-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, It2MDbAK9Vat7t5VNJyeEaNzqGlf/KvGD3sawCECzEIP8XQp4n6yauxI4Xy6gYdR WUhqZqL6lPdg3J18gk+idA== 0000912057-96-020929.txt : 19960924 0000912057-96-020929.hdr.sgml : 19960924 ACCESSION NUMBER: 0000912057-96-020929 CONFORMED SUBMISSION TYPE: S-2/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19960923 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PREMIS CORP CENTRAL INDEX KEY: 0000724910 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 411424202 STATE OF INCORPORATION: MN FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: S-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-10917 FILM NUMBER: 96633281 BUSINESS ADDRESS: STREET 1: 15301 HIGHWAY 55 WEST CITY: PLYMOUTH STATE: MN ZIP: 55447 BUSINESS PHONE: 6125501999 MAIL ADDRESS: STREET 1: 15301 HIGHWAY 55 WEST CITY: PLYMOUTH STATE: MN ZIP: 55447 S-2/A 1 S-2/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 23, 1996 REGISTRATION NO. 333-10917 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 -------------------------- PRE-EFFECTIVE AMENDMENT NO. 2 TO FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ PREMIS CORPORATION (Exact name of registrant as specified in its charter) MINNESOTA 41-1424202 (State or other jurisdiction of (IRS Employer Identification No.) incorporation)
15301 HIGHWAY 55 WEST PLYMOUTH, MN 55447 TELEPHONE: (612) 550-1999 TELEFAX: (612) 550-2999 (Address, including zip code and telephone number, including area code of registrant's principal executive offices) F. T. BIERMEIER, PRESIDENT AND CHIEF EXECUTIVE OFFICER PREMIS CORPORATION 15301 HIGHWAY 55 WEST PLYMOUTH, MN 55447 TELEPHONE: (612) 550-1999 TELEFAX: (612) 550-2999 (Name, address, including zip code and telephone number, including area code, of agent for service) -------------------------- COPIES TO: JANNA R. SEVERANCE, ESQ. MELODIE R. ROSE, ESQ. CORY LARSEN BETTENGA, ESQ. JAMES A. KORN, ESQ. MOSS & BARNETT FREDRIKSON & BYRON, P.A. A PROFESSIONAL ASSOCIATION 1100 INTERNATIONAL CENTRE 4800 NORWEST CENTER 900 SECOND AVENUE SOUTH 90 SOUTH SEVENTH STREET MINNEAPOLIS, MINNESOTA 55402 MINNEAPOLIS, MINNESOTA 55402-4129 TELEPHONE: (612) 347-7000 TELEPHONE: (612) 347-0367
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are being offered on a delayed or continuous basis, pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / -------------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED SEPTEMBER 23, 1996 PROSPECTUS 1,750,000 SHARES [LOGO] COMMON STOCK The 1,750,000 shares of Common Stock offered hereby are offered by PREMIS Corporation ("PREMIS"). The Common Stock is listed on the Nasdaq SmallCap Market under the trading symbol "PMIS." On September , 1996, the last sale price of the Common Stock as quoted on the Nasdaq SmallCap Market was $ per share. The Company has applied for listing of its Common Stock on the Nasdaq National Market, subject to completion of this offering. See "Underwriting" and "Price Range of Common Stock." ------------------------ THE SHARES OF COMMON STOCK OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 5. --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITING PROCEEDS TO PRICE TO PUBLIC DISCOUNT (1) PREMIS (2) Per Share...................... $ $ $ Total (3)...................... $ $ $
(1) PREMIS has agreed to indemnify the underwriters (the "Underwriters") against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Act"), and to pay R. J. Steichen & Company, as representative of the Underwriters (the "Representative") a non-accountable expense allowance equal to 2 1/4% of the total Price to Public. In addition, PREMIS has agreed to sell to the Representative for nominal consideration, a five-year warrant (the "Representative's Warrant") to purchase up to 175,000 shares of Common Stock exercisable at a price per share equal to 120% of the per share Price to Public. See "Underwriting." (2) Before deducting expenses of the offering payable by PREMIS estimated at $400,000. See "Use of Proceeds." (3) PREMIS has granted to the Underwriters a 45-day option to purchase up to 262,500 additional shares of Common Stock for the purpose of covering over-allotments. If the Underwriters purchase all of the shares of Common Stock under the over-allotment option, the total Price to Public, total Underwriting Discount and Proceeds to PREMIS will be $ , $ and $ , respectively. See "Underwriting." The shares are offered by the Underwriters on a "firm commitment" basis, subject to prior sale when, as and if delivered and accepted by them, and subject to the right of the Underwriters to reject any order in whole or in part. It is expected that delivery of shares of Common Stock will be made in Minneapolis, Minnesota on or about , 1996. RJ STEICHEN & COMPANY THE DATE OF THIS PROSPECTUS IS , 1996 PREMIS develops, markets and supports a line of industry-specific information management software systems designed to assist businesses with management of their day-to-day operations and long-term strategic planning. PREMIS' proprietary software products are typically sold in combination with PC workstation equipment and client/server hardware. [FLOW CHART OF PREMIS IRIS-TM-/REF OPEN ENTERPRISE-TM- SYSTEM] IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS MAY ENGAGE IN PASSIVE MARKET-MAKING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON NASDAQ IN ACCORDANCE WITH RULE 10(B)-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING." 2 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY INFORMATION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS. THE ENTIRE PROSPECTUS, INCLUDING THE INFORMATION SET FORTH UNDER THE CAPTION "RISK FACTORS", SHOULD BE READ AND CAREFULLY CONSIDERED BY PROSPECTIVE INVESTORS. UNLESS OTHERWISE INDICATED, ALL FINANCIAL INFORMATION IS PRESENTED IN U.S. DOLLARS. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT OPTION AND REPRESENTATIVE'S WARRANT ARE NOT EXERCISED. THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE ACQUISITION OF REF RETAIL SYSTEMS CORPORATION ("REF") HAS OCCURRED. REFERENCES TO PREMIS OR REF REFER TO THE INDIVIDUAL OPERATIONS OF THE RESPECTIVE CORPORATIONS. REFERENCES TO THE COMPANY REFER TO THE CONSOLIDATED OPERATIONS OF PREMIS AND REF, AS PARENT AND WHOLLY-OWNED SUBSIDIARY. The Company develops, markets and supports a line of industry-specific information management software systems designed to assist businesses with management of their day-to-day operations and long-term strategic planning. The Company's proprietary software products are typically sold in combination with PC workstation equipment and client/server hardware. The Company's turn-key systems provide an enterprise-wide solution to the information needs of multi-store specialty retailing businesses, food brokers and food distributors and include a variety of integrated functions such as: - point of sale data collection and management review of transactions - "real time" sales analysis reporting by store, product, customer or salesperson - individual store stock positions and enterprise inventory tracking - purchasing, order tracking and warehouse control - accounts receivable management and commission receivable accounting - sales promotion fund management and advertising budget accounting - electronic data interface for on-line ordering from vendors and customers - intranet communications connections between stores and main corporate office The Company's strategy is to develop leading-edge, industry-specific software systems to collect business information, analyze the collected data and provide concise, meaningful reports to individuals within an organization. PREMIS initially developed software products targeted toward food brokers and specialty food distribution companies. In 1994, PREMIS entered the specialty retail market when it acquired the exclusive marketing rights for a software system which assists with the back office and headquarters management functions of multi-store specialty retail chains. Since that time, PREMIS has continued to enhance the applications and functionality of its software products and has evolved from a provider of single application specialty software into a turn-key vendor of enterprise-wide, information management systems. In July 1996, as part of its strategy to provide end-to-end management information solutions, PREMIS agreed to acquire REF, a Toronto-based provider of Windows NT-Registered Trademark--based retail management software and systems which complement PREMIS' existing retail software product. REF's retail software combines an easy-to-use, point of sale ("POS") transaction processing interface with sophisticated data analysis and information reporting capabilities. The Windows NT-Registered Trademark- graphical user interface significantly reduces the cost of training cashier personnel and shortens the time required to process a sale. The REF software is designed to accelerate information access and provide a wide variety of management reports on a "real time" basis to various levels of an organization. The sophisticated data acquisition and processing features of the REF product position these systems toward the high end of the specialty retail market, which broadens the range of product offerings for the Company's specialty retail systems. Management believes the REF acquisition will provide the Company with an improved sales capability and contribute a higher level of technology and functionality for its products. PREMIS is a Minnesota corporation formed in 1982. Its principal offices are located at 15301 Highway 55 West, Plymouth, MN 55447. Telephone: (612) 550-1999, Telefax: (612) 550-2999. Internet address: premis.com. 3 THE OFFERING Common Stock Offered......................... 1,750,000 shares Common Stock To Be Outstanding After This Offering (1)................................ 4,457,052 shares Use of Proceeds.............................. PREMIS intends to apply the net proceeds of this offering to the acquisition of REF, to expansion of sales and marketing and to general corporate purposes. Proposed Nasdaq National Market Symbol....... PMIS
- ------------------------ (1) Does not include (i) 486,250 shares of Common Stock reserved for issuance under the 1994 Employee Incentive Stock Option Plan (the "Option Plan"); (ii) 516,667 shares of Common Stock reserved for issuance upon exercise of non-qualified options; or (iii) 600,000 shares issuable upon exercise of options issued to Edward W. Anderson, President of REF, in connection with his employment by the Company effective with the REF acquisition. See "Management" and "Underwriting." SUMMARY FINANCIAL INFORMATION
YEARS ENDED MARCH 31, THREE MONTHS ENDED JUNE 30, --------------------------------------------- ---------------------------------- PRO FORMA PRO FORMA ACTUAL ACTUAL ACTUAL COMBINED ACTUAL ACTUAL COMBINED 1994 1995 1996 1996 (1) 1995 1996 1996 (1) --------- ---------- ---------- ---------- ---------- ---------- ---------- STATEMENT OF OPERATIONS DATA: Revenue........................ $ 892,217 $3,017,568 $5,902,161 $9,098,677 $1,189,754 $1,914,179 $2,962,180 Gross profit................... 544,012 1,602,690 2,865,839 4,628,337 548,094 946,440 1,512,044 Net income..................... 148,931 474,687 827,632 605,128 143,988 332,236 363,383 --------- ---------- ---------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ---------- ---------- ---------- ---------- Net income per share........... $ 0.06 $ 0.18 $ 0.28 $ 0.14 $ 0.05 $ 0.11 $ 0.08 --------- ---------- ---------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ---------- ---------- ---------- ---------- Weighted average common and common equivalent shares outstanding................... 2,590,694 2,590,694 2,925,581 4,374,404 2,912,661 2,979,683 4,428,506 --------- ---------- ---------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ---------- ---------- ---------- ----------
JUNE 30, 1996 ----------------------------- MARCH 31, 1996 PRO FORMA -------------- COMBINED ACTUAL ACTUAL AS ADJUSTED(1)(2) -------------- ---------- ----------------- BALANCE SHEET DATA: Working capital................................................. $ 1,291,726 $1,624,063 $ 3,896,327 Total assets.................................................... 2,833,040 4,091,438 12,744,832 Long-term debt, less current portion............................ 112,097 835,982 1,116,789 Total liabilities............................................... 1,320,585 2,039,186 2,841,380 Retained earnings............................................... 755,180 1,087,416 1,087,416 Shareholders' equity............................................ 1,512,455 2,052,252 9,903,452
- ------------------------------ (1) The unaudited pro forma statement of operations is presented as if the acquisition of REF occurred on April 1, 1995. A $494,566 annual earnings adjustment of goodwill amortization, a non-cash charge to earnings, is included in these adjustments. Weighted average common and common equivalent shares outstanding are adjusted to reflect the shares issued in this offering in connection with the acquisition of REF. The unaudited pro forma balance sheet is presented as if the acquisition of REF occurred on June 30, 1996. See the pro forma condensed combined financial information appearing elsewhere in this Prospectus. (2) Adjusted to give effect to the sale of 1,750,000 shares offered hereby and the application of the estimated net proceeds thereof. See the pro forma condensed combined financial information appearing elsewhere in this Prospectus. 4 RISK FACTORS CERTAIN STATEMENTS CONTAINED IN THIS PROSPECTUS ARE FORWARD-LOOKING STATEMENTS (AS SUCH TERM IS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995). BECAUSE SUCH STATEMENTS INCLUDE RISKS AND UNCERTAINTIES, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. IN ADDITION TO CONSIDERING THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS IN EVALUATING AN INVESTMENT IN THE COMPANY. DEPENDENCE ON KEY CUSTOMERS Both PREMIS and REF are dependent upon a few major customers whose volume of purchases each year has been significantly greater than that of other customers. Sales to the U.S. Postal Service represented 64% and 67% of total revenues for PREMIS during the fiscal year ended March 31, 1996, and the three months ended June 30, 1996, respectively. Trade accounts receivable due from the U.S. Postal Service represented 61% and 71% of total PREMIS trade receivables at March 31, 1996, and June 30, 1996, respectively. REF is also dependent upon a few major customers, but these major customers tend to change from year to year. Although the Company has experienced significant growth in its customer base as its sales volume has increased, it is currently still dependent on continued purchases by its present customers. Loss of the U.S. Postal Service or any other significant current customers or an inability to further expand its customer base would adversely affect the Company. See "Business -- Customers." HIGHLY COMPETITIVE MARKETS The markets for the Company's products are highly competitive. Several companies offer products with certain features competitive with the Company's products. These competitors and potential competitors include established companies that have significantly greater financial, technical and marketing resources than the Company. There can be no assurance that such competitors will not develop products that are superior to the Company's products or that achieve greater market acceptance. There is no assurance that the Company will be able to compete successfully against current and future sources of competition or that the competitive pressures faced by the Company will not adversely affect its financial performance. The Company is dependent to some extent on the market for particular hardware platforms because customers may base their purchase decisions on a particular platform. Most of these hardware vendors (such as International Business Machines Corp., ICL Fujitsu, a division of Fujitsu America, Inc., and NCR Corp., a subsidiary of AT&T Co.) offer their own proprietary software systems which directly compete with some of the Company's software products. Competition between hardware vendors is intense, and many of these vendors have significantly greater financial and other resources than the Company. As of June 30, 1996, management estimates that in excess of 80% of the Company's software was installed on NCR hardware, however, the Company believes that its software products are adaptable to any of the principal PC- or UNIX-Registered Trademark--based hardware platforms without material commitments of time and funding. Any significant increase in direct software competition by these vendors, given their significant resources and market share, or any inability of the Company to adapt its software for use on a particular hardware platform, could adversely impact the Company's ability to compete effectively for customers in certain markets and may have a material adverse effect on the Company. See "Business -- Competition." INTEGRATION OF ACQUISITION A substantial portion of the proceeds of this offering will be used to acquire REF. The Company's future growth and operating results will depend on management's ability to integrate REF's products, as well as its software development and marketing personnel into the Company's current operations. PREMIS and REF have been operating as separate independent entities, and there can be no assurance that management will be able to effectively integrate and manage the combined entity and implement the Company's operating or growth strategies. Further, there can be no assurance that the Company will be able to retain the personnel currently employed by PREMIS and REF following the 5 acquisition or that current sales personnel will be able to effectively sell the other firm's products. Failure to properly integrate these businesses on a timely basis or to implement the Company's operating and growth strategy could have a material adverse impact on the Company's profitability and future operating results. See "Business -- Acquisition of REF." DEPENDENCE ON SALES AND MARKETING EFFORTS The Company's business strategy includes significant expansion of its sales and marketing efforts, particularly with respect to the REF OpenEnterprise-TM- system. There can be no assurance that the Company will be able to attract, train and retain the additional sales and marketing personnel necessary to expand its business. Further, there can be no assurance that expansion of the Company's sales and marketing activities will result in increased sales volume. See "Business -- Marketing and Sales." PROTECTION OF PROPRIETARY TECHNOLOGY The Company has no registered copyrights, trademarks or patents. The Company primarily relies on a combination of trade secrets, confidentiality procedures and contractual provisions to protect its proprietary technology; however, these measures afford only limited protection. The Company's success will depend in part upon its ability to protect its proprietary technology and no assurance can be given that others will not independently develop or acquire substantially equivalent technologies, gain access to the Company's proprietary technology or disclose such technology to third parties. The Company's success may also depend in part on its ability to operate without infringing the proprietary rights of others. The Company has not undertaken any independent investigation to determine whether it is infringing any intellectual property rights of third parties. There can be no assurance that others have not developed or will not develop similar products, duplicate any of the Company's products or design around the Company's products. Failure to adequately protect its proprietary technology may have an adverse effect on the Company's financial condition and results of operations. See "Business -- Proprietary Rights." TECHNOLOGICAL OBSOLESCENCE The market for the Company's products is characterized by rapid technological advances, evolving industry standards, changes in end-user requirements and frequent new product introductions and enhancements. The introduction of products embodying new technologies and the emergence of new industry standards could render the Company's existing products and those currently under development obsolete and unmarketable. The Company's future success will depend upon its ability to enhance its current products as well as develop and introduce new products that keep pace with technological developments and achieve market acceptance. Any failure by the Company to anticipate or respond adequately to technological developments or end-user requirements, or any significant delays in product development or introduction, could result in a loss of competitiveness or revenues. Furthermore, the Company may not have sufficient financial resources to maintain research and development capabilities and, consequently, to maintain its technology position. Even though the Company's products have been designed to incorporate the latest technology, some of its competitors have greater financial resources and larger research and development staffs than the Company and accordingly may have greater capabilities to adapt their products to technological changes. See "Business -- Products and Services" and "Business -- Competition." DEPENDENCE ON KEY PERSONNEL The Company believes its future success depends to a significant extent on the efforts of key management, technical and sales personnel, including F. T. Biermeier, President and Chief Executive Officer, and Edward W. Anderson, who will continue as the President of REF, a wholly-owned subsidiary of PREMIS. PREMIS has no employment agreement with Mr. Biermeier, but maintains and is the beneficiary of a keyperson life insurance policy on Mr. Biermeier in the amount of $300,000. The Company intends to enter into a five-year employment agreement with Mr. Anderson and to obtain keyperson life insurance on Mr. Anderson in the amount of CDN$2 million. The loss of Mr. Biermeier or Mr. Anderson could have a material adverse effect on the Company's financial condition and results 6 of operations. Moreover, there can be no assurance that the Company will be able to attract and retain any additional qualified personnel necessary for its business. The Company intends to hire a full-time chief financial officer in the near future to assume financial duties performed by Mr. Biermeier. Mr. Biermeier's time is currently spread over a number of executive functions, and the Company's inability to retain a qualified chief financial officer in the near term may compromise the effective integration of PREMIS and REF and may otherwise limit the effectiveness of management. Although REF has generally required its employees to enter into agreements restricting future competing employment, PREMIS' employees are not restricted as to future competitive employment. All employees of the Company are restricted as to use of information which is confidential and proprietary to the Company. See "Management." CONTROL BY DIRECTORS AND EXECUTIVE OFFICERS Following completion of this offering, directors and executive officers of the Company (including Edward W. Anderson, President of REF) will beneficially own approximately 45% of the Company's outstanding Common Stock. Accordingly, these shareholders, individually and as a group, may be able to influence the outcome of shareholder votes, including votes concerning the election of directors, the adoption or amendment of provisions in the Company's Articles of Incorporation and Bylaws and the approval of certain mergers or similar transactions. Such control by existing shareholders could have the effect of delaying, deferring or preventing a change in control of the Company. See "Principal Shareholders." FLUCTUATIONS IN QUARTERLY OPERATING RESULTS The Company may experience variability in its operating results on a quarterly basis as a result of many factors, including the product mix between hardware and software, size and timing of orders, shifts in demand for software and hardware products, technological changes and industry announcements of new products and upgrades. If revenues do not meet expectations in any given quarter and the Company is unable to adjust spending in a timely manner, operating results may be materially adversely affected. The Company's systems include both hardware and software components. Profit margins on sales of software are significantly higher than on hardware. Operating results can vary significantly from quarter to quarter depending on the percentage of software as compared to hardware included in the system sold to the Company's customers. Additionally, the size of orders by certain customers varies from quarter to quarter. These fluctuations could result in significant quarterly variations in financial results. As a result of the potential fluctuations in quarterly operating results, the Company believes that period-to-period comparisons of its financial results should not be relied upon as an indication of future performance. RELIANCE ON KEY SUPPLIERS The Company acquires some of the components for its systems from other companies. Management currently estimates that in excess of 80% of the Company's software is installed on NCR hardware. While the loss of NCR or any other supplier could cause a short-term disruption in the availability of components, the Company believes, although no assurance can be given, that alternative sources could be obtained for such components without materially affecting system costs or timely delivery. The Company currently has no written agreements for supply of required components. See "Business -- Marketing and Sales." ISSUANCE OF ADDITIONAL SHARES The Company's authorized capital stock includes 10,000,000 shares of Common Stock, of which 4,457,052 shares of Common Stock will be issued and outstanding upon completion of this offering. The Company's Board of Directors has authority, without action or vote of the shareholders, to issue all or part of the authorized but unissued shares. Any such issuance will dilute the percentage ownership interest of existing shareholders, including investors in this offering, and may dilute the book value of the Common Stock. See "Description of Securities." 7 EFFECT ON PRICE OF COMMON STOCK FROM FUTURE SALES OF COMMON STOCK Upon sale of the shares offered hereby, the Company will have outstanding 4,457,052 shares of Common Stock. All of the shares of Common Stock currently outstanding, all of the 486,250 shares that may be issued under the Option Plan and 516,667 shares reserved for issuance upon exercise of non-qualified options, are "freely tradable" under the Act (provided that, pursuant to agreement with the Underwriters, 2,363,251 shares beneficially held by current officers and directors and 75,000 shares held by a former affiliate of the Company are subject to restrictions on sale for a period of 180 days after this offering in the case of officers and directors, and 90 days after this offering in the case of the former affiliate). In addition, the 600,000 shares of Common Stock issuable upon exercise of the option to be granted to Edward W. Anderson may be registered for resale under the Act, although such shares are not currently registered. Such shares would then also be "freely tradable." The sale, or availability for sale, of substantial amounts of Common Stock in the public market subsequent to this offering could have a material adverse effect on the market price of the Common Stock and could impair the Company's ability to raise additional capital through the sale of its equity securities or debt financing. See "Shares Eligible for Future Sale" and "Underwriting." POSSIBLE NEED FOR ADDITIONAL CAPITAL OR FINANCING The Company believes that the net proceeds of this offering, together with cash flow from operations, will be sufficient to meet its capital requirements for at least the next 12 months. However, the Company's cash needs may vary significantly from its forecasts if it is unable to generate anticipated cash flow or if growth occurs faster than anticipated. No assurance can be given that the Company's projections regarding its cash needs will prove accurate, that the Company will not require additional financing prior to or subsequent to such time, that the Company will be able to secure required additional financing when needed or at all, or that such financing, if obtained, will be on terms favorable or acceptable to the Company. If the Company is unable to obtain additional financing when needed, it could be required to curtail its planned expansion. The Company's inability to obtain additional financing could have a material adverse effect on operating results, and any future financings may result in dilution to holders of the Common Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." CANADIAN SUBSIDIARY The Company will be subject to certain risks inherent in foreign operations, including management of a large subsidiary in Canada, general economic conditions in Canada, political risks, the overlap of different tax structures and changes in Canadian and U.S. laws and regulations governing foreign operations. Moreover, fluctuations in the exchange rates between the United States dollar and the Canadian dollar could have a negative impact on the Company's consolidated operating results. In addition, the Company's operations, properties and employees in Canada will be subject to Canadian law, which could result in additional administrative and compliance costs for the Company. There can be no assurance that these factors will not adversely affect the Company's operating results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." USE OF PROCEEDS The net proceeds to the Company from the sale of the 1,750,000 shares offered hereby are estimated to be approximately $ million after deducting underwriting discounts and commissions and estimated offering expenses ($ million, if the Underwriters' over-allotment option is exercised in full). PREMIS intends to use approximately $6.5 million of the net proceeds for the acquisition of REF. The remaining net proceeds, including net proceeds from any exercise of the Underwriters' over-allotment option, will be used for expansion of sales and marketing efforts, research and development and general corporate purposes including working capital. Pending such uses, the net proceeds from the offering will be invested in short-term, interest-bearing investment grade securities or commercial paper, or in money market funds composed of the foregoing. 8 PRICE RANGE OF COMMON STOCK Since September 11, 1996, PREMIS' Common Stock has been listed on the Nasdaq SmallCap Market under the symbol "PMIS." The range of the high and low sales prices for the Common Stock, for the period from September 11, 1996 through September 20, 1996 has been $5.00 to $5.75. The last reported sale price of the Common Stock on the Nasdaq SmallCap Market on September 24, 1996 was $ per share. The Company has applied for listing of its Common Stock on the Nasdaq National Market, subject to completion of this offering. The following table sets forth the quarterly high and low closing bid prices in the over-the-counter market for PREMIS' Common Stock, as reported by the National Association of Securities Dealers' OTC Bulletin Board for the fiscal years ended March 31, 1995 and 1996 and for the subsequent interim quarters, through September 10, 1996, and as reported by the Nasdaq SmallCap Market from September 11 through September 20, 1996. Such quotations represent interdealer prices, without retail markup, markdown or commission, and do not necessarily represent actual transactions.
CLOSING BID PRICE -------------------- LOW HIGH --------- --------- FISCAL YEAR ENDED MARCH 31, 1995 First Quarter.............................................................................. * * Second Quarter............................................................................. * * Third Quarter.............................................................................. * * Fourth Quarter............................................................................. $ .25 $ .25 FISCAL YEAR ENDED MARCH 31, 1996 First Quarter.............................................................................. .25 .875 Second Quarter............................................................................. .75 1.875 Third Quarter.............................................................................. 1.125 2.25 Fourth Quarter............................................................................. 1.50 2.50 FISCAL YEAR ENDED MARCH 31, 1997 First Quarter.............................................................................. 2.125 4.50 Second Quarter (through September 10, 1996)................................................ 3.00 5.125 Second Quarter (September 11-20, 1996)..................................................... 5.00 5.50
- ------------------------ * No quoted prices are available for this period As of August 30, 1996, PREMIS' Common Stock was held of record by 98 holders. Registered ownership includes nominees who may hold securities on behalf of multiple beneficial owners. DIVIDEND POLICY PREMIS has never declared or paid dividends on its Common Stock, and the Board of Directors presently intends to retain all earnings, if any, for use in the Company's business for the foreseeable future. Any future determination as to declaration and payment of dividends will be made at the discretion of the Board of Directors, subject to covenants in any loan documents restricting the payment of dividends. 9 CAPITALIZATION The following table sets forth, as of June 30, 1996, the (i) capitalization of PREMIS and (ii) pro forma capitalization of the Company to reflect the completion of the REF acquisition, as adjusted to give effect to the sale of 1,750,000 shares in this offering and application of the estimated net proceeds thereof. See the pro forma condensed combined financial information appearing elsewhere in this Prospectus.
