<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 1996
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 Number: 0-25526
C-ATS SOFTWARE INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0185283
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1870 EMBARCADERO ROAD, PALO ALTO, CA 94303
(Address of principal executive offices) (Zip Code)
415-321-3000
(Registrant's telephone number, including area code)
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.
[X (1)] Yes [X (2)] No
Number of shares outstanding of the issuer's common stock, $0.001 par value
as of May 10, 1996: 6,600,263
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C-ATS SOFTWARE INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Interim Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Interim Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 8-12
and Results of Operations
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
Index to Exhibits 15
.Exhibit 27 EDGAR Requirements for the Format and Input of 16-17
Financial Data Schedules
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C-ATS SOFTWARE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
ASSETS 1996 1995
----------- ------------
(unaudited)
Current assets:
Cash and cash equivalents $ 3,144 $ 4,199
Short-term investments 19,699 22,502
Accounts receivable, net 5,684 7,153
Prepaid expenses 543 430
Deferred taxes 2,764 2,888
--------- ---------
Total current assets 31,834 37,172
Property and equipment, at cost
Equipment 2,963 2,472
Leasehold improvements 311 306
Furniture and fixtures 442 470
--------- ---------
3,716 3,248
Accumulated depreciation (2,759) (2,293)
--------- ---------
Net property and equipment 957 955
Purchased software, at cost 1,435 376
Accumulated amortization (407) (321)
--------- ---------
Net purchased software 1,028 55
Other assets 306 318
--------- ---------
$ 34,125 $ 38,500
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 188 $ 1,093
Accrued liabilities 968 1,159
Accrued compensation 1,196 1,019
Accrued taxes payable 641 1,058
Deferred revenue 10,100 11,279
--------- ---------
Total current liabilities 13,093 15,608
Commitments:
Shareholders' equity:
Common stock 7 6
Additional paid in capital 22,649 18,205
Cumulative translation adjustment 278 319
Retained earnings (accumulated deficit) (1,902) 4,362
--------- ---------
Total shareholders' equity 21,032 22,892
--------- ---------
$ 34,125 $ 38,500
--------- ---------
--------- ---------
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<PAGE>
C-ATS SOFTWARE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended March 31,
1996 1995
------------ ------------
(unaudited) (unaudited)
Revenues:
License revenue $ 5,386 $ 4,754
Service and other revenue 308 429
--------- --------
Total revenues 5,694 5,183
Costs and expenses:
Cost of revenues 54 289
Research and development 1,224 881
Sales and marketing 2,669 2,289
General and administrative 710 679
Acquired in-process research and
development 7,066
--------- --------
Total costs and expenses 11,723 4,138
--------- --------
Operating income (loss) (6,029) 1,045
Interest income 231 86
--------- --------
Income (loss) before provision for income
taxes (5,798) $ 1,131
Provision for income taxes 469 396
--------- --------
Net income (loss) $ (6,267) $ 735
--------- --------
--------- --------
Net income (loss) per share, primary $ (1.00) $ 0.17
--------- --------
--------- --------
Net income (loss) per share, fully diluted $ (1.00) $ 0.14
--------- --------
--------- --------
Weighted average common shares
outstanding, primary 6,260 4,321
Weighted average common shares
outstanding, fully diluted 6,260 5,229
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<PAGE>
C-ATS SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1996 1995
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (6,267) $ 735
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 206 169
Acquired in-process research
and development 7,066 --
Changes in operating assets and liabilities:
Decrease in accounts receivable 1,469 2,583
Increase in prepaid expenses (113) (453)
(Increase) decrease in other assets 11 (177)
(Increase) decrease in deferred tax asset 124 (1)
Increase (decrease) in accounts payable (905) 415
Increase (decrease) in accrued liabilities (191) 521
Increase (decrease) in accrued compensation 177 (566)
Decrease in accrued taxes payable (417) (237)
Decrease in deferred revenue (1,179) (77)
---------- ---------
Net cash provided (used) by operating
activities (19) 2,912
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments -- (20,625)
Investment in acquisition of LORGB (8,084) --
Purchase of property and equipment (159) (174)
---------- ---------
Net cash used in investing activities (8,243) (20,799)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of short-term investments 2,803 --
Proceeds from issuance of common stock 4,445 14,164
