SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
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 MAY 07, 1999
----- ---------------------------------
Common stock
Par value $.01 per share 6,754,576
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CPS SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
As of As of
03/31/99 12/31/98
(unaudited)
ASSETS
CURRENT ASSETS
Cash ............................................ $ 461 $ 296
Accounts receivable ............................. 2,435 2,852
Deferred income tax ............................. 1,132 907
Inventory ....................................... 202 201
Refundable income taxes ......................... 89 267
Prepaid expense and other current assets ........ 446 564
-------- --------
Total current assets: ............... 4,765 5,087
PROPERTY AND EQUIPMENT ............................... 765 790
SOFTWARE DEVELOPMENT COST ............................ 5,258 4,167
OTHER ASSETS
Costs in excess of net assets acquired .......... 1,552 1,623
Debt issue costs ................................ 58 79
Other assets .................................... 23 29
-------- --------
--------
1,633 1,731
--------
$ 12,421 $ 11,775
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long term debt ............... $ 2,050 $ 1,050
Accounts payable ................................ 1,310 1,066
Accrued income tax payable ...................... 27 --
Other accrued expenses .......................... 380 437
Customer deposits, unearned revenue ............. 3,929 4,013
-------- --------
Total current liabilities: .......... 7,696 6,566
OTHER LIABILITIES
Long-term debt .................................. 1,027 1,023
Unearned revenue ................................ 14 14
Other liabilities ............................... -- --
-------- --------
Total long term debt: ............... 1,041 1,037
-------- --------
Total Liabilities: .................. 8,737 7,603
COMMITMENTS AND CONTINGENCIES ........................ -- --
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized
10,000,000 shares, none issued and outstanding -- --
Common stock, $.01 par value, 50,000,000 shares
authorized; 6,743,902 shares issued in 1999
and 6,734,928 shares issued in 1998 .......... 67 67
Additional paid-in capital ...................... 6,812 6,805
Accumulated deficit ............................. (3,195) (2,700)
-------- --------
--------
Total Shareholders' Equity: ......... 3,684 4,172
--------
$ 12,421 $ 11,775
======== ========
The accompanying notes are an integral part of these balance sheets.
2
CPS SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
1999 1998
---- ----
Revenue
License fees .......................... $ 357 $ 198
Recurring maintenance and service fees 1,011 1,076
Product sales ......................... 385 643
Other service fees .................... 149 281
------- -------
1,902 2,198
Cost of Revenue
Product Sales ......................... 287 499
Purchased software .................... 288 147
Distribution .......................... 5 4
------- -------
580 650
Gross profit ..................... 1,322 1,548
------- -------
Operating Expenses
Support and customer service .......... 1,091 934
Selling and marketing ................. 233 471
Research and development .............. 123 102
General and administrative ............ 433 459
Amortization of intangible goodwill ... 70 71
------- -------
1,950 2,037
Earnings(loss) from operations ... (628) (489)
------- -------
Interest and financing costs ..................... 84 245
------- -------
Earnings(loss) before income taxes (712) (734)
Income tax expense(benefit) ...................... (217) (260)
------- -------
Net Earnings(loss) ............... $ (495) $ (474)
======= =======
Net earnings(loss) per common share
Basic and Diluted ........................... ($ 0.07) ($ 0.11)
Weighted average shares used in computing net
earnings(loss) per common share:
Basic and Diluted ........................... 6,744 4,140
The accompanying notes are an integral part of these statements.
