<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[Mark One]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _______________
Commission File No. 000-20068
PRECISION SYSTEMS, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 41-1425909
------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11800 30th Court North, St. Petersburg, Florida 33716
------------------------------------------------------
(Address of principal executive offices)
(727) 572-9300
------------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of capital stock as of the
latest practicable date.
Total number of shares of outstanding capital stock as of May 7,
1999:
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . 17,886,787<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three months ended March 31,
-------------------------------
1999 1998
--------------- ---------------
Revenues
Contract revenue . . . . . . . . . . . $ 1,449,780 $ 999,757
Service and support . . . . . . . . . 3,662,960 4,736,798
License fee revenue . . . . . . . . . . 1,607,204 931,862
--------------- ---------------
6,719,944 6,668,417
--------------- ---------------
Cost of sales, exclusive of
depreciation and amortization shown
separately below . . . . . . . . . . . 3,128,610 5,118,958
Operating Expenses
Selling, general, and administrative . 2,452,002 3,648,397
Research, engineering and development . 573,221 1,312,638
Depreciation and amortization . . . . . 581,308 832,790
--------------- ---------------
3,606,531 5,793,825
--------------- ---------------
Operating loss . . . . . . . . . . . . . (15,197) (4,244,366)
Interest expense, net . . . . . . . . . . 126,477 90,627
--------------- ---------------
Loss before income taxes . . . . . . . . (141,674) (4,334,993)
Income taxes . . . . . . . . . . . . . . - -
--------------- ---------------
Net Loss . . . . . . . . . . . . . . . . (141,674) (4,334,993)
Other Comprehensive Income
Foreign currency translation
adjustments . . . . . . . . . . . . . (153,372) 118,907
--------------- ---------------
Comprehensive Loss . . . . . . . . . . . $ (295,046) $ (4,216,086)
=============== ===============
Net Loss Applicable to Common Stock
Net loss . . . . . . . . . . . . . . . $ (141,674) $ (4,334,993)
Preferred stock dividend
requirements . . . . . . . . . . . . . (174,570) (170,949)
--------------- ---------------
$ (316,244) $ (4,505,942)
=============== ===============
Basic and Diluted Loss Per Share
Net loss . . . . . . . . . . . . . . . $ (.01) $ (.24)
=============== ===============
Net loss applicable to common stock . . $ (.02) $ (.25)
=============== ===============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
1<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1999 1998
ASSETS --------------- ---------------
(unaudited)
Current Assets
Cash and cash equivalents . . . . . . . $ 2,865,602 $ 2,543,763
Accounts and contracts receivable, net . 7,114,903 6,823,640
Supplies and other current assets . . . 2,552,854 2,381,153
Costs and earnings in excess of billings
on uncompleted contracts . . . . . . . 1,195,595 1,425,303
--------------- ---------------
Total current assets . . . . . . . . 13,728,954 13,173,859
--------------- ---------------
Property, Plant and Equipment, Net . . . 6,052,086 6,821,741
Intangible Assets, Net . . . . . . . . . 34,794 37,822
--------------- ---------------
$ 19,815,834 $ 20,033,422
=============== ===============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
2<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
March 31, December 31,
1999 1998
LIABILITIES AND STOCKHOLDERS' DEFICIT --------------- ---------------
(unaudited)
Current Liabilities
Current portion of long-term debt . . . $ 9,836,746 $ 9,864,171
Accounts payable . . . . . . . . . . . 4,318,164 5,758,372
Accrued expenses . . . . . . . . . . . 6,123,042 6,985,381
Billings in excess of costs and earnings
on uncompleted contracts . . . . . . . 1,868,970 1,010,680
Deferred revenue . . . . . . . . . . . 2,264,833 723,464
--------------- ---------------
Total current liabilities . . . . . . 24,411,755 24,342,068
--------------- ---------------
Long-term Debt . . . . . . . . . . . . . 100,832 154,137
--------------- ---------------
Commitments and Contingencies . . . . . .