---------- ---------
Net cash provided by financing activities 7,248 14,164
---------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS (41) 178
---------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,055) (3,545)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 4,199 7,689
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,144 $ 4,144
---------- ---------
---------- ---------
</TABLE>
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<PAGE>
C-ATS SOFTWARE INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. NATURE OF OPERATIONS:
C-ATS Software Inc. (the "Company") was organized in 1988 as a successor to
a partnership formed in 1986. The Company develops and markets client/server
software for financial risk management. The majority of the Company's current
clients are domestic and international financial institutions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to those rules and
regulations, although the Company believes that the disclosures made are
adequate to make the information presented not misleading. The interim
financial statements are unaudited, but reflect all adjustments (consisting of
only normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation. The financial statements should be read in
conjunction with the Company's financial statements and footnotes as presented
in the Company's Annual Report filed under SEC Form 10-K.
REVENUE RECOGNITION
The Company licenses its products to end users under annual license
agreements which include rights to maintenance support services and product
upgrades. Accordingly, license revenues are recognized ratably over twelve
months.
In addition, the Company provides training and consulting services to its
clients. Revenue from such services is generally recognized as the services are
performed. Revenues from long-term systems integration projects are recognized
based on the percentage-of-completion method.
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<PAGE>
EARNINGS PER SHARE
Earnings per share is computed using the weighted average number of shares
of common stock and dilutive common equivalent shares from stock options (using
the treasury stock method). Pursuant to the Securities and Exchange Commission
Staff Accounting Bulletin No. 83, common and common equivalent shares issued
during the twelve-month period prior to the Company's March 1995 public offering
are included in the calculation of common and common equivalent shares as if
they were outstanding for all periods prior to the initial public offering.
Furthermore, common share equivalents from convertible stock that converted upon
the Company's initial public offering were included in the calculation as if
they had been converted on March 28, 1995.
In the first quarter of 1996, common share equivalents, if included, would
have an anti-dilutive effect on the net loss per share calculation, and are
therefore excluded from both the primary and fully diluted calculations for
1996. The Financial Accounting Standards Board is currently considering a
proposal to eliminate common share equivalents from all future earnings per
share calculations beginning in 1997.
STOCK EXCHANGE; COMMON STOCK
The Company was reincorporated in Delaware, effective March 1995. Pursuant
to the reorganization, the Delaware successor Company issued one share of stock
for each share of outstanding Common Stock and Preferred Stock. During March
1995, the Company completed its initial public offering of stock and sold an
aggregate of 1.3 million shares of Common Stock generating net proceeds to the
Company, after underwriting and other costs, of approximately $13.8 million.
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<PAGE>
C-ATS SOFTWARE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Actual results could differ materially from those
projected in the forward looking statements as a result of factors set forth
in the section titled "Future Operating Results" and elsewhere.
The following table sets forth for the periods indicated the percentage of
revenues represented by certain line items in the Company's Consolidated
Statements of Operations:
Three Months Ended
March 31, March 31,
1996 1995
----------- ----------
(unaudited) (unaudited)
Revenues:
License revenue 94% 92%
Service and other revenue 6 8
----- ----
Total revenues 100 100
Costs and expenses:
Cost of revenues 1 6
Research and development 22 17
Sales and marketing 47 44
General and administrative
In process R&D expense 12 13
124 --
----- ----
Total costs and expenses 206 80
----- ----
Operating income (loss) (106) 20
Interest income 4 2
----- ----
Income (loss) before provision for
income taxes (102) 22
Provision for income taxes 8 8
----- ----
Net income (loss) (110)% 14%
REVENUES
Total revenues during the first quarter of 1996 increased to $5.7
million, a 10% gain over first quarter 1995 revenues of $5.2 million.