JUNE 30, 1996 ----------------------------- PRO FORMA COMBINED ACTUAL AS ADJUSTED ------------- -------------- Long-term debt, less current portion............................................... $ 835,982 $ 1,116,789 Shareholders' equity:.............................................................. Common Stock, $.01 par value, 10,000,000 shares authorized, 2,701,527 shares issued, and 4,451,527 shares issued, as adjusted (1)............................ 27,015 44,515 Additional paid-in capital....................................................... 937,821 8,771,521 Retained earnings................................................................ 1,087,416 1,087,416 ------------- -------------- Total shareholders' equity....................................................... 2,052,252 9,903,452 ------------- -------------- Total capitalization............................................................... $ 2,888,234 $ 11,020,241 ------------- -------------- ------------- --------------
- ------------------------ (1) Does not include (i) 486,250 shares of Common Stock reserved for issuance under the Option Plan; (ii) 516,667 shares of Common Stock reserved for issuance pursuant to exercise of non-qualified stock options; or (iii) 600,000 shares issuable upon exercise of options issued to Edward W. Anderson, President of REF, in connection with his employment by the Company effective with the REF acquisition. See "Management" and "Underwriting." 10 SELECTED FINANCIAL DATA PREMIS CORPORATION The selected financial data presented below as of and for the years ended March 31, 1994, 1995 and 1996, is derived from the financial statements of PREMIS, which financial statements have been audited by Price Waterhouse LLP. The selected financial data presented below as of and for the three months ended June 30, 1995 and 1996, is derived from the unaudited financial statements of PREMIS and, in the opinion of PREMIS' management, present fairly the results of operations and the financial condition of PREMIS as of and for the three months ended June 30, 1995 and 1996. The selected financial data should be read in conjunction with the financial statements and notes thereto included elsewhere in this Prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
THREE MONTHS ENDED JUNE 30, ---------------------------------- YEARS ENDED MARCH 31, (UNAUDITED) ------------------------------------------------ ---------------------- PRO FORMA PRO FORMA ACTUAL ACTUAL ACTUAL COMBINED ACTUAL ACTUAL COMBINED 1994 1995 1996 1996 (1) 1995 1996 1996 (1) ---------- ---------- ---------- ------------ ---------- ---------- ---------- STATEMENT OF OPERATIONS DATA: System sales................ $ 666,364 $2,425,882 $4,923,132 $7,648,388 $ 982,449 $1,570,791 $2,538,264 Maintenance fees and other services................... 225,853 591,686 979,029 1,450,289 207,305 343,388 423,916 Total revenue........... 892,217 3,017,568 5,902,161 9,098,677 1,189,754 1,914,179 2,962,180 Cost of sales............... 348,205 1,414,878 3,036,322 4,470,340 641,660 967,739 1,450,136 Gross profit................ 544,012 1,602,690 2,865,839 4,628,337 548,094 946,440 1,512,044 Operating expenses.......... 442,081 1,100,485 1,507,065 3,596,474 301,651 397,224 932,040 Net income.................. 148,931 474,687 827,632 605,128 143,988 332,236 363,383 ---------- ---------- ---------- ------------ ---------- ---------- ---------- ---------- ---------- ---------- ------------ ---------- ---------- ---------- Net income per share........ $ 0.06 $ 0.18 $ 0.28 $ 0.14 $ 0.05 $ 0.11 $ 0.08 ---------- ---------- ---------- ------------ ---------- ---------- ---------- ---------- ---------- ---------- ------------ ---------- ---------- ---------- Weighted average common and common equivalent shares outstanding................ 2,590,694 2,590,694 2,925,581 4,374,404 2,912,661 2,979,683 4,428,506 ---------- ---------- ---------- ------------ ---------- ---------- ---------- ---------- ---------- ---------- ------------ ---------- ---------- ----------
JUNE 30, ---------------------------------------- MARCH 31, (UNAUDITED) --------------------------------- ---------------------- PRO FORMA COMBINED ACTUAL ACTUAL ACTUAL ACTUAL ACTUAL AS ADJUSTED 1994 1995 1996 1995 1996 1996 (1)(2) --------- ---------- ---------- ---------- ---------- ---------------- BALANCE SHEET DATA: Working capital...................... $ 99,104 $ 533,427 $1,291,726 $ 673,658 $1,624,063 $ 3,896,327 Total assets......................... 351,431 1,559,621 2,833,040 1,690,691 4,091,438 12,744,832 Long-term debt, less current portion............................. 3,272 226,084 112,097 226,084 835,982 1,116,789 Total liabilities.................... 144,108 877,611 1,320,585 864,693 2,039,186 2,841,380 Retained earnings (deficit).......... (547,139) (72,452) 755,180 71,536 1,087,416 1,087,416 Shareholders' equity................. 207,323 682,010 1,512,455 825,998 2,052,252 9,903,452
- ------------------------------ (1) The unaudited pro forma statement of operations is presented as if the acquisition of REF occurred on April 1, 1995. A $494,566 annual earnings adjustment of goodwill amortization, a non-cash charge to earnings, is included in these adjustments. Weighted average common and common equivalent shares outstanding are adjusted to reflect the shares issued in this offering in connection with the acquisition of REF. The unaudited pro forma balance sheet is presented as if the acquisition of REF occurred on June 30, 1996. See the pro forma condensed combined financial information appearing elsewhere in this Prospectus. (2) Adjusted to give effect to the sale of 1,750,000 shares offered hereby and the application of the estimated net proceeds thereof. See the pro forma condensed combined financial information appearing elsewhere in this Prospectus. 11 REF RETAIL SYSTEMS CORPORATION The selected financial data presented below as of and for the years ended March 31, 1995 and 1996, is derived from the financial statements of REF, which have been audited by Price Waterhouse LLP. The selected financial data presented below as of and for the year ended March 31, 1994 and as of and for the three months ended June 30, 1995 and 1996, is derived from the unaudited financial statements of REF and, in the opinion of REF's management, present fairly the results of operations and the financial condition of REF as of and for the year ended March 31, 1994 and as of and for the three months ended June 30, 1995 and 1996. The selected financial data should be read in conjunction with the financial statements and notes thereto included elsewhere in this Prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
YEARS ENDED MARCH 31, THREE MONTHS ENDED ----------------------------------- JUNE 30, (UNAUDITED) 1994 ---------------------- (UNAUDITED) 1995 1996 1995 1996 ----------- ---------- ---------- ---------- ---------- STATEMENT OF OPERATIONS DATA: System sales.................................... $2,281,367 $2,676,945 $2,725,256 $ 384,604 $ 967,473 Maintenance fees and other services............. 247,745 410,155 471,260 107,648 80,528 Total revenue............................... 2,529,112 3,087,100 3,196,516 492,252 1,048,001 Cost of sales................................... 1,045,742 1,140,348 1,434,018 313,613 482,397 Gross profit.................................... 1,483,370 1,946,752 1,762,498 178,639 565,604 Operating expenses.............................. 757,233 1,199,555 1,726,537 312,514 440,093 Net income...................................... 564,543 543,201 186,461 (87,147) 135,992 ----------- ---------- ---------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- MARCH 31, ----------------------------------- JUNE 30, (UNAUDITED) 1994 ---------------------- (UNAUDITED) 1995 1996 1995 1996 ----------- ---------- ---------- ---------- ---------- BALANCE SHEET DATA: Working capital................................. $ 901,338 $1,177,995 $ 911,219 $ 937,304 $ 921,064 Total assets.................................... 1,289,363 1,830,930 2,239,765 1,516,886 2,356,534 Long-term debt, less current portion............ 22,991 211,606 280,807 Total liabilities............................... 294,242 469,396 816,604 372,598 802,194 Retained earnings............................... 645,936 1,168,884 1,335,524 1,081,737 1,471,516 Shareholders' equity............................ 995,121 1,361,534 1,423,161 1,144,289 1,554,340
12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HISTORICAL RESULTS OF PREMIS OPERATIONS
YEARS ENDED MARCH 31, THREE MONTHS ENDED JUNE 30, ------------------------ ------------------------ 1995 1996 1995 1996 ----------- ----------- ----------- ----------- Total revenue......................................................... 100.0% 100.0% 100.0% 100.0% Cost of sales......................................................... 46.9% 51.4% 53.9% 50.6% Gross profit.......................................................... 53.1% 48.6% 46.1% 49.4% Operating expenses.................................................... 36.5% 25.5% 25.4% 20.8% Net income............................................................ 15.7% 14.0% 12.1% 17.4%
FISCAL YEARS ENDED MARCH 31, 1995 AND 1996 REVENUE. Revenue increased 96% to $5,902,161 for the fiscal year ended March 31, 1996 compared with $3,017,568 for the fiscal year ended March 31, 1995, due primarily to increases in food distribution systems sold, sales for IRIS-TM- products to existing customers and new installations for the U.S. Postal Service "Store of the Future." Additionally, in fiscal 1995 and 1996, software maintenance revenue rose proportionally to new installations of IRIS-TM- customers. GROSS PROFIT. Gross profit increased 79% to $2,865,839 for the fiscal year ended March 31, 1996 compared with $1,602,690 for the fiscal year ended March 31, 1995. The gross profit margin was 53% in 1995 and 49% in 1996, primarily reflecting changes in the sales mix of hardware and software sales. In 1994, PREMIS became a remarketer for certain hardware products of International Business Machines Corp. ("IBM") and NCR Corp. ("NCR"). The shift of PREMIS' sales mix from primarily software systems toward increased hardware systems has reduced gross margins over the last three years due to the lower margin contribution of hardware compared to software sales. OPERATING EXPENSES. Operating expenses increased 37% to $1,507,065 for the fiscal year ended March 31, 1996 compared with $1,100,485 for the fiscal year ended March 31, 1995. However, as a percentage of revenue, operating expenses have improved from 37% of revenues in 1995 to 26% of revenue in 1996. This improvement is principally due to the lower selling expense associated with hardware sales as a percentage of revenue compared to software sales. Research and development expenditures, which are included in operating expenses, decreased 17% to $303,000 for the fiscal year ended March 31, 1996 compared to $368,161 for the fiscal year ended March 31, 1995. As a percentage of revenue, research and development expenses were 5% in 1996 and 12% in 1995. The decrease is due to a reduction of programming time spent on product enhancements and changes due to an increased use of object-oriented development techniques. NET INCOME. Net income increased 74% to $827,632 for the fiscal year ended March 31, 1996 compared to $474,687 for the fiscal year ended March 31, 1995. Income was fully taxed in fiscal 1996 while the realization of previously unrecognized net operating loss carryforwards offset income tax liability in both of the prior years. THREE MONTHS ENDED JUNE 30, 1995 AND 1996 REVENUE. Revenue increased 61% to $1,914,179 for the three months ended June 30, 1996 compared with $1,189,754 for the three months ended June 30, 1995. This increase resulted principally from increased penetration of IRIS-TM- products to existing customers combined with growth in new installations for the U.S. Postal Service "Store of the Future." Customer purchases of annual software maintenance contracts continued to increase consistent with sales. GROSS PROFIT. Gross profit increased 73% to $946,440 for the three months ended June 30, 1996 compared with $548,094 for the three months ended June 30, 1995. The gross profit margin increased to 49% in 1996 from 46% in 1995, which is attributable to a higher percentage of software sales compared to the similar period last year. OPERATING EXPENSES. For the three months ended June 30, 1996, operating expenses increased 32% to $397,224, compared with $301,651 for the three months ended June 30, 1995. As a percentage 13 of revenue, operating expenses were 25% and 21% for the three month periods ended June 30, 1995 and 1996, respectively. Research and development expenditures, which are included in operating expenses, increased 15% to $94,650 for the three months ending June 30, 1996 compared to $82,466 for the three months ended June 30, 1995. As a percentage of revenue, research and development expenditures were 5% for the three months ended June 30, 1996, compared to 7% for the same period in 1995. This decrease is principally due to increased productivity from object-oriented development techniques, which reduce the amount of time required to program software changes and enhancements. NET INCOME. Net income increased 131% to $332,236 for the three months ended June 30, 1996 compared to $143,988 for the three months ended June 30, 1995. Income was fully taxed in both fiscal 1995 and 1996. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 1996, PREMIS had current assets of $2,500,214 versus $1,184,954 a year earlier, and $2,827,267 at June 30, 1996. Current liabilities at March 31, 1996 were $1,208,488, versus $651,527 a year earlier, and $1,203,204 at June 30, 1996, with a majority of the difference represented by accrued income taxes and the current portion of capitalized lease obligations. Shareholders' equity at March 31, 1996 was $1,512,455 versus $682,010 at March 31, 1995 and $2,052,252 at June 30, 1996. Long-term obligations decreased from $226,084 in 1995 to $112,097 in 1996 and increased to $835,982 at June 30, 1996, representing an increase in capitalized lease obligations in the three month period. Except for a capitalized office lease agreement, PREMIS has no material commitment for capital expenditures. Working capital was $1,291,726 on March 31, 1996 versus $533,427 at March 31, 1995. Working capital increased to $1,624,063 at June 30, 1996. Management believes working capital is sufficient to fund current operations and planned growth through internal sources for the next twelve months. Inflation has had no significant impact on the results of operations of PREMIS. HISTORICAL RESULTS OF REF OPERATIONS
YEARS ENDED THREE MONTHS ENDED MARCH 31, JUNE 30, ------------------------ ------------------------ 1995 1996 1995 1996 ----------- ----------- ----------- ----------- Total revenue......................................................... 100.0% 100.0% 100.0% 100.0% Cost of sales......................................................... 36.9% 44.9% 63.7% 46.0% Gross profit.......................................................... 63.1% 55.1% 36.3% 54.0% Operating expenses.................................................... 38.9% 54.0% 63.5% 42.0% Net income............................................................ 17.6% 5.8% (17.7)% 13.0%
FISCAL YEARS ENDED MARCH 31, 1995 AND 1996 REVENUE. Revenue increased 4% to $3,196,516 for the year ended March 31, 1996 compared with $3,087,100 for the fiscal year ended March 31, 1995. The increased sales were the result of contracts for custom POS software to larger retail chains and improved revenue from annual software maintenance fees. The slowing rate of sales increases reflects a year in which REF made expenditures in anticipation of revenue in future years. These expenditures in custom systems, governmental entity systems and REF OpenEnterprise-TM-, although they did not produce significant revenue in fiscal 1996, required a commitment of substantial resources in engineering, sales, marketing and administration. The Company expects that these investments will result in significant revenue in future years. For example, sales in 1995 to the U.S. Navy Commissary ("NEXCOM") are attributable in large part to development expenditures in earlier years. GROSS PROFIT. Gross profit decreased 9% to $1,762,498 for the fiscal year ended March 31, 1996 compared to $1,946,752 for the fiscal year ended March 31, 1995. Percentage gross profit was 63% in 1995 and 55% in 1996. A large sale of POS systems to NEXCOM increased the gross margin in 1995, while projects which had higher direct costs combined to decrease the gross margin in 1996. OPERATING EXPENSES. Operating expenses increased 44% to $1,726,537 for the year ended March 13, 1996 compared with $1,199,555 for the fiscal year ended March 31, 1995. Operating expenses, as a percentage of revenue, increased to 54% for fiscal year 1996 from 39% for fiscal year 14 1995 due to an increase in large custom design projects and expenses related to the planned introduction of REF OpenEnterprise-TM-. Management believes that a large proportion of the development costs expensed in 1996 should produce revenue in future years, similar to the substantial sales to NEXCOM in 1995, which resulted from development expenses incurred in earlier years. Historically, products have been developed on a project basis for specific clients, with development expenses charged to the particular projects. In fiscal 1996, research and development expenditures were directed toward the new REF OpenEnterprise-TM- products. As of March 31, 1996, $473,038 of identifiable research and development costs have been capitalized. NET INCOME. Net income decreased 66% to $186,461 for the year ended March 31, 1996 compared to $543,201 for the year ended March 31, 1995. Certain expenses related to REF OpenEnterprise-TM-, custom development for a large customer and development for a governmental entity, for which sales could not be recorded in fiscal 1996, caused a decrease in net income as a percentage of sales from 18% in 1995 to 6% in 1996. THREE MONTHS ENDED JUNE 30, 1995 AND 1996 REVENUE. Revenue increased 113% to $1,048,001, for the three months ended June 30, 1996 compared with $492,252 for the three months ended June 30, 1995. Revenue from new customers and time and material funds received for POS prototype development of government entity software were included in the 1996 quarter. GROSS PROFIT. Gross profit increased 217% to $565,604 for the three months ended June 30, 1996 compared to $178,639 for the same period in 1995. Percentage gross profit was 36% in 1995 and 54% in 1996, principally due to a reduction in direct costs related to non-revenue producing development projects in the same quarter of 1995. OPERATING EXPENSES. Operating expenses increased 41% to $440,093 for the three months ended June 30, 1996 compared with $312,514 for the same period in 1995. Operating expenses, as a percentage of revenue, improved to 42% for the three months ending June 30, 1996 from 64% for the three months ended June 30, 1995 due to increased productivity through use of enhanced programming techniques, plus expense controls, combined with higher revenue in the 1996 period. Research and development expenditures in the three months ended June 30, 1995 and 1996 were directed toward REF OpenEnterprise-TM- and have been capitalized. As of June 30, 1996, total net capitalized software was $602,393. NET INCOME. Net income increased $223,139 to $135,992 for the three months ended June 30, 1996 compared to a loss of $87,147 in the same quarter in 1995. Higher sales, cost controls and a reduction in expenditures for products expected to produce revenue in future quarters all contributed to an improved net income performance during the 1996 quarter. LIQUIDITY AND CAPITAL RESOURCES Working capital decreased $266,776 from March 31, 1995 to March 31, 1996 and increased $9,845 in the three months ended June 30, 1996. REF financed its increased sales from internally generated cash for the year ending March 31, 1996 and the first quarter ended June 30, 1996. Net cash provided from operating activities increased $175,316 for the year ended March 31, 1996. Net cash provided from operating activities decreased by $315,654 for the first quarter ended June 30, 1996, primarily due to a decrease in the costs and estimated earnings in excess of billings. Current assets decreased to $1,395,567 at March 31, 1996 and further to $1,382,525 at June 30, 1996, due to decreases in cash and accounts receivable. Current liabilities increased to $484,348 on March 31, 1996 from $450,101 on March 31, 1995, primarily due to increases in notes payable and deferred rent partially offset by a decrease in accrued income taxes. Current liabilities as of June 30, 1996 were $461,460. 15 PRO FORMA RESULTS OF OPERATIONS Management believes that the pro forma financial statements included elsewhere in this Prospectus and the following selected financial information and discussion are informative and should be considered carefully by prospective investors, given the significance of the acquisition of REF.
YEAR ENDED MARCH 31, 1996 ---------------------------------------- PREMIS REF PRO FORMA ACTUAL ACTUAL COMBINED (1) ------------ ------------ ------------ STATEMENT OF OPERATIONS DATA: System sales...................................................... $ 4,923,132 $ 2,725,256 $7,648,388 Maintenance fees and other services............................... 979,029 471,260 1,450,289 ------------ ------------ ------------ Total revenue................................................. 5,902,161 3,196,516 9,098,677 Cost of sales..................................................... 3,036,322 1,434,018 4,470,340 Gross profit...................................................... 2,865,839 1,762,498 4,628,337 Earnings before income taxes, depreciation and amortization....... 1,456,615 320,183 1,868,492 Net income........................................................ 827,362 186,461 605,128 ------------ ------------ ------------ ------------ ------------ ------------ Net income per share.............................................. $ 0.28 N/A $ 0.14 ------------ ------------ ------------ ------------ ------------ ------------ Weighted average common and common equivalent shares outstanding...................................................... 2,925,581 N/A 4,374,404 ------------ ------------ ------------ ------------ ------------ ------------
THREE MONTHS ENDED JUNE 30, 1996 ----------------------------------------- PREMIS REF PRO FORMA ACTUAL ACTUAL COMBINED (1) ------------ ------------ ------------- STATEMENT OF OPERATIONS DATA: System sales...................................................... $ 1,570,791 $ 967,473 $ 2,538,264 Maintenance fees and other services............................... 343,388 80,528 423,916 ------------ ------------ ------------- Total revenue................................................. 1,914,179 1,048,001 2,962,180 Cost of sales..................................................... 967,739 482,397 1,450,136 Gross profit...................................................... 946,440 565,604 1,512,044 Earnings before income taxes, depreciation and amortization....... 571,352 178,384 778,655 Net income........................................................ 332,236 135,992 363,383 ------------ ------------ ------------- ------------ ------------ ------------- Net income per share.............................................. $ 0.11 N/A $ 0.08 ------------ ------------ ------------- ------------ ------------ ------------- Weighted average common and common equivalent shares outstanding...................................................... 2,979,683 N/A 4,428,506 ------------ ------------ ------------- ------------ ------------ -------------
JUNE 30, 1996 --------------------------------------------- PRO FORMA COMBINED PREMIS REF AS ADJUSTED ACTUAL ACTUAL (1)(2) ------------ ------------ ----------------- BALANCE SHEET DATA: Working capital................................................... $ 1,624,063 $ 921,064 $ 3,896,327 Total assets...................................................... 4,091,438 2,356,534 12,744,832 Long-term debt, less current portion.............................. 835,982 280,807 1,116,789 Total liabilities................................................. 2,039,186 802,194 2,841,380 Retained earnings................................................. 1,087,416 1,471,516 1,087,416 Shareholders' equity.............................................. 2,052,252 1,554,340 9,903,452
- -------------------------- (1) The unaudited pro forma statement of operations is presented as if the acquisition of REF occurred on April 1, 1995. A $494,566 annual earnings adjustment of goodwill amortization, a non-cash charge to earnings, is included in these adjustments. Weighted average common and common equivalent shares outstanding are adjusted to reflect the shares issued in this offering in connection with the acquisition of REF. The unaudited pro forma balance sheet is presented as if the acquisition of REF occurred on June 30, 1996. See the pro forma condensed combined financial information appearing elsewhere in this Prospectus. (2) Adjusted to give effect to the sale of 1,750,000 shares offered hereby and the application of the estimated net proceeds thereof. See the pro forma condensed combined financial information appearing elsewhere in this Prospectus. 16 PRO FORMA RESULTS OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1996 AND FOR THE THREE MONTHS ENDED JUNE 30, 1996 The combined pro forma statements, as adjusted to reflect the issuance of 1,750,000 shares in this offering and the consolidation of REF, assume that the offering and acquisition were effective April 1, 1995. These statements indicate revenues of $9,098,677 and $2,962,180 for the year ended March 31, 1996 and the three months ended June 30, 1996, respectively, and earnings before taxes, depreciation and amortization of $1,868,492 and $778,655 for the year ended March 31, 1996 and the three months ended June 30, 1996, respectively. The acquisition of REF resulted in the recording of goodwill of $4,945,660, which was determined based on the excess acquisition cost over the estimated fair market value of identifiable assets. Goodwill represents the base of substantial existing REF customers and the excellent product reputation of REF. This excess amount is being amortized on a straight line basis over a period of ten years. Assuming that its current projections and forecasts of future business are achieved, management believes that the business expansion anticipated as a result of the REF acquisition will offset the adverse effect on earnings of the annual amortization of goodwill, which is a noncash charge against earnings. Moreover, earnings per share in the fiscal year ending March 31, 1997 will be computed using a weighted average number of shares outstanding including the 1,750,000 shares issued in this offering for the period from date of closing of this offering to March 31, 1997. In contrast, the pro forma presentation assumes that an additional 1,448,823 shares (the estimated number of shares required to be issued at an assumed offering price to provide the net proceeds to be paid in connection with the acquisition of REF) are issued and outstanding for the entire twelve month pro forma period. Thus, actual earnings per share in fiscal 1997 may be greater than earnings per share in the pro forma presentation merely as a result of the smaller weighted average number of shares actually outstanding in the 1997 period. RECENTLY ISSUED ACCOUNTING STANDARD PREMIS accounts for stock options and other equity instruments in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees." Effective in fiscal 1997, the Company will account for stock options in accordance with Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting of Stock Based Compensation." SFAS No. 123 establishes accounting standards for organizations that have stock based employee compensation plans. Generally, the statement defines a fair value based method of accounting for these plans which requires the measurement of compensation costs at the grant date and recognition of such costs over the service period, which is usually the vesting period. The Company will continue to value its options under APB Opinion No. 25 and will comply with the disclosure requirements of SFAS No. 123. 17 BUSINESS The Company develops, markets and supports a line of industry-specific information management software systems designed to assist businesses with management of their day-to-day operations and long-term strategic planning. The Company's proprietary software products are typically sold in combination with PC workstation equipment and client/server hardware. The Company's turn-key systems provide an enterprise-wide solution to the information needs of multi-store specialty retailing businesses, food brokers and food distributors and include a variety of integrated functions such as: - point of sale data collection and management review of transactions - "real time" sales analysis reporting by store, product, customer or salesperson - individual store stock positions and enterprise inventory tracking - purchasing, order tracking and warehouse control - accounts receivable management and commission receivable accounting - sales promotion fund management and advertising budget accounting - electronic data interface for on-line ordering from vendors and customers - intranet communications connections between stores and main corporate office The Company's strategy is to develop leading-edge, industry-specific software systems to collect business information, analyze the collected data and provide concise, meaningful reports to individuals within an organization. PREMIS initially developed software products targeted toward food brokers and specialty food distribution companies. In 1994, PREMIS entered the specialty retail market when it acquired the exclusive marketing rights for a software system which assists with the back office and headquarters management functions of multi-store specialty retail chains. Since that time, PREMIS has continued to enhance the applications and improve the functionality of its software products and has evolved from a provider of single application specialty software into a turn-key vendor of enterprise-wide information management systems. In July 1996, as part of its strategy to provide end-to-end management information solutions, PREMIS agreed to acquire REF, a Toronto-based provider of Windows NT-Registered Trademark--based retail management software and systems which complement PREMIS' existing retail software product. REF's retail software combines an easy-to-use POS transaction processing interface with sophisticated data analysis and information reporting capabilities. The Windows NT-Registered Trademark- graphical user interface significantly reduces the cost of training cashier personnel and shortens the time required to process a sale. The REF software is designed to accelerate information access and provide a wide variety of management reports on a "real time" basis to various levels of an organization. The sophisticated data acquisition and processing features of the REF product position the Company's systems toward the high end of the specialty retail market, which broadens the range of product offerings for the Company's specialty retail systems. Management believes the REF acquisition will provide the Company with an improved sales capability and contribute a higher level of technology and functionality for its products. INDUSTRY OVERVIEW Over the past two decades, many businesses have significantly increased their use of software products and computer systems to automate tasks and improve the efficiency of their day-to-day operations and long-term strategic planning. Historically, most businesses purchased software tools specifically designed to address a particular task or function of their operations. Most of these software tools were engineered by different software companies and, consequently, each tool had difficulty communicating data it gathered to the other systems. The need for fast and reliable data transfer between various business functions created a demand for software and hardware solutions which integrated the independent business functions of an organization. 18 In response, firms like the Company have expanded the functionality of their software products to integrate a wide variety of independent tasks within a particular business. These software systems allow data from one business function to be available to any other function, thereby creating an enterprise-wide information management system. Company-wide portability provides critical information to a wide variety of personnel within an organization to more effectively and efficiently manage day-to-day activities as well as long-term strategic objectives. MULTI-STORE SPECIALTY RETAIL CHAIN MARKET The multi-store specialty retail chain market is comprised of approximately 14,000 chain headquarters controlling roughly 250,000 stores. This market includes apparel and accessory stores, gift and novelty stores and sporting goods stores. Although the number of specialty retail stores has not shown consistent growth, there are always individual store chains which are expanding and new chains which are emerging. PREMIS has found that as specialty retail chains expand, even those that historically developed their own information management systems migrate toward outside vendors because they lack technical expertise necessary to support rapidly evolving and changing information management technologies. Although specialty retailers historically have computerized POS data, many have not integrated their POS software with their "back office" or headquarters systems. This lack of integration of the back office and headquarters systems has prevented effective interface between POS and management data. Specialty retailers are increasingly seeking the full integration of these individual store and headquarters management functions to maximize the availability of data on an enterprise-wide basis. Management believes that the Company's products are marketable to any size multi-store specialty retail chain. FOOD DISTRIBUTION MARKET Management believes that food brokers and distributors have historically computerized certain data, such as commissions, accounts receivable and inventory control, with separate software systems for each function. These functions have operated independently, but food brokers and distributors now seek to integrate these functions within one complete operating system. Management believes that approximately 4,000 food brokers and specialty food distributors nationwide are viable market opportunities for the Company. STRATEGY The Company's long-term objective is to rapidly grow the Company and achieve and maintain a leadership position as a provider of enterprise-wide information management systems in a variety of market niches. The Company's business strategy for attainment of its objective is to: - provide innovative leading edge systems - expand marketing and sales efforts to penetrate its selected markets to capitalize on first to market product advantages - pursue strategic acquisitions of complementary products and service capabilities PROVIDE LEADING EDGE SYSTEMS. The Company intends to leverage REF's extensive technical expertise in software development and advanced programming techniques with PREMIS' marketing, training and hardware integration to offer both standardized and customized fully-integrated, enterprise-wide solutions to its customers. EXPAND MARKETING AND SALES EFFORTS. By expanding its product offerings to include fully functional software systems for retail distributors of all types of goods, the Company plans to broaden its customer base to include a wide variety of commercial enterprises. The Company intends to utilize the existing PREMIS sales and marketing organization to reach the Company's expanded markets with the full line of PREMIS and REF products and services, as well as cross-marketing PREMIS and REF products to their respective existing customers. Marketing and sales efforts will be augmented with strategic alliances and reseller relationships, such as the current relationships of the Company with NCR and Microsoft Corporation ("Microsoft"). See "Business -- Marketing and Sales." 19 PURSUE STRATEGIC ACQUISITIONS. A significant part of the net proceeds of this offering will be used to acquire REF. This acquisition will provide the Company with the ability to offer comprehensive enterprise-wide management solutions to a broad range of multi-store retail distributors. The Company intends to explore and evaluate other opportunities for acquisition of complementary products and services as such opportunities present themselves, but none have been identified to date. ACQUISITION OF REF On July 9, 1996, PREMIS entered into an agreement for acquisition of all of the outstanding equity stock of REF, in consideration of $6.5 million, to be paid concurrently with the closing of this offering. As described elsewhere herein, Mr. Edward W. Anderson will continue as the President of REF and will become an employee of the Company. Mr. Robert E. Ferguson, the founder and Chief Financial Officer of REF, will not continue with the Company and has entered into a five-year agreement not to compete, except in the area of golf course retail management systems. REF develops and markets software for the specialty retail distribution marketplace, specializing in software customized for POS terminals. REF has in excess of ten years' experience developing custom POS applications for some of North America's largest specialty retailers and has used its experience to develop a fully functional Windows NT-Registered Trademark--based POS package. Until recently, REF's products, like those of PREMIS, addressed only part of the multi-store chain retailer's needs. However, REF has recently launched a complete integrated system known as REF OpenEnterprise-TM-. PREMIS believes that no competitive counterpart to the REF OpenEnterprise-TM- system currently exists and that it will take at least two years for competitors to develop the minimum requirements of such a product. To date, the major competitors of PREMIS and REF have focused either on POS software or back office and headquarters software. Both companies have designed systems using leading edge client/server technology; REF has completed the additional development required for a complete software solution for retailers, while PREMIS has completed only prototype development of its complete solutions products. Management believes that a system with ease of use, complete information access and flexibility of client/server and Windows NT-Registered Trademark-, will be actively sought by buyers as the standard for effective management of specialty retail distribution and that the first company that introduces such a product will have the opportunity to set the standard and establish a strong foothold. In the opinion of management, a system which combines the products of REF and the products and services of PREMIS fulfills more of the requirements of specialty retailers than any competing system. Historically, PREMIS' specialty retail customers were primarily smaller store chains which did not require customization of its standard software products or sophisticated POS capabilities. Conversely, REF's specialty retail customers were primarily larger store chains which required customization of various software functions and desired detailed POS data collection. Also, the products of PREMIS currently address only the hardgoods specialty retail market (products sold by the unit without regard to size, color, or style, such as greeting cards or screws). Many competitors of PREMIS also focus either on the hardgoods or the softgoods specialty retail market (products sold with regard to size, color and style, such as apparel and accessories). The products of the Company address all aspects of specialty retail distribution and the needs of both hardgoods and softgoods specialty retailers, which broadly increases the market opportunity for the Company. Thus, the Company expects that REF's products and target customers will complement, rather than overlap, PREMIS' products and target customers. PREMIS and REF combined offer substantial synergies in product offerings, market reach and operations, including the following: - EXPANDED MARKETS. The Company will offer a complete end-to-end management information solution to multi-store specialty retailers both in hardgoods and softgoods markets, as well as addressing the existing PREMIS food distribution markets. The Company's geographic scope will also expand. 20 - FULL RANGE OF PRODUCTS. The products and services provided by the Company will offer a complete integrated enterprise-wide management solution, from POS to back room controls, for the multi-store specialty retailer. - INTERNATIONAL APPLICATION. The graphical user interface and Windows NT-Registered Trademark- features of the Company's products accommodate multiple language and currency environments and are easily adaptable to settings in which the language is other than English and the currency is other than U.S. Dollars, or in which multiple languages or currencies are used. - OPPORTUNITY FOR IMPROVED PROFITABILITY. The Company's expanded product line will be targeted to large customers whose needs support products priced at the high end of the range. In addition, the Company expects that improved profitability will result from its ability to provide product components, such as POS software, which PREMIS must now purchase from third party suppliers. - SYNERGIES IN STAFFING. Currently, PREMIS considers sales and marketing, systems integration and systems maintenance and support as particular strengths of its personnel. REF, on the other hand, views its staff's forte as technology and advanced programming skills. Accordingly, the companies believe that the current staffing of their respective organizations, complement and enhance each other and should not require significant downsizing. - CROSS-MARKETING TO CUSTOMERS. The Company believes that significant opportunities exist for marketing the respective strengths of PREMIS and REF (I.E., POS software and customization in the case of REF and integration and support in the case of PREMIS) to the existing customer base of the other. Further, management believes that, in addition to product and service synergies described above, the combination of PREMIS and REF offers broadened access to particular significant customers and markets currently served by one or both of them, for example: - Both PREMIS and REF have extensive experience with the U.S. Postal Service and have on-going involvement in Postal Service projects. See "Business -- Customers." - REF has been working with the Canadian Postal System on a prototype system for domestic use in Canada. PREMIS believes that a substantial market opportunity is presented for international postal systems utilizing REF's POS software and PREMIS' skills in integration, installation and training. - The Company believes that growing acceptance of the Internet will provide a significant opportunity for retailers to offer products via computer terminal in thousands of homes, rendering the Internet the retail store of choice. Retail stores on the Internet will have the same needs for POS software, backroom systems and headquarters management. The products of PREMIS and REF are uniquely suited for use with the Internet because their design characteristics allow portions of a traditional POS transaction to be processed at separate locations. - To date, PREMIS has invested several years in a demand forecasting system based on neural network technology. This technology is easier to use and more accurate than traditional methods because it considers more variable inputs with minimal complexity in processing. This product, which has been developed in client/server architecture with a Windows interface, offers the retailer reduced inventory investment, reduced out-of-stocks and higher customer satisfaction. PRODUCTS AND SERVICES The Company's products, while targeted to selected vertical markets, are broad in their functionality and flexibility and are scaleable from small to large business organizations. The Company strives to provide an enterprise-wide solution to the information needs of businesses in its vertical markets. These solutions include registering data at the point of transaction, assembling data at the point of processing, analyzing and summarizing data using business specific rules, warehousing data and 21 converting data into meaningful information through flexible inquiry and reporting. The concepts and technology, while currently adapted to specific types of businesses, can be adapted to many vertical markets. PREMIS was founded with a focus on the food distribution marketplace, with particular emphasis on food brokers and specialty distributors. In 1994, PREMIS added multi-store specialty retail chains to its target vertical markets by purchasing exclusive marketing rights to IRIS-TM-. REF also provides software products to multi-store specialty retail chains, but, because of their design and use, REF's products do not directly compete with the products of PREMIS. The Company's systems consist of standardized and optional applications software offered to its target markets. These software products are often combined with computer hardware purchased by the Company from various suppliers providing equipment using the UNIX-Registered Trademark- and Windows NT-Registered Trademark- operating systems. For multi-store specialty retail chains, the Company's current principal products are the IRIS-TM- and REF OpenEnterprise-TM- systems; for food distribution, the Company's principal products are the ADVANTAGE-TM- and RETAIN-TM- systems. The Company also provides extensive project management, education, end-user training and on-site support to help manage the implementation process for new customers, as well as help desk services for existing customers, dealers and field employees with critical and exhaustive software support needs. MULTI-STORE SPECIALTY RETAIL CHAIN MARKET Software marketed by the Company provides the aggressive multi-store chain specialty retailer with information management and control within the store, in the back office and at headquarters. IRIS-TM- (an acronym for "Integrated Retail Information System") provides integrated POS and inventory management for small to mid-sized hardgoods retailers with multiple sales outlets in the specialty store segment of the market. IRIS-TM- provides head office control over multi-store inventory, purchasing, pricing, warehousing and sales, as well as providing advanced data communications and executive reporting. IRIS-TM- is designed to be combined with third party POS software and hardware to supply a complete solution for a hardgoods specialty retailer. Information flows from various terminal locations, such as individual stores and warehouses, to the main system; information flows back to users at terminal sites or to vendors (via integrated fax or electronic data interchange). Among its key functions, IRIS-TM-: - provides control of purchasing, receiving, inventory and POS - operates in a variety of hardgoods specialty retail environments - tracks an entire inventory cycle for each store - utilizes fully-integrated modules - allows multiple users and tasks to simultaneously access the same files IRIS-TM- runs on a UNIX-Registered Trademark- operating system, which provides complete multi-user and multi-tasking functionality. Multiple permission levels provide complete data security. 