3
CPS SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
1999 1998
-------------------
Cash flows from operating activities:
Net income(loss) .............................................. $ (495) $ (476)
Adjustments to reconcile net income(loss) to net cash:
Depreciation and amortization .............................. 188 178
Adjustment to put warrants ................................. -- 125
Loss on disposal of property and equipment ................. -- 1
Accrued interest to shareholders ........................... -- 2
Changes in assets and liabilities, net of business acquired:
Accounts receivable .................................... 417 (245)
Refundable income taxes ................................ 178 75
Inventories ............................................ (1) (232)
Deferred income tax expense ............................ (225) (508)
Prepaid expenses and other current assets .............. 118 (31)
Accounts payable ....................................... 244 (59)
Accrued expenses ....................................... (51) 253
Customer deposits, and unearned revenue ................ (84) 931
Income taxes payable ................................... 27 97
Other liabilities ...................................... -- 1
------------------
Net cash provided by operating activities $ 316 $ 111
Cash Flows from investing activities:
Purchase of property and equipment ............................ (38) (94)
Software development costs .................................... (1,124) (537)
------------------
Net cash used by investing activities .... $(1,162) $ (631)
Cash flows from financing activities:
Principal payment on long-term debt ........................... 4 (23)
Proceeds from notes payable - Tyler Corporation ............... 1,000 --
Proceeds from employee stock purchase plan .................... 7 --
Proceeds from public offering, net of offering cost ........... -- 6,434
------------------
Net cash provided by financing activities $ 1,011 $ 6,411
Net increase(decrease) in cash ..................................... 165 5,891
Cash at beginning of period ........................................ 296 327
------------------
Cash at end of period .............................................. $ 461 $ 6,218
Supplementary Cash Flow Disclosure:
Interest and financing costs paid ............................. $ 63 $ 92
Income taxes paid (refunded), net ............................. $ (180) $ --
The accompanying notes are an integral part of these statements.
4
CPS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
(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 March 31, 1999, and the consolidated
results of operation and cash flows for the three months ended March 31, 1999
and 1998. 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, 1998, included in the Company's Form 10-K filed with the Securities and
Exchange Commission on April 15, 1999.
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. Net proceeds subsequent to the
exercise of the over-allotment option was $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. Upon exercise of the put warrants, their recorded value of $367 was
reclassified to paid in capital.
NOTE D- SENIOR TERM LOAN
On December 31, 1999, the current portion, approximately $1,100 of a $2,100
senior note payable to Hanifen Imhoff Mezzanine Fund, L.P. (the "Hanifen Loan")
becomes due. As of December 31, 1998, the Company was in violation of the note
agreement with Hanifen Imhoff Mezzanine Fund, L.P., relating to the Hanifen
Loan. The violation pertains to the ratio of cash flow to total contractual debt
service. Hanifen Imhoff Mezzanine Fund, L.P has waived through September 30,
1999 compliance with this ratio.
5
CPS SYSTEMS, INC. AND SUBSIDIARY
MARCH 31, 1999
NOTE E- MERGER AGREEMENT AND TERM LOAN
On March 30, 1999, the Company executed an Agreement and Plan of Merger with
Tyler Corporation ("Tyler") pursuant to which the Company will merge with and
into a wholly owned subsidiary of Tyler. In addition, on March 30, 1999, Tyler
loaned $1,000 to the Company, evidenced by a secured promissory note (the "Tyler
Loan"). The Tyler Loan is due on October 30, 1999, and has an interest rate of
2% over the prime rate. An interest payment is due June 30, 1999, and the entire
principal balance and accrued interest is then due on October 30, 1999. The note
is secured by a lien on the Company's assets, subordinate to the Hanifen Loan.
NOTE F- Backlog
The Company currently has a backlog of seven contracts representing
approximately $4,300 in initial license fees and $1,100 in average annual
recurring maintenance revenue. These seven contracts are for the Company's
property tax billing and collection product and computer-assisted mass appraisal
system.
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.
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 filings with the Securities and Exchange Commission from time to
time, including the Company's annual report on Form 10-K for the fiscal year
ended December 31, 1998 filed with the Securities and Exchange Commission on
April 15, 1999 and the registration statement on Form SB-2 filed on March 25,
1998 (File No. 333-39173). All dollar amounts are expressed in thousands, except
per share amounts. The financials results reflected in this item 2 are
unaudited.
