purchased 10,000
shares of the Company's non-voting Series A Preferred Stock, par value $.01 per
share with a liquidation preference of $580 per share (the "Stated Value") from
PSI for $5,800,000. The preferred shares are convertible into Common Stock of
the Company at the election of the holders at any time following December 31,
1994, at a conversion price of $4.76 per share. A cumulative dividend of 6
percent per year is payable quarterly on the preferred shares prior to the
payment of any other dividends. Interest accrues on accumulated but unpaid
dividends at the rate of 6 percent yearly compounded quarterly. The Series A
Preferred Stock is redeemable, in whole or part, at the option of the Company
following December 31, 1994, at 100 percent of the Stated Value plus accrued
dividends and interest. The designation of preferences relating to the Series A
Preferred Stock include restrictions relating to the issuance of any shares
senior to the preferred shares, the increase in the authorized number of
preferred shares, the payment of dividends on junior classes of stock and the
incurrence of indebtedness.
The Company acquired The Renaissance Group, Inc. ("TRG") in July 1994 in
exchange for $3,750,000 in cash, 1,398,600 shares of PSI common stock and
options to acquire 101,400 shares of PSI common stock (see Note 16).
During November 1995, Vulcan Ventures, Incorporated ("Vulcan") exercised
warrants to purchase 500,000 shares of the Company's common stock at $5.00 per
share, 500,000 shares of common stock at $6.00 per share, and 500,000 shares of
common stock at $6.25 per share, thereby generating additional capital to the
Company of $8,625,000. Vulcan's third tier warrants for the purchase of 500,000
shares originally were for Class B Common Stock at $7.00 per share or, if an
amendment to the Certificate of Incorporation of the Company increasing the
authorized number of shares of Class B Common Stock had not been effected by the
date of exercise, then the warrants to purchase 500,000 of the Company's Common
Stock were to be exercised at $6.25 per share.
The Company acquired Vicorp, N.V. ("Vicorp") in April 1996 in exchange for
3,135,467 shares of newly issued common stock in exchange for substantially all
of the outstanding shares of Vicorp. In addition, the Company assumed certain
outstanding obligations of Vicorp and converted options issued to Vicorp
employees into options to purchase the Company's stock.
Vicorp shareholders received 29.46 shares of the Company's common stock for
each share of Vicorp stock. The discounted exchange value of the shares to be
issued to Vicorp holders and the value of options to be issued to Vicorp
employees, together with an agreement to pay certain obligations of Vicorp,
equal approximately $32,000,000. The agreement includes a lock-up provision and
a right of first refusal back to the Company on certain shares of the Company's
stock that, as a result of this transaction, are held by certain current Vicorp
shareholders. The acquisition has been accounted for using the purchase method
of accounting.
The Company acquired BFD Productions, Inc. ("BFD") in October 1996 for
approximately $1,500,000 in cash and approximately 272,000 shares of
newly-issued Common Stock for a total purchase price of approximately $3,400,000
in exchange for all of the capital stock of BFD. The acquisition was accounted
for using the purchase method of accounting.
41
<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 percent 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 S.A. In connection with the financing, each
Shareholder invested $2,000,000 and received a promissory note (the "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 percent. 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.
11. STOCK OPTIONS AND RESTRICTED STOCK
The Stock Option and Restricted Stock Plan (the "Employee Plan") provides
for the grant to key employees of options to purchase Common stock at prices as
established by the Compensation/Benefits Committee (the "Committee") of the
Board of Directors. The options generally become exercisable with respect to
one-fifth of the shares covered by each option each year over a five-year period
beginning one year from the date of grant. In most cases, the options expire
five years from the date they vest and become exercisable. The Employee Plan
also allows the Committee to grant shares of restricted stock to key employees
subject to such terms and conditions as may be established from time to time by
the Committee.
The Stock Option Plan for Outside Directors (the "Directors' Plan")
provides for the grant of options to outside directors. The exercise price of
options granted under the Directors' Plan will be the fair market value on the
date of grant. The options vest and become exercisable equally over three years
beginning on the date of grant. All of the options expire five years from the
date they vest and become exercisable.
The Company has granted options to purchase common stock under option plans
as follows:
<TABLE>
<CAPTION>
Weighted
Average
Stock Option Plan Exercise
Employee Plan Directors' Plan Total Price
<S> <C> <C> <C>
Authorized............................... 4,500,000 500,000 5,000,000
------------------- -------------------- -----------------
Outstanding-- August 31, 1994............ 1,721,516 100,000 1,821,516 $ 2.29
Granted.................................. 544,988 50,000 594,988 3.78
Exercised ($.01 to $4.88 per share)...... (667,749) (25,000) (692,749) 2.07
Canceled................................. (184,239) - (184,239) 3.01
------------------- -------------------- ------------------
Outstanding-- August 31, 1995............ 1,414,516 125,000 1,539,516 2.76
Granted.................................. 1,426,356 125,000 1,551,356 8.89
Exercised ($.01 to $15.50 per share)..... (348,470) (25,000) (373,470) 2.14
Canceled................................. (158,636) - (158,636) 4.97
------------------- -------------------- ------------------
Outstanding-- August 31, 1996............ 2,333,766 225,000 2,558,766 6.26
Granted.................................. 397,000 - 397,000 6.73
Exercised ($.01 to $9.00 per share)...... (112,154) - (112,154) 1.52
Canceled................................. (236,964) - (236,964) 10.31
------------------- -------------------- ------------------
Outstanding-- December 31, 1996.......... 2,381,648 225,000 2,606,648 6.17
Granted.................................. 1,183,923 50,000 1,233,923 3.21
Exercised ($.01 to $2.50 per share)...... (242,631) (10,000) (252,631) 1.25
Canceled................................. (1,148,697) (50,000) (1,198,697) 7.73
------------------- -------------------- ------------------
Outstanding-- December 31, 1997.......... 2,174,243 215,000 2,389,243 4.10
=================== ==================== =================
At December 31, 1997, December 31, 1996, August 31, 1996, and August 31,
1995, the number of exercisable options were 1,192,947, 1,355,906,
1,291,218 and 1,024,923, respectively. The weighted average fair value of
options granted during the year ended December 31, 1997, the four months
ended December 31, 1996 and the year ended August 31, 1996 were $2.31 per
share, $4.49 per share, and $6.08 per share, respectively.
</TABLE>
<TABLE>
<CAPTION>
The following table summarizes information about stock options outstanding at December 31,
1997:
Options Outstanding Options Exercisable
------------------------------------------------------ ------------------------------------
Weighted-Average
Remaining
Range of Number Contractual Weighted-Average Number Weighted-Average
Exercise Price Outstanding Life Exercise Price Exercisable Exercise Price
- -------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ .01- 1.98 387,534 8.73 years $1.33 338,359 $1.49
2.03- 3.94 1,550,209 10.82 3.19 644,889 3.12
4.00- 5.50 103,000 10.66 4.54 52,933 4.74
6.13- 7.75 108,000 10.23 7.72 45,900 7.72
8.88- 9.00 80,000 10.08 8.95 40,000 8.94
11.50-12.38 10,500 10.20 11.54 4,200 11.54
14.50-15.75 150,000 10.43 14.71 66,666 14.69
--------- ---------
$ .01-15.75 2,389,243 1,192,947
========= =========
</TABLE>
42
<PAGE>
PRECISIONS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company applies Accounting Principles Board Opinion 25 and related
Interpretations in accounting for its stock option and restricted stock plans.
Had compensation costs for the Company's stock option and restricted stock plans
been determined based on the fair value at the grant dates for awards under
these plans consistent with the method prescribed by Financial Accounting
Standard Board Statement No. 123, the Company's net loss and earnings per share
on a pro forma basis would have been:
<TABLE>
<CAPTION>
Four
Year Months Year
Ended Ended Ended
December 31, December 31, August 31,
1997 1996 1996
---- ---- ----
<S> <C> <C> <C>
Basic and diluted net loss applicable to common stock........ $ (29,786,989) $ (4,404,318) $ (36,756,883)
Basic and diluted net loss per share.................. (1.69) (.25) (2.50)
</TABLE>
The fair value of each stock option and restricted stock grant was
estimated using the Black-Scholes options-pricing model. The following
assumptions were used for the year ended December 31, 1997, the four months
ended December 31, 1996 and the year ended August 31, 1996, respectively: (1)
risk-free interest rates of 6.2 percent, 5.7 percent, and 6.0 percent; (2)
volatility of 92.0 percent, 68.4 percent, and 68.8 percent; (3) dividend yield
of zero for all periods; and (4) expected lives of 5.0 years, 2.6 years, and 2.9
years. Results can vary materially depending on the assumptions applied within
the model and the resulting compensation expense may not be representative of
compensation expense to be incurred on a pro forma basis in the future.
12. BENEFITS PLANS
The Company's Board of Directors authorized the establishment of the
Precision Systems, Inc. Retirement Savings Plan pursuant to Internal Revenue
Code Section 401(k) covering substantially all employees. Matching employer
contributions are set at the discretion of the Board of Directors. There were no
matching employer contributions made during the year ended December 31, 1997,
during the four months ended December 31, 1996, and during the years ended
August 31, 1996 and 1995.