Stockholders' Deficit
Non-redeemable preferred stock $.01
par value; authorized 50,000 shares:
Series A 6 percent Cumulative
Convertible Preferred Stock;
convertible at $4.76 per share;
issued and outstanding 10,000
shares; liquidation preference
$5,800,000 . . . . . . . . . . . . . 100 100
Series B 8 percent Cumulative
Convertible Preferred Stock;
convertible at $4.47 per share,
issued and outstanding
4,500 shares; liquidation
preference $4,500,000 . . . . . . . 45 45
Common stock $.01 par value;
authorized 30,000,000 shares,
issued 18,019,644 and 17,986,106
shares, respectively . . . . . . . . . 180,196 179,861
Additional paid-in capital . . . . . . 113,426,639 113,554,218
Accumulated deficit . . . . . . . . . . (120,794,168) (120,652,494)
Treasury stock (132,937 shares)
at cost . . . . . . . . . . . . . . . (422,360) (422,360)
Accumulated preferred stock dividends . 2,554,119 2,379,549
Accumulated other comprehensive income . 358,676 512,048
Unearned compensation . . . . . . . . . - (13,750)
--------------- ---------------
Total stockholders' deficit . . . . . (4,696,753) (4,462,783)
--------------- ---------------
$ 19,815,834 $ 20,033,422
=============== ===============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended March 31,
-------------------------------
1999 1998
--------------- ---------------
Cash Flows Operating Activities:
Net loss . . . . . . . . . . . . . . . $ (141,674) $ (4,334,993)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization . . . . 581,308 832,790
Amortization of unearned compensation. 13,750 88,750
Loss on sale of property, plant and
equipment . . . . . . . . . . . . . . - 55,146
Change in current assets and
liabilities:
Accounts and contracts receivable . . (291,263) 1,100,807
Costs and earnings in excess of
billings on uncompleted contracts . 229,708 (1,262,157)
Supplies and other current assets . . (171,701) (97,339)
Accounts payable . . . . . . . . . . (1,440,208) (95,764)
Accrued expenses . . . . . . . . . . (688,734) (30,705)
Billings in excess of costs and
earnings on uncompleted contracts . 858,290 1,171,141
Deferred revenue . . . . . . . . . . 1,541,369 1,031,179
--------------- ---------------
Net cash provided by (used in)
operating activities . . . . . . . 490,845 (1,541,145)
--------------- ---------------
Cash Flows Investing Activities:
Purchase of property, plant and (198,174) (941,396)
equipment . . . . . . . . . . . . . .
Proceeds from sale of property, plant
and equipment . . . . . . . . . . . . 45,297 -
--------------- ---------------
Net cash used in investing activities. (152,877) (941,396)
--------------- ---------------
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited)
Three months ended March 31,
-------------------------------
1999 1998
--------------- ---------------
Cash Flows Financing Activities:
Repayment of note payable . . . . . . . (63,455) (94,106)
Proceeds from issuance of common stock . 47,326 64
--------------- ---------------
Net cash used in financing
activities . . . . . . . . . . . . . (16,129) (94,042)
--------------- ---------------
Net increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . 321,839 (2,576,583)
Cash and cash equivalents at beginning
of period . . . . . . . . . . . . . . . 2,543,763 4,582,757
--------------- ---------------
Cash and cash equivalents at end of
period . . . . . . . . . . . . . . . . $ 2,865,602 $ 2,006,174
=============== ===============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The interim condensed consolidated financial statements of Precision
Systems, Inc. (the "Company") are unaudited and should be read in
conjunction with the audited financial statements and notes thereto as of
and for the years ended December 31, 1998 and 1997, the four-month
transition period ended December 31, 1996, and the year ended August 31,
1996.
In the opinion of the Company, all adjustments necessary for a fair
presentation of such financial statements have been included. Such
adjustments consist only of normal recurring items. Interim results are
not necessarily indicative of results for a full year. The interim
financial statements and notes thereto are presented as permitted by the
Securities and Exchange Commission and do not contain information
included in the Company's annual financial statements and notes thereto.
Certain amounts for previous periods have been reclassified to
conform with the 1999 presentation. Such reclassifications had no impact
on the Company's total assets, equity, net loss or cash flows in the
previous period.
2. BASIC AND DILUTED LOSS PER SHARE
Basic and diluted loss per share for the three months ended March 31,
1999 and 1998, have been computed based upon the weighted average common
shares outstanding of 17,871,182 and 17,786,107, respectively. The
diluted loss per share calculation does not include preferred convertible
securities and stock options, which are common stock equivalents, as
their inclusion would be anti-dilutive.