6
CPS SYSTEMS, INC. AND SUBSIDIARY
MARCH 31, 1999
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:
THREE MONTHS ENDED MARCH 31,
1999 1998
---- ----
Revenue
License fees ................................ 18.8% 9.0%
Recurring maintenance and service fees ...... 53.2% 49.0%
Product sales ............................... 20.2% 29.2%
Other service fees .......................... 7.8% 12.8%
----- -----
Total Revenue: ......................... 100.0% 100.0%
----- -----
Cost of Revenue
Product Sales ............................... 15.1% 22.7%
Purchased software .......................... 15.1% 6.7%
Distribution ................................ 0.3% 0.2%
----- -----
Total Cost of Sales: ................... 30.5% 29.6%
----- -----
Gross profit: .......................... 69.5% 70.4%
Operating Expenses:
Support and customer service ................ 57.3% 42.5%
Selling and marketing ....................... 12.3% 21.4%
Research and development .................... 6.5% 4.6%
General and administrative .................. 22.7% 20.9%
Amortization of intangible goodwill ......... 3.7% 3.2%
----- -----
Total Operating Expense: .............. 102.5% 92.6%
----- -----
Earnings(loss) from operations ......... (33.0)% (22.2)%
Interest and financing costs ........................... 4.4% 11.1%
----- -----
Earnings(loss) before income taxes ..... (37.4)% (33.3)%
Income tax expense(benefit) ............................ (11.4)% (11.8)%
----- -----
Net Earnings(loss) ..................... (26.0)% (21.5)%
----- -----
7
CPS SYSTEMS, INC. AND SUBSIDIARY
MARCH 31, 1999
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998
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 $1,902 for the three months ended March 31,
1999 compared to $2,198 for the three months ended March 31, 1998, a decrease of
$296 or 13.5%. This decrease was primarily due to a decrease in remittance
processing ("RPS") hardware, software and installation sales. The decrease was
partially offset by an increase in city and municipal("City") sales and an
increase in our hardware parts and repair group ("Systems Engineering")sales.
License Fees. The Company's revenue from license fees was $357 for the three
months ended March 31, 1999 compared to $198 for the three months ended March
31, 1998, an increase of $159 or 80.3%. The increase was primarily due to a new
property tax billing and collection system ("Collections") installation. This
increase was partially offset by a decrease in RPS third party software sales.
The Company currently has a backlog of seven contracts representing
approximately $4,300 in initial license fees.
Recurring Maintenance and Service Fees. The Company's revenue from recurring
fees was $1,011 for the three months ended March 31, 1999 compared to $1,076 for
the three months ended March 31, 1998, a decrease of $65 or 6.0%. The decrease
was primarily due to a decline in hardware maintenance. This decline is
associated with 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.
The Company currently has a backlog of seven contracts representing
approximately $1,100 in average annual recurring maintenance revenue.
Product Sales. Revenue from product sales was $385 for the three months ended
March 31, 1999 compared to $643 for the three months ended March 31, 1998, a
decrease of $258 or 40.1%. This decrease is primarily due to a decrease in RPS
product sales and, to a lesser extent, product sales for Collection systems.
This decrease was partially offset by an increase in product sales for our City
and Systems Engineering groups.
Other Service Fees. Revenue from other service fees was $149 for the three
months ended March 31, 1999 compared to $281 for the three months ended March
31, 1998, a decrease of $132 or 47.0%. This decrease was primarily due to
decreased 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 $580 for the three months ended March 31, 1999
compared to $650 for the three months ended March 31, 1998, a decrease of $70 or
10.8%. This yielded a gross profit margin of 69.5% for the three months ended
March 31, 1999 compared to a gross profit margin of 70.4% for the three months
ended March 31, 1998. The decrease was associated with a decrease in the sale of
product sales, partially offset by an increase in cost of RPS software
installations. The decrease also resulted from additional costs to correct RPS
third-party software issues for existing customers incurred by the Company.
8
CPS SYSTEMS, INC. AND SUBSIDIARY
MARCH 31, 1999
Product Sales. The cost of product sales was $287, or approximately 74.6% of
product sales, for the three months ended March 31, 1999 compared to $499, or
approximately 77.6% of product sales, for the three months ended March 31, 1998,
a decrease of $212 or 42.5%. This decrease was primarily due to a decrease in
product sales revenue of 40.1% for the three months ended March 31, 1999
compared to the three months ended March 31, 1998.
Software. Cost of software includes purchased software as well as the
amortization of capitalized software development costs. The cost of software was
$288 or approximately 80.7% of license fees, for the three months ended March
31, 1999 compared to $147, or approximately 74.2% of license fees, for the three
months ended March 31, 1998, an increase of $141 or 95.9%. This increase was
largely due to the increase in cost of RPS software installations. The Company
has incurred additional costs to correct RPS third-party software issues for
existing customers. Amortization of software development cost was $33 for the
three months ended March 31, 1999 and $33 for the three months ended March 31,
1998.
Distribution. The costs associated with distribution were $5 for the three
months ended March 31, 1999 compared to $4 for the three months ended March 31,
1998, an increase of $1 or 25.0%.