In association with the Vicorp acquisition, certain United States based
employees are covered by the Vicorp Interactive Systems ("VIS") Retirement
Savings Plan pursuant to Internal Revenue Code Section 401(k). Under such plan,
participating employees may defer a certain percent of their pre-tax salary but
not more than statutory limits. VIS contributes $.25 for each $1.00 a
participant contributes within a maximum contribution of 3 percent of a
participant's earnings. Matching employer contributions made during the year
ended December 31, 1997, during the four months ended December 31, 1996, and for
the year ended August 31, 1996 were approximately $64,000, $26,000, and $40,000,
respectively.
Additionally, the Company's Board of Directors authorized adoption of the
Employee Stock Ownership Plan which provides for contributions of shares of
common stock to the plan in amounts as authorized by the Board of Directors. To
date, no common stock has been contributed to the plan.
13. RELATED PARTY TRANSACTIONS
During the year ended August 31, 1995, the Company issued 7,596 shares of
restricted stock (exercise price of $4.44 per share) to one of the members of
the Company's Board of Directors. The effect of this issuance was to increase
the Company's compensation expense by $33,726.
During the year ended December 31, 1997, the four months ended December 31,
1996, and the year ended August 31, 1996, the Company recorded expenses of
$120,000, $40,000, and $70,000, respectively, for consulting services provided
by one of the members of the Company's Board of Directors.
43
<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Historically, activity with Home Shopping Network, Inc. ("HSN") had been
presented as affiliate transactions. Due to ownership interest changes of former
common shareholders, HSN is no longer considered a related party and all amounts
of disclosures relating to the change have been reclassified and/or modified.
The following information relates to certain historical relationships between
the Company and HSN.
Distribution Agreement
The Company and HSN entered into the Distribution Agreement (the
"Distribution"), which provides for, among other things, the principal corporate
transaction required to effect the Distribution, the division between HSN and
the Company of certain liabilities, and certain other agreements governing the
relationship between HSN or its subsidiaries and the Company following the
Distribution. The Distribution Agreement provides for cooperation between HSN
and the Company in obtaining initial insurance coverage for the Company after
the Distribution and provides for allocation of benefits under existing
insurance policies between HSN and the Company. To date, no claim has resulted
which would be governed by the Distribution Agreement.
Moreover, the Distribution Agreement provides for each party to indemnify
the other against certain liabilities that may arise in connection with the
Distribution or from the Company's business prior to or following the
Distribution. In particular, HSN will indemnify the Company against losses from
existing or future claims relating to the Company's voice processing business
prior to the Distribution other than warranty or contract claims of the
Company's customers arising in connection with the sale, lease or license of
VRUs or the Enhanced Services Platform ("ESP") prior to or following the
Distribution. The Company will indemnify HSN, however, against certain
liabilities including any claims to contractual, warranty or indemnification
obligations of the Company arising in connection with the sale, lease or license
of VRUs or the ESP and against any claims that may be asserted that any hardware
manufactured or assembled by the Company's customers relating to the service
bureau business conducted by the Company prior to the Distribution, and each
party will indemnify the other against claims relating to misstatements or
omissions of material facts provided by such party in the Information Statement
or in the Form 10 of which it is a part, filed pursuant to the Distribution.
To date, certain situations have occurred in the ordinary course of
business that were covered under the Distribution Agreement. In particular, in
1993 the Company received $222,500 from HSN pursuant to the indemnification
provisions of the Distribution Agreement. This related to certain claims and
actions brought against the Company while a wholly-owned subsidiary of HSN.
These claims and actions have been settled.
Software License Agreement
The Company licensed certain software and patented technology used in the
ESP to HSN. The license is non-transferable, perpetual and HSN is the exclusive
licensee of the software and patented technology for use in the televised
electronic retail industry.
Additionally, HSN also licensed from the Company the proprietary operating
and application software used in the VRUs developed by the Company for HSN.
During fiscal 1994, $132,000 was paid to the Company under this agreement. HSN
is also the exclusive licensee of this software in the televised electronic
retail industry.
Systems Maintenance and Support Agreement
The Company and HSN have also entered into an agreement pursuant to which
the Company will complete the final modifications of HSN's ESP platform and
provide maintenance and support services for the platform. The maintenance
agreement has an initial term of one year that is automatically extended for
additional one-year terms at the discretion of both parties. The maintenance
agreement is terminable if the Company fails to provide the maintenance services
specified by the agreement or, with prior notice, at the end of the initial term
of any subsequent extension.
44
<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Credit Agreement
The Company entered into an unsecured line of credit agreement with HSN in
the amount of $5,000,000. The interest rate was prime plus 1 percent. Principal
and interest were due on July 31, 1995, or one year from the date of the first
draw, whichever is earlier. Restrictions contained in the agreement include, but
are not limited to, the payment of dividends, certain redemption of capital
stock of the Company, and the incurrence of senior debt. The Company received
$5,000,000 from HSN during August 1994 relating to this line of credit agreement
and such amounts were repaid during fiscal 1995.
14. SEGMENT INFORMATION
<TABLE>
<CAPTION>
Four
Year Months
Ended Ended
December 31, December 31, Years Ended August 31,
1997 1996 1996 1995
<S> <C> <C> <C> <C>
Revenues:
U.S. operations........................... $ 17,625,009 $ 5,651,027 $ 18,275,706 $ 21,521,733
European operations....................... 18,984,826 8,617,025 15,359,123 -
Other international operations............ 5,621,048 856,896 326,454 -
Eliminations.............................. (1,618,496) (262,925) (7,258,456) -
---------------- ---------------- ---------------- ------------
Total.................................. $ 40,612,387 $ 14,862,023 $ 26,702,827 $ 21,521,733
================ ================ ================ ================
Operating Loss:
U.S. operations........................... $ (11,655,083) $ (3,430,521) $ (14,581,367) $ (2,516,796)
European operations....................... (14,832,808) (693,560) (21,768,987) -
Other international operations............ 780,886 414,417 (113,221) -
Eliminations.............................. - - - -
---------------- ---------------- ---------------- ------------
Total.................................. $ (25,707,005) $ (3,709,664) $ (36,463,575) $ (2,516,796)
================ ================ ================ =================
Identifiable Assets:
U.S. operations........................... $ 23,694,016 $ 25,802,225 $ 16,876,684 $ 27,327,925
European operations....................... 3,288,398 21,904,526 29,193,442 -
Other international operations............ 2,148,158 2,115,000 1,487,220 -
Eliminations.............................. (655,019) (627,376) - -
---------------- ---------------- ---------------- ------------
Total.................................. $ 28,475,553 $ 49,194,375 $ 47,557,346 $ 27,327,925
================ ================ ================ ================
</TABLE>
15. SIGNIFICANT CUSTOMERS
During the year ended December 31, 1997, the four months ended December 31,
1996, and the years ended August 31, 1996 and 1995, a substantial portion of the
Company's revenues have come from SEMA, MCI, and HSN. The dollar and
percentage amounts are as follows:
<TABLE>
<CAPTION>
December 31, December 31, August 31,
-----------------------------------------------
1997 1996 1996 1996 1995 1995
----------------------- ----------------------- -------------- -------- -------------- --------
Amounts % Amounts % Amounts % Amounts %
-------------- -------- -------------- -------- -------------- -------- -------------- -------
<S> <C> <C> <C> <C> <C> <C>
SEMA..................... $ 2,425,000 6.0% $ 274,767 1.9% $ - - % $ - - %
MCI...................... 2,753,801 6.8% 873,324 5.9% 11,875,428 44.5% 13,683,303 63.6%
HSN...................... - - % 481,766 3.2% 1,504,632 5.6% 1,909,354 8.9%
Other customers.......... 35,433,586 87.2% 13,232,166 89.0% 13,322,767 49.9% 5,929,076 27.5%
-------------- -------- -------------- -------- -------------- -------- -------------- --------
$ 40,612,387 100.0% $ 14,862,023 100.0% $ 26,702,827 100.0% $ 21,521,733 100.0%
============== ======== ============== ======== ============== ======== ============== ========
</TABLE>
45
<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. BUSINESS ACQUISITIONS/DISPOSALS
On June 30, 1993, the Company acquired Active Designs Inc. for
approximately $150,000 in cash, assumption of $150,000 in accounts payable and a
$100,000 non-interest bearing note due January 1, 1994. Subsequent to the
acquisition, Active Designs, Inc. was renamed Interactive Services, Inc.
Effective April 30, 1995, certain assets, liabilities, and the business of
Interactive Services, Inc., were sold to EarthCall Communications Corporation
for approximately $1,000,000 in cash and the assumption of certain liabilities.
The gain on disposition of such activity in the amount of $529,419 has been
accounted for as a gain from sale of discontinued subsidiary. Revenues of
Interactive Services, Inc., for the four months ended December 31, 1996 and for
the years ended August 31, 1996, 1995 and 1994, were $0, $0, $1,607,100, and
$789,555, respectively.
