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 SEPTEMBER 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 NOVEMBER 11, 1998
----- ---------------------------------
Common stock
Par value $.01 per share 6,734,928
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 09/30/98 12/31/97
CURRENT ASSETS (unaudited)
<S> <C> <C>
Cash $1,561 $327
Accounts receivable $4,133 $1,718
Deferred income tax $913 $160
Inventory $150 $161
Refundable income taxes $200 $75
Prepaid expense and other current assets $738 $134
Deferred offering costs $0 $367
------------------ -----------------
Total current assets: $7,695 $2,942
PROPERTY AND EQUIPMENT $760 $536
SOFTWARE DEVELOPMENT COST $3,164 $938
OTHER ASSETS
Costs in excess of net assets acquired $1,693 $1,905
Debt issue costs $99 $160
Other assets $16 $18
------------------ -----------------
$1,808 $2,083
------------------ -----------------
$13,428 $6,499
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long term debt $0 $731
Accounts payable $692 $683
Accrued salaries, wages and payroll taxes $0 $12
Accrued offering costs $0 $243
Accrued income tax payable $37 $0
Other accrued expenses $318 $230
Customer deposits and unearned revenue $4,887 $1,533
------------------ -----------------
Total current liabilities: $5,934 $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 $56 $47
------------------ -----------------
Total long term debt: $2,434 $2,548
------------------ -----------------
Total Liabilities: $8,368 $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 $6,946 $961
Accumulated deficit (1,953) (723)
------------------ -----------------
Total Shareholders' Equity: $5,060 $277
------------------ -----------------
$13,428 $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 SEPT 30, NINE MONTHS ENDED SEPT 30,
1998 1997 1998 1997
----------------------------- -------------------------------
Revenue
<S> <C> <C> <C> <C>
License fees $327 $430 $927 $1,795
Recurring maintenance and service fees $1,136 $976 $3,265 $2,887
Product sales $642 $651 $2,041 $2,299
Other service fees $356 $257 $908 $738
----------------------------- -------------------------------
$2,461 $2,314 $7,141 $7,719
Cost of Revenue
Product sales $476 $380 $1,609 $1,616
Purchased software $309 $132 $684 $414
Distribution $10 $16 $17 $56
----------------------------- -------------------------------
$795 $528 $2,310 $2,086
----------------------------- -------------------------------
Gross profit $1,666 $1,786 $4,831 $5,633
Operating Expenses:
Support and customer service $1,018 $899 $2,940 $2,358
Selling and marketing $593 $293 $1,631 $702
Research and development $7 $407 $273 $1,136
General and administrative $492 $263 $1,260 $793
Amortization of intangible goodwill &
non-compete agreements $70 $84 $211 $265
----------------------------- -------------------------------
$2,180 $1,946 $6,315 $5,254
Earnings(loss) from operations ($514) ($160) ($1,484) $379
----------------------------- -------------------------------
Interest and financing costs $54 $43 $387 $275
----------------------------- -------------------------------
Earnings(loss) before income taxes ($568) ($203) ($1,871) $104
Income tax expense(benefit) ($191) ($87) ($643) $87
----------------------------- -------------------------------
Net earnings(loss) ($377) ($116) ($1,228) $17
============================= ===============================
Net earnings(loss) per common share
Basic and Diluted ($0.06) ($0.03) ($0.21) $0.00
Weighted average shares used in computing net
earnings per common share:
Basic and Diluted 6,733 3,905 5,790 3,905
</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)
NINE MONTHS ENDED SEPT 30,
1998 1997
--------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $(1,229) $ 17
Adjustments to reconcile net income(loss) to net cash:
Depreciation and amortization 555 559
Adjustment to put warrants 125 (90)
Loss on disposal of property and equipment 1 0
Accrued interest to shareholders 2 0
Changes in assets and liabilities, net of business acquired: 0
Accounts receivable (2,415) (217)
Refundable income taxes (125) 0
Inventories 12 31
Deferred income tax expense (912) 14
Prepaid expenses and other current assets (556) (66)
Accounts payable (151) 58
Accrued expenses 347 (24)
Customer deposits and unearned revenue 3,354 188
Income taxes payable 37 (129)
Other liabilities 9 21
--------------------------------
Net cash (used)provided by operating activities ($946) $361
Cash Flows from investing activities:
Purchase of property and equipment (416) (216)
Software development costs (2,318) (186)
Other receivables 4
--------------------------------
Net cash used by investing activities ($2,734) ($399)
Cash flows from financing activities:
Principal payment on long-term debt (855) (216)
Proceeds from public offering, net of offering cost 5,768 0
--------------------------------
Net cash provided(used) by financing activities $4,913 ($216)
Net increase(decrease) in cash 1,234 (254)
Cash at beginning of period 327 592
--------------------------------
Cash at end of period $1,561 $338
================================
Supplementary Cash Flow Disclosure:
Interest and financing costs paid 198 337
Income taxes paid, net 200 202
</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
SEPTEMBER 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 September 30, 1998, and the
consolidated results of operation for the three months and nine months ended
September 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 in conformance with SOP 97-2 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.