22 [FLOW CHART OF PREMIS IRIS-TM-/REF OPEN ENTERPRISE-TM- SYSTEM] REF OpenEnterprise-TM- and its related components provides a complete enterprise-wide automation solution for all specialty retail distributors, including softgoods retailers, and eliminates the need to purchase and integrate software components from a number of different vendors. The REF OpenEnterprise-TM- system features SQL/ODBC (a formatted, standardized method for accessing information) relational databases, a Windows NT-Registered Trademark- graphical user interface ("GUI") and compliance with the Windows NT-Registered Trademark- operating system. All REF OpenEnterprise-TM- products have been designed as client/ server solutions using the processing power of a main server and a PC workstation client. REF OpenEnterprise-TM- includes: - REF OpenOffice-TM-, which automates head office functions and provides easy access to mission critical information for the entire retail organization; - REF OpenStore-TM-, which automates the entire POS function consistent with the "open system" concept; and 23 - REF OpenCom-TM-, which provides a means of communication between headquarters and individual stores, by extending the head office LAN to the POS workstation in individual stores, with real-time on-line communications as well as periodic summaries. Each of the system's component parts may operate independently or in conjunction with other components; typically, a customer that purchases both REF OpenOffice-TM- and REF OpenStore-TM- will also purchase REF OpenCom-TM- because REF OpenCom-TM- provides the intra-enterprise communication system. REF OpenOffice-TM-, a component of REF OpenEnterprise-TM-, was developed for two primary platforms, Windows NT-Registered Trademark- and UNIX-Registered Trademark-. Typically, REF OpenOffice-TM- operates on a Microsoft SQL Server. With minor modification, REF OpenOffice-TM- can be ported to any open relational database built for client/server architecture using an industry standard SQL such as Oracle-Registered Trademark- or Informix-Registered Trademark-. The primary components of REF OpenOffice-TM- are modular in design to provide maximum benefits with a minimum investment in computing hardware. The user has the option of designing a solution with modules of its choice. Additional software may be added at any time with no disruption to the existing system. The Base System is the core of the REF OpenOffice-TM- retail management system and is required for all other modules. The Base System is comprised of various structures which create organizational, merchandise and time hierarchies of data which are meaningful to the user. The Base System structures are designed for ease of use and maximum flexibility. The user may, at any time, change, add or delete levels within structures and may move data within either structure with a simple click of a mouse and "drag and drop" to the new or changed level. All existing data is reassigned and all summary tables are re-summarized automatically. For example, if some stores in one region are realigned to another region, the click of a mouse can immediately move the data to the new region structure, without additional programming or loss of data. The specific modules available with REF OpenOffice-TM- include Store, Vendor, Item/SKU (stock keeping unit), Sales Audit, Polling Audit, Processing Audit, Store Audit, Cash Audit, Electronic Journal, Sales Analysis, Merchandising, Customer Profiling, Gross Margin Analysis, Cash Audit, Employee Auditing, Store Ordering, Perpetual Inventory, Inventory Management and Cash Management. REF OpenStore-TM- is an advanced POS software system which automates the entire POS function consistent with the "open system" concept. REF OpenStore-TM- can operate on a wide variety of POS hardware and PC's combined with cash drawers and can be easily integrated with other PC-based office systems. Particular attention has been given to the GUI, which can be combined with keyboard entry, touch screen or the NCR Dynakey cash register terminal display. Data tables that are maintained in REF OpenStore-TM- have companion tables that are maintained in REF OpenOffice-TM- and vice versa, resulting in quick, seamless transmission. Some of the features of REF OpenStore-TM- are its ability to: - manage multiple sales transactions types - monitor extensive Item/SKU level price management, including special promotions - support multiple currencies and languages - support local, county, special, national and other taxation - manage multiple tender types, such as cash, check, debit cards, credit cards, etc. - configure cash drawer compulsion by tender type and control - enter data by manual keystroke, scanning or special search screens - monitor balancing and floating counts for cash paid in, paid out and petty cash 24 - generate reports by department sales, associate sales, tender totals, returns/exchanges, voids, store productivity, sales discounts, store summary, layaway status and aging reports - compile extensive store summary reporting, including sales and gross profit generated, net sales by sales type and layaway sales - create "customer profiling" for tracking customer demographics, preferences and purchase history - manage inventory control at the store level - connect directly with credit authorization service - fully support peripheral interfaces such as scanners, scales, customer keypads and check validation REF OpenCom-TM- provides a means of communication between a retailer's headquarters and its individual stores through a variety of different communication standards and protocols. While competitive software modules offer either real-time on-line communications or nightly polling of store systems by the host, REF OpenCom-TM- incorporates both. Using this system, communications between stores, districts, regions or headquarters can be as frequent or as selective as desired. Updates can go to the central, regional or district hosts independently or simultaneously. Transactions can be instantaneous or summarized and periodic, depending on the communications network. Public networks such as the Internet can be used as well as private networks or dialup polling. This flexibility recognizes the need for faster headquarters information on product marketing, sales force utilization, shopping patterns and other marketing and product information and prepares the system to meet all of the possible communications demands of the modern retailer. REF OpenCom-TM- features: - a file-based inventory locator server - standard E-mail messaging enhancements - multiple service providers for electronic funds transfer - REF OpenCom-TM- network traffic and monitor extension - industry standard Windows NT-Registered Trademark- client interfaced to REF OpenCom-TM- - support for System Network Architecture services to mainframes - TCP/IP standard support ISDN interface to communications providers - SQL server integration for access to enterprise data - system-wide alert messaging and logging facilities The REF OpenEnterprise-TM- components described above also serve as the foundation for custom development projects for large multi-store retailers. Purchases of custom designed systems generally involve contracts ranging from $500,000 to $1,500,000. The Company anticipates that large retailers will continue to purchase custom designed systems with the unique solutions and flexibility required for their special needs. To date, the Company has successfully installed custom designed products for the following multi-store clients: Lerner New York Inc. and Lane Bryant, Inc. (divisions of The Limited, Inc.), The Gymboree Corp., Kirkland's Inc., NEXCOM, Music World and Bi-Way Stores Ltd. In addition, a custom design project is currently in process with Strouds, Inc. FOOD DISTRIBUTION MARKET The Company's ADVANTAGE-TM- and RETAIN-TM- systems are designed to assist food brokers and distributors with day-to-day business management and analysis of information concerning the retail distribution of products. Information flows from individual brokers, distributors, or offices to the main system; information flows back to the user sites, as well as store sites served by the food broker or distributor (via electronic data interchange or fax). 25 [FLOW CHART OF PREMIS ADVANTAGE-TM-/RETAIN SYSTEM] Among its key features, ADVANTAGE-TM- offers: - electronic data interchange ("EDI") and systematic order control - budgeting and quota management - multiple security levels and commission accounting control - integrated fax capability, allowing a document to be faxed directly from ADVANTAGE-TM- without the need to print a paper copy and send the paper copy by dedicated fax equipment - extensive reporting and forms management - reclamation management, which permits grocers to obtain manufacturer's credits for return of damaged, spoiled or out-dated products - portable Windows NT-Registered Trademark--based systems for sales staff 26 ADVANTAGE-TM- employs a client/server relational database, variable overlapping Windows NT-Registered Trademark- presentation and pop-up or pull-down menus. Its EDI communication capabilities permit various sales order information to be transmitted between the broker and its retail store customers and the manufacturers for whom the broker acts as agent, such as confirmation, promotions, price changes and invoices. ADVANTAGE-TM- controls orders and commissions and reports on various sales-related issues. ADVANTAGE-TM- provides data security with five levels of clearance, and data collected with ADVANTAGE-TM- can be exported to the users of word processing, spreadsheet, accounting and graphics programs. Reports produced with ADVANTAGE-TM- include: (i) Order Reports -- which specify orders placed on specified dates; (ii) Sales Recaps -- which provide information on sales and commissions for each order, sorted first by principal (I.E., the product manufacturer) and then by retail store under each principal; (iii) an Order Register -- which provides a complete log of all orders with item detail; (iv) Order Status Reports -- which check the status of orders when customers call; (v) Principal Order Histories -- which provide item sales for year-to-date; (vi) Item Tracking -- which provides information on how a particular item is selling; (vii) Ranking Reports -- which provide information on principals, customers, items and salespersons by performance or purchases; and (viii) Commission Listings -- which disclose payment or nonpayment of commissions. Enhanced reports are also available for more in-depth analysis. ADVANTAGE-TM- is fully integrated with other food distributors software modules from the Company. RETAIN-TM- is a system for managing the distribution of vendors' products in retail stores. The maintenance of shelf space allocations for a manufacturer's products requires constant supervision of merchandisers at the store level. The RETAIN-TM- System supports all activities for the merchandisers and reports on the status of items from the regional level right down to the store shelf. RETAIN-TM- utilizes pen-based computers operating Windows NT-Registered Trademark- to gather data in retail stores. The clipboard sized pen-based computer uses a stylus and a touch-sensitive screen to record store information. Onscreen pop-up store lists allow the user to select the store being visited. Sales merchandisers select from a product list to identify the item with a pen touch to indicate the action taken, such as conformance to shelf standards, number of facings, out of stock items, resets and displays built. Store data can be transmitted in a single three-minute phone call at the end of the day. Once the data arrives at the central computer, the RETAIN-TM- software identifies changes in retail distribution since the last survey. It spots new products, changes in facings and items that are no longer in distribution. The system provides complete reporting on distribution by salesperson, territory, manufacturer, distributor, sales team, or product line. The system also produces reports on salesperson performance, such as stores covered, work hours, travel versus store time and travel patterns. MULTIPLE MARKET PRODUCTS Two of the Company's add-on features can be used in both food distribution and retail distribution. The Company's uniform communication standard ("UCS") EDI system allows trading partners to send and receive a full range of UCS computer-to-computer data transmissions with and from their customers and manufacturers. It permits high-speed paperless communication of purchase orders and related adjustments, invoices and related adjustments, order acknowledgments, credit/debit memos, price changes, promotion announcements, administrative messages, marketing fund transactions, product activity, shipment notices and purchase confirmations. The Company's other add-on feature is an integrated capability to fax orders and reports directly from the system. This feature allows a user to display a report and re-direct the report to be faxed to a remote location without first printing, then manually faxing the report with dedicated fax equipment. FULFILLMENT AND HELP DESK SERVICES The Company provides extensive project management, education, end-user training and on-site support to help manage the implementation process for new customers. In general, customers view these services as important discriminating factors in a purchase decision. 27 Fulfillment services are conducted from the Company's headquarters in Minneapolis, Minnesota, and, following the REF acquisition, also from the Canadian Division offices in Toronto, Canada. Each office conducts fulfillment services for its respective country and is staffed accordingly. The fulfillment services organization: - assists sales representatives with retail industry expertise, to better address customers' industry-specific needs - manages the business relationship between the Company and the customer - designs custom programming specifications - develops installation plans to achieve customer schedules - provides education and training for customer staff - provides physical product installation and setup - provides regular status reporting and transition to Help Desk for support on an on-going basis Fulfillment services have become an increasingly important source of revenue as the Company's installed base of customers has grown. Currently, approximately 25% of the initial software purchase price charged to the Company's customers is dedicated to installation and custom modifications, if required. In addition, the Company charges an annual fee equivalent to 15% of the initial software purchase price for maintenance and software support services. Customers who purchase maintenance agreements receive Help Desk telephone support and product upgrades once the system has been installed. The Help Desk provides critical and extensive software support to its customers, dealers and field employees by telephone. The Help Desk is highly automated, with computer assisted tracking of each client call, high speed text search for similar problems, on-line manuals, interactive diagnostics and expert systems for guidance through special and third party supplier problems. Senior product specialists take referral of difficult problems which cannot be easily resolved by Help Desk personnel. The Company recently purchased a sophisticated software system which will facilitate this two-tiered approach. The Help Desk operates 16 hours a day, Monday through Friday, plus 10 hours a day on Saturday and Sunday, for retail customers with extended support agreements. MARKETING AND SALES The Company believes that a comprehensive understanding of the business issues which are prevalent in a customer's particular market is a key component to successful marketing. To this end, PREMIS has compiled industry-specific databases, which are continually updated by the sales staff and fulfillment services staff based on changing market conditions. These databases also contribute to educating personnel in the marketing department and in research and development to ensure that customer issues, features and requirements are addressed and incorporated in future product releases. In addition, the Company seeks to provide comprehensive uninterrupted service by utilizing a team for each customer throughout the customer's relationship with the Company, consisting of personnel from sales and marketing, systems integration and support and maintenance. The Company intends to serve the ongoing needs of smaller multi-store retailers through distributor relationships. The Company's sales techniques involve traditional methods, including development of prospects through telemarketing, direct mail, seminars and advertising; development and distribution of marketing literature, such as brochures, product technical overviews, newsletters and direct marketing letters; direct selling efforts through sales meetings with prospective customers; and order fulfillment, including planning, training, installation and long-term customer support. Following the acquisition of REF, the Company anticipates that its marketing and sales will continue to be based 28 principally in the United States and that all marketing and sales efforts will be coordinated from the U.S. office. A limited number of sales and marketing personnel will be located in Canada to handle accounts which are better served from that location. The Company estimates that hardware components comprise approximately 50% to 60% of the cost of a management information system. The Company primarily sells its software systems together with hardware components, which are purchased by the Company from a variety of equipment vendors. In certain markets, the Company also sells its software directly to equipment vendors for resale by the vendors to their end-user customers. The Company has developed strategic alliances with key hardware vendors of open systems, including NCR which is the primary vendor in this market. To date, PREMIS and NCR have cooperated in a strategic alliance partner program which provides customers with turn-key solutions including NCR hardware and maintenance services and PREMIS software. However, since PREMIS is also an NCR remarketer, it can provide hardware as well. The Company is working to expand its hardware offerings and may enter into reseller relationships with other hardware suppliers. REF has also been a marketing affiliate of NCR and receives a commission on the hardware portion of a sale in which NCR hardware is teamed with REF software. In addition, REF OpenEnterprise-TM- products may be marketed with certain Microsoft products. This has resulted in marketing seminars presented jointly by the Company and Microsoft. CUSTOMERS The following table presents a sampling of current customers that are representative of the types of businesses served by the Company, each of whom has purchased products or services from PREMIS or REF during the last fiscal year. RETAIL CUSTOMERS FOOD DISTRIBUTION CUSTOMERS U.S. Postal Service Delicious Cookies Paper Warehouse, Inc. Stark & Co., Inc. Truck Stops of America Bonacker & Leigh Inc. Marriott International, Inc. Johnson-Lieber Inc. Springs Industries, Inc. Bromar Inc. Lane Bryant, Inc. (a division of The Limited, Inc.)
The Company believes that the U.S. Postal Service will continue to be a significant customer. On August 13, 1996, a contract was awarded by the U.S. Postal Service to NCR and IBM as hardware vendors for a project known as POS One. The U.S. Postal Service intends to upgrade and open new retail stores in various post office locations. NCR's portion of the POS One contract involves installation of new POS software equipment for 9,100 retail work stations. Following discussions with NCR and the U.S. Postal Service, management believes that this contract potentially represents approximately $4.0 million in revenues to the Company over the next eighteen months. Over the last three years, PREMIS has installed 200 systems for the U.S. Postal Service's "Store of the Future" prototypes, which are new or remodeled postal stores where products are displayed for customer viewing and cash registers are positioned at an island in the display area. "Store of the Future" is a separate project from POS One. However, the longer term POS One project for replacement registers will include those stores developed in the "Store of the Future" program. PREMIS has also installed the Postal Service headquarters system which controls inventory and reports on sales for the "Store of the Future" sites. Because of this strong positioning and PREMIS' proven skills with installation, training and help desk, it has established a reputation for high quality with the Postal Service and with vendors like NCR and IBM. PREMIS is in discussion with both IBM and NCR about utilizing PREMIS as the installation vendor for the longer term POS One replacement systems and believes that as a result, the Company may also participate as an installer and integrator in the next generation Postal Service system. 29 COMPETITION The Company develops and markets proprietary, industry-specific information management software products which are typically sold in combination with PC workstation equipment and client/ server hardware. Due to the fact that the hardware component of a system is such a substantial portion of the total cost, most of the Company's customers select a hardware platform prior to their decision to purchase a software package. Consequently, the software package alternatives available to the customer will be limited to those products that run on the selected hardware platform. The Company competes directly with other information systems software vendors and system integrators that market similar software. The Company competes indirectly with certain hardware vendors that offer their own proprietary management information system software. Competition in the Company's markets is based principally upon functionality, quality of service and support, type of hardware (I.E., the compatibility and availability of desired hardware and software components and the ease of integration with the customer's existing system) and price. The Company believes that its current and anticipated levels of product functionality and service and support are generally perceived as comparable or superior to those of its competitors. Although the Company's products may be priced higher than other products marketed for the same purpose, the Company believes that the Company is able to justify such higher prices to customers based on the high value provided by its advanced technological design, its integration capability, "complete solution" functionality, comprehensive support and maintenance services and in-depth knowledge of its customers' industry requirements. In the Company's view, its strongest competitors in the specialty retail distribution market are those that have the ability to design, develop and install a turn-key management information system. In general, these competitors are highly knowledgeable about the specialty retailer's business and about the capabilities of their own products. PREMIS believes that its primary direct competitors in the specialty retail market are STS Systems, Inc., Retail Store Systems, Inc., Post Software, Inc., CRS Business Computers, Inc., JDA Software, Inc. and Retail Interact, Inc., as well as other smaller vendors. PREMIS considers its direct competitors in the food distribution market to be Information Access Inc., Success Systems, Inc. and Becton Schantz Co., which each design and market software similar to PREMIS' food distribution systems. The Company also has several indirect competitors in hardware vendors such as IBM, ICL Fujitsu, (a division of Fujitsu America Inc.) and NCR, that offer, along with their hardware, software systems that compete with the Company's software products. TECHNOLOGY AND PRODUCT DEVELOPMENT The Company utilizes state-of-the-art technologies to gather relevant information from a business transaction, transport that data to a central database, manipulate and analyze the data and provide concise and comprehensive reports to the appropriate people within an organization to assist them with their day-to-day decisions and long-term strategic planning. The Company's software products are written in C and object-oriented C++ source code languages which enable a programmer to develop a user-friendly GUI and to program tasks more efficiently for increased speed. The Company utilizes several relational database technologies, such as Sybase-Registered Trademark- and Oracle-Registered Trademark-, for its software to reduce the information processing time required to sort data and to allow multiple users to simultaneously access the same information. These software products can port to either a PC platform or a variety of UNIX-Registered Trademark- platforms, such as the IBM RISC/6000 or an NCR enterprise server. The predominant trend in consumer software is toward a GUI, user-friendly, menu driven interface. A GUI interface requires the use of object-oriented programming languages and programming techniques. PREMIS has been using the object-oriented programming language C++ since 1991, and REF has been programming with C++ since 1994. The Company believes that most of its competitors currently do not have GUI products or the ability to utilize this advanced programming technique. The Company's products utilize client/server architecture and relational databases. While relational database products have been available since the early 1980s, they were not considered practical 30 for enterprise-wide applications until the widespread implementation of enterprise servers in the early 1990s. In a client/server environment, a relational database can be addressed by the server, which then sends and receives data over a local area network to simultaneous multiple users (I.E., clients). As server processor technology speeds have increased and the cost of servers has decreased, the market for network systems and products has expanded. A business which comprises many separate locations, such as a retail chain store, presents a natural application of client/server and relational database technologies. The Company's management believes that client/server architecture is the dominant networking technology for the foreseeable future and that the Company is uniquely positioned to capitalize on this trend. The Company believes that to maintain its leading market position it must continue to enhance its current products and develop new software and technologies to quickly respond to market opportunities. The Company is focusing its product development efforts on enhancing the breadth and depth of its current products while developing key new add-on features. PREMIS currently employs six software programmers and will be acquiring a staff of approximately 50 experienced software programmers from REF. Research and development expenditures by PREMIS for fiscal 1995 and 1996, were $368,161 and $303,000 respectively. REF has also invested substantial resources in product development, particularly for its REF OpenEnterprise-TM- system. As of June 30, 1996, REF carried approximately $602,000 of capitalized software development costs in accordance with SFAS 86. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." PROPRIETARY RIGHTS PREMIS does not own any patents or any registered copyrights or trademarks; PREMIS claims trademark protection of the names and marks "ADVANTAGE-TM-" and "RETAIN-TM-," but does not consider such marks to be material to its operations. REF does not own any patents or any registered copyrights or trademarks. However, REF claims trademark protection of the names and marks "REF OpenEnterprise-TM-," "REF OpenOffice-TM-," "REF OpenCom-TM-" and "REF OpenStore-TM-." This Prospectus also contains trademarks of other companies. PREMIS primarily relies on a combination of trade secret laws and confidentiality agreements to protect its proprietary technology. REF currently has non-competition and confidentiality agreements with all of its employees, including Mr. Robert E. Ferguson who will not continue as an employee of the Company. IRIS-TM- is marketed by PREMIS pursuant to the terms of a software license and distribution agreement (the "IRIS-TM- License") dated April 15, 1994, with Commercial Systems Corporation, pursuant to which the Company is granted an exclusive worldwide right to license and sublicense and to develop, copy, distribute, remarket and maintain IRIS-TM- for a term ending March 31, 1999, in consideration of an initial one time payment, which was made in 1994, plus a fixed monthly royalty in the amount of $8,342 for five years and a percentage royalty in the amount of 4% of Net Cash Receipts (as defined in the IRIS-TM- License) of sales of IRIS-TM-. Further, PREMIS has the option to purchase IRIS-TM- for a cash payment of $25,000, exercisable at any time during the IRIS-TM- License, to be effective at the expiration of the five year term, and to renew the IRIS-TM- License on a yearly basis with payment of a percentage royalty in the total amount of at least $10,000 per year. All derivative upgrades, enhancements, new releases, new versions and other improvements made by PREMIS, and all copyrights, trademark rights, trade secret rights and patent rights, as well as all marketing and all other materials developed by PREMIS with respect to IRIS-TM-, are the sole and exclusive property of PREMIS. EMPLOYEES PREMIS had 36 employees as of June 30, 1996. Although employees function as an integral team, their primary assignments are as follows: six in software development, fourteen in client services, eight in administration and two in finance. Additionally, PREMIS currently employs six employees who fulfill marketing and sales functions. With the acquisition of REF, the Company expects to increase its marketing and sales department to eight employees. 31 REF had 59 employees as of March 31, 1996, whose primary assignments are as follows: forty-six in software development, three in client services, eight in administration and management and two in marketing and sales. None of the employees of PREMIS or REF is covered by a collective bargaining agreement, and management considers relations with employees to be excellent. FACILITIES PREMIS currently leases office space in Plymouth, Minnesota, consisting of 14,371 square feet located in a professional office building at 15301 Highway 55 West on a 36-month minimum lease expiring April 30, 1998. Future minimum rentals under this lease are $85,392 for the fiscal year ending March 31, 1997. PREMIS intends to terminate its occupancy of its current lease in October 1996 and is actively seeking to sublet these facilities. PREMIS intends to relocate its executive offices and other operations to a building nearby pursuant to a lease, effective September 1, 1996, with a limited liability partnership controlled by two officers and directors of PREMIS. The new lease provides approximately 21,956 square feet of space at a minimum monthly base rent of $13,477. PREMIS has prepaid $105,000 in rent, which reduces the minimum monthly base rent by $2,816 for the first 44 months of the lease (an aggregate credit of $105,000 plus 9% interest per annum). The new lease has an initial ten year term, ending August 31, 2006, with two successive two-year options for renewal. The Company believes that this new facility will be adequate to meet its domestic needs for the foreseeable future. See "Certain Transactions." REF currently leases facilities in Markham, Ontario (near Toronto) for use as its corporate offices. The lease provides 20,005 square feet at a minimum monthly rent of CDN$11,083 pursuant to a ten-year term expiring in December 2005, with one option for renewal for an additional five-year term. The minimum monthly rent on this lease increases to CDN$16,671 in year three, to CDN$17,922 in year six, and to CDN$20,005 in year eight of the lease term. The Company believes that corporate offices will be retained following the acquisition and will be adequate for its needs in Canada for the foreseeable future. LEGAL PROCEEDINGS Neither PREMIS nor REF is currently a party to any legal proceedings. 32 MANAGEMENT DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES The directors, executive officers and key employees of the Company, are as follows:
NAME AGE POSITION - --------------------- --- ------------------------------------------ F. T. Biermeier 56 President, Chief Executive Officer, Treasurer and Director Mary Ann Calhoun 37 Vice President, Secretary and Director Gerald F. Schmidt 56 Director S. Albert D. Hanser 59 Director Edward W. Anderson 45 President of REF Michael A. Dahlstrom 39 National Sales Manager
- ------------------------ F. T. BIERMEIER has been a Director of PREMIS since its inception in April 1982. Since May of 1988, he has been President and Chief Executive Officer. From June 1986 to May 1988, he was Chairman and Chief Executive Officer. From April 1982 to June 1986, he was President and Secretary. He also functions as PREMIS' Treasurer. From 1980 to 1983, he operated an independent management consulting firm F.T. Biermeier & Associates, Inc. From July of 1986 to January 1988, Mr. Biermeier was President and Chief Executive Officer of Intran Corporation, a supplier of imaging software to publishing organizations, and devoted part-time efforts to PREMIS. Mr. Biermeier and Ms. Calhoun are husband and wife. MARY ANN CALHOUN has been a Director and Vice President of PREMIS since June of 1986. From 1983 to 1986, she held positions of Customer Support Representative, Manager Customer Support and Director of Software Development and Customer Support of PREMIS. From 1980 to 1983, she held positions for the United States Senate in the office of Senator David Durenberger, including Assistant to the Press Secretary and Manager of Information Systems. Ms. Calhoun is married to Mr. Biermeier, the President of PREMIS. GERALD F. SCHMIDT has been a Director of PREMIS since January of 1996. Since 1989, Mr. Schmidt has been President and CEO of Cordova Capital Inc., a venture capital firm located in Atlanta, Georgia. Cordova Capital is the General Partner in two growth funds with $52 million dollars under management. From 1984 to 1988, he was Senior Vice President and partner in O'Neill Development Inc., a commercial real estate development firm in Atlanta, Georgia. From 1966 to 1984, he held various positions in sales and marketing management and was Vice President and General Manager of two divisions of Jostens Corporation in Minneapolis, Minnesota. S. ALBERT D. HANSER was elected as a Director of PREMIS in September 1996. Mr. Hanser has been a member of the Board of Directors of Astrocom Corporation ("Astrocom") and has served as Chairman of the Board of Astrocom since March 1992. In December 1992, Mr. Hanser became President and Chief Executive Officer of Astrocom. Since 1989, he has served as Chairman of Hanrow Financial Group, Ltd., a merchant banking firm. Mr. Hanser is also currently a member of the Boards of Directors of Hawkins Chemical, Inc. and E-Z Gard Industries, Inc. EDWARD W. ANDERSON has served as the President of REF for the past eight years and will continue in that role following the acquisition of REF by PREMIS, and pursuant to the terms of his employment agreement, will become a Director of the Company. Mr. Anderson has 20 years experience working within Canada's high technology community. Early in his career, Mr. Anderson was employed by a start up venture formed by faculty and graduates from the Computer Communications Group within the Department of Electrical Engineering at the University of Toronto. This company pioneered the first application of packet switching in North America. Mr. Anderson has also been 33 involved in the development of large scale, high performance on-line transaction processing systems implemented by a number of financial institutions, insurance companies and universities internationally. During his career, Mr. Anderson has also established and managed the technology marketing function with one of Canada's most successful high technology companies. Moreover, Mr. Anderson has been involved with operations and technology systems at two of North America's largest retailers. MICHAEL A. DAHLSTROM currently serves as PREMIS' National Sales Manager and will serve a key role in the Company's expanded sales and marketing efforts, including integration of the REF products and education of the expanded sales force. Mr. Dahlstrom joined PREMIS in February 1996, following approximately nine months with Great Plains Software ("GPS"), as value-added retail manager. Prior to his association with GPS, Mr. Dahlstrom spent approximately three years as Systems Manager at Precision Business Systems, Inc., preceded by several years as an account executive with Memorex Telex Corporation. All directors of the Company hold office until the next regular meeting of the shareholders or until their successors are elected and qualify. All officers hold office until their successor is appointed by the Board. There are no arrangements or understandings between any of the directors or officers or any other person pursuant to which any person was or may be elected as a director or selected as an officer of the Company, other than the agreement with Edward W. Anderson, discussed below. During fiscal 1996, Gerald F. Schmidt, the sole nonemployee director during fiscal 1996, was paid $500 for each meeting attended. In addition, Mr. Schmidt was granted a 5-year non-qualified stock option, exercisable on and after April 1, 1996, to purchase 5,000 shares of Common Stock of the Company at $1.75 per share, which was the fair market value of the Common Stock as of the grant date. EXECUTIVE COMPENSATION AND EMPLOYMENT AGREEMENTS The following table discloses compensation received by PREMIS' Chief Executive Officer, the only executive officer whose aggregate cash compensation exceeded $100,000 (the "Named Executive Officer"). SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM ----------------------------------------- COMPENSATION OTHER ANNUAL ------------- NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (1) OPTIONS - ----------------------------------------------- --------- ----------- --------- ----------------- ------------- F. T. Biermeier................................ 1996 $ 110,000 $ 27,000 $ 5,690 -- Chief Executive Officer 1995 95,000 22,000 1,544 300,000 and President 1994 86,000 7,000 -- --
- ------------------------ (1) Represents PREMIS' contributions to the Employee Retirement 401(k) Plan. PREMIS currently has no employment agreement with Mr. Biermeier or any other executive officer. Effective upon the closing of this offering and the acquisition of REF, the Company will enter into an employment agreement with Mr. Edward W. Anderson, the current President of REF (the "Employment Agreement") pursuant to which he will continue to serve as President of REF for period of five years, subject to earlier termination by either the Company or Mr. Anderson, and renewal thereafter by agreement of the parties. If the Company terminates the Employment Agreement without cause, it must pay Mr. Anderson an amount equal to the greater of the base salary that would have been payable for the balance of the initial term (or extended term if the Employment Agreement has been renewed) or for two years. Mr. Anderson's base salary is initially set at CDN$150,000, with annual adjustments to reflect the percentage salary increases granted to Mr. Biermeier as Chief Executive Officer of the Company. The Employment Agreement also provides that Mr. Anderson shall be paid a "sign on" bonus, in an amount expected to be CDN$42,000. A Change of Control of the 34 Company, as defined in the Employment Agreement, is deemed a termination by the Company without cause. The Company agrees to maintain a CDN$2 million keyperson life insurance policy on Mr. Anderson and upon his death, to use the proceeds thereof to repurchase shares of the Company owned by Mr. Anderson at a price per share equal to the average bid price of the Company's Common Stock over the 30-day period immediately preceding his death, with any excess insurance proceeds paid to his estate. The Employment Agreement also provides that Mr. Anderson shall be elected as a director of both PREMIS and REF during the entire term of the Employment Agreement and any renewals and extensions thereof. The Company agrees that it shall take all actions necessary and shall exert its influence to cause the election of Mr. Anderson as a director; Mr. Biermeier, as a principal shareholder of the Company, agrees to vote his shares for the continued election of Mr. Anderson as a director and shall cause any member of his immediate family and any firm or corporation under his control to whom he may transfer any shares of his stock of the Company to join in this covenant. The non-election of Mr. Anderson at any time as a director of PREMIS or REF, or his removal as a director of PREMIS or REF, shall constitute a termination of the Employment Agreement by the Company without cause. STOCK OPTIONS The PREMIS 1994 Employee Incentive Stock Option Plan (the "Option Plan"), was adopted to provide incentives to selected employees of PREMIS. The Board of Directors is authorized to grant options under the Option Plan for purchase of up to 486,250 shares of Common Stock at exercise prices not less than the fair market value of the Common Stock as of the grant date. As of September 1, 1996, there were outstanding options to purchase an aggregate of 144,000 shares of Common Stock pursuant to the Option Plan, at an average exercise price of $.56 per share. One fourth of the options granted become exercisable one (1) year from the date of the grant with an additional twenty-five percent becoming exercisable each succeeding year. The closing bid price of the Common Stock is treated as the market value on the applicable date. In addition to the Option Plan, the Board has authorized grant of non-qualified stock options for up to 516,667 shares of Common Stock to employees (including officers) and non-employee directors. As of September 1, 1996, non-qualified options to purchase 335,000 shares were outstanding. Such options are exercisable at an average exercise price of $.31 per share and, in each case, the exercise price is equal to the fair market value of the Common Stock as of the grant date. Upon execution of his Employment Agreement, Edward W. Anderson shall be granted a non-qualified option to purchase 600,000 shares of the Company's Common Stock on and after the date which is six months following the date of issuance until December 31, 2006, at a price equal to the Price to Public. Such option is not a part of the Option Plan or the shares reserved by the Board for non-qualified options, discussed above. The option terminates and is no longer be exercisable (i) 90 days after voluntary termination of employment by Mr. Anderson, or (ii) if he is involuntarily terminated for any reason other than death, on the earlier of the expiration of his employment as contemplated in the Employment Agreement or December 31, 2006 (provided that the option shall remain exercisable for at least 90 days following such involuntary termination). If Mr. Anderson dies while employed by PREMIS, the option may be exercised within one year after his death or until expiration of the option term, whichever shall first occur. The exercisability of the option is accelerated in the event of (i) the merger of PREMIS with any other corporation in which PREMIS is not the survivor, (ii) sale of PREMIS or all or substantially all of its assets to another person, or (iii) purchase of more than 50% of PREMIS' outstanding Common Stock by any other person. In connection with the grant of the option, PREMIS agrees that during the six months after the date of the REF acquisition, it shall not increase its authorized capital stock and that during the initial five year term of the Employment Agreement or any renewals thereof, Mr. Anderson shall be afforded the same anti-dilution protection, if any, which may be afforded to Mr. Biermeier, to any member of Mr. Biermeier's immediate family, or any firm or corporation under his control. 35 AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE The following table contains information concerning exercises of stock options during the last fiscal year and the value of options previously granted under the Option Plan which were held by the Named Executive Officer at the end of the fiscal year ended March 31, 1996. There were no grants of stock options under the Option Plan or otherwise to the Named Executive Officer during the fiscal year ended March 31, 1996.