The Company acquired The Renaissance Group, Inc. in July 1994 in exchange
for $3,750,000 in cash, 1,398,600 shares of PSI common stock with a market value
of $3,375,000 and options to acquire 101,400 shares of PSI common stock for $.01
per share, which collectively is a purchase price of $7,125,000. Additionally,
during the year ended August 31, 1995, PSI paid state and federal income taxes
of $138,547 relating to the operation of TRG for the period from January 1,
1994, through July 24, 1994. TRG provides enhanced services for network based
platforms and applications. This acquisition has been accounted for using the
purchase method of accounting and, accordingly, the purchase price has been
allocated to the assets acquired (approximately $638,000) and the liabilities
assumed ($363,817) based on the estimated fair values at the date of
acquisition. The purchase price associated with the acquisition exceeded the net
assets of TRG by approximately $6,900,000 which was assigned to goodwill. The
operating results of TRG for the period from July 25, 1994 to August 31, 1994
are included in the Company's consolidated results of operations for year ended
August 31, 1994.
The Company acquired substantially all of the capital stock of Vicorp, N.V.
("Vicorp") in April 1996 by issuing 3,135,467 shares of newly issued common
stock. In addition, the Company assumed certain outstanding obligations of
Vicorp and converted options issued to Vicorp employees into options to purchase
the Company's stock.
Vicorp shareholders received 29.46 shares of the Company's common stock for
each share of Vicorp stock they owned. The discounted exchange value of the
shares issued to Vicorp holders and the value of options issued to Vicorp
employees, together with an agreement to pay certain obligations of Vicorp,
equaled approximately $31,000,000. The agreement includes a lock-up provision
and a right of first refusal back to the Company on certain shares of the
Company's stock that, as a result of this transaction, will be held by certain
current Vicorp shareholders. The acquisition was accounted for by the purchase
method of accounting. The purchase price of $32,434,985 was comprised of Company
Common Stock valued at $29,521,577, Company stock options with in-the-money
value of $1,469,321, and other direct acquisition costs totaling $1,444,087.
The Company allocated the excess purchase price over the fair value of net
tangible assets acquired to the following identifiable intangible assets --
developed technology value, assembled work force value, goodwill and purchased
in-process research and development. As of the acquisition date, technological
feasibility of the in-process technology has not been established and the
technology has no alternative future use. Therefore, the Company expensed the
amount of the Vicorp purchase price allocated to in-process research and
development of $19,500,000 as of the date of the acquisition in accordance with
generally accepted accounting principles.
The amount of the purchase price allocated to in-process research and
development was determined by estimating the stage of development of in-process
research and development projects at the date of acquisition, estimating cash
flows resulting from the expected revenues generated from such projects, and
discounting the net cash flows back to their present value using a discount rate
of 20 percent, which represents a premium to the Company's cost of capital. The
estimated revenues assume annual revenue growth rates of between approximately
15 to 40 percent during 1999 to 2005. Estimated revenues peek in 2005 and
declines thereafter as other new products are introduced. These projections were
based on management's estimate of market size and growth, expected trends in
technology and the expected timing of new product introductions. The remaining
identifiable intangible assets from the Vicorp acquisition are amortized on a
straight-line basis over lives ranging from three to seven years. If these
in-process research and development projects are not successfully developed, the
Company may not realize the value assigned to the in-process research and
development projects. In addition, the value of the other acquired intangible
assets may also become impaired.
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 following unaudited pro-forma summary presents the Company's results of
operations as if the acquisition had occurred at the beginning of the period
presented. This summary does not purport to be indicative of what would have
occurred had the acquisition been made as of this date or of results which may
occur in the future. This method of combining the companies is for the
presentation of unaudited pro-forma summary results of operations. Actual
statements of operations of the Company and of Vicorp were combined from the
effective date of the acquisition forward, with no retroactive restatement.
<TABLE>
<CAPTION>
Pro-Forma Unaudited Year Ended August 31, 1996
<S> <C>
Revenue....................................................................................... $ 50,621,909
===============
Net loss...................................................................................... $ (35,639,010)
===============
Net loss per common share..................................................................... $ (2.13)
===============
</TABLE>
46
<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company acquired BFD in October 1996 cash and approximately 272,000 shares
of newly-issued Common Stock for a total purchase price of approximately
$3,400,000 in exchange for all of the capital stock of BFD. The acquisition will
be accounted for using the purchase method of accounting. This purchase price of
$3,394,749 was comprised of $1,500,000 in cash, Company common stock valued at
$1,655,833, and other direct acquisition costs totaling $238,916.
The purchase price allocation among the assets acquired and liabilities
assumed in the acquisition of BFD are as follows:
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
===============
The following unaudited pro-forma summary presents the Company's results of
operations as if the BFD acquisition had occurred at the beginning of the period
presented. This summary does not purport to be indicative of what would have
occurred had the acquisition been made as of this date or of results that may
occur in the future. This method of combining the companies is for the
presentation of unaudited pro-forma summary results of operations. Actual
statements of operations of the Company and of BFD were combined from the
effective date of the acquisition forward, with no retroactive restatement.
<TABLE>
<CAPTION>
Pro-Forma Unaudited Four Months Ended December 31, 1996
<S> <C>
Revenues...................................................................................... $ 15,119,530
===============
Net loss...................................................................................... $ (3,510,055)
===============
Net loss per common share..................................................................... $ (.20)
===============
</TABLE>
17. OTHER MATTERS
Effective August 31, 1996, John Hindman, Chief Operating Officer, Mike
Felix, Vice President of Marketing, and Alan Donahue, Vice President of Sales,
resigned or were terminated from the Company.
The Company entered into a settlement agreement with Mr. Hindman, the terms
of which provided for severance pay of $50,000 and a six-month consulting
agreement for approximately $87,000. A consulting agreement was also entered
into with Mr. Felix for three months for $37,500. Additionally, the Company
automatically fully vested certain restricted stock originally granted to Mr.
Hindman and Mr. Felix (See Note 10).
On October 25, 1996, Russell I. Pillar resigned as the Company's President
and Chief Executive Officer. On December 10, 1996, Mr. Pillar resigned from the
Company's Board of Directors. The Company entered into a settlement agreement
with Mr. Pillar, the terms of which provide for severance pay of $230,000 and a
six-month consulting agreement for approximately $115,000. Additionally, the
Company fully vested certain restricted stock originally granted to Mr. Pillar
(see Note 10).
John D. Loewenberg did not stand for reelection as Chairman of the Board of
the Company. Richard T. Liebhaber was elected as the Company's new Chairman of
the Board of the Company as of June 1996. During February 1997, Mr. Liebhaber
resigned as Chairman of the Board and was replaced by Willem Huisman.
18. LEGAL PROCEEDINGS
The Company is subject to certain legal proceedings in the ordinary course
of business. The discussion below summarizes the most material of such
proceedings. In the opinion of management, these and other legal proceedings
will not have a material adverse effect on the operations or the financial
condition of the Company.
Rachael Lefkovits v. Hector Acalde, Bert Kolde, Kwang-I Yu, Willem Huisman,
Ian Dalziel, Francis R. Santangelo, and Precision Systems, Inc. On March 11,
1998, a class action lawsuit was filed in the Court of Chancery of the State of
Delaware in and for New Castle County, alleging breach of fiduciary duty by the
Directors of Precision Systems, Inc. in regard to the Exchange Transaction
proposed by Speer Communication Limited Partnership and Speer Virtual Media
Limited Partnership. The Complaint alleges, in part, that because the majority
shareholders of the Company (RMS, Alta, and Vulcan) will benefit from the
proposed transaction, and that because the proposal indicates that Directors
will be assured of continuation in office, that the Directors cannot, therefore,
fairly and independently act upon the proposal in the best interests of all
public shareholders. The Complaint seeks preliminary and permanent injunctive
relief, as well as compensatory damages. The Company believes these claims to be
without merit and will vigorously defend.
47
<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
InterVoice, Inc. v. Precision Systems, Inc. and Vicorp Interactive Systems,
Inc. On April 11, 1996 InterVoice, Inc. ("INTV") filed suit against the Company
in the Federal District Court for the Northern District of Texas (Dallas)
alleging infringement of various U.S. Patents owned by INTV and false
advertising. The parties settled this lawsuit on December 1, 1997. Under the
terms of the settlement, all counts were dismissed with prejudice, and the
Company is licensed to sell systems that practice the InterVoice patents. The
patents relate to the implementation of applications and services in the
Intelligent Network architecture that are capable of providing dual Intelligent
Peripheral and Service Node functionality. The InterVoice patents covered by the
license are U.S. Patents 5,469,500; 5,644,631; and 5,572,581. The settlement has
no material adverse financial impact on the Company.
Daniel Schultz v. Precision Systems, Inc. et al. On December 13, 1996,
following the dismissal of his federal court action alleging similar claims,
Daniel Schultz, a holder of Vicorp shares and options, filed a three-count
complaint against the Company; Russell I. Pillar; John Loewenberg; Alta; Didier
Primat; Primwest Holding, N.V.; and Ian Dalziel, in a civil action in the
Circuit Court of the Sixth Judicial Circuit In and For Pinellas County, Florida.
The complaint was later amended to allege seven counts. In Counts One and Two,
the plaintiff alleges that the Company and Messrs. Pillar and Loewenberg
fraudulently induced him to assist the Company in its acquisition of Vicorp by
representing to him that he would receive an executive position with Vicorp if
the acquisition was successful. In Counts Three through Six, the plaintiff
alleges that all the defendants intentionally interfered with his prospective
economic advantage and contractual relationships, and conspired to do so, by
impairing his ability to exercise his Vicorp options and his ability to convert
his Vicorp shares into shares of the stock of the Company. In Count Seven,
plaintiff alleges that the Company and Messrs. Pillar and Loewenberg breached an
oral contract to employ the plaintiff in an executive position. The case is in
discovery. The Company has defenses and will vigorously defend.