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.
Support and Customer Service. Expenses related to support and customer service
were $1,091 for the three months ended March 31, 1999 compared to $934 for the
three months ended March 31, 1998, an increase of $157 or 16.8%. This increase
resulted from an increase in salaries and hiring to enhance customer service and
support future growth.
Selling and Marketing. The Company's selling and marketing expenses were $233
for the three months ended March 31, 1999 compared to $471 for the three months
ended March 31, 1998, a decrease of $238 or 50.5%. This decrease was due to a
decrease in the numbers of sales personnel and expenses related to developing
new markets. In November 1998, the Company decided to focus on its core products
and core markets in an effort to grow these areas.
Research and Development. Research and development expenses were $123 for the
three months ended March 31, 1999 compared to $102 for the three months ended
March 31, 1998, an increase of $21 or 20.6%. These expenses are comprised
primarily of salaries as well as amounts paid to outside consultants to
supplement continuing product enhancement efforts. The increase resulted from
movement of personnel from the capitalization projects to research and
development expensed assignments.
General and Administrative. General and administrative expenses were $433 for
the three months ended March 31, 1999 compared to $459 for the three months
ended March 31, 1998, a decrease of $26 or 5.7%. This decrease was primarily due
to a decrease in legal expenses related to claims arising out of the Company's
operations in the normal course of business.
Amortization of Goodwill. 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 March 31, 1999 compared to $71 for the three months ended
March 31, 1998, a decrease of approximately $1 or 1.4%.
9
CPS SYSTEMS, INC. AND SUBSIDIARY
MARCH 31, 1999
EARNINGS FROM OPERATIONS
Loss from operation was $628 or (33.0%) of revenue, for the three months ended
March 31, 1999, compared to a loss from operations of $489 or (22.2%) for the
three months ended March 31, 1998. This decrease in earnings from operations of
$139 was primarily due to the decrease of 13.5% in total revenue for the three
months ended March 31, 1999 compared to the three months ended March 31, 1998.
To a lesser extent, the decrease resulted from a reduction in gross profit
margin to 69.5% for the three months ended March 31, 1999 from 70.4% for the
three months ended March 31, 1998
NON-OPERATING EXPENSES
Interest and Financing Costs. The Company's interest expense for its long term
debt was $84 for the three months ended March 31, 1999 compared to $245 for the
three months ended March 31, 1998, a decrease of $161 or 65.7%. This decrease
was primarily attributed to a put warrant adjustment for the three months ended
March 31, 1998. The put warrant adjustment is primarily based on the operating
earnings of the Company for the previous twelve month period, which increased in
the first quarter of 1998. There was no put warrant adjustment made in 1999.
Provisions for Income Taxes. The Company's provision for income tax benefit was
$217 for the three months ended March 31, 1999 compared to $260 for the three
months ended March 31, 1998, a decrease of $43. This decrease was attributable
primarily to decreased earnings from operations. The income tax provision is
higher than income taxes determined by applying the applicable statutory rates
primarily due to non-deductible amortization of goodwill and non-deductible put
warrant adjustments.
LIQUIDITY AND CAPITAL RESOURCES
The Company was acquired by an international private investor group on December
30, 1994 for approximately $4,600 in a leveraged transaction. The acquisition
was financed with a $1,500 senior term loan due December 1998, provided by
FINOVA Capital Corporation (the "Finova Loan") and a $2,100 senior subordinated
note due in two installments in December 1999 and December 2000, provided by
Hanifen Imhoff Mezzanine Fund, L.P. (the "Hanifen Loan"). The balance of the
acquisition funding was provided by certain officers and directors of the
Company in the form of equity capital.
Since that time, the Company has funded its business solely with cash generated
from operations. However, on March 30, 1998 the Company successfully completed
an initial public offering ("IPO") of $1,900 shares of its common stock. Net
proceeds of the IPO less all issuance costs were approximately $5,619.
