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 JUNE 30, 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 AUGUST 10, 1999
----- ---------------------------------
Common stock
Par value $.01 per share 6,765,337
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
06/30/99 12/31/98
(unaudited)
ASSETS
CURRENT ASSETS
Cash .............................................. $ 83 $ 296
Accounts receivable ............................... 1,345 2,852
Deferred income tax ............................... 1,555 907
Inventory ......................................... 192 201
Refundable income taxes ........................... 89 267
Prepaid expense and other current assets .......... 493 564
-------- --------
Total current assets: ................. 3,757 5,087
PROPERTY AND EQUIPMENT ................................. 754 790
SOFTWARE DEVELOPMENT COST .............................. 6,114 4,167
OTHER ASSETS
Costs in excess of net assets acquired ............ 1,482 1,623
Debt issue costs .................................. 38 79
Other assets ...................................... 21 29
-------- --------
1,541 1,731
-------- --------
$ 12,166 $ 11,775
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long term debt ................. $ 1,050 $ 1,050
Accounts payable .................................. 2,217 1,066
Note payable ...................................... 1,000 --
Accrued income tax payable ........................ 16 --
Other accrued expenses ............................ 611 437
Customer deposits and unearned revenue ............ 3,365 4,013
-------- --------
Total current liabilities: ............ 8,259 6,566
OTHER LIABILITIES
Long-term debt .................................... 1,031 1,023
Unearned revenue .................................. 14 14
Other liabilities ................................. -- --
-------- --------
Total long term debt: ................. 1,045 1,037
-------- --------
Total Liabilities: .................... 9,304 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; 6,754,576 shares issued in 1999
and 6,734,928 shares issued in 1998 ............ 67 67
Additional paid-in capital ........................ 6,820 6,805
Accumulated deficit ............................... (4,025) (2,700)
-------- --------
Total Shareholders' Equity: ........... 2,862 4,172
-------- --------
$ 12,166 $ 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
---- ---- ---- ----
Revenue
License fees .......................... $ 491 $ 402 $ 848 $ 600
Recurring maintenance and service fees $ 997 $ 1,053 $ 2,008 $ 2,129
Product sales ......................... $ 270 $ 756 $ 655 $ 1,399
Other service fees .................... $ 71 $ 271 $ 220 $ 552
------- ------- ------- -------
$ 1,829 $ 2,482 $ 3,731 $ 4,680
Cost of Revenue
Product sales ......................... $ 225 $ 634 $ 512 $ 1,133
Purchased software .................... $ 245 $ 228 $ 533 $ 375
Distribution .......................... $ 3 $ 3 $ 8 $ 7
------- ------- ------- -------
$ 473 $ 865 $ 1,053 $ 1,515
------- ------- ------- -------
Gross profit ..................... $ 1,356 $ 1,617 $ 2,678 $ 3,165
Operating Expenses:
Support and customer service .......... $ 1,085 $ 988 $ 2,176 $ 1,922
Selling and marketing ................. $ 259 $ 567 $ 492 $ 1,038
Research and development .............. $ 355 $ 164 $ 478 $ 266
General and administrative ............ $ 719 $ 309 $ 1,152 $ 768
Amortization of intangible goodwill ... $ 70 $ 70 $ 140 $ 141
------- ------- ------- -------
$ 2,488 $ 2,098 $ 4,438 $ 4,135
Earnings(loss) from operations ... ($1,132) ($ 481) ($1,760) ($ 970)
------- ------- ------- -------
Interest and financing costs ..................... $ 113 $ 88 $ 197 $ 333
------- ------- ------- -------
Earnings(loss) before income taxes ($1,245) ($ 569) ($1,957) ($1,303)
Income tax expense(benefit) ...................... ($ 416) ($ 192) ($ 633) ($ 452)
------- ------- ------- -------
Net earnings(loss) ............... ($ 829) ($ 377) ($1,324) ($ 851)
======= ======= ======= =======
Net earnings(loss) per common share
Basic and Diluted ........................... ($ 0.12) ($ 0.06) ($ 0.20) ($ 0.16)
Weighted average shares used in computing net
earnings(loss) per common share:
Basic and Diluted ........................... 6,754 6,733 6,757 5,436
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)
SIX MONTHS ENDED JUNE 30,
1999 1998
-------------------------
Cash flows from operating activities:
Net income(loss) ................................................... $(1,325) $ (851)
