UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1997
Commission File Number: 1-11691
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CUSA Technologies, Inc.
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(Exact name of the registrant as specified in charter)
Nevada 87-0439511
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(State of Incorporation) (IRS Identification Number)
986 West Atherton Drive, Salt Lake City, Utah 84123
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(Address of principle executive offices)
(801) 263-1840
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(Telephone of issuer including area code)
Securities registered under section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None None
Securities registered under section 12(g) of the Exchange Act:
Common Stock, Par Value $0.001
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 during the
past 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 in response to Item
405 of Regulation S-K is not contained herein will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ___X___
As of October 10, 1997, there were 15,289,437 shares of the Issuer's common
stock, par value $0.001, issued and outstanding. The aggregate market value of
the Issuer's voting stock held by nonaffiliates of the Issuer was approximately
$3,512,889 computed at the closing bid for the Issuer's common stock of $0.56 as
of October 10, 1997 .
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly describe them
and identify the part of the Form 10-K (e.g., part I, part II, etc.) into which
the document is incorporated: (1) any annual report to security holders; (2) any
proxy or information statement; and (3) any prospectus filed pursuant to rule
424(b) or (c) under the Securities Act of 1933. The list documents should be
clearly described for identification purposes. None.
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TABLE OF CONTENTS
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Item Number and Caption Page
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PART I
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1. Business 3
2. Properties 12
3. Legal Proceedings 13
4. Submission of Matters to a Vote of Security Holders 13
PART II
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5. Market for Registrant's Common Equity and Related
Stockholder Matters 13
6. Selected Financial Data 14
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
8. Financial Statements and Supplementary Data 19
9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 19
PART III
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10. Directors and Executive Officers of the Registrant 20
11. Executive Compensation 22
12. Security Ownership of Certain Beneficial Owners and
Management 28
13. Certain Relationships and Related Transactions 30
PART IV
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14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 33
Signatures 40
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PART I
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ITEM 1. BUSINESS
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General
CUSA Technologies, Inc. (referred to herein, along with its subsidiaries, as the
"Company" or "CTI"), incorporated in 1986, is a developer of computerized
information systems for credit unions. The Company's software packages are sold
as part of a complete data processing solution including hardware, software,
operating systems, installation, training, software support and hardware
maintenance. The Company's PC based workstation products, which are sold as
add-ons to the core information processing systems, increase the accessibility
and usability of strategic information by credit union employees and members.
The Company's data processing services, such as statement processing, disaster
recovery, credit bureau reporting, microfiche, and optical storage, complement
the Company's core credit union data processing system products.
The Company, formerly known as Mountain Surgical Centers, Inc., entered the
credit union software market through the acquisition of CUSA, Inc. ("CUSA") in
June of 1994 and contemporaneously changed its name to CUSA Technologies, Inc.
From September of 1994 to July of 1995 the Company consolidated its distribution
network through the acquisition of six independent resellers of the CUSA credit
union software package (the "Acquired Resellers"). As a result of these
acquisitions, the Company provides support and maintenance services to nearly
all of the approximately 1,100 users of its credit union systems and is well
positioned to provide these users with future enhancements, software and
hardware upgrades, and related products.
In addition to the acquisition of the acquired resellers, in November of 1994,
through the acquisition of Outside Force, Inc., a Texas corporation the Company
acquired the Reliance credit union management software, a fourth generation
language based open systems software solution for credit unions.
The Company has operated five non-credit union software business units for all
or a portion of fiscal 1997: the medical practice management software business
unit, the medical records software business unit, the commercial data processing
systems business unit, the equipment rental software business unit, and the
surgery center business unit. The medical practice management software business
unit was engaged in the development, support and maintenance of software for
physician offices and clinics. The commercial data processing systems business
unit developed, installed and maintained open accounting systems for a variety
of businesses. The medical records software business unit was involved in the
development of software for tracking medical patient records. The equipment
rental software business unit is a turnkey provider of computer solutions
including proprietary software to businesses that rent equipment and supplies.
The surgery center business units consists of two out-patient podiatry centers
located in Sparks & Carson City, Nevada. In addition to these business unit the
Company owned during part of fiscal 1997 an office complex located in Sparks,
Nevada.
Focus on the Credit Union Software market
Recently, the Company has either sold or adopted a plan to sell each of its
non-credit union business units in order to focus its attention and capital
resources on its core credit union business. This focus on credit union software
was accomplished through the completion, in fiscal 1997 of (1) the sale of the
assets of the Company's medical practice management and commercial data
processing systems software business units to Physicians Computer Network, Inc.
for $8,950,000 plus the assumption of certain liabilities pursuant to an Asset
Purchase Agreement dated July 2, 1997, (2) the discontinuance, in fiscal 1997,
of the operations of the Company's medical records software business unit, (3)
the sale of the assets of the Company's equipment rental software business unit
for $400,000 pursuant to an agreement dated March 31, 1997, (4) the sale of the
Company's office rental complex to a family partnership of which Richard N.
Beckstrand, controlling shareholder, chief executive officer and chairman of the
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board of directors of the Company (sometimes referred to herein as the
"Investor") is the general partner, for $1,258,425 plus the assumption of
$1,658,565 in mortgage debt related to the real property, and (5) the approval,
by the Company's board of directors, of a plan to dispose of the Company's
surgery center business unit. As a result, over the past two years, the
percentages of the Company's revenue from continuing operations related to the
credit union software business has grown from 62, percent for the year ended
June 30, 1996 to 100 percent for the year ended June 30 1997.
Private Placement of Common Stock
On January 24, 1997 the Company entered into a Purchase and Sale Agreement (the
"Agreement") whereby it agreed to sell 8,648,649 shares of its common stock,
representing 49% of the common stock to be outstanding after the completion of
the sale, to the Investor for $8.0 million in cash. Upon the completion of the
transaction, the Investor increased his ownership interest to over fifty percent
and obtained a controlling interest in the common stock of the Company. In
February of 1997, the Company received $6.0 million of the purchase price which
was used to retire long term debt and certain current liabilities. The Company
anticipates that the remaining $2.0 million will be received in fiscal 1998.
Also pursuant to the Agreement, the Investor will surrender approximately
1,208,400 five year options to purchase shares of the Company's common stock at
prices from $1.50 to $5.00 in exchange for the grant of 1,000,000 five year
options to purchase the Company's common stock at $1.00 per share for the first
year, with the option price increasing by $0.25 each year on the anniversary
date of the grant. The transaction was negotiated between the Investor and an
independent committee of the board of directors.
Principal products and services
The Company's credit union management solutions consist of the
fourth-generation-language Reliance(TM) Software and the CUSA System(TM). The
Company's credit union management systems are installed in nearly 10% of
America's credit unions, representing a customer base of approximately 1,100.
The CUSA System, developed in 1977, was one of the first software products to be
designed specifically for the computerization of credit unions' data processing
functions. Through over 20 years of refining, the Company's management believes
that CUSA has become one of the most popular software systems for small to
medium sized credit unions (credit unions with total assets between 5 and 100
million dollars).
The CUSA System is a very mature and functional product. It was developed in a
language which was designed for use with proprietary hardware. Proprietary
systems such as the CUSA System are often referred to in the software industry
as "legacy systems." As the industry moved away from proprietary hardware and
software and new standards were developed, CUSA developed operating system
bridges which allowed the CUSA System to operate under a UNIX environment on
standard hardware platforms. While these measures have allowed the Company to
provide the users with important strategic advantages, the Company became
concerned that the proprietary nature of the product would limit the future
application of current and emerging technologies such as graphical user
interface (GUI), relational database, client/server architecture and fourth
generation programming languages. In order to allow CTI to extend its product
offerings to larger credit unions and to provide its current customers with the
advantages of current and emerging software and hardware technologies, CTI
purchased the Reliance Software package in November of 1994 through the
acquisition of Outside Force, Inc. (See "Acquisitions") Since that time, as part
of a steady product migration strategy, CTI has focused its new sales efforts on
sales of the Reliance System while encouraging its current base of CUSA System
users to take advantage of the superior technology of the Reliance System. The
CUSA software and the Reliance software are sold as part of fully integrated
systems, including hardware, applications software, operating systems,
installation, training, post-installation hardware maintenance, and software
training and support. Post installation hardware maintenance and software
support contracts provide annual recurring revenues of approximately 16-25% of
the sales price of the system, depending on the size and complexity of the
system.
In addition to its core credit union management systems, CTI has developed a
number of workstation products which integrate with both the CUSA System and the
Reliance System and are sold as add-on products to enhance functionality. Since
these workstation products are designed to integrate with either the CUSA System
or the Reliance System, these workstation products allow CUSA System users to
increase the functionality of their current system. The workstation products are
an important part of CTI's strategy to offer a cost effective migration path to
modern computing technology. Also, through the CTI Resource Group (the "Resource
Group"), CTI provides services to credit unions to assist them in their
governmental reporting, credit bureau inquiries, microfiche storage, statement
processing, disaster recovery, and custom form printing.
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The CUSA System
The CUSA System has been refined through 20 years of tailoring its functions to
meet the needs and suggestions of its users which now number over 1,000. The
CUSA System consists of a series of fully integrated modules, constructed so
that the proper combination of products can be supplied to meet the specific
requirements of each credit union in a cost-efficient configuration. The product
is designed so that the user can move quickly throughout the system using a
combination of menus, windows and user-defined access keys. On-screen prompts,
"help" functions, and pop up windows make the system user friendly. The features
of the system include online teller transactions, loan processing, online loan
application, charged-off loans, mortgage lending, 360/365 day interest
calculation options, share draft processing, certificate management, IRA
processing, club accounts, safe deposit box control, travelers check management,
electronic payroll processing, ATM processing, credit card processing, audio
response, optical disk records management, customized report writer, job queing
system, bank reconciliation, full branch accounting, shared branching/service
center, asset/liability management, bill payer system, credit bureau inquiry,
credit bureau reporting, laser statement processing, government reporting, call
reporting and automated clearinghouse transmission processing.
As complementary products to its CUSA System, CTI offers peripheral products,
such as credit/debit cards; CUSAPLAN Plus, a PC based financial analysis and
reporting package for credit unions; CUSA Talk II, a PC based audio response
account inquiry system; an Automated Clearinghouse Debit/Credit Processing
Module for automated funds transfer; CUSANet Batch & CUSANet Online, modules
which allow credit union members to participate in established ATM networks;
CUSACard, an in-house credit card system which interfaces with the credit
unions' Visa processor; CUSAPay, an online payroll module; and Credit Bureau
Inquiry, a software package which allows credit unions to pull credit reports on
their members from any of the major credit reporting institutions.
Reliance System
The Reliance System is currently installed in approximately 65 credit unions. It
was developed in Progress (registered trademark of Progress Software), a fourth
generation programming language, and utilizes the latest open systems technology
of the software industry. The fourth-generation development environment allows
for rapid product fixes and shortened development cycles for new features and
functionality. In addition, it allows for flexibility in modification,
implementation and hardware platform choices.
CTI believes that the fourth-generation development environment provides a
significant competitive advantage in foreign markets where, in some cases, the
movement from legacy systems to open systems is proceeding quickly and the speed
with which a product may be localized is critical to market penetration. In
particular, CTI has started initiatives in Australia and Central America.
In connection with the Australia initiative, the Company is working through a
local distributor, CUSA Pty, Ltd., an Australian corporation. According to the
distributorship agreement, CTI is to assist in the localization of the Reliance
System, scheduled for completion in January, 1998. Once localization is
completed CTI will receive a royalty on each software sale and an ongoing fee to
provide level three support. The distributor is responsible for configuration,
installation, training and level one and two support and maintenance of the
system. To date the distributor has received six orders totaling approximately
$1,115,000. The revenue for these orders will be recognized upon the delivery of
the fully localized Reliance product.
In cooperation with the World Council of Credit Unions, the Company has
installed a Spanish version of the Reliance product in a credit union located in
Guatemala. Though this international initiative is still in the beta stage, the
Company feels that the Spanish version of the Reliance product may be successful
in the Central and South American markets.
The Reliance System is designed for use in any size of credit union, though many
of its functions have been developed specifically to meet the requirements of
large-to-medium-sized credit unions with assets over 50 million dollars. Its
functions include: online teller transactions, online teller services, travelers
checks, safe deposit box-control, vault teller, loan processing, online loan
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application, complete online or hard copy "what if" calculations for payment,
interest and amortization, 360/365 day interest calculation options, online
credit bureau interface, detailed loan tracking, share draft processing,
application integration into general ledger, member CDs, member IRAs, credit
union customized member statements, easy sort functions for bulk mailings of
statements, unlimited electronic payroll distribution and processing, inventory
tracking of all fixed assets, comprehensive report system, credit union-defined
security features, back office automation, electronic mail system for staff,
complete "to do" list for any user, infinite calendar with Easy-Date feature,
voice information processing, distributed branch processing, ATM interface
software, mortgage loans, collections, staff tracking, accounts payable
disbursements, complete tracking of credit union investments, touchscreen
teller, fax interface, word processing capabilities, optical disk, signature
verification, report warehousing, document storage and retrieval, automated
clearinghouse transmission processing, and report creation for custom reports.
Both credit union systems are marketed as a complete package including hardware,
software, installation, and post-installation training and support. The
Company's credit union software offerings run on a variety of computers, ranging
from personal computers to the IBM RS 6000. System prices typically range from
$30,000 to $300,000 for the CUSA System and $100,000 to over $1,500,000 for the
Reliance System, in each case depending on the size and sophistication of the
system. During the past two years, the Company has installed approximately 77
new and upgraded CUSA Systems and 14 new Reliance Systems.
Workstation products
In addition to its core credit union management systems, CTI has developed a
number of workstation products which are sold as add-on products to enhance
functionality and are designed to integrate with both the CUSA and Reliance
Systems. The cross platform integration allows a CUSA user to enhance the
functionality of its CUSA System, at the same time investing in a technology
that can be used with the Reliance System. The workstation products are an
important part of CTI's strategy to offer its customers a cost effective
migration path to modern computing technology.
In 1996, CTI released its Archive Management System ("AMS 5.0"), a product
designed to archive customer account information from the credit union system
onto an optical disk system. AMS 5.0 works with both the CUSA and Reliance
Systems. To date CTI has completed approximately 10 installations of AMS 5.0.
In August of 1996, CTI released the Reports Workstation product for the CUSA
System. This workstation product is based upon a product called Crystal
Reports(TM), which is owned by Seagate Software. The Reports Workstation allows
users of the CUSA System to produce ad hoc reports from the information
contained in the database files of the CUSA System. To date the Company has sold
24 CUSA Reports Workstation modules. The Reports Workstation for Reliance is
currently in development and should ber available for shipment in March of 1998.
CTI released its Loan Origination workstation product in June of 1997. This
workstation product is designed to automate the loan origination process and
features a graphical user interface and point and click capabilities which
simplify the process of entering and processing information. In fiscal 1997, CTI
sold approximately 12 loan origination workstation modules.
Home Banking Product
CTI's home banking product is currently in development. The home banking product
will allow credit unions to offer home banking services to members through
secured connections. As confidence in electronic banking increases, the Company
believes that an increasing number of credit union members will utilize home
banking services. CTI is well positioned to partner with its customers to offer
such services to the credit union members.
In addition to those workstation products specifically discussed above, a number
of other workstation and other software products are currently scheduled for
development and deployment in fiscal 1998.
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Year 2000
The Company is currently conducting an internal audit of the features of its
software, hardware and operating system products for the impending year 2000.
This internal audit expected to be completed by December 1997. The Company is
also preparing for a formal independent audit to verify compliance with the year
2000 situation. This audit is expected to be completed by the end of March 1998.
The Company expects its products to be year 2000 certified with minor
modifications and development expenses.
Support
Once a system is installed, the Company provides ongoing software support
pursuant to annual support contracts for a fee equal to approximately 16-25% of
the total cost of the software. CTI's support department maintains offices in
three cities in the United States. Through a sophisticated frame relay call
tracking system, support calls are logged at a central location and dispatched
to the appropriate service representatives in CTI's offices across the country.
Support call tracking reports, which detail the number of calls per customer,
per system function and per support representative, provide useful data to
management, sales and programming. The Company currently has software support
contracts with 99% of its customers. Revenues from software and hardware support
contracts represented approximately 29 percent of the Company's revenues in
fiscal 1997.
CTI Resource Group
The Company, through the Resource Group, provides services to credit unions to
assist them in their monthly, quarterly, and annual customer laser statement
processing, governmental reporting, credit bureau reporting, microfiche printing
and storage, and disaster recovery. CTI processed over 13.2 million monthly,
quarterly, and annual customer statements in fiscal 1997, including
government-required 1099 printing and processing during CTI's third fiscal
quarter. CTI's laser statement processing services consist of the electronic
receipt and reformatting, printing, and mail handling of account data from the
CUSA or Reliance Systems. The Resource Group's disaster recovery system is
tested and certified annually and includes a complete hot site backup facility,
disaster planning assistance, data retention services and microfiche document
storage and retrieval. In fiscal 1997, revenues from laser statement printing,
microfiche services, credit bureau reporting and disaster recovery accounted for
approximately 26 percent of CTI's total revenues.
Sales of hardware and software, consisting mainly of the CUSA System, the
Reliance System and the workstation products, were approximately 35 percent, 42
percent and 49 percent of total revenues in the fiscal years ended 1997, 1996
and 1995, respectively. Support, maintenance and other services, which consist
of software support, hardware maintenance, training, and revenues from the
Resource Group, were 65 percent, 58 percent and 51 percent of total revenue in
the fiscal years ended 1997, 1996 and 1995, respectively.
Distribution
The Company's products are marketed primarily through a direct sales
organization. Once a sale is made, the hardware is shipped to the customer site
with certain software and operating components pre-loaded. The product is then
installed on-site by a member of the Company's installation staff or a third
party installer, and the customer's employees are trained to operate the system.
Custom modifications, bug fixes, and minor enhancements are completed at the
Company's corporate offices and distributed via modem or some other form of
electronic media.
Manufacturing and suppliers
The Company's computer systems are assembled using various standard components
such as PC Monitors, minicomputers, communications equipment, and other
electronic and computer components that are purchased from third party
suppliers. As part of the Medical Divestiture Agreement (see"Dispositions and
Discontinued Operations") CTI agreed to purchase $10,000,000 of computer
hardware from Physicians Computer Network, Inc. for a discounted rate over a
five year period. The agreement calls for yearly minimum purchases of
$2,000,000. The Company exceeded the $2,000,000 minimum purchase requirement in
fiscal 1997. The Company's projected hardware purchases for the next four years
exceed the required yearly minimum purchase obligation. The Company believes
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that the hardware prices set by the Divestiture Agreement are at least as
favorable as would be available to the Company from other computer hardware
suppliers.
