SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CPS SYSTEMS, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
As of As of
06/30/98 12/31/97
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $3,302 $327
Accounts receivable $2,220 $1,718
Deferred income tax $160 $160
Inventory $267 $161
Refundable income taxes $0 $75
Prepaid expense and other current assets $1,871 $134
Deferred offering costs $0 $367
----------------- -----------------
Total current assets: $7,820 $2,942
PROPERTY AND EQUIPMENT $657 $536
SOFTWARE DEVELOPMENT COST $2,055 $938
OTHER ASSETS
Costs in excess of net assets acquired $1,764 $1,905
Debt issue costs $119 $160
Other assets $15 $18
----------------- -----------------
$1,898 $2,083
----------------- -----------------
$12,430 $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 $238 $0
Other accrued expenses $869 $230
Unearned revenue, current portion $1,609 $1,533
----------------- -----------------
Total current liabilities: $3,061 $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: $5,491 $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 -$73 -$723
----------------- -----------------
----------------- -----------------
Total Shareholders' Equity: $6,939 $277
----------------- -----------------
$12,430 $6,499
----------------- -----------------
</TABLE>
The accompanying notes are an integral part of these statements.
2
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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
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue
License fees $1,959 $1,175 $3,176 $1,365
Recurring maintenance and service fees $1,053 $956 $2,128 $1,911
Product sales $756 $1,147 $1,399 $1,648
Other service fees $271 $335 $552 $481
-------------------------- -----------------------
$4,039 $3,613 $7,255 $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 $3,174 $2,514 $5,740 $3,847
Operating Expenses:
Support and customer service $1,022 $727 $1,969 $1,459
Selling and marketing $615 $264 $1,099 $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
-------------------------- -----------------------
$2,180 $1,687 $4,243 $3,308
Earnings from operations $994 $827 $1,497 $539
-------------------------- -----------------------
Interest and financing costs $88 $116 $333 $232
-------------------------- -----------------------
Earnings before income taxes $906 $711 $1,164 $307
Income tax expense $389 $299 $514 $174
-------------------------- -----------------------
Net earnings $517 $412 $650 $133
========================== =======================
Net earnings per common share
Basic $0.08 $0.11 $0.10 $0.03
Diluted $0.08 $0.09 $0.12 $0.03
Weighted average shares used in computing net
earnings per common share:
Basic 6,733 3,905 6,733 3,905
Diluted 6,849 4,833 5,487 4,833
</TABLE>
The accompanying notes are an integral part of these statements.
3
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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
-------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income ......................................................... $ 650 $ 133
Adjustments to reconcile net income(loss) to net cash:
Deferred income tax expense ..................................... 0 5
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 ..................................... 75 0
Inventories ................................................. (105) (83)
Prepaid expenses and other current assets ................... (1,740) (1)
Accounts payable ............................................ (598) 264
Accrued expenses ............................................ 793 (63)
Unearned revenue ............................................ 76 (145)
Income taxes payable ........................................ 238 (35)
Other liabilities ........................................... 4 14
------ -------
Net cash (used)provided by operating activities ($ 613) $ 369
Cash Flows from investing activities:
Purchase of property and equipment ................................. (249) (119)
Software development costs ......................................... (1,175) (105)
Other receivables .................................................. 0 (124)
------ ------
Net cash used by investing activities ......... ($1,424) ($ 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 .......................................... 2,975 (145)
Cash at beginning of period ............................................. 327 592
------- ------
Cash at end of period ................................................... $ 3,302 $ 447
======= =======
Supplementary Cash Flow Disclosure:
Interest and financing costs paid .................................. 165 189
Income taxes paid, net ............................................. 201 205
</TABLE>
The accompanying notes are an integral part of these statements.
4
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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 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.
NOTE C- 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 D- STOCK OPTIONS
Upon the completion of the IPO, the Company granted 307,500 stock options to
officers and employees at an exercise price equal to the IPO price of $4.00 per
share. 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.
5
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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 48.5% 32.5% 43.8% 25.3%
Recurring maintenance and service fees 26.1% 26.5% 29.3% 35.4%
Product sales 18.7% 31.7% 19.3% 30.5%
Other service fees 6.7% 9.3% 7.6% 8.9%
--- --- --- ---
Total Revenue 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Cost of Revenue
Product sales 15.7% 24.2% 15.6% 22.9%
Purchased software. 5.6% 5.2% 5.2% 5.2%
Distribution 0.1% 1.0% 0.1% 0.7%
--- --- --- ---
Total Cost of Sales 21.4% 30.4% 20.9% 28.8%
---- ---- ---- ----
Gross profit 78.6% 69.6% 79.1% 71.2%
Operating Expenses:
Support and customer service 25.3% 20.1% 27.1% 27.0%
Selling and marketing 15.2% 7.3% 15.1% 7.6%
Research and development 4.1% 10.4% 3.7% 13.5%
General and administrative 7.7% 6.3% 10.6% 9.8%
Amortization of intangible goodwill &
non-compete agreements 1.7% 2.5% 1.9% 3.3%
--- --- --- ---
Total Operating Expense 54.0% 46.7% 58.5% 61.2%
---- ---- ---- ----
Earnings from operations 24.6% 22.9% 20.6% 10.0%
Interest and financing costs 2.2% 3.2% 4.6% 4.3%
--- --- --- ---
Earnings (loss) before income taxes 22.4% 19.7% 16.0% 5.7%
Income tax expense (benefit) 9.6% 8.3% 7.1% 3.2%
--- --- --- ---
Net earnings (LOSS) 12.8% 11.4% 9.0% 2.5%
---- ---- --- ---
</TABLE>
6
<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 $4,039 for the three months ended June 30, 1998
compared to $3,613 for the three months ended June 30, 1997, an increase of $426
or 11.8%. This increase was primarily due to an increase in license fee sales
for property appraisal and assessment systems (CAMA) and remittance processing
(RPS) hardware and software sales.