Adjustments to reconcile net income(loss) to net cash:
Depreciation and amortization ................................... 382 368
Adjustment to put warrants ...................................... -- 125
Loss on disposal of property and equipment ...................... 7 1
Accrued interest to shareholders ................................ -- 2
Changes in assets and liabilities, net of business acquired:
Accounts receivable ......................................... 1,506 (502)
Refundable income taxes ..................................... 178 (125)
Inventories ................................................. 10 (105)
Deferred income tax expense ................................. (648) (713)
Prepaid expenses and other current assets ................... 73 (543)
Accounts payable ............................................ 1,151 (598)
Accrued expenses ............................................ 180 793
Customer deposits and unearned revenue ...................... (648) 1,379
Income taxes payable ........................................ 16 132
Other liabilities ........................................... -- 5
Net cash provided(used) by operating activities $ 882 $ (633)
------------------
Cash Flows from investing activities:
Purchase of property and equipment ................................. (98) (249)
Software development costs ......................................... (2,020) (1,155)
------------------
Net cash used by investing activities ......... $(2,118) $(1,404)
Cash flows from financing activities:
Principal payment on long-term debt ................................ 8 (855)
Proceeds from notes payable - Tyler Corporation .................... 1,000 --
Proceeds from employee stock purchase plan ......................... 15 --
Proceeds from public offering, net of offering cost ................ -- 5,867
------------------
Net cash provided by financing activities ..... $ 1,023 $ 5,012
Net increase(decrease) in cash .......................................... (213) 2,976
Cash at beginning of period ............................................. 296 327
------------------
Cash at end of period ................................................... $ 83 $ 3,303
Supplementary Cash Flow Disclosure:
Interest and financing costs paid .................................. $ 63 $ 167
Income taxes paid (refunded), net .................................. $ (180) $ 200
The accompanying notes are an integral part of these statements.
4
CPS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(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, 1999, and the consolidated
results of operation for the three months and six months ended June 30, 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 - 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. As of July 1, 1999, the Company is in violation
of the note agreement for failure to make an interest payment of $63, due June
30, 1999.
NOTE D - MERGER AGREEMENT AND TERM LOAN
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 would 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. As of July 1, 1999, the Company is in violation
of the Tyler Loan for non-payment of the interest due on June 30, 1999.
5
CPS SYSTEMS, INC. AND SUBSIDIARY
JUNE 30, 1999
On June 3, 1999, the Company received notice from Tyler of termination of the
Merger Agreement. Currently, the Company and Tyler are in active negotiations to
find an alternative structure for the transaction.
NOTE E - Backlog
As of June 30, 1999, the Company has a backlog of six contracts representing
approximately $3,300 in initial license fees and $1,000 in average annual
recurring maintenance revenue. These six contracts are for the Company's
property tax billing and collection product ("Collection"), computer-assisted
mass appraisal ("CAMA") and interactive voice response system.
On June 1, 1999, the Company and Hillsborough County, Florida ("Hillsborough")
reached a mutual agreement to terminate the contract dated February 26, 1998.
This contract was to have the Company install its Collection product for
licensed use by Hillsborough. Upon cancellation of the contract, the Company
retains the $274 Hillsborough paid to the Company pursuant to the terms of the
contract. However, in the event Hillsborough purchases the Collection product
from the Company prior to January 1, 2001, then the Company will credit
Hillsborough with $266 against the payment of the license fee for the newly
purchased software.
