SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ____________ to
________________
Commission File No: 00-113959
CPS SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-1607857
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
3400 CARLISLE, SUITE 500
DALLAS, TEXAS 75204
(214) 855-5277
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AS OF AUGUST 10, 1998
----- ---------------------------------
Common stock
Par value $.01 per share 6,732,502
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CPS SYSTEMS, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
As of As of
ASSETS 06/30/98 12/31/97
CURRENT ASSETS (unaudited)
<S> <C> <C>
Cash $3,303 $327
Accounts receivable $2,220 $1,718
Deferred income tax $714 $160
Inventory $266 $161
Refundable income taxes $200 $75
Prepaid expense and other current assets $727 $134
Deferred offering costs $0 $367
------------------ -----------------
Total current assets: $7,430 $2,942
PROPERTY AND EQUIPMENT $657 $536
SOFTWARE DEVELOPMENT COST $2,035 $938
OTHER ASSETS
Costs in excess of net assets acquired $1,763 $1,905
Debt issue costs $119 $160
Other assets $14 $18
------------------ -----------------
$1,896 $2,083
------------------ -----------------
$12,018 $6,499
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long term debt $0 $731
Accounts payable $245 $683
Accrued salaries, wages and payroll taxes $0 $12
Accrued offering costs $100 $243
Accrued income tax payable $132 $0
Other accrued expenses $763 $230
Customer deposits and unearned revenue $2,912 $1,533
------------------ -----------------
Total current liabilities: $4,152 $3,432
OTHER LIABILITIES
Long-term debt $2,014 $2,014
Deferred income taxes $317 $317
Notes payable-shareholders $0 $123
Unearned revenue $47 $47
Other liabilities $52 $47
------------------ -----------------
Total long term debt: $2,430 $2,548
------------------ -----------------
Total Liabilities: $6,582 $5,980
PUT WARRANTS $0 $242
COMMITMENTS AND CONTINGENCIES $0 $0
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized
10,000,000 shares, none issued and outstanding $0 $0
Common stock, $.01 par value, 50,000,000 shares
authorized; issued and outstanding, 6,732,502
and 3,904,736 shares $67 $39
Additional paid-in capital $6,944 $961
Accumulated deficit ($1,575) ($723)
------------------ -----------------
Total Shareholders' Equity: $5,436 $277
------------------ -----------------
$12,018 $6,499
================== =================
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
CPS SYSTEMS, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1998 1997 1998 1997
---------- ---------- ---------- ------------
Revenue
<S> <C> <C> <C> <C>
License fees $402 $1,175 $600 $1,365
Recurring maintenance and service fees $1,053 $956 $2,129 $1,911
Product sales $756 $1,147 $1,399 $1,648
Other service fees $271 $335 $552 $481
---------- ---------- ---------- ------------
$2,482 $3,613 $4,680 $5,405
Cost of Revenue
Product sales $634 $873 $1,133 $1,236
Purchased software $228 $189 $375 $282
Distribution $3 $37 $7 $40
---------- --------- ---------- -----------
$865 $1,099 $1,515 $1,558
---------- --------- ---------- -----------
Gross profit $1,617 $2,514 $3,165 $3,847
Operating Expenses:
Support and customer service $988 $727 $1,922 $1,459
Selling and marketing $567 $264 $1,038 $409
Research and development $164 $376 $266 $729
General and administrative $309 $229 $768 $530
Amortization of intangible goodwill &
non-compete agreements $70 $91 $141 $181
---------- --------- ---------- ----------
$2,098 $1,687 $4,135 $3,308
Earnings(loss) from operations ($481) $827 ($970) $539
---------- --------- ---------- ----------
Interest and financing costs $88 $116 $333 $232
---------- --------- ---------- ----------
Earnings(loss) before income taxes ($569) $711 ($1,303) $307
Income tax expense(benefit) ($192) $299 ($452) $174
---------- --------- ---------- ----------
Net earnings(loss) ($377) $412 ($851) $133
========== ========= ========== ==========
Net earnings(loss) per common share
Basic ($0.06) $0.11 ($0.16) $0.03
Diluted ($0.06) $0.09 ($0.16) $0.03
Weighted average shares used in computing net
earnings per common share:
Basic 6,733 3,905 5,436 3,905
Diluted 6,849 4,833 5,487 4,833
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
CPS SYSTEMS, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
1998 1997
--------------------------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ (851) $ 133
Adjustments to reconcile net income(loss) to net cash:
Depreciation and amortization 368 373
Adjustment to put warrants 125 (10)
Loss on disposal of property and equipment 1 0
Accrued interest to shareholders 2 0
Changes in assets and liabilities, net of business acquired:
Accounts receivable (502) (82)
Refundable income taxes (125) 0
Inventories (105) (83)
Deferred income tax expense (713) 5