Daniel Gilbert Schultz v. Vicorp et al. This action was initiated in the
Court of First Instance, Curacao, Netherlands Antilles ("Court"), on March 29,
1996. The plaintiff filed a petition denominated a "complaint in summary
process" against Vicorp and Alta. The Company is not a party to this proceeding.
In this action, the plaintiff alleged that Vicorp had denied him access to the
books and records of Vicorp, and that Alta (as the then controlling shareholder
in Vicorp) had both refused to provide him access to Vicorp's records and
refused to give him information on Alta's negotiations with third parties for
the sale of its shares of Vicorp stock. The plaintiff further alleged that these
actions impaired his ability to exercise certain put and call options that he
held with respect to certain shares of the stock of Vicorp. The plaintiff sought
various court orders requiring Alta and Vicorp to provide certain financial data
to him, to record in the Vicorp share register the option he held, and to accept
and pay for certain of the Plaintiff's shares that were the subject of a put
option. The plaintiff also sought an order prohibiting Alta from reducing its
ownership interest in Vicorp. On May 17, 1996, the Court dismissed all of the
plaintiff's claims. The plaintiff appealed to the Court of Appeals of the
Netherlands Antilles and Aruba on June 3, 1996, and this appeal was dismissed on
September 23, 1997.
Daniel Gilbert Schultz v. Alta Investissements, S.A. et al. This action was
initiated in the Court of First Instance, Curacao, Netherlands Antilles on April
23, 1996. The plaintiff filed a petition denominated a petition "on an
abbreviated term" against Alta, the Company, and Vicorp. In his petition, the
plaintiff sought a court order nullifying both the transfer by Alta to the
Company of Alta's shares of Vicorp stock and the transfer by the Company to Alta
of certain shares of the Company's stock, both of which transfers were carried
out pursuant to the Share Exchange Agreement between the Company and Alta dated
April 13, 1996. The plaintiff alleged that insufficient notice was given to him
of a Vicorp shareholders' meeting at which a resolution approving the share
exchange was adopted, and that consequently the defendants breached a duty of
good faith towards him. The plaintiff seeks court orders annulling the two share
transfers, and prohibiting Vicorp from acting on any instructions received from
the Company. The Court has ruled in favor of the defendants and dismissed all
the plaintiff's claims. The plaintiff's time to appeal has expired without an
appeal being taken.
48
<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Daniel Gilbert Schultz v. Vicorp France S. A. et al. This action was
initiated in the French Labor Court (the "Conseil de Prud'hommes") on March 7,
1996. The plaintiff filed claims against both Vicorp France S.A. and Vicorp Asia
Holding arising out of his employment relationships with companies in the Vicorp
Group. The Company is not a party to this proceeding. The Plaintiff has alleged
that the two defendants are liable to him, under provisions of French law, for
damages for dismissal without real and serious cause, for damages for abusive
indemnity, for dismissal indemnities, and for a paid vacation indemnity. The
French Labor Court dismissed the plaintiff's claims, and the plaintiff has
appealed. Under the terms of the Share Exchange Agreement between the Company
and Alta, Alta has agreed to indemnify the Company and Vicorp against any
damages or liability imposed against Vicorp in connection with this action.
Claim of Robert Maube. On March 13, 1997, Mr. Maube, a former employee of
Vicorp N.V., initiated an action in the Labour Court of Brussels, Belgium,
against the Belgian, Dutch and Swiss subsidiaries of Vicorp N.V. In the action,
Mr. Maube is seeking 34,166,134 Belgian Francs (approximately $979,900) in
connection with the termination of his employment. Such amount includes claims
for gross payments as indemnity in lieu of notice, holiday payments, year-end
premium payments, damages for an alleged abusive dismissal, additional
compensation and a prorated bonus. Mr. Maube has requested the Court to set a
briefing and oral argument schedule, but no such schedule has yet been
established. The Company has defenses and will defend vigorously.
19. SUBSEQUENT EVENT
In April 1998, Precision Systems, Inc. announced that its Board of
Directors approved and the Company entered into a definitive agreement
("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 million 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
million shares of Precision Systems' common stock.
49
<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $3 million line of
credit to be made available by Speer upon signing of the Agreement for operating
capital requirements. After the transaction, Mr. Speer will control over eighty
percent (80%) 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.
On March 11, 1998, a class action lawsuit was filed in the Court of
Chancery of the State of Delaware in and for New Castle County, alleging breach
of fiduciary duty by the Directors of Precision Systems, Inc. in regard to the
Exchange Transaction proposed by Speer Communication Limited Partnership and
Speer Virtual Media Limited Partnership. The Complaint alleges, in part, that
because the majority shareholders of the Company (RMS, Alta, and Vulcan) will
benefit from the proposed transaction, and that because the proposal indicates
that Directors will be assured of continuation in office, that the Directors
cannot, therefore, fairly and independently act upon the proposal in the best
interests of all public shareholders. The Complaint seeks preliminary and
permanent injunctive relief, as well as compensatory damages. The Company
believes these claims to be without merit and will vigorously defend.
50
<PAGE>
PART III
Item 9 -- Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
On October 31, 1997, the Company filed a report on Form 8-K announcing that
on October 29, 1997, the Company had retained the services of Coopers and
Lybrand L.L.P. to serve as its auditors for the fiscal year ending December 31,
1997, and dismissed the accounting firm of Deloitte & Touche L.L.P., who was
engaged as the Company's principal auditors since the Company became publicly
traded in 1992.
Item 10 - Directors and Executive Officers of the Registrant
Information Regarding Directors
Willem Huisman, 63, was appointed to the Company's Board of Directors
in January 1997 and appointed Chairman of the Board in February 1997. He became
President and Chief Executive Officer ("CEO") of the Company during October 1996
and has been with the Company since April 1996. Prior to joining the Company,
Mr. Huisman held key positions at several large corporations. Most recently, he
was Chairman of the Board of Management at RAET N.V., a Dutch corporation
specializing in automation and software. Other previous positions include
Chairman and CEO at Philips Communications Systems Division; Chairman and CEO at
Philips Defense and Control Systems Division, Executive Vice President at AT&T
Philips Joint Venture; and Managing Director of Telecommunications Cables at NFK
Cable.
Hector Alcalde, 64, joined the Company as a member of the Board of
Directors in January 1994. In 1973, Mr. Alcalde founded the firm Alcalde & Fay,
a government and public affairs consulting firm in Washington, D.C., and serves
as its President and Chief Executive Officer. He has provided consulting
services to numerous local governments and national and international
organizations and has served on several public and corporate boards.
Bert Kolde, 44, was appointed to the Company's Board of Directors in
June 1995. Mr. Kolde also serves as Vice Chairman of the Portland Trail Blazers
and Seattle Seahawks, Oregon Arena Corp., First and Goal Corp., and as President
of the Paul G. Allen Virtual Education Foundation and the Paul G. Allen Forest
Protection Foundation. Mr. Kolde also serves as Chairman of Asymetrix Learning
Systems, Inc., a company he helped found with Paul Allen in 1985, and is Vice
President and Director of Vulcan Ventures, Inc. Mr. Kolde is also a Director of
MetaCreations Corp. and Software.net Corp.
Ian M. Dalziel, 50, was appointed to the Company's Board of Directors
in June 1996. Since 1992, Mr. Dalziel has served as Chairman of the Board of
C.S.I., Inc. In addition, since 1989, Mr. Dalziel has served as a Director of
Lepercq-Amcur Fund N.V. and as Chairman at Continental Assets Trust PLC. He was
a member of the European Parliament from 1979 to 1984.
Francis R. Santangelo, 65, was appointed to the Company's Board of
Directors in January, 1997. Mr. Santangelo is an independent legal and financial
consultant with over 30 years experience in the financial community. From 1959
to 1988, Mr. Santangelo was a principal in Francis R. Santangelo & Co., a
specialist firm on the American Stock Exchange and is also a former member of
the Board of Directors of the American Stock Exchange. Mr. Santangelo also
served on the Company's Board from August 24, 1991 to July 8, 1993 and has been
a consultant to the Company from February 1, 1996 to January 31, 1998.
51
<PAGE>
Executive Officers
The following is a list of the current executive officers of the
Company who do not serve on the Board of Directors:
Gregory L. Baltzer, 32, joined the Company in November 1995 and
currently serves as the Chief Operating Officer. Prior to joining the Company,
Mr. Baltzer spent eight years with Brite Voice Systems where the last position
he held was Vice President and General Manager.
Kenneth M. Clinebell, 36, joined the Company in January 1994 and
currently serves, since October 1997, as the Chief Financial Officer, Treasurer
and Corporate Secretary. From January 1994 to October 1997, Mr. Clinebell was
the Company's Vice President of Finance and Controller. Prior to joining the
Company, Mr. Clinebell spent five years at Kimmins Environmental Service Corp.
of Tampa, where he held the position of Controller. Prior to Kimmins, Mr.
Clinebell was with Laventhol & Horwath, CPAs, for five years, where he held the
position of Manager in the firm's audit and accounting division.