One of the backlog contracts has a clause in the contract providing for
liquidating damages under limited circumstances. Circumstances triggering
damages include failure to complete installation of the CAMA and Collection
products by January 1, 1999 and March 1, 1999, respectively. Liquidating damages
accumulate until live production of the systems. As of June 30, 1999, the
Company may be subject to a potential liquidating damages claim of approximately
$1,300. The Company does not believe it is subject to the claim for liquidating
damages and is currently negotiating with the county to resolve the matter.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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. 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
JUNE 30, 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
---- ---- ---- ----
Revenue
License fees ........................... 26.8% 16.2% 22.7% 12.8%
Recurring maintenance and service fees . 54.5% 42.4% 53.8% 45.5%
Product sales .......................... 14.8% 30.5% 17.6% 29.9%
Other service fees ..................... 3.9% 10.9% 5.9% 11.8%
------- ------- ------- -------
Total Revenue ..................... 100.0% 100.0% 100.0% 100.0%
------- ------- ------- -------
Cost of Revenue
Product sales .......................... 12.3% 25.5% 13.7% 24.2%
Purchased software ..................... 13.4% 9.2% 14.3% 8.0%
Distribution ........................... 0.2% 0.1% 0.2% 0.1%
------- ------- ------- -------
Total Cost of Sales ............... 25.9% 34.8% 28.2% 32.3%
------- ------- ------- -------
Gross profit ...................... 74.1% 65.2% 71.8% 67.7%
Operating Expenses:
Support and customer service ........... 59.3% 39.8% 58.3% 41.1%
Selling and marketing .................. 14.2% 22.8% 13.2% 22.2%
Research and development ............... 19.4% 6.6% 12.8% 5.7%
General and administrative ............. 39.3% 12.5% 30.9% 16.4%
Amortization of intangible goodwill .... 3.8% 2.8% 3.8% 3.0%
------- ------- ------- -------
Total Operating Expense .......... 136.0% 84.5% 119.0% 88.4%
------- ------- ------- -------
Earnings(loss) from operations ... (61.9)% (19.3)% (47.2)% (20.7)%
Interest and financing costs ...................... 6.2% 3.5% 5.3% 7.1%
------- ------- ------- -------
Earnings(loss) before income taxes (68.1)% (22.8)% (52.5)% (27.8)%
Income tax expense(benefit) ....................... (22.7)% (7.7)% (17.0)% (9.7)%
------- ------- ------- -------
Net earnings(loss) ............... (45.4)% (15.1)% (35.5)% (18.1)%
======= ======= ======= =======
7
CPS SYSTEMS, INC. AND SUBSIDIARY
JUNE 30, 1999
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 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 $1,829 for the three months ended June 30, 1999 compared to $2,482
for the three months ended June 30, 1998, a decrease of $653 or 26.3%. 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 a new Collection installation.
License Fees. The Company's revenue from license fees was $491 for the three
months ended June 30, 1999 compared to $402 for the three months ended June 30,
1998, an increase of $89 or 22.1%. The increase was primarily due to a new
Collection installation. This increase was partially offset by a decrease in RPS
third party software sales. The Company currently has a backlog of six contracts
representing approximately $3,300 in initial license fees.
Recurring Maintenance and Service Fees. The Company's revenue from recurring
fees was $997 for the three months ended June 30, 1999 compared to $1,053 for
the three months ended June 30, 1998, a decrease of $56 or 5.3%. The decrease
was primarily due to a decline in hardware and city and municipal software
("City") maintenance. The hardware maintenance 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 decline of City
maintenance (approximately $34) is due to the reduction of City contracts. The
Company currently has a backlog of six contracts representing approximately
$1,000 in average annual recurring maintenance revenue.
Product Sales. Revenue from product sales was $270 for the three months ended
June 30, 1999 compared to $756 for the three months ended June 30, 1998, a
decrease of $486 or 64.3%. This decrease is primarily due to a decrease in RPS
product sales and, to a lesser extent, product sales for Collection systems and
the hardware parts and repair ("Systems Engineering") group.
Other Service Fees. Revenue from other service fees was $71 for the three months
ended June 30, 1999 compared to $271 for the three months ended June 30, 1998, a
decrease of $200 or 73.8%. 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 $473 for the three months
ended June 30, 1999 compared to $865 for the three months ended June 30, 1998, a
decrease of $392 or 45.3%. This yielded a gross profit margin of 74.1% for the
three months ended June 30, 1999 compared to a gross profit margin of 65.2% for
the three months ended June 30, 1998. The decrease in total cost of revenue was
primarily associated with a decrease in the revenue from product sales. This
decrease was offset by additional costs to resolve RPS third-party software
issues for existing customers.
Product Sales. The cost of product sales was $225, or approximately 83.3% of
product sales, for the three months ended June 30, 1999 compared to $634, or
approximately 83.9% of product sales, for the three months ended June 30, 1998,
a decrease of $409 or 64.5%. This decrease was primarily due to a decrease in
product sales revenue of 64.3% for the three months ended June 30, 1999 compared
to the three months ended June 30, 1998.
8
CPS SYSTEMS, INC. AND SUBSIDIARY
JUNE 30, 1999
Software. Cost of software includes purchased software as well as the
amortization of capitalized software development costs. The cost of software was
$245 or approximately 49.9% of license fees, for the three months ended June 30,
1999 compared to $228, or approximately 56.7% of license fees, for the three
months ended June 30, 1998, an increase of $17 or 7.5%. This increase was
primarily due to the increase in cost of RPS software installations. The Company
incurred additional costs to resolve RPS third-party software issues for
existing customers. Amortization of software development cost was $41 for the
three months ended June 30, 1999 and $34 for the three months ended June 30,
1998.