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.
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.
5
<PAGE>
CPS SYSTEMS, INC. AND SUBSIDIARY
SEPTEMBER 30, 1998
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.
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 September 30,
1998 and September 30, 1997," "Comparison of Nine Months Ended September 30,
1998 and September 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.
6
<PAGE>
CPS SYSTEMS, INC. AND SUBSIDIARY
SEPTEMBER 30, 1998
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 SEPT 30, NINE MONTHS ENDED SEPT 30,
1998 1997 1998 1997
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Revenue
License fees 13.3% 18.6% 13.0% 23.3%
Recurring maintenance and service fees 46.2% 42.2% 45.7% 37.4%
Product sales 26.1% 28.1% 28.6% 29.7%
Other service fees 14.5% 11.1% 12.7% 9.6%
---------- --------- ---------- ---------
Total Revenue 100.0% 100.0% 100.0% 100.0%
---------- --------- ---------- ---------
Cost of Revenue
Product sales 19.3% 16.4% 22.5% 20.9%
Purchased software. 12.6% 5.7% 9.6% 5.4%
Distribution 0.4% 0.7% 0.2% 0.7%
---------- --------- ---------- ---------
Total Cost of Sales 32.3% 22.8% 32.3% 27.0%
---------- --------- ---------- ---------
Gross profit 67.7% 77.2% 67.7% 72.9%
Operating Expenses:
Support and customer service 41.4% 38.9% 41.2% 30.5%
Selling and marketing 24.1% 12.7% 22.8% 9.1%
Research and development 0.3% 17.6% 3.8% 14.7%
General and administrative 20.0% 11.4% 17.6% 10.3%
Amortization of intangible goodwill &
non-compete agreements 2.8% 3.6% 3.0% 3.4%
---------- --------- ---------- ---------
Total Operating Expense 88.6% 84.2% 88.4% 68.0%
---------- --------- ---------- ---------
Earnings(loss) from operations (20.9%) (7.0%) (20.7%) 4.9%
Interest and financing costs 2.2% 1.9% 5.4% 3.6%
---------- --------- ---------- ---------
Earnings(loss) before income taxes (23.1%) (8.9%) (26.1%) 1.3%
Income tax expense(benefit) (7.8%) (3.8%) (9.0%) 1.1%
---------- --------- ---------- ---------
Net earnings(loss) (15.3%) (5.1%) (17.1%) 0.2%
---------- --------- ---------- ---------
</TABLE>
7
<PAGE>
CPS SYSTEMS, INC. AND SUBSIDIARY
SEPTEMBER 30, 1998
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 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 $2,461 for the three months ended September 30,
1998 compared to $2,314 for the three months ended September 30, 1997, an
increase of $147 or 6.4%. This increase was primarily due to an increase in
remittance processing ("RPS") hardware and software sales. This increase was
partially offset by a decrease in sales for property appraisal and assessment
systems ("CAMA") and integrated voice response systems ("IVR") sales.