If the supply of certain components of hardware were interrupted without
sufficient notice, an interruption or delay in product deliveries could result.
The Company does not foresee any difficulty in obtaining the necessary
components or subassemblies.
Seasonality
Credit unions generally plan expenditures based on a calendar year budgeting
cycle. Consequently, in the past a greater portion of the credit unions'
computer software and hardware purchasing decisions have been made toward the
end of the calendar year. In addition, the volume of laser statements and
government reports (including year end governmental processing for Form 1099's)
processed by the Company is greater in the first quarter of the calendar year.
The Company's historical operating results reflect these trends and it is
anticipated that the results from operations for the 1998 fiscal year will
continue to reflect these seasonal factors.
Significant Customers
No single customer or contract accounted for more than ten percent of the
Company's annual revenues for the 1997, 1996 or 1995 fiscal years.
Backlog
The Company's backlog of orders for its products was approximately $2,960,000 as
of September 30, 1997 compared to approximately $930,000 as of September 30,
1996.
The Company's backlog includes international and domestic sales and excludes
contracts for recurring hardware and software maintenance and support contracts.
The Company's backlog is subject to fluctuation due to various factors,
including the size and timing of orders for the Company's products and is not
necessarily indicative of future revenue.
Acquisitions
In June of 1994, the Company entered into the credit union software business
through the acquisition of the credit union sales, marketing, installation and
support business of the Boston, Massachusetts-based VERSYSS, Inc., which
distributed the Company's CUSA Credit Union System in most of the North-Eastern
United States. In July of 1994, the Company completed the acquisition of 100% of
the stock of CUSA, Inc., the developer of the CUSA Credit Union System and
related peripherals and services. Since entering the credit union software
business, CTI successfully consolidated the management and sales capabilities
and support operations of all major distributors of its credit union systems and
expanded its product offerings to include the Reliance open systems-based
software package through a number of acquisitions as summarized in the table
below:
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Date of Entity Primary Business
Transaction
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RK & DR Concepts dba Credit union, medical, commercial
September 1994 Versyss Data Systems data processing systems and
equipment rental software and
hardware sales, installation and
services
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November 1994 New Outside Force, Inc. Reliance open systems based credit
union software sales and service
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November 1994 Sierra Center for Foot Medical clinic for out patient
Surgery, Inc.* foot surgery
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Benchmark Computer Credit union, medical, commercial
February 1995 Systems, Inc. data processing systems software
and hardware sales, installation
and services
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Equipment rental software
February 1995 Computer Ease, Inc. development and support
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New Medical Computer Medical software development,
May 1995 Management, Inc. sales, installation and support
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Benchmark Computer Medical, commercial data
June 1995 Systems of Va., Inc. processing systems software and
hardware sales, installation and
services
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Credit union, medical, commercial
July 1995 Benchmark Computer data processing systems software
Systems, Inc. and hardware sales, installation
and services
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September 1995 Preferred Health Systems, Software for managed health care
Inc.
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Sale and installation of Lotus
December 1995 Workgroup Designs, Inc. Notes-based custom software
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January 1996 Medfo Systems of America, Medical records software sales and
Inc. installation
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Medical, commercial data
February 1996 Automated Solutions, Inc. processing systems software and
hardware sales, installation and
services
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February 1996 Source Computing, Inc. Medical software sales,
installation and support
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Preparation and submission of
February 1996 Medical Clearing electronic medical claims
Corporation
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* Acquired pursuant to an agreement in principal entered into previous to the
Company's entrance into the software business.
Dispositions and Discontinued Operations
In fiscal 1997, the Company either discontinued or adopted a plan to discontinue
each of its non-credit union business units in order to focus its attention and
capital resources on its credit union business unit.
Medical Software Business Unit
Pursuant to an Asset Purchase Agreement (the "Medical Divestiture Agreement")
dated July 2, 1996 as amended in October of 1996, CUSA Technologies, Inc. and
certain of its subsidiaries sold the business and assets of the Company's
medical and commercial divisions to Physicians Computer Network, Inc. for a
total purchase price of $8,950,000 plus the assumption of certain liabilities.
The assets sold included the accounts receivable, goodwill, customer lists,
hardware and software maintenance agreements, workforce-in-place, and
intellectual property related to the medical and commercial divisions. The
Medical Divestiture Agreement contains certain non-compete and non-solicitation
provisions whereby the Company and its affiliates are restricted from selling
any product to any of the end-users of the medical and commercial divisions or
participating in the medical practice management software business for a period
of five years and from selling its eCLINIC medical records product to any end
user who was a PCN practice management software customer as of the closing, for
a period of two years following the closing. As part of the Medical Divestiture
Agreement, PCN will become the Company's exclusive provider of IBM hardware for
the next five years. Under such arrangement, the Company committed to purchase a
minimum of $2,000,000 of hardware each year at a discount from PCN's reseller
prices upon favorable credit terms. The Medical Divestiture Agreement also
required CTI to complete certain software development obligations related to
operating software known as XRTS which was initially developed through a
cooperative effort of CTI and VERSYSS, Inc., a wholly owned subsidiary of PCN.
-9-
On October 15, 1996 the parties amended the Medical Divestiture Agreement. Of
the remaining purchase price of $900,000, $750,000 was retained by PCN in
consideration of their assumption of certain additional liabilities related to
the medical and commercial customer accounts. Pursuant to the October 15, 1996
amendment and a letter agreement between the PCN and CTI dated July 2, 1996, the
remaining $150,000 is to be paid to the Company upon the delivery of certain
assets which are currently subject to a court order restricting such transfer
pending the settlement of certain judgments.
In September of 1997, the Company settled a dispute with PCN related to the
Company's performance of its development obligations under the Medical
Divestiture Agreement with respect to XRTS. In connection with the settlement,
CTI paid $250,000 to PCN and agreed to forgive the $150,000 remaining payment on
the purchase price.
Equipment Rental Software Business Unit
With the February 1995, acquisition of Computer Ease, the Company obtained
ownership of its equipment rental software product known as the Computer Ease
Rental Center System which was formerly marketed by RK & DR Concepts, Inc. dba
Versyss Data Systems (a wholly owned subsidiary of CTI) (see "Acquisitions" ).
On March 31,1997, pursuant to an Asset Purchase Agreement (the "Rental
Divestiture Agreement") between the Company and JFJ Corporation, a company which
is wholly owned by a shareholder and former employee of the Company (the
"Buyer"), the Company sold all of the assets related to its equipment rental
software business for $400,000 represented by two promissory notes, of $200,000
each ("Note A" and "Note B", collectively, "the Notes") and the assumption of
certain liabilities of the rental software business unit. The Notes are each
secured by a pledge of shares of the Company's common stock held in the name of
the Buyer in the amount of 200,000 shares for Note A, and 300,000 shares for
Note B. Note A, which bears interest at 8 percent per annum, is payable in equal
monthly installments over a two year time period beginning August 1, 1997.
Interest accrued at 6 percent per annum and the entire principal of Note B is
payable in full without further notice on March 31, 1999.
Medical Records Software Business Unit
In July of 1995, CTI entered into a Software Ownership and Development Agreement
("SODA") with Pacific Intesys Corporation ("PI") regarding the development and
marketing of an electronic patient records system known as Carepoint(TM) for
Clinics(TM). Carepoint(TM) is a trademark of PI. The product runs on a Windows
NT operating system and utilizes pen-based PCs. Pursuant to SODA, CTI had the
exclusive right to market the product to the ambulatory care market, including
clinics and emergency rooms. For a period of time, CTI engaged in further
development and enhancement of the product and has recently changed the name of
the product to eCLINIC. As of January 31, 1997 CTI had installed eCLINIC in five
sites. These installations were considered beta sites because of the unique
modifications that were being made to the product at each site. Pursuant to a
plan of disposition adopted in June of 1996, CTI ceased installation and support
of eCLINIC, reached settlement with each of the former users of the eCLINIC
software and concluded its obligations under SODA.
Office Rental Complex
In June of 1997, pursuant to an agreement, the Company sold its office rental
complex located in Sparks, Nevada to a family partnership of which the Investor
is the general partner. The sales price was equal to the appraised value of
$3,125,000 less commissions and fees of 6.5 percent. The $2,925,000 purchase
price included the payment of $1,258,425 in cash and the assumption of a
$1,658,565 mortgage on the purchased property. Prior to the sale, the commercial
real property had been listed for sale with a local agent since June of 1995
during which time the Company did not receive a qualified offer which approached
the appraised price.
Surgery Center Business Unit
Though not central to the Company's core business of selling information systems
technology, the Company's surgery center business unit generates positive cash
flow. In fiscal 1997, the surgery center business represented less than 2% of
the Company's total assets or revenues.
-10-
The Company's surgery center business unit consists of the Ford Center for Foot
Surgery, located in Sparks, Nevada (the "Ford Center") and the Sierra Surgery
Center, located in Carson City, Nevada (the "Sierra Center") (collectively "the
Surgery Centers"). The Ford Center is located adjacent to the general office of
L. Bruce Ford, D.P.M., for the practice of podiatry, and consists of 860 square
feet of leased space. The Sierra Center consists of 1,000 square feet of leased
space, contiguous with the general offices of Dr. Kim Bean, D.P.M. The Surgery
Centers are built to stringent Medicare specifications and are equipped with
up-to-date surgical equipment, including laser surgery.
The Ford Center has an agreement with the professional corporation of L. Bruce
Ford, D.P.M., a director and principal shareholder of the Company, whereby his
professional corporation provides professional services, manages the surgery
center, pays all the expenses, supervises all employees, some of whom are shared
with his general practice, and pays for supplies necessary for the successful
operation of the Ford Center. The parties allocate the salaries of nursing and
other staff, the cost of insurance, supplies, utilities, and similar items. The
Company's share of those costs ranges from 20-33% of the total costs incurred.
Rent for space and equipment, legal and accounting, and outside professional
fees are borne separately by the parties. The Company has a similar arrangement
for professional services, management, expenses, and staffing for the Sierra
Center with the corporations of Kim Bean, D.P.M.
The Company's surgery center business is subject to a number of risks, including
adverse regulatory changes or regulatory non-compliance, malpractice claims
(which are covered by the physicians malpractice insurance) and the
highly-competitive market for surgery services.
As part of the Company's plan to focus its resources on the credit union
software business, since the sale of the medical software division in July of
1996, the Company has actively sought a buyer for the surgery center business
unit. In June of 1997, the board of directors of the Company approved a plan to
dispose the Company's surgery center business unit. The completion of the
disposition was subject to the identification of a qualified buyer, negotiation
of an acceptable purchase price and terms and execution of a final purchase and
sale agreement. On September 30, 1997 the Board approved a transaction whereby
the surgery center business unit will be sold to a group of investors consisting
of the Investor and two shareholders of the Company for a price of approximately
$460,000. The Board's approval of the transaction is subject to the receipt of a
fairness opinion from an independent financial advisor.
Government Reporting
Although CTI's software business is not directly subject to material industry or
governmental regulation, CTI's credit union customers are subject to extensive
governmental and industrial regulation. CTI's software is designed to help
customers conform to governmental and industrial standards of reporting and data
collection. From time to time, regulation of the Company's clients or businesses
necessitates the development and release of software upgrades which are
specifically constructed to meet the specifications of a new government
regulation. Generally, CTI charges its customers a fee for the purchase and
installation of such compliance upgrades.
Competition
The market for selling data processing services to financial institutions and
the other businesses serviced by the Company is highly competitive. The
Company's competitors include internal data processing departments, affiliates
of large banks, and independent service firms, as well as direct competitors
such as Ultradata Corporation, Users Incorporated, XP Systems, Symitar
Incorporated, Fiserv, Inc., and Electronic Data Systems, Inc. Some of these
companies possess greater financial and managerial resources than those of the
Company.
The competitive factors for the Company's software services include product
technology, product features and functionality, flexibility and compatibility
with other products, continuity of product enhancement, ease of installation and
use, reliability and quality of technical support, documentation and training,
the experience and financial stability of the vendor, and price. While the
Company believes that it has competed effectively to date, competition in the
industry is likely to intensify as current competitors expand their product
lines and new companies enter the market. To be successful in the future, the
Company must respond promptly and effectively to the challenges of technological
-11-
change, evolving standards, and its competitors' innovations, by continually
enhancing its own product and support offerings, as well as its marketing
programs.
Copyrights, Trademarks, Patents and Licenses
In accordance with the industry practice, the Company relies upon a combination
of contract provisions and copyright, trademark and trade secret laws to protect
its proprietary rights in its products. The Company distributes its products
under software license agreements which grant customers a non-exclusive license
to use the Company's products, and which contain terms and conditions
prohibiting the unauthorized reproduction or transfer of the Company's products.
In addition, the Company attempts to protect its trade secrets and other
proprietary information through agreements with employees and consultants.
Although the Company intends to protect its rights vigorously, there can be no
assurance that these measures will be successful.
The Company seeks to protect the source code of its products as a trade secret
and as an unpublished copyright work. The Company does not believe that patent
laws are a significant source of protection for the Company's software products.
Where possible, the Company seeks to obtain protection of its names and logos
through trademark registration and other similar procedures.
The Company believes that, due to the rapid pace of innovation within its
industry, factors such as the technological and creative skills of its personnel
are more important in establishing and maintaining a leadership position within
the industry, than are the various avenues of legal protection for its
technology. In addition, the Company believes that the nature of its customers,
the importance of the Company's products to them, and their need for continuing
product support reduce the risk of unauthorized reproduction.
Employees
As of September 30, 1997, the Company had193 full time employees. To date, the
Company has been successful in recruiting and retaining sufficient numbers of
qualified personnel to conduct its business successfully. None of the Company's
employees is represented by a labor union. The Company has experienced no work
stoppages and believes its relations with employees are good.
Industry Segments
As of June 30, 1997 the Company's only business segment was credit union
software.
- --------------------------------------------------------------------------------
ITEM 2. PROPERTIES
- --------------------------------------------------------------------------------
The Company maintains core offices in Salt Lake City, Utah; Dedham,
Massachusetts; and Omaha, Nebraska. CTI's core offices each have over 20
employees. Additional CTI locations include Eden Prairie, Minnesota; and
Fayetteville, New York.
The Company's home office is located in Salt Lake City, Utah, where it leases
approximately 32,885 square feet from an entity controlled by the Investor. The
monthly rent under the terms of this lease is currently $21500 (subject to
escalators), and the primary term expires February 1, 2005. (see Item 13,
Certain Relationships and Related Transactions)
The Company rents its other facilities from third parties under the terms of
leases expiring through April, 2000. The Company believes that its existing
facilities are adequate to meet its current and anticipated requirements.
The Company owns office equipment, including sophisticated computer systems, in
amounts which management believes are appropriate and which are located at the
Company's offices.
-12-
- --------------------------------------------------------------------------------
ITEM 3. LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
The Company is involved in certain legal matters in the ordinary course of
business. In the opinion of management and legal counsel, such matters will not
have a material effect on the financial position or results of operations of the
Company.
- --------------------------------------------------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------------------------
================================================================================
================================================================================
None. PART II
- --------------------------------------------------------------------------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
- --------------------------------------------------------------------------------
Commencing in January of 1994, the Company's common stock has been traded on a
limited basis in the over-the-counter market and is listed on the Electronic
Bulletin Board of the National Association of Securities Dealers, Inc. under the
symbol "CSAT." On October 10, 1997 there were 15,289,437 shares of common stock
issued and outstanding and 4,525,539 reserved for issuance upon the exercise of
currently vested outstanding options, subscriptions and the conversion of
Preferred Stock. Of the shares of common stock issued and outstanding, an
estimated 1,000,000 shares are believed to currently be available for trading.
As a result, there is a limited amount of activity in the market for the
Company's common stock and the prices quoted may not be indicative of the prices
that could be obtained in actual transactions.
The following table sets forth, for the periods indicated, the approximate range
of high and low bids for the Company's common stock based on historical trading
information. The quotations represented reflect inter-dealer prices, without
retail markup, markdown, commissions or other adjustments. The prices shown do
not necessarily reflect actual transactions in the common stock of the Company.
Fiscal 1996 Fiscal 1997
High Low High Low
First Quarter $5.00 $3.00 $4.00 $1.13
Second Quarter $8.00 $4.25 $2.50 $ .44
Third Quarter $6.00 $4.00 $1.13 $ .50
Fourth Quarter $4.25 $3.00 $ .63 $ .38
On October 10, 1997, the Company's common stock closed in the over-the-counter
market at approximately $0.56.
No dividends have been paid on the Company's common stock and it is not
anticipated that dividends will be paid in the foreseeable future. At June 30,
1997, there were approximately 500 record holders of the Company's common stock
not including those shares held in securities position listings.
- --------------------------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
The information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
-13-
the financial statements and related notes included elsewhere in this annual
report on Form 10-K. The Statement of Operations data for the periods presented
are not necessarily indicative of future results from operations because of the
Company's high level of acquisition activity over the past three years.
Statement of Operations Data* 1997(4) 1996(4) 1995(4) 1994(2) 1993(1)
(in thousands, except per share data) ------- ------- ------- ------- -------
Net Revenues $26,890 $26,823 $21,608 -0- -0-
Earnings (loss) from continuing operations 437 (9,554) 925 -0- -0-
Earnings (loss) from continuing operations
per common share $0.04 ($1.10) $0.12 - -
Weighted average shares outstanding 11,062 8,695 7,655 2,419 1,589
Balance Sheet Data 1997 1996 1995(5) 1994(3) 1993(1)
(in thousands) ---- ---- ------- ------- -------
Total assets $ 9,739 $14,025 $23,880 $ 9,447 -0-
Long term obligations 2,118 5,070 5,224 3,766 -0-
*reflect only continuing operations as of 6/30/97
(1)Prior to December 14, 1993, CUSA Technologies Inc. fka Dimension Capital
Corporation ("Dimension") was a business development company and did not have
significant operations. On December 14, 1993 Dimension merged with Mountain
Surgical Centers, Inc. ("MSC") with MSC as the surviving corporation. From
its inception, February 20, 1991, until the date of the merger with
Dimension, MSC's operations consisted of a single surgery center, The Ford
Center for Foot Surgery, Inc. (the "Ford Center"), a wholly owned subsidiary
of MSC (see Item 1, Description of Business, Surgery Center Business Unit).
The merger was treated as a reverse acquisition for financial reporting
purposes, similar to a recapitalization of MSC, and the Statement of
Operations and Balance Sheet Data for the periods prior to the merger reflect
the business and activities of MSC, and its wholly owned subsidiary, the Ford
Center.