Item 11 - Executive Compensation
The following table provides information on the compensation received
by the Chief Executive Officer ("CEO") and the other highly compensated
executive officers (the "Executive Officers") for the fiscal year ended December
31, 1997, the four-month transitional period ended December 31, 1996, and the
fiscal years ended August 31, 1996 and 1995.
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term
Annual Compensation Compensation Awards
------------------- -------------------
Other
Annual All Other
Compen- Restricted Compen-
Fiscal Salary Bonus sation Stock Award(8) Options/ sation
Name & Principal Position Year (1) $ $ $ $ SARs $
- ------------------------- -------- ------ ----- ------- ------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Willem Huisman (2) 1997 $206,879 $35,000 -- $100,000(4) 300,000(9) --
President and Chief 1996 (1) $ 66,667 $35,000 -- -- 125,000 --
Executive Officer 1996 $ 83,335 -- -- -- 100,000 --
Gregory L. Baltzer (6) 1997 $156,057 -- -- $ 50,000(4) 140,000(10) --
Chief Operating Officer 1996 (1) $ 42,212 $40,000 -- -- -- --
1996 $ 70,654 $10,000 $6,481(7) $ 13,961(3) 90,000 --
Kenneth M. Clinebell 1997 $112,423 $10,000 -- $ 27,500(4) 15,000 --
Chief Financial Officer, 1996 (1) $ 38,797 $10,000 -- -- -- --
Secretary & Treasurer 1996 $ 88,881 $25,000 -- $ 11,423(3) -- --
1995 $ 82,269 $10,009 -- -- 15,000 --
Steven H. Grant (5) 1997 $106,730 -- -- -- -- --
Former Chief Financial 1996(1) $ 39,663 $ 5,000 -- -- -- --
Officer, Secretary & 1996 $ 8,173 -- -- $15,865(3) 100,000 --
Treasurer
</TABLE>
52
<PAGE>
(1) In September 1996, the Board of Directors voted to change the Company's
fiscal year from a year ending August 31 to a calendar year. For the
purposes of the Summary Compensation Table, "1997" refers to the fiscal
year ended December 31, 1997, "1996(1)" refers to the four months ended
December 31, 1996, and "1996" and "1995" refer to the fiscal years ended
August 31, 1996 and August 31, 1995, respectively.
(2) Mr. Huisman commenced employment with the Company in April 1996. As a
result, no information regarding compensation prior to such date is
provided herein.
(3) Restricted stock granted in exchange for 15% of gross salary; vested 100%
August, 1997.
(4) Restricted stock awarded as Executive Compensation; total shares granted
were 44,375 (25,000 for Mr. Huisman, 12,500 for Mr. Baltzer, and 6,875 for
Mr. Clinebell), of which 50% vested on February 28, 1998 and 50% vests on
February 28, 1999.
(5) Mr. Grant commenced employment with the Company in July 1996 and as a
result, no information regarding compensation prior to such date is
provided herein. Mr. Grant resigned from the Company in September 1997.
(6) Mr. Baltzer commenced employment with the Company in November, 1995. As a
result, no information regarding compensation prior to such date is
provided herein.
(7) Represents relocation expense reimbursement.
(8) As of December 31, 1997, Mr. Huisman held 25,000 shares of the Company's
restricted stock with a fair market value of $50,781; Mr. Baltzer held
14,780 shares of the Company's restricted stock with a fair market value of
$30,022; and Mr. Clinebell held 8,740 shares of the Company's restricted
stock with a fair market value of $17,753.
(9) Includes 225,000 options to purchase the Company's common stock that were
repriced during fiscal 1997. See "Repricing of Options/SARs." Of the
225,000 repriced options, 100,000 shares were originally granted on March
19, 1996 at an exercise price of $7.50 per share, 25,000 shares were
originally granted on September 30, 1996 at an exercise price of $7.75, and
100,000 were originally granted on November 22, 1996 at an exercise price
of $5.50 per share.
(10) Includes 80,000 options to purchase the Company's common stock that were
repriced during fiscal 1997. See "Repricing of Options/SARs." Of the
80,000 repriced options, 50,000 shares were originally granted on
November 14, 1995 at an exercise price of $7.50 per share and 30,000
shares were originally granted on September 30, 1996 at an exercise price
of $7.75 per share.
53
<PAGE>
The following table summarizes stock options granted to the Executive
Officers in fiscal 1997. The amount shown as potentially realizable values of
these options are based on assumed annual rates of appreciation in the price of
the Company's Common Stock of 5 and 10 percent over the terms of the options and
are not intended to forecast future appreciation of the Company's stock price:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Percent of Potential Realizable
Total Options Value at Assumed
Granted to Annual Rates of Stock
Fiscal Options Employees in Exercise or Expiration Price Appreciation for
Name and Principal Position Year Granted (1) Fiscal Year Base Price(3) Date Option Term (4)
- --------------------------- ------ ---------- ----------- ----------- ---- -----------
5 Percent 10 Percent
--------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Willem Huisman........................... 1997 225,000 (2) 17.112% $3.25 9/5/09 $459,875 $ 1,165,422
President and Chief Executive Officer 1997 75,000 5.704% $3.25 9/5/09 $153,293 $ 388,474
Gregory L. Baltzer....................... 1997 80,000 (2) 6.084% $3.25 9/5/11 $163,511 $ 414,372
Chief Operating Officer 1997 60,000 4.563% $3.25 9/5/11 $122,633 $ 310,779
Kenneth M. Clinebell..................... 1997 15,000 1.140% $3.25 9/5/11 $ 30,658 $ 77,694
Chief Financial Officer, Secretary and
Treasurer
</TABLE>
(1) Under the terms of the Employee Stock Option and Restricted Stock Plan, the
Compensation and Benefits Committee retains discretion, subject to plan
limits, to modify the terms of outstanding options and to reprice such
options.
(2) On September 5, 1997, the Compensation Committee of the Board of Directors
authorized the granting of options with an exercise price of $3.25, the
closing price of the Company's stock on September 5, 1997, in exchange for
the cancellation of existing options priced greater than $3.25 per share.
Messrs. Huisman and Baltzer participated in this exchange. See "Repricing
of Options/SARs."
(3) Options were granted at an exercise price equal to the closing price of the
Common Stock on the date prior to the date of grant.
(4) Potential realizable value is based on fair market value of stock on grant
date compounded annually at the rates shown in column heading, for option
term, less total exercise price. These rates of appreciation are mandated
by the rules of the Securities and Exchange Commission, and do not
represent an estimate or projection of future prices for the Company's
Common Stock.
The following table summarizes the net value realized on the exercise
of options in fiscal 1997, and the value of outstanding options as of December
31, 1997 for the named Executive Officers:
54
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
Shares Value of Unexercised
Acquired Number of Unexercised In-the Money Options
Fiscal On Value Options at Fiscal Year End At Fiscal Year End (1)
Name Year Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Willem Huisman 1997 -- $0 100,000 200,000 $0 $0
Gregory L. 1997 -- $0 38,000 112,000 $0 $0
Baltzer
Kenneth M. 1997 -- $0 32,700 23,000 $284 $0
Clinebell
</TABLE>
(1) Difference between the fair market value of the underlying Common Stock and
the exercise price, for in-the-money options, on December 31, 1997
Compensation of Directors
The Company pays an annual fee of $10,000 ($2,500 per quarter) to each
director not employed as an officer of the Company. It also pays each director
not employed as an officer of the Company $1,000 for each meeting of the Board
of Directors which he or she attends in person, or $500 for each telephonic
meeting, plus reimbursement for all reasonable expenses incurred by such
director in connection with his or her attendance at any meeting of the Board of
Directors. Furthermore, the Company pays each member of a committee of the Board
of Directors not employed by the Company as an officer $1,000 for each meeting
of a committee of the Board of Directors which he or she attends in person, or
$500 for each telephonic meeting, plus reimbursement for any expenses incurred
in connection with his or her attendance at any committee meeting.
The outside directors of the Company also participate in the Stock
Option Plan for Outside Directors (the "Plan"). Under the Plan, options to
purchase up to 500,000 shares of Common Stock may be granted to directors who
are not employees of the company. The Plan provides that each director who is
not a full-time employee of the Company shall automatically be granted an
Initial Option to purchase 25,000 shares of Common Stock on the day the director
is first elected to the Board. In addition, 25,000 Tenure Options (as defined in
the Plan) are automatically granted, in addition to the Initial Option, on the
date of each director's first anniversary of his or her initial election to the
Board of Directors. The Chairman of the Board, provided he or she is not also an
employee, shall automatically be granted, in addition to the Initial Option and
the Tenure Option, an option to purchase 50,000 shares of Common Stock of the
Company (the "COB Option"). The exercise price for options issued under the Plan
is to be equal to the fair market value of Common Stock on the date prior to the
date of grant.
During the fiscal year ended December 31, 1997, Francis R. Santangelo
was granted 25,000 Initial Options at $4.6875 per share and Ian M. Dalziel was
granted 25,000 Tenure Options at $3.25 per share, in each case the fair market
values of the stock on the date of grant.
55
<PAGE>
Initial Options granted under the Plan are subject to the terms of a
stock option agreement, vest and become exercisable equally over three years
beginning on the date of grant. The Tenure Options and COB Options vest equally
over five years beginning on the date of grant. All options expire five years
from the date of grant. Options granted under the Plan expire 90 days after the
resignation of a director from the Board of Directors. The number of shares
issuable under the Plan and the exercise price for options granted under the
Plan are subject to adjustment as the result of stock splits, stock dividends,
recapitalizations or mergers or other similar changes affecting the number of
outstanding shares of Common Stock. No options may be granted under the Plan
after the tenth anniversary of its adoption.