Prepaid expenses and other current assets (543) (1)
Accounts payable (598) 264
Accrued expenses 793 (63)
Customer deposits and unearned revenue 1,379 (145)
Income taxes payable 132 (35)
Other liabilities 5 14
--------------------------------
Net cash (used)provided by operating activities ($632) $369
Cash Flows from investing activities:
Purchase of property and equipment (249) (119)
Software development costs (1,155) (105)
Other receivables 0 (124)
--------------------------------
Net cash used by investing activities ($1,404) ($348)
Cash flows from financing activities:
Principal payment on long-term debt (855) (166)
Proceeds from public offering, net of offering cost 5,867 0
--------------------------------
Net cash provided(used) by financing activities $5,012 ($166)
Net increase(decrease) in cash 2,976 (145)
Cash at beginning of period 327 592
--------------------------------
Cash at end of period $3,303 $447
================================
Supplementary Cash Flow Disclosure:
Interest and financing costs paid 167 189
Income taxes paid, net 200 205
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
CPS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE A - BASIS OF PRESENTATION
The interim condensed consolidated financial statements included herein have
been prepared by the Company without audit. These statements reflect all
adjustments which are, in the opinion of management, necessary to present fairly
the consolidated financial position as of June 30, 1998, and the consolidated
results of operation for the three months and six months ended June 30, 1998 and
1997. All such adjustments are of a normal recurring nature. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. The Company believes that the disclosures are adequate to make the
information presented not misleading. It is suggested that these consolidated
financial statements and notes be read in conjunction with the audited
consolidated financial statements and notes for the year ended December 31,
1997, included in the Company's Form SB-2 Registration Statement(File No.
333-39173) filed with the Securities and Exchange Commission, effective March
25, 1998.
NOTE B - REVENUE RECOGNITION
The company licenses its software products. Pursuant to AICPA Statement of
Position 97-2, "Software Revenue Recognition", revenue from software license
fees is recognized when an agreement has been executed, software has been
delivered and installed, all significant contractual obligations have been met
and collection of the related receivable is probable. Post contract customer
support revenue, consisting of continuing maintenance and service fees,
including that bundled with initial license fees, is deferred and recognized
ratably over the contractual periods the services are provided. Product sales,
consisting primarily of computer hardware, are recognized upon delivery of the
product.
The accompanying financial statements represent a restatement of the previous
financial statements for the quarter ending June 30, 1998. These previous
financial statements recognized revenue for initial software license fees
ratably over the period during which contracted customer development was being
performed.
NOTE C - INITIAL PUBLIC OFFERING
On March 30, 1998 the Company successfully completed its initial public
offering(IPO) of common stock. The Company issued 1,900,000 shares of common
stock in connection with its IPO at $4.00 per share, which upon payment of all
offering costs resulted in net proceeds of approximately $5,767, net of issuance
costs of approximately $1,833. In April 1998, the underwriters exercised their
option to purchase 285,000 additional shares of common stock to cover
over-allotments. All of the over-allotment shares were sold by certain selling
shareholders, resulting in no proceeds to the company. However the Company
incurred additional issuance cost of $148,000. Net proceeds net of issuance cost
are $5,619.
In connection with the IPO, all of the Company's outstanding put warrants were
converted into common stock. The exercise of the put warrants resulted in the
issuance of 927,766 common shares and proceeds to the Company of approximately
$2.4. Upon exercise of the put warrants, their recorded value of $367 was
reclassified to paid in capital.
5
<PAGE>
CPS SYSTEMS, INC. AND SUBSIDIARY
JUNE 30, 1998
NOTE D - SENIOR TERM LOAN AND REVOLVING LINE OF CREDIT
In April 1998, the Company repaid its senior term loan in full utilizing
proceeds from the IPO. The balance of the senior term loan at the time of the
repayment, including principal, interest and repayment penalties, was
approximately $761. Upon repayment of the senior term loan, the Company's $1,000
revolving line of credit with the same financial institution was terminated.
There were no borrowings outstanding under the revolving line of credit.