(2)On June 22, 1994, the Company acquired the Sparks Buildings, the VERSYSS
Credit Union Division and CUSA, Inc. Thus, the Statement of Operations Data
for the year ended June 30, 1994 reflects a full year of operations of MSC
and the Ford Center. The operations of the VERSYSS Credit Division, CUSA,
Inc. and the Sparks Buildings, from June 22, 1994 to June 30, 1994 are not
included.
(3)The Balance Sheet Data as of June 30, 1994 reflects the assets and
liabilities of MSC and the Ford Center which were discontinued in fiscal 1997
and the credit union software business acquired on June 22, 1994.
(4)The Statement of Operations Data for the periods ending June 30,1996 and
1995 includethe results from the continuing operations (credit union software
business) of the businesses acquired in fiscal 1995 and 1994, respectively,
from the acquisition dates.
- --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
General
In June of 1994, the Company entered into the credit union software business
through the acquisition of CUSA and the credit union software division of
VERSYSS, CUSA's largest distributor. From June of 1994 to July of 1995, the
-14-
Company acquired most of the distributors of the CUSA software, some of which
were distributors of software products in the medical, commercial, and rental
open systems markets. In 1997, the Company disposed of the business and assets
of the Company's medical and commercial divisions, through a sale of assets PCN.
In 1997, the Company also sold the Rental division and the office rental
complex. The Company has also decided to dispose of the surgery center business
by the end of the 1997 calendar year. With the divestiture of the medical,
commercial and rental divisions, the office rental complex and the surgery
center business, the Company plans to devote its resources to the development
and expansion of its credit union software business. (Unless otherwise specified
all references to years in this Item 7. refer to the corresponding fiscal year.)
Results from continuing operations (credit union software business) improved
substantially from 1996 to 1997. The increase was due mainly to the
implementation by management of an aggressive plan to reduce corporate overhead
expenses and to focus on credit union operations. Management will continue to
monitor corporate overhead expenses in 1998 and intends to increase its focus on
expanding the revenues and profitability of the credit union software business.
1997 compared to 1996
Net revenues
- ------------
The Company's total revenues from continuing operations increased less than 1
percent from $26.8 million in 1996 to $26.9 million in 1997. Revenues from
hardware and software sales decreased 15.5 percent from $11.2 million in 1996 to
$9.4 million in 1997. The decrease is due primarily to management's decision to
decrease emphasis on sales of larger systems which have had lower profit margins
in the past because of complicated conversion, installation and training
processes. Revenues from support, maintenance and other services increased 11.5
percent from $15.6 million in 1996 to $17.4 million in 1997. The increase was
due to increased sales of the Company's statement processing services and an
increase in support and maintenance fees. Revenues are derived from computer
system sales, hardware maintenance and software support, and the sale of
products, which are related to the Company's core computer systems such as
statement printing, disaster recovery, and microfiche services.
Gross margin
- ------------
The gross margin increased 3.6 percent from $11.5 million in 1996 to $11.9
million in 1997. The hardware and software gross profit margin increased from 47
percent in 1996 to 56.6 percent in 1997. In the same period, the gross profit
margins from support, maintenance and other services revenues decreased from
40.2 percent to 37.9 percent. The increase in the hardware and software gross
margin is attributable mainly to a decrease in amortized software and increased
efficiencies in the Company's installation and training processes. The decrease
in the gross profit margin from support, maintenance and other services revenue
is due to increased software support personnel in 1997. Cost of goods sold
consists of the cost of hardware and software purchased for resale, the
amortization of capitalized software development costs and the expense of
supporting and installing the systems sold.
Product development costs
- -------------------------
Product development costs represent the uncapitalized costs of software
development. Uncapitalized costs include research and development, minor
enhancements to operational systems and maintenance software upgrades. The
increase in product development costs from $1.1 million in 1996 to $2.5 million
in 1997 is an indication of the dedication that management has for improving its
products. During 1997, the Company devoted much of its resources to improving
systems that are in general release and enhancing features of various products.
The Company expects that development expenditures will continue in fiscal 1998
at approximately the same amount as 1997, as the Company continues to improve
current products and to invest in the development of new products.
Selling, general and administrative expenses
- --------------------------------------------
As a percentage of net revenues, the selling, general, and administrative
expenses for the Company decreased 31% from $12.6 million in 1996, to $8.7 in
1997. The decrease is the result of management's effort to reduce corporate
overhead by eliminating selling, general and administrative expenses associated
-15-
with the disposed entities, and a reduction in the administrative staff,
management personnel and office locations related to the continuing operations.
Although management plans to continue to look for ways to decrease overhead and
to improve efficiencies, it is anticipated that the selling, general and
administrative costs will not decrease significantly from the 1997 level.
In 1996 the Company recorded $360,209 in expense for the amortization of the
excess of purchase price over the fair value of the net tangible and
identifiable intangible assets acquired ("Acquired Goodwill') which is included
in selling, general and administrative expenses. In 1997 the Company recorded no
expense for the amortization of the Acquired Goodwill due to the write down of
the Acquired Goodwill through a nonrecurring charge incurred in 1996. (See
discussion of nonrecurring charges in the 1996 compared to 1995 below.)
Nonrecurring charges
- --------------------
In 1996, the Company reported nonrecurring charges of $6.9 million which are
primarily related to certain restructuring charges and the reduction of the
carrying value of the Acquired Goodwill and software development and acquisition
costs. In 1997, no nonrecurring charges where incurred. (See discussion of
nonrecurring charges in the 1996 compared to 1995 below.)
Interest and income tax expense
- -------------------------------
Interest expense decreased 37 percent in 1997 from 1996 due the elimination of
debt during the year. It is anticipated that interest expense will continue to
drop in 1998.
Income tax expense in both 1996 and 1997 for continuing operations was zero due
to the significant loss in 1996 and the utilization of loss carry forwards in
1997.
Discontinued Operations
- -----------------------
The loss from discontinued operations, net of income taxes, decreased from $5.4
million in 1996 to $0.2 million in 1997. The decrease in 1997 is the result of
not having any operations in the unprofitable medical practice management or
commercial data processing systems software business units in 1997 that were
sold in 1996. The operations of the medical practice management or commercial
data processing systems software business units resulted in significant losses
from operations in 1996.
The loss from the disposal of discontinued operations, net of income taxes of
$1.6 million in 1997, includes $1.9 million in additional medical expenses
incurred over the estimated $2.5 accrued at June 30, 1997, $475,000 in income
tax expense related to the tax gain on the sale of the medical division, a gain
of $479,738 on the sale of the office rental complex, and a $293,690 gain on the
sale of the rental software division. Management does not anticipate additional
losses from the disposal of the discontinued operations for fiscal year 1998;
however, no assurance can be given that unexpected costs related to the
discontinued segments will not occur.
1996 compared to 1995
Net revenues
- ------------
The Company's total revenues from continuing operations increased 24 percent
from $21.6 million in 1995 to $26.8 million in 1996. Revenues from hardware and
software sales increased 4.9 percent from $10.7 million in 1995 to $11.2 million
in 1996. The increase was less than expected primarily because of slower than
anticipated new sales related to the continuing operations of entities acquired
in 1995, and delays in product delivery at the end of 1996. Revenues from
support, maintenance and other services increased 42.9% from $10.9 million in
1995 to $15.6 million in 1996. The increase was due to increased sales of the
Company's statement processing services and the addition in 1996 of support,
maintenance and other service revenue of entities acquired during 1995. On a pro
forma consolidated basis, which reports the revenue of the Company as if each of
the consolidated entities were acquired, or disposed of, as the case may be, at
the beginning of the periods reported, the total revenue was $23.9 million for
fiscal 1995 and $26.8 million for fiscal 1996, representing a 12% increase.
-16-
Revenues are derived from computer system sales, hardware maintenance and
software support, and the sale of products, which are related to the Company's
core computer systems such as statement printing, disaster recovery, and
microfiche services.
Gross margin
- ------------
The hardware and software gross profit margin decreased from 56 percent in 1995
to 47 percent in 1996. In the same period, the gross profit margins from
support, maintenance and other services revenues decreased from 45 percent to 40
percent. The decrease in the hardware and software gross margin is attributable
to decreased hardware margins due to customers increased demand for less
profitable personal computers. The decrease in the gross profit margin from
support, maintenance and other services revenue is due to increased software
support personnel, and an increase of lower margin statement processing services
as a percentage of support, maintenance and other services revenue in 1996 when
compared to 1995. Costs of goods sold consist of the cost of hardware and
software purchased for resale, the amortization of capitalized software
development costs and the expense of supporting and installing the systems sold.
Product development costs
- -------------------------
Product development costs represent the uncapitalized cost of software
development. Uncapitalized costs include research and development, system
operational error fixes and maintenance software upgrades. Product development
costs were $1 million in 1995 and $1.1 million in 1996
Selling, general and administrative costs
- -----------------------------------------
The selling, general, and administrative expenses for the Company increased 58%
from $8 million in 1995, to $12.6 in 1996. This steep increase is partly the
result of the incremental selling, general, and administrative expenses of the
entities acquired in 1995 and 1996, which were not reduced to the extent
anticipated through cost reduction plans implemented in 1995 and 1996.
Additionally, as required by generally accepted accounting principles, the
Company's entire general corporate overhead was included in continuing
operations, with no allocation of corporate overhead to the discontinued
operations. Since a majority of the assets of the disposed divisions were
acquired in the fourth quarter of 1995 and in 1996, the dollar volume of
incremental general corporate overhead attributable to the disposed divisions
was greater in 1996 than 1995. The incremental general corporate overhead
attributable to the disposed divisions was eliminated in the first and second
quarters of fiscal 1997
The amortization of the excess of purchase price over the fair value of the net
tangible and identifiable intangible assets acquired ("Acquired Goodwill') is
included in selling, general and administrative expenses. The Acquired Goodwill
was amortized using the straight-line method over an estimated life of 15 years.
During 1996, total amortization of the Acquired Goodwill was $360,209 compared
to $364,146 in 1995.
Portions of the purchase price of certain acquisitions completed in 1995 and
1996 were allocated to software acquisition costs. The amortization of the
acquired software acquisition costs is included in cost of goods sold. Software
acquisition costs are amortized over the estimated life of the software
(principally three to five years). During 1996, amortization of software
development and acquisition costs were $834,509 compared to $414,124 in 1995.
Nonrecurring charges
- --------------------
In 1996, the Company reported nonrecurring charges of $6.9 million, which are
primarily related to certain restructuring charges and the reduction of the
carrying value of the Acquired Goodwill and software development costs.
Pursuant to a limited restructuring plan adopted in June of 1996, the employment
contract of a shareholder and member of the board of directors was terminated in
the second fiscal quarter of 1997. As a result, compensation and severance fees
of approximately $611,000 were accrued in 1996 as a nonrecurring charge.
-17-
As discussed in the Company's reports on Form 10-Q dated December 31, 1995 and
March 31, 1996, over the six month period ending June 30, 1996, management
studied the relationship between the carrying value of the Acquired Goodwill and
the expected future cash flows related thereto. The Acquired Goodwill relates
primarily to certain customer contracts and customer lists. As evidenced by the
loss from continuing operations incurred in 1996, the costs of servicing the
contracts acquired were higher than anticipated. Additionally, the profitability
of sales to the customer base acquired was lower than anticipated. Therefore, in
the opinion of management, the expected future discounted cash flows net of
related expenses from the Acquired Goodwill of credit union assets were
insufficient to support the recorded value. Consequently a nonrecurring charge
of $5.4 million was recorded in 1996.
In order to evaluate the expected cash flow of the capitalized software, the
Company compared the amount of capitalized software for each product to the
expected future undiscounted cash flow from the sale of such products. The study
showed that, at expected sales volumes, the costs associated with the sale and
installation of certain software products capitalized were higher than the
expected discounted cash flows from such sales. Consequently, management
determined that the expected cash flows for certain products were insufficient
to support the amounts capitalized for the related software. Accordingly, a
one-time charge of approximately $846,000 was recorded in 1996 to adjust
capitalized software to be consistent with the estimated future cash flows from
the sales of the related products.
Interest and income tax expense
- -------------------------------
Interest expense increased 82 percent in 1996 due primarily to an increase in
the average debt outstanding used to finance discontinued operations.
Income tax expense was $727,432 in 1995 (resulting in an effective tax rate of
43.7 percent) compared to a tax expense of zero in 1996. The difference in the
tax expense is due to the losses incurred in 1996 for which no income tax
benefit has been recorded.
Discontinued Operations
- -----------------------
The loss from discontinued operations, net of income taxes, increased from
$149,000 in 1995 to $5.4 million in 1996. The increased loss in 1996 is
primarily the result of the inclusion of a full year of operations of the
medical and commercial divisions of businesses acquired in 1995 and the loss
from operations of the medical and commercial portions of businesses acquired in
1996 from the respective dates of acquisition. The 1996 loss from discontinued
operations reflects the unprofitability of the acquired medical and commercial
operations and the Company's inability to recognize expected cost synergy and
revenue targets in its medical and commercial business units.
The estimated loss from the disposal of discontinued operations, net of income
taxes includes the estimated costs for the disposal of the medical records
software product through the anticipated date of disposition. The estimated loss
from the disposal also includes the costs incurred for contractually specified
severance payments to employees not hired by PCN subsequent to PCN's purchase of
the medical division, the cost of closing facilities, (including estimated
future lease obligations, which were not assumed by PCN in connection with the
sale), and the estimated loss from the discontinued eCLINIC product line through
the anticipated disposition date.
Capital Resources and Liquidity
At June 30, 1997, the Company had current assets of $6 million and current
liabilities of $11.5 million. The current liabilities include $5.5 million of
deferred revenue, which primarily represents payments received for services to
be provided over the remaining term of software and hardware maintenance
contracts (generally one year).
Losses from operations for 1996 and the first quarter of 1997 caused the Company
to be in violation of loan covenants with its primary lender and raised concerns
among employees, stockholders and some customers. In order to address these
circumstances the board of directors decided to seek equity financing and on
January 24, 1997 the Company entered into a Stock Purchase and Sale Agreement
whereby it agreed to sell 8,648,649 shares of its common stock, representing 49%
of the common stock to be outstanding after the completion of the sale, to the
-18-
Investor for $8.0 million in cash. Upon the completion of the transaction, the
Investor increased his ownership interest to over fifty percent and obtained a
controlling interest in the common stock of the Company. In February of 1997,
the Company received $6.0 million of the purchase price which was used to retire
certain current liabilities and long term debt. The Company anticipates that the
remaining $2.0 million will be received in fiscal 1998 which the Company plans
to use to redeem the 1994 Series Convertible Preferred Stock. The transaction
was negotiated between the Investor and an independent committee of the board of
directors. During 1997, the Company reduced its total liabilities from $20.3
million at June 1996 to $11.7 million at June 1997.
As part of the overall business plan implemented during 1997, management reduced
the overall corporate overhead (which is included in selling, general and
administrative expenses) from $12.6 million in 1996 to $8.7 million in 1997. In
1998, the Company expects operating results and cash flows to improve as
management turns its focus from disposing of divisions, to the management of the
credit union business. The Company believes that cash flow will be sufficient to
permit the Company to meet its cash requirements through the up coming year.
- --------------------------------------------------------------------------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
The financial statements are included beginning at page F-2. See page F-1 for
the index to the consolidated financial statements.
- --------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
- --------------------------------------------------------------------------------
In fiscal 1996, the board of directors of the Company elected to change auditors
from Grant Thornton LLP to KPMG Peat Markwick LLP. The reports of Grant Thornton
LLP for the 1995 fiscal year did not contain an adverse opinion of disclaimer
and were not modified as to uncertainty, audit scope, or accounding principles.
The Company and its former accountants, Grant Thornton LLP, did not disagree on
any matter of accounting principles or practices, financial statment disclosure,
or auditing scope or procedute. The cange in auditors was reported on Form 8-K
dated May 10, 1996.
-19-
PART III
- --------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT
- --------------------------------------------------------------------------------
At the end of fiscal 1997, the board of directors consisted of Richard N.
Beckstrand, Chairman, Mark Scott, Associate Chairman, David J. Rank, Jonathan S.
Beckstrand, Secretary, L. Bruce Ford, and Gary L. Leavitt.
The current board of directors and executive officers of the Company are as
follows:
Name Age Position With Company Term Expires
---- --- --------------------- ------------
Richard N. Beckstrand 56 Chief Executive Officer, 1997 Annual Meeting
Chairman of the Board,
Director
Mark Scott 48 Associate Chairman of the 1997 Annual Meeting
Board, Director
David J. Rank 43 Director 1997 Annual Meeting
L. Bruce Ford, D.P.M. 49 Director 1997 Annual Meeting
Gary L. Leavitt 55 Director 1997 Annual Meeting
Jonathan S. Beckstrand 29 Secretary, Director 1997 Annual Meeting
D. Jeff Peck 42 Chief Financial Officer N/A
Roger Kuhns 51 CEO, Credit Union Division N/A
Set forth below is certain biographical information for each executive officer
and director of the Company:
Richard N. Beckstrand is currently serving as the Chief Executive Officer and
Chairman of the Board for CTI, positions he has held since December 1993. For
the three years prior to the acquisition of CUSA, Inc. by the Company in June of
1994, Mr. Beckstrand was an active member of CUSA, Inc.'s board of directors.
Mr. Beckstrand received a Masters of Business Administration from the University
of Utah in 1969 and became a Certified Public Accountant in May of 1983. For the
past 21 years, Mr. Beckstrand has provided personal financial consulting and
investment advice to medical professionals and medical imaging, and surgery
centers through Beckstrand Management Corporation and Aspen Business Company.
Mark Scott is a Director of the Company. For the past seven years, Mr. Scott has
served as president of the Mid-Columbia Medical Center and Health Care for the
Mid-Columbia Region, located in The Dalles, Oregon. Before his tenure at
Columbia Medical, he held the position of Director of Surgical Services for the
University of Oregon and Associate Director of Surgery for LDS Hospital in Salt
Lake City, Utah.
David J. Rank, former president of VERSYSS Data Systems ("VDS"), was appointed
to the board of directors of CTI in August of 1994, and served as CTI's
President and Chief Operating Officer from August of 1994 until December of
1996. His computer industry career began with The Burroughs Corporation in 1975
in the commercial computer products division. In 1986 Mr. Rank was appointed as
Contel Corporation's Vice-President of Sales. In 1990, Messrs. Rank and Kuhns
purchased VDS where Mr. Rank served as president until VDS was acquired by CTI
in September of 1994.