The following table provides information on the weighted average
shares of dilutive securities which are not included in the diluted loss
per share calculation because their inclusion would be anti-dilutive:
Three Months Ended March 31,
1999 1998
--------------- ---------------
Preferred convertible securities . . . 3,500,198 3,500,198
Stock options and restricted stock . . 1,087,646 2,193,445
--------------- ---------------
4,587,844 5,693,643
=============== ===============
6<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. LONG-TERM DEBT
March 31, December 31,
1999 1998
--------------- ---------------
(unaudited)
Notes payable to shareholders, interest
at 8 percent, with detachable warrants
convertible into 825,000 shares of
common stock at $4.00 per share,
uncollateralized, and due April to
August 1999 . . . . . . . . . . . . . . $ 6,000,000 $ 6,000,000
Notes payable to shareholder, interest at
9.5 percent, uncollateralized, and due
upon demand; the Company has $1,250,000
of available funding remaining on these
notes as of March 31, 1999 and December
31, 1998 . . . . . . . . . . . . . . . 3,750,000 3,750,000
Capital lease obligations, interest rates
varying from 6 percent to 9 percent;
collateralized by certain assets with
net book value of approximately
$350,000 for 1999 and 1998 and maturing
through the year 2001 . . . . . . . . . 187,578 268,308
--------------- ---------------
9,937,578 10,018,308
Less current portion . . . . . . . . . . (9,836,746) (9,864,171)
--------------- ---------------
$ 100,832 $ 154,137
=============== ===============
7<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. RESTRUCTURING CHARGES
During the year ended December 31, 1998, in an effort to reduce
overhead and cut costs, the Company terminated the employment of 58
individuals, which approximated the estimate for the total number of
employee terminations under the original restructuring plan, and closed
several offices world-wide. The effect of the restructuring charges
associated with these headcount reductions and office closings was to
increase the Company's selling, general and administrative expenses and
accrued expenses by approximately $2,438,000 during the year ended
December 31, 1998. The following tables provide an itemization of the
costs included in the restructuring liability based on original
estimates, the amounts paid and charged against the liability,
adjustments made to the original estimates, and the residual value of the
restructuring liability as of March 31, 1999, and December 31, 1998:
Three months ended March 31, 1999
----------------------------------
Liability Liability
as of as of
December 31, March 31,
1998 Charges Adjustments 1999
------------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
Employee termination
benefits . . . . . . $ 139,926 $ (92,689) $ - $ 47,237
Non-cancellable
operating leases . . 274,046 (123,122) - 150,924
Asset write-offs,
including leasehold
improvements . . . . 347,366 (244,343) - 103,023
Professional services . 160,712 (7,828) - 152,884
------------ ----------- ----------- -----------
$ 922,050 $ (467,982) $ - $ 454,068
============ =========== =========== ===========
8<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. RESTRUCTURING CHARGES (continued)
Year ended December 31, 1998
----------------------------------
Liability
as of
Original December 31,
Estimate Charges Adjustments 1998
---------- ------------ ----------- ------------
Employee termination $ 950,000 $ (788,916) $ (21,158) $ 139,926
benefits . . . . . .
Non-cancellable 524,000 (250,663) 709 274,046
operating leases . . .
Asset write-offs,
including leasehold
improvements . . . . 775,000 (430,088) 2,454 347,366
Professional services . 251,000 (46,216) (44,072) 160,712
---------- ------------ ----------- ------------
$2,500,000 $(1,515,883) $ (62,067) $ 922,050
========== ============ =========== ============
The "Charges" columns above represent the actual cash payments made
to employees for restructuring plan termination benefits and lease
payments associated with office closures made subsequent to the
restructuring plan. In addition, the "Charges" columns represent certain
asset write-offs disposed of regarding such office closures. The asset
write-offs included in the restructuring plan primarily represent the
historical net book value of certain furniture, leasehold improvements,
and other miscellaneous equipment associated with the office closures.
The Company does not expect to generate any material proceeds for the
sale of such assets upon disposal.
The restructuring plan liability as of March 31, 1999, represents
management's estimate of the remaining portion of the cash to be paid out
to employees regarding termination benefits, non-cancellable operating
leases for offices closed, and legal and accounting fees associated with
the completion of the restructuring plan. All cash payments to be made
for employee termination benefits and legal and accounting fees are
expected to be made by September 30, 1999. In addition, all cash payments
on non-cancellable operating leases are expected to be completed by
December 31, 1999. No cash payments will occur as a result of the asset
impairments.
The Company's restructuring plan did not discontinue any corporate
business activities with separately identifiable operations. The
restructuring plan was initiated to reduce the Company's operating
expenses to better match the Company's expected revenue and gross margin
opportunities. In addition, the Company centralized its BETEX and Lydian
product development efforts to its United Kingdom office (versus separate
offices, Boston and United Kingdom, prior to the restructuring).
9<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which the
Company adopted in 1998.
The Company identifies such segments based on a combination of
factors including the products and services from which the Company
derives its revenues, management responsibility and geographic areas of
operations. The Company has three reportable segments: The U.S.
operations segment produces network-based telecommunications products for
sale to large telecommunications carriers. In addition to network-based
telecommunications products, the international operations segment
produces customer premises equipment products that are marketed to call
centers and customer contact centers in the financial, insurance,
airline, retail, telco, and service bureau industries. The third product
category is the service bureau segment, which is sold through the
Company's subsidiary, BFD Productions, Inc. ("BFD"). BFD sells 800, 888
and 900 services to corporations and other entities, including government
agencies and large software entertainment companies. The accounting
policies of the segments are the same as those described in the "Summary
of Significant Accounting Policies" in the Company's December 31, 1998
Form 10-K. The Company accounts for intercompany sales at a discounted
price. Intercompany revenues and the related cost of sales are eliminated
in the Company's consolidated financial statements.