NUMBER OF VALUE OF UNEXERCISED OPTION EXERCISES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS ---------------------------- AT FY-END AT FY-END (1) SHARES ACQUIRED VALUE ------------------- -------------------- NAME ON EXERCISE REALIZED EXERCISABLE EXERCISABLE - ---------------------------------------- --------------- ----------- ------------------- -------------------- F. T. Biermeier......................... None None 300,000 $ 930,000
- ------------------------ (1) Value is calculated based on the difference between the option exercise price and the closing price for the Common Stock on March 29, 1996, as quoted on the National Association of Securities Dealers' OTC Bulletin Board, multiplied by the number of shares underlying the option. RETIREMENT PLAN During fiscal year 1995, PREMIS established a retirement savings plan which qualifies under Internal Revenue Code Section 401(k) ("401(k) Plan"). All employees with at least 90 days of employment are eligible to participate in the 401(k) Plan. The Company's contributions to the 401(k) Plan are based on 15% of employee contributions which are subject to salary limitations. PREMIS contributions to the 401(k) Plan were approximately $5,000 during fiscal 1996. In fiscal 1996, PREMIS also paid a one time discretionary profit sharing bonus of $16,000. CERTAIN TRANSACTIONS Effective September 1, 1996, the Company has entered into a lease for executive offices in a building owned by a limited liability partnership which is controlled by F. T. Biermeier, the Company's President and Chief Executive Officer, a member of the Board of Directors, and a principal shareholder of the Company, and his spouse, Mary Ann Calhoun, another officer and director of the Company. The Company believes that, notwithstanding the absence of arms length negotiation, this lease was entered into on terms which are commercially reasonable and comparable to the terms of leases for other properties which would have been available to the Company. In addition, PREMIS has guaranteed the mortgage loan obligation of the limited liability partnership with respect to this property in the principal amount of $945,000. Currently, this loan carries interest at 2.75% over the rate on five year U.S. Treasury notes. See "Business - -- Facilities." 36 PRINCIPAL SHAREHOLDERS The following table sets forth certain information with respect to beneficial ownership of the Common Stock, and as adjusted to reflect the sale of shares offered hereby (i) by each person who is known by the Company to beneficially own more than five percent (5%) of the Common Stock, (ii) by each director, (iii) by the Named Executive Officer and (iv) all executive officers and directors as a group.
SHARES PERCENT PERCENT BENEFICIALLY BEFORE AFTER NAME OWNED (1) OFFERING OFFERING - ----------------------------------------------------------------------- ----------------- ------------ ------------ F. T. Biermeier (2).................................................... 1,819,751 60.5% 38.3% Mary Ann Calhoun (3)................................................... 12,500 * * Gerald F. Schmidt (3).................................................. 5,000 * * S. Albert D. Hanser.................................................... 1,000 * * All Directors and Executive Officers as a group (4 persons) (4)....................................................... 1,838,251 60.8% 38.5%
- ------------------------ * Less than 1%. (1) Shares not outstanding but deemed beneficially owned by virtue of the individual's right to acquire them as of the date of the Prospectus, or within 60 days of such date, are treated as outstanding when determining the percent of the class owned by such individual and when determining the percent owned by the group. For purposes of calculating the percent of class owned after this offering, it was assumed that the officers, directors and principal shareholders will not be purchasing Shares in this offering. Unless otherwise indicated, each person named or included in the group has sole voting and investment power with respect to the shares of Common Stock set forth opposite the shareholder's name. (2) Includes 75,000 shares held of record by Sandra J. Biermeier and 300,000 shares of Common Stock which may be acquired pursuant to exercise of a non-qualified stock option. (3) Represents shares that may be acquired pursuant to exercise of options. (4) Does not include 600,000 shares which may be acquired by Edward W. Anderson upon exercise of an option to be issued simultaneously with the closing of this offering and the acquisition of REF. Such option is not exercisable until six months after the date of issuance. The business address of Mr. Biermeier and Ms. Calhoun is the address of PREMIS Corporation, 15301 Highway 55 West, Plymouth, MN 55447; the business address of Mr. Schmidt is Cordova Capital, Inc. 3350 Cumberland Circle, Suite 970, Atlanta, GA 30339; and the business address of Mr. Hanser is Astrocom Corporation, 2700 Summer Street N.E., Mpls, MN 55413. 37 DESCRIPTION OF SECURITIES GENERAL The Company's authorized capital stock consists of 10,000,000 shares of Common Stock, $.01 par value per share. As of the date of this Prospectus, there are 2,707,052 shares of Common Stock outstanding. COMMON STOCK There are no preemptive, subscription, conversion or redemption rights pertaining to the Common Stock. The absence of preemptive rights could result in a dilution of the interest of existing shareholders if additional shares of Common Stock are issued. Holders of the Common Stock are entitled to receive such dividends as may be declared by the Board of Directors out of assets legally available therefor and to share ratably in the assets of PREMIS available upon liquidation. Each share of Common Stock is entitled to one vote for all purposes and cumulative voting is not permitted in the election of directors. Accordingly, the holders of more than 50% of all of the outstanding shares of Common Stock can elect all of the directors. Significant corporate transactions such as amendments to the Articles of Incorporation, mergers, sales of assets and dissolution or liquidation require approval by the affirmative vote of the majority of the outstanding shares of Common Stock. Other matters to be voted upon by the holders of Common Stock normally require affirmative vote of a majority of the shares present at the particular shareholders meeting. WAIVER OF DIRECTOR LIABILITY AND INDEMNIFICATION The Company's Articles of Incorporation limit personal liability for breach of the fiduciary duty of its directors, to the fullest extent provided by the Minnesota Business Corporation Act. Such Articles eliminate the personal liability of directors for damages occasioned by breach of fiduciary duty, except for liability based on breach of the director's duty of loyalty to the Company, liability for acts or omissions not made in good faith, liability for acts or omissions involving intentional misconduct, liability based on payments of improper dividends, liability based on violations of state securities laws and liability for acts occurring prior to the date such provision was added. Any amendment to or repeal of such Articles' provision shall not adversely affect any right or protection of a director of the Company for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. In addition, the Minnesota Business Corporation Act and the Company's Bylaws provide that officers and directors of the Company have the right to indemnification from PREMIS for liability arising out of certain actions to the fullest extent permissible by law. This indemnification may be available for liabilities arising in connection with this offering. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Act") may be permitted to directors, officers or persons controlling the Company pursuant to such indemnification provisions, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is therefore unenforceable. STATE LAW PROVISIONS WITH POTENTIAL ANTI-TAKEOVER EFFECT Certain provisions of Minnesota law described below could have an anti-takeover effect. These provisions are intended to provide management flexibility, to enhance the likelihood of continuity and stability in the composition of the Company's Board of Directors and in the policies formulated by the Board and to discourage an unsolicited takeover of the Company, if the Board determines that such a takeover is not in the best interests of the Company and its shareholders. However, these provisions could have the effect of discouraging certain attempts to acquire the Company which could deprive the Company's shareholders of opportunities to sell their shares of Common Stock at prices higher than prevailing market prices. Section 302A.671 of the Minnesota Statutes applies, with certain exceptions, to any acquisition of voting stock of the Company (from a person other than the Company, and other than in connection with certain mergers and exchanges to which the Company is a party) resulting in the beneficial 38 ownership of 20% or more of the voting stock then outstanding. Section 302A.671 requires approval of any such acquisition by a majority vote of the shareholders of the Company prior to its consummation. In general, shares acquired in the absence of such approval are denied voting rights and are redeemable at their then-fair market value by the Company within 30 days after the acquiring person has failed to give a timely information statement to the Company or the date the shareholders voted not to grant voting rights to the acquiring person's shares. Section 302A.673 of the Minnesota Statutes generally prohibits any business combination by the Company, or any subsidiary of the Company, with any shareholder that purchases 10% or more of the Company's voting shares (an "interested shareholder") within four years following such interested shareholder's share acquisition date, unless the business combination is approved by a committee of all of the disinterested members of the Board of Directors of the Company before the interested shareholder's share acquisition date. TRANSFER AGENT AND REGISTRAR Corporate Stock Transfer, Denver, Colorado, is the transfer agent and registrar for the Common Stock. 39 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, the Company will have outstanding 4,452,057 shares of Common Stock (4,719,552 in the event that the Underwriters' over-allotment option is exercised in full), which does not include (i) 486,250 shares reserved for issuance under the Option Plan, 144,000 of which are subject to options outstanding as of September 1, 1996, (ii) 516,667 shares of Common Stock issuable upon exercise of non-qualified options granted from time to time as currently authorized by resolutions of the Board of Directors, 335,000 of which are subject to options currently outstanding, (iii) 175,000 shares of Common Stock issuable upon exercise of the Representative's Warrant, or (iv) 600,000 shares issuable upon exercise of options to be issued to Edward W. Anderson, President of REF, which cannot be exercised for 180 days following this offering. All of the shares to be issued in this offering will be freely tradable and available for future sale. In addition, all of the 2,707,052 shares of Common Stock currently outstanding, all of the 486,250 shares that may be issued under the Option Plan, and the 516,667 shares issuable upon exercise of authorized non-qualified options, have been registered under the Act and are freely tradable, provided that, pursuant to agreement with the Underwriters, 2,363,251 shares beneficially held by current officers and directors and 75,000 shares held by a former affiliate of the Company are subject to restrictions on sale, for a period of 180 days after this offering in the case of officers and directors, and 90 days after this offering in the case of the former affiliate. In addition, the 600,000 shares of Common Stock issuable upon exercise of the option to be granted to Edward W. Anderson may be registered for resale under the Act, although such shares are not currently registered. Such shares would then be "freely tradable." Moreover, provided the Company meets the reporting requirements of Rule 144 under the Act, a person (or persons whose sales are aggregated) who beneficially owns unregistered securities last acquired privately from the Company, or an affiliate of the Company at least two years previously and affiliates of the Company who beneficially own shares last acquired (whether or not such shares were acquired privately) from the Company or an affiliate of the Company at least two years previously, is entitled to sell within any three-month period a number of shares that does not exceed the greater of 1% of the then outstanding shares of the Company's Common Stock or the average weekly trading volume in the Company's Common Stock during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain manner-of-sale provisions, notice requirements and the availability of current public information about the Company. A person who has not been an affiliate of the Company at any time during the three months preceding a sale and who beneficially owns shares last acquired from the Company or an affiliate of the Company at least three years previously is entitled to sell all such shares under Rule 144 without regard to any of the limitations of the Rule. In addition, Rule 144A under the Act, as currently in effect, in general, permits unlimited resales of certain restricted securities of any issuer provided that the purchaser is an institution that owns and invests on a discretionary basis at least $100 million in securities or is a registered broker-dealer that owns and invests $10 million in securities. Rule 144A allows the existing shareholders of the Company to sell their shares to such institutions and registered broker-dealers without regard to any volume or other restrictions. Unlike under Rule 144, restricted securities sold under Rule 144A to nonaffiliates do not lose their status as restricted securities. The Company cannot predict the effect, if any, that sales of securities or the availability of such securities for sale could have on the market price, if any, prevailing from time to time. Nevertheless, sales of substantial amounts of the Company's securities could adversely affect prevailing market prices of the Company's securities and the Company's ability to raise additional capital by occurring at a time when it would be beneficial for the Company to sell securities. 40 UNDERWRITING The Underwriters named below (the "Underwriters"), for which R. J. Steichen & Company is acting as representative (the "Representative") have severally agreed, subject to the terms and conditions set forth in the Underwriting Agreement by and between PREMIS and the Underwriters, to purchase from PREMIS, and PREMIS has agreed to sell to the Underwriters, the respective number of shares of Common Stock set forth opposite each Underwriter's name below:
NUMBER OF UNDERWRITERS SHARES - ------------------------------------------------------------------------------------------- ----------- R. J. Steichen & Company................................................................... ----------- Total.................................................................................... 1,750,000 ----------- -----------
The nature of the Underwriters' obligations under the Underwriting Agreement is such that all shares of the Common Stock offered hereby, excluding shares covered by the over-allotment option granted to the Underwriters (discussed below), must be purchased if any are purchased. PREMIS has been advised by the Representative that the Underwriters propose initially to offer the Shares directly to the public at the price set forth on the cover page of this Prospectus and to certain dealers at such public offering price less a concession not to exceed $ per share. The Underwriters may allow, and such dealers may allow, a discount not to exceed $ per share in sales to certain other dealers. After the public offering, the public offering price and concessions and discounts may be changed by the Representative. PREMIS has granted to the Underwriters an over-allotment option, exercisable not later than 45 days after the date of this Prospectus, to purchase up to an additional 262,500 shares of Common Stock at the Price to Public set forth on the cover page of this Prospectus, less the underwriting discounts and commissions. To the extent that the Underwriters exercise the over-allotment option, the Underwriters will have a firm commitment to purchase such shares and PREMIS will be obligated pursuant to sell such shares to the Underwriters. The Underwriters may exercise the over-allotment option only for the purposes of covering over-allotments, if any, made in connection with the distribution of the shares to the public. In the Underwriting Agreement, PREMIS and the Underwriters have agreed to indemnify each other against certain liabilities under the Act, or to contribute to payments which the Underwriters may be required to make in respect thereof. Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers or persons controlling PREMIS pursuant to such indemnification provisions, PREMIS has been advised that in the opinion of the Securities and Exchange Commission (the "Commission") such indemnification is against public policy as expressed in the Act and is therefore unenforceable. PREMIS has agreed to pay the Representative a non-accountable expense allowance equal to 2 1/4% of the gross proceeds of sale of the shares, including shares sold upon exercise of the over-allotment option. The Company and certain of its executive officers and directors have agreed not to sell or otherwise dispose of any of their 2,363,251 shares of Common Stock for a period of 180 days from the date of this Prospectus, and a former affiliate of the Company has agreed not to sell or otherwise dispose of her 75,000 shares of Common Stock for a period of 90 days from the date of this Prospectus, except with the prior written consent of the Representative. 41 Upon closing of this offering, PREMIS has agreed to sell the Representative's Warrant to the Representative for nominal consideration, which will entitle the Representative to purchase 175,000 shares of Common Stock of PREMIS at a price per share equal to 120% of the Price to Public, commencing one year from the date of this Prospectus until four years after such date. The Representative's Warrant will also provide certain anti-dilution rights, registration rights and net issuance exercise rights to the Representative. Until the first anniversary of the date of this Prospectus, the Representative's Warrant may not be sold, transferred, assigned or hypothecated, except to officers or directors of the Representative. The offering price for the Common Stock will be determined by negotiations among PREMIS and the Representative, based largely upon the market price for the Common Stock at the time of the offering. The foregoing is a summary of the material provisions of the Underwriting Agreement and the Representative's Warrant. Copies of such documents have been filed as exhibits to the Registration Statement of which this Prospectus is a part. The rules of the Commission generally prohibit the Underwriters and other members of the selling group, if any, from making a market in the Common Stock during a "cooling-off" period immediately preceding the commencement of sales in the offering. The Commission has, however, adopted exemptions from these rules that permit passive market making under certain conditions. These rules permit an Underwriter or other members of the selling group, if any, to continue to make a market in the Common Stock subject to the condition, among others, that its bid not exceed the highest bid by a market maker not connected with the offering and that its net purchases on any one trading day not exceed prescribed limits. Pursuant to these exemptions, certain Underwriters and other members of the selling group, if any, may engage in passive market making in the Common Stock during the cooling-off period. LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for PREMIS by Moss & Barnett, A Professional Association, Minneapolis, Minnesota 55402. Fredrikson & Byron, P.A., Minneapolis, Minnesota 55402 has acted as counsel to the Representative in connection with certain legal matters relating to this offering. EXPERTS The financial statements of PREMIS as of March 31, 1995 and 1996, and for each of the three years in the period ended March 31, 1996, and the financial statements of REF as of March 31, 1996, and for each of the two years in the period ended March 31, 1996, included in this Prospectus, have been so included in reliance on the reports of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. AVAILABLE INFORMATION PREMIS is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports and other information with the Securities and Exchange Commission (the "Commission") relating to its business, financial position, results of operations and other matters. Such reports and other information can be inspected and copied at the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and its Regional Offices at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of such material also can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission 42 also maintains a Web site that contains reports, proxy and information statements and other materials that are filed through the Commission's Electronic Data Gathering, Analysis and Retrieval system. This Web site can be accessed at http://www.sec.gov. PREMIS has filed with the Commission in Washington, D.C., a Registration Statement on Form S-2 under the Securities Act of 1933, as amended (the "Act") with respect to the securities offered hereby. As permitted by the rules and regulations of the Commission, this Prospectus omits certain information contained in the Registration Statement. For further information with respect to PREMIS and the securities offered hereby, reference is hereby made to the Registration Statement and the exhibits and schedules thereto. Statements made in this Prospectus as to the contents of any contract or other document are not necessarily complete, and in each such instance reference is made to the copy of such contract or other document filed as an exhibit to such Registration Statement, or to such other document, each such statement being qualified in all respects by such reference. The Registration Statement, including the exhibits and schedules thereto, may be inspected at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part thereof may be obtained from such office upon payment of the prescribed fees. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents heretofore filed by PREMIS with the Commission (File No. 0-12196) pursuant to the Exchange Act are incorporated by reference in this Prospectus: (1) Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996; and (2) Quarterly Report on Form 10-QSB for the quarter ended June 30, 1996. All documents filed by PREMIS pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the termination of this offering shall be deemed to be incorporated by reference in this Prospectus and to be a part hereof from the date of filing such documents. Any statement contained herein, or in a document incorporated or deemed to be incorporated by reference herein, shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein, or in any subsequently filed document which also is or is deemed to be incorporated by reference herein, modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. Copies of the documents incorporated herein by reference (excluding exhibits unless such exhibits are specifically incorporated by reference into such documents) may be obtained upon written or oral request without charge by persons to whom this Prospectus is delivered. Requests should be made to F. T. Biermeier, Chief Executive Officer, PREMIS Corporation, 15301 Highway 55 West, Plymouth, MN 55447, 612-550-1999. 43 INDEX TO FINANCIAL STATEMENTS
PAGE ---- PREMIS CORPORATION Report of Independent Accountants......................................... F-2 Balance Sheet as of March 31, 1995 and 1996 (audited) and June 30, 1996 (unaudited).............................................................. F-3 Statement of Operations for the year ended March 31, 1994, 1995 and 1996 (audited) and the three months ended June 30, 1995 and 1996 (unaudited).............................................................. F-4 Statement of Shareholders' Equity for the years ended March 31, 1994, 1995 and 1996 (audited) and the three months ended June 30, 1996 (unaudited).............................................................. F-5 Statement of Cash Flows for the years ended March 31, 1994, 1995 and 1996 (audited) and the three months ended June 30, 1995 and 1996 (unaudited).............................................................. F-6 Notes to the Financial Statements......................................... F-7 REF RETAIL SYSTEMS CORPORATION Report of Independent Accountants......................................... F-12 Consolidated Balance Sheet as of March 31, 1995 and 1996 (audited) and June 30, 1996 (unaudited)................................................ F-13 Consolidated Statement of Operations for the Years ended March 31, 1995 and 1996 (audited) and the three months ended June 30, 1995 and 1996 (unaudited).............................................................. F-14 Consolidated Statement of Shareholders' Equity for the years ended March 31, 1995 and 1996 (audited) and the three months ended June 30, 1996 (unaudited).............................................................. F-15 Consolidated Statement of Cash Flows for the years ended March 31, 1995 and 1996 (audited) and the three months ended June 30, 1995 and 1996 (unaudited).............................................................. F-16 Notes to the Consolidated Financial Statements............................ F-17
PREMIS CORPORATION PRO FORMA COMBINED Introduction to Pro Forma Financial Information........................... F-22 Pro Forma Combined Balance Sheet as of June 30, 1996 (unaudited).......... F-23 Pro Forma Combined Statement of Operations for the year ended March 31, 1996 (unaudited)......................................................... F-24 Pro Forma Combined Statement of Operations for the three months ended June 30, 1996 (unaudited)..................................................... F-25 Notes to Pro Forma Financial Statements................................... F-26
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of PREMIS Corporation In our opinion, the accompanying balance sheet and the related statements of operations, of shareholders' equity and of cash flows present fairly, in all material respects, the financial position of PREMIS Corporation at March 31, 1995 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 1996 in conformity with generally accepted accounting principles. 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 audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Minneapolis, Minnesota May 10, 1996 F-2 PREMIS CORPORATION BALANCE SHEET ASSETS
MARCH 31, ---------------------- JUNE 30, 1995 1996 1996 ---------- ---------- ---------- (UNAUDITED) Current assets: Cash and cash equivalents............................. $ 426,959 $ 968,083 $ 368,366 Trade accounts receivable, net of allowance for doubtful accounts of $35,000, $82,420 and $54,420, respectively......................................... 541,240 1,204,874 2,077,471 Inventory............................................. 165,555 282,720 217,794 Prepaid expenses...................................... 1,200 11,537 130,636 Deferred taxes........................................ 50,000 33,000 33,000 ---------- ---------- ---------- Total current assets................................ 1,184,954 2,500,214 2,827,267 ---------- ---------- ---------- Property and equipment: Capitalized leased property........................... 950,000 Furniture and equipment............................... 197,135 225,437 225,437 Leasehold improvements................................ 12,229 31,773 31,773 Less accumulated depreciation and amortization........ (160,613) (173,685) (179,460) ---------- ---------- ---------- 48,751 83,525 1,027,750 ---------- ---------- ---------- Software distribution rights, net of accumulated amortization of $77,994, $158,776 and $179,656, respectively........................................... 325,916 249,301 236,421 ---------- ---------- ---------- Total assets........................................ $1,559,621 $2,833,040 $4,091,438 ---------- ---------- ---------- ---------- ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable................................ $ 177,339 $ 137,964 $ 361,853 Other accrued liabilities............................. 145,028 228,524 172,069 Accrued income taxes.................................. 510,000 131,211 Unearned income....................................... 170,529 187,211 139,098 Customer deposits..................................... 58,010 41,861 94,603 Notes payable -- banks................................ 23,513 17,746 13,579 Note payable.......................................... 77,108 85,182 64,676 Current portion of capital lease obligation........... 226,115 ---------- ---------- ---------- Total current liabilities........................... 651,527 1,208,488 1,203,204 ---------- ---------- ---------- Long-term liabilities: Notes payable -- banks................................ 38,526 9,721 9,721 Note payable.......................................... 187,558 102,376 102,376 Capital lease obligation.............................. 723,885 ---------- ---------- ---------- Total long-term liabilities......................... 226,084 112,097 835,982 ---------- ---------- ---------- Shareholders' equity: Common stock, 4,000,000 shares authorized, 2,590,694, 2,609,444 and 2,701,527 shares issued and outstanding, $.01 par value.......................... 25,906 26,094 27,015 Additional paid-in capital............................ 728,556 731,181 937,821 Retained earnings..................................... (72,452) 755,180 1,087,416 ---------- ---------- ---------- Total shareholders' equity.......................... 682,010 1,512,455 2,052,252 ---------- ---------- ---------- Total liabilities and shareholders' equity.......... $1,559,621 $2,833,040 $4,091,438 ---------- ---------- ---------- ---------- ---------- ----------
See accompanying notes to the financial statements. F-3 PREMIS CORPORATION STATEMENT OF OPERATIONS
THREE MONTHS ENDED YEAR ENDED MARCH 31, JUNE 30, ----------------------------------------- ---------------------------- 1994 1995 1996 1995 1996 ----------- ------------- ------------- ------------- ------------- (UNAUDITED) Revenue: System sales..................................... $ 666,364 $ 2,425,882 $ 4,923,132 $ 982,449 $ 1,570,791 Supplies sales................................... 16,233 15,282 33,184 2,239 13,395 Maintenance fees and other revenue............... 209,620 576,404 945,845 205,066 329,993 ----------- ------------- ------------- ------------- ------------- Total revenue.................................. 892,217 3,017,568 5,902,161 1,189,754 1,914,179 ----------- ------------- ------------- ------------- ------------- Cost of sales: Systems.......................................... 166,062 1,079,191 2,510,219 550,444 817,788 Supplies......................................... 9,143 11,035 28,852 3,711 8,481 Support.......................................... 173,000 324,652 497,251 87,505 141,470 ----------- ------------- ------------- ------------- ------------- Total cost of sales............................ 348,205 1,414,878 3,036,322 641,660 967,739 ----------- ------------- ------------- ------------- ------------- Gross profit....................................... 544,012 1,602,690 2,865,839 548,094 946,440 Selling, general, and administrative expenses...... 294,581 732,324 1,204,065 219,185 302,574 Research and development expenses.................. 147,500 368,161 303,000 82,466 94,650 ----------- ------------- ------------- ------------- ------------- Income from operations............................. 101,931 502,205 1,358,774 246,443 549,216 Interest expense, net.............................. 27,518 4,142 6,463 4,519 Other income (expense)............................. (3,000) ----------- ------------- ------------- ------------- ------------- Income before cumulative effect of a charge on accounting principles and income taxes............ 98,931 Cumulative effect of change in accounting principle......................................... 50,000 ----------- ------------- ------------- ------------- ------------- Income before income taxes......................... 148,931 474,687 1,354,632 239,980 544,697 Income tax expense................................. 527,000 95,992 212,461 ----------- ------------- ------------- ------------- ------------- Net income......................................... $ 148,931 $ 474,687 $ 827,632 $ 143,988 $ 332,236 ----------- ------------- ------------- ------------- ------------- ----------- ------------- ------------- ------------- ------------- Net income per share............................... $ 0.06 $ 0.18 $ 0.28 $ 0.05 $ 0.11 ----------- ------------- ------------- ------------- ------------- ----------- ------------- ------------- ------------- ------------- Weighted average number of common stock equivalents....................................... 2,590,694 2,590,694 2,925,581 2,912,661 2,979,683 ----------- ------------- ------------- ------------- ------------- ----------- ------------- ------------- ------------- -------------
See accompanying notes to the financial statements. F-4 PREMIS CORPORATION STATEMENT OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED MARCH 31, 1996 AND 1995 AND FOR THE THREE MONTHS ENDED JUNE 30, 1996
ACCUMULATED ADDITIONAL DEFICIT/ PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS TOTAL ----------- --------- ----------- ------------- ------------- Balance at March 31, 1993.......................... 2,590,694 $ 25,906 $ 728,556 $ (696,070) $ 58,392 Net income......................................... 148,931 148,931 ----------- --------- ----------- ------------- ------------- Balance at March 31, 1994.......................... 2,590,694 25,906 728,556 (547,139) 207,323 Net income......................................... 474,687 474,687 ----------- --------- ----------- ------------- ------------- Balance at March 31, 1995.......................... 2,590,694 25,906 728,556 (72,452) 682,010 Stock options exercised............................ 18,750 188 2,625 2,813 Net income......................................... 827,632 827,632 ----------- --------- ----------- ------------- ------------- Balance at March 31, 1996.......................... 2,609,444 26,094 731,181 755,180 1,512,455 Stock options exercised............................ 92,083 921 206,640 207,561 Net income......................................... 332,236 332,236 ----------- --------- ----------- ------------- ------------- Balance at June 30, 1996 (unaudited)............... 2,701,527 $ 27,015 $ 937,821 $ 1,087,416 $ 2,052,252 ----------- --------- ----------- ------------- ------------- ----------- --------- ----------- ------------- -------------
See accompanying notes to the financial statements. F-5 PREMIS CORPORATION STATEMENT OF CASH FLOWS
THREE MONTHS ENDED YEAR ENDED MARCH 31, JUNE 30, --------------------------------------- -------------------------- 1994 1995 1996 1995 1996 ----------- ------------ ------------ ------------ ------------ (UNAUDITED) Cash flows from operating activities: Net income............................................. $ 148,931 $ 474,687 $ 827,632 $ 143,988 $ 332,236 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization........................ 16,099 91,080 101,983 24,748 26,655 Changes in assets and liabilities: Trade accounts receivable.......................... (62,109) (438,917) (663,634) (118,354) (872,597) Inventory.......................................... (6,432) (147,095) (117,165) 49,704 64,926 Prepaid expenses................................... 2,053 (1,200) (10,337) (19,449) (119,099) Deferred taxes..................................... (50,000) 17,000 64,000 81,250 Trade accounts payable............................. (6,389) 156,546 (39,375) (83,522) 223,889 Accrued liabilities................................ 569 124,721 596,434 (4,532) (435,244) Unearned income.................................... 6,165 139,786 16,682 (13,876) (48,113) Customer deposits.................................. 27,666 21,728 (16,149) 93,970 52,742 Gain from disposal of fixed assets................. (1,716) ----------- ------------ ------------ ------------ ------------ Net cash provided by operating activities........ 76,553 419,620 713,071 136,677 (693,355) ----------- ------------ ------------ ------------ ------------ Cash flows from investing activities: Purchase of property and equipment..................... (45,537) (7,632) (72,325) (28,505) Sale of property and equipment......................... 9,000 16,350 Purchase of software distribution rights............... (139,242) (4,167) (8,000) ----------- ------------ ------------ ------------ ------------ Net cash (used) by investing activities.......... (45,537) (137,874) (60,142) (28,505) (8,000) ----------- ------------ ------------ ------------ ------------ Cash flows from financing activities: Exercising of common stock options..................... 2,813 126,311 Repayment of debt (net)................................ 32,652 29,387 (111,680) (18,028) (24,673) Capital lease obligations.............................. (3,492) (3,331) (2,938) (930) ----------- ------------ ------------ ------------ ------------ Net cash provided (used) by financing activities...................................... 29,160 26,056 (111,805) (18,958) 101,638 ----------- ------------ ------------ ------------ ------------ Net increase in cash..................................... 60,176 307,802 541,124 89,214 (599,717) Cash and cash equivalents at beginning of year........... 58,981 119,157 426,959 426,959 968,083 ----------- ------------ ------------ ------------ ------------ Cash and cash equivalents at end of year................. $ 119,157 $ 426,959 $ 968,083 $ 516,173 $ 368,366 ----------- ------------ ------------ ------------ ------------ ----------- ------------ ------------ ------------ ------------ Non-cash transaction: Capital lease obligation............................... $ 950,000