License Fees. The Company's revenue from license fees was $1,959 for the three
months June 30, 1998 compared to $1,175 for the three months ended June 30,
1997, an increase of $784 or 66.7%. The increase was primarily due to an
increase in new customer CAMA installations and to a lesser extent,
installations of RPS software.
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 property tax billing and collection systems (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 78.6% 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 increase in gross profit margin resulted from an
increase in license fees and recurring maintenance from 59.0% of total revenue
for the three months ended June 30, 1997 to 74.6% of total revenue for the three
months ended June 30, 1998. License fees and recurring maintenance have a lower
cost of revenue than the Company's other major source of revenue (i.e., product
sales.)
7
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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 11.6% 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 $1,022 for the three months ended June 30, 1998 compared to $727 for the
three months ended June 30, 1997, an increase of $295 or 40.6%. 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 $615
for the three months ended June 30, 1998 compared to $264 for the three months
ended June 30, 1997, an increase of $351 or 133.0%. 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,
Collection and Cama systems.
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
8
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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
Earnings from operation were $994, or 24.6% 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 increase in earnings from operations of $167 was
primarily due to the increase of license fee revenue to 48.5% 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 the reduction in research and
development expenses from 10.4% of total revenue for the 3 months ended June 30,
1997, to 4.1% for the three months ended June 30, 1998. The increase in earnings
was partially offset by increased operating expenses for support and customer
Service and selling and marketing.
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 $389 for the
three months ended June 30, 1998 compared to $299 for the three months ended
June 30, 1997, an increase of $90 or 30.1%. This increase was attributable to
increased 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 $7,255 for the six months ended June 30, 1998
compared to $5,405 for the six months ended June 30, 1997, an increase of $1,850
or 34.2%. This increase was primarily due to an increase in Collection and CAMA
license fee sales and to a lesser extent an increase in RPS hardware and
software sales.
License Fees. The Company's revenue from license fees was $3,176 for the six
months June 30, 1998 compared to $1,365 for the six months ended June 30, 1997,
an increase of $1,811 or 132.7%. The increase was primarily due to an increase
in new customer Collection and CAMA installations and to a lesser extent,
installations of RPS software.
9
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CPS SYSTEMS, INC. AND SUBSIDIARY
JUNE 30, 1998
Recurring Maintenance and Service Fees. The Company's revenue from recurring
fees was $2,128 for the six months ended June 30, 1998 compared to $1,911 for
the six months ended June 30, 1997, an increase of $217 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 79.1% 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 increase in gross profit margin resulted from an increase in
license fees and recurring maintenance from 60.6% of total revenue for the six
months ended June 30, 1997 to 73.1% of total revenue for the six months ended
June 30, 1998. License fees and recurring maintenance have a lower cost of
revenue than the Company's other major source of revenue (i.e., product sales.)
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 11.8% of license fees, for the six months ended June 30,
1998 compared to $282, or approximately 20.6% 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.
10
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CPS SYSTEMS, INC. AND SUBSIDIARY
JUNE 30, 1998
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.
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 $1,969 for the six months ended June 30, 1998 compared to $1,459 for the
six month ended June 30, 1997, an increase of $510 or 35.0%. 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 $1,099
for the six months ended June 30, 1998 compared to $409 for the six months ended
June 30, 1997, an increase of $690 or 168.7%. 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,
Collection and Cama systems.
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 were $1,497, or 20.6% 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 increase in earnings from operations of $958 was
primarily due to the increase of license fee revenue to 43.8% 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 the reduction in research and
development expenses from 13.5% of total revenue for the six months ended June
30, 1997 to 3.7% for the six months ended June 30, 1998. The increase in
earnings was partially offset by increased operating expenses for support and
customer service and selling and marketing.
11
<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 and to a lesser extent completion of the non-compete
amortization effective December 31, 1997.
Income Tax Expense. The Company's provision for income taxes was $514 for the
six months ended June 30, 1998 compared to $174 for the six months ended June
30, 1997, an increase of $340 or 195.4%. This increase was attributable to
increased 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 $613 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, inventories of $105,
prepaid expenses of $1,740, and a decrease in accounts payable of $598. These
decreases to cash was partially offset by net income of $650 plus non-cash
depreciation and amortization of $368, accrued expenses increase of $793, put
warrant adjustment of $125 and income tax payable increase of $238, for the six
months ended June 30, 1998.
The Company used cash of $1,424 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 $1,076 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.
12
<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
13
<PAGE>
CPS SYSTEMS, INC. AND SUBSIDIARY
JUNE 30, 1998
the over-allotment option. None of the expenses of the Offering constituted
direct 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 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 officers and directors of the Company Options to
purchase 307,500 shares of Common Stock at an exercise price of $4.00 per share
(the IPO price). The grant became effective upon the consummation of the IPO 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.
14
<PAGE>
CPS SYSTEMS, INC. AND SUBSIDIARY
JUNE 30, 1998
Date: August 10, 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)
15
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