<TABLE>
Three months ended March 31, 1999
----------------------------------
<CAPTION>
Telecommunications
Products
--------------------------
U.S. International Service Intercompany
Operations Operations Bureau Eliminations Consolidated
----------- -------------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues from
external customers . $ 1,848,688 4,039,152 832,104 - $ 6,719,944
Revenues from other
segments . . . . . . $ 515,343 - - (515,343) $ -
Total revenues . . . $ 2,364,031 4,039,152 832,104 (515,343) $ 6,719,944
Depreciation and
amortization . . . . $ 297,398 183,847 100,063 - $ 581,308
Operating profit $ (91,338) 36,563 39,578 - $ (15,197)
(loss) . . . . . . .
Interest expense, net . $ 3,991 108,616 13,870 - $ 126,477
Total assets . . . . . $ 27,574,842 9,353,028 1,626,216 (18,738,252) $ 19,815,834
</TABLE>
10<PAGE>
PRECISION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. SEGMENT INFORMATION
<TABLE>
Three months ended March 31, 1998
---------------------------------
<CAPTION>
Telecommunications
Products
--------------------------
U.S. International Service Intercompany
Operations Operations Bureau Eliminations Consolidated
----------- -------------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues from external
customers . . . . . . $ 2,265,576 3,372,484 1,030,357 - $ 6,668,417
Revenues from other
segments . . . . . . $ 235,774 - - (235,774) $ -
Total revenues . . . $ 2,501,350 3,372,484 1,030,357 (235,774) $ 6,668,417
Depreciation and
amortization . . . . $ 446,434 241,760 144,596 - $ 832,790
Operating loss . . . . $(2,121,941) (2,067,249) (55,176) - $ (4,244,366)
Interest income $ 42,151 (113,602) (19,176) - $ (90,627)
(expense), net . . .
Total assets . . . . . $ 25,208,510 12,757,040 2,243,135 (13,992,856) $ 26,215,829
</TABLE>
11<PAGE>
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations
Precision Systems, Inc. (the "Company" or "PSI") is a global company
that, together with its subsidiaries, Vicorp N.V. and BFD Productions,
Inc., delivers telecommunications solutions to service providers and
corporations. Vicorp's software and hardware products support enhanced
calling and prepaid services, toll-free services, and advanced call
center applications. BFD Productions is a service bureau specializing in
audiotext and Internet applications. Headquartered in St. Petersburg,
Florida (USA), Precision Systems meets the needs of customers in more
than thirty countries.
The following table sets forth for the periods indicated (i) the
percentage of total revenues represented by certain items in the
financial statements of the Company, and (ii) the percentage change in
the dollar amount of such items from period to period.
Percentage of
Revenue
Three Months Ended Percentage
March 31, Increase
-------------------- (Decrease)
1999 1998 1999 vs. 1998
---------- --------- ----------------
Revenues:
Contract revenue . . . . . . . . 21.6% 15.0% 45.0%
Service and support . . . . . . . 54.5% 71.0% (22.7%)
License fee revenue . . . . . . . 23.9% 14.0% 72.5%
---------- ----------
Total revenues . . . . . . . . . 100.0% 100.0% 0.8%
Cost of sales, exclusive of
depreciation and 46.6% 76.7% (38.9%)
amortization shown separately
below . . . . . . . . . . . . . .
Operating Expenses:
Selling, general and 36.4% 54.7% (32.8%)
administrative . . . . . . . . .
Research, engineering and
development . . . . . . . . . . 8.5% 19.7% (56.3%)
Depreciation and amortization . . 8.7% 12.5% (30.2%)
---------- ----------
Operating loss . . . . . . . . . . (0.2%) (63.6%) (99.6%)
Interest expense, net . . . . . . . (1.9%) (1.4%) 39.6%
Loss before income taxes . . . . . (2.1%) (65.0%) (96.7%)
Net Loss . . . . . . . . . . . . . (2.1%) (65.0%) (96.7%)
12<PAGE>
Total Revenues
Effective January 1, 1998, the Company adopted the American
Institute of Certified Public Accountants ("AICPA") Statement of Position
("SOP") 97-2, "Software Revenue Recognition." Adoption of SOP 97-2 did
not have a material impact on the financial condition or the results of
operations of the Company.