See accompanying notes to the financial statements. F-6 PREMIS CORPORATION NOTES TO THE FINANCIAL STATEMENTS NOTE 1 -- ORGANIZATION PREMIS Corporation (the "Company") is in the business of developing and selling turnkey computer software systems. NOTE 2 -- ACCOUNTING POLICIES CASH EQUIVALENTS Marketable securities with original maturity of three months or less are included in cash equivalents. INVENTORY Inventory is stated at the lower of cost (first-in, first-out) or market. Inventory consists of computer equipment held for resale. No reserves have been provided as historical write-downs have been insignificant. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and depreciated for financial statement purposes on a straight-line basis over the estimated useful life of the assets of three to five years for furniture and equipment and the life of the lease for leased property and improvements. Depreciation expense for the years ended March 31, 1994, 1995 and 1996 was $16,099, $26,838 and $21,201, respectively. SOFTWARE DISTRIBUTION RIGHTS The Company has acquired certain software marketing licenses and distribution rights. The costs are capitalized and amortized using the straight-line method over the term of the agreements which range from three to five years. RESEARCH AND DEVELOPMENT COSTS Expenditures for research and software development costs are expensed as incurred. Such costs are required to be expensed until the point technological feasibility and proven marketability of the product are established. Costs otherwise capitalizable after technological feasibility is achieved have also been expensed because they have been insignificant. No costs have been capitalized due to post-technological feasibility costs being immaterial to both total assets and pre-tax results. REVENUE RECOGNITION System sales include software and certain computer equipment. Revenue is recognized after completion of installation. Customers are provided with a warranty period which provides customer support for a period of three months. No reserve has been provided as warranty costs have been insignificant. After the warranty period, support is only provided if a maintenance contract is in place. Maintenance fees are deferred when billed and are recognized ratably over the contract period. NET INCOME PER SHARE OF COMMON STOCK Net earnings per share was computed by dividing net income by the weighted average number of shares of common stock and dilutive common stock equivalents using the treasury method. INCOME TAXES The Company accounts for income taxes under the liability method of accounting. Deferred tax assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using currently enacted tax rates. F-7 PREMIS CORPORATION NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) NOTE 2 -- ACCOUNTING POLICIES (CONTINUED) FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash and cash equivalents, short-term trade receivables and payables for which current carrying amounts approximate fair market value. Additionally, interest rates on outstanding debt are at rates which approximate market rates for debt with similar terms and average maturities. CASH FLOW DISCLOSURE For the years ended March 31, 1995 and 1996, the Company made cash payments for interest of $30,095 and $27,960, respectively. USE OF 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 revenue and expenses during the reporting period. Actual results could differ from those estimates. UNAUDITED INTERIM FINANCIAL STATEMENTS In the opinion of management, PREMIS Corporation has made all adjustments consisting primarily of normal recurring accruals necesssary for a fair presentation of the financial condition of the Company as of June 30, 1996 and the results of operations and cash flows for the three month periods ended June 30, 1996 and 1995, as presented in the accompanying unaudited financial statements. NOTE 3 -- LEASE COMMITMENTS The Company leases equipment and its facilities under various operating leases. Future minimum payments under noncancelable leases are as follows:
FISCAL YEAR ENDING MARCH 31, - --------------------------------------------------------------------------------- 1997............................................................................. $ 94,080 1998............................................................................. 88,137 1999............................................................................. 7,116 ----------- $ 189,333 ----------- -----------
Rental expense under operating leases was $29,794, $47,787 and $114,803 for the years ended March 31, 1994, 1995 and 1996, respectively. NOTE 4 -- EMPLOYEE STOCK OPTION PLAN The PREMIS Corporation 1994 Employee Stock Option Plan (the "Plan") was adopted to provide incentives to selected eligible officers and key employees of the Company. As adopted, the Plan authorized qualified options for up to 500,000 shares of common stock. In addition, the Board of Directors has reserved 600,000 shares of common stock for non-qualified stock options. The Company accounts for stock options and other equity instruments in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees." Effective in fiscal 1997, the Company will account for stock options in accordance with Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting of Stock Based Compensation." SFAS No. 123 establishes accounting standards for organizations that have stock based employee compensation plans. Generally, the statement defines a fair value based method of accounting for these plans which requires the measurement of compensation costs at the grant date and recognition of such costs over the service period, which is usually the vesting period. The Company will continue to value its options under APB Opinion No. 25 and will F-8 PREMIS CORPORATION NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) NOTE 4 -- EMPLOYEE STOCK OPTION PLAN (CONTINUED) comply with the disclosure requirements of SFAS No. 123. The Company determines option prices at the time any option is granted and the price shall not be less than the fair market value of the stock at the date of grant. Activity under the Company's stock option plans is presented below:
EMPLOYEE STOCK OPTIONS NON-QUALIFIED OPTIONS --------------------------- -------------------------- PRICE RANGE PRICE RANGE PER SHARE OPTIONS PER SHARE OPTIONS --------------- ---------- --------------- --------- Balance at March 31, 1993.......... $.05 100,000 Granted............................ $.15 110,000 ---------- Balance at March 31, 1994.......... $.05-$.15 210,000 -- Granted............................ $.15 290,000 $.17 300,000 Cancelled.......................... $.05-$.15 (210,000) ---------- --------- Balance at March 31, 1995.......... $.15 290,000 $.17 300,000 Granted............................ $1.125 55,000 $1.50-$1.75 255,000 Exercised.......................... $0.15 (18,750) Cancelled.......................... $0.15-$1.125 (169,500) ---------- --------- Balance at March 31, 1996.......... $.15-$1.125 156,750 $.17-$1.75 555,000 ---------- --------- ---------- --------- Options exercisable at March 31, 1996.............................. 27,500 300,000 ---------- --------- ---------- ---------
The outstanding non-qualified options for 300,000 shares are held by an officer-shareholder. All outstanding options expire five years from the date of grant. NOTE 5 -- NOTES PAYABLE The Company's notes payable to banks at March 31, 1996 are secured by automobiles, computer equipment and accounts receivable and consist of the following:
1995 1996 ---------- ---------- Note payable - bank, monthly payments of $439 through May, 1996, interest at 6.9%.................................................... $ 16,403 Note payable - bank, monthly payments of $299 through December, 1995, interest at 9%...................................................... 2,580 Note payable - bank, monthly payments of $1,388 through October 20, 1997, variable interest at 10.25%................................... 43,056 $ 27,467 ---------- ---------- 62,039 27,467 Less current portion................................................. (23,513) (17,746) ---------- ---------- $ 38,526 $ 9,721 ---------- ---------- ---------- ----------
F-9 PREMIS CORPORATION NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) NOTE 5 -- NOTES PAYABLE (CONTINUED) The Company also has a note payable at March 31, 1995 and 1996 (see Note 7) for the purchase of a software license and distribution rights as follows:
1995 1996 ----------- ----------- Note payable, monthly payments of $8,342 through April, 1999........ $ 264,666 $ 187,558 Less current portion................................................ (77,108) (85,182) ----------- ----------- $ 187,558 $ 102,376 ----------- ----------- ----------- -----------
NOTE 6 -- INCOME TAXES Income tax expense is comprised of the following at March 31, 1996: Current income taxes: Federal........................................................ $ 400,000 State.......................................................... 110,000 --------- Total current income taxes................................... 510,000 Deferred income taxes............................................ 17,000 --------- Income tax expense............................................... $ 527,000 --------- ---------
At April 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). The effect of this change in accounting principle as of April 1, 1993 was the recognition of a deferred tax asset of $50,000. This amount is net of a valuation allowance as recorded in accordance with SFAS 109. A reconciliation of the expected federal statutory rate for the years ended March 31, 1994, 1995 and 1996 is as follows:
1994 1995 1996 ---------- ------------ ----------- Expected tax provision at statutory rate.............. $ 33,600 $ 161,400 $ 462,000 State income tax provision, net of federal tax effect............................................... 5,900 28,480 81,000 Reduction of valuation allowance...................... (26,000) (112,000) Effect of graduated income tax rates.................. (9,900) (59,000) Other................................................. (3,600) (18,880) (16,000) ---------- ------------ ----------- Total............................................. $ 0 $ 0 $ 527,000 ---------- ------------ ----------- ---------- ------------ -----------
No tax provision was recorded in the fiscal years ended March 31, 1994 and 1995 due to the utilization of net operating loss (NOL) carryforwards. The deferred tax provisions of approximately $26,000 and $112,000 for the years ended March 31, 1994 and 1995 are negated by reductions in the valuation allowances as previously established in accordance with SFAS 109. F-10 PREMIS CORPORATION NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) NOTE 6 -- INCOME TAXES (CONTINUED) Deferred tax assets (liabilities) are comprised of the following at March 31:
1994 1995 1996 ------------ --------- --------- Allowance for doubtful accounts.......................... $ 4,500 $ 14,000 $ 33,000 Net operating loss carryforwards......................... 154,500 24,000 Business credit carryforwards............................ 12,000 12,000 Valuation allowance...................................... (124,000) Other.................................................... 3,000 ------------ --------- --------- Net deferred tax asset............................... $ 50,000 $ 50,000 $ 33,000 ------------ --------- --------- ------------ --------- ---------
NOTE 7 -- PURCHASE OF SOFTWARE LICENSE AND DISTRIBUTION RIGHTS During fiscal year 1995, PREMIS purchased a software license and distribution rights for a period of 5 years for $403,910 ($75,000, plus 48 fixed monthly royalty payments). In addition to the purchase price, the Company must make contingent royalty payments based on a percentage of the net cash receipts from related sales. The Company capitalized the purchase price as software distribution rights and is amortizing the amount over the term of the agreement. Amortization of $77,994 and $80,782 is included in cost of sales for the years ended March 31, 1995 and 1996, respectively. NOTE 8 -- EMPLOYEE BENEFITS During fiscal year 1995, the Company established a retirement savings plan which qualifies under the Internal Revenue Code Section 401(k). All employees with at least 90 days of employment are eligible to participate in the Plan. The Company's contributions to the Plan are based on 15% of employee contributions which are subject to salary limitations. Company contributions to the Plan were approximately $5,000 during 1996. In fiscal 1996, the Company also paid a one time discretionary profit sharing bonus of $16,000. NOTE 9 -- SIGNIFICANT CUSTOMERS Sales to one customer represented 39% and 64% of total revenues during 1995 and 1996, respectively. Additionally, this customer represented 55% and 61% of trade accounts receivable at March 31, 1995 and 1996, respectively. NOTE 10 -- SUBSEQUENT EVENT (UNAUDITED) On June 30, 1996, the Company signed a lease agreement to be effective September 1, 1996 which was recorded as a capital lease. The Company's executive offices and operations will occupy this facility, which is owned by a limited liability partnership controlled by two officers and directors of the Company. The lease has an initial ten year term with monthly base rent of $13,477 and two successive two year options for renewals. PREMIS has guaranteed the mortgage loan obligation of the limited liability partnership with respect to this property in the principal amount of $945,000. This loan carries interest at 2.75% over the rate on five year treasury notes. PREMIS has entered into a Stock Purchase Agreement dated July 9, 1996 with the shareholders of REF Retail Systems Corporation ("REF") for purchase of all of the issued and outstanding equity securities of REF for $6.5 million payable in cash upon closing. F-11 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of REF Retail Systems Corporation In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of shareholders' equity and of cash flows present fairly, in all material respects, the financial position of REF Retail Systems Corporation and its subsidiary at March 31, 1995 and 1996, and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. 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 audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Minneapolis, Minnesota August 7, 1996 F-12 REF RETAIL SYSTEMS CORPORATION CONSOLIDATED BALANCE SHEET ASSETS
MARCH 31, ------------------------ JUNE 30, 1995 1996 1996 ----------- ----------- ----------- (UNAUDITED) Current assets: Cash and cash equivalents..................................... $ 523,399 $ 197,327 $ 107,101 Trade accounts receivable, less allowance for doubtful accounts of $63,306 and $16,420, respectively................ 301,444 596,279 587,123 Inventory..................................................... 96,852 78,118 Prepaid expenses.............................................. 52,721 22,499 23,589 Cost and estimated earnings in excess of billings............. 747,140 423,915 529,703 Other current assets.......................................... 3,392 58,695 56,890 ----------- ----------- ----------- Total current assets........................................ 1,628,096 1,395,567 1,382,524 ----------- ----------- ----------- Property and equipment: Furniture and equipment....................................... 467,622 787,424 817,359 Leasehold improvements........................................ 5,521 Less accumulated depreciation and amortization................ (270,309) (416,264) (445,742) ----------- ----------- ----------- 202,834 371,160 371,617 ----------- ----------- ----------- Capitalized software development................................ 473,038 602,393 ----------- ----------- ----------- Total assets................................................ $ 1,830,930 $ 2,239,765 $ 2,356,534 ----------- ----------- ----------- ----------- ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable........................................ $ 20,422 $ 37,129 $ 54,002 Other accrued liabilities..................................... 107,442 128,507 82,050 Accrued income taxes.......................................... 137,507 67,083 159,473 Unearned income............................................... 90,745 77,800 104,066 Customer deposits............................................. 65,680 82,008 12,016 Notes payable -- banks........................................ 25,718 Notes payable................................................. 41,064 Note payable -- shareholder................................... 28,305 63 62 Deferred rent................................................. 24,976 49,791 ----------- ----------- ----------- Total current liabilities................................... 450,101 484,348 461,460 ----------- ----------- ----------- Long-term liabilities: Deferred income taxes......................................... 19,295 120,650 59,927 Notes payable -- banks........................................ 98,823 137,274 Notes payable................................................. 112,783 143,533 ----------- ----------- ----------- Total long-term liabilities................................. 19,295 332,256 340,734 ----------- ----------- ----------- Shareholders' equity: Preferred Class A stock: no par value; unlimited shares authorized; 20,000 shares outstanding at March 31, 1995...... 162,417 Class B Special stock: no par value; unlimited shares authorized; 925,000 shares outstanding at both dates......... 36,379 35,700 35,700 Common stock: no par value; unlimited shares authorized; 2,000 shares outstanding at both dates............................. 1 1 1 Retained earnings............................................. 1,168,884 1,335,524 1,471,516 Cumulative translation adjustment............................. (6,147) 51,936 47,123 ----------- ----------- ----------- Total shareholders' equity.................................. 1,361,534 1,423,161 1,554,340 ----------- ----------- ----------- Total liabilities and shareholders' equity.................. $ 1,830,930 $ 2,239,765 $ 2,356,534 ----------- ----------- ----------- ----------- ----------- -----------
See accompanying notes to the consolidated financial statements. F-13 REF RETAIL SYSTEMS CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS YEAR ENDED MARCH 31, ENDED JUNE 30, ---------------------------- --------------------------- 1995 1996 1995 1996 ------------- ------------- ------------ ------------- (UNAUDITED) Revenue: System sales......................................... $ 2,676,945 $ 2,725,256 $ 384,604 $ 967,473 Maintenance fees and other service revenue........... 410,155 471,260 107,648 80,528 ------------- ------------- ------------ ------------- Total revenue...................................... 3,087,100 3,196,516 492,252 1,048,001 ------------- ------------- ------------ ------------- Cost of sales.......................................... 1,140,348 1,434,018 313,613 482,397 ------------- ------------- ------------ ------------- Gross profit........................................... 1,946,752 1,762,498 178,639 565,604 Selling, general, and administrative expenses.......... 1,199,555 1,726,537 312,514 440,093 ------------- ------------- ------------ ------------- Income (loss) from operations.......................... 747,197 35,961 (133,875) 125,511 Interest expense....................................... (3,026) (5,475) (175) (4,209) Other income........................................... 45,500 148,000 -- -- ------------- ------------- ------------ ------------- Income (loss) before income taxes...................... 789,671 178,486 (134,050) 121,302 Income tax expense (benefit)........................... 246,470 (7,975) (46,903) (14,690) ------------- ------------- ------------ ------------- Net income (loss)...................................... $ 543,201 $ 186,461 $ (87,147) $ 135,992 ------------- ------------- ------------ ------------- ------------- ------------- ------------ -------------
See accompanying notes to the consolidated financial statements. F-14 REF RETAIL SYSTEMS CORPORATION CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
CLASS A PREFERRED CLASS B SPECIAL COMMON CUMULATIVE -------------------- -------------------- -------------------------- TRANSLATION RETAINED SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ADJUSTMENT EARNINGS --------- --------- --------- --------- ----------- ------------- ----------- ---------- Balance at March 31, 1994....... 40,000 $ 324,834 925,000 $ 36,379 2,000 $ 1 $ (12,029) $ 645,936 Net income.................... 543,201 Preferred dividends........... (20,253) Effect of currency translation adjustment................... (10,282) Redeem preferred shares....... (20,000) (162,417) 16,164 -- --------- --------- --------- --------- ----- ----------- ---------- Balance at March 31, 1995....... 20,000 162,417 925,000 36,379 2,000 1 (6,147) 1,168,884 Net income.................... 186,461 Dividends on preferred stock........................ (10,324) Redeem Class B special shares....................... (18,500) (679) (9,497) Redeem Class A preferred shares....................... (20,000) (162,417) 15,746 Currency translation adjustment................... 42,337 -- --------- --------- --------- --------- ----- ----------- ---------- Balance at March 31, 1996....... 0 0 906,500 35,700 2,000 1 51,936 1,335,524 Net income (unaudited)........ 135,992 Currency translation adjustment (unaudited)....... (4,813) -- --------- --------- --------- --------- ----- ----------- ---------- Balance at June 30, 1996 (unaudited).................... 0 $ 0 906,500 $ 35,700 2,000 $ 1 $ 47,123 $1,471,516 -- -- --------- --------- --------- --------- ----- ----------- ---------- --------- --------- --------- --------- ----- ----------- ---------- TOTAL ---------- Balance at March 31, 1994....... $ 995,121 Net income.................... 543,201 Preferred dividends........... (20,253) Effect of currency translation adjustment................... (10,282) Redeem preferred shares....... (146,253) ---------- Balance at March 31, 1995....... 1,361,534 Net income.................... 186,461 Dividends on preferred stock........................ (10,324) Redeem Class B special shares....................... (10,176) Redeem Class A preferred shares....................... (146,671) Currency translation adjustment................... 42,337 ---------- Balance at March 31, 1996....... 1,423,161 Net income (unaudited)........ 135,992 Currency translation adjustment (unaudited)....... (4,813) ---------- Balance at June 30, 1996 (unaudited).................... $1,554,340 ---------- ----------
See accompanying notes to the consolidated financial statements. F-15 REF RETAIL SYSTEMS CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED YEAR ENDED MARCH 31, JUNE 30, -------------------------- -------------------------- 1995 1996 1995 1996 ------------ ------------ ------------ ------------ (UNAUDITED) Cash flows from operating activities: Net income (loss)............................................. $ 543,201 $ 186,461 $ (87,147) $ 135,992 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization............................... 62,757 141,697 22,083 57,822 Changes in assets and liabilities: Trade accounts receivable................................. 14,771 (245,371) (9,553) 7,244 Inventory................................................. (95,448) (2,788) 18,452 Prepaid expenses.......................................... 21,620 8,554 (187,430) 451 Costs and earnings in excess of billings.................. (751,247) 340,205 754,391 (107,329) Income tax receivable..................................... 144,091 50,262 Deferred taxes............................................ (13,078) 89,176 (60,432) Trade accounts payable.................................... 4,847 15,873 (881) 17,021 Accrued liabilities....................................... 121,165 (102,095) (42,250) 46,637 Unearned income........................................... 31,792 (15,389) 10,666 26,560 Customer deposits......................................... 57,490 14,186 (43,923) (69,840) Deferred rent............................................. 24,614 24,936 ------------ ------------ ------------ ------------ Net cash provided by operating activities............... 237,409 412,725 413,168 97,514 ------------ ------------ ------------ ------------ Cash flows from investing activities: Purchase of property and equipment............................ (118,094) (272,860) (41,740) (38,300) Capitalized software development.............................. (351,636) (152,270) Investment in subsidiary...................................... (205,176) ------------ ------------ ------------ ------------ Net cash (used) by investing activities................. (118,094) (829,672) (41,740) (190,570) ------------ ------------ ------------ ------------ Cash flows from financing activities: Payment of dividend........................................... (20,253) (10,324) (10,102) Repayment of note payable to shareholder...................... (22,865) (28,715) (28,580) Repayment of notes payable.................................... 274,351 3,323 Redemption of Common Shares................................... (10,178) Redemption of preference shares............................... (146,253) (146,671) (144,316) ------------ ------------ ------------ ------------ Net cash provided (used) by financing activities........ (189,371) 78,463 (182,998) 3,323 ------------ ------------ ------------ ------------ Effect of exchange rate changes on cash......................... (3,487) 12,412 12,105 (493) ------------ ------------ ------------ ------------ Net increase in cash and cash equivalents....................... (73,543) (326,072) 200,535 (90,226) Cash and cash equivalents at beginning of period................ 596,942 523,399 523,399 197,327 ------------ ------------ ------------ ------------ Cash and cash equivalents at end of period...................... $ 523,399 $ 197,327 $ 723,934 $ 107,101 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
See accompanying notes to the consolidated financial statements. F-16 REF RETAIL SYSTEMS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- ORGANIZATION REF Retail Systems Corporation (the "Company") is a Canadian business that develops and markets point-of-sale application software to the retail distribution marketplace. In August, 1995, the Company acquired 100% of the outstanding common shares of Softworks Group, Inc. ("Softworks"). The operations of Softworks have been incorporated into the Company on the date of acquisition. NOTE 2 -- ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash and investments in Canadian treasuries with an original maturity of three months or less. Investments are valued at cost, which approximates market. BASIS OF PRESENTATION The consolidated financial statements are presented in U.S. dollars and are presented in accordance with accounting principles generally accepted in the United States. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts are eliminated in consolidation. INVENTORY Inventory is stated at the lower of cost (first-in, first-out) or market. Inventory consists primarily of software licenses held for resale. No reserves have been provided, since historical writedowns have been insignificant. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and depreciated for financial statement purposes on a declining-balance basis over the estimated useful lives of the assets, which is three to five years for furniture and equipment. RESEARCH AND DEVELOPMENT COSTS Costs incurred to establish the technological feasibility of computer software to be marketed are expensed as research and development costs in the period incurred. Costs incurred subsequent to the establishment of technological feasibility and before the software is released to the general public are capitalized as software development costs. Such costs are amortized to cost of revenues at the greater of straight-line amortization over three years or the proportion of the current period's product revenues to total expected product revenues. Recording of amortization of software development cost began in May, 1996 when certain modules of the software were released to the general public. REVENUE RECOGNITION Revenues derived from system installation contracts are recognized over the period the Company satisfies its obligations using the percentage-of-completion method. Progress on the contracts is measured by the percentage of cost incurred to date to the total estimated cost for each contract. Management considers cost to be the best available measure of progress on these contracts. Changes in conditions and estimated earnings may result in revisions of estimated costs and earnings during the course of the contract and are reflected in the accounting period in which the facts which require the revision become known. In the normal course of business, the Company may also be subject to a risk of loss by incurring costs to complete a contract in excess of the fixed bid price. Customers are provided with a warranty which provides customer support for a 90-day period. No reserve has been provided, since warranty costs have been insignificant. After the 90-day warranty period, support is provided only if a maintenance contract is in place. Revenues derived from system maintenance contracts are deferred and recognized ratably over the contract period. F-17 REF RETAIL SYSTEMS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 -- ACCOUNTING POLICIES (CONTINUED) INCOME TAXES The Company accounts for income taxes under the liability method of accounting. Deferred tax assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using currently enacted tax rates. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash and cash equivalents, short-term trade receivables and payables for which current carrying amounts approximate fair market value. Additionally, interest rates on outstanding debt are at rates which approximate market rates for debt with similar terms and average maturities. USE OF 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 revenue and expenses during the reporting period. Actual results could differ from those estimates. CASH FLOW DISCLOSURE For the years ended March 31, 1995 and 1996, the Company made cash payments for interest of $3,026 and $5,475, respectively. UNAUDITED INTERIM FINANCIAL STATEMENTS In the opinion of management, REF Retail Systems Corporation has made all adjustments consisting primarily of normal recurring accruals, necessary for a fair presentation of the financial condition of the Company as of June 30, 1996 and the results of operations and cash flows for the three month periods ended June 30, 1996 and 1995, as presented in the accompanying unaudited financial statements. NOTE 3 -- COSTS, ESTIMATED EARNINGS AND BILLINGS ON UNCOMPLETED CONTRACTS IN PROGRESS Costs, estimated earnings and billings on uncompleted contracts are summarized as follows:
MARCH 31, ---------------------------- 1995 1996 ------------- ------------- Costs incurred on uncompleted contracts......................... $ 400,426 $ 762,849 Estimated earnings.............................................. 926,240 549,819 ------------- ------------- 1,326,666 1,312,668 Billings to date................................................ 579,526 888,753 ------------- ------------- Costs and estimated earnings in excess of billings.............. $ 747,140 $ 423,915 ------------- ------------- ------------- -------------
This amount is included in current assets as all contracts in progress are expected to be completed within one year. Billings in excess of costs and estimated earnings of $65,080 and $82,008 are reported as customer deposits at March 31, 1995 and 1996, respectively. F-18 REF RETAIL SYSTEMS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 -- BUSINESS COMBINATIONS In August, 1995, the Company acquired all of the outstanding shares of Softworks for $207,539 (CDN$283,000) in a transaction accounted for as a purchase. For financial statement purposes, the assets acquired and liabilities assumed were recorded at their respective fair market values as follows: Tangible assets acquired......................................... $ 148,890 Software development costs....................................... 115,862 Total liabilities assumed........................................ (57,213) --------- Purchase price................................................. $ 207,539 --------- ---------
The software development costs relate to specific products which were determined to be technologically feasible at the date of acquisition and will be amortized in accordance with the polices disclosed in Note 2. NOTE 5 -- LEASE COMMITMENTS The Company leases equipment and its facilities under various operating leases. Future minimum payments under noncancelable leases are as follows:
FISCAL YEAR ENDING MARCH 31, - ------------------------------------------------------------------------------- 1997........................................................................... $ 78,863 1998........................................................................... 147,582 1999........................................................................... 173,229 2000........................................................................... 147,186 2001........................................................................... 149,946 Thereafter..................................................................... 806,782 ------------- $ 1,503,588 ------------- -------------
Rental expense under operating leases was $84,090 and $139,235 for the years ended March 31, 1995 and 1996, respectively. NOTE 6 -- NOTES PAYABLE The Company's notes payable to banks at March 31, 1996 are Small Business Development Loans, are secured by assets of the Company and consist of the following: Note payable -- bank, monthly payments $1,759 through December, 2000, interest at 2% above prime (8.75% at March 31, 1996)...... $ 54,273 Note payable -- bank, monthly payments $2,201 through February, 2001, interest at 2% above prime (8.75% at March 31, 1996)...... 70,268 --------- 124,541 Less current portion............................................. 25,718 --------- $ 98,823 --------- ---------
F-19 REF RETAIL SYSTEMS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6 -- NOTES PAYABLE (CONTINUED) The Company has notes payable at March 31, 1996 for the purchase of a software license and distribution rights and the purchase of inventory as follows: Note payable related to acquisition of Softworks, monthly payments of $1,533 through August, 2000, secured by assets of the Company, interest at 7%..................................... $ 81,231 Inventory note payable, monthly payments of $2,384 through February, 1999, interest at 9.7%p............................... 72,616 --------- 153,847 Less current portion............................................. 41,064 --------- $ 112,783 --------- ---------
The Company also has an interest bearing note payable to an officer with a balance of $28,305 and $63 at March 31, 1995 and 1996, respectively. The note carries an interest rate of 7.42% and is payable in monthly installments of $1,471. NOTE 7 -- INCOME TAXES Income tax expense is comprised of the following at March 31:
1995 1996 ----------- ------------ Current income taxes: Federal.......................................................... $ 160,740 $ (100,914) Provincial....................................................... 105,200 (8,416) ----------- ------------ Total current income taxes..................................... 265,940 (109,330) Deferred income taxes expense (benefit)............................ (19,470) 101,355 ----------- ------------ Income taxes expense (benefit)..................................... $ 246,470 $ (7,975) ----------- ------------ ----------- ------------
A reconciliation of the expected Canadian federal income taxes for the years ended March 31, 1995 and 1996 is as follows:
1995 1996 ----------- ---------- Expected tax provision at 29%........................................ $ 229,000 $ 53,349 Provincial income tax provision, net of federal tax effect........... 114,500 25,880 Small business tax rate benefit...................................... (71,000) (16,000) Net benefit from research and development credits.................... (28,800) (68,000) Other................................................................ 2,770 (3,204) ----------- ---------- Total income taxes expense (benefit)............................... $ 246,470 $ (7,975) ----------- ---------- ----------- ----------