From March 25, 1998 through March 31, 1999, the Company applied the following
amounts of its net proceeds from the IPO pursuant to the IPO registration
statement:
Construction of plant, building and facilities $
Purchase and installation of machinery and equipment
Purchases of real estate
Acquisitions of other business(es)
Repayment of indebtedness 855 Working
capital 1,401
Temporary investments
Other uses of at least $100,000 (research and development expenses) 3,363
-----
Total $5,619
10
CPS SYSTEMS, INC. AND SUBSIDIARY
MARCH 31, 1999
In May 1997, some of the Company's shareholders advanced approximately $123,000
to CDP Systems, Inc., the Company's wholly owned subsidiary("CDP"), to cover CDP
expenses (the "CDP Loans"). As of April 8, 1998, there was approximately
$128,000 in principal and accrued interest outstanding under the CDP Loans. On
that date, the CDP Loans were paid from proceeds of the IPO. With the exception
of the repayment of the CDP Loans, 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 Company's cash balances were $461 and $6,218 as of March 31, 1999, and March
31, 1998, respectively. The Company's operating activities provided cash of $316
and $111 during the three months ended March 31, 1999 and March 31, 1998,
respectively. The Company's source of cash during the three months ended March
31, 1999 was primarily attributable to a decrease in accounts receivable of
$417, decrease in refundable income tax of $178, and an increase to accounts
payable of $244. These increases to cash were offset by a decrease to net income
of $495 and an increase to deferred income tax of $225.
The Company used cash of $1,162 and $631 for investing activities during the
three months ended March 31, 1999 and March 31, 1998, respectively. Investing
activities have consisted principally of the acquisition of property and
equipment and capitalized software development cost. The increase of $531 was
primarily attributable to increases in capitalized software development cost
The Company's financing activities provided cash of $1,011 for the three months
ended March 31, 1999 and $6,411 for the three months ended March 31, 1998. On
March 30, 1999, the Company executed an Agreement and Plan of Merger (the
"Merger Agreement") with Tyler Technologies (formerly known as "Tyler
Corporation" and referred to hereinafter as "Tyler") pursuant to which the
Company will merge with and into a wholly owned subsidiary of Tyler. Also, on
March 30, 1999, Tyler loaned $1,000 to the Company, evidenced by a secured
promissory note (the "Tyler Loan"). As of March 31, 1998, the Company's
aggregate net proceeds were $6,411 from the sale of 1,900,000 share of common
stock through its initial public offering. Subsequent to March 31, 1998, the
Company paid $761 to retire the outstanding principal amount of its senior term
loan including interest and prepayment fees on the Finova Loan, $128 in loans
from shareholders to the Company and $148 for over-allotment issuance cost.
On December 31, 1999, the current portion, $1,050, of a $2,100 senior note
payable to Hanifen Imhoff Mezzanine Fund, L.P. under the Hanifen Loan becomes
due. As of December 31, 1998, the Company was in violation of the note agreement
with Hanifen Imhoff Mezzanine Fund, L.P. The violation pertains to the ratio of
cash flow to total contractual debt service. Hanifen Imhoff Mezzanine Fund, L.P.
has waived through September 30, 1999 compliance with this ratio.
The Tyler Loan, originally due on September 30, 1999, has been extended by
agreement of the parties until October 30, 1999. The interest rate remains 2%
over the prime rate. An interest payment is still due June 30, 1999, but the
entire principal balance and accrued interest is next due on October 30, 1999.
The note is secured by a lien on the Company's assets, subordinate to the
Hanifen Loan. The Company believes that the proceeds of this Tyler Loan, when
combined with its cash balances and cash generated from operations, will satisfy
the Company's working capital, business development and capital expenditure
requirements through September 30, 1999. There can be no assurances, however,
that the Company will have sufficient working capital to satisfy all of the
anticipated needs until September 30, 1999. Increased costs, delays in
receivable collections and
11
CPS SYSTEMS, INC. AND SUBSIDIARY
MARCH 31, 1999
opportunities for growth or expansion may increase the demand for working
capital, thereby making an additional infusion of capital necessary prior to
September 30, 1999. After September 30, 1999, the Company will have insufficient
resources to satisfy all of its obligations, working capital, business
development and capital expenditure requirements. The Company will require
additional sources of liquidity which may include equity offerings or debt
financing. The Company believes that the merger with Tyler, if consummated, will
permit it to satisfy these obligations, working capital, business development
and capital expenditure requirements. If the Merger Agreement is not closed and
the merger consummated, then the Company will not be able to satisfy its
obligations or fulfill its requirements absent additional equity offerings
and/or debt financings.