Total revenues increased to $6,719,944 for the three months ended
March 31, 1999, compared to $6,668,417 for the three months ended March
31, 1998. The various components of revenue fluctuated as explained
below.
Contract Revenue
Contract revenue, consisting primarily of telecommunications
equipment hardware sales, increased to $1,449,780 for the three months
ended March 31, 1999, compared to $999,757 during the same period in
1998. The increase is primarily due to an increase in contract revenues
associated with Vicorp's BETEX products of $1,449,780 during the three
months ended March 31, 1999, compared to $969,757 during the same period
in 1998.
Service and Support
Service and support revenue, consisting primarily of custom
development services, maintenance services, and service bureau services,
decreased to $3,662,960 for the three months ended March 31, 1999,
compared to $4,736,798 for the three months ended March 31, 1998.
Service and support revenue generated from MCIWorldCom relating to
its ESP equipment decreased to $330,849 for the three months ended March
31, 1999, compared to $470,029 for the same period in 1998, due to the
customer's request for a lower level of support to be provided by the
Company in 1999 compared to 1998.
Service and support revenue for Vicorp BETEX products decreased to
$2,418,954 for the three months ended March 31, 1999, compared to
$3,153,381 for the three months ended March 31, 1998. Vicorp's service
and support revenue includes maintenance and custom development services
provided to its customers.
Service and support revenue for BFD decreased to $832,104 for the
three months ended March 31, 1999, compared to $1,030,357 for the three
months ended March 31, 1998. BFD's service and support revenue primarily
includes interactive voice response service bureau activity.
License Fee Revenue
License fee revenue increased to $1,607,204 for the three months
ended March 31, 1999, compared to $931,862 for the three months ended
March 31, 1998. License fee revenue for the three months ended March 31,
1999, relating to the Company's BETEX product line was $1,185,104 and
$422,100 for the UniPort product line. The Company expects to generate
future license fee revenue for its BETEX and UniPort products, although
no assurance can be given for such future revenue.
13<PAGE>
Cost of Sales
Cost of sales decreased to $3,128,610 (47 percent of revenue) for
the three months ended March 31, 1999, compared to $5,118,958 (77 percent
of revenue) for the three months ended March 31, 1998. The reason for the
decrease in the Company's cost of sales dollar amount is primarily due to
the lower total contract revenue and service and support revenue during
the three months ended March 31, 1999, compared to the same period in
1998. Such revenue historically has had higher cost of sales percentages
than the Company's license fee revenue. The reason for the decrease in
the Company's cost of sales dollar percentage is primarily due to the
increase in the percentage of license fee revenue in the Company's
revenue mix during the three months ended March 31, 1999, compared to the
same period in 1998. License fee revenue historically has had a lower
cost of sales percentage compared to contract revenue and service and
support revenue.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased to $2,452,002
for the three months ended March 31, 1999, compared to $3,648,397 for the
three months ended March 31, 1998. The decrease in selling, general and
administrative expenses for the three months ended March 31, 1999, is
primarily due to the positive effects of the Company's efforts during
1998 at reducing its overhead costs through restructurings, employee lay-
offs and office closures. Such restructurings generated approximately
$979,000 of cost savings during the three months ended March 31, 1999,
compared to the same period in 1998. In addition, the Company continued
its efforts at managing and controlling costs in order to improve the
alignment of cost outlays against potential revenue opportunities. The
Company reduced its travel expenses due to increased controls and a
decrease in the Company's employee base, which generated approximately
$300,000 in cost savings.
Research, Engineering, and Development
Research, engineering and development expenses decreased to $573,221
for the three months ended March 31, 1999, compared to $1,312,638 for the
three months ended March 31, 1998. The decrease in research, engineering
and development expenses primarily relates to the reduction in
development work associated with the Company's BETEX and UniPort
products. The Company has reduced its research and development efforts on
UniPort due to reduced sales and marketing opportunities for the product
and to focus future activities on BETEX and BETEX-related products, such
as Lydian. Although the Company is reducing its research and development
activities for BETEX and BETEX-related products, it does not anticipate a
material negative effect on its customer-related revenue opportunities.
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.
14<PAGE>
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 $581,308 for the three months
ended March 31, 1999, compared to $832,790 for the three months ended
March 31, 1998. The decrease is primarily due to certain computer
equipment that became fully depreciated subsequent to March 31, 1998,
and, therefore, generated no depreciation expense during the three months
ended March 31, 1999. In addition, certain furniture, leasehold
improvements, and other miscellaneous equipment that were written off as
part of the 1998 restructuring plan created no depreciation expense
during the three months ended March 31, 1999.