Distribution. The cost associated with distribution were $3 for the three
months ended June 30, 1999 compared to $3 for the three months ended June 30,
1998.
OPERATING EXPENSES
The Company's operating expenses includes support and customer service, selling
and marketing, research and development, general and administrative, and
amortization of intangible goodwill.
Support and Customer Service. Expenses related to support and customer service
were $1,085 for the three months ended June 30, 1999 compared to $988 for the
three months ended June 30, 1998, an increase of $97 or 9.8%. This increase
resulted from an increase in salaries and hiring to enhance customer service.
Selling and Marketing. The Company's selling and marketing expenses were $259
for the three months ended June 30, 1999 compared to $567 for the three months
ended June 30, 1998, a decrease of $308 or 54.3%. This decrease was due to a
decrease in the numbers of sales and marketing 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 $355 for the
three months ended June 30, 1999 compared to $164 for the three months ended
June 30, 1998, an increase of $191 or 116.5%. 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 $719 for
the three months ended June 30, 1999 compared to $309 for the three months ended
June 30, 1998, an increase of $410 or 132.7%. This increase was primarily due to
an increase in legal expenses related to claims arising out of the Company's
operations and the five class-action lawsuits filed against the Company during
the period from December 1998 through January 1999.
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 June 30, 1999 compared to $70 for the three months ended June 30,
1998.
EARNINGS FROM OPERATIONS
Loss from operation was $1,132 or (61.9%) of revenue, for the three months ended
June 30, 1999, compared to a loss from operations of $481 or (19.4%) for the
three months ended June 30, 1998. This decrease in earnings from operations of
$651 was primarily due to a decrease of 26.3% in total revenue for the three
months ended June 30, 1999 compared to the three months ended June 30, 1998 and
to an increase in operating expenses of 18.6% for the three months ended June
30, 1999 compared to the three months ended June 30, 1998.
9
CPS SYSTEMS, INC. AND SUBSIDIARY
JUNE 30, 1999
NON-OPERATING EXPENSES
Interest and Financing Costs. The Company's interest expense and financing cost
was $113 for the three months ended June 30, 1999 compared to $88 for the three
months ended June 30, 1998, an increase of $25 or 28.4%. This increase was
primarily attributed to interest expense accrued on the Tyler Loan for the three
months ended June 30, 1999.
Provisions for Income Taxes. The Company's provision for income tax benefit was
$416 for the three months ended June 30, 1999 compared to $192 for the three
months ended June 30, 1998, an increase of $224. This increase 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.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 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 $3,731 for the six months ended June 30, 1999 compared to $4,680 for
the six months ended June 30, 1998, a decrease of $949 or 20.3%. This decrease
was due to a decrease in RPS hardware, software and installation sales. The
decrease was partially offset by an increase in new Collection installations.
License Fees. The Company's revenue from license fees was $848 for the six
months June 30, 1999 compared to $600 for the six months ended June 30, 1998, an
increase of $248 or 41.3%. The increase was primarily due to an increase in new
Collection installations. This increase, to a lesser extent, was partially
offset by a decrease in RPS third party license fee sales. The Company currently
has a backlog of six contracts representing approximately $3,300 in initial
license fees.
Recurring Maintenance and Service Fees. The Company's revenue from recurring
fees was $2,008 for the six months ended June 30, 1999 compared to $2,129 for
the six months ended June 30, 1998, a decrease of $121 or 5.7%. The decrease was
primarily due to a decline in hardware maintenance and to a lesser extent a
decline in City software maintenance. The hardware maintenance 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 decline of City maintenance (approximately $21) is due to the reduction of
City contracts. The Company currently has a backlog of six contracts
representing approximately $1,000 in average annual recurring maintenance
revenue.
Product Sales. Revenue from product sales was $655 for the six months ended June
30, 1999 compared to $1,399 for the six months ended June 30, 1998, a decrease
of 744 or 53.2%. This decrease is primarily due to a decrease in RPS product
sales and to a lesser extent a decrease in Collection product sales.
Other Service Fees. Revenue from other service fees was $220 for the six months
ended June 30, 1999 compared to $552 for the six months ended June 30, 1998, a
decrease of $332 or 60.1%. This decrease was primarily due to decreased RPS
installation sales.