NOTE E - STOCK OPTIONS
Upon the completion of the IPO, the Company granted 335,000 stock options to
officers and employees at an exercise price equal to the IPO price of $4.00 per
share pursuant to the 1997 Equity Participation Plan ("the Plan"). Of the
original 335,000 share options granted, 27,500 lapsed pursuant to the terms of
the Plan. These options vest over a period of 3 years and expire in March 2008.
The Company's stock option plan is accounted for under the intrinsic value
method in which compensation expense is recognized for the amount, if any, that
the fair value of the underlying common stock exceeds the exercise price at the
date of grant. Accordingly, no compensation expense was recorded in connection
with the aforementioned options.
6
<PAGE>
CPS SYSTEMS, INC. AND SUBSIDIARY
June 30, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This section of the Report contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
Discussion containing such forward-looking statements may be found in
Management's Discussion and Analysis of Financial Condition and Results of
Operations under the captions "Comparison of Three Months Ended June 30, 1998
and June 30, 1997," "Comparison of Six Months Ended June 30, 1998 and June 30,
1997" and "Liquidity and Capital Resources." Actual results for future periods
could differ materially from those discussed in this section as a result of the
various risks and uncertainties discussed herein. A comprehensive summary of
such risks and uncertainties can be found in the Company's registration
statement on Form S-1 (File No. 333-39173), which was declared effective on
March 25, 1998. All dollar amounts are expressed in thousands, except per share
amounts. The financial results expressed in this item 2 are unaudited.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
total revenues represented by certain revenue, expense and income items:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1998 1997 1998 1997
----------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue
License fees 16.2% 32.5% 12.8% 25.3%
Recurring maintenance and service fees 42.4% 26.5% 45.5% 35.4%
Product sales 30.5% 31.7% 29.9% 30.5%
Other service fees 10.9% 9.3% 11.8% 8.9%
----------- --------- ---------- ---------
Total Revenue 100.0% 100.0% 100.0% 100.0%
----------- --------- ---------- ---------
Cost of Revenue
Product sales 25.5% 24.2% 24.2% 22.9%
Purchased software. 9.2% 5.2% 8.0% 5.2%
Distribution 0.1% 1.0% 0.1% 0.7%
----------- --------- ---------- ---------
Total Cost of Sales 34.8% 30.4% 32.3% 28.8%
----------- --------- ---------- ---------
Gross profit 65.2% 69.6% 67.7% 71.2%
Operating Expenses:
Support and customer service 39.8% 20.1% 41.1% 27.0%
Selling and marketing 22.8% 7.3% 22.2% 7.6%
Research and development 6.6% 10.4% 5.7% 13.5%
General and administrative 12.5% 6.3% 16.4% 9.8%
Amortization of intangible goodwill &
non-compete agreements 2.8% 2.5% 3.0% 3.3%
----------- --------- ---------- ---------
Total Operating Expense 84.5% 46.7% 88.4% 61.2%
----------- --------- ---------- ---------
Earnings(loss) from operations (19.3%) 22.9% (20.7%) 10.0%
Interest and financing costs 3.5% 3.2% 7.1% 4.3%
----------- --------- ---------- ---------
Earnings(loss) before income taxes (22.9%) 19.7% (27.8%) 5.7%
Income tax expense(benefit) (7.7%) 8.3% (9.7%) 3.2%
----------- --------- ---------- ---------
Net earnings(loss) (15.2%) 11.4% (18.1%) 2.5%
----------- --------- ---------- ---------
</TABLE>
7
<PAGE>
CPS SYSTEMS, INC. AND SUBSIDIARY
June 30, 1998
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
REVENUE
The Company's revenue includes revenue of license fees, recurring maintenance
and service fees, product sales, and other service fees.
The Company's total revenue was $2,482 for the three months ended June 30, 1998
compared to $3,613 for the three months ended June 30, 1997, a decrease of
$1,131 or 31.3%. This decrease was primarily due to a decrease in sales for
property appraisal and assessment systems ("CAMA") and property tax billing and
collection systems ("Collection"). This decrease was partially offset by an
increase in remittance processing ("RPS") hardware and software sales.
License Fees. The Company's revenue from license fees was $402 for the three
months June 30, 1998 compared to $1,175 for the three months ended June 30,
1997, a decrease of $773 or 65.8%. The decrease was primarily due to a decrease
in new customer CAMA and Collection installations.