YEAR 2000 COMPLIANCE
There is significant uncertainty in the software industry concerning the
potential effects associated with compliance with Year 2000 ("Y2K") date codes.
Potential effects include, but are not limited to, product compliance, internal
systems compliance, impact upon the Company's revenue, and expenses related
thereto.
Product Compliance. Most of the Company's current products are Y2K compliant,
based upon results of successful tests on its software. Those products that are
not presently Y2K compliant are presently under development. These products will
be made Y2K compliant prior to December 31, 1999. Therefore, the Company does
not anticipate its products will be adversely affected by date changes in the
Y2K. However, there can be no assurance that the Company's products contain all
features or functions deemed necessary by customers, distributors, resellers and
systems integrators to be Y2K compliant. While the Company continuously enhances
its software to ensure availability of desired features and functions, there can
be no assurance that such features and functions will be timely available. The
Company's products may also rely upon the products of other vendors that may not
be Y2K compliant. Such reliance may prevent the Company's customers from
achieving all of the Company's desired features and functions. The Company
anticipates the software industry will generally be subject to material
litigation. Such claims against the Company, with or without merit, could have a
material adverse effect on the Company's business, operating results and
financial condition.
Internal Systems. The Company has assessed the impact of Y2K issues with regard
to its internal reporting systems and operations and determined that the
remaining costs associated with addressing such issues will not be material. The
Company expects all of its internal systems to be Y2K compliant prior to January
1, 2000. The Company is contacting its own key suppliers and vendors to
ascertain the extent to which their systems are Y2K compliant and the extent to
which the Company could be adversely affected by the failure of such systems to
be Y2K compliant. Management does not believe that the cost to bring its
software products and internal systems into Y2K compliance will have a material
adverse effect on the Company's results of operations or financial condition.
However, a failure to fully identify all Y2K dependencies in the Company's
systems or in the systems of its suppliers, vendors, and financial institutions
could have material adverse effect upon the Company, including but not limited
to operating results, financial condition and delays in the delivery or sale of
products. The Company believes that the likelihood of a disruption in operations
related to Y2K issues is remote.
Impact on Revenue. The Company believes the purchasing patterns of existing and
potential customers may be affected by Y2K issues. Many companies are expending
substantial resources to repair, in some cases temporarily, their current
software systems for Y2K compliance. These expenditures may result in an
increase in demand for the Company's products. However, there can be no
assurance that such increase in
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CPS SYSTEMS, INC. AND SUBSIDIARY
MARCH 31, 1999
demand will be realized or that any increase can be sustained beyond the end of
the current fiscal year. Consequently, changes in purchasing patterns could have
a material adverse effect upon the Company's business, operating results and
financial condition.
Expenses Related to Y2K Compliance. The Company has not incurred significant
expense in becoming Y2K compliant. Future costs related to Y2K compliance are
not expected to have a material adverse effect on the Company's operating
results or financial condition.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is presently involved in significant litigation. Five law suits have
been filed against the Company during the period from December 1998 through
January 1999 seeking class certification and recovery for, among other things,
violations of federal securities laws associated with the Company's registration
statement and its Form 10-Qs for the first and second quarter of 1998. These
lawsuits were filed following the Company's November 4, 1998 press release
announcing that it was restating its first and second quarter revenues for 1998
in light of AICPA Statement of Position 97-2, for software revenue recognition
requirements. The Company intends to vigorously defend the lawsuits.
The Company is also a defendant in Continental Pacific Corporation v. CPS
Systems Inc., et al., pending in the Circuit Court for Lee County, Florida. This
suit alleges that three former employees of the plaintiff joined the employment
of the Company in violation of their non-competition agreement, and seeks
injunctive and monetary relief for the defendants' breaches of the irrespective
employment agreements and for the Company's role in soliciting their employment.
The three former employees of the plaintiff left the plaintiff and sought other
employment due to financial difficulties facing the plaintiff, which caused it
to discontinue paying salary and employment benefits to the three individual
defendants. Accordingly, the defendants contend that the non-competition
agreements at issue in the case are unenforceable. In a preliminary injunction
hearing held in the case, the Company and the individual defendants prevailed.