L. Bruce Ford, D.P.M., is the Company's Vice-President of Medical Sales and has
been a member of the board of directors since December 14, 1993. Dr. Ford has
been a podiatrist in private practice since 1971.
-20-
Gary L. Leavitt is a Director of the Company. Mr. Leavitt founded CUSA, Inc. in
1982, and served as its president until July of 1994. He has been employed by
CTI since its acquisition of CUSA, Inc., in July 1994, and has served the credit
union community for over 18 years.
Jonathan S. Beckstrand, is a Director of the Company. Mr. Beckstrand assists in
acquisition/disposition, SEC reporting, and investor relations matters of the
Company. He has been a member of the Utah State Bar since 1995 (J.D. Brigham
Young University, 1995) and the Utah Association of Certified Public Accountants
since April of 1997. Mr. Beckstrand is the son of Richard Beckstrand, Chief
Executive Officer of the Company.
D. Jeff Peck is the Chief Financial Officer of the Company. Mr. Peck, a
Certified Public Accountant since 1981, is a member of the AICPA and the UACPA
and has 18 years of accounting experience. Prior to joining CTI in 1995, Mr.
Peck was a partner with the firm of Joseph B. Glass & Associates.
Roger L. Kuhns has been the Chief Executive Officer of the Credit Union Division
of CTI June of 1996. Mr. Kuhns has a B.A. in both Marketing and Finance from the
University of Maryland. His career in the computer industry began in 1971 with
the Burroughs Corporation. In 1979 Mr. Kuhns co-founded Lehigh Data Systems,
which was later sold to Contel Corporation. Mr. Kuhns served as Vice President
of Canadian Sales, and later as the Vice President of Strategic Planning for
Contel Corporation. In 1990 Messrs. Kuhns and Rank acquired Benchmark Computer
Systems, presently VERSYSS Data Systems.
-21-
- --------------------------------------------------------------------------------
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------------------------------------------------------
Summary Compensation
The following table sets forth certain information regarding the compensation
earned during fiscal 1997 and, where applicable, 1996 and 1995, by CTI's Chief
Executive Officer and each of CTI's three other most highly compensated
executive officers (based on salary and bonuses earned during fiscal 1997).
Long Term Compensation
---------------------------------------------------------------------------
Annual Compensation Awards Payouts
---------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Restricted Securities
Name and Year Other Stock Underlying LTIP All
Principal Ended Salary Bonus Annual Award(s) Options/ Payouts Other
Position June 30 ($) ($) Compensation ($) SARs (no.) ($) Compensation
($) ($)
- ----------------------------------------------------------------------------------------------------------------
1997 $320,000 - - - 1,002,000 - (1)
Richard N.
Beckstrand, 1996 $90,367 - - - 2,500 - (2)(3)
Chief Executive Officer
1995 - - - - 2,500 - (3)
David J. Rank, former
President & Chief 1997 $110,769 - - - 2,500 - $87,000(4)
Operating Officer
1996 $180,00 $200,000 - - 2,500 - (5)
1995 $140,000 - - - - - -
1997 $150,000 - - - - - -
Roger L. Kuhns,
CEO Credit Union 1996 $129,000 $65,801(6) - - - - -
Division
1995 $120,000 $2,029 - - - - -
(1)In connection with the private purchase of 8,648,649 shares of common stock
for a price of $ 0.92 1/2 per share completed in January of 1997 (See Item
13, Certain Relationships and Related Transactions), Mr. Beckstrand was
granted 1,000,000 options to purchase common stock for five years at a price
of $1.00 per share for the first year, the option price increasing by $0.25
each year on the anniversary date of the grant. As a condition to the grant,
Mr. Beckstrand surrendered all options held except those issued in connection
with his service on the board of directors. An aggregate 1,208,400 options
were surrendered with exercise prices from $1.50 to $5.00.
(2)Mr. Beckstrand was also granted options to purchase 190,000 shares at an
exercise price of $2.50 in fiscal 1995 and options to purchase 68,400 shares
at $5.00 per share in fiscal 1996 in connection with his personal guarantees
of a line of credit and an equipment loan made available to the Company from
a commercial financial institution. The options were surrendered in 1997 (see
Note (1) above).
(3)The Company also reimbursed Beckstrand Management for $3,333 per month in
consideration for certain property management services for the office rental
complex and for consulting services provided to the Company's surgery centers
by an employee of Beckstrand Management through September of 1997. (see Item
13, Certain Relationships and Related Transactions)
(4)Mr Rank was reimbursed an aggregate of $28,000 during the 1995 fiscal year
and $65,500 during the 1996 fiscal year for costs associated with the
maintenance of two households prior to relocating his family to Salt Lake
City and for making his personal residence available for visiting out-of-town
-22-
Company employees. The reimbursement was not treated as payment for personal
services to the Company. (see Item 13, Certain Relationships and Related
Transactions)
(5)Severance paid pursuant to a termination agreement and moving expenses. The
termination agreement called for the payment of the $200,000 severance and a
$100,000 bonus payment due (accrued in fiscal 1996) to Mr. Rank in equal
installments of $12,500 over a two year period. (see Item 13, Certain
Relationships and Related Transactions)
(6)Includes a $54,101 bonus payment of a previously accrued guaranteed one-time
bonus related to CTI's initial employment agreement with Mr. Kuhns entered
into in connection with the acquisition by the Company of VDS.
Options/SAR Grants During Fiscal 1997
The following table sets forth information respecting all individual grants of
options and stock appreciation rights ("SARs") made during the last completed
fiscal year to the chief executive officer of the Company and the three most
highly paid executive officers of CTI.
(a) (b) (c) (d) (e)
% of Total
Number of Options/SARs
Securities Granted to
Underlying Employees
Options During Exercise of
Name SARS Fiscal Year Base Price Expiration
Granted ($/share) Date
(no.)
Richard N. Beckstrand (1)1,000,000 96% $1.00 1/24/02
Chief Executive 2,500 * $1.63 10/1/02
Officer
David J. Rank, former 2,500 * $1.63 10/1/02
President & Chief
Operating Officer
Roger L. Kuhns - - - -
CEO, Credit Union
Division
(1)Options granted in connection with the private purchase of 8,648,649 shares
of common stock for a price of $ 0.92 1/2 per share completed in January of
1997(See Item 13, Certain Relationships and Related Transactions). As a
condition to the grant, Mr. Beckstrand surrendered all options held except
those issued in connection with his service on the board of directors. A
total of 1,208,400 options were surrendered with exercise prices from $1.50
to $5.00.
In November 1993, the Company adopted its Director Stock Option Plan which
provides for the grant of options to acquire 2,500 shares of common stock to
each director serving at the end of each fiscal year. The exercise price for
these options is fixed at the closing bid price for the common stock on the date
of grant or, in the event of a grant to a holder of 10% or more of the voting
power of the issued and outstanding stock of the Company, 110% of such bid
price. The directors are reimbursed for direct expenses incurred in connection
with attending board meetings and completing their responsibilities.
-23-
Employment agreements
On March 15, 1996, the Company entered into a five year employment agreement
with Richard N. Beckstrand to serve as the Company's Chief Executive Officer.
The agreement provides for annual compensation of $320,000 per year. The
agreement may be terminated upon six months notice by either party after the
first anniversary of the contract. Upon termination Mr. Beckstrand is entitled
to a severance payment equal to one year's compensation, the release by the
Company's lenders of all loan guarantees executed by Mr. Beckstrand, and the
redemption, at the average bid price during the twenty days prior to the notice
of termination, of 500,000 shares of the Company's common stock held by Mr.
Beckstrand.
On June 10, 1994, in connection with the acquisition of CUSA, Inc., the Company
entered into a ten year employment agreement with Gary L. Leavitt, former
president and founder of CUSA, Inc. The agreement provided for an annual salary
of $200,000, the issuance of incentive options to purchase 50,000 shares of the
Company's common stock at an exercise price of $1.30, and the issuance of non
statutory options to purchase 200,000 shares of the Company's common stock at an
exercise price of $2.00 The agreement may be terminated upon 30 days notice and
the payment of a $500,000 termination fee. In June of 1996, Mr. Leavitt was
given notice of management's intention to terminate the agreement in fiscal 1997
and the agreement was terminated in February of 1997 through the payment of the
$500,000 termination fee.
On September 19, 1994, in connection with the acquisition of VDS, the Company
entered into a five year employment agreement with David J. Rank to serve as the
Company's Chief Operating Officer. The agreement provided for annual
compensation of $180,000 per year and the issuance of options to purchase
100,000 shares of the Company's common stock for a price of $1.80 per share.
After the first two years of the employment period, the Company may terminate
the agreement upon 30 days notice and the payment of $200,000. In order to
facilitate Mr. Rank's move to Salt Lake City, Utah (the location of the
principal business offices of the Company), the Company and Mr. Rank entered
into a relocation agreement. The terms of the relocation agreement were amended
on December 7, 1994 and, under the current agreement, through August of 1996,
the Company advanced $6,000 per month to Mr. Rank for the mortgage payments on
his home in Pennsylvania. Repayment of the amount advanced is due on the earlier
of December 7, 1999, the effective date of an offering of the Company's common
stock (in which case CTI will be obligated to allow Mr. Rank to register a
portion of his common shares equal in value to the amount owed pursuant to the
advances), the sale of a portion of Mr. Rank's restricted securities, or the
termination of Mr. Rank's employment agreement with CTI. The relocation
agreement also called for the immediate issuance to Mr. Rank of options to
purchase 200,000 shares of common stock at $2.25 per share and, in connection
with the agreement, the Company agreed to pay additional compensation of
$100,000 to Mr. Rank.. (see Item 13, Certain Relationships and Related
Transactions). In January of 1997, the Company entered into a termination
agreement with Mr. Rank. The termination agreement provides for: 1) the payment
to Mr. Rank, by the Company, of $300,000 in monthly installments of $12,500 in
consideration for an extended non-competition agreement, 2) the return of Mr.
Rank's option to purchase 200,000 shares of common stock for $2.50 per share and
option to purchase 100,000 shares of common stock for $1.80 per share, 3) the
return, by Mr. Rank of 25,000 shares of the Company's common stock in exchange
for the Company's forgiveness of approximately $140,000 of debt owed to the
Company by Mr. Rank, and 4) the waiver, by Mr. Rank of all rights related to the
relocation agreement.
In June of 1997 the Company entered into a five year employment agreement with
Roger Kuhns to serve as the Chief Executive Officer of the Company's Credit
Union Division. The agreement provides for annual compensation of $150,000 per
year. The agreement may be terminated by the Company upon the payment of
severance equal to $150,0000 (12 months salary).
Each of the Company's executive officers is covered by the Company's medical
health insurance program, vacation and sick leave policies. Executive officers
receive benefits under these plans on the same terms as other employees of the
Company.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Board of Directors consists of Mark D. Scott,
chair, L. Bruce Ford, and David J. Rank. Compensation issues are decided by the
Compensation Committee. David J. Rank served as the Company's Chief Operating
Officer for part of fiscal 1997. The Board of Director has approved the sale of
the surgery center business unit to a group of purchasers of which L Bruce Ford
is a member (see Item 13. Certain Relationships and Related Transactions).
-24-
Compensation Committee Report on Executive Compensation
Under the supervision of the board of directors, the Company endeavors to
develop and implement compensation policies, plans, and programs which enhance
the profitability and growth of the Company. The Company provides incentive to
executives in the form of stock options and a management/executive profit
incentive bonus program.
CEO and Executive Officer Compensation
The Compensation Committee establishes base compensation for executive officers,
including the CEO, by reference to surveys of similar companies as discussed
above, adjusted as deemed appropriate for variations in the talent and
experience of the individual, industry type, size, geographic location, and the
Company's profitability. Generally, bonuses and stock options are awarded on the
same basis as other employees, except for the non-statutory options, of which
500,000 were authorized by the board of directors for distribution to members of
senior management in fiscal 1995.
In fiscal 1995 and 1996 some of the Company's employment agreements with
executives called for guaranteed bonuses which are paid when due regardless of
the Company's profitability. In fiscal 1995 and 1996, the Company did not meet
its profitability objectives and, with the exception of those bonuses which were
guaranteed pursuant to employment agreements, no bonuses were paid to the
Company's CEO or executive officers.
In fiscal 1997 the Company implemented a profit-based incentive bonus plan
through with the Company's management, including certain of the executive
officers could receive up to $250,000 if calendar 1997 profit objectives are
obtained. Approximately $50,000 was paid pursuant to this plan in fiscal 1997.
Also in fiscal 1997, bonuses totaling approximately $115,000 were paid to
certain executive officers pursuant to the profit-based incentive bonus plan and
in connection with the sale of the assets of the Company's medical and
commercial divisions to PCN.
In fiscal 1994 and 1995, Richard N. Beckstrand, did not receive compensation for
his services to the Company as Chief Executive Officer. In the second quarter of
1996, the board of directors decided that it would be in the best interests of
the Company to enter into a long-term employment agreement with Mr. Beckstrand.
Board Member Mark Scott and former Board Member Debbie Sanich were assigned to
survey the salaries of CEOs of companies of similar size, industry and
geographic location and to report the results to the Board, with a recommended
range for Mr. Beckstrand's compensation. After such a study and some
deliberation, the Board chose to enter into a five year employment agreement
with Mr. Beckstrand at a rate of $320,000 per year.
The foregoing report was furnished by: Mark Scott
L. Bruce Ford, D.P.M.
David J. Rank
Performance Graph
Common Share Price Performance Graph
The following graph compares the cumulative total return of the Company's Common
Stock with the Nasdaq Stock Market (US Companies) and the Nasdaq Computer and
Data Processing Stocks during the fiscal years 1994 through 1997*, assuming the
investment of $100 on June 30, 1994 and the reinvestment of dividends. Since the
Company's Common Stock did not start trading until January of 1994, return
information is not available for 1993 and 1992.
(Line graph of data table shown below)
6/30/94 6/30/95 6/30/96 6/30/97
CUSA Technologies, Inc. 100 234 312 37
Nasdaq Stock Market (U.S. Companies) 100 133 171 265
Nasdaq Computer and Data Processing Stocks 100 163 217 274
Source: Center for Research in Security Prices
*The Company's fiscal year end is June 30.
-25-
- --------------------------------------------------------------------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
- --------------------------------------------------------------------------------
The following table sets forth, as of June 30, 1997, the number of shares of the
Company's common stock, par value $0.001 and of the 1994 Series Convertible
Preferred Stock, par value .001 (the "Preferred Stock"), held of record or
beneficially by each person who held of record or was known by the Company to
own beneficially, more than 5% of the Company's common or Preferred Stock, and
the name and shareholdings of each officer and director and of all officers and
directors as a group. All percentages are based on the 15,289,437 shares of
common stock and the 1,000,000 shares of Preferred Stock issued and outstanding
as of June 30, 1997.
Amount and Nature of
Name of Person or Group Ownership(1) Percent of Class(2)
Principal Shareholders
66.0%
Richard N. Beckstrand Common 11,178,583
5156 Cottonwood Lane Stock(3)(4) 1,010,000
Salt Lake City, UT 84117 Options
David J. Rank Common Stock 475,000 3.1%
986 West Atherton Drive Options 5,000
Salt Lake City, UT 84123
Gary L. Leavitt Common Stock(5) 709,330 6.2%
986 West Atherton Drive Options 257,600
Salt Lake City, UT 84123
Roger L. Kuhns Common Stock 500,000 3.3%
986 West Atherton Drive
Salt Lake City, UT 84123
L. Bruce Ford, D.P.M. Common Stock 157,551 1.1%
Pyramid Prof. Center Options 10,000
Suite 26 Preferred Stock 64,995 6.50%
2321 Pyramid Way
Sparks, NV 89106
Kim Bean, D.P.M.
1801 North Carson Preferred Stock 175,270 17.53%
Carson City, Nevada
89701
Val Jensen Pension Plan *
1001 North Mountain Preferred Stock 125,270 12.53%
Street
Suite 2D
Carson City, Nevada
89701
Hannum Pension Plan
990 South 550 West Preferred Stock 83,513 8.35%
Brigham City, Utah 84302
Roderick Sage
975 Ryland Street Preferred Stock(6) 208,513 20.85%
Reno, Nevada 89502
-26-
The Roberts Family Trust
890 Mill Preferred Stock(7) 208,513 20.85%
Reno, Nevada 89502
Officers and Directors
Richard N. Beckstrand -----See Above-----
David J. Rank -----See Above-----
Roger L. Kuhns -----See Above-----
L. Bruce Ford, D.P.M. -----See Above-----
Gary L. Leavitt -----See Above-----
Mark Scott Common Stock 45,661 *
Options 10,000
D. Jeff Peck Common Stock - *
Options 30,000
Jonathan S. Beckstrand Common Stock 29,000 *
Options 3,000
All Executive Officers Common Stock 13,095,125 82.6%
and Directors as a Options 1,325,600
Group (8 persons) Preferred Stock 64,995 6.50%
* Indicates less than 1% ownership
(1)Except as otherwise noted, to the best knowledge of the Company, all stock
is owned beneficially and of record by the indicated owner, and each
shareholder has sole voting and investment power over the stock. The total
beneficial ownership of common stock includes securities, including shares
subject to stock options, except stock options, which the shareholder has the
right to acquire beneficial ownership within 60 days. Stock options have been
listed separately for presentational convenience and unless otherwise noted,
the beneficial ownership of the common stock underlying each stock option
listed may be obtained within 60 days.
(2)The percentage of beneficial ownership for each shareholder is based on an
adjusted total of issued and outstanding common stock, equal to the total
common stock issued and outstanding at June 30, 1997 plus any security of
which the shareholder has the right to acquire beneficial ownership within 60
days.
(3)Mr. Beckstrand's shares include 577,614 shares held by Aspen Business
Company, which is wholly-owned by Mr. Beckstrand; 345,306 shares held by
Beckstrand Management that is wholly-owned by Mr. Beckstrand; and 264,000
shares held by Firethorn Investment, Ltd. in which Mr. Beckstrand is a
partner. Since Mr. Beckstrand is an officer, director, and principal
shareholder of each of these entities, he may be deemed to have voting and
dispositive power over the shares and hence be the beneficial owner of the
shares
(4)Mr. Beckstrand's Common stockholdings include 2,162,162 shares issuable by
the Company upon the funding of the remainder of the Mr. Beckstrand's
purchase commitment as set forth by the purchase and sale agreement dated
January 24, 1997.