Recurring Maintenance and Service Fees. The Company's revenue from recurring
fees was $1,053 for the three months ended June 30, 1998 compared to $956 for
the three months ended June 30, 1997, an increase of $97 or 10.1%. The increase
was primarily attributable to the realization of recurring revenue associated
with Collection license fee sales of a prior period and to a lesser extent
integrated voice response ("IVR") maintenance contracts. The recurring revenue
attributable to the maintenance and service contracts are recognized upon the
effective date of the maintenance and service contracts (which could become
effective up to 12 months following execution of the licensing agreement.)
During this same period, hardware maintenance declined due to hardware
manufacturers offering longer extended warranties, declining costs of hardware
and the Company's belief that some customers no longer view hardware maintenance
as a mission critical need for all components.
Product Sales. Revenue from product sales was $756 for the three months ended
June 30, 1998 compared to $1,147 for the three months ended June 30, 1997, a
decrease of $391 or 34.1%. This decrease is primarily due to a decrease in sales
of hardware for Collection and CAMA systems. This decrease was partially offset
by an increase in RPS hardware sales.
Other Service Fees. Revenue from other service fees was $271 for the three
months ended June 30, 1998 compared to $335 for the three months ended June 30,
1997, a decrease of $64 or 19.1%. This decrease was primarily due to decreased
installation sales of our hardware parts and repair group ("Systems
Engineering") and to a lesser extent, Collections service sales.
COST OF REVENUE
The Company's cost of revenue includes the cost of hardware product sales, the
cost of purchased software, amortization of software development cost and
distribution costs.
The total cost of revenue was $865 for the three months ended June 30, 1998
compared to $1,099 for the three months ended June 30, 1997, a decrease of $234
or 21.3%. This yielded a gross profit margin of 65.2% for the three months ended
June 30, 1998 compared to a gross profit margin of 69.6% for the three months
ended June 30, 1997. This decrease in gross profit margin resulted from an
increase in purchased software from 5.2% of total revenue for the three months
ended June 30, 1997 to 9.2% of total revenue for the three months ended June 30,
1998.
8
<PAGE>
CPS SYSTEMS, INC. AND SUBSIDIARY
JUNE 30, 1998
Product Sales. The cost of product sales was $634, or approximately 83.9% of
product sales, for the three months ended June 30, 1998 compared to $873, or
approximately 76.1% of product sales, for the three months ended June 30, 1997,
a decrease of $239 or 27.4%. This decrease was primarily due to costs associated
with a decrease in sales of hardware for Collection and CAMA systems. This
decrease was partially offset by an increase in cost associated with higher RPS
hardware sales. The increase in cost as a percentage of product sales was due to
RPS hardware comprising a larger portion of total hardware sales. RPS hardware
generally has a higher cost of sales than other hardware products.
Purchased Software. Cost of software includes purchased software as well as the
amortization of capitalized software development costs. The cost of software was
$228, or approximately 57.0% of license fees, for the three months ended June
30, 1998 compared to $189, or approximately 16.1% of license fees, for the three
months ended June 30, 1997, an increase of $39 or 20.6%. This increase was
largely due to the installation of RPS third-party software sales. The Company
is a preferred reseller of Rpxpress software. Amortization of software
development cost was $34 for the three months ended June 30, 1998 and $36 for
the three months ended June 30, 1997.
Distribution. The costs associated with distribution were $3 for the three
months ended June 30, 1998 compared to $37 for the three months ended June 30,
1997, a decrease of $34 or 91.9%. This decrease was due primarily to a large
Collection and CAMA hardware shipment in June, 1997.
OPERATING EXPENSES
The Company's operating expenses includes support and customer service, selling
and marketing, research and development, general and administrative, and
amortization of intangible goodwill & non-compete agreements.
Support and Customer Service. Expenses related to support and customer service
were $988 for the three months ended June 30, 1998 compared to $727 for the
three months ended June 30, 1997, an increase of $261 or 35.9%. This increase
resulted primarily from an increase in salaries and hiring to enhance customer
service and support future growth. In addition, outsourcing costs rose to
accommodate expansion into new markets and build infrastructure for growth
expected from Year 2000 sales.
Selling and Marketing. The Company's selling and marketing expenses were $567
for the three months ended June 30, 1998 compared to $264 for the three months
ended June 30, 1997, an increase of $303 or 114.8%. This increase was due to an
increase in the numbers of sales personnel and expenses related to covering new
markets such as California, Illinois, Nevada, Georgia, Ohio and Tennessee. In
addition, sales commission expenses rose as a result of increased sales of RPS.