The Court refused to enjoin the individual defendants from continuing to work
for the Company. The case is presently in discovery, and several key witnesses
remain to be deposed. The Company and the individual defendants have filed a
motion for summary judgment asking the Court to dismiss the case based on the
lack of a genuinely disputed issue of material fact that remains for trial.
Although the motion is presently pending, the Company and the defendants do not
expect a ruling until discovery in the case has been completed.
The Company has also been notified by Peoria County, Illinois of the County's
termination of the contract between the Company and the county and the county's
intention to recover the customer deposit of $340,000 and to receive a credit of
an outstanding receivable of $170,650. The outstanding receivable is not
recognized as current income but is instead booked to deferred revenue. The
Company has reviewed the notice and the contract and determined the county's
termination was not warranted.
From time to time, the Company is involved in other litigation relating to
claims arising out of its operations in the normal course of business. Except as
set forth above, the Company is not a party to any legal proceedings, the
adverse outcome of which, individually or in the aggregate, would have a
material adverse effect on the Company's results of operations or financial
position.
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CPS SYSTEMS, INC. AND SUBSIDIARY
MARCH 31, 1999
ITEM 2. CHANGES IN SECURITIES
The Company has established an equity participation plan (the "1997 Equity
Participation Plan") to enable executive officers, other key employees,
independent directors and consultants of CPS to participate in the ownership of
the Company. The 1997 Equity Participation Plan provides for the award to
executive officers, other key employees, independent directors and consultants
of the Company of a broad variety of stock-based compensation alternatives such
as nonqualified stock options, incentive stock options, restricted stock and
performance awards and provides for the grant to executive officers, other key
employees, independent directors and consultants of nonqualified stock options.
Awards under the 1997 Equity Participation Plan may provide participants with
rights to acquire shares of common stock. A total of 600,000 shares of Common
Stock are reserved for issuance pursuant to the 1997 Equity Participation Plan,
of which options to purchase 556,600 shares have been granted to certain
directors, officers and employees as of March 31, 1999. For the three months
ended March 31, 1999, 15,000 options were granted. Options shall become
exercisable in three cumulative equal installments. The first installment shall
become exercisable on the first anniversary of the date the option was granted.
Neither these options, nor the underlying securities, have been registered under
the Securities Act of 1933, as amended (the "Securities Act").
The Company has also established the CPS Systems, Inc. Employee Stock Purchase
Plan (the "Employee Stock Purchase Plan") to assist employees of the Company in
acquiring a stock ownership interest in CPS and to encourage them to remain in
the employment of the Company. The Employee Stock Purchase Plan permits
employees to purchase shares of Common Stock through payroll deductions at a
price equal to 85% of fair market value. A total of 100,000 shares of Common
Stock are reserved for issuance pursuant to the Employee Stock Purchase Plan. A
total of 100,000 shares of Common Stock are reserved for issuance pursuant to
the Employee Stock Purchase Plan. For the three months ended March 31, 1999,
employees have purchased 8,974 shares. Shares purchased under the Employee Stock
Purchase Plan are restricted for one year from the date of purchase. These
shares have not been registered under the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of December 31, 1998, the Company was in violation of the note agreement with
Hanifen Imhoff Mezzanine Fund, L.P. relating to the Hanifen Loan The violation
pertains to the ratio of cash flow to total contractual debt service. Hanifen
Imhoff Mezzanine Fund, L.P has waived through September 30, 1999 compliance with
this ratio.
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.
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CPS SYSTEMS, INC. AND SUBSIDIARY
MARCH 31, 1999
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 2.1 Agreement and Plan of Merger dated March 30, 1999 between Tyle
Corporation and CPS Systems, Inc.
Exhibit 2.2 Agreement and Plan of Merger Amendment No. 1 dated April 20, 1999
between Tyler Corporation and CPS Systems, Inc.
Exhibit 27.1 Financial Data Schedule
(c) No reports on Form 8-K were filed by CPS SYSTEMS, INC. during the quarter
ended March 31, 1999.
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: May 17, 1999
/s/ PAUL E. KANA
-----------------------------------------------
Paul E. Kana
CHAIRMAN OF THE BOARD OF DIRECTORS,
CHIEF EXECUTIVE OFFICER
AND DIRECTOR (PRINCIPAL EXECUTIVE OFFICER)
/s/ KEVIN L. FIGGE
-----------------------------------------------
Kevin L. Figge
VICE PRESIDENT, CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
15