(5)Includes 109,970 shares held by the Lyman Leavitt Family Trust and 100,000
shares held by the Lynette Leavitt Family Trust which are deemed beneficially
owned by Mr. Leavitt by virtue of his position as Trustee.
(6)Includes shares held by the Roderick Sage, M.D., Ltd., Pension Plan and
Defined Benefit Plan and by Roderick Sage.
(7)Includes shares held by the Roberts Family Trust and Frank Roberts.
-27-
- --------------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------------------------------
Richard N. Beckstrand
In December 1993, Richard N. Beckstrand (the "Investor") became the chief
executive officer, chairman of the board of directors, and a principal
shareholder of the Company. Since that time, the Investor has been, and
continues to be, the primary force in identifying, negotiating, and completing
the acquisitions undertaken by the Company and in seeking and making
arrangements for the financing necessary for such acquisitions and the
operations of the Company. The Investor was a director of CUSA, Inc. and a
principal shareholder of the Ford Center and the Sierra Center which make up the
Company's surgery center business unit prior to their acquisition by the Company
and is one of a group of purchasers in the proposed sale of the surgery center
business unit. In addition, the Investor had an ownership interest in the four
professional office buildings located in Nevada prior to their acquisition by
the Company and purchased the office buildings through a family partnership of
which the Investor is a general partner. The Investor is also the owner of the
real property leased by the Company for its principal executive offices located
at 986 West Atherton Drive, Salt Lake City, Utah 84123. The leased premises
consist of 32,885 square feet with current monthly rent of approximately $21,500
with a primary term expiring February 1, 2005.
In December of 1994, Aspen Business Company ("Aspen"), a corporation controlled
by the Investor, provided the Company with an accounts receivable line of credit
in the amount of $995,000, for which Aspen receives interest at the rate of
5.86% per annum, payable quarterly, with the principal amount due December 31,
1997. Aspen also purchased, for $5,000, warrants to purchase options in
connection with this transaction for an aggregate of 100,000 shares of
restricted common stock of the Company at an exercise price of $2.50 per share
at any time on or before December 31, 1997. The entire principal and interest of
the line of credit was retired in February of 1997.
In December of 1996, the Company authorized the issuance of convertible
debentures, which were due on June 30, 1998, bear interest at 8% and are
convertible into shares of common stock at a conversion price of $3.00 per share
if exercised in 1996, $3.50 per share in 1997 and $4.00 in 1998. In fiscal 1996,
the Company issued an aggregate of $1,450,000 of such debentures to Aspen
Business Company, an entity controlled by the Investor. The debentures were
retired in February of 1997.
On January 24, 1997 the Company entered into a stock Purchase and Sale Agreement
(the "Agreement") whereby it agreed to sell approximately 8,648,649 shares of
its common stock, representing 49% of the common stock to be outstanding after
the completion of the sale, to the Investor for $8.0 million in cash. Upon the
completion of the transaction, the Investor increased his ownership interest to
over fifty percent and obtained a controlling interest in the common stock of
the Company. In February of 1997, the Company received $6.0 million of the
purchase price which was used to retire long term debt and certain current
liabilities. The Company anticipates that the remaining $2.0 million will be
received in fiscal 1998. Also pursuant to the Agreement, the Investor
surrendered approximately 1,208,400 five year options to purchase shares of the
Company's common stock at prices from $1.50 to $5.00 in exchange for the grant
of 1,000,000 five year options to purchase the Company's common stock at $1.00
per share for the first year, with the option price increasing by $0.25 each
year on the anniversary date of the grant. The transaction was negotiated
between the Investor and an independent committee of the board of directors.
In June of 1997, pursuant to an agreement, the Company sold its office rental
complex located in Sparks, Nevada to a family partnership of which the Investor
is the general partner. The sales price was equal to the appraised value of
$3,125,000 less projected commissions and fees of 6.5 percent. The $2,925,000
purchase price included the payment of $1,258,425 in cash and the assumption of
a $1,658,565 mortgage on the purchased property. Prior to the sale, the
commercial real property had been listed for sale with a local agent since June
of 1995
-28-
during which time the Company did not receive a qualified offer which approached
the appraised price.
As a result of the foregoing relationships and transactions (see also discussion
regarding the planned surgery centers disposition), including his ownership
interest in acquired entities, the Investor holds, directly or indirectly,
9,016,421 shares of common stock of the Company and options to purchase an
additional 1,000,000 shares of common stock at an exercise price of $1.00 per
share for the first year, with the option price increasing by $0.25 each year on
the anniversary date of the grant and 12,500 options with exercise prices
ranging from $0.70 to $2.20. The Company considers the terms of the transactions
with the Investor to be as favorable to the Company as would be available from
third parties.
David J. Rank
The Company entered into a relocation agreementwith Mr. Rank in connection with
the acquisition of VDS, which was amended on December 7, 1994. Pursuant to the
relocation agreement the Company loaned Mr. Rank $6,000 monthly to pay the
mortgage payment on his home in Bethlehem, Pennsylvania, agreed to pay Mr. Rank
$100,000 in cash, and agreed to issue Mr. Rank options to purchase 200,000
shares of common stock of the Company at an option exercise price of $2.25.
According to the relocation agreement, repayment of the amount advanced was due
on the earlier of December 7, 1999, the effective date of an offering of the
Company's common stock (in which case CTI was to be obligated to allow Mr. Rank
to register a portion of his common shares equal in value to the amount owed
pursuant to the advances), the sale of a portion of Mr. Rank's restricted
securities, or the termination of Mr. Rank's employment agreement with CTI. In
addition, under the terms of the acquisition of VDS, which terminated its
election to be treated as a small business under Subchapter S of the Internal
Revenue Code of 1986, the Company agreed to cause VDS to distribute $600,000 to
the three former owners of VDS, including Mr. Rank, and to repay Mr. Rank's
capital contribution to VDS of $142,500.
In January of 1997, the Company entered into a termination agreement with Mr.
Rank. The termination agreement provides for: 1) the payment to Mr. Rank, by the
Company, of $300,000 in monthly installments of $12,500 in consideration for an
extended non-competition agreement, 2) the return of Mr. Rank's option to
purchase 200,000 shares of common stock for $2.50 per share and option to
purchase 100,000 shares of common stock for $1.80 per share, 3) the return, by
Mr. Rank of 25,000 shares of the Company's common stock in exchange for the
Company's forgiveness of approximately $140,000 of debt owed to the Company by
Mr. Rank including amounts loaned to pay the mortgage of Mr. Rank's Bethlehem,
Pennsylvania home, and 4) the waiver, by Mr. Rank of all other rights related to
the relocation agreement, including, but not limited to, the mortgage/loan
arrangement, and his employment agreement with the Company.
Richard Pedersen
Effective January 1, 1996, the Company acquired 100% of the equity interest in
Medfo Systems of America, Inc. ("Medfo"). The sole shareholder of Medfo was at
the acquisition date, President of the Company's medical division and a
shareholder of the Company. Medfo is a business engaged in the distribution and
support of software, principally in the medical industry. In connection with the
acquisition of Medfo, the Company issued 40,267 shares of its restricted common
stock and agreed to issue options to the former owner and the employees of Medfo
to acquire 150,000 shares of its common stock at fair market value. In August of
1996, the employment relationship between the Company and Mr. Pedersen was
terminated. In connection with the termination, the Company paid $264,968 to Mr.
Pedersen representing the balance of a promissory note owed to Mr. Pedersen in
connection with the Company's purchase, in fiscal 1995, of Benchmark of
Virginia, Inc. less certain offsets and Mr. Pedersen returned the 40,267 shares
of the Company's common stock received pursuant to the Medfo sale.
Surgery Center Disposition
In June of 1997, the board of directors of CTI approved a plan to dispose the
Company's surgery center business unit. The completion of the disposition was
subject to the identification of a qualified buyer, negotiation and execution of
an acceptable purchase price and the terms of a final purchase and sale
agreement. On September 30, 1997 the Board approved, a transaction whereby the
surgery center business unit will be sold to a group of investors consisting of
the Investor and two shareholders, one of whom is a director of the Company, for
a price of approximately $460,000. The Board's approval of the transaction is
subject to the receipt of a fairness opinion from an independent financial
advisor.
-29-
PART IV
- --------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
(a) 1 and 2. The response to this portion is submitted in the Index to
Item 8 which is in a separate section following Part IV.
The following exhibits are included as part of this report:
Exhibit SEC Title of Document Location
Number Reference
Number
- --------------------------------------------------------------------------
Item 3 Articles of Incorporation and Bylaws
3.01 3 Articles of Incorporation of CUSA Registration
Technologies, Inc., as amended Statement filed
February 7, 1994, and July 15, 1994 on Form SB-2,
Exhibit 3.01,
SEC File No.
33-71150-D
3.02 3 Bylaws of CUSA Technologies, Inc., Registration
as amended February 9, 1995 Statement filed
on Form SB-2,
Exhibit 3.04,
SEC File No.
33-71150-D and
Report on Form
10-QSB for
March 31, 1995
3.03 3 Designation of Rights, Privileges Report on Form
and Preferences of 1994 Series 8-K dated June
Preferred Convertible Stock 22, 1994
3.04 3 Registration Agreement between the Report on Form
Company and the holders of the 1994 8-K dated June
Series Convertible Preferred Stock 22, 1994
Item 4 Instruments Defining the Rights of
Security Holders
4.06 4 Amended Relocation Agreement Report on Form
between CUSA Technologies, Inc. and 10-QSB dated
David J. Rank dated December 7, 1995 September 30,
1995
Item 10 Material Contracts
10.01 10 CUSA Technologies, Inc., 1993 Registration
Employee Stock Option Plan Statement filed
on Form SB-2,
Exhibit 10.01,
SEC File No.
33-71150-D
10.02 10 CUSA Technologies, Inc., 1993 Registration
Directors' Stock Option Plan Statement filed
on Form SB-2,
Exhibit 10.02,
SEC File No.
33-71150-D
10.03 10 CUSA Technologies, Inc., 1995 Report on Form
Employee Stock Option Plan 10-QSB for
March 31, 1995
-30-
10.13 10 Agreement and Plan of Report on Form
Reorganization entered into by and 8-K dated
among CUSA Technologies, Inc., September 19,
RK&DR Concepts, Inc., dba VERSYSS 1994
Data Systems, and Roger L. Kuhns,
Joseph F. Jerkovich, and David J.
Rank
10.14 10 Employment Agreement between CUSA Report on Form
Technologies, Inc., and David J. 8-K dated
Rank September 19,
1994
10.15 10 Relocation Agreement between the Report on Form
Registrant and David J. Rank 8-K dated
September 19,
1994
10.46 10 Agreement and Plan of Report on Form
Reorganization between CUSA 8-K dated July
Technologies, Inc., New Benchmark 21, 1995
Systems of Wisconsin, Inc.,
Benchmark Systems of Wisconsin,
Inc., and Van Gusdorff, dated July
21, 1995
10.47 10 Employment Agreement with Van Report on Form
Gusdorff 8-K dated July
21, 1995
10.51 10 Agreement and Plan of Merger Report on Form
between CUSA Technologies, Inc. and 10-QSB dated
Automated Systems, Inc. and December 31,
Automated Solutions, Inc. dated 1995
January 19, 1996
-31-
10.52 10 Agreement and Plan of Merger Report on Form
between CUSA Technologies, Inc. 10-QSB dated
and Source Computing, Inc. dated December 31,
February 10, 1996 1995
10.53 10 Agreement and Plan of Merger Report on Form
between CUSA Technologies, Inc. and 10-QSB dated
Medical Clearing Corporation dated December 31,
February 10, 1996 1995
10.54 10 Asset Purchase Agreement between Report on Form
Physician's Computer Network, Inc. 8-K dated July
and CUSA Technologies, Inc. dated 17, 1996
July 2, 1996
10.55 10 Employment Agreement of Richard N. Report on Form
Beckstrand 10K dated June
30, 1996
10.56 10 Stock Purchase and Sale Agreement Report on Form
between the Company and Richard N. 10Q dated Dec.
Beckstrand dated January 24, 1997 31, 1996
10.57 10 Agreement between the Richard N. This Filing
Beckstrand Family Partnership and
the Company dated as of May 28, 1997
Item 16 Letter on Change in Certifying
Accountant Contracts
16.01 16 Letter from Joseph B. Glass & Report on Form
Associates 8-K dated March
24, 1995
16.02 16 Letter from Grant Thornton LLP Report on Form
8-K dated May
10, 1996
Item 27 Financial Data Schedule
27.01 27 Financial Data Schedule This Filing
-32-
Reports on Form 8-K
The Company filed a report on Form 8-K dated July 17, 1996 with respect to
the disposition of the medical and commercial divisions of the Company to
Physicians Computer Network, Inc.
Upon request, the Company will provide a copy of this Form 10-K free of charge.
-33-
- --------------------------------------------------------------------------------
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of section 13 or 15(d) of the Securities and
Exchange Act of 1934 as amended, the Company has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Dated: Oct. 13, 1997 CUSA Technologies, Inc.
/s/Richard N. Beckstrand
----------------------------------------------
Richard N. Beckstrand, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Dated: Oct. 13 , 1997 By: /s/Richard N. Beckstrand
------------ ------------------------------------------
Richard N. Beckstrand, Principal Executive
Officer, Director
Dated: Oct. 13 , 1997 By: /s/D. Jeff Peck
------------ ------------------------------------------
D. Jeff Peck, Principal Financial Officer
Dated: Oct. 13 , 1997 By: /s/Paul G. Murray
------------ ------------------------------------------
Paul G. Murray, Controller
Dated: Oct. 13 , 1997 By: /s/Johnathan S. Beckstrand
------------ ------------------------------------------
Jonathan S. Beckstrand, Director
Dated: Oct. 13 , 1997 By: /s/Gary L. Leavitt
------------ ------------------------------------------
Gary L. Leavitt, Director
Dated: Oc. 13 , 1997 By: /s/David J. Rank
------------ ------------------------------------------
David J. Rank, Director
Dated: ____________, 1997 By: __________________________________________
Mark Scott, Director
Dated: ____________, 1997 By: __________________________________________
L. Bruce Ford, D.P.M., Director
-34-
CUSA TECHNOLOGIES, INC.
Consolidated Financial Statements
June 30, 1997, 1996, and 1995
(With Independent Auditors' Report Thereon)
CUSA TECHNOLOGIES, INC.
Index to Consolidated Financial Statements
Page
Independent Auditors Reports:
Report of KPMG Peat Marwick LLP, Independent F-2
Auditors (as to the fiscal years ended June 30, 1997 and 1996)
Report of Grant Thornton LLP, Independent Certified Public
Accountants (as to the fiscal year ended June 30, 1995) F-3
Financial Statements:
Consolidated Balance Sheets as of June 30, 1997 and 1996 F-4
Consolidated Statements of Operations for the years ended
June 30, 1997, 1996, and 1995 F-6
Consolidated Statements of Stockholders' Deficit for the
years ended June 30, 1997, 1996, and 1995 F-7
Consolidated Statements of Cash Flows for the
years ended June 30, 1997, 1996, and 1995 F-9
Notes to Consolidated Financial Statements F-10
Schedules:
Report of KPMG Peat Marwick LLP, Independent Auditors F-32
Schedule II - Valuation and Qualifying Accounts F-33
F-1
Independent Auditors' Report
----------------------------
Board of Directors and Stockholders
CUSA Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of CUSA
Technologies, Inc. and subsidiaries as of June 30, 1997 and 1996, and the
related consolidated statements of operations, stockholders' deficit, and cash
flows for the years then ended. 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 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 provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CUSA Technologies,
Inc. as of June 30, 1997 and 1996, and the results of their operations and their
cash flows for the years then ended in conformity with generally accepted
accounting principles.
We also audited the reclassifications that were applied to restate the 1995
financial statements as a result of the discontinued operations as described in
note 4. In our opinion, such reclassifications are appropriate and have been
properly applied.
KPMG Peat Marwick LLP
Salt Lake City, Utah
October 9, 1997
F-2
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
----------------------------
Board of Directors and Stockholders
CUSA Technologies, Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of CUSA Technologies, Inc. and Subsidiaries
for the year ended June 30, 1995 (before restatement for the discontinued
medical, commercial, rental software, office rental complex and surgery centers
divisions as described in Note 4). 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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and consolidated
cash flows of CUSA Technologies, Inc. and Subsidiaries for the year ended of
June 30, 1995, in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Salt Lake City, Utah
September 15, 1995
F-3
CUSA TECHNOLOGIES, INC.
Consolidated Balance Sheets
June 30, 1997 and 1996
Assets 1997 1996
------ ---------- ----------
Current assets:
Cash and cash equivalents $2,861,994 583,080
Trade accounts receivable, net of allowance for doubtful accounts
of $221,000 in 1997 and $495,000 in 1996 (notes 5, 6, and 7) 2,489,176 2,589,428
Inventories (notes 5 and 7) 370,479 137,902
Prepaid expenses and other assets 313,991 422,029
Net assets of discontinued operations (note 4) - 6,127,253
---------- ----------
Total current assets 6,035,640 9,859,692
Property and equipment (notes 5 and 7):
Leasehold improvements 134,836 121,482
Furniture, fixtures, and equipment 2,332,357 2,521,005
Other 721,450 668,405
---------- ----------
Total property and equipment 3,188,643 3,310,892
Less accumulated depreciation and amortization 1,528,951 1,024,462
---------- ----------
Net property and equipment 1,659,692 2,286,430
Equipment under capital lease obligations less accumulated
amortization of $473,750 in 1997 and $400,813 in 1996 (note 12) 259,255 219,940
Receivables from related parties (note 13) 52,440 93,701
Software development and acquisition costs less accumulated
amortization of $819,274 in 1997 and $411,142 in 1996
(notes 3, 4, and 16) 1,659,398 1,398,510
Other assets 73,047 166,418
---------- ----------
$9,739,472 14,024,691
========== ==========
See accompanying notes to consolidated financial statements.
F-4
Liabilities and Stockholders' Deficit 1997 1996
------------------------------------- ----------- -----------
Current liabilities:
Line of credit with banks (note 5) $ - 891,022
Current installments of long-term debt (note 7) 29,367 1,462,244
Current installments of obligations under capital leases (note 12) 163,148 205,888
Accounts payable 1,760,421 3,738,559
Accrued liabilities 1,698,865 3,233,359
Customer deposits 1,622,469 1,642,081
Income taxes payable (notes 4 and 11) 485,480 18,081
Payables to related parties (note 13) - 1,167,398
Net liabilities of discontinued operations (note 4) 304,464 -
Deferred revenue 5,506,377 4,831,740
----------- -----------
Total current liabilities 11,570,591 17,190,408
Long-term debt with related parties (note 6) - 2,445,000
Long-term debt, excluding current installments (note 7) - 430,894
Obligations under capital leases, excluding current
installments (note 12) 118,241 193,977
----------- -----------
Total liabilities 11,688,832 20,260,279
Commitments and contingent liabilities (notes 2, 4, 12, and 14)
Stockholders' deficit (notes 3, 4, 6, 8, 9, 13 and 14):
Series A convertible preferred stock, $.001 par value.