Research and Development. Research and development expenses were $164 for the
three months ended June 30, 1998 compared to $376 for the three months ended
June 30, 1997, a decrease of $212 or 56.4%. These expenses are comprised
primarily of salaries as well as amounts paid to outside consultants to
supplement continuing product enhancement efforts. The decrease resulted from
the capitalization of research and development cost associated with new product
development.
General and Administrative. General and administrative expenses were $309 for
the three months ended June 30, 1998 compared to $229 for the three months ended
June 30, 1997, an increase of $80 or 34.9%. This increase was primarily due to a
increase in travel and insurance activity created by the IPO, as well as,
expenses associated
9
<PAGE>
CPS SYSTEMS, INC. AND SUBSIDIARY
JUNE 30, 1998
with additional General and Administrative staffing. To a lesser extent the
increase is associated with increased employee benefits.
Amortization of Goodwill and Non-compete Agreements. The Company incurred a
non-cash expense related to the 1994 acquisition of the Company by a private
investor group of $70 for the three months ended June 30, 1998 compared to $91
for the three months ended June 30, 1997, a decrease of approximately $21 or
23.1%. The decrease in amortization is primarily due to the completion in
December 1997 of the non-compete agreement amortization.
EARNINGS FROM OPERATIONS
Net loss from operation was $481, or (19.3%) of revenue, for the three months
ended June 30, 1998, compared to $827, or 22.9% of revenue, for the three months
ended June 30, 1997. This decrease in earnings from operations of $1,308 was
primarily due to the decrease of license fee revenue to 16.2% of total revenue
for the three months ended June 30, 1998 compared to 32.5% of total revenue for
the three months ended June 30, 1997, and increases of higher operating expenses
for support and customer service and selling and marketing. This loss was
partially offset by the reduction in research and development expenses from
10.4% of total revenue for the 3 months ended June 30, 1997, to 6.6% for the
three months ended June 30, 1998.
NON-OPERATING EXPENSES
Interest and Financing Costs. The Company's interest expense for its long term
debt was $88 for the three months ended June 30, 1998 compared to $116 for the
three months ended June 30, 1997, a decrease of $28 or 24.1%. This decrease was
primarily attributed to the repayment of the senior term loan(FINOVA CAPITIAL
CORPORATION) and interest income on investments from the remaining proceeds of
the IPO. To a lesser extent the decrease was attributed to completion of the
non-compete amortization effective December 31, 1997. The decrease was partially
offset by a prepayment penalty and success fee on the senior term loan of $65.
Income Tax Expense. The Company's provision for income taxes was $(192) for the
three months ended June 30, 1998 compared to $299 for the three months ended
June 30, 1997, an decrease of $491 or 164.2%. This increase in tax benefit was
attributable to decreased earnings from operations.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
REVENUE
The Company's revenue includes revenue of license fees, recurring maintenance
and service fees, product sales, and other service fees.
The Company's total revenue was $4,680 for the six months ended June 30, 1998
compared to $5,405 for the six months ended June 30, 1997, a decrease of $725 or
13.4%. This decrease was primarily due to a decrease in CAMA hardware and
software sales and to a lesser extent a decrease in Collection hardware and
software sales. The decrease was partially offset by an increase in RPS hardware
and software sales.
License Fees. The Company's revenue from license fees was $600 for the six
months June 30, 1998 compared to $1,365 for the six months ended June 30, 1997,
a decrease of $765 or 56.0%. The decrease was primarily due to a decrease in new
customer Collection and CAMA installations.
10
<PAGE>
CPS SYSTEMS, INC. AND SUBSIDIARY
JUNE 30, 1998
Recurring Maintenance and Service Fees. The Company's revenue from recurring
fees was $2,129 for the six months ended June 30, 1998 compared to $1,911 for
the six months ended June 30, 1997, an increase of $218 or 11.4%. The increase
was primarily attributable to the realization of recurring revenue associated
with Collection license fee sales of a prior period and to a lesser extent IVR
maintenance contracts. The recurring revenue attributable to the maintenance and
service contracts are recognized upon the effective date of the maintenance and
service contracts (which could become effective up to 12 months following
execution of the licensing agreement.) During this same period, hardware
maintenance declined due to hardware manufacturers offering longer extended
warranties, declining costs of hardware and the Company's belief that some
customers no longer view hardware maintenance as a mission critical need for all
components.