Employment Contracts
In December 1997, the Compensation Committee of the Company's Board of
Directors approved key executive severance agreements with Mr. Huisman, Mr.
Baltzer, and Mr. Clinebell. The primary terms of the key executive severance
agreement includes a lump sum payment of one year's base salary in the event of
termination of the executive officer within one year following a change in
control, other than for cause. The executive officer will also be entitled to an
extension of time to exercise the stock options to one year from the termination
date. Additionally, the key executive severance agreement includes, for
non-change in control terminations, a biweekly payment of base salary for six
months following the date of termination.
Repricing of Options/SARs
The following table summarizes the repriced stock options granted to
the named Executive Officers in Fiscal 1997:
<TABLE>
<CAPTION>
TEN-YEAR OPTION/SAR REPRICINGS
Number of Length of
Securities Market Price Exercise Original
Underlying of Stock at Price at Time Option Term
Options/SARs Time of of Repricing New Remaining at
Repriced or Repricing or or Amendment Exercise Date of
Amended (1) Amendment (2) Price (3) Repricing or
Name Date (#) ($) ($) ($) Amendment
---- ---- ------------ ------------ ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Willem Huisman 9/5/97 125,000 $3.25 $7.75 $3.25 9 years
President and Chief 9/5/97 100,000 $3.25 $5.50 $3.25 9 years
Executive Officer
Gregory L. Baltzer 9/5/97 30,000 $3.25 $7.75 $3.25 8 years
Chief Operating 9/5/97 50,000 $3.25 $7.50 $3.25 7 years
Officer
</TABLE>
(1) On September 5, 1997, the Compensation Committee of the Board of Directors
authorized the grant of options with an exercise price of $3.25, the
closing price of the Company's stock on September 5, 1997, in exchange for
the cancellation of existing options priced greater than $3.25 per share.
The options were repriced to provide employees with an incentive for
long-term tenure with the Company and to maintain a competitive position in
the market place.
56
<PAGE>
(2) Represents the original exercise price of the cancelled option.
(3) Represents the current exercise price of the replacement option.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended December 31, 1997, the Compensation
Committee for the Company was comprised of Kwang-I Yu (serving as Chairman of
the Committee), Hector Alcalde and Ian Dalziel. In February 1998, Kwang-I Yu
resigned from the Board of Directors and the Compensation Committee.
Additionally, in February 1998, Ian Dalziel was appointed to the position of
Chairman of the Compensation and Benefits Committee and Bert Kolde was appointed
to the Compensation and Benefits Committee.
COMPENSATION AND BENEFITS COMMITTEE
REPORT ON EXECUTIVE COMPENSATION
The Compensation and Benefits Committee of the Board of Directors (the
"Committee") is responsible for reviewing and approving the compensation
arrangements for each of the Company's executive officers and the individual
managers reporting directly to the CEO and for granting of options to purchase
shares of Common Stock under the Company's Employee Stock Option and Restricted
Stock Plan. The goal of the Committee is to maintain executive compensation
programs and policies which enable the Company to attract and retain the
services of highly qualified executives. Awards of incentive compensation in the
form of discretionary cash bonuses and periodic grants of stock options and/or
restricted stock grants are designed to reward and incent individual initiative
and achievement.
Salary
In 1992 the Company undertook to establish a salary program in
connection with William M. Mercer, Inc., a compensation consulting firm. They
reviewed the salary practices of various industry groups in the local Tampa/St.
Petersburg market, the southeastern region, and nationally. In addition, in July
1995, the Committee updated such study with additional work by Pearl Meyer
Associates, which explored industry comparables in depth. Based on these
studies, the Company established a salary grade matrix which includes matrices
for merit and promotional increases which were set at the median compensation
amounts identified in the study. Salaries paid to Executive Officers are based
upon the Committee's subjective assessment of the nature of the position,
individual and corporate performance, individual experience and expertise,
attainment of specific performance-related targets, and Company tenure of the
executive. All salary recommendations of the individuals reporting directly to
the CEO are presented by the CEO to the Committee which is responsible for
approving or disapproving those recommendations.
Incentive Bonus
Near the beginning of each fiscal year, the Board of Directors asks the
CEO to submit to the Committee a strategic and tactical plan for the coming
fiscal year. Following each fiscal year, the CEO develops individual bonus
recommendations for executives based upon the CEO's evaluation of each
executive's contribution to the Company. No specific formula is used; however,
the CEO and the Committee review factors which may include achieving specific
57
<PAGE>
objectives developed by the executive and the CEO relating to achievement of
budgeted goals of revenue, profitability, new product development, cost
containment, new customer development, and other similar factors. Such factors
are linked to specific performance related targets and given specific weight.
In November 1996, the Committee adopted a bonus plan for 1997 linking
targeted bonus amounts, determined as a percentage (ranging from 50% to 100%) of
base salary, to the achievement of certain corporate objectives with a portion
of each executive's targeted bonus allocable to achievement of the specific
objectives. For the year ended December 31, 1997, these objectives included
certain financial, tactical and strategic goals including targeted revenue
growth, increased cash flow and net income, new product development and improved
realization on marketing efforts. Due to the Company's failure to meet a number
of financial goals, the Committee has not awarded executive officers with 1997
bonuses associated with those goals.
Stock Options and Restricted Stock
The Committee is authorized to grant incentive and non-qualified stock
options, as well as shares of restricted stock, to key employees of the Company,
including executives. Such grants are intended to provide additional long-term
incentive to key employees. No specific formula is used to determine grants made
to any particular person (including executives); however, grants are based
generally on factors such as the length of employment, promotion, contribution
toward Company performance, and expected contribution toward meeting long-term
strategic goals of the Company, together with a review of outstanding options or
restricted stock grants. The Company has adopted guidelines regarding
appropriate stock option grants for employees. Option grants typically vest over
a five-year period and expire at the end of ten years. The number of stock
option granted during the year ended December 31, 1997 to executive officers
other than the Chief Executive Officer was based upon the recommendation of the
Chief Executive Officer's subjective evaluation of the contribution of such
officers to the Company during the fiscal year. The number of stock options
granted during the year ended December 31, 1997 to the Chief Executive Officer
was based on the recommendation of the Compensation Committee after
consideration of the Chief Executive Officer's base salary and the Compensation
Committee's subjective evaluation of the contribution of the Chief Executive
Officer to the Company during the fiscal year.
On September 5, 1997, the Compensation Committee of the Board of
Directors authorized the grant of options with an exercise price of $3.25, the
closing price of the Company's stock on September 5, 1997, in exchange for the
cancellation of existing options priced greater than $3.25 per share. Such grant
of options in exchange for the cancellation of existing options was, on a
voluntary basis, offered to all employees of the Company who held options on
September 5, 1997, including executive officers. During fiscal 1997, 654,800
options with original exercise prices ranging from $3.50 to $14.50 per share
were voluntarily cancelled in exchange for the granting of 654,800 options
priced at $3.25 per share. The newly granted options vesting schedules restarted
from September 5, 1997. The options were repriced to provide employees with an
incentive for long-term tenure with the Company and to maintain a competitive
position in the market place.
Compensation of Chief Executive Officer
Compensation of Willem Huisman (the "CEO") was determined based on
negotiations by the CEO and the Compensation Committee and ratified by the Board
of Directors. The Compensation Committee considered the compensation studies,
58
<PAGE>
among other factors, as a basis for determining the CEO's compensation package.
The CEO is also eligible for the payment of a discretionary annual bonus for
achieving revenue and other performance criteria. During 1997, the CEO was
granted 300,000 options to purchase the Company's common stock at an exercise
price of $3.25 per share. (See "Summary Compensation Table" and "Repricing of
Options/SARs.") During 1997, the CEO was granted 25,000 shares of restricted
stock vesting over two years.
Compliance with Internal Revenue Code Section 162(m)
Section 162(m) of the Internal Revenue code, enacted in 1993, generally
disallows tax deduction to public companies for compensation over $1 million
paid to the corporation's Chief Executive Officer and four other most highly
compensated Executive Officers. Qualifying performance-based compensation will
not be subject to the deduction limit if certain requirements are met. The
Compensation Committee intends to consider the provisions of Section 162(m) in
connection with the performance-based portion of the compensation of its
executives (which currently consists of stock option grants, restricted stock
grants, and annual bonuses described above); however, the Committee does not
necessarily intend to structure compensation to its executives to avoid
disallowance of any tax deductions in the future in light of the Company's
current net operating losses and the necessity to meet all of the requirements
imposed by Section 162(m) and the proposed regulations thereunder for
compensation fully to be deductible for federal income tax purposes.
Members of the Compensation and Benefits Committee
Ian M. Dalziel, Chairman
Hector Alcalde
Bert Kolde
Stock Performance Graph
The following graph compares the Company's cumulative stockholder
return on its Common Stock since September 1, 1993, through December 31, 1997,
with the return on the NASDAQ Market Index and the NASDAQ Computer Index. To
date, no dividends have been paid with respect to the capital stock of the
Company.