Authorized 1,500,000 shares; issued and outstanding
1,000,000 shares ($2.00 liquidation value) 1,000 1,000
Common stock, $.001 par value. Authorized 25,000,000
shares; issued and outstanding 15,289,437 shares at June
30, 1997 and 8,916,438 shares at June 30, 1996 15,289 8,916
Additional paid-in capital 16,347,576 10,530,308
Accumulated deficit (18,313,225) (16,775,812)
----------- -----------
Total stockholders' deficit (1,949,360) (6,235,588)
----------- -----------
$ 9,739,472 14,024,691
=========== ===========
F-5
CUSA TECHNOLOGIES, INC.
Consolidated Statements of Operations
Years ended June 30, 1997, 1996, and 1995
1997 1996 1995
------------ ------------- ------------
Net revenues:
Hardware and software sales $ 9,442,148 11,180,004 10,658,134
Support, maintenance, and other services 17,447,765 15,642,755 10,950,006
------------ ------------- ------------
Total revenues 26,889,913 26,822,759 21,608,140
------------ ------------- ------------
Cost of goods sold and other direct costs:
Hardware and software 4,097,113 5,923,075 4,681,804
Support, maintenance, and other services 10,843,749 9,359,764 6,067,347
------------ ------------- ------------
Total cost of goods sold and other direct costs 14,940,862 15,282,839 10,749,151
------------ ------------- ------------
Gross profit 11,949,051 11,539,920 10,858,989
Product development costs 2,481,421 1,085,253 1,048,942
Selling, general, and administrative expenses 8,713,650 12,627,058 7,972,383
Nonrecurring charges (note 16) - 6,905,343 -
------------ ------------- ------------
Operating income (loss) 753,980 (9,077,734) 1,837,664
Other income (expense):
Interest expense (276,901) (439,232) (240,943)
Other, net (40,438) (37,434) 55,645
------------ ------------- ------------
Income (loss) from continuing operations
before income taxes 436,641 (9,554,400) 1,652,366
Income tax expense (note 11) - - 727,432
------------ ------------- ------------
Earnings (loss) from continuing operations 436,641 (9,554,400) 924,934
Loss from discontinued operations, net of income taxes
(note 4) (219,330) (5,401,641) (148,908)
Estimated loss from disposal of discontinued operations,
net of income taxes (note 4) (1,634,724) (2,494,451) -
------------ ------------- ------------
Net income (loss) $ (1,417,413) (17,450,492) 776,026
============ ============= ============
Earnings (loss) per common and common equivalent share:
From continuing operations $ 0.04 (1.10) 0.12
From discontinued operations (0.17) (0.91) (0.02)
------------ ------------- ------------
Net income (loss) $ (0.13) (2.01) 0.10
============ ============= ============
Weighted average common and common equivalent shares 11,062,181 8,695,419 7,655,280
See accompanying notes to consolidated financial statements.
F-6
CUSA TECHNOLOGIES, INC.
Consolidated Statements of Stockholders' Deficit
Years ended June 30, 1997, 1996, and 1995
Retained
Preferred Stock Common Stock earnings Total
--------------------- --------------------- Additional (accumu- stock-
Number Number of paid-in lated holders'
of shares Amount shares Amount capital deficit) (deficit)
--------- --------- ---------- --------- ---------- ---------- ----------
--------- --------- ---------- --------- ---------- ---------- ----------
Balances at June 30, 1994 1,000,000 $ 1,000 4,739,294 4,739 4,082,185 147,468 4,235,392
Shares issued in business acquisitions (note 3) - - 3,514,227 3,514 4,593,046 (6,148) 4,590,412
Sale of shares to employees under stock purchase
plan (note 9) - - 254,635 255 434,730 - 434,985
Shares issued under stock option plans (note 9) - - 1,360 2 1,846 - 1,848
Proceeds from common stock warrants (note 6) - - - - 5,000 - 5,000
Preferred stock dividends (note 8) - - - - - (122,666) (122,666)
Net income - - - - - 776,026 776,026
--------- --------- ---------- --------- ---------- ---------- ----------
Balances at June 30, 1995 1,000,000 1,000 8,509,516 8,510 9,116,807 794,680 9,920,997
Shares issued in business acquisitions (note 3) - - 350,267 350 1,336,239 - 1,336,589
Shares issued for software development - - 50,000 50 149,950 - 150,000
Shares issued under stock option plans (note 9) - - 20,905 20 2,798 - 2,818
Shares redeemed from former employees - - (14,250) (14) (75,486) - (75,500)
Preferred stock dividends (note 8) - - - - - (120,000) (120,000)
Net loss - - - - - (17,450,492) (17,450,492)
--------- --------- ---------- --------- ---------- ---------- ----------
Balances at June 30, 1996 1,000,000 1,000 8,916,438 8,916 10,530,308 (16,775,812) (6,235,588)
F-7
CUSA TECHNOLOGIES, INC.
Consolidated Statements of Stockholders' Deficit (continued)
Years ended June 30, 1997, 1996, and 1995
Retained
Preferred Stock Common Stock earnings Total
--------------------- --------------------- Additional (accumu- stock-
Number Number paid-in lated holders'
of shares Amount of shares Amount capital deficit) deficit
--------- --------- ---------- --------- ---------- ---------- ----------
Proceeds from sale of stock (note 8) - $ - 6,486,486 6,486 5,993,514 - 6,000,000
Shares redeemed and/or returns
(notes 4 and 13) - - (113,487) (113) (176,246) - (176,359)
Preferred stock dividends (note 8) - - - - - (120,000) (120,000)
Net loss - - - - - (1,417,413) (1,417,413)
--------- --------- ---------- --------- ---------- ---------- ----------
Balances at June 30, 1997 1,000,000 $ 1,000 15,289,437 $ 15,289 16,347,576 (18,313,225)(1,949,360)
========= ========= ========== ========= ========== ========== ==========
See accompanying notes to consolidated financial statements.
F-8
CUSA TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
Years ended June 30, 1997, 1996, and 1995
1997 1996 1995
---------- ---------- ----------
Cash flows from operating activities:
Earnings (loss) from continuing operations $ 436,641 (9,554,400) 924,934
Adjustments to reconcile earnings (loss) from continuing
operations to net cash provided by (used in) operating
activities:
Depreciation and amortization 1,405,466 2,143,667 1,285,101
Provision for doubtful accounts (273,771) 451,249 36,000
Nonrecurring charges - 6,905,343 -
Net change in current assets and liabilities:
Trade accounts receivable 374,023 (884,856) (1,482,744)
Inventories (232,577) 317,139 238,637
Prepaid expenses and other current assets 108,038 (195,150) (115,564)
Accounts payable and accrued liabilities (3,622,667) 2,193,103 (202,213)
Customer deposits (19,612) 695,445 596,764
Deferred revenue 674,637 959,255 503,999
Income taxes 467,398 (91,181) 8,936
Deferred income taxes - - 767,508
---------- ---------- ----------
Net cash provided by (used in) continuing
operating activities (682,424) 2,939,614 2,561,358
Net cash used in discontinued operations (4,507,121) (3,043,119) (754,433)
---------- ---------- ----------
Net cash provided by (used in) operating
activities (5,189,545) (103,505) 1,806,925
---------- ---------- ----------
Cash flows from investing activities:
Purchase of property and equipment, net (297,659) (1,878,911) (696,963)
Cash paid for business acquisitions, including
acquisition costs, less cash acquired - (48,234) (79,366)
Software development costs (669,020) (890,947) (262,982)
Receivables from related parties 41,261 (36,815) -
Change in other assets 93,371 (76,531) (46,552)
Net cash used in investing activities of discontinued
operations - (171,086) (771,571)
---------- ---------- ----------
Net cash used in investing activities (832,047) (3,102,524) (1,857,434)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from debt with related parties 100,000 1,300,000 1,145,000
Proceeds from long-term debt - 1,981,023 -
Repayment of debt with related parties (1,267,398) - -
Net borrowings (repayments) of lines of credit (891,022) 517,775 (321,000)
Repayments of obligations under capital leases (230,728) (224,320) (172,109)
Repayment of long-term debt (4,308,771) (638,172) (240,321)
Reduction of payables to related parties - (994,257) (868,717)
Sale of common stock and exercise of stock options 6,000,000 2,818 441,832
Preferred dividend distributions (60,000) (120,000) (122,666)
Redemption of common stock - (75,500) -
Net cash provided by financing activities of
discontinued operations 8,958,425 1,220,859 628,282
---------- ---------- ----------
Net cash provided by financing activities 8,300,506 2,970,226 490,301
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 2,278,914 (235,803) 439,792
Cash and cash equivalents at beginning of year 583,080 818,883 379,091
---------- ---------- ----------
Cash and cash equivalents at end of year $2,861,994 583,080 818,883
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-9
CUSA TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
June 30, 1997, 1996, and 1995
(1) Description of Business Operations and Summary of Significant Accounting
Policies
(a) Description of Business Operations
The principal business operations of CUSA Technologies, Inc. (CTI)
and its subsidiaries (collectively, "the Company") are the
development, license, and support of computer software technology and
resale and maintenance of hardware for credit unions. As described in
note 4, in June 1996, the Board of Directors of CTI committed to
dispose of the business and assets of the medical and commercial
divisions which was completed on July 1, 1996. During 1997, the
Company sold it's office rental complex and its rental software
division and the Board of Directors also committed to dispose of the
Company's surgical centers. Certain amounts in the prior years'
consolidated financial statements and related notes have been
reclassified to conform to the current year's presentation as
required with respect to discontinued operations. Unless otherwise
specified, disclosures in the following footnotes relate to assets,
liabilities, and operations of continuing operations.
(b) Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of CTI and all of its subsidiaries, substantially all of
which are wholly-owned at June 30, 1997. All significant intercompany
balances and transactions have been eliminated in consolidation.
(c) Revenue Recognition
Revenue on hardware and software sales is generally recognized upon
shipment. A portion of the revenue is deferred on certain sales when
the Company has a significant obligation for future services.
Software support and hardware maintenance services are billed in
advance. Revenue from software support and hardware maintenance is
deferred and recognized ratably over the maintenance period
(generally one year). Revenue for other goods and services is
recognized when the goods are shipped or when the services are
rendered.
(d) Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with
an original maturity to the Company of less than ninety days.
(e) Financial Instruments
The carrying value of the Company's financial instruments at June 30,
1997 approximates fair value.
F-10
CUSA TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
(f) Inventories
Inventories, which consist principally of computer hardware and
supplies held for resale, are stated at the lower of cost or market.
Cost is determined using the first-in, first-out method.
(g) Property and Equipment
Property and equipment are stated at cost. Depreciation and
amortization are provided for in amounts sufficient to relate the
cost of depreciable assets to operations over their estimated service
lives. Leasehold improvements are amortized over the lives of the
respective leases or the service lives of the improvements, whichever
is shorter.
The estimated lives used in determining depreciation and amortization
are:
Leasehold improvements 5-32 years
Furniture, fixtures, and equipment 3-10 years
Other 3-5 years
Equipment under capital leases is amortized over the lives of the
respective leases or, for those leases which substantially transfer
ownership, over the service lives of the assets. Amortization expense
for capital leases is included with depreciation and amortization
expense.
The straight-line method of depreciation and amortization is followed
for substantially all assets for financial reporting purposes.
Certain assets are depreciated under accelerated methods for tax
purposes.
(h) Intangible Assets
All research and development costs incurred by the Company in the
development and acquisition of computer software to be sold to
customers is charged to expense until the technological feasibility
of the software is established. After technological feasibility has
been established, software development and acquisition costs are
capitalized until the software is available for general release to
customers. Software development and acquisition costs are recorded at
the lower of unamortized historical cost or estimated net realizable
value. Software development and acquisition costs are amortized on a
product-by-product basis using the straight-line method over their
estimated useful lives of three to five years. Amortization of
software development and acquisition costs was $408,132, $684,232,
and $366,644 for the years ended June 30, 1997, 1996 and 1995,
respectively.
The excess of purchase price over fair value of net tangible and
identifiable intangible assets acquired in certain business
acquisitions is amortized using the straight-line method, principally
over fifteen years. Amortization expense was $360,209 and $364,146
for the years ended June 30, 1996 and 1995, respectively (none in
1997).
F-11
CUSA TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
(h) Intangible Assets (continued)
On an ongoing basis, management reviews the valuation and
amortization of software development and acquisition costs and the
excess purchase price to determine possible impairment by comparing
the carrying value to the undiscounted estimated future cash flows of
the related businesses (note 16).
(i) Income Taxes
The Company accounts for income taxes under the asset and liability
method, under which deferred taxes are determined based on the
difference between the financial statement and the tax bases of
assets and liabilities using enacted tax rates in effect in the years
in which the deferred tax assets or liabilities are expected to be
paid or recovered. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that
includes the enactment date. A valuation allowance related to
deferred tax assets is recorded when it is more likely than not that
such tax benefits will not be realized.
(j) Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
(k) Earnings (Loss) Per Share
Earnings or loss per common and common equivalent share is computed
by dividing net earnings (loss) by the weighted average common shares
outstanding during each year, including common equivalent shares (if
dilutive). Common equivalent shares include stock options,
convertible preferred stock, and convertible debt. Earnings used in
the calculation are reduced (loss in increased) by the dividends paid
to preferred stockholders. Fully diluted earnings (loss) per share is
not materially different from primary earnings (loss) per share.
(l) Stock-Based Compensation
Effective July 1, 1996, the Company adopted the footnote disclosure
provisions of Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS 123). SFAS 123
encourages entities to adopt a fair value based method of accounting
for stock options or similar equity instruments. However, it also
allows an entity to continue measuring compensation cost for
stock-based compensation using the intrinsic-value method of
accounting prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25). The Company has
elected to continue to apply the provisions of APB 25 and provide pro
forma footnote disclosures required by SFAS 123.
F-12
CUSA TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
(m) Accounting Standards Not Yet Adopted
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings per
Share (SFAS 128). SFAS 128 establishes a different method of
computing earnings (loss) per share than is currently required under
the provisions of Accounting Principles Board Opinion No. 15. Under
SFAS 128, the Company will be required to present both basic earnings
(loss) per share and diluted earnings (loss) per share. Basic and
diluted loss per share is expected to be comparable to the currently
presented loss per share.
SFAS 128 is effective for the consolidated financial statements for
interim and annual periods ending after December 15, 1997.
Accordingly, the Company plans to adopt SFAS 128 in the second
quarter of its 1998 fiscal year and at that time all historical
earnings per share data presented will be restated to conform to the
provisions of SFAS 128.
(n) Reclassifications
Certain reclassifications have been made in the 1996 and 1995
consolidated financial statements to conform with classifications
adopted in 1997.
(2) Liquidity
During the year ended June 30, 1997, the Company incurred a net loss of
$1,417,413, used cash in operating activities of $5,189,545, including
$4,507,121 from discontinued operations and at June 30, 1997 had a
stockholders' deficit of $1,949,360. The Company also had a net loss
during the year ended June 30, 1996 of $17,450,492, including $7,896,092
from discontinued operations. A significant portion of the net loss during
1996 relates to the noncash write down of the excess of purchase price
over fair value of net tangible and identifiable intangible assets
acquired and software development and acquisition costs to their estimated
fair value (note 16). During the year ending June 30, 1997, management
implemented plans to return the Company to profitable operations and
positive cash flow. In the opinion of management, the continued
implementation of these plans will permit the Company to meet its
operating and debt cash requirements, at least through the next fiscal
year; however, the Company is subject to many uncertainties over which
management has limited control, any one of which could adversely affect
the Company's operating cash flows, and thus create cash flow problems for
the Company.
(3) Business Acquisitions
During the period from December 1994 through February 1996, CTI acquired
various entities. In each acquisition where CTI issued its stock as part
or all of the purchase consideration, the stock has been valued at the
average of the bid and ask prices on the date of closing, less an
appropriate discount for restrictions on marketability.
F-13
CUSA TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
(3) Business Acquisitions (continued)
(a) Fiscal 1996
Preferred Health Systems, Inc.
Effective October 1, 1995, CTI acquired 100 percent of the equity
interest in Preferred Health Systems, Inc. (PHS), a software
development company. In connection with the acquisition, CTI issued
75,000 shares of restricted common stock (valued at $262,500) in
exchange for all of the outstanding stock of PHS. PHS is the owner
and developer of a fourth generation language software application
for managed healthcare organizations. Results of operations of PHS
are included in the financial statements of the Company since October
1, 1995. The acquisition has been accounted for using the purchase
method and the excess of purchase price over fair value of net
tangible assets acquired was allocated to software development and
acquisition costs and is being amortized over five to fifteen years.
Workgroup Design, Inc.
On December 22, 1995, CTI acquired 100 percent of the equity interest
in Workgroup Design, Inc. (WGD), a Lotus Notes application
development company. In connection with the acquisition, CTI issued
25,000 shares of restricted common stock (valued at $100,000) and a
note payable in the amount of $42,000. The financial statements of
the Company include the results of operations of WGD since the
effective date of the acquisition. The acquisition has been accounted
for using the purchase method and the excess of purchase price over
fair value of net tangible assets acquired was amortized over five
years.
Medfo Systems of America, Inc.
Effective January 1, 1996, CTI acquired 100 percent of the equity
interest in Medfo Systems of America, Inc. (Medfo). Medfo is a
business engaged in the distribution and support of software,
principally in the healthcare industry. In connection with the
acquisition of Medfo, CTI issued 40,267 shares of its restricted
common stock (valued at $134,089) and agreed to issue options to the
former owner and the employees of Medfo to acquire 150,000 shares of
its common stock at fair market value as of the closing date. Results
of operations of Medfo are included in the financial statements of
the Company since January 1, 1996. The acquisition has been accounted
for using the purchase method and the excess of purchase price over
fair value of net tangible assets acquired was being amortized over
fifteen years.
The former owner of Medfo is a shareholder of CTI and was an officer
until September 1996. Prior to the acquisition, Medfo and the medical
division of CTI jointly conducted business pursuant to a subcontract
and assignment agreement under which CTI provided software, hardware,
and other resources to customers of Medfo, for which CTI earned
revenues. CTI had also advanced Medfo $256,312 for its business
operations prior to the acquisition.