International revenues accounted for 78% and 79% of total revenues in the
first quarter of 1996 and 1995, respectively. In the first quarter of 1996,
domestic revenues increased by 5% while international revenues increased by
11% over the first quarter of 1995. Revenues from Japan increased by 8%,
revenues from the United Kingdom increased by 29%, and revenues from other
international clients increased by 5% in the first quarter of 1996 compared
to the first quarter of 1995. Domestic revenues were slower than the overall
Company growth rates due in large part to the completion in the fourth
quarter of 1995 of a systems integration project which began during the
second half of 1994.
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<PAGE>
LICENSE. License revenue increased to $5.4 million in the first quarter of
1996 from $4.8 million in the first quarter of 1995. License revenue increased
primarily as a result of an increase in the number of sites where the Company's
products are licensed.
SERVICE AND OTHER. Service and other revenues decreased to $0.3 million in
the first quarter of 1996 from $0.4 million in the first quarter of 1995.
Service and other revenues decreased primarily due to the completion of a
systems integration project that was undertaken and subcontracted by the Company
in the middle of 1994 and concluded in the fourth quarter of 1995.
COSTS AND EXPENSES
COST OF REVENUES. Cost of revenues includes the cost of documentation
materials, royalties and the cost of subcontracted services. Cost of revenues
decreased to $0.1 million in the first quarter of 1996 from $0.3 million in the
first quarter of 1995. This decrease was due primarily to the reduction in
subcontracted services related to the systems integration project, referred to
above.
RESEARCH AND DEVELOPMENT. Most of research and development expenditures
are personnel related. Total expenditures for research and development
increased to $1.2 million in the first quarter of 1996 from $0.9 million in the
first quarter of 1995. The increase in research and development expenditures
was due primarily to increases in expenditures for new product development. The
increase also included the addition of research staff from the acquired firm of
Lor/Geske Bock Associates, Inc. ("LORGB") on February 13, 1996. In connection
with the LORGB acquisition, the Company recognized a one-time expense amounting
to $7.1 million of in process research and development. The amounts of ongoing
software development costs which could have been capitalized were immaterial
and, therefore, no internal software development costs have been capitalized by
the Company to date. The Company believes that significant investment for
product research and development is essential to product and technical
leadership, and the Company anticipates that it will continue to commit
substantial resources to research and development in the future. The Company
anticipates that research and development expenditures will continue to increase
in dollar amount during the remainder of 1996.
SALES AND MARKETING. Sales and marketing expenses consist principally of
salary, commissions and facilities-related costs. Sales and marketing
expenditures increased to $2.7 million in the first quarter of 1996 from $2.3
million in 1995. The increase in sales and marketing expenditures was due
primarily to increases in personnel-related costs. The Company anticipates that
sales and marketing expenses will continue to increase in dollar amount in 1996
as the Company expands its sales and service organization..
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of
personnel costs for finance, contract administration, human resources and
general management and administration, as well as legal, accounting and auditing
expenses. General and administrative expenses remained level at $0.7 million in
1996 from 1995. The Company anticipates that general and administrative
expenses will increase in dollar amount in 1996.
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<PAGE>
INTEREST INCOME
Interest income is comprised primarily of interest earned on the Company's
excess cash and short term investment balances, net of interest expense.
Interest income increased to $231,000 in the first quarter of 1996 from $86,000
in the first quarter of 1995. Interest income increased as a result of higher
cash and short term investment balances.
PROVISION FOR INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
provides for a liability approach under which deferred income taxes are provided
based upon enacted laws and rates applicable to the periods in which the taxes
become payable. The provision for income taxes was 37% and 35% in the first
quarter of 1996 and 1995, respectively. The provision for income taxes takes
into account the effects of foreign income taxes and state income taxes, offset
by utilization of research and development credits in 1995 and foreign tax
credits in both years. The higher rate in 1996 anticipates non-continuance of
the research and development credit during the 1996 tax year.