Product Sales. Revenue from product sales was $1,399 for the six months ended
June 30, 1998 compared to $1,648 for the six months ended June 30, 1997, a
decrease of 249 or 15.1%. This decrease is primarily due to a decrease in sales
of hardware for Collection and CAMA systems. This decrease was partially offset
to by an increase in RPS hardware sales.
Other Service Fees. Revenue from other service fees was $552 for the six months
ended June 30, 1998 compared to $481 for the six months ended June 30, 1997, a
increase of $71 or 14.8%. This increase was primarily due to increased RPS
installation sales.
COST OF REVENUE
The Company's cost of revenue includes the cost of hardware product sales, the
cost of purchased software, amortization of software development cost and
distribution costs.
The total cost of revenue was $1,515 for the six months ended June 30, 1998
compared to $1,558 for the six months ended June 30, 1997, a decrease of $43 or
2.8%. This yielded a gross profit margin of 67.7% for the six months ended June
30, 1998 compared to a gross profit margin of 71.2% for the six months ended
June 30, 1997. This decrease in gross profit margin resulted primarily from an
increase in purchases software from 5.2% of total revenue for the six months
ended June 30, 1997 to 8.0% of total revenue for the six months ended June 30,
1998.
Product Sales. The cost of product sales was $1,133, or approximately 81.0% of
product sales, for the six months ended June 30, 1998 compared to $1,236, or
approximately 75.0% of product sales, for the six months ended June 30, 1997, a
decrease of $103 or 8.3%. This decrease was primarily due to costs associated
with a decrease in sales of hardware for Collection and CAMA systems. This
decrease was partially offset by an increase to cost associated with higher RPS
hardware sales. The increase in cost as a percentage of product sales was due to
RPS hardware comprising a larger portion of total hardware sales. RPS hardware
generally has a higher cost of sales than other hardware products.
Purchased Software. Cost of software includes purchased software as well as the
amortization of capitalized software development costs. The cost of software was
$375, or approximately 62.5% of license fees, for the six months ended June 30,
1998 compared to $282, or approximately 20.7% of license fees, for the six
months ended June 30, 1997, an increase of $93 or 33.0%. This increase was
largely due to the installation of RPS third-party software sales. The Company
is a preferred reseller of Rpxpress software. Amortization of software
development cost was $67 for the six months ended June 30, 1998 and $72 for the
six months ended June 30, 1997.
Distribution. The costs associated with distribution were $7 for the six months
ended June 30, 1998 compared to $40 for the six months ended June 30, 1997, a
decrease of $33 or 82.5%. This decrease was due primarily to a large Collection
and CAMA hardware shipment in June 1997.
11
<PAGE>
CPS SYSTEMS, INC. AND SUBSIDIARY
JUNE 30, 1998
OPERATING EXPENSES
The Company's operating expenses includes support and customer service, selling
and marketing, research and development, general and administrative, and
amortization of intangible goodwill & non-compete agreements.
Support and Customer Service. Expenses related to support and customer service
were $1,922 for the six months ended June 30, 1998 compared to $1,459 for the
six month ended June 30, 1997, an increase of $463 or 31.7%. This increase
resulted primarily from an increase in salaries and hiring to enhance customer
service and support future CPS growth. In addition, outsourcing costs rose to
accommodate expansion into new markets and build infrastructure for growth
expected from Year 2000 sales.
Selling and Marketing. The Company's selling and marketing expenses were $1,038
for the six months ended June 30, 1998 compared to $409 for the six months ended
June 30, 1997, an increase of $629 or 153.8%. This increase was due to an
increase in the numbers of sales personnel and expenses related to covering new
markets such as California, Illinois, Nevada, Georgia, Ohio and Tennessee. In
addition, sales commission expenses rose as a result of increased sales of RPS.
Research and Development. Research and development expenses were $266 for the
six months ended June 30, 1998 compared to $729 for the six months ended June
30, 1997, a decrease of $463 or 63.5%. These expenses are comprised primarily of
salaries as well as amounts paid to outside consultants to supplement continuing
product enhancement efforts. The decrease resulted from the capitalization of
research and development cost associated with new product development.
General and Administrative. General and administrative expenses were $768 for
the six months ended June 30, 1998 compared to $530 for the six months ended
June 30, 1997, an increase of $238 or 44.9%. This increase was primarily due to
a increase in legal fees and travel and insurance activity created by the IPO,
as well as, expenses associated with additional General and Administrative
staffing. To an lesser extent the increase is associated with increased employee
benefits.