Deferred tax (assets) liabilities are comprised of the following at March 31:
1995 1996 --------- ----------- Capitalized software development..................................... $ 90,400 Research and development credit...................................... $ 15,205 34,552 Deferred revenue..................................................... (8,772) Depreciation......................................................... 4,090 4,470 --------- ----------- Net deferred income tax liabilities................................ $ 19,295 $ 120,650 --------- ----------- --------- -----------
F-20 REF RETAIL SYSTEMS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8 -- EMPLOYEE BENEFITS During fiscal year 1996, the Company established a defined contribution employee retirement plan. All employees with at least one year of employment are eligible to participate. The Company's contributions to the plan range from 1% to 2% of the employee's compensation depending upon length of service. The Company's contribution for the year ended March 31, 1996 was $15,504. NOTE 9 -- SIGNIFICANT CUSTOMERS Sales to one customer represented 42% and 40% of total revenues during 1995 and 1996, respectively. This customer represented 14% of trade accounts receivable at March 31, 1996. In addition, two different customers represented 10% and 13% of 1995 revenues and two separate customers represented 10% and 11% of 1996 revenues. NOTE 10 -- OTHER INCOME Other income in 1996 represents proceeds from the settlement of a law suit brought against former employees. F-21 PREMIS CORPORATION PRO FORMA COMBINED FINANCIAL STATEMENTS (UNAUDITED) The following unaudited pro forma financial statements give effect to the acquisition by PREMIS Corporation (PREMIS) of REF Retail Systems Corporation (REF) in a transaction to be accounted for as a purchase. The unaudited pro forma balance sheet is based on the individual balance sheets of PREMIS and REF appearing elsewhere in this Prospectus and has been prepared to reflect the acquisition by PREMIS of REF as of June 30, 1996. The unaudited pro forma statement of income is based on the individual statements of income of PREMIS and REF appearing elsewhere in this Prospectus, and combines the results of operations of PREMIS and REF for the year ended March 31, 1996 and for the three months ended June 30, 1996 as if the acquisition occurred on April 1, 1995. These unaudited pro forma financial statements should be read in connection with the historical financial statements and notes thereto of PREMIS and REF included elsewhere in this Prospectus. The accompanying unaudited pro forma financial statements do not necessarily reflect the financial position or results of operations of the Company had the Company acquired REF as of June 30, 1996 (for purposes of the Pro Forma Combined Balance Sheet) or as of April 1, 1995 (for purposes of the Pro Forma Combined Statement of Operations for the year ended March 31, 1996 or for the three months ended June 30, 1996). F-22 PREMIS CORPORATION PRO FORMA COMBINED BALANCE SHEET YEAR ENDED JUNE 30, 1996 (UNAUDITED)
PREMIS REF PRO FORMA PRO FORMA ACTUAL ACTUAL ADJUSTMENTS COMBINED ---------- ---------- ----------- ------------ ASSETS: Cash and cash equivalents.......... $ 368,366 $ 107,101 $ 1,351,200(e) $ 1,826,667 Trade accounts receivable.......... 2,077,471 587,123 2,664,594 Inventory.......................... 217,794 78,118 295,912 Prepaid expenses and other current assets............................ 163,636 80,479 244,115 Costs and estimated earnings in excess of billings................ 529,703 529,703 ---------- ---------- ------------ Total current assets............. 2,827,267 1,382,524 5,560,991 Property and equipment, net........ 1,027,750 371,617 1,399,367 Goodwill........................... 4,945,660(b) 4,945,660 Capitalized software development... 236,421 602,393 838,814 ---------- ---------- ------------ Total assets..................... $4,091,438 $2,356,534 $ 12,744,832 ---------- ---------- ------------ ---------- ---------- ------------ LIABILITIES AND SHAREHOLDERS' EQUITY: Trade accounts payable............. $ 361,853 $ 54,002 $ 415,855 Other accrued liabilities.......... 172,069 82,050 254,119 Accrued income taxes............... 131,211 159,473 290,684 Unearned income.................... 139,098 104,066 243,164 Customer deposits.................. 94,603 12,016 106,619 Notes payable...................... 78,255 62 78,317 Deferred rent...................... 49,791 49,791 Current portion of capital lease obligation........................ 226,115 226,115 ---------- ---------- ------------ Total current liabilities........ 1,203,204 461,460 1,664,664 Deferred income taxes.............. 59,927 59,927 Notes payable...................... 112,097 280,807 392,904 Capital lease obligations.......... 723,885 723,885 ---------- ---------- ------------ Total long-term liabilities...... 835,982 340,734 1,176,716 Class B Special stock.............. 35,700 (35,700)(c) Common stock....................... 27,015 1 (1)(c) 44,515 17,500(e) Additional paid-in capital......... 937,821 7,833,700(e) 8,771,521 Retained earnings.................. 1,087,416 1,471,516 (1,471,516)(c) 1,087,416 Cumulative translation adjustment........................ 47,123 (47,123)(c) 0 ---------- ---------- ------------ 2,052,252 1,554,340 9,903,452 ---------- ---------- ------------ Total liabilities and shareholders' equity $4,091,438 $2,356,534 $ 12,744,832 ---------- ---------- ------------ ---------- ---------- ------------
F-23 PREMIS CORPORATION PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1996 (UNAUDITED)
PREMIS REF RETAIL PRO FORMA PRO FORMA ACTUAL ACTUAL ADJUSTMENTS COMBINED ---------- ---------- ----------- ----------- STATEMENT OF OPERATIONS DATA: Revenue Systems sales.................... $4,923,132 $2,725,256 $ 7,648,388 Maintenance fees, supplies and other income.................... 979,029 471,260 1,450,289 ---------- ---------- ----------- Total Revenue.................. 5,902,161 3,196,516 9,098,677 Cost of sales...................... 3,036,322 1,434,018 4,470,340 ---------- ---------- ----------- Gross profit....................... 2,865,839 1,762,498 4,628,337 Selling, general and administrative.................... 1,204,065 1,726,537 $ (131,694)(a) 3,293,474 494,566(b) Research and development........... 303,000 0 303,000 ---------- ---------- ----------- ----------- Income from operations........... 1,358,774 35,961 (362,872) 1,031,863 Interest expense................... (4,142) (5,475) (9,617) Other income....................... 148,000 148,000 ---------- ---------- ----------- Income before income taxes....... 1,354,632 178,486 1,170,246 Income tax expense (benefit)....... 527,000 (7,975) 46,093(a) 565,118 ---------- ---------- ----------- Net income......................... 827,632 186,461 605,128 ---------- ---------- ----------- ---------- ---------- ----------- Net income per share............... $ 0.28 $ 0.14 ---------- ----------- ---------- ----------- Weighted average common and common equivalent shares outstanding..... 2,925,581 1,448,823(d) 4,374,404 ---------- ----------- ---------- -----------
F-24 PREMIS CORPORATION PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
PREMIS REF RETAIL PRO FORMA PRO FORMA ACTUAL ACTUAL ADJUSTMENTS COMBINED ---------- ---------- ----------- ----------- STATEMENT OF OPERATIONS DATA: Revenue Systems sales............... $1,570,791 $ 967,473 $ 2,538,264 Maintenance fees, supplies and other income........... 343,388 80,528 423,916 ---------- ---------- ----------- Total revenue................. 1,914,179 1,048,001 2,962,180 Cost of sales................. 967,739 482,397 1,450,136 ---------- ---------- ----------- Gross profit.................. 946,440 565,604 1,512,044 Selling, general and administrative............... 302,574 440,093 (28,919)(a) 837,390 123,642(b) Research and development...... 94,650 0 94,650 ---------- ---------- ----------- ----------- Income from operations...... 549,216 125,511 (94,723) 580,004 Interest expense.............. (4,519) (4,209) (8,728) ---------- ---------- ----------- Income before income taxes...................... 544,697 121,302 571,276 Income tax expense (benefit).................... 212,461 (14,690) 10,122(a) 207,893 ---------- ---------- Net income.................... 332,236 135,992 363,383 ---------- ---------- ----------- ---------- ---------- ----------- Net income per share.......... $ 0.11 $ 0.08 ---------- ----------- ---------- ----------- Weighted average common and common equivalent shares outstanding.................. 2,979,683 1,448,823(d) 4,428,506 ---------- ----------- ---------- -----------
F-25 PREMIS CORPORATION NOTES TO PRO FORMA INFORMATION (UNAUDITED) REF ACQUISITION ADJUSTMENTS (a) Adjustment to reflect the decrease in salary, benefits and auto expenses for an officer of REF Retail Systems Corporation (REF) whose employment terminates with the acquisition by PREMIS Corporation (PREMIS) and the income tax effect of this adjustment. (b) The purchase price of REF exceeds the fair value of the assets acquired. As a result, PREMIS will record goodwill of approximately $4.9 million with annual amortization of $494,566. The Company amortizes goodwill over a period of 10 years. The recoverability of the unamortized goodwill will be assessed on an ongoing basis by comparing anticipated undiscounted future cash flows from operations to net book value. (c) Adjustment to reflect the elimination of REF shareholder equity and REF retained earnings. (d) Adjusted to reflect net offering proceeds of $6,500,000 needed to fund the acquisition of REF through the issuance of 1,448,823 common shares based on an assumed offering price of $5.125 per share ($4.49 per share net of offering costs). The weighted average common and common equivalent shares outstanding have been adjusted to reflect the estimated number of shares issued in the offering to provide cash to be paid in connection with the acquisition of REF. (e) Adjustment to give effect to the sale of 1,750,000 shares offered hereby at a gross offering price of $5.125 ($4.49 per share net of offering costs) per share and the application of the net proceeds therefrom, including the purchase of REF's stock. F-26 [PICTURE OF STORE FRONT] [PICTURE OF STORE FRONT] [PICTURE OF STORE FRONT] [PICTURE OF STORE FRONT] [PICTURE OF STORE FRONT] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY PREMIS, REF OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF PREMIS OR REF SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. ------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................................................ 3 Risk Factors.............................................................. 5 Use of Proceeds........................................................... 8 Price Range of Common Stock............................................... 9 Dividend Policy........................................................... 9 Capitalization............................................................ 10 Selected Financial Data................................................... 11 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 13 Business.................................................................. 18 Management................................................................ 33 Certain Transactions...................................................... 36 Principal Shareholders.................................................... 37 Description of Securities................................................. 38 Shares Eligible for Future Sale........................................... 40 Underwriting.............................................................. 41 Legal Matters............................................................. 42 Experts................................................................... 42 Available Information..................................................... 42 Incorporation of Certain Documents by Reference........................... 43 Index to Financial Statements............................................. F-1 Financial Statements...................................................... F-2
1,750,000 SHARES [LOGO] COMMON STOCK --------------------- PROSPECTUS --------------------- RJ STEICHEN & COMPANY , 1996 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The estimated expenses in connection with the issuance and distribution of the Common Stock registered hereby, other than underwriting discounts and fees, are set forth in the following table: SEC registration fee (1)......................................... $ 3,928 NASD filing fee (1).............................................. 1,640 Nasdaq fees...................................................... 34,960 Legal fees and expenses.......................................... 55,000 Accounting fees and expenses..................................... 50,000 Blue Sky fees and expenses....................................... 5,000 Printing and engraving expenses.................................. 40,000 Representative's non-accountable expense allowance (1)(2)........ 201,797 Miscellaneous.................................................... 7,675 --------- Total.......................................................... $ 400,000 --------- ---------
- ------------------------ (1) Assumes offering price per share as set forth on the cover page of this registration statement (2) In the event that the Underwriters' over-allotment option is exercised in full, the non-accountable expense allowance will increase to $232,067. ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Unless prohibited in a corporation's articles or bylaws, Minnesota Statutes Section302A.521 requires indemnification of officers, directors, employees and agents, under certain circumstances, against judgments, penalties, fees, settlements and reasonable expenses (including attorney's fees and disbursements) incurred by such person in connection with a threatened or pending proceeding with respect to the acts or omissions of such person in his or her official capacity. The general effect of Minnesota Statutes Section302A.521 is to reimburse (or pay on behalf of) directors and officers of the Registrant any personal liability that may be imposed for certain acts performed in their capacity as directors and officers of the Registrant, except where such persons have not acted in good faith. The Bylaws of the Registrant provide for such indemnification to the maximum extent permitted by Minnesota Statutes. Under the Underwriting Agreement filed as Exhibit 1.1 hereto, the Underwriters agrees to indemnify, under certain conditions, the Registrant, its directors, certain of its officers and persons who control the Registrant within the meaning of the Act against certain liabilities. ITEM 16. EXHIBITS.
EXHIBIT NO. DESCRIPTION OF EXHIBITS - ------------- ------------------------------------------------------------------------------------------------ 1.1 Form of Underwriting Agreement 1.2 Form of Representative's Warrant 2.1 REF Stock Purchase Agreement dated July 9, 1996 3.1 Articles of Incorporation, as amended 3.2 Bylaws (1) 4.1 Form of certificate representing the Common Stock 4.2 Articles of Incorporation, as amended (included as part of Exhibit 3.1 to the Registration Statement) 4.3 Bylaws (included as part of Exhibit 3.2 to the Registration Statement) 5.1 Opinion and Consent of Counsel to PREMIS
II-1
EXHIBIT NO. DESCRIPTION OF EXHIBITS - ------------- ------------------------------------------------------------------------------------------------ 10.1 Form of Employment Agreement with Edward W. Anderson 10.2 Form of R. Ferguson Noncompete Agreement 10.3 Form of E. Anderson Noncompete Agreement 10.4 Form of E. Anderson Stock Option Agreement 23.1 Consent of Price Waterhouse LLP, independent accountants 23.2 Consent of Counsel to PREMIS (included as part of Exhibit 5.1 to the Registration Statement)
- ------------------------ (1) Incorporated by reference to exhibit filed as a part of Form S-18, SEC File No. 2-85498-C. ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to section 15(d) of the Securities Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The undersigned registrant hereby undertakes to deliver or cause to be delivered with the prospectus, to each person to whom the prospectus is sent or given, the latest annual report to security holders that is incorporated by reference in the prospectus and furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of 1934; and, where interim financial information required to be presented by Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or cause to be delivered to each person to whom the prospectus is sent or given, the latest quarterly report that is specifically incorporated by reference in the prospectus to provide such interim financial information. Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions or otherwise, the small business issuer has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the small business issuer of expenses incurred or paid by a director, officer or controlling person of the small business issuer in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the small business issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. For determining any liability under the Act, the undersigned issuer hereby undertakes that it will: (1) Treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the small business issuer under Rule 424(b)(1) or (4) or 497(h) under the Act as part of this registration statement as of the time the Commission declared it effective. (2) Treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and that offering of the securities at that time as the initial bona fide offering of those securities. II-2 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has authorized this amendment to registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Minneapolis, State of Minnesota, on September 23, 1996. PREMIS Corporation By /s/ F. T. BIERMEIER ------------------------------------------ F. T. Biermeier CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Act of 1933, this amendment to registration statement has been signed below by the following persons on behalf of PREMIS and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------------------- ------------------------------------------- ----------------------- Chief Executive Officer, President, Chief /s/ F. T. BIERMEIER Financial Officer, Treasurer and Director ---------------------------------- (Principal executive officer and principal September 23, 1996 F. T. Biermeier accounting and financial officer) /s/ MARY ANN CALHOUN ---------------------------------- Director and Secretary September 23, 1996 Mary Ann Calhoun * ---------------------------------- Director September 23 1996 Gerald F. Schmidt ---------------------------------- Director September 23 1996 S. Albert D. Hanser
*Executed by the undersigned as attorney-in-fact for the named signatory. /s/ F. T. BIERMEIER - ---------------------------------- F. T. Biermeier
II-3 INDEX TO EXHIBITS
EXHIBIT NO. - ------------- 1.1 Revised Form of Underwriting Agreement 23.1 Consent of Price Waterhouse LLP, independent accountants
EX-1.1 2 EXHIBIT 1.1 1,750,000 SHARES COMMON STOCK PREMIS CORPORATION UNDERWRITING AGREEMENT __________________, 1996 R. J. Steichen & Company As Representative of the Several Underwriters 700 Midwest Plaza West 801 Nicollet Avenue Minneapolis, MN 55402 Dear Ladies and Gentlemen: Premis Corporation, a Minnesota corporation (the "Company"), hereby confirms its agreement to issue and sell to the underwriters named in Schedule I hereto (the "Underwriters"), for which R. J. Steichen & Company is acting as the representative (in such capacity, the "Representative"), an aggregate of 1,750,000 shares of authorized but unissued common stock, par value $.01 per share, of the Company (the "Common Stock"). Such 1,750,000 shares of Common Stock are collectively referred to in this Agreement as the "Firm Shares." The Company also hereby confirms its agreement to issue and sell to the Underwriter an aggregate of up to 262,500 additional shares of Common Stock upon the request of the Representative solely for the purpose of covering overallotments. Such additional shares are referred to in this Agreement as the "Option Shares." The Firm Shares and the Option Shares are collectively referred to herein as the "Shares." Further, the Company hereby confirms its agreement to issue to the Representative warrants for the purchase of a total of 175,000 shares as described in Section 5 hereof (the "Representative's Warrants"), assuming purchase by the Underwriters of the Firm Shares. The shares issuable upon exercise of the Representative's Warrants are referred to as the "Warrant Shares." The Company hereby confirms the arrangements with respect to the purchase, severally and not jointly, by each of the Underwriters the number of the Firm Shares set forth opposite their respective names in Schedule I, plus their pro rata portion of the Option Shares purchased if the overallotment option is exercised in whole or in part. The Company has been advised and hereby acknowledges that the Representative has been duly authorized to act as the representative of the Underwriters. As used in this Agreement, the term "Underwriter" refers to any individual member of the underwriting syndicate and includes any party substituted for an Underwriter under Section 9 hereof. 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to and agrees with each of the several Underwriters as follows: (a) A registration statement on Form S-2 with respect to the Shares has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "1933 Act") and the rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "SEC") thereunder and has been filed with the SEC under the 1933 Act. The Company has filed such amendments to the registration statement and such amended preliminary prospectuses as may have been required to be filed to the date hereof. If the Company has elected not to rely upon Rule 430A, the Company has prepared and will promptly file an amendment to the registration statement and an amended prospectus (provided the Representative has consented to such filing). If the Company has elected to rely upon Rule 430A, it will prepare and timely file a prospectus pursuant to Rule 424(b) that discloses the information previously omitted from the prospectus in reliance upon Rule 430A. Copies of such registration statement and each pre-effective amendment thereto, and each related preliminary prospectus have been delivered by the Company to the Representative. Such registration statement, as amended or supplemented, including all prospectuses included as a part thereof, financial schedules, exhibits, the information (if any) deemed to be part thereof pursuant to Rules 430A and 434 under the 1933 Act and any registration statement filed pursuant to Rule 462 under the 1933 Act, is herein referred to as the "Registration Statement." The term "Prospectus" as used herein shall mean the final prospectus, as amended or supplemented, included as a part of the Registration Statement on file with the SEC when it becomes effective; provided, however, that if a prospectus is filed by the Company pursuant to Rules 424(b) and 430A or a term sheet is filed by the Company pursuant to Rule 434 under the 1933 Act, the term "Prospectus" as used herein shall mean the prospectus so filed pursuant to Rules 424(b) and 430A) and the term sheet so filed pursuant to Rule 434. The term "Preliminary Prospectus" as used herein means any prospectus, as amended or supplemented, used prior to the Effective Date (as defined in Section 4(a) hereof) and included as a part of the Registration Statement, including any prospectus filed with the SEC pursuant to Rule 424(a). (b) Neither the SEC nor any state securities division has issued any order preventing or suspending the use of any Preliminary Prospectus, or issued a stop order with respect to the offering of the Shares or requiring the recirculation of a Preliminary Prospectus and, to the best knowledge of the Company, no proceeding for any such purpose has been initiated or threatened. Each part of the Registration Statement, when such part became or becomes effective, each Preliminary Prospectus, on the date of filing with the SEC, and the Prospectus and any amendment or supplement thereto, on the date of filing thereof with the SEC and on any Closing Date (as defined in Section 3 hereof), as the case may be, conformed or will conform in all material respects with the requirements of the 1933 Act and the Rules and Regulations and the securities laws ("Blue Sky Laws") of the states where the Shares are to be sold (the "States") and contained or will contain all statements that are required to be stated therein in accordance with the 1933 Act, the Rules and Regulations and the Blue Sky Laws of the States. When the Registration Statement became or becomes effective and when any post-effective amendments thereto shall become effective, the Registration Statement did not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Neither any Preliminary Prospectus, on the date of filing thereof with the SEC, nor the Prospectus or any amendment or supplement thereto, on the date of filing thereof with the SEC and on the First and Second Closing Dates, contained or will contain any untrue statement of a material fact or omit to state a material fact necessary in order to make 2 the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that none of the representations and warranties in this Subsection 1(b) shall apply to statements in, or omissions from, the Registration Statement, Preliminary Prospectus or the Prospectus, or any amendment thereof or supplement thereto, which are based upon and conform to written information furnished to the Company by the Underwriters specifically for use in the preparation of the Registration Statement, Preliminary Prospectus or the Prospectus, or any amendment or supplement thereto. There is no contract or other document of the Company of a character required by the 1933 Act or the Rules and Regulations to be described in the Registration Statement or Prospectus, or to be filed as an exhibit to the Registration Statement, that has not been described or filed as required. The descriptions of all such contracts and documents or references thereto are correct in all material respects and include the information required under the 1933 Act and the Rules and Regulations. (c) Upon consummation of the acquisition of all of the outstanding stock of REF Retail Systems Corporation ("REF"), as described in the Prospectus, concurrent with the First Closing Date, REF will become a wholly-owned subsidiary of the Company. Other than REF, the Company is not affiliated with any other company or business entity. The Company has full requisite power and authority to enter into the Stock Purchase Agreement with REF dated July 9, 1996 ("REF Agreement"). The REF Agreement has been duly authorized, executed and delivered by the Company and REF and is a valid and binding agreement on the part of the Company and REF, enforceable in accordance with its terms, except as enforceability may be limited by the application of bankruptcy, insolvency, moratorium or similar laws affecting the rights of creditors generally and by judicial limitations on the right of specific performance and except as the enforceability of the indemnification or contribution provisions thereof may be affected by applicable federal or state securities laws. The performance of the REF Agreement and the consummation of the transactions therein contemplated will not result in a breach or violation of any of the terms and provisions of, or constitute a default under or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or REF pursuant to, (i) any indenture, mortgage, deed of trust, loan agreement, bond, debenture, note, agreement or other evidence of indebtedness, lease, contract or other agreement or instrument to which the Company or REF is a party or by which the property or assets of the Company or REF is bound, (ii) the Company's or REF's Articles of Incorporation or Bylaws or (iii) any statute or any order, rule or regulation of any court, governmental agency or body having jurisdiction over the Company or REF. (d) Each of the Company and REF has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of their organization, with full corporate power and authority, to own, lease and operate their properties and conduct their businesses as described in the Registration Statement and Prospectus. The Company and REF are duly qualified to do business as foreign corporations in good standing in each jurisdiction in which the ownership or lease of their properties, or the conduct of their business, requires such qualification and in which the failure to be qualified or in good standing would have a material adverse effect on the business of the Company or REF. The Company and REF have all necessary and material authorizations, approvals and orders of and from all governmental regulatory officials and bodies to own 3 their properties and to conduct their businesses as described in the Registration Statement and Prospectus, and are conducting their businesses in substantial compliance with all applicable material laws, rules and regulations of the jurisdictions in which they conduct business. The Company and REF hold all material licenses, certificates, permits, authorizations, approvals and orders of and from all state, federal and other governmental regulatory officials and bodies necessary to own their properties and to conduct their businesses as described in the Registration Statement and Prospectus, or has obtained waivers from any such applicable requirements from the appropriate state, federal or other regulatory authorities. All such licenses, permits, approvals, certificates, consents, orders and other authorizations are in full force and effect, and the Company or REF have not received notice of any proceeding or action relating to the revocation or modification of any such license, permit, approval, certificate, consent, order or other authorization which, individually or in the aggregate, if the subject of an unfavorable decision, ruling or finding, might materially and adversely affect the conduct of the business or the condition, financial or otherwise, or the earnings, affairs or business prospects of the Company or REF. (e) Neither the Company nor REF are in violation of their respective Articles of Incorporation or Bylaws, nor in default in the performance or observance of any obligation, agreement, covenant or condition contained in any bond, debenture, note or other evidence of indebtedness or in any contract, indenture, mortgage, loan agreement, joint venture or other agreement or instrument to which the Company or REF is a party or by which the Company, REF or their properties are bound, and there does not exist any state of facts which constitutes an event of default on the part of the Company or REF or which, with notice or lapse of time or both, would constitute such an event of default. Neither the Company nor REF are in violation of any law, order, rule, regulation, writ, injunction or decree of any government, governmental instrumentality or court, domestic or foreign, which violation is material to the business of the Company or REF. (f) The Company has full requisite power and authority to enter into this Agreement. This Agreement has been duly authorized, executed and delivered by the Company and will be a valid and binding agreement on the part of the Company, enforceable in accordance with its terms, if and when this Agreement shall have become effective in accordance with Section 8, except as enforceability may be limited by the application of bankruptcy, insolvency, moratorium or similar laws affecting the rights of creditors generally and by judicial limitations on the right of specific performance and except as the enforceability of the indemnification or contribution provisions hereof may be affected by applicable federal or state securities laws. The performance of this Agreement and the consummation of the transactions herein contemplated will not result in a breach or violation of any of the terms and provisions of, or constitute a default under or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or REF pursuant to, (i) any indenture, mortgage, deed of trust, loan agreement, bond, debenture, note, agreement or other evidence of indebtedness, lease, contract or other agreement or instrument to which the Company or REF is a party or by which the property or assets of the Company or REF is bound, (ii) the Company's or REF's Articles of Incorporation or Bylaws or (iii) any statute or any order, rule or regulation of any court, governmental agency or body having jurisdiction over the Company or REF. No consent, approval, authorization or order of any court, governmental agency or body is required for 4 the consummation by the Company of the transactions on its part herein contemplated, except such as may be required under the 1933 Act, the Rules and Regulations, the Blue Sky Laws, the rules and regulations of the National Association of Securities Dealers, Inc. ("NASD") and the rules and regulations of Nasdaq SmallCap Market-SM- and Nasdaq National Market. (g) Except as is otherwise expressly stated in the Registration Statement or Prospectus, there are no actions, suits or proceedings pending before any court or governmental agency, authority or body to which the Company or REF are a party or of which the business or property of the Company or REF are the subject which might result in any material adverse change in the condition (financial or otherwise), business or prospects of the Company or REF, materially and adversely affect their properties or assets or prevent consummation of the transactions contemplated by this Agreement. No such actions, suits or proceedings are threatened except as is otherwise expressly stated in the Registration Statement or Prospectus. Neither the Company nor REF are aware of any facts which would form the basis for the assertion of any material claim or liability which are not disclosed in the Registration Statement or the Prospectus or adequately reserved for in the financial statements which are a part thereof, except for such claims or liabilities which are not currently expected to have a material adverse effect on the condition (financial or otherwise) or the earnings, affairs or business prospects of the Company or REF. All pending legal or governmental proceedings to which the Company or REF are a party or to which any of their properties are subject which are not described in the Registration Statement and the Prospectus, including ordinary routine litigation incidental to the business, are, considered in the aggregate, not material to the Company or REF. (h) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus. The outstanding Common Stock of the Company is duly authorized, validly issued, fully paid and nonassessable. The Shares conform in substance to all statements relating thereto contained in the Registration Statement and Prospectus. The Shares to be sold by the Company hereunder have been duly authorized and, when issued and delivered pursuant to this Agreement, will be validly issued, fully paid and nonassessable and will conform to the description thereof contained in the Prospectus. No preemptive rights or similar rights of any security holders of the Company exist with respect to the issuance and sale of the Shares by the Company or exercise of the Representative's Warrants. The Company has no agreement with any security holder which gives such security holder the right to require the Company to register under the 1933 Act any securities of any nature owned or held by such person either in connection with the transactions contemplated by this Agreement or after a demand for registration by such holder. Upon payment for and delivery of the Shares pursuant to this Agreement, the Underwriters will acquire the Shares, free and clear of all liens, encumbrances or claims. The certificates evidencing the Shares will comply as to form with all applicable provisions of the laws of the State of organization. Except as set forth in any part of the Registration Statement, the Company does not have outstanding any options to purchase, or any rights or warrants to subscribe for, or any securities or obligations convertible into, or any contracts or commitments to issue or sell, any Common Stock or other securities of the Company, or any such warrants, convertible securities or obligations. 