10
CPS SYSTEMS, INC. AND SUBSIDIARY
JUNE 30, 1999
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 $1,053 for the six months
ended June 30, 1999 compared to $1,515 for the six months ended June 30, 1998, a
decrease of $462 or 30.5%. This yielded a gross profit margin of 71.8% for the
six months ended June 30, 1999 compared to a gross profit margin of 67.7% for
the six months ended June 30, 1998. This decrease in cost of revenue was
primarily attributed to a decrease in product sales of 53.2% for the six months
ended June 30, 1999 compared to the six months ended June 30, 1998. The decrease
was partially offset by an increase in purchases software from 8.0% of total
revenue for the six months ended June 30, 1998 to 14.3% of total revenue for the
six months ended June 30, 1999.
Product Sales. The cost of product sales was $512, or approximately 78.2% of
product sales, for the six months ended June 30, 1999 compared to $1,133, or
approximately 81.0% of product sales, for the six months ended June 30, 1998, a
decrease of $621 or 54.8%. This decrease was primarily due to costs associated
with a decrease in sales of hardware for RPS and to a lesser extent Collection.
Purchased Software. Cost of software includes purchased software as well as the
amortization of capitalized software development costs. The cost of software was
$533, or approximately 62.9% of license fees, for the six months ended June 30,
1999 compared to $375, or approximately 62.5% of license fees, for the six
months ended June 30, 1998, an increase of $158 or 42.1%. This increase was
primarily 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 $71 for the
six months ended June 30, 1999 and $67 for the six months ended June 30, 1998.
Distribution. The costs associated with distribution were $8 for the six months
ended June 30, 1999 compared to $7 for the six months ended June 30, 1998, an
increase of $1 or 14.3%.
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 $2,176 for the six months ended June 30, 1999 compared to $1,922 for the
six month ended, June 30, 1998, an increase of $254 or 13.2%. This increase
resulted from an increase in salaries and hiring to enhance customer service.
Selling and Marketing. The Company's selling and marketing expenses were $492
for the six months ended June 30, 1999 compared to $1,038 for the six months
ended June 30, 1998, an decrease of $546 or 52.6%. This decrease was due to a
decrease in the numbers of sales and marketing 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 $478 for the
six months ended June 30, 1999 compared to $266 for the six months ended June
30, 1998, an increase of $212 or 79.7%. 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.
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CPS SYSTEMS, INC. AND SUBSIDIARY
JUNE 30, 1999
General and Administrative. General and administrative expenses were $1,152 for
the six months ended June 30, 1999 compared to $768 for the six months ended
June 30, 1998, an increase of $384 or 50.0%. This increase was primarily due to
an increase in legal fees. To a lesser extent the increase is associated with
increased employee benefits and travel and insurance activity created by the
IPO.
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 $140 for the six months ended June 30, 1999 compared to $141
for the six months ended June 30, 1998, a decrease of approximately $1 or 0.7%.
EARNINGS FROM OPERATIONS
Earnings from operation was a loss of $1,760 or (47.2%) of revenue, for the six
months ended June 30, 1999, compared to a loss of $970, or (20.7%) of revenue,
for the six months ended June 30, 1998. This decrease in earnings from
operations of $790 was primarily due to the decrease of sales in the RPS group
coupled with increased cost to correct RPS third-party software issues for
existing customers. To a lesser extent the decrease is attributed to a 5.7%
decrease in recurring maintenance and service fees revenue and a 7.3% increase
in operating expenses for the six months ended June 30, 1999 compared to June
30, 1998.
NON-OPERATING EXPENSES
Interest and Financing Costs. The Company's interest expense and financing cost
was $197 for the six months ended June 30, 1999 compared to $333 for the six
months ended June 30, 1998, an decrease of $136 or 40.8%. This increase was
primarily attributed to a put warrant adjustment of $131 made during the six
months ended June 30, 1998.
Income Tax Expense. The Company's provision for income tax benefit was $633 for
the six months ended June 30, 1999 compared to $452 for the six months ended
June 30, 1998, an increase of $181. This increase 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's cash balances were $83 and $3,303 as of June 30, 1999, and June
30, 1998, respectively. The Company's operating activities provided cash of $882
and used cash of $633 during the six months ended June 30, 1999 and June 30,
1998, respectively. The Company's source of cash during the six months ended
June 30, 1999 was primarily attributable to a reduction in accounts receivable
of $1,506 and an increase to accounts payable of $1,151. These increases to cash
were offset by a decrease to net income of $1,325 and to customer deposits and
unearned revenue of $648 and an increase in deferred income tax of $648.