As of March 31, 1996, the Company had $4.5 million of deferred tax assets
for application against future income. Due to certain limitations of benefits
related to tax carrybacks, the Company has provided a valuation allowance of
$1.7 million related to the deferred tax asset. Accrued taxes payable include
reserves for tax liabilities. The Company's tax returns for 1990 through 1994
are being examined by the Internal Revenue Service. Such examination may result
in adjustments to previously filed tax returns. While the Company believes that
it has reserves sufficient to cover any actual tax liabilities as a result of
this examination, no assurance can be given that the reserves will be adequate.
FUTURE OPERATING RESULTS
The Company has derived substantially all of its revenues from the sale
of software products and services for derivatives risk management, and its
future growth is critically dependent on increased revenues from products for
this use. The market for derivatives risk management products is highly
competitive. There is no assurance that competition will not cause the
Company to lose market share, or will not affect pricing and margins. The
Company's C-atalyst product family includes among other features a Global
Risk Manager product designed to facilitate firm-wide risk management. There
can be no assurance that C-atalyst will achieve significant market
acceptance. The market for firm-wide risk management products is at a very
early stage of development Failure of a significant market for firm-wide risk
management products or Financial CAD to develop or, if it does, failure of
the Company's products to achieve broad market acceptance could have a
material adverse affect on the Company's business, operating results and
financial condition.
The Company's revenues are derived primarily from annual renewable license
fees, and although the Company has been successful to date in negotiating
renewable licenses rather than perpetual licenses, the Company may in the future
encounter resistance to such renewable licenses. A significant decline in the
percentage of clients who renew their license or the failure of the Company to
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<PAGE>
enter into renewable licenses would have a material adverse effect on the
business, operating results and financial condition of the Company.
A significant portion of the Company's revenues are derived from sales to
international clients. International sales and operations may be limited or
disrupted by the imposition of government controls, export license requirements,
political instability, trade restrictions, changes in tariffs and exchange
rates, difficulties in staffing, coordinating communications, managing
international operations and other factors. The Company prices its products in
U.S. dollars, but it incurs expenses in local currencies for its overseas
operations. The Company attempts to reduce its exposure to exchange rate
fluctuations by purchasing foreign currencies every six to twelve months in
amounts equal to the operating expenses estimated to be payable in such
currencies during the next six to twelve months. Regulatory compliance
requirements differ among foreign countries and are also different from those
established in the United States, and any inability to obtain necessary foreign
regulatory approvals on a timely basis could have an adverse effect on the
Company's international sales, and thereby on its business, financial condition
and results of operations. Additionally, the Company's business, financial
condition and international operating results may be adversely affected by
fluctuations in currency exchange rates as well as increases in duty rates,
difficulties in obtaining export licenses, ability to maintain or increase
prices and competition.
The Company's acquisition of LORGB entails various risks. Additional
development will be required before the LORGB products are broadly marketed.
There is no assurance that the development work will be completed timely or
successfully. There is also no assurance that the LORGB products will win
broad market acceptance. The addition of the LORGB personnel and related
overhead also increases the Company's expenses. If the Company is not
successful in developing and marketing the LORGB products, then the Company's
earnings will be adversely affected.
The Company's quarterly operating results may fluctuate
substantially as a result of a variety of factors including the volume and
timing of license renewals by existing clients, license agreements with new
clients, the timing and market acceptance of new products or technological
advances by the Company or its competitors, price levels, and unexpected
expenses. The Company's expense levels are based, in part, on expectations of
future revenues. If revenues in a particular quarter do not meet expectations,
operating results could be adversely affected. The Company expects that its
operating results will fluctuate in the future as a result of these and other
factors. Additionally, the Company has accrued a reserve for tax liabilities in
connection with an Internal Revenue Service examination. There can be no
assurance that such reserve will be adequate to cover any liabilities. Results
of past quarters should not be relied on as an indication of future results.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date through cash flow from
operations and its initial public offering of stock effective March 20, 1995.