5 (i) The Representative's Warrants and the Warrant Shares have been duly authorized. The Representative's Warrants, when issued and delivered to the Representative, will constitute valid and binding obligations of the Company in accordance with their terms, except as enforceability may be limited by the application of bankruptcy, insolvency, moratorium or similar laws affecting the rights of creditors generally and by judicial limitations on the right of specific performance. The Warrant Shares when issued in accordance with the terms of this Agreement and pursuant to the Representative's Warrants, will be validly issued, fully paid and nonassessable and subject to no preemptive rights or similar rights on the part of any person or entity. A sufficient number of shares of Common Stock of the Company have been reserved for issuance by the Company upon exercise of the Representative's Warrants. (j) Price Waterhouse, LLP, whose reports appear in the Registration Statement and Prospectus, are independent accountants within the meaning of the 1933 Act and the Rules and Regulations. The financial statements of the Company and REF, together with the related notes, forming part of the Registration Statement and Prospectus (the "Financial Statements"), fairly present the financial position and the results of operations of the Company and REF at the respective dates and for the respective periods to which they apply. The Financial Statements are accurate, complete and correct and have been prepared in accordance with the 1933 Act, the Rules and Regulations and generally accepted accounting principles ("GAAP"), consistently applied throughout the periods involved, except as may be otherwise stated therein. The summaries of the Financial Statements and the other financial, statistical and related notes set forth in the Registration Statement and the Prospectus are (i) accurate and correct and fairly present the information purported to be shown thereby as of the dates and for the periods indicated on a basis consistent with the audited financial statements of the Company and (ii) in compliance in all material respects with the requirements of the 1933 Act and the Rules and Regulations. The Financial Statements are based upon and consistent with the financial statements and other reports filed by the Company with the SEC, except for inconsistencies attributable solely to differences between GAAP and regulatory accounting principles. (k) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus and at any Closing Date, except as is otherwise disclosed in the Registration Statement or Prospectus, there has not been: (i) any change in the capital stock or long-term debt (including any capitalized lease obligation), or increase in the short-term debt of the Company; (ii) any issuance of options, warrants, convertible securities or other rights to purchase the capital stock of the Company (except as contemplated by the Company's option plan); (iii) any adverse change, or any development involving a material adverse change, in or affecting the business, business prospects, properties, assets, patents or patent applications (including those of the Company, REF and those relating to devices or technologies licensed to the Company or REF which are material to its 6 business), management, financial position, stockholders' equity, results of operations or general condition of the Company or REF; (iv) any material transaction entered into by the Company or REF; (v) any material obligation, direct or contingent, incurred by the Company or REF, except obligations incurred in the ordinary course of business that, in the aggregate, are not material; or (vi) any dividend or distribution of any kind declared, paid or made on the Company's capital stock. (l) Except as is otherwise disclosed in the Registration Statement or Prospectus, the Company and REF have good and marketable title to all of the property, real and personal, described in the Registration Statement or Prospectus as being owned by the Company and REF, free and clear of all liens, encumbrances, equities, charges or claims, except as do not materially interfere with the uses made and to be made by the Company or REF of such property or as disclosed in the Financial Statements. Except as is otherwise disclosed in the Registration Statement or Prospectus, the Company and REF have valid and binding leases to the real and personal property described in the Registration Statement or Prospectus as being under lease to the Company or REF, except as to those leases which are not material to the Company or REF or the lack of enforceability of which would not materially interfere with the use made and to be made by the Company and REF of such leased property. (m) The Company and REF have filed all necessary federal, state and provincial income and franchise tax returns and paid all taxes shown as due thereon. The Company and REF are not in default in the payment of any taxes and have no knowledge of any tax deficiency which might be asserted against the Company or REF which would materially and adversely affect the Company's or REF's business or properties. (n) No labor disturbance by the employees of the Company or REF exists or is imminent which could reasonably be expected to have a material adverse effect on the conduct of the business, operations, financial condition or income of the Company or REF. (o) Except as disclosed in the Prospectus: (i) The Company and REF own or possess the unrestricted rights to use all patents, copyrights, trademarks, trade secrets and proprietary rights or information necessary for the development, manufacture, operation and sale of all products and services sold or proposed to be sold by the Company or REF and for the conduct of their present or intended business as described in the Prospectus. There are no pending legal, governmental or administrative proceedings relating to patents, copyrights, trademarks or proprietary rights or information to which the Company or REF are a party or to which any property of the Company or REF are subject and no such proceedings are, to the best of the Company's knowledge, threatened or contemplated against the Company or REF by any governmental agency or authority or others. The Company or REF have not received any notice of conflict with 7 asserted rights of others. Neither the Company nor REF are using any confidential information or trade secrets of any third party without such party's consent. (ii) Neither the Company nor REF infringe upon the right of any person under or with respect to any of the intangible rights listed in the preceding subsection. Neither the Company nor REF are obligated or under any liability whatsoever to make any payments by way of royalties, fees or otherwise to any owner of, licensor of, or other claimant to, any patent, trademark, trade name, copyright or other intangible asset, with respect to the use thereof or in connection with the conduct of its business or otherwise, except as disclosed in the Prospectus. (p) The Company intends to apply the proceeds from the sale of the Shares by it to the purposes and substantially in the manner set forth in the Prospectus. (q) Neither the Company nor REF have a defined benefit pension plan or other pension benefit plan which is intended to comply with the provisions of the Employee Retirement Income Security Act of 1974 as amended from time to time, except as disclosed in the Registration Statement. (r) To the best of the Company's knowledge, no person is entitled, directly or indirectly, to compensation from the Company, REF or the Underwriters for services as a finder in connection with the transactions contemplated by this Agreement. (s) The conditions for use of a Registration Statement on Form S-2 for the distribution of the Shares have been satisfied with respect to the Company. (t) The Company has not taken and will not take, directly or indirectly, any action (and does not know of any action by its directors, officers, stockholders, or others) which has constituted or is designed to, or which might reasonably be expected to, cause or result in stabilization or manipulation, as defined in the Securities Exchange Act of 1934, as amended (the "1934 Act") or otherwise, of the price of any security of the Company to facilitate the sale or resale of the Shares. (u) The Company has not sold any securities in violation of Section 5(a) of the 1933 Act. (v) Each of the Company and REF maintain insurance, which is in full force and effect, of the types and in the amounts adequate for their business and in line with the insurance maintained by similar companies and businesses. (w) The Company hereby represents that, as of the date hereof, it has complied with all provisions of Section 517.075, Florida Statutes and Rule 3E-900-001 of the Rules of the Florida Department of Banking and Finance, Division of Securities, copies of which are attached hereto. (x) Each of the Company and REF maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in 8 accordance with management's general or specific authorizations and (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP. (y) All material transactions between the Company and its stockholders who beneficially own more than 5% of any class of the Company's voting securities have been accurately disclosed in the Prospectus, and the terms of each such transaction are fair to the Company and no less favorable to the Company than the terms that could have been obtained from unrelated parties. (z) The Company has obtained a written agreement from each of the officers and directors of the Company, that for 180 days following the Effective Date, such person will not, without the Representative's prior written consent, sell, transfer or otherwise dispose of, or agree to sell, transfer, or otherwise dispose of, any of his or her shares of Common Stock or any options, warrants or rights to purchase Common Stock, beneficially held by such persons during such 180 day period other than by gift to donees who agree to be bound by the same restriction or by will or the laws of descent. Additionally, the Company has obtained a written agreement from Sandra J. Biermeier, that for 90 days following the Effective Date, she will not, without the Representative's prior written consent, sell, transfer or otherwise dispose of, or agree to sell, transfer, or otherwise dispose of, any of her shares of Common Stock or any options, warrants or rights to purchase Common Stock, beneficially held by her during such 90 day period other than by gift to donees who agree to be bound by the same restriction or by will or the laws of descent. (aa) The Common Stock of the Company has been approved for trading on the Nasdaq National Market-SM- following effectiveness of the Registration Statement. (bb) The Company has timely filed all documents and amendments to previously filed documents required to be filed by it pursuant to the 1934 Act and the rules and regulations of the SEC thereunder. Each such document conformed in all material respects with the requirements of the 1934 Act and contained all information required to be stated therein in accordance with the 1934 Act. No part of any such document contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading. True copies of each of the documents incorporated by reference, if any, into each Preliminary Prospectus and the Prospectus have been delivered by the Company to the Representative. To the best of the Company's knowledge, the executive officers and directors of the Company and stockholders who hold more than 5% of the Company's outstanding Common Stock, have made, and are current with, all filings, if any, that are required under the 1934 Act. 2. PURCHASE, SALE, DELIVERY AND PAYMENT. (a) On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to issue and sell to each of the Underwriters, and the Underwriters agree, severally and not jointly, to purchase from the Company, at $_____________ per Share (net of underwriting discounts and commissions of $______ per Share) the respective amount of Firm Shares set 9 forth opposite such Underwriter's name in Schedule I hereto. The Underwriters will collectively purchase all of the Firm Shares if any are purchased. (b) On the basis of the representations and warranties herein contained, but subject to the terms and conditions herein set forth, the Company hereby grants an option to the Underwriters to purchase an aggregate of the Option Shares at the same purchase price as the Firm Shares for use solely in covering any overallotments made by the Underwriters in the sale and distribution of the Firm Shares. The option granted hereunder may be exercised at any time (but not more than once) within 45 days after the Effective Date (as defined in Section 4(a) hereof) upon notice (confirmed in writing) by the Representative to the Company setting forth the aggregate number of Option Shares as to which the Underwriters are exercising the option and the date on which certificates for such Option Shares are to be delivered. The option granted hereby may be canceled by the Representative as to the Option Shares for which the option is unexercised at any time prior to the expiration of the 45-day period upon notice to the Company. (c) The Company will deliver the Firm Shares to the Representative at the offices of Moss & Barnett, a Professional Association, unless some other place is agreed upon, at 10:00 A.M., Minneapolis time, against payment of the purchase price at the same place, on the third full business day after trading the Shares has commenced (but not more than ten full business days after the date the Registration Statement is declared effective), or such earlier time as may be agreed upon between the Representative and the Company. Such time and place is herein referred to as the "First Closing Date." (d) The Company will deliver the Option Shares being purchased by the Underwriters to the Representative at the offices of Moss & Barnett, a Professional Association, set forth in Section 2(c) above, unless some other place is agreed upon, at 10:00 A.M., Minneapolis time, against payment of the purchase price at the same place, on the date determined by the Representative and of which the Company has received notice as provided in Section 2(b), which shall not be earlier than one nor later than three full business days after the exercise of the option as set forth in Section 2(b), or at such other time not later than ten full business days thereafter as may be agreed upon by the Representative and the Company, such time and date being herein referred to as the "Second Closing Date." The First and Second Closing Dates are collectively referred to herein as the "Closing Date." (e) Certificates for the Shares to be delivered will be registered in such names and issued in such denominations as the Underwriters shall request of the Company at least two full business days prior to the First Closing Date or the Second Closing Date, as the case may be. The certificates will be made available to the Underwriters in definitive form for the purpose of inspection and packaging at least 24 hours prior to each respective Closing Date. (f) Payment for the Shares shall be made, against delivery to the Representative or its designated agent, of certificates for the Shares by wire transfer to a designated account of the Company. (g) The Underwriters will make a public offering of the Shares directly to the public (which may include selected dealers who are members in good standing with the 10 NASD or foreign dealers not eligible for membership in the NASD but who have agreed to abide by the interpretation of the NASD's Board of Governor's with respect to free-riding and withholding) as soon as the Underwriter deems practicable after the Registration Statement becomes effective at the Price to Public set forth in Section 2(a) above, subject to the terms and conditions of this Agreement and in accordance with the Prospectus. Such concessions from the public offering price may be allowed selected dealers of the NASD as the Underwriter determines, and the Underwriters will furnish the Company with such information about the distribution arrangements as may be necessary for inclusion in the Registration Statement. It is understood that the public offering price and concessions may vary after the initial public offering. The Underwriters shall offer and sell the Shares only in jurisdictions in which the offering of Shares has been duly registered or qualified, or is exempt from registration or qualification, and shall take reasonable measures to effect compliance with applicable state and local securities laws. (h) On the First Closing Date, the Company shall issue and deliver to the Representative the Representative's Warrants against payment by the Representative of the purchase price therefor of $50. (i) It is understood that the Representative, individually and not as a Representative, may (but shall not be obligated to) make payment on behalf of any Underwriter or Underwriters for the Shares to be purchased by such Underwriter or Underwriters. No such payment by the Representative shall relieve such Underwriter or Underwriters from any of its or their other obligations hereunder. 3. FURTHER AGREEMENTS OF THE COMPANY. The Company hereby covenants and agrees with each of the Underwriters as follows: (a) If the Registration Statement has not become effective prior to the date hereof, the Company will use its best efforts to cause the Registration Statement and any subsequent amendments thereto to become effective as promptly as possible. The Company will notify the Representative promptly, after the Company shall receive notice thereof, of the time when the Registration Statement, or any subsequent amendment thereto, has become effective or any supplement to the Prospectus has been filed. Following the execution and delivery of this Agreement, the Company will prepare, and timely file or transmit for filing with the SEC in accordance with Rules 430A, 424(b) and 434, as applicable, copies of the Prospectus, or, if necessary, a post-effective amendment to the Registration Statement (including the Prospectus ), in which event, the Company will take all necessary action to have such post-effective amendment declared effective as soon as possible. The Company will notify the Representative promptly upon the Company's obtaining knowledge of the issuance by the SEC of any stop order suspending the effectiveness of the Registration Statement or of the initiation or threat of any proceedings for that purpose and will use its best efforts to prevent the issuance of any stop order and, if a stop order is issued, to obtain as soon as possible the withdrawal or lifting thereof. The Company will promptly prepare and file at its own expense with the SEC any amendments of, or supplements to, the Registration Statement or the Prospectus which may be necessary in connection with the distribution of the Shares by the Underwriters. During the period when a Prospectus relating to the Shares is required to be delivered under the 1933 Act, the Company will promptly file 11 any amendments of, or supplements to, the Registration Statement or the Prospectus which may be necessary to correct any untrue statement of a material fact or any omission to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The Company will notify the Representative promptly of the receipt of any comments from the SEC regarding the Registration Statement or Prospectus or request by the SEC for any amendment thereof or supplement thereto or for any additional information. The Company will not file any amendment of, or supplement to, the Registration Statement or Prospectus, whether prior to or after the Effective Date, which shall not previously have been submitted to the Representative and its counsel a reasonable time prior to the proposed filing or to which the Representative shall have reasonably objected. (b) The Company has used and will continue to use its best efforts to register or qualify the Shares for sale under the securities laws of such jurisdictions as the Representative may designate and the Company will file such consents to service of process or other documents necessary or appropriate in order to effect such registration or qualification. In each jurisdiction in which the Shares shall have been registered or qualified as above provided, the Company will continue such registrations or qualifications in effect for so long as may be required for purposes of the distribution of the Shares; provided, however, that in no event shall the Company be obligated to qualify to do business as a foreign corporation in any jurisdiction in which it is not now so qualified or to take any action which would subject it to the service of process in suits, other than those arising out of the offering or sale of the Shares in any jurisdiction where it is not now so subject. In each jurisdiction where any of the Shares shall have been so qualified, the Company will file such statements and reports as are or may be reasonably required by the laws of such jurisdiction to continue such qualification in effect. The Company will notify the Representative immediately of, and confirm in writing, the suspension of qualification of the Shares or the threat of such action in any jurisdiction. The Company will use its best efforts to qualify or register its Common Stock for sale in nonissuer transactions under (or obtain exemptions from the application of) the securities laws of such states designated by the Representative (and thereby permit market-making transactions and secondary trading in its Common Stock in such states), and will comply with such securities laws and will continue such qualifications, registrations and exemptions in effect for a period of five years after the date hereof. (c) The Company will furnish to the Representative, as soon as available, copies of the Registration Statement (one of which will be signed and which shall include all exhibits), each Preliminary Prospectus, the Prospectus and any amendments or supplements to such documents, including any prospectus prepared to permit compliance with Section 10(a)(3) of the 1933 Act, all in such quantities as the Representative may from time to time reasonably request prior to the printing of each such document. The Company specifically authorizes the Underwriters and all dealers to whom any of the Shares may be sold by the Underwriters to use and distribute copies of such Preliminary Prospectuses and Prospectuses in connection with the sale of the Shares as and to the extent permitted by the federal and applicable state and local securities laws. 12 (d) For as long as the Company has more than 100 beneficial owners, but in no event more than five years after the Effective Date, the Company will mail as soon as practicable to the holders of its Common Stock substantially the following documents, which documents shall be in compliance with this Section if they are in the form prescribed by the 1934 Act: (i) within forty-five days after the end of the first three quarters of each fiscal year, copies of the quarterly unaudited statement of profit and loss and quarterly unaudited balance sheets of the Company and any material subsidiaries; and (ii) within ninety days after the close of each fiscal year, appropriate financial statements as of the close of such fiscal year for the Company and any material Subsidiaries which shall be certified to by a nationally recognized firm of independent certified public accountants in such form as to disclose the Company's financial condition and the results of its operations for such fiscal year. (e) For as long as the Company has more than 100 beneficial owners, but in no event more than five years after the Effective Date, the Company will furnish to the Representative (i) concurrently with furnishing such reports to its stockholders, the reports described in Section 3(d) hereof; (ii) as soon as they are available, copies of all other reports (financial or otherwise) mailed to security holders; and (iii) as soon as they are available, copies of all reports and financial statements furnished to, or filed with, the SEC, the NASD, any securities exchange or any state securities commission by the Company. During such period, the foregoing financial statements shall be on a consolidated basis to the extent that the accounts of the Company and any subsidiary or subsidiaries are consolidated and shall be accompanied by similar financial statements for any significant Subsidiaries which is not so consolidated. (f) The Company will not, without the prior written consent of the Representative, which consent shall not be unreasonably withheld, sell or otherwise dispose of any capital stock or securities convertible or exercisable into capital stock of the Company (other than pursuant to currently outstanding options and warrants) during the 180-day period following the Effective Date. Prior to the Closing Date, the Company will not repurchase or otherwise acquire any of its capital stock or declare or pay any dividend or make any distribution on any class of its capital stock. (g) Subject to the proviso set forth below, the Company shall be responsible for and pay all costs and expenses incident to the performance of its obligations under this Agreement including, without limiting the generality of the foregoing, (i) all costs and expenses in connection with the preparation, printing and filing of the Registration Statement (including financial statements and exhibits), Preliminary Prospectuses and the Prospectus and any amendments thereof or supplements to any of the foregoing; (ii) the issuance and delivery of the Shares, including taxes, if any; (iii) the cost of all certificates representing the Shares; (iv) the fees and expenses of the transfer agent for the Shares; (v) the fees and disbursements of counsel for the Company; (vi) all fees and other charges of the independent public accountants of the Company; (vii) the cost of furnishing and delivering to the Underwriters and dealers participating in the offering copies of the Registration Statement 13 (including appropriate exhibits), Preliminary Prospectuses, the Prospectus and any amendments of, or supplements to, any of the foregoing; (viii) the NASD filing and quotation fees; (ix) the fees and disbursements, including filing fees and all accountable fees and expenses of counsel for the Company incurred in registering or qualifying the Shares for sale under the laws of such jurisdictions upon which the Representative and the Company may agree; and (x) a non-accountable expense allowance to the Representative equal to 2.25% of the gross proceeds of the Offering. The Representative hereby acknowledge receipt of a $10,000 advance against the Representative's non-accountable expense allowance referred to in the preceding sentence. In the event this Agreement is terminated pursuant to Section 8 below, the Company shall remain obligated to pay the Representative its actual accountable out-of-pocket expenses, not to exceed $20,000. Further, if upon termination of this Agreement pursuant to Section 8 below, the Representative's actual accountable out-of-pocket expenses do not exceed the $10,000 advance against the Representative's non-accountable expense allowance, the portion of the advance not used will be reimbursed to the Company by the Representative. (h) The Company will not take, and will use its best efforts to cause each of its officers and directors not to take, directly or indirectly, any action designed to or which might reasonably be expected to cause or result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares. (i) The Company will use its best efforts to maintain the quotation of its Common Stock on the Nasdaq SmallCap Market-SM-. (j) For a period of at least three years after the Effective Date, the Company will file with the SEC all reports and other documents as may be required by the 1933 Act, the Rules and Regulations and the 1934 Act. (k) The Company will apply the proceeds from the sale of the Shares substantially in the manner set forth in the Prospectus. (l) Prior to or as of the First Closing Date, the Company shall have performed each condition to closing required to be performed by it pursuant to Section 4 hereof. (m) Other than as permitted by the 1933 Act and the Rules and Regulations, the Company will not distribute any prospectus or other offering material in connection with the Offering. (n) On First Closing Date, the Company shall sell to the Representative for $50 the Representative's Warrants, in substantially the form attached as Appendix B hereto. (o) The Company will use its best efforts to consummate the acquisition of REF as described in the Prospectus and the REF Agreement. 4. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The respective obligations of the Underwriters to purchase and pay for the Shares as provided herein shall be subject to the accuracy of the representations and warranties of the Company, in the case of the Firm Shares as of the date 14 hereof and the First Closing Date (as if made on and as of the First Closing Date) and in the case of the Option Shares, as of the date hereof and the Second Closing Date (as if made on and as of the Second Closing Date), to the performance by the Company of its obligations hereunder, and to the satisfaction of the following additional conditions on or before the First Closing Date in the case of the Firm Shares and on or before the Second Closing Date in the case of the Option Shares: (a) The Registration Statement shall have become effective not later than 5:00 P.M. Minneapolis time, on the first full business day following the date of this Agreement, or such later date as shall be consented to in writing by the Representative (the "Effective Date"). If the Company has elected to rely upon Rule 430A, the information concerning the price of the Shares and price-related information previously omitted from the effective Registration Statement pursuant to Rule 430A shall have been transmitted to the SEC for filing pursuant to Rule 424(b) within the prescribed time period, and prior to the Closing Date the Company shall have provided evidence satisfactory to the Representative of such timely filing (or a post-effective amendment providing such information shall have been promptly filed and declared effective in accordance with the 1933 Act and the Rules and Regulations). No stop order suspending the effectiveness thereof shall have been issued and no proceeding for that purpose shall have been initiated or, to the knowledge of the Company or the Representative, threatened by the SEC or any state securities commission or similar regulatory body. Any request of the SEC for additional information (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the satisfaction of the Underwriters and their legal counsel. The NASD, upon review of the terms of the Offering, shall not have objected to the terms of the Underwriters' participation in the Offering. (b) The Representative shall not have advised the Company that the Registration Statement or Prospectus, or any amendment thereof or supplement thereto, contains any untrue statement of a fact which is material or omits to state a fact which is material and is required to be stated therein or is necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading; provided, however, that this Section 4(b) shall not apply to statements in, or omissions from, the Registration Statement or Prospectus , or any amendment thereof or supplement thereto, which are based upon and conform to written information furnished to the Company by the Underwriters specifically for use in the preparation of the Registration Statement or the Prospectus, or any such amendment or supplement. (c) Subsequent to the date as of which information is given the Registration Statement and Prospectus, there shall not have occurred any change, or any development involving a prospective change, which materially and adversely affects the business or properties of the Company or REF and which, in the reasonable opinion of the Representative, materially and adversely affects the market for the Shares. (d) The Representative shall have received the opinion of Moss & Barnett, a Professional Association, counsel for the Company, dated as of such respective Closing Date and satisfactory in form and substance to the Representative and its counsel, to the effect that: 15 (i) The Company and REF have been duly incorporated and are validly existing in good standing under the laws of the jurisdiction of their organization with the requisite corporate power to own, lease and operate their properties and conduct their businesses as described in the Prospectus; and are duly qualified to do business as a foreign corporation in good standing in all jurisdictions where the ownership or leasing of their properties or the conduct of its business requires such qualification and in which the failure to be so qualified or in good standing would have a material adverse effect on their businesses. (ii) The number of authorized and, to the best of such counsel's knowledge, the number of issued and outstanding shares of capital stock of the Company are as set forth in the Prospectus and all such capital stock has been duly authorized and is validly issued, fully paid and nonassessable. Upon delivery of and payment for the Shares hereunder, the Underwriters will acquire the Shares free and clear of all liens, encumbrances or claims other than those created by the Underwriters. To the best of such counsel's knowledge, no preemptive rights, contractual or otherwise, of securities holders of the Company exist with respect to the issuance or sale of the Shares by the Company pursuant to this Agreement or the issuance of the Warrant Shares upon exercise of the Representative's Warrants. To the best of such counsel's knowledge, no rights to require registration of shares of Common Stock or other securities of the Company exist which may be exercised in connection with the filing of the Registration Statement. The Shares, Representative's Warrants and Warrant Shares conform as to matters of law in all material respects to the description of these securities made in the Prospectus and such description accurately sets forth the material legal provisions thereof required to be set forth in the Prospectus. (iii) The Shares have been duly authorized and, upon delivery to the Underwriters against payment therefor, will be validly issued, fully paid and nonassessable. (iv) The certificates evidencing the Shares comply as to form with the applicable provisions of the laws of the State of Minnesota. (v) The Representative's Warrants have been duly authorized, executed and delivered by the Company and are the valid and binding obligations of the Company, enforceable in accordance with their terms, except as enforceability may be limited by the application of bankruptcy, insolvency, moratorium, or other laws of general application affecting the rights of creditors generally and by judicial limitations on the right of specific performance and other equitable remedies, and except as the enforceability of indemnification or contribution provisions hereof may be limited by federal or state securities laws. The Warrant Shares when issued in accordance with the terms of this Agreement and pursuant to the Representative's Warrants will be validly issued, fully paid and nonassessable. A sufficient number of shares of Common Stock has been reserved for issuance upon exercise of the Representative's Warrants. 