Amortization of Goodwill and Non-compete Agreements. The Company incurred a
non-cash expense related to the 1994 acquisition of the Company by a private
investor group of $141 for the six months ended June 30, 1998 compared to $181
for the six months ended June 30, 1997, a decrease of approximately $40 or
22.1%. The decrease in amortization is primarily due to the completion in
December 1997 of the non-compete agreement amortization.
EARNINGS FROM OPERATIONS
Earnings from operation was a loss of $970 or (20.7%) of revenue, for the six
months ended June 30, 1998, compared to $539, or 10.0% of revenue, for the six
months ended June 30, 1997. This decrease in earnings from operations of $1,509
was primarily due to the decrease of license fee revenue to 12.8% of total
revenue for the six months ended June 30, 1998 compared to 25.3% of total
revenue for the six months ended June 30, 1997, and by the increased operating
expenses for support and customer service and selling and marketing. The
decrease in earnings was partially offset by the reduction in research and
development expenses from 13.5% of total revenue for the six months ended June
30, 1997 to 5.7% for the six months ended June 30, 1998.
12
<PAGE>
CPS SYSTEMS, INC. AND SUBSIDIARY
JUNE 30, 1998
NON-OPERATING EXPENSES
Interest and Financing Costs. The Company's interest expense for its long term
debt was $333 for the six months ended June 30, 1998 compared to $232 for the
six months ended June 30, 1997, an increase of $101 or 43.5%. This increase was
primarily attributed to a increase in the put warrant adjustment and to a lesser
extent the prepayment and success fee on the senior term loan. This increase was
partially offset by a decrease attributed to the Company's repayment of the
senior term loan, interest income on investments from the remaining proceeds of
the Initial Public Offering.
Income Tax Expense. The Company's provision for income taxes was $(452) for the
six months ended June 30, 1998 compared to $174 for the six months ended June
30, 1997, an decrease of $626 or 359.8%. This increase in tax benefit was
attributable to decreased earnings from operations. The income tax provision is
higher than income taxes determined by applying the applicable statutory rates
for the six months ended June 30, 1998 primarily due to non-deductible
amortization of goodwill and non-deductible put warrant adjustments.
LIQUIDITY AND CAPITAL RESOURCES
On March 30, 1998 CPS SYSTEMS, INC. successfully completed its IPO. The Company
sold 1,900,000 shares of common stock for $5,767 net of issuance costs of
$1,833. Subsequent to March 31, 1998, the underwriters exercised their option to
purchase 285,000 additional shares of common stock from certain selling
shareholders to cover over-allotments. Certain selling shareholders received
$1,140 from the transaction and the Company incurred additional issuance costs
of $148. The Company has invested the net proceeds of the IPO in short-term
investment grade interest-bearing securities.
The Company's operating activities used cash of $632 and provided cash of $369
during the six months ended June 30, 1998 and June 30, 1997, respectively. The
Company's use of cash during the six months ended June 30, 1998 was primarily
attributable to increases in accounts receivable of $502, deferred income taxes
of $713, prepaid expenses of $543, net loss of $851 and a decrease in accounts
payable of $598. These decreases to cash were partially offset by non-cash
depreciation and amortization of $368, accrued expenses increase of $793, put
warrant adjustment of $125 and customer deposits, and unearned revenue increase
of $1,379, for the six months ended June 30, 1998.
The Company used cash of $1,404 and $348 for investing activities during the six
months ended June 30, 1998 and June 30, 1997, respectively. Investing activities
have consisted principally of the acquisition of property and equipment and
capitalized software development cost. The increase of $1,056 was primarily
attributable to increases in capitalized software development cost. In addition,
the Company made significant investments in upgrading internal systems.
The Company's financing activities provided cash of $5,012 and used cash of $166
during the six months ended June 30, 1998 and June 30, 1997, respectively. In
March 1998, the Company raised aggregate net proceeds of $5,767 from the sale of
1,900,000 share of common stock through its IPO. Additional IPO expenditures in
the second quarter of 1998 decreased aggregate net proceeds to $5,619. In April
1998 the Company paid $761 to retire the outstanding principal amount of its
senior term loan including interest and prepayment fees to FINOVA CAPITAL
CORPORATION and repaid $128 in loans from shareholders. Also, the Company paid
$148 for over-allotment issuance costs.