License Fees. The Company's revenue from license fees was $327 for the three
months September 30, 1998 compared to $430 for the three months ended September
30, 1997, a decrease of $103 or 24.0%. The decrease was primarily due to a
decrease in new customer IVR, CAMA and property tax billing and collection
systems ("Collection") installations. This decrease was partially offset by an
increase in remittance processing software sales.
Recurring Maintenance and Service Fees. The Company's revenue from recurring
fees was $1,136 for the three months ended September 30, 1998 compared to $976
for the three months ended September 30, 1997, an increase of $160 or 16.4%. The
increase was primarily attributable to the realization of recurring revenue
associated with Collection license fee sales of a prior period. 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.).
Product Sales. Revenue from product sales was $642 for the three months ended
September 30, 1998 compared to $651 for the three months ended September 30,
1997, a decrease of $9 or 1.4%. This decrease is primarily due to a decrease in
sales of hardware for Collection, CAMA and IVR systems. This decrease was offset
by an increase in RPS hardware sales.
Other Service Fees. Revenue from other service fees was $356 for the three
months ended September 30, 1998 compared to $257 for the three months ended
September 30, 1997, a increase of $99 or 38.5%. This increase was primarily due
to increased installation sales RPS systems.
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 $795 for the three months ended September 30, 1998
compared to $528 for the three months ended September 30, 1997, an increase of
$267 or 50.6%. This yielded a gross profit margin of 67.7% for the three months
ended September 30, 1998 compared to a gross profit margin of 77.2% for the
three months ended September 30, 1997. This decrease in gross profit margin
resulted from an increase in purchased software from 5.7% of total revenue for
the three months ended September 30, 1997 to 12.6% of total revenue for the
three months ended September 30, 1998.
8
<PAGE>
CPS SYSTEMS, INC. AND SUBSIDIARY
SEPTEMBER 30, 1998
Product Sales. The cost of product sales was $476, or approximately 74.1% of
product sales, for the three months ended September 30, 1998 compared to $380,
or approximately 58.4% of product sales, for the three months ended September
30, 1997, an increase of $96 or 25.3%. This increase was primarily due to costs
associated with an increase in higher RPS hardware sales and partially offset by
a decrease in Collection, CAMA and IVR 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
$309, or approximately 94.5% of license fees, for the three months ended
September 30, 1998 compared to $132, or approximately 30.7% of license fees, for
the three months ended September 30, 1997, an increase of $177 or 134.1%. 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 $33 for the three months ended September 30, 1998
and $35 for the three months ended September 30, 1997.
Distribution. The costs associated with distribution were $10 for the three
months ended September 30, 1998 compared to $16 for the three months ended
September 30, 1997, a decrease of $6 or 37.5%. This decrease was due primarily
decreased Collection, CAMA and IVR hardware shipments.
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 $1,018 for the three months ended September 30, 1998 compared to $899 for
the three months ended September 30, 1997, an increase of $119 or 13.2%. 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 $593
for the three months ended September 30, 1998 compared to $293 for the three
months ended September 30, 1997, an increase of $300 or 102.4%. 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 systems.
Research and Development. Research and development expenses were $7 for the
three months ended September 30, 1998 compared to $407 for the three months
ended September 30, 1997, a decrease of $400 or 98.3%. 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 $492 for
the three months ended September 30, 1998 compared to $263 for the three months
ended September 30, 1997, an increase of $229 or 87.1%. This increase was
primarily due to an increase in travel and insurance activity created by the
IPO, as well as, expenses associated
9
<PAGE>
CPS SYSTEMS, INC. AND SUBSIDIARY
SEPTEMBER 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 September 30, 1998 compared to
$84 for the three months ended September 30, 1997, a decrease of approximately
$14 or 16.7%. The decrease in amortization is primarily due to the completion in
December 1997 of the non-compete agreement amortization.