The Company used cash of $2,118 and $1,404 for investing activities during the
six months ended June 30, 1999 and June 30, 1998, respectively. Investing
activities have consisted principally of the acquisition of property and
equipment and capitalized software development cost. The increase was primarily
attributable to increases in capitalized software development cost.
The Company's financing activities provided cash of $1,023 for the six months
ended June 30, 1999 and $5,012 for the six months ended June 30, 1998. On March
30, 1999, the Company executed the Merger Agreement with Tyler pursuant to which
the Company would merge with and into a wholly owned subsidiary of Tyler. Also,
on March 30,
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CPS SYSTEMS, INC. AND SUBSIDIARY
JUNE 30, 1999
1999, Tyler loaned $1,000 to the Company, evidenced by a secured promissory
note. On June 3, 1999, the Company received notice from Tyler of termination of
the Merger Agreement. The Company and Tyler are in active negotiations to find
an alternative structure for the transaction. The Company is in violation of the
Tyler Loan for failure to make an interest payment of $25, due June 30, 1999.
On July 13, 1999, the Company received a loan of $147 from its Chairman of the
Board and C.E.O., Paul E. Kana. Also, on July 30, 1999 Sidney H. Cordier a
member of the Company's Board of Directors loaned the Company $40. Both loans
("Director Loans"), subordinate to the Hanifen Loan and Tyler Loan, were
evidenced by secured promissory notes that have an interest rate of 2% over the
prime rate. Interest payments are due September 30, 1999, and the entire
principal with accrued interest is then due on December 31, 1999.
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 Company is
in violation of the note agreement for failure to make an interest payment of
$63, due June 30, 1999.
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 proceeds from the Tyler Loan and the
Director Loans 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 August 31, 1999. At the time of filing
Form 10-QSB for the quarter ended March 31, 1999 on May 14, 1999, the Company
anticipated timely receipt of milestone payments under certain existing
contracts. Payments were not forthcoming, resulting in a revision of the
Company's liquidity estimate. Moreover, unexpected delays in development and
installation have resulted in deferral of certain revenue previously anticipated
to be received in the second quarter. The Company expects to complete all
installations on the backlog contracts and receive payment therefor by the end
of the fiscal year. There can be no assurances, however, that the Company will
have sufficient working capital to satisfy all of the anticipated needs after
August 31, 1999. Due to increased costs, delays in receivable collections and
opportunities for growth or expansion, the Company believes it will have
insufficient resources to satisfy all of its obligations, working capital,
business development and capital expenditure requirements after August 31, 1999
without immediate additional sources of liquidity through equity offerings or
debt financing.
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
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CPS SYSTEMS, INC. AND SUBSIDIARY
JUNE 30, 1999
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 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 material litigation. Five law suits, now
consolidated into a single proceeding, have been filed against the Company in
United States District Court for the Northern District of Texas during the
period from December 1998 through January 1999. The plaintiffs are 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 has filed a motion for dismissal in each suit. The motion is presently
pending. The Company intends to vigorously defend the lawsuits.
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CPS SYSTEMS, INC. AND SUBSIDIARY
JUNE 30, 1999
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, instituted February 1998, 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 is a third party defendant in Civitas Bank v. Smith v. CPS,
instituted June 1999, in which the finance company alleges that Okaloosa County,
Florida breached its obligations thereto under the terms of its financing
agreement for the purchase of CPS software. Okaloosa County, contending it
failed to comply with the terms of its agreement because CPS breached its
purchase agreement with the County, filed a third party complaint against the
Company. The Company's answer is due in September 1999 and it intends to deny
contractual liability and defend itself vigorously.
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.
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. 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.
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 527,100 shares have been granted to certain
directors, officers and employees as of June 30, 1999. 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").
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CPS SYSTEMS, INC. AND SUBSIDIARY
JUNE 30, 1999
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 June 30, 1999,
employees have purchased 10,674 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. As of June 30, 1999, the Company was in violation of the note
agreement with Hanifen Imhoff Mezzanine Fund, L.P. relating to the Hanifen Loan
and the secured promissory note with Tyler relating to the Tyler Loan. The
violations pertain to non-payment of interest due June 30, 1999.
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.
On June 14, 1999, R. Harris Turner resigned from the Board of Directors of the
Company, for personal reasons which would limit the time necessary to devote to
the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27.1 Financial Data Schedule
(c) No reports on Form 8-K were filed by CPS SYSTEMS, INC. during the quarter
ended June 30, 1999.
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CPS SYSTEMS, INC. AND SUBSIDIARY
JUNE 30, 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: August 16, 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 AND ACCOUNTING OFFICER)
17