Income Tax Expense
The Company uses the asset and liability method to account for
deferred income taxes. Under the asset and liability method, deferred
income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to future
years to differences between the financial statement carrying amounts and
the tax basis of existing assets and liabilities. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date.
Interest Expense
For the three months ended March 31, 1999, net interest expense was
$126,477 compared to $90,627 during the same period in 1998. The increase
in net interest expense is primarily due to promissory notes of
$3,750,000 issued in April and August of 1998 that bear interest at 9.5
percent.
Litigation
Reference is made to the legal proceedings described at Part 1, Item
3, in the Company's December 31, 1998 Form 10-K. The Company is subject
to certain legal actions arising in the normal course of business. After
taking into consideration legal counsel's evaluation of such actions,
management is of the opinion that their final resolution will not have
any significant adverse effect upon the Company's business or its
consolidated financial statements.
15<PAGE>
Financial Position, Liquidity, and Capital Resources
At March 31, 1999, the Company had working capital deficiency of
$10,682,801 compared to $11,168,209 at December 31, 1998. During the
three months ended March 31, 1999, cash provided by operations was
$490,845. The Company expects that in 1999, as in 1998, 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. The Company has
taken steps regarding the improvement of its cash flow and cash position,
including:
* Retained an investment banking firm to assist in the development
and evaluation of future strategic initiatives, including
potential financing opportunities;
* Analyzed opportunities to sell certain non-core assets, including
real estate; and
* Implemented a restructuring plan to reduce operating expenses.
However, there is no assurance that the Company will be able to
obtain additional financing on acceptable terms and conditions or that
its existing working capital will be sufficient to fund its operating and
investing activities for 1999.
In April 1998, the Company announced that its Board of Directors
approved and the Company entered into a definitive agreement (the
"Contribution Agreement") with various privately held entities controlled
by Roy M. Speer to acquire a controlling interest in the Company. The
transaction was valued at approximately $100,000,000 and was subject to
shareholder and certain antitrust and regulatory approvals and other
customary conditions.
Under the terms of the Contribution Agreement, which was initially
proposed on March 6, 1998, the Speer entities (Speer Communication
Holdings Limited Partnership, Speer World Wide Digital Transmission and
Vaulting Limited Partnership, Speer Virtual Media Limited Partnership,
and Speer Productions Limited Partnership) had proposed to contribute to
the Company $15,000,000 in cash and their digital storage, audiovisual
production and telecommunications assets and businesses in Nashville,
Tennessee and Washington, D.C. in exchange for approximately 105,000,000
shares of the Company's common stock (the "Property Contribution"). The
Agreement permitted Speer, in its sole discretion, to consummate an
alternative transaction in lieu of the Property Contribution, whereby
Speer could have elected to transfer all of the assets and liabilities of
Speer Virtual Media Limited Partnership, plus $36,000,000 in cash in
exchange for 41,000,000 shares of common stock of the Company (the "Cash
Contribution"). The Contribution Agreement further contemplated that all
debt and preferred stock of the Company held by its major stockholders
would be converted into common stock at the rate of $1.00 per share. The
Contribution Agreement provided for a $5,000,000 line of credit to be
made available by Speer upon signing of the Contribution Agreement for
operating capital requirements. As of March 31, 1999, the Company's
16<PAGE>
outstanding balance owed on the line of credit was $3,750,000. After the
transaction, Mr. Speer would have controlled over 80 percent of the
outstanding stock of the Company. Mr. Speer currently controls RMS
Limited Partnership ("RMS"), an entity that was one of the Company's
major stockholders prior to March 16, 1999, when RMS sold its interest in
the Company to Anschutz Digital Media, Inc. RMS would have also
contributed certain real estate in Nashville as part of the transaction.
In February 1999, the Company announced that its Board of Directors
received from Speer Communications Holdings Limited Partnership ("Speer")
notice of termination of the Contribution Agreement dated April 22, 1998.
In addition, RMS delivered notice that it elected to terminate both the
Real Estate Transfer Agreement and Plan of Recapitalization between RMS
and the Company.
Also in February 1999, following termination of the Contribution
Agreement, the Speer entities entered into an asset purchase agreement
(the "Asset Purchase Agreement") with Anschutz Digital Media, Inc.
("Anschutz"). Under the terms of the Asset Purchase Agreement, Anschutz
agreed to purchase substantially all of the assets of the Speer entities,
including RMS's debt and ownership interest in the Company. The
transaction closed on March 16, 1999.