EARNINGS FROM OPERATIONS
Loss from operation was $514, or (20.9%) of revenue, for the three months ended
September 30, 1998, compared to a loss of $160, or (7.0%) of revenue, for the
three months ended September 30, 1997. This decrease in earnings from operations
of $354 was primarily due to the increase of purchased software cost to 12.6% of
total revenue for the three months ended September 30, 1998 compared to 5.7% of
total revenue for the three months ended September 30, 1997, and increases of
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 17.6% of total revenue for the 3 months ended September 30, 1997,
to .3% for the three months ended September 30, 1998.
NON-OPERATING EXPENSES
Interest and Financing Costs. The Company's interest expense for its long term
debt was $54 for the three months ended September 30, 1998 compared to $43 for
the three months ended September 30, 1997, an increase of $11 or 25.6%. This
increase was primarily attributed to an adjustment of decreased interest expense
for the put warrants during the three months ended September 30, 1997. This
increase was partially offset by interest income on investments from the
remaining proceeds of the IPO for the three months ended September 30, 1998.
Income Tax Expense. The Company's provision for income taxes was $(191) for the
three months ended September 30, 1998 compared to $(87) for the three months
ended September 30, 1997, a decrease of $104 or 119.5%. This increase in tax
benefit was attributable to decreased earnings from operations.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 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 $7,141 for the nine months ended September 30,
1998 compared to $7,719 for the nine months ended September 30, 1997, a decrease
of $578 or 7.5%. 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 $927 for the nine
months September 30, 1998 compared to $1,795 for the nine months ended September
30, 1997, a decrease of $868 or 48.4%. The decrease was primarily due to a
decrease in new customer Collection and CAMA installations. This decrease was
partially offset by an increase in RPS software installations.
10
<PAGE>
CPS SYSTEMS, INC. AND SUBSIDIARY
SEPTEMBER 30, 1998
Recurring Maintenance and Service Fees. The Company's revenue from recurring
fees was $3,265 for the nine months ended September 30, 1998 compared to $2,887
for the nine months ended September 30, 1997, an increase of $378 or 13.1%. 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 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 $2,041 for the nine months ended
September 30, 1998 compared to $2,299 for the nine months ended September 30,
1997, a decrease of 258 or 11.2%. 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 $908 for the nine months
ended September 30, 1998 compared to $738 for the nine months ended September
30, 1997, a increase of $170 or 23.0%. 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 $2,310 for the nine months ended September 30,
1998 compared to $2,086 for the nine months ended September 30, 1997, an
increase of $224 or 10.7%. This yielded a gross profit margin of 67.7% for the
nine months ended September 30, 1998 compared to a gross profit margin of 72.9%
for the nine months ended September 30, 1997. This decrease in gross profit
margin resulted primarily from an increase in the cost of purchased software
from 5.4% of total revenue for the nine months ended September 30, 1997 to 9.6%
of total revenue for the nine months ended September 30, 1998.
Product Sales. The cost of product sales was $1,609, or approximately 78.8% of
product sales, for the nine months ended September 30, 1998 compared to $1,616,
or approximately 70.3% of product sales, for the nine months ended September 30,
1997, a decrease of $7 or 0.4%. This decrease was primarily due to costs
associated with a decrease in sales of hardware for Collection, CAMA and IVR
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
$684, or approximately 73.8% of license fees, for the nine months ended
September 30, 1998 compared to $414, or approximately 23.1% of license fees, for
the nine months ended September 30, 1997, an increase of $270 or 65.2%. 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 $100 for the nine months ended September 30, 1998
and $107 for the nine months ended September 30, 1997.
11
<PAGE>
CPS SYSTEMS, INC. AND SUBSIDIARY
SEPTEMBER 30, 1998
Distribution. The costs associated with distribution were $17 for the nine
months ended September 30, 1998 compared to $56 for the nine months ended
September 30, 1997, a decrease of $39 or 69.6%. 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 $2,940 for the nine months ended September 30, 1998 compared to $2,358 for
the nine month ended September 30, 1997, an increase of $582 or 24.7%. 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 $1,631
for the nine months ended September 30, 1998 compared to $702 for the nine
months ended September 30, 1997, an increase of $929 or 132.3%. 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 $273 for the
nine months ended September 30, 1998 compared to $1,136 for the nine months
ended September 30, 1997, a decrease of $863 or 76.0%. 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 $1,260 for
the nine months ended September 30, 1998 compared to $793 for the nine months
ended September 30, 1997, an increase of $467 or 58.9%. This increase was
primarily due to an 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 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 $211 for the nine months ended September 30, 1998 compared to
$265 for the nine months ended September 30, 1997, a decrease of approximately
$54 or 20.4%. The decrease in amortization is primarily due to the completion in
December 1997 of the non-compete agreement amortization.