16 (vi) The Registration Statement has become and is effective under the 1933 Act, the Prospectus has been filed as required by Rule 424(b), if necessary and, to the best knowledge of such counsel, no stop orders suspending the effectiveness of the Registration Statement have been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the 1933 Act. (vii) To the best of such counsel's knowledge, there are no material legal or governmental proceedings of a character required by the 1933 Act and the Rules and Regulations to be described or referred to in the Registration Statement or Prospectus that are not described or referred to therein. All pending legal or governmental proceedings, if any, to which the Company or REF is a party or to which any of its property is subject which are not described in the Registration Statement and the Prospectus, including ordinary routine litigation incidental to the business, are, considered in the aggregate, not material to the Company or REF. (viii) No authorization, approval or consent of any governmental authority or agency is necessary in connection with the issuance and sale of the Shares as contemplated under this Agreement, except such as may be required and obtained under the 1933 Act or under state or other securities laws in connection with the purchase and distribution of the Shares by the Underwriters. (ix) The Registration Statement, when it became effective, the Prospectus and any amendments thereof or supplements thereto, (other than the financial statements and supporting financial and statistical data included or incorporated therein, as to which such counsel need express no opinion) on the date of filing or the date thereof, complied as to form in all material respects with the requirements of the 1933 Act and the Rules and Regulations. (x) This Agreement has been duly authorized, executed and delivered by, and is a valid and binding agreement of the Company, enforceable in accordance with its terms, except as enforceability may be limited by the application of bankruptcy, insolvency, moratorium or similar laws affecting the rights of creditors generally and judicial limitations on the right of specific performance and except as the enforceability of indemnification or contribution provisions hereof may be limited by federal or state securities laws. (xi) The REF Agreement has been duly authorized, executed and delivered by, and is a valid and binding agreement of the Company and REF, enforceable in accordance with its terms, except as enforceability may be limited by the application of bankruptcy, insolvency, moratorium or similar laws affecting the rights of creditors generally and judicial limitations on the right of specific performance and except as the enforceability of indemnification or contribution provisions hereof may be limited by federal or state securities laws. (xii) To the best of such counsel's knowledge, the execution, delivery and performance of this Agreement, the REF Agreement and the consummation of the transactions described therein will not result in a violation of, or a default under, the 17 terms or provisions of (A) any material bond, debenture, note, contract, lease, license, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument to which the Company or REF is a party or by which the Company, REF or any of its properties are bound, or (B) any material law, order, rule, regulation, writ, injunction, or decree known to such counsel of any government, governmental agency or court having jurisdiction over the Company or any of its properties. (xiii) To the best of such counsel's knowledge, except as described in the Prospectus, there are no United States patents of third parties which are infringed by the manufacture, use or sale of the products or processes currently made, used or sold by the Company or REF. (xiv) To the best of such counsel's knowledge, and except as stated below, there are no legal, governmental or administrative proceedings pending or threatened against the Company or REF that relate to patents, trademarks or other intellectual property, except for pending or proposed United States and foreign patent applications. (xv) To the best of such counsel's knowledge, after due inquiry, neither the Company nor REF has received any notice of conflict with the asserted rights of others in respect of any trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights, licenses, inventions, trade secrets, patents, patent applications, know-how, or similar rights, nor of any threatened actions with respect thereto, which, if determined adversely to the Company or REF, would individually or in the aggregate have a material adverse effect on the general affairs, financial position, net worth or results of operations of the Company or REF. (xvi) To the best of such counsel's knowledge, after due inquiry, the Company and REF own, possess or are licensed under all such material trademarks, trademark applications, trademark registrations, service marks, service mark registrations, copyrights, patents, patent applications and licenses as are described in the Prospectus and which are necessary for the Company's and REF's present or planned future business as described in the Prospectus. In expressing the foregoing opinion, as to matters of fact relevant to conclusions of law, counsel may rely, to the extent that they deem proper, upon certificates of public officials and of the officers of the Company, provided that copies of such officers' certificates are attached to the opinion. In addition to the matters set forth above, such opinion shall also include a statement to the effect that, although such counsel cannot guarantee the accuracy, completeness or fairness of any of the statements contained in the Registration Statement, Prospectus, or any amendment thereof or supplement thereto in connection with such counsel's representation, investigation and due inquiry of the Company in the preparation of the Registration Statement, Prospectus and any amendment thereof or supplement thereto, nothing has come to the attention of such counsel which causes them 18 to believe that the Registration Statement, Prospectus, or any amendment thereof or supplement thereto (other than the financial statements and supporting financial and statistical data included or incorporated therein, as to which such counsel need express no opinion) contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; provided, however, that such opinion of counsel does not require any statement concerning statements in, or omissions from, the Registration Statement, Prospectus, or any amendment thereof or supplement thereto, which are based upon and conform to written information furnished to the Company by the Underwriters specifically for use in the preparation of the Registration Statement, Prospectus, or any such amendment or supplement. (e) The Representative shall have received from Fredrikson & Byron, P.A., its counsel, such opinion or opinions as the Representative may reasonably require, dated as of each closing date and satisfactory in form and substance to the Representative, with respect to the sufficiency of corporate proceedings and other legal matters relating to this Agreement and the transactions contemplated hereby, and the Company shall have furnished to said counsel such documents as they may have requested for the purpose of enabling them to pass upon such matters. In connection with such opinion, as to matters of fact relevant to conclusions of law, such counsel may rely, to the extent that they deem proper, upon representations or certificates of public officials and of responsible officers of the Company. (f) The Representative and the Company shall have received letters, dated the date hereof and as of each closing date, from Price Waterhouse, LLP, independent public accountants, substantially similar to the form set forth in Appendix A hereto. (g) The Representative shall have received from the Company a certificate, dated as of each closing date, of the principal executive officer and the principal financial or accounting officer of the Company to the effect that: (i) The representations and warranties of the Company in this Agreement are true and correct as if made on and as of each closing date. The Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at, or prior to, such date. (ii) No stop order suspending the effectiveness of the Registration Statement has been issued and no proceeding for that purpose has been instituted or is pending or to the best knowledge of such officers contemplated under the 1933 Act. (iii) Neither the Registration Statement nor the Prospectus nor any amendment thereof or supplement thereto included any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, and, since the effective date of the Registration Statement, there has occurred no event required to be set forth in an amended or supplemented prospectus which has not been so set forth; provided, however, that such certificate does not require any representation concerning statements in, or omissions from, the Registration Statement or Prospectus, or any amendment thereof or supplement 19 thereto, which are based upon and conform to written information furnished to the Company by any of the Underwriters specifically for use in the preparation of the Registration Statement or the Prospectus, or any such amendment or supplement. (iv) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, and except as contemplated or referred to in the Prospectus, no event has occurred that should have been set forth in an amendment or supplement to Registration Statement or the Prospectus which has not been so set forth and the Company has not incurred any direct or contingent liabilities or obligations material to the Company, or entered into any material transactions, except liabilities, obligations or transactions in the ordinary course of business, and there has not been any change in the capital stock or long-term debt of the Company, (including any capitalized lease obligations), any material increase in the short-term debt of the Company, any material adverse change in the financial position, net worth or results of operations of the Company or declaration or payment of any dividend. (v) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, the Company has not sustained any material loss of, or damage to, its properties, whether or not insured. (vi) Except as is otherwise expressly stated in the Registration Statement and Prospectus, there are no material actions, suits or proceedings pending before any court or governmental agency, authority or body, or, to the best of their knowledge, threatened, to which the Company is a party or of which the business or property of the Company is the subject. (vii) The transactions contemplated by the REF Agreement have been consummated. (h) The Representative shall have received, dated as of each closing date, from the Secretary of the Company a certificate of incumbency certifying the names, titles and signatures of the officers authorized to execute the resolutions of the Board of Directors of the Company authorizing and approving the execution, delivery and performance of this Agreement, a copy of such resolutions to be attached to such certificate, certifying that such resolutions and the Articles of Incorporation of the Company and the Bylaws of the Company have been validly adopted and have not been amended or modified. (i) The Representative shall have received a written agreement from each of the officers and directors of the Company, that for 180 days following the Effective Date, such person will not, without the Representative's prior written consent, sell, transfer or otherwise 20 dispose of, or agree to sell, transfer or otherwise dispose of, other than by gift to donees who agree to be bound by the same restriction or by will or the laws of descent, any of his or her Common Stock, or any options, warrants or rights to purchase Common Stock or any shares of Common Stock received upon exercise of any options, warrants or rights to purchase Common Stock, all of which are beneficially held by such persons during the 180 day period. Additionally, the Representative shall have received a written agreement from Sandra J. Biermeier, that for 90 days following the Effective Date, she will not, without the Representative's prior written consent, sell, transfer or otherwise dispose of, other than by gift to donees who agree to be bound by the same restriction or by will or the laws of descent, any shares of Common Stock received upon exercise of any options, warrants or rights to purchase Common Stock, all of which are beneficially held by her during the 90-day period. (j) The Company shall not have failed to have performed any of its agreements herein contained and required to be performed by it at or prior to the First Closing Date or the Second Closing Date, as the case may be. The Representative may waive in writing the performance of any one or more of the conditions specified in this Section 4 or extend the time for their performance. (k) The Shares shall have been registered or qualified for sale or exempt from such registration or qualification under the securities laws of such jurisdictions as designated by the Representative such qualifications or exemptions shall continue in effect to and including the First Closing Date or the Second Closing Date, as the case may be. (l) The transactions contemplated by the REF Agreement shall have occurred simultaneously with the First Closing Date. (m) The Company shall have furnished to the Representative, dated as of the date of each Closing Date, such further certificates and documents as the Representative shall have reasonably required. (n) All such opinions, certificates, letters and documents will be in compliance with the provisions hereof only if they are reasonably satisfactory to the Representative and its legal counsel. All statements contained in any certificate, letter, or other document delivered pursuant hereto by, or on behalf of, the Company shall be deemed to constitute representations and warranties of the Company. (o) The Representative may waive in writing the performance of any one or more of the conditions specified in this Section 4 or extend the time for their performance. (p) If any of the conditions specified in this Section 4 shall not have been fulfilled when and as required by this Agreement to be fulfilled, this Agreement and all obligations of the Underwriters hereunder may be canceled at, or at any time prior to, each Closing Date by the Representative. Any such cancellation shall be without liability of the Underwriters to the Company and shall not relieve the Company of its obligations under Section 3(g) 21 hereof. Notice of such cancellation shall be given to the Company at the address specified in Section 11 hereof in writing, or by telegraph or telephone confirmed in writing. 5. REPRESENTATIVE'S WARRANTS. On the First Closing Date, the Company shall sell to the Representative for $50 the Representative's Warrants, which shall first become exercisable one year after the Effective Date and shall remain exercisable for a period of four years thereafter. The Representative's Warrants shall be subject to certain transfer restrictions and shall be in substantially the form filed as an exhibit to the Registration Statement and attached as Appendix B hereto. 6. INDEMNIFICATION. (a) The Company hereby agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the 1933 Act against any losses, claims, damages or liabilities, joint or several, to which such Underwriter or each such controlling person may become subject, under the 1933 Act, the 1934 Act, the common law or otherwise, insofar as such losses, claims, damages or liabilities (or judicial or governmental actions or proceedings in respect thereof) arise out of, or are based upon, (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, or the omission or alleged omission to state in the Registration Statement or any amendment thereof a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (ii) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus if used prior to the Effective Date of the Registration Statement or in the Prospectus (as amended or as supplemented, if the Company shall have filed with the SEC any amendment thereof or supplement thereto), or the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; or (iii) any untrue statement or alleged untrue statement of a material fact contained in any application or other statement executed by the Company or based upon written information furnished by the Company filed in any jurisdiction in order to qualify the Shares under, or exempt the Shares or the sale thereof from qualification under, the securities laws of such jurisdiction, or the omission or alleged omission to state in such application or statement a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and the Company will reimburse each Underwriter and each such controlling person for any legal or other expenses reasonably incurred by such Underwriter or controlling person (subject to the limitation set forth in Section 6(c) hereof) in connection with investigating or defending against any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of, or is based upon, an untrue statement, or alleged untrue statement, omission or alleged omission, made in reliance upon and in conformity with written information furnished to the Company by, or on behalf of, any Underwriter specifically for use in the preparation of the Registration Statement or any such post effective amendment thereof, any such Preliminary Prospectus or the Prospectus or any such amendment thereof or supplement thereto, or in any application or other statement executed by the Company or any Underwriter filed in any jurisdiction in order to qualify the Shares under, or exempt the 22 Shares or the sale thereof from qualification under, the securities laws of such jurisdiction; and provided further that the foregoing indemnity agreement is subject to the condition that, insofar as it relates to any untrue statement, alleged untrue statement, omission or alleged omission made in any Preliminary Prospectus but eliminated or remedied in the Prospectus, such indemnity agreement shall not inure to the benefit of any Underwriter if the person asserting any loss, claim, damage or liability purchased the Shares from such Underwriter which are the subject thereof (or to the benefit of any person who controls such Underwriter), if a copy of the Prospectus was not sent or given to such person with, or prior to, the written confirmation of the sale of such Shares to such person. This indemnity agreement is in addition to any liability which the Company may otherwise have. (b) Each Underwriter severally, but not jointly, agrees to indemnify and hold harmless the Company, each of the Company's directors, each of the Company's officers who has signed the Registration Statement and each person who controls the Company within the meaning of Section 15 of the 1933 Act against any losses, claims, damages or liabilities to which the Company or any such director, officer, or controlling person may become subject, under the 1933 Act, the 1934 Act, the common law, or otherwise, insofar as such losses, claims, damages, or liabilities (or judicial or governmental actions or proceedings in respect thereof) arise out of, or are based upon, (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, or the omission or alleged omission to state in the Registration Statement or any amendment thereof, a material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus if used prior to the Effective Date of the Registration Statement or in the Prospectus (as amended or as supplemented, if the Company shall have filed with the SEC any amendment thereof or supplement thereto), or the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; or (iii) any untrue statement or alleged untrue statement of a material fact contained in any application or other statement executed by the Company or by any Underwriter and filed in any jurisdiction in order to qualify the Shares under, or exempt the Shares or the sale thereof from qualification under, the securities laws of such jurisdiction, or the omission or alleged omission to state in such application or statement a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; in each case to the extent, but only the extent, that such untrue statement, alleged untrue statement, omission or alleged omission, was made in reliance upon and in conformity with written information furnished to the Company by, or on behalf of, any Underwriter specifically for use in the preparation of the Registration Statement or any such post effective amendment thereof, any such Preliminary Prospectus or the Prospectus or any such amendment thereof or supplement thereto, or in any application or other statement executed by the Company or by any Underwriter and filed in any jurisdiction; 23 and each Underwriter will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer or controlling person in connection with investigating or defending against any such loss, claim, damage, liability or action. This indemnity agreement is in addition to any liability which the Underwriters may otherwise have. (c) Promptly after receipt by an indemnified party under this Section 6 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 6, notify in writing the indemnifying party of the commencement thereof. The omission so to notify the indemnifying party will not relieve it from any liability under this Section 6 as to the particular item for which indemnification is then being sought, unless such omission so to notify prejudices the indemnifying party's ability to defend such action. In case any such action is brought against any indemnified party and the indemnified party notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel who shall be reasonably satisfactory to such indemnified party; and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section 6 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided, however, that if, in the reasonable judgment of the indemnified party, it is advisable for such parties and controlling persons to be represented by separate counsel, any indemnified party shall have the right to employ separate counsel to represent it and all other parties and their controlling persons who may be subject to liability arising out of any claim in respect of which indemnity may be sought by the Underwriters against the Company or by the Company against the Underwriters hereunder, in which event the fees and expenses of such separate counsel shall be borne by the indemnifying party and paid as incurred. Any such indemnifying party shall not be liable to any such indemnified party on account of any settlement of any claim or action effected without the prior written consent of such indemnifying party. 7. CONTRIBUTION. (a) If the indemnification provided for in Section 6 is unavailable under applicable law to any indemnified party in respect of any losses, claims, damages or liabilities referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Underwriters from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law,in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Underwriters in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The Company and the Underwriters agree that contribution determined by per capita 24 allocation (even if the Underwriters were considered a single person) would not be equitable. The respective relative benefits received by the Company on the one hand, and the Underwriters, on the other hand, shall be deemed to be in the same proportion (A) in the case of the Company, as the total price paid to the Company for the Shares by the Underwriters (net of underwriting discount received but before deducting expenses) bears to the aggregate public offering price of the Shares and (B) in the case of the Underwriters, as the aggregate underwriting discount received by them bears to the aggregate public offering price of the Shares, in each case as reflected in the Prospectus. The relative fault of the Company and the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages and liabilities referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. Notwithstanding the provisions of this Section 7, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of any untrue or alleged untrue statement or omission or alleged omission in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto. The Underwriters' obligation to contribute pursuant to this section are several and not joint. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7, each person who controls an Underwriter within the meaning of the 1933 Act or the 1934 Act shall have the same rights to contribution as such Underwriter, each person who controls the Company within the meaning of the 1933 Act or the 1934 Act shall have the same rights to contribution as the Company and each officer of the Company who shall have signed the Registration Statement and each director of the Company shall have the same rights to contribution as the Company. (b) Promptly after receipt by a party to this Agreement of notice of the commencement of any action, suit or proceeding, such person will, if a claim for contribution in respect thereof is to be made against another party (the "Contributing Party"), notify the Contributing Party of the commencement thereof, but the omission so to notify the Contributing Party will not relieve the Contributing Party from any liability which it may have to any party other than under this Section 7, unless such omission so to notify prejudices the indemnifying party's ability to defend such action. Any notice given pursuant to Section 6 hereof shall be deemed to be like notice hereunder. In case any such action, suit or proceeding is brought against any party, and such person notifies a Contributing Party of the commencement thereof, the Contributing Party will be entitled to participate therein with the notifying party and any other Contributing Party similarly notified. 8. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION. 25 (a) This Agreement shall become effective at _____ a.m., Minneapolis time, on the day on which the Underwriters release the initial public offering of the Firm Shares for sale to the public. The Representative shall notify the Company immediately after any action has been taken which causes this Agreement to become effective. Until this Agreement is effective, it may be terminated by the Company or the Representative by giving notice as hereinafter provided, except that the provisions of Sections 4(g), and 8 shall at all times be effective. For purposes of this Agreement, the release of the initial public offering of the Firm Shares for sale to the public shall be deemed to have been made when the Underwriters release, by telegram or otherwise, firm offers of the Firm Shares to securities dealers or release for publication a newspaper advertisement relating to the Firm Shares, whichever occurs first. (b) Until the First Closing Date, this Agreement may be terminated by the Representative, at its option, by giving notice to the Company, if (i) the Company shall have sustained a loss by fire, flood, accident or other calamity which is material with respect to the business of the Company; the Company shall have become a party to material litigation, not disclosed in the Registration Statement or the Prospectus; or the business or financial condition of the Company shall have become the subject of any material litigation, not disclosed in the Registration Statement or the Prospectus; or there shall have been, since the respective dates as of which information is given in the Registration Statement or the Prospectus, any material adverse change in the general affairs, business, key personnel, capitalization, financial position or net worth of the Company, whether or not arising in the ordinary course of business, which loss or change, in the reasonable judgment of the Representative, shall render it inadvisable to proceed with the delivery of the Shares, whether or not such loss shall have been insured; (ii) trading in securities generally on the New York Stock Exchange, American Stock Exchange, Nasdaq National Market, Nasdaq SmallCap Market-SM- or the over-the-counter market shall have been suspended or minimum prices shall have been established on such exchange by the SEC or by such exchanges or markets; (iii) a general banking moratorium shall have been declared by federal, New York or Minnesota authorities; (iv) there shall have been such a material adverse change in general economic, monetary, political or financial conditions, or the effect of international conditions on the financial markets in the United States shall be such that, in the judgment of the Representative, makes it inadvisable to proceed with the delivery of the Shares; (v) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of either of any court or other governmental authority which, in the judgment of the Representative, materially and adversely affects or will materially and adversely affect the business or operations of the Company; (vi) there shall be a material outbreak of hostilities or material escalation and deterioration in the political and military situation between the United States and any foreign power, or a formal declaration of war by the United States of America shall have occurred; (vii) the Company shall have failed to comply with any of the provisions of this Agreement on its part to be performed on or prior to such date or if any of the conditions, agreements, representations or warranties of the Company shall not have been fulfilled within the respective times provided for in this Agreement. Any such termination shall be without liability of any party to any other party, except as provided in Sections 6 and 7 hereof; provided, however, that the Company shall remain obligated to pay costs and expenses to the extent provided in Section 3(g) hereof. 26 (c) If the Representative elects to prevent this Agreement from becoming effective or to terminate this Agreement as provided in this Section 8, it shall notify the Company promptly by telegram or telephone, confirmed by letter sent to the address specified in Section 12 hereof. If the Company shall elect to prevent this Agreement from becoming effective, it shall notify the Representative promptly by telegram or telephone, confirmed by letter sent to the address specified in Section 12 hereof. 9. DEFAULT OF UNDERWRITER. If any Underwriter or Underwriters default in their obligation to purchase the Firm Shares hereunder and the aggregate amount of Firm Shares which such defaulting Underwriter or Underwriters agreed but failed to purchase does not exceed 10% of the total amount of Firm Shares, the other Underwriters shall be obligated, severally, in proportion to their respective commitments hereunder, to purchase the Firm Shares which such defaulting Underwriter or Underwriters agreed but failed to purchase. If any Underwriter or Underwriters so defaults and the aggregate amount of Firm Shares with respect to which such default or defaults occur is more than 10% of the total number of Firm Shares and arrangements satisfactory to the Representative and the Company for purchase of such Firm Shares by other persons (who may include one or more of the nondefaulting Underwriters, including the Representative) are not made within 48 hours after such default, this Agreement will terminate without liability on the part of any nondefaulting Underwriter or the Company except for the provisions of Sections 6 and 7 hereof. In any such case, either the Representative or the Company shall have the right to postpone the Closing Date, but in no event for more than seven days, in order that any required changes, not including a reduction in the number of Firm Shares, to the Registration Statement and the Prospectus of any other documents or arrangements may be effected. As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section 9. Nothing herein shall relieve a defaulting Underwriter from liability for its default. 10. SURVIVAL OF INDEMNITIES, CONTRIBUTION AGREEMENTS, WARRANTIES AND REPRESENTATIONS. The respective indemnity and contribution agreements of the Company and the Underwriters contained in Sections 6 and 7, respectively, the representations and warranties of the Company set forth in Section 1 hereof and the covenants of the Company set forth in Section 3 hereof shall remain operative and in full force and effect, regardless of any investigation made by, or on behalf of, the s, the Company, any of its officers and directors, or any controlling person referred to in Sections 6 and 7, and shall survive the delivery of and payment for the Shares. The aforesaid indemnity and contribution agreements shall also survive any termination or cancellation of this Agreement. Any successor of any party or of any such controlling person, or any legal representative of such controlling person, as the case may be, shall be entitled to the benefit of the respective indemnity and contribution agreements. 11. NOTICES. All notices or communications hereunder, except as herein otherwise specifically provided, shall be in writing and, if sent to the Representative, shall be mailed, delivered or telegraphed and confirmed, to R. J. Steichen & Company, 700 Midwest Plaza West, 801 Nicollet Avenue, Minneapolis, Minnesota 55402 Attention: Patrick M. Sidders, Senior Vice President and Managing Director, with a copy to Melodie R. Rose, Esq., Fredrikson & Byron, P.A., 1100 International Centre, 900 Second Avenue South, Minneapolis, Minnesota 55402; or, if sent to the Company, shall be mailed, delivered or telegraphed and confirmed, to Premis Corporation, 15301 Highway 55 West, Plymouth, Minnesota, Attention: Fritz T. Biermeier, with a copy to Janna R. 27 Severance, Esq., Moss & Barnett, a Professional Association, 4800 Norwest Center, 90 South Seventh Street, Minneapolis, Minnesota 55402. 12. INFORMATION FURNISHED BY THE UNDERWRITERS. The statements relating to the stabilization activities of the Underwriters and the statements under the caption "Underwriting" in any Preliminary Prospectus and in the Prospectus constitute the written information furnished by, or on behalf of, the Underwriters specifically for use with reference to the Underwriters referred to herein. 13. PARTIES. This Agreement shall inure to the benefit of and be binding upon the Underwriters and the Company, their respective successors and assigns, and the officers, directors and controlling persons referred to in Sections 6 and 7. Nothing expressed in this Agreement is intended or shall be construed to give any person or corporation, other than the parties hereto, their respective successors and assigns, and the controlling persons, officers and directors referred to in Sections 6 and 7 any legal or equitable right, remedy, or claim under, or in respect of, this Agreement or any provision herein contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of the parties hereto and their respective executors, administrators, successors, assigns and such controlling persons, officers and directors, and for the benefit of no other person or corporation. No purchaser of any Shares from the Underwriters shall be construed a successor or assign merely by reason of such purchase. 14. GOVERNING LAW. This Agreement shall be construed and enforced in accordance with the laws of the State of Minnesota. If the foregoing is in accordance with the Representative's understanding of this agreement, kindly sign and return to the Company the enclosed counterpart of this Agreement, whereupon it will become a binding agreement between the Company and the Underwriters in accordance with its terms. Very truly yours, PREMIS CORPORATION By ------------------------------------------- Its ------------------------------------------ ACCEPTANCE The foregoing Underwriting Agreement is hereby confirmed and accepted by the undersigned for itself and as Representative of the several Underwriters referred to in the foregoing Agreement as of the date first above written. R.J. STEICHEN & COMPANY 28 By ---------------------------- Its ---------------------------- 568948 29 SCHEDULE I Name of Underwriter Number of Firm Shares - ------------------- --------------------- 1. R. J. Steichen & Company. . . . . . . . . . . . . 2. [Name]. . . . . . . . . . . . . . . . . . . . . . 3. [Name]. . . . . . . . . . . . . . . . . . . . . . 4. [Name]. . . . . . . . . . . . . . . . . . . . . . 5. [Name]. . . . . . . . . . . . . . . . . . . . . . 6. [Name]. . . . . . . . . . . . . . . . . . . . . . 7. [Name]. . . . . . . . . . . . . . . . . . . . . . 8. [Name]. . . . . . . . . . . . . . . . . . . . . . 9. [Name]. . . . . . . . . . . . . . . . . . . . . . 10. [Name]. . . . . . . . . . . . . . . . . . . . . . 11. [Name]. . . . . . . . . . . . . . . . . . . . . . 12. [Name]. . . . . . . . . . . . . . . . . . . . . . 13. [Name]. . . . . . . . . . . . . . . . . . . . . . 14. [Name]. . . . . . . . . . . . . . . . . . . . . . 15. [Name]. . . . . . . . . . . . . . . . . . . . . . ---------------- TOTAL. . . . . . . . . . . . . . . . . . . . 1,750,000 ---------------- ---------------- 568948 APPENDIX A FORM OF COMFORT LETTER OF PRICE WATERHOUSE, LLP (1) They are independent public accountants with respect to the Company within the meaning of the Securities Act of 1933, as amended (the "1933 Act"). (2) In their opinion, the financial statements of the Company included in the Registration Statement which are stated therein to have been examined by them comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the related published rules and regulations. (3) On the basis of specified procedures (but not an audit in accordance with generally accepted auditing standards), including inquiries of certain officers of the Company responsible for financial and accounting matters as to transactions and events subsequent to the date of the financial statements included in the Prospectus, a reading of minutes of meetings of the stockholders and directors of the Company since the date of the financial statements included in the Prospectus and other procedures as specified in such letter, nothing came to their attention which caused them to believe that (a) at a specified date not more than five days prior to the date thereof in the case of the first letter and not more than two business days prior to the date thereof in the case of the second and third letters, there was any change in the capital stock, long-term debt, or short-term debt (other than normal payments) of the Company, or any material decrease in net current assets or stockholders' equity, as compared with amounts shown on the latest balance sheet of the Company included in the Registration Statement; or (b) for the period from the date of such balance sheet to a date not more than five days prior to the date thereof in the case of the first letter and not more than two business days prior to the date thereof in the case of the second letter, there were any material decreases in working capital, long-term debt or total stockholders' equity, except for changes or decreases which the Prospectus discloses, have occurred or may occur, or which are set forth in such letter. (4) They have carried out specified procedures, which have been agreed to by the Representative, with respect to certain information in the Prospectus specified by the Representative, and on the basis of such procedures, they have found such information to be in agreement with the accounting records of the Company or with material derived from such records. 568948 31 EX-23.1 3 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-2 of our report dated May 10, 1996 related to the financial statements of PREMIS Corporation and of our report dated August 7, 1996 related to the financial statements of REF Retail Systems Corp., which appear in such Prospectus. We also consent to the references to us under the headings "Experts" and "Selected Financial Data" in such Prospectus. However, it should be noted that Price Waterhouse LLP has not prepared or certified such "Selected Financial Data." PRICE WATERHOUSE LLP Minneapolis, Minnesota September 23, 1996 -----END PRIVACY-ENHANCED MESSAGE-----