<TABLE>
<CAPTION>
Precision Systems, Inc. NASDAQ Market Index NASDAQ Computer Index
---------------------- ------------------- ---------------------
<S> <C> <C> <C>
08/31/93 100.00 100.00 100.00
08/31/94 50.00 100.00 100.00
08/31/95 150.00 150.00 200.00
08/31/96 125.00 150.00 225.00
12/31/96 100.00 175.00 250.00
12/31/97 50.00 225.00 300.00
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
8/31/93 8/31/94 8/31/95 8/31/96 12/31/96 12/31/97
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Precision Systems, Inc. 100.00 56.98 132.56 113.95 93.02 37.79
- -------------------------------------------------------------------------------------------------------------
NASDAQ Market Index 100.00 104.09 140.17 158.05 178.62 219.19
- -------------------------------------------------------------------------------------------------------------
NASDAQ Computer Index 100.00 104.22 183.02 218.56 262.86 318.05
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Assumes $100 invested at the close of trading on August 31, 1993.
59
<PAGE>
The stock price performance information shall not be deemed incorporated by
reference by any general statement incorporating this proxy into any filing
under the Securities Act of 1933 or the Securities Exchange Act of 1934, except
to the extent that the Company specifically incorporates this information by
reference and shall not otherwise be deemed filed under such acts.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
The following table and accompanying footnotes set forth information
concerning ownership of the Company's Common Stock as of April 23, 1998. The
table also shows information concerning beneficial ownership by all directors
and nominees, by each of the current executive officers named in the Summary
Compensation Table (the "Summary Compensation Table"), and by all directors and
executive officers as a group. The number of shares beneficially owned by each
director or executive officer is determined under rules of the Securities and
Exchange Commission, and the information is not necessarily indicative of
beneficial ownership for any other purpose. Under such rules, beneficial
ownership includes any shares to which the individual has the sole or shared
voting power or investment power and also any shares which the individual has
the right to acquire within sixty days of April 23, 1998 through the exercise of
any stock option or other right. Unless otherwise indicated, each person has
sole investment and voting power (or shares such powers with his or her spouse)
with respect to the shares set forth in the following table:
<TABLE>
<CAPTION>
Number Percent
Name of Shares (10) of Class
- ---- --------- --------
<S> <C> <C>
Alta Investissments SA............................................ 2,808,427 15.7
8 Boulevard Emmanuel Servais
L2535 Luxembourg
Vulcan Ventures Incorporated (1).................................. 2,750,000 15.3
110-110th Avenue, N.E., Suite 530
Bellevue, Washington 98004
RMS Limited Partnership (1) (2)................................... 2,415,945 13.5
50 West Liberty Street, Suite 650
Reno, Nevada 89501
Willem Huisman (3)................................................ 212,500 1.2
Hector Alcalde (4)................................................ 60,000 *
Bert Kolde (5).................................................... 35,000 *
Ian M. Dalziel (6)................................................ 21,666 *
Francis R. Santangelo (7)......................................... 121,666 *
Gregory L. Baltzer (8)............................................ 46,530 *
Kenneth M. Clinebell (9) ......................................... 43,002 *
---------- ------
All officers and directors as a group (7 persons) ............... 540,364 3.0
</TABLE>
*Represents less than 1 percent
60
<PAGE>
The following table sets forth information relating to the beneficial ownership
of the Company's Series A Preferred Stock:
<TABLE>
<CAPTION>
Name and Address Number Percent
of Beneficial Owner of Shares of Class
- ------------------- --------- --------
<S> <C> <C> <C>
RMS Limited Partnership (2).................................... 10,000 100%
50 West Liberty Street, Suite 650
Reno, Nevada 89501
</TABLE>
The following table sets forth information relating to the beneficial ownership
of the Company's Series B Preferred Stock:
<TABLE>
<CAPTION>
Name and Address Number Percent
of Beneficial Owner of Shares of Class
- ------------------- --------- --------
<S> <C> <C>
Primwest Holding N.V........................................... 1,500 33.33
7, Cours de Rive
1204 Geneva, Switzerland
Vulcan Ventures Incorporated ............................... 1,500 33.33
110-110th Avenue, N.E., Suite 530
Bellevue, Washington 98004
RMS Limited Partnership .................................... 1,500 33.33
50 West Liberty Street, Suite 650
Reno, Nevada 89501
</TABLE>
(1) Does not include Series B Preferred Stock (see table below). Further
described in the section titled "Certain Relationships and Related
Transactions" section.
(2) RMS Limited Partnership is a limited partnership organized under the laws
of the State of Nevada, the managing general partner of which is Crystal
Diamond, Inc. Roy M. Speer is the sole stockholder of Crystal Diamond, Inc.
and the non-managing general partner of RMS Limited Partnership. Richard W.
Baker, as trustee under an InterVivos Trust agreement dated January 1,
1967, with Roy M. Speer, is a limited partner of RMS Limited Partnership.
All or any portion of Series A Preferred Stock may be converted at any time
into shares of Common Stock at a conversion price of $4.76 per share. The
shares of Series A Preferred Stock may be converted into 1,218,487 shares
of Common Stock or approximately 6.8 percent of the class. Assuming
conversion of all the outstanding shares of Series A Preferred Stock, RMS
Limited Partnership would own 3,634,432 shares, representing approximately
20.3 percent of the class. Mr. Speer and Crystal Diamond, Inc. share
beneficial ownership of the Common Stock and Series A Preferred Stock held
by RMS Limited Partnership. Does not include 17,213 shares of Common Stock
held by Richard W. Baker, as trustee for certain irrevocable trusts
established for the benefit of certain members of Roy M. Speer's family.
(3) Does not include non-vested options to purchase 200,000 shares of Common
Stock pursuant to the Company's Employee Stock Option and Restricted Stock
Plan. Additionally, does not include 12,500 shares of Restricted Stock
vesting on February 28, 1999.
(4) Does not include non-vested options to purchase 10,000 shares of Common
Stock pursuant to the Company's Stock Option Plan for Outside Directors.
61
<PAGE>
(5) Does not include non-vested options to purchase 15,000 shares of Common
Stock pursuant to the Company's Stock Option Plan for Outside Directors.
(6) Does not include non-vested options to purchase 28,334 shares of Common
Stock pursuant to the Company's Stock Option Plan for Outside Directors.
Additionally, does not include: (i) grant by Alta Investissements SA
("Alta") of an option to acquire 14,720 shares of the Common Stock of
Precision Systems, Inc. ("Stock") and (ii) grant by Primwest Holding N.V.
(the controlling shareholder of Alta Investissements SA) ("Primwest") of an
option to acquire five percent of the shares of Stock held by Primwest
through its participation in Alta (currently expected to be not more than
99,545 shares, but may be considerably less), exercisable upon the
distribution of such shares by Alta to Primwest at an undetermined future
date.
(7) Does not include non-vested options to purchase 28,334 shares of Common
Stock pursuant to the Company's Stock Option Plan for Outside Directors.
(8) Does not include non-vested options to purchase 112,000 shares of Common
Stock pursuant to the Company's Employee Stock Option and Restricted Stock
Plan. Additionally, does not include 6,250 shares of Restricted Stock
issuable on February 28, 1999.
(9) Does not include non-vested options to purchase 18,000 shares of Common
Stock pursuant to the Company's Employee Stock Option and Restricted Stock
Plan. Additionally, does not include 3,438 shares of Restricted Stock
issuable on February 28, 1999.
(10) Does not include the effects of the change in control transaction with
entities controlled by Roy M. Speer. On April 23, 1998, the Company
announced that its Board of Directors has approved and the Company has
entered into a definitive agreement ("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, 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
million 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 million shares of
Precision Systems' common stock. 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 $3 million line of credit to be made
available by Speer upon signing of the agreement for operating capital
requirements. After the transaction, Mr. Speer will control over eighty
percent (80%) 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.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors, officers, and persons who own more than 10
percent of the Company's Common Stock, to file initial reports of ownership and
reports of changes in ownership with the Securities and Exchange
62
<PAGE>
Commission and the NASD. Such persons are required by the Commission's
regulations to furnish the Company with copies or all Section 16(a) reports
which they file.
Based solely on its review of the copies of such forms received by it
with respect to fiscal 1997 or written representation from certain reporting
persons, the Company believes that during fiscal 1997, all filing requirements
applicable to its directors, executive officers and greater than ten percent
beneficial owners were complied with except that one director, Francis R.
Santangelo, filed one untimely report regarding four transactions.
Item 13 - Certain Relationships and Related Transactions
During April, 1997, the Company completed a financing transaction with
Primwest Holding N.V. (controlling shareholder of Alta Investissements SA),
Vulcan Ventures Incorporated, and RMS Limited Partnership (the "Financing").
Under the Financing, the Company created a new Series B Preferred Stock. Each of
the three shareholders purchased 1,500 shares of such Series B Preferred Stock
(total of 4,500 shares) in exchange for $1,500,000 in cash (total of
$4,500,000). The Series B Preferred Stock will accrue a cumulative dividend of
8% per annum, payable quarterly, when and as declared by the Company's Board of
Directors. Additionally, the Series B Preferred Stock is subordinate to the
Company's Series A Preferred Stock and has a liquidation preference equal to the
original purchase price. 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.