EARNINGS FROM OPERATIONS
Loss from operation was $1,484 or (20.7%) of revenue for the nine months ended
September 30, 1998, compared to $379, or 4.9% of revenue for the nine months
ended September 30, 1997. This decrease in earnings from operations of $1,863
was primarily due to the decrease of license fee revenue to 13.0% of total
revenue for the nine months ended September 30, 1998 compared to 23.3% of total
revenue for the nine months ended September 30, 1997, and by the increased
operating expenses for support and customer service and selling and marketing.
The decrease in earnings was
12
<PAGE>
CPS SYSTEMS, INC. AND SUBSIDIARY
SEPTEMBER 30, 1998
partially offset by the reduction in research and development expenses from
14.7% of total revenue for the nine months ended September 30, 1997 to 3.8% for
the nine months ended September 30, 1998.
NON-OPERATING EXPENSES
Interest and Financing Costs. The Company's interest expense for its long term
debt was $387 for the nine months ended September 30, 1998 compared to $275 for
the nine months ended September 30, 1997, an increase of $112 or 40.7%. This
increase was primarily attributed to an 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 $(643) for the
nine months ended September 30, 1998 compared to $87 for the nine months ended
September 30, 1997, an decrease of $730 or 839.1%. 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 nine months ended September 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 $946 and provided cash of $361
during the nine months ended September 30, 1998 and September 30, 1997,
respectively. The Company's use of cash during the nine months ended September
30, 1998 was primarily attributable to increases in accounts receivable of
$2,415, deferred income taxes of $912, prepaid expenses of $556 and net loss of
$1,229. These decreases to cash were partially offset by increases to non-cash
depreciation and amortization of $555, accrued expenses increase of $347 and
customer deposits, and unearned revenue increase of $3,354, for the nine months
ended September 30, 1998.
The Company used cash of $2,734 and $398 for investing activities during the
nine months ended September 30, 1998 and September 30, 1997, respectively.
Investing activities have consisted principally of the acquisition of property
and equipment and capitalized software development cost. The increase of $2,336
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 $4,913 and used cash of $216
during the nine months ended September 30, 1998 and September 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
13
<PAGE>
CPS SYSTEMS, INC. AND SUBSIDIARY
SEPTEMBER 30, 1998
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.
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 September 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
14
<PAGE>
CPS SYSTEMS, INC. AND SUBSIDIARY
SEPTEMBER 30, 1998
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 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 September 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 885,000
Temporary investments (as specified below) 1,561,000
Other uses of at least $100,000 (as specified below) 2,318,000
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.
15
CPS SYSTEMS, INC. AND SUBSIDIARY
SEPTEMBER 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 September 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.
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
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 1,561
<SECURITIES> 0
<RECEIVABLES> 4,223
<ALLOWANCES> 90
<INVENTORY> 150
<CURRENT-ASSETS> 7,695
<PP&E> 2,292
<DEPRECIATION> 1,532
<TOTAL-ASSETS> 13,428
<CURRENT-LIABILITIES> 5,934
<BONDS> 0
0
0
<COMMON> 67
<OTHER-SE> 4,993
<TOTAL-LIABILITY-AND-EQUITY> 13,428
<SALES> 0
<TOTAL-REVENUES> 7,141
<CGS> 0
<TOTAL-COSTS> 8,625
<OTHER-EXPENSES> 61
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 326
<INCOME-PRETAX> (1,871)
<INCOME-TAX> (643)
<INCOME-CONTINUING> (1,228)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,228)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</TABLE>