F-14
CUSA TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
(3) Business Acquisitions (continued)
Automated Solutions, Inc.
Effective February 1, 1996, CTI acquired 100 percent of the equity
interest in Automated Solutions, Inc. and Automated Systems of
Arizona, Inc., and 40 percent of the equity interest in Automated
Solutions of California, Inc. (collectively, ASI). ASI is a business
engaged in hardware and software distribution and related support
services, principally to the healthcare and certain commercial
industries. In connection with the acquisition of ASI, CTI issued
50,000 shares of its restricted common stock (valued at $200,000) to
the former owners of ASI and agreed to settle certain liabilities of
a former owner of ASI in the approximate amount of $114,000 related
to his prior purchase of stock in ASI. CTI also agreed to issue
options to a former owner and the employees of ASI to acquire 70,000
shares of its common stock at fair market value as of the closing
date. Results of operations of ASI are included in the financial
statements of the Company since February 1, 1996. The acquisition has
been accounted for using the purchase method and the excess of
purchase price over fair value of net tangible assets acquired was
being amortized over fifteen years.
Source Computing, Inc.
Effective February 1, 1996, CTI acquired 100 percent of the equity
interest in Source Computing, Inc., Medical Clearing Corporation, and
certain assets of a proprietorship, all of which were under common
ownership (collectively, Source). Source is a business engaged in the
development, distribution, and support of software, principally in
the area of practice management and electronic claims processing for
the healthcare industry. In connection with the acquisition of
Source, CTI issued an aggregate of 160,000 shares of its restricted
common stock (valued at $640,000) and agreed to pay an aggregate of
$300,000 in cash. CTI also agreed to issue options to the former
owners and the employees of Source to acquire 25,000 shares of its
common stock at fair market value as of the date of closing. Results
of operations of Source are included in the financial statements of
the Company since February 1, 1996. The acquisition has been
accounted for using the purchase method and the excess of purchase
price over fair value of net tangible assets acquired was being
amortized over fifteen years.
(b) Fiscal 1995
VERSYSS Data Systems
Effective September 1, 1994, CTI acquired 100 percent of the stock of
RK & DR Concepts, Inc. dba VERSYSS Data Systems (VDS) in exchange for
1,500,000 shares of restricted common stock (valued at $1,800,000)
and a cash payment of $700,000. VDS markets software, hardware and
support services to the credit union, healthcare, and rental
industries. Results of operations of VDS are included in the
financial statements of the Company since September 1, 1994. The
acquisition has been accounted for as a purchase and the excess
purchase price over fair value of net tangible assets acquired was
being amortized over fifteen years.
F-15
CUSA TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
(3) Business Acquisitions (continued)
Outside Force
Effective November 15, 1994, CTI acquired 100 percent of the stock of
Outside Force, Inc. (Outside Force) in exchange for 200,000 shares of
restricted common stock (valued at $333,333) and a cash payment of
$250,000. Outside Force is the developer of a credit union management
software system written in a fourth generation software language.
Results of operations of Outside Force are included in the financial
statements of the Company since November 15, 1994. The acquisition
has been accounted for as a purchase and the excess purchase price
over fair value of net tangible assets acquired was allocated to
software acquisition costs and is being amortized over five years.
Benchmark Computer Systems of Nebraska and Iowa, Inc.
Effective February 1, 1995, CTI acquired 100 percent of the stock of
Benchmark Computer Systems, of Nebraska and Iowa, Inc., (Benchmark of
Omaha) in exchange for 205,000 shares of restricted common stock
(valued at $410,000) and a cash payment of $200,000. Benchmark of
Omaha markets software, hardware and support services to the credit
union and healthcare industries. Results of operations of Benchmark
of Omaha are included in the financial statements of the Company
since February 1, 1995. The acquisition has been accounted for as a
purchase and the excess purchase price over fair value of net
tangible assets acquired was being amortized over fifteen years.
Computer Ease, Inc.
Effective February 1, 1995, CTI acquired 100 percent of the stock of
Computer Ease for cash of $350,000. Computer Ease is the developer of
a rental center management software system. Results of operations of
Computer Ease are included in the financial statements of the Company
since February 1, 1995. The acquisition has been accounted for as a
purchase and the excess purchase price over fair value of net
tangible assets acquired was allocated to software acquisition costs
and is being amortized over three years.
Benchmark Computer Systems of Va., Inc.
Effective May 1, 1995, CTI acquired 100 percent of the stock of
Benchmark Computer Systems of Va., Inc., (Benchmark of Virginia) in
exchange for 380,000 shares of restricted common stock (valued at
$950,000) and a cash payment of $1,000,000. Benchmark of Virginia
markets software, hardware and support services to the credit union
and healthcare industries. Results of operations of Benchmark of
Virginia are included in the financial statements of the Company
since May 1, 1995. The acquisition has been accounted for as a
purchase and the excess purchase price over fair value of net
tangible assets acquired was being amortized over fifteen years.
F-16
CUSA TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
(3) Business Acquisitions (continued)
Benchmark Computer Systems of Wisconsin
Effective June 1, 1995, CTI acquired 100 percent of the stock of
Benchmark Computer Systems, Inc. (Benchmark of Wisconsin) in exchange
for 192,667 shares of restricted common stock (valued at $481,668).
Benchmark of Wisconsin markets software, hardware and support
services to the credit union and healthcare industries. Results of
operations of Benchmark of Wisconsin are included in the financial
statements of the Company since June 1, 1995. The acquisition has
been accounted for as a purchase and the excess purchase price over
fair value of net tangible assets acquired was being amortized over
fifteen years.
Medical Computer Management, Inc.
On May 18, 1995 CTI acquired 100 percent of the stock of Medical
Computer Management, Inc. and its 90 percent-owned subsidiary,
Healthcare Business Solutions of Arizona, Inc. (collectively, MCMI)
in exchange for 300,000 shares of restricted common stock. MCMI
develops, sells, and supports a medical management software system
written in a fourth generation software language. The acquisition has
been accounted for as a pooling of interests and, accordingly, all
prior period financial statements presented have been restated as if
the acquisition took place at the beginning of the earliest period
presented.
Sierra Surgery Center
Pursuant to an amended agreement in principle dated March 31, 1993,
and effective November 1, 1994, CTI acquired 100 percent of the stock
of the Sierra Surgery Center (Sierra) in exchange for 415,000 shares
of restricted common stock. Sierra operates a surgery center in
Nevada. Sierra and CTI were entities under common control and
accordingly the transaction has been accounted for on an as if pooled
basis. However, the financial statements of the Company prior to the
acquisition have not been restated due to the insignificance of the
historical results of operations of Sierra.
Pro forma Results of Operations
Assuming all of the acquisitions described above had occurred at the
beginning of each period presented below, the Company's unaudited pro
forma condensed consolidated results of continuing operations,
exclusive of nonrecurring charges, would have been approximately as
follows:
Year ended June 30,
------------------------
1996 1995
----------- -----------
Revenues $26,822,759 23,889,001
=========== ===========
Earnings (loss) from continuing operations $(9,554,400) 792,809
=========== ===========
Earnings (loss) per share $ (1.10) 0.10
=========== ===========
F-17
CUSA TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
(3) Business Acquisitions (continued)
The unaudited pro forma condensed consolidated results of operations
are not necessarily indicative of the actual results that would have
been achieved had the aforementioned acquisitions taken place at the
dates set forth above and are not necessarily indicative of future
results.
(4) Discontinued Operations
As part of an overall business plan, the Board of Directors and management
have decided to concentrate the Company's business activities on its core
operations in the credit union business. The following discontinued
operations are a result of that plan.
In June 1997, the Company sold the office rental complex to an officer and
major stockholder of the Company for $2,925,000. The Company received cash
of $1,258,425 and the officer assumed long-term debt secured by the
complex of $1,658,565. The Company recognized a gain on the sale before
income taxes of approximately $479,000 which has been included in the loss
from disposal of discontinued operations in 1997.
In June 1997, the Board of Directors of CTI committed to dispose of the
business and assets of the surgery centers. The surgery centers have been
operating at a small profit and the Company believes that a loss will not
be incurred in the disposal of the division, therefore no anticipated loss
on final disposition has been recorded. The net assets of the surgery
centers of approximately $435,000 have been included in the net
liabilities of discontinued operations as of June 30, 1997. The Company
expects the disposal to be completed before the end of calendar year 1997.
Effective March 31, 1997, the Company sold its rental software division to
JFJ Corporation (JFJ) which is owned by a CTI stockholder for $400,000
represented by a $200,000, eight percent note receivable due in monthly
installments of $6,453 and a $200,000, six percent note receivable due
March 31, 1999. The notes are secured by 500,000 shares of CTI common
stock. According to the asset purchase agreement, JFJ 1) assumed deferred
software support and hardware maintenance obligations, accrued
liabilities, and customer deposits associated with the rental software
division, and 2) assumed liability for certain real and personal property
leases of the Company with terms through December of 1997. The Company
recognized a gain on the sale of approximately $294,000 which has been
included in the loss from disposal of discontinued operations in 1997.
In June 1996, the Board of Directors of CTI committed to dispose of the
business and assets of the medical and commercial divisions. On July 2,
1996, CTI entered into an asset purchase agreement with Physician Computer
Network, Inc. (PCN) whereby PCN agreed to acquire substantially all of the
assets and assume certain liabilities of the medical and commercial
divisions. Terms of the purchase agreement, as subsequently modified in
October 1996 and again in September 1997, provided for the purchase of
certain specified assets for $8,950,000, payable as follows: 1) $4,500,000
at closing, 2) cancellation of $1,500,000 note payable to PCN incurred on
June 13, 1996, 3) $3,150,000 within five business days of receipt of the
June 1996 audited financial statements, 4) $50,000 due upon the signed
amendment in October 1996 and 5) a repayment of $250,000 to PCN by the
Company in September 1997.
F-18
CUSA TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
(4) Discontinued Operations (continued)
Also, according to the asset purchase agreement, PCN 1) assumed the
balances of the Company's liabilities related to accounts and notes
payable to Versyss, Inc., a subsidiary of PCN, deferred software support
and hardware maintenance obligations, accrued liabilities, and customer
deposits associated with the medical and commercial divisions, and 2)
assumed liability for certain real and personal property leases of the
Company with terms through October 1999.
Under the asset purchase agreement, CTI agreed to purchase from PCN not
less than $2,000,000 of hardware and software products during each of the
five twelve-month periods commencing July 1, 1996, for an aggregate
commitment of $10,000,000. The Company is in compliance with the agreement
at June 30, 1997.
The medical, commercial, and rental software divisions along with the
office rental complex and surgery centers divisions have been accounted
for as discontinued operations, and accordingly, the results of their
operations are segregated from continuing operations in the accompanying
statements of operations. Revenue, operating costs and expenses, other
income and expense, and income taxes of these divisions for the fiscal
years ended June 30, 1997, 1996, and 1995, have also been reclassified as
discontinued operations. No allocation of general corporate overhead has
been made to discontinued operations related to these divisions.
In June 1996, upon adoption of the plan to dispose of the medical and
commercial divisions, the Company recorded a provision for the estimated
loss on the disposal of the divisions in the amount of $2,494,451 (net of
income tax benefit of $-0-). This provision relates to the expected gain
on the sale to PCN, net of disposal costs, severance benefits to division
employees, certain occupancy costs under noncancelable leases, and
anticipated future losses related to assets and operations not sold to PCN
until their ultimate disposition is completed. Interest expense has been
allocated to discontinued operations in the same percentage as assets of
discontinued operations compared to total assets not specifically
identified to any division. During the year ending June 30, 1997, the
Company incurred $2,408,152 of additional medical and commercial division
expenses (including $475,000 for income taxes) not anticipated or provided
for at June 30, 1996. These expenses are recorded in the loss from
disposal of discontinued operations for the year ending June 30, 1997. A
provision for estimated future expenses of the medical and commercial
divisions of $1,177,620 is included in the net liabilities of discontinued
operations at June 30, 1997.
During the year ending June 30, 1997, as part of various agreements
related to the discontinuance of the medical division, the Company
received 113,487 shares of CTI stock from former employees and business
partners of the Company.
The rental software, office rental complex, and the surgery centers are
not expected to generate additional net expenses from disposal after June
30, 1997. Thus no estimated loss on the disposal of these segments has
been provided in the accompanying statement of operations.
F-19
CUSA TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
(4) Discontinued Operations (continued)
Summary operating results of discontinued operations for the fiscal years
ended June 30, 1997, 1996, and 1995, excluding the above loss on disposal,
are as follows:
1997 1996 1995
----------- ---------- -----------
Revenues $ 1,898,853 16,590,998 10,931,575
=========== ========== ===========
Gross profit $ 862,903 5,544,364 4,818,130
=========== ========== ===========
Loss before income taxes $ (219,330) (5,401,641) (89,468)
Income tax expenses - - (59,440)
=========== ========== ===========
Loss from discontinued operations $ (219,330) (5,401,641) (148,908)
=========== ========== ===========
The assets and liabilities related to the discontinued operations have
been separately classified on the balance sheets as net assets
(liabilities) of discontinued operations. A summary of these assets and
liabilities as of June 30, 1997 and 1996, are as follows:
1997 1996
---------- -----------
Assets:
Trade accounts receivable, net $ 84,012 2,584,180
Other current assets 272,644 283,301
Property and equipment, net 60,878 2,954,398
Software development and acquisition costs, - 1,409,241
net
Excess of purchase price over fair value of
net tangible assets acquired, net - 8,827,260
Other noncurrent assets 480,214 479,811
---------- -----------
Total assets 897,748 16,538,191
---------- -----------
Liabilities:
Accounts payable, accrued liabilities, and
customer deposits 24,592 2,351,932
Deferred revenue - 2,170,844
Notes payable - 3,393,711
Liability for estimated loss on disposal 1,177,620 2,494,451
---------- -----------
Total liabilities 1,202,212 10,410,938
========== ===========
Net assets/(liabilities) of
discontinued operations $ (304,464) 6,127,253
========== ===========
F-20
(5) Line Of Credit With Banks
Line of credit with banks are as follows:
1997 1996
========== ==========
Line of credit, interest at prime plus 1.5% (9.75%
at June 30, 1996), secured by accounts receivable,
inventories, general intangible assets, and trust
deed on real estate, personally guaranteed by an
officer and director of the Company, the line of
credit was paid and closed in February of 1997.
The weighted-average interest rate on the line of
credit was 9.75 percent in 1997, 10.15 percent in
1996, and 11.00 percent in 1995. $ - 891,022
========== ==========
(6) Long-term Debt With Related Parties
The Company was indebted to a company affiliated with an officer and
director of the Company for a long-term line of credit in the amount of
$995,000, all of which was drawn at June 30, 1996. The line of credit
accrued interest at 5.86 percent. The line of credit including all accrued
interest was paid in full in February 1997. The line was secured by
accounts receivable and was subordinated to the line of credit and
long-term debt with a bank which were also paid in full in February 1997
(notes 5 and 7). In connection with this line, the Company issued warrants
in exchange for $5,000 to purchase 100,000 shares of the Company's
restricted common stock at $2.50 per share. The warrants expire on or
before December 31, 1997.
At June 30, 1996, the Company was indebted under debentures to an entity
controlled by an officer and director of the Company in the principal
amount of $1,450,000 with interest at eight percent, payable quarterly,
and convertible into common stock of the Company at $3.00 per share
through June 30, 1996, $3.50 per share through June 30, 1997. The
debentures were paid in full in February 1997.
Interest expense accrued on the note was $116,205, $174,307, and $174,307
for 1997, 1996 and 1995, respectively.
F-21
CUSA TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
(7) Long-term Debt
Long-term debt is summarized as follows:
1997 1996
--------- ----------
Prime plus 1.5% (9.75% at June 30, 1996) ote to a bank,
payable in monthly installments of $90,427 including
interest, due October 1997, secured by inventories,
accounts receivable, equipment, and general intangible
assets of the Company. The note was paid in full in
February 1997. $ - 1,320,148
9%note to a hardware maintenance company, payable
in quarterly installments of $41,667 plus interest, due
in October 1999, secured by hardware maintenance
agreements, and related accounts receivable, paid in
July 1996. - 500,000
Other notes and obligations 29,367 72,990
--------- ----------
Total long-term debt 29,367 1,893,138
Less current installments 29,367 1,462,244
--------- ----------
Long-term debt, less current installments $ - 430,894
========= ==========
(8) Common and Convertible Preferred Stock
Significant operating losses in fiscal 1996 and the first quarter of
fiscal 1997 resulted in violations of loan covenants with the Company's
primary lender and raised concerns among employees, stockholders, and
customers. In order to address these circumstances the Board of Directors
decided to seek equity financing and on January 24, 1997, the Company
entered into a Stock Purchase and Sale Agreement (the "Agreement") whereby
it agreed to sell approximately 8,648,649 shares of its common stock,
representing 49 percent of the common stock to be outstanding after the
completion of the sale, to its Chairman and Chief Executive Officer (the
"Investor), for $8.0 million in cash. In February of 1997, the Company
received $6.0 million of the purchase price for which 6,486,486 shares of
common stock were issued. Upon the completion of the transaction, the
Investor increased his ownership interest to over 50 percent and obtained
a controlling interest in the common stock of the Company. The proceeds
were used to retire long-term debt and certain current liabilities. The
Company anticipates that the remaining $2.0 million will be received in
fiscal 1998. The transaction was negotiated between the Investor and an
independent committee of the Board of Directors. Also pursuant to the
agreement, the Investor surrendered 1,208,400 five year options to
purchase shares of the Company's common stock at prices from $1.50 to
$5.00 per share in exchange for the grant of 1,000,000 five year options
to purchase the Company's common stock at $1.00 per share for the first
year, with the option price increasing by $0.25 per year.
In addition to the common stock, the articles of incorporation of the
Company authorize the issuance of 5,000,000 shares of Preferred Stock, of
which 1,500,000 shares are authorized as the 1994 Series A Convertible
Preferred Stock (the "Series A Preferred Stock").
F-22
CUSA TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
(8) Convertible Preferred Stock (continued)
The Series A Preferred Stock has a preferential liquidation rate of $2.00
per share plus unpaid dividends and may be redeemed at the Company's
option at $2.00 per share. The Series A Preferred Stock pays dividends at
the rate of $.12 per share per annum and dividends are cumulative. The
Series A Preferred Stock is convertible into common stock of the Company
(subject to certain adjustments) at the rate of three shares of the Series
A Preferred Stock for two shares of common stock. The Series A Preferred
Stock is convertible into common stock at the option of the preferred
stockholder or automatically upon the occurrence of either of the
following:
- The filing of a public offering of the securities of the Company for a
minimum of at least $2,000,000 in cash, or
- The listing of the Company's common stock on the NASDAQ market at a
price of not less than $3.00 per share for at least 20 days prior to
the conversion date.