In March 1999, the Company announced that its Board of Directors
unanimously approved and the Company has entered into a definitive merger
agreement (the "Agreement") with Anschutz. Under the terms of the
Agreement, which was initially proposed on February 17, 1999, Anschutz
would acquire all of the outstanding common stock of the Company in a
transaction wherein the Company would be merged with a subsidiary of
Anschutz, and holders of the Company's common stock would receive $1.00
per share in cash. The Agreement further contemplates that all debt to
the Company's shareholders will be repaid and the Company's preferred
stock will be canceled for an amount equal to its liquidation preference,
plus accrued dividends and interest thereon. The Agreement also provides
the Company with a line of credit with available borrowings of $1,250,000
to be extended by Anschutz, replacing the line of credit extended to the
Company by the Speer entities. The transaction is subject to shareholder
and certain antitrust and regulatory approvals and other customary
conditions. Anschutz is an affiliate of the Anschutz Company whose
operating divisions and wholly-owned subsidiaries engage in
telecommunications, natural resources, transportation, real estate, and
sports entertainment businesses.
The Company's accounts and contracts receivable increased to
$7,114,903 as of March 31, 1999, from $6,823,640 as of December 31, 1998.
The increase is primarily due to certain large customer receivable
balances outstanding at March 31, 1999, that are expected to be collected
by June 30, 1999.
The Company's supplies and other current assets increased to
$2,552,854 as of March 31, 1999, from $2,381,153 as of December 31, 1998.
The increase is primarily due to an increase in inventory in anticipation
of customer deliverables subsequent to March 31, 1999.
17<PAGE>
The Company's costs and earnings in excess of billings on
uncompleted contracts decreased to $1,195,595 as of March 31, 1999, from
$1,425,303 as of December 31, 1998. The decrease is primarily associated
with the completion of certain BETEX product delivery contracts that were
in process for its customers at December 31, 1998, which were billed
during 1999.
The Company's current portion of long-term debt decreased to
$9,836,746 as of March 31, 1999, from $9,864,171 as of December 31, 1998.
The Company's long-term debt decreased to $100,832 as of March 31, 1999,
from $154,137 as of December 31, 1998. The total decrease in the current
portion of long-term debt and long-term debt is due to payments made on
the Company's capital lease obligations.
The Company's accounts payable decreased to $4,318,164 as of March
31, 1999, from $5,758,372 as of December 31, 1998. The decrease is
primarily due to the timing of certain vendor payments.
The Company's accrued expenses decreased to $6,123,042 as of March
31, 1999, from $6,985,381 as of December 31, 1998. The decrease is
primarily due to a decrease in accrued restructuring charges to
approximately $454,000 as of March 31, 1999, from $922,000 as of December
31, 1998. In addition, accrued payroll costs decreased to approximately
$1,260,000 as of March 31, 1999, from approximately $1,489,000 as of
December 31, 1998, due to the timing of certain payroll related payments.
The Company's billings in excess of costs and earnings on
uncompleted contracts increased to $1,868,970 as of March 31, 1999, from
$1,010,680 as of December 31, 1998. The increase is primarily associated
with the billing of certain BETEX software development contracts during
the first quarter of March 31, 1999, that were still in process for its
customers at March 31, 1999.
The Company's deferred revenue balance increased to $2,264,833 as of
March 31, 1999, from $723,464 as of December 31, 1998. The Company's
deferred revenue balance primarily represents prepaid maintenance
contracts for services to be provided to its customers.
The Company incurred approximately $198,000 in expenditures for
capital assets during the three months ended March 31, 1999. 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.
18<PAGE>
Readiness for Year 2000
The Company is in the process of developing a plan to identify and
resolve all of its issues relating to the "Year 2000" problems relating
to its business. The Year 2000 problem is the result of computer programs
being written using two digits (rather than four) to define the
applicable year. Software programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in a major system failure or miscalculations. This
issue affects the Company's internal information systems and could impact
software systems sold and delivered to customers. Various task forces
have been formed to assess the scope of the Company's risks in this area
and bring applications into compliance. To date, the Company has
experienced very few problems relating to Year 2000 testing and those
identified have been fixed in the Company's day-to-day operating
environment. The Company has also started coordinating with vendors about
their progress in identifying and addressing problems that their computer
systems may face in correctly processing date information relating to the
Year 2000. The Company intends to continue its efforts to monitor the
Year 2000 compliance of vendors. In the event any third parties cannot
timely provide the Company with products that meet the Year 2000
requirements, then the Company's abilities to offer its products and
services could be materially adversely affected. The cost incurred by the
Company during 1998 to address Year 2000 compliance was less than
approximately $500,000. The Company estimates it will incur less than
approximately $500,000 in direct costs during 1999 to support its
compliance initiatives. Although the Company expects its systems to be
Year 2000 compliant on or before December 31, 1999, it cannot predict the
outcome or the success of its Year 2000 programs, or that third party
systems are or will be Year 2000 compliant, or that the costs required to
address the Year 2000 issue will not exceed its estimates, or that the
impact of a failure to achieve substantial Year 2000 compliance, will not
have a material adverse effect on the Company's businesses, financial
conditions, or results of operations. In addition, the Company's business
may be materially adversely affected in the event that its customers'
systems are not Year 2000 compliant to the extent that such (i)
customers' systems are not compatible with those products or services
offered by the Company or (ii) customers delay purchase of products or
services from the Company while such customers' systems are made Year
2000 compliant. The Company has not adopted a contingency plan to address
possible risks to its systems.