Each of the three major shareholders described above also acquired
warrants (the "Warrants") to purchase up to 150,000 shares of common stock each
(total of 450,000 shares). Each Warrant will have an exercise price equal to:
(I) the current market price of the Company's common stock as determined by the
closing price of the common stock on the NASDAQ stock market on the day prior to
the date of closing; plus (ii) a 25 percent premium or approximately $6.09 per
share. Each Warrant will be exercisable at any time during the five year period
commencing one year after the date of issuance.
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. The
warrants will be exercisable for a five-year period beginning October 1998 at
$4.00.
During the year ended December 31, 1997, the Company paid $120,000 to
Francis R. Santangelo, a director of the Company, for consulting services
rendered.
63
<PAGE>
PART IV
Item 14 -- Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) List of Documents filed as part of this Report
(1) Financial statements
Report of Independent Accountants -- Coopers & Lybrand L.L.P.
Report of Independent Accountants -- Deloitte & Touche L.L.P.
Report of Independent Accountants -- Coopers & Lybrand N.V.
Consolidated Balance Sheets as of December 31, 1997 and December 31,
1996
Consolidated Statements of Operations for the year ended
December 31, 1997, for the four months ended December 31, 1996, and
for the years ended August 31, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the year ended
December 31, 1997, for the four months ended December 31, 1996,
and for the years ended August 31, 1996 and 1995
Consolidated Statements of Cash Flows for the year ended December 31,
1997, for the four months ended December 31, 1996, and for the
years ended August 31, 1996 and 1995
Notes to Consolidated Financial Statements
(2) Financial Statement Schedule
Schedule Page
Number Number
------ ------
II Valuation and Qualifying Accounts......................... S-1
The report of the Company's independent auditors with respect to the above
listed financial statement schedule appears on page 55 hereof.
All other financial statements and schedules not listed have been omitted
since the required information is included in the financial statements or the
notes thereto or is not applicable or required.
(3) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
Exhibit
Number
- ------
2.0 -- Merger Agreement and Plan of Reorganization between the Registrant
and The Renaissance Group filed in Exhibit 99.1 to the Company's Form
8-K, as amended, is incorporated herein by reference
2.1 -- Share Exchange Agreement between the Registrant and Alta
Investissements S.A. filed in Exhibit 99.1 to the Company's Form 8-K,
as amended, is incorporated herein by reference
3.1 -- Restated Certificate of Incorporation of the Registrant filed as
Exhibit 3.1 to the Company's Registration Statement on Form 10, as
amended, is incorporated herein by reference
3.2 -- Restated bylaws of the Registrant filed as Exhibit 3.2 to the
Company's Registration Statement on Form 10, as amended, is
incorporated herein by reference
16 -- Letter to Securities and Exchange Commission from Deloitte &
Touche L.L.P. filed in Exhibit 16.1 to the Company's Form 8-K is
incorporated herein by reference
21 -- Subsidiaries of the Registrant
22 -- Proxy Statement of the Registrant dated April 15, 1997, is incorporated
herein by reference
27 -- Financial Data Schedule (for SEC use only)
64
<PAGE>
(b) Reports on Form 8-K
On October 31, 1997, the Company filed a report on Form 8-K
announcing the Company's issuance of promissory notes and warrants to
purchase 825,000 shares of common stock to RMS Limited Partnership,
Vulcan Ventures, Inc., and Mr. Didier Primat for aggregate
consideration of $6,000,000 on September 30, 1997.
On October 31, 1997, the Company filed a report on Form 8-K
announcing that on October 29, 1997, the Company had retained the
services of Coopers and Lybrand L.L.P. to serve as its auditors for the
fiscal year ending December 31, 1997, and dismissed the accounting firm
of Deloitte & Touche L.L.P., who was engaged as the Company's principal
auditors since the Company became publicly traded in 1992.
65
<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
President and Chief
Financial Officer
October 9, 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 October 9, 1998.
Signature Title
--------- -----
/s/ KENNETH M. CLINEBELL President and Chief Financial Officer
------------------------
Kenneth M. Clinebell (Principal Financial Officer)
/s/ CARLA K. NEWSOME Controller
--------------------
Carla K. Newsome (Principal Accounting Officer)
/s/ HECTOR ALCADE Director
-----------------
Hector Alcade
/s/ BERT KOLDE Director
--------------
Bert Kolde
/s/ IAN DALZIEL Director
---------------
Ian Dalziel
/s/ FRANCIS SANTANGELO Director
----------------------
Francis Santangelo
66
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Precision Systems, Inc.
Our report on the consolidated financial statements of Precision Systems, Inc.
and subsidiaries is included on page 27 of this Form 10-K. In connection with
our audit of such financial statements, we have also audited the related
financial statement schedule as of December 31, 1997 and for the year then ended
listed in the index on page 64 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Tampa, Florida
February 19, 1998
67
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Precision Systems, Inc.
We have audited the consolidated financial statements of Precision Systems, Inc.
and subsidiaries (the "Company") as of December 31, 1996, and for the four
months ended December 31, 1996, and for each of the two years in the period
ended August 31, 1996, and have issued our report thereon dated March 27, 1997;
such consolidated financial statements are included herein. Our audits also
included the consolidated financial statement schedule of the Company as of
December 31, 1996, listed in Item 14, and for the four months ended December 31,
1996, and for each of the two years in the period ended August 31, 1996. The
consolidated financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. We
did not audit the consolidated financial statements of Vicorp N.V. (a
consolidated subsidiary), which statements reflect total assets constituting 33
percent of consolidated total assets as of December 31, 1996, and total revenues
constituting 80 percent and 42 percent, respectively, of consolidated total
revenues for the four months ended December 31, 1996 and for the year ended
August 31, 1996. Such financial statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for Vicorp N.V., is based solely on the report of such other
auditors. In our opinion, based on our audits and the report of other auditors,
such consolidated financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
Deloitte & Touche L.L.P.
Tampa, Florida
March 27, 1997
68
<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
<TABLE>
<CAPTION>
Charged
Balance at to Charged Balance
Beginning Costs and to Other at End of
of Period Expenses Accounts Deductions Period
------------- ------------ ---------- ------------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts
Year ended December 31, 1997........... $ 1,532,134 $ 926,689 $ - $ (1,219,626) (1) $ 1,239,197
Four months ended
December 31, 1996................... 1,253,347 278,787 - - 1,532,134
Year ended August 31, 1996............. 153,561 1,196,412 - (96,626) (1) 1,253,347
Year ended August 31, 1995............. 37,335 116,226 - - 153,561
Obsolescence Reserve
Year ended December 31, 1997........... $ - $ - $ - $ - $ -
Four months ended
December 31, 1996................... - - - - -
Year ended August 31, 1996............. - - - - -
Year ended August 31, 1995............. 885,002 - - (885,002) (2) -
</TABLE>
- ---------------
(1) Represents write-off of uncollectible accounts
(2) Represents write-off of obsolete inventory
S-1
EXHIBIT 21
List of Subsidiaries of Precision Systems, Inc. as of December 31, 1997.
Name of Subsidiary State or Country of Incorporation
- -------------------------------------------------------------------------------
BFD Productions, Inc.....................................................Nevada
Vicorp Canada Incorporated...............................................Canada
Vicorp Systems Espana, S.A................................................Spain
Vicorp Italia, s.r.l......................................................Italy
Interactive Services, Inc..............................................Delaware
The Renaissance Group................................................California
Vicorp, N.V............................................The Netherlands Antilles
Vicorp Europe Holding B.V.......................................The Netherlands
Vicorp Nederland B.V............................................The Netherlands
Vicorp International Services Nederland B.V.....................The Netherlands
Vicorp International Services, Belux....................................Belgium
Vicorp France S.A........................................................France
Vicorp Denmark A/S......................................................Denmark
Vicorp Sweden A/B........................................................Sweden
Vicorp U.K. Holding.....................................................England
Vicorp U.K. Limited.....................................................England
Vicorp Finland OY.......................................................Finland
Vicorp Interactive Systems, Inc...................................Massachusetts
Vicorp Deutschland GmbH.................................................Germany
Vicorp Asia Holding Limited...........................................Hong Kong
Vicorp Asia-Pacific Services Pte Ltd..................................Singapore
Vicorp Geminus GmbH.....................................................Germany
Belle System Networking ApS.............................................Denmark
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FIANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PRECISIONS SYSTEMS, INC. FOR THE YEAR ENDED
DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,582,757
<SECURITIES> 0
<RECEIVABLES> 10,896,552
<ALLOWANCES> 1,239,197
<INVENTORY> 0
<CURRENT-ASSETS> 19,553,902
<PP&E> 35,534,611
<DEPRECIATION> 26,665,434
<TOTAL-ASSETS> 28,475,553
<CURRENT-LIABILITIES> 15,962,247
<BONDS> 0
0
145
<COMMON> 179,061
<OTHER-SE> 6,093,916
<TOTAL-LIABILITY-AND-EQUITY> 28,475,553
<SALES> 6,203,229
<TOTAL-REVENUES> 40,612,387
<CGS> 15,152,116
<TOTAL-COSTS> 15,152,116
<OTHER-EXPENSES> 51,167,276
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (26,058,716)
<INCOME-TAX> 0
<INCOME-CONTINUING> (26,058,716)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,058,716)
<EPS-PRIMARY> (1.48)
<EPS-DILUTED> (1.48)
</TABLE>