13
<PAGE>
CPS SYSTEMS, INC. AND SUBSIDIARY
JUNE 30, 1998
The Company believes its cash balances and cash generated from operations will
satisfy the Company's working capital and capital expenditure requirements for
at least the next 12 months. In the longer term, the Company may require
additional sources of liquidity to fund future growth. Such sources of liquidity
may include additional equity offerings or debt financing. In the normal course
of business, the Company evaluates acquisitions of businesses, products and
technologies that complement the Company's business. The Company has not
executed any agreements with respect to any such transaction.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in several legal actions arising in the normal course of
business. While it is not possible to determine with certainty the outcome of
these matters, in the opinion of management the eventual resolution of these
claims and actions will not have a material adverse effect on the Company's
financial position or operating results.
ITEM 2. CHANGES IN SECURITIES
Use of Proceeds from Registered Securities. Pursuant to Rule 463 of the
Rules and Regulations of the Securities Act of 1933, as amended, the Company is
furnishing the use of proceeds from its IPO.
The Company's Form SB-2, Registration Statement Under the
Securities Act of 1933, Registration No. 333-39173, was declared effective by
oral order of the Securities and Exchange Commission on March 25, 1998 (the "IPO
Registration Statement").
(v)From March 25, 1998 through June 30, 1998, the effective date of the IPO
Registration Statement to the end of the reporting period, the amount of
expenses incurred for the account of the Company in connection with the issuance
and distribution of the Shares is, based upon reasonable estimate, as follows:
Underwriting discounts and commissions $ 874,000
Finders fees 0
Expenses paid to or for Underwriters 262,000
Other expenses 845,000
------------
TOTAL EXPENSES $ 1,981,000
Underwriting, discounts and commissions include $114,000, incurred on behalf of
the selling shareholders upon exercise of the over-allotment option on April 14,
1998. Expenses paid to or for the underwriters include additional expenses
totaling approximately $34 incurred on behalf of the selling shareholders, upon
exercise of the over-allotment option. None of the expenses of the Offering
constituted direct
14
<PAGE>
CPS SYSTEMS, INC. AND SUBSIDIARY
JUNE 30, 1998
or indirect payments to directors, officers or general partners, or associates
thereof, persons owning 10% or more of any class of securities or any affiliates
of the Company.
(vi) The net proceeds to the Company of the Offering pursuant to the IPO
Registration Statement, after the expenses listed in (v) above, is $5,619,000.
(vii) From March 25, 1998 through June 30, 1998, the Company has applied the
following amounts of its net proceeds from the Offering pursuant to the IPO
Registration Statement:
Construction of plant, building and facilities $ 0
Purchase and installation of machinery and equipment 0
Purchases of real estate 0
Acquisitions of other business(es) 0
Repayment of indebtedness 855,000
Working capital 287,000
Temporary investments (as specified below) 3,302,000
Other uses of at least $100,000 (as specified below) 1,175,000
None of the uses constituted direct or indirect payments to the Company's
directors, officers or general partners, or associates thereof, persons owning
10% or more of any class of securities or any affiliates of the Company. The
temporary investments consist of money market accounts available on a daily
basis. Other uses of at least $100,000 reflects research and development
expenses.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
The Company's common stock is listed on the American Stock Exchange under the
symbol "SYS". Trading in the stock began on March 25, 1998.
Pursuant to the 1997 Equity Participation Plan (the "Plan"), the Company has the
authority to issue up to 600,000 shares (the "Options") of the Company's common
stock, par value $.01 per share (the "Common Stock"). These Options vest over a
period of three years from the date of the grant and expire in March 2008. The
Board of Directors granted to certain officer and directors of the Company
Options to purchase 335,000 shares of Common Stock at an exercise price of $4.00
per share (the initial public offering price). Of the original 335,000 share
options granted, 27,500 lapsed pursuant to the terms of the Plan. The grant
became effective upon the consummation of the initial public offering on March
30, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No exhibits and reports on Form 8-K were filed by the Company during the quarter
ended June 30, 1998.
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
15
<PAGE>
CPS SYSTEMS, INC. AND SUBSIDIARY
JUNE 30, 1998
Date: November 11, 1998
-----------------------------------------------
Paul E. Kana
CHAIRMAN OF THE BOARD OF DIRECTORS,
CHIEF EXECUTIVE OFFICER
AND DIRECTOR (PRINCIPAL EXECUTIVE OFFICER)
-----------------------------------------------
Kevin L. Figge
VICE PRESIDENT, CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
16
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