19<PAGE>
Forward-looking Information
The foregoing discussion in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contains forward-looking
statements that reflect management's current views with respect to future
events and the financial performance and condition of the Company. Such
statements involve risks and uncertainties, and there are certain
important factors that could cause actual results to differ materially
from those anticipated. Some of the important factors that could cause
actual results to differ materially from those anticipated include:
* The Company competes in an industry marked by frequent
technological changes which will force the Company to expend
funds to develop new products and implement new technologies
* The various markets into which the Company sells its products are
undergoing significant changes with increasing demands for
product innovations
* The Company must be successful in competing against many
competitors, many of which have significantly greater assets than
the Company
* The Company will be required to properly estimate costs under
fixed price contracts
* Increased risk of litigation in the Company's industry resulting
from aggressive prosecutions of intellectual property claims
* The Company's ability to retain its larger customers, including
MCIWorldCom
* Availability of certain hardware and software components which
are incorporated with the Company's products and are purchased
from a limited number of vendors
* The Company's ability to hire and retain qualified personnel
* Legislative changes affecting the Company's markets, including
the Telecommunications Act of 1996
* Given the Company's acquisition of Vicorp and its large presence
in international markets, regulatory, monetary and inflationary
factors can negatively impact the Company's operations in the
future
* The Company's reliance on large sales orders that increase the
risk of significant revenue fluctuations, from quarter to quarter
and year to year
* The ability of the Company and its significant suppliers and
large customers to address the Year 2000 issue
* The Company's ability to generate sufficient cash, from
operations or from external sources, to fund its global
operations
20<PAGE>
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.
21<PAGE>
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings
Reference is made to the legal proceedings described at Part 1, Item
3, in the Company's December 31, 1998, Form 10-K. The Company is subject
to certain legal actions arising in the normal course of business. After
taking into consideration legal counsel's evaluation of such actions,
management is of the opinion that their final resolution will not have
any significant adverse effect upon the Company's business or its
consolidated financial statements.
ITEM 2 CHANGES IN SECURITIES
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 OTHER INFORMATION
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
On March 31, 1999, the Company filed a report on Form 8-K,
under Item 1, announcing its Board of Directors approved and
the Company entered into a definitive agreement (the
"Agreement") dated March 15, 1999, with Anschutz Digital Media,
Inc. ("Anschutz"). Under the terms of the Agreement, Anschutz
would acquire all of the outstanding common stock of the
Company in a transaction wherein the Company would be merged
with a subsidiary of Anschutz, and holders of the Company's
common stock would receive $1.00 per share in cash.
22<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
PRECISION SYSTEMS, INC.
By: /S/ KENNETH M. CLINEBELL
-------------------------
Kenneth M. Clinebell
Interim President and Chief Financial Officer
May 17, 1999
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 May 17, 1999.
Signature Title
/s/ KENNETH M. CLINEBELL Interim President and
------------------------------- Chief Financial Officer
Kenneth M. Clinebell (Principal Financial Officer)
/s/ CARLA K. LUKE Controller
------------------------------- (Principal Accounting Officer)
Carla K. Luke
23<PAGE>
24<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,865,602
<SECURITIES> 0
<RECEIVABLES> 7,756,808
<ALLOWANCES> 641,905
<INVENTORY> 0
<CURRENT-ASSETS> 13,728,954
<PP&E> 33,545,176
<DEPRECIATION> 27,493,090
<TOTAL-ASSETS> 13,728,954
<CURRENT-LIABILITIES> 24,411,755
<BONDS> 0
0
145
<COMMON> 180,196
<OTHER-SE> (4,877,094)
<TOTAL-LIABILITY-AND-EQUITY> 19,815,834
<SALES> 1,449,780
<TOTAL-REVENUES> 6,719,944
<CGS> 3,128,610
<TOTAL-COSTS> 3,128,610
<OTHER-EXPENSES> 3,606,531
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 126,477
<INCOME-PRETAX> (141,674)
<INCOME-TAX> 0
<INCOME-CONTINUING> (141,674)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (141,674)
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