The Series A Preferred Stock has voting rights based on the number of
shares of common stock that would be outstanding if the Preferred Stock
were converted.
The Company plans to redeem the preferred stock for $2.00 per share in
fiscal 1998 upon the receipt of the remaining $2,000,000 from the January
24, 1997 stock purchase and sale agreement.
(9) Employee Stock Option and Purchase Plans
(a) Stock-Based Compensation
On November 5, 1993 the Company adopted the "1993 Employee Stock
Option Plan" and reserved 200,000 shares of common stock for issuance
upon the exercise of options. In July 1994, the Board increased the
number of options under the 1993 Employee Stock Option Plan to
500,000 shares of common stock. Also in November 1993, the Company
adopted the "1993 Director Stock Option Plan" and reserved 62,500
shares of common stock for issuance to members of the Board of
Directors upon the exercise of options. In 1996, the Board increased
the number of options under the "1993 Director Stock Option Plan" to
82,500 shares of common stock for issuance upon the exercise of
options.
In February 1995 the Company adopted the "1995 Employee Stock Option
Plan" and reserved 300,000 shares of common stock for issuance upon
the exercise of options that the Company plans to grant from time to
time under this plan. The exercise price of options under the various
plans maintained by the Company is equivalent to the estimated fair
market value of the stock at the date of grant. The number of shares,
terms, and exercise period are determined by the Board of Directors
on an option-by-option basis. Options generally vest ratably over
five years and expire no longer than ten years from date of grant.
F-23
CUSA TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
(9) Employee Stock Option and Purchase Plans (continued)
Options as of June 30, 1997 for the "1993 Employee Stock Option Plan"
have been granted in the amount of 551,669 and the options canceled
are 310,912. As of June 30, 1997, options to acquire 163,034 shares
have vested and may be exercised at any time. Options as of June 30,
1997 for the "1995 Employee Stock Option Plan" have been granted in
the amount of 513,246 and the options canceled are 411,754. As of
June 30, 1997, options to acquire 60,920 shares have vested and may
be exercised at any time. Options as of June 30, 1997 for the "1993
Director Stock Option Plan" have been granted in the amount of 49,500
and the options canceled are 16,000. As of June 30, 1997, options to
acquire 33,500 shares have vested and may be exercised at any time.
In addition to the options authorized under the plans described
above, the Board of Directors has also authorized the issuance of
3,265,000 shares of common stock to be granted as nonstatutory
options to certain individuals, including certain officers,
directors, and stockholders, in conjunction with their employment,
equity and debt financing or personnel guarantees since 1993. As of
June 30, 1997, options of 250,000 have been exercised and 1,383,000
have been canceled for the nonstatutory stock options.
A summary of activity is as follows:
1997 1996 1995
------------------- ------------------- ------------------
Weighted Weighted
-average -average
exercise exercise Price
Number of price Number of price Number of per
shares shares shares share
-------- -------- -------- -------- -------- --------
Options outstanding
at beginning
of year 2,849,306 $ 2.63 2,575,240 $ 2.24 1,043,200 $ 1.30 - 2.00
Options granted 1,042,500 1.04 553,256 4.65 1,538,800 1.80 - 3.57
--------- --------- ---------
3,891,806 3,128,496 2,582,000
--------- --------- ---------
Options exercised - - (20,905) 2.25 (1,360) 1.30 - 1.80
Options canceled (1,888,812) 2.72 (258,285) 2.48 (5,400) 1.30 - 1.80
--------- --------- ---------
(1,888,812) (279,190) (6,760)
--------- --------- ---------
Options outstanding
at end of year 2,002,994 $ 1.72 2,849,306 $ 2.63 2,575,240 $ 1.30 - 3.57
========= ========= =========
Weighted-average
fair value of
options granted
during the year $ .28 $ 4.15
F-24
CUSA TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
(9) Employee Stock Option and Purchase Plans (continued)
The following table summarizes information about fixed stock options
outstanding at June 30, 1997:
Options outstanding Options exercisable
------------------------------------ ------------------------
Number Weighted Weighted Number Weighted
out- average -average exercisable -average
Range of standing at remaining exercise at June 30, exercise
exercise June 30, contractual price 1997 price
prices 1997 life
---------- ----------- ---------- ---------- ----------- -----------
$1.00 -1.00 1,000,000 4.57 $ 1.00 1,000,000 $ 1.00
1.30 -2.75 866,810 2.37 2.21 683,566 2.16
2.97 -5.37 136,184 3.24 3.84 81,958 3.94
=========== ===========
2,002,994 1,765,524
=========== ===========
The Company accounts for these plans under APB 25, under which no
compensation cost has been recognized. Had compensation cost for
these plans been determined consistent with SFAS 123, the Company's
net loss per share would have been reduced or, increased,
respectively, to the following pro forma amounts:
1997 1996
------------ ------------
Net loss:
As reported $(1,417,413) (17,450,492)
Pro Forma (1,944,062) (18,066,551)
Loss per share:
As reported $ (.13) (2.01)
Pro Forma (.18) (2.08)
Pro forma net loss reflects only options granted in 1997 and 1996.
Therefore, the effect that calculating compensation cost for
stock-based compensation under SFAS 123 has on the pro forma net loss
as shown above may not be representative of the effects on reported
net earnings (loss) for future years.
The fair value of each option grant is estimated on the date of the
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 1997 and 1996,
respectively: risk-free interest rate of 5.8 percent; expected
dividend yields of 0 percent; expected lives of 0.6 and 4.3 years;
and expected volatility of 146 percent.
(b) Employee Stock Purchase Plan
During the year ended June 30, 1995, the Company sponsored the 1994
Employee Stock Purchase Plan, under which the Company reserved
400,000 shares of common stock. Under the terms of the plan, any
employee who was customarily employed for more than twenty hours per
week and more than five months in a calendar year was eligible to
participate. Eligible employees could purchase up to 12,500 shares of
the Company's common stock at 85 percent of fair market value. The
Company paid one-third of the purchase price for the first 1,000
shares purchased. The stock purchase plan terminated on June 30,
1995. Under the plan, 125 employees purchased 254,635 shares of
common stock for an aggregate purchase price of $434,985 (including
$66,684 paid by the Company).
F-25
CUSA TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
(10) Retirement Plan
The Company sponsors a retirement plan under Section 401(k) of the
Internal Revenue Code. To participate an employee must meet certain
minimum age and length of service requirements. Company contributions to
the 401(k) plan are at the discretion of the Board of Directors. The
Company made no contribution to the 401(k) plan during 1997, 1996, or
1995.
(11) Income Taxes
Income (loss) from continuing operations before income taxes and the
related income tax expense consists of the following:
1997 1996 1995
---------- ---------- ----------
Income (loss) from continuing
operations before income $ 436,641 (9,554,400) 1,652,366
taxes
========== ========== ==========
Current:
Federal $ - - -
State - - -
Deferred:
Federal - - 670,002
State - - 57,430
---------- ---------- ----------
Total $ - - 727,432
========== ========== ==========
Differences between income taxes attributable to continuing operations at
the statutory federal income tax rate and the Company's effective tax rate
of 34 percent are as follows:
1997 1996 1995
---------- ----------- ----------
Tax at federal statutory rate $ 148,458 (3,248,496) 561,804
State income taxes, net of federal
tax benefit - - 37,585
Amortization and impairment of
certain intangible assets - 1,218,422 82,832
Change in valuation allowance (187,617) 1,994,606 -
Other, net 39,159 35,468 45,211
---------- ----------- ----------
$ - - 727,432
========== =========== ==========
Effective income tax rate 00.0% 00.0 % 43.7%
F-26
CUSA TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
(11) Income Taxes (continued)
Components of deferred income tax assets and liabilities at June 30, 1997
and 1996, are as follows:
1997 1996
----------- ----------
Deferred tax assets:
Net operating losses $ 1,819,558 3,874,398
Certain accrued liabilities 562,482 1,588,166
Allowance for uncollectible accounts 86,105 616,853
Differences in deductible goodwill 780,196 844,960
Alternative minimum tax credit 118,349 -
Other, net - 4,839
----------- ----------
3,366,690 6,929,216
Less valuation allowance (2,781,937) (5,754,884)
----------- ----------
584,753 1,174,332
----------- ----------
Deferred tax liabilities:
Capitalized software costs (339,710) (902,312)
Depreciation of property and equipment (133,441) (272,020)
Other, net (111,602) -
----------- ----------
(584,753) (1,174,332)
----------- ----------
Net deferred tax asset (liability) $ - -
=========== ==========
The Company has net operating loss carryforwards of approximately
$4,500,000 for income tax purposes which expire in years through 2011. The
utilization of approximately $260,000 of these net operating losses were
obtained from the acquisition of businesses and is subject to limitation
under the Internal Revenue Code Section 382, although management believes
that these net operating losses will become available for utilization
prior to their expiration.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods
in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected
future taxable income, and tax planning strategies in making this
assessment. In order to fully realize the deferred tax assets, CTI will
need to generate future taxable income of approximately $5,000,000 prior
to the expiration of the net operating loss carryforwards in 2011. Due to
the uncertainty of the ultimate realization of the deferred tax assets,
the Company has recorded a valuation allowance against these assets of
$2,781,937 at June 30, 1997, a decrease of $2,972,947 from the $5,754,884
valuation allowance at June 30, 1996. At June 30, 1996, the valuation
allowance was increased $5,658,270 over the prior year.
F-27
CUSA TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
(12) Leasing Arrangements
The Company leases substantially all of its office facilities under
noncancelable operating leases. One of these leases is with a company
controlled by an officer and director of the Company. The Company also
leases certain of its property and equipment under both capital and
noncancelable operating leases.
Future minimum lease payments under capital and noncancelable operating
leases as of June 30, 1997, are as follows:
Operating leases
----------------------------------------
Discontinued
Continuing operations operations
------------------------------ -------------------
Capital Third Related ThiRelated
leases parties party partparty
--------- -------- --------- -------- ---------
Year ending June 30:
1998 $ 191,117 102,190 258,020 125,488 19,025
1999 89,862 53,345 270,921 185,500 -
2000 39,061 53,580 284,467 - -
2001 - 53,580 298,690 - -
2002 - 8,930 313,625 - -
Thereafter - - 913,149 - -
--------- -------- --------- -------- ---------
Total minimum lease 320,040 $ 271,625 2,338,872 310,988 19,025
payments
======== ========= ======== =========
Less amount representing
interest 38,651
---------
Present value of net
minimum
capital lease
payments 281,389
Less current installments
of obligations under
capital leases 163,148
=========
$ 118,241
=========
Total rent expense under operating leases from continuing operations was
$611,135 in 1997, $1,174,000 in 1996, and $1,047,000 in 1995, including
rent expense of $332,225 in 1997, $324,000 in 1996, and $364,000 in 1995
under the lease with a company controlled by an officer and director of
the Company.
(13) Related Party Transactions
(a) Receivables from related parties consist of the following:
1997 1996
-------- ---------
8.5% note with a stockholder and employee
of the Company, interest payable annually,
principal due upon termination of
employment, secured by 10,000 shares of
CTI stock $ 52,440 49,315
Noninterest bearing advances to a stockholder
of the Company, repaid in August 1996 - 44,386
-------- ---------
$ 52,440 93,701
======== =========
F-28
CUSA TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
(13) Related Party Transactions (continued)
(b) Payables to related parties
At June 30, 1996, payables to related parties principally consist of
amounts remaining to be paid on the acquisitions of Versyss Data
Systems ($540,384), Benchmark of Virginia ($424,014), Source
Computing ($175,000), and Workgroup Designs ($28,000). All of these
amounts were paid during the fiscal year ending to June 30, 1997.
(c) Relocation agreement
In conjunction with the acquisition of VDS, the Company entered into
a relocation agreement with a then current officer, director and
stockholder under which the Company 1) agreed to advance $6,000 per
month to be repaid on September 30, 1997, 2) agreed to pay additional
compensation of $100,000 and, 3) agreed to issue him options to
purchase 200,000 shares of common stock at an exercise price of $2.50
per share. During the fiscal year ending June 30, 1997, the Company
entered into a termination agreement, which amended the relocation
agreement. Under the terms of the termination agreement, the Company
is to 1) pay the former officer $300,000 in monthly installments of
$12,500 per month beginning in January of 1997 as severance pay and
compensation for a noncompetition agreement, 2) forgive debts owed to
the Company of approximately $140,000, and 3) pay the former officer
$12,000 for moving expenses. In return the former officer, 1)
returned 25,000 shares of CTI stock, 2) returned the option to
purchase 200,000 shares of CTI for $2.50 per share, 3) returned an
option to purchase 100,000 shares of CTI stock for $1.80, and 4)
agreed to waive all rights related to the relocation agreement.
(14) Commitments and Contingent Liabilities
(a) Employment contracts
The Company has employment agreements with certain of its management
personnel. These agreements generally continue until terminated by
the employee or by the Company, and generally provide for salary
continuation for a limited period of time after termination. In the
case of three executives, their employment agreements provide
remaining employment terms of three to eight years, although the
Company may terminate the agreements for payments ranging from
$200,000 to $500,000. Additionally, in the event of termination of
one employment agreement, the Company would be required to 1) cause
all loans guaranteed by the employee to be repaid or to obtain
releases of the guarantees (note 5), and 2) to redeem 500,000 shares
of common stock held by the employee at the bid price of the stock.
As of June 30, 1996, the Company has agreed to the termination of two
of the executives. Related severance compensation of $200,000 for one
executive is accrued in loss on disposal of discontinued operations
(notes 4 and 13) and $500,000 has been recorded as a nonrecurring
charge for the other executive (note 16). During 1997, the Company
paid $575,000 of the severance compensation, leaving a balance of
$150,000 which is recorded in the net liabilities of discounted
operations at June 30, 1997.
F-29
CUSA TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
(14) Commitments and Contingent Liabilities (continued)
(b) Legal matters
The Company is involved in certain legal matters in the ordinary
course of business. In the opinion of management and legal counsel,
such matters will not have a material effect on the financial
position or results of operations of the Company.
(15) Supplemental Cash Flow Information
The Company has completed several business acquisitions during the years
ended June 30, 1996 and 1995. For all acquisitions described in note 3
accounted for using the purchase method, a summary of the purchase prices
paid, fair value of assets acquired, and liabilities assumed related to
all acquisitions is as follows:
1996 1995
---------- -----------
Fair value of assets acquired $ 2,988,610 15,051,322
Less cash acquired (133,293) (633,081)
Liabilities assumed and minority interest (1,470,494) (10,370,022)
Issuance of common and preferred stock (1,336,589) (3,968,853)
========== ===========
Cash paid for business acquisitions,
including acquisition costs, less cash $ 48,234 79,366
acquired
========== ===========
1997 1996 1995
---------- ----------- -----------
Cash paid during the year for:
Interest $ 276,900 419,410 348,663
Income taxes 7,424 70,450 -
The Company entered into additional noncash financing activities from
obligations under capital lease in the amount of $112,252 and $214,425
during the years ended June 30, 1997 and 1996, respectively.
F-30
CUSA TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
(16) Nonrecurring Charges
As a result of operating losses incurred during the fiscal year ending
June 30, 1996, the Company completed an evaluation of impairment of its
software development and acquisition costs, and the excess of purchase
price over fair value of net tangible and identifiable intangible assets
acquired in business combinations. In this evaluation, the carrying value
of these assets were compared to the specific future estimated discounted
cash flows net of expenses to which these assets relate. Based on this
analysis, the following nonrecurring charges, principally related to the
credit union segment, have been provided in the accompanying consolidated
statement of operations for the year ended June 30, 1996:
Impairment of excess of purchase price over fair
value of assets acquired $ 5,447,810
Impairment of software development and acquisition
costs 846,533
----------
$ 6,294,343
==========
Prior to June 30, 1996, the Board of Directors committed the Company to
terminate the employment contract of an employee/director (note 14(a)).
The Company has agreed to pay the required severance and salary of the
employee until the planned severance date. At June 30, 1996, the Company
has accrued $611,000 as a nonrecurring charge, representing the severance,
one half of his annual salary, plus related payroll taxes and benefits.
The accrued expenses were paid in the fiscal year ended June 30, 1997.
F-31
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders
CUSA Technologies, Inc.:
Under date of October 9, 1997, we reported on the consolidated balance sheets of
CUSA Technologies, Inc. (the Company) and subsidiaries as of June 30, 1997 and
1996, and the related consolidated statements of operations, stockholders'
deficit, and cash flows for the years then ended. In connection with our audits
of the aforementioned consolidated financial statements, we also audited the
related consolidated financial statement schedule. The financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statement schedule based on our
audits.
In our opinion, such 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.
KPMG Peat Marwick LLP
Salt Lake City, Utah
October 9, 1997
F-32
Schedule II
CUSA TECHNOLOGIES, INC.
Valuation and Qualifying Accounts(1)
Year ended June 30, 1997
Additions
Balance at charged to Charges Balance at
beginning cost and against end of
of year expenses allowance of year
---------- ---------- ---------- ----------
Allowance for doubtful accounts receivables $ 495,000 (274,000) - 221,000
========== ========== ========== ==========
Accumulated amortization of software
development and acquisition costs $ 411,142 408,132 - 819,274
========== ========== ========== ==========
Year ended June 30, 1996
Additions
Balance at charged to Charges Balance at
beginning cost and against end of
of year expenses allowance of year
---------- ---------- ---------- ----------
Allowance for doubtful accounts receivables $ 83,894 451,249 40,143 495,000
========== ========== ========== ==========
Accumulated amortization of software
development and acquisition costs $ 367,429 684,232 640,519 411,142
========== ========== ========== ==========
Accumulated amortization of excess purchase
price over fair value of net tangible and
identifiable intangible assets acquired (2) $ 364,146 360,209 724,355 -
========== ========== ========== ==========
(1) Disclosures included in this Schedule II relate to assets and operations
of continuing operations as described in the footnotes to the financial
statements.
(2) As discussed in note 16 to the financial statements, the Company wrote off
excess of purchase price over fair value of net tangible and identifiable
intangible assets acquired and certain software development and
acquisition costs.
(3) Disclosures are presented for the years ended June 30, 1997 and 1996. For
the year ended June 30, 1995, the Company reported pursuant to Regulation
SB and was not required to include Schedule II in its filings.
F-33