As of March 31, 1996, the Company had $22.8 million in cash, cash equivalents
and short-term investments, and no long term debt.
Net cash used by operating activities totaled $19,000 in the first quarter
of 1996. In the first quarter of 1995, operating activities provided $2.9
million to net cash. The Company used $8.1 million of net cash in the first
quarter of 1996 for acquisitions versus the $20.6 million utilized for investing
activities in the first quarter of 1995. The Company's investments in short-
term investments increased by $20.6 million in the first quarter of 1995. The
Company added $0.2 million of property and equipment in both the first quarter
of 1996 and 1995. The Company has no significant capital commitments and
currently anticipates that additions to property and equipment for 1996 will be
approximately $0.8 million. In April 1995, the Company's existing lease for its
Palo Alto, California facilities expired and the Company signed a new lease for
another facility in Palo Alto, California in
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<PAGE>
close proximity to its previous office. This new facility lease is for
approximately 30,000 square feet of space and expires in April 2001.
Financing activities provided cash of $2.8 million in the first quarter
of 1996, resulting from the sale of short-term investments. In addition, the
Company issued $4.2 million of common stock in connection with the acquisition
of LORGB. This compares to the $14.2 million provided by financing
activities in the first quarter of 1995 which is primarily attributable to the
completion of the Company's initial public offering of stock in March of 1995.
The Company believes that the liquidity provided by existing cash, cash
equivalents and short-term investment balances, and the cash flow expected to be
generated from operations will be adequate to meet the Company's anticipated
cash needs for working capital and capital expenditure requirements for at least
the next twelve months.
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<PAGE>
C-ATS SOFTWARE INC.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No items were submitted to a vote of security holders during the
quarter ended March 31, 1996.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
A report on Form 8-K under a filing date of February 13, 1996 was
filed by the Company during the quarter ended March 31, 1996. The
Form 8-K filing described terms of the acquisition of LOR/Geske Bock
Associates, Inc. (LORGB), a California Corporation, pursuant to an
"Agreement and Plan of Reorganization" dated January 30, 1996. LORGB
designs, develops, and markets integrated, organization-wide market
and credit risk management software systems. The transaction was
accounted for as a "purchase" for accounting purposes.
As a result of the merger, the outstanding LORGB common stock was
exchanged for an aggregate of approximately 578,651 shares of the
Company's common stock and approximately $3,294,000 in cash. In
addition, the Company assumed all options to purchase LORGB capital
stock outstanding at the effective time of the merger. As a result of
the merger, the Company assumed options representing the right to
purchase approximately 167,000 shares of the Company's common stock.
No other reports on Form 8-K were filed by the Company during the
quarter ended March 31, 1996.
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C-ATS SOFTWARE INC.
SIGNATURES
Pursuant to the Requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
C-ATS Software Inc.
(Registrant)
Date: May 14, 1996 By: /s/ Rod A. Beckstrom
------------------------------------
Rod A. Beckstrom
President, Chief Executive Officer
and Chairman
(Principal Executive Officer)
Date: May 14, 1996 By: /s/ G. Bradford Solso
------------------------------------
G. Bradford Solso
Vice President,
Chief Financial Officer and
Treasurer
(Principal Financial and
Principal Accounting Officer)
C-ATS SOFTWARE INC.
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<PAGE>
INDEX TO EXHIBITS
EXHIBIT EXHIBIT TITLE PAGE
NUMBER NUMBER
27 Requirements for the Format and Input of Financial Data Schedules 16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 3,144
<SECURITIES> 19,699
<RECEIVABLES> 5,684
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 31,834
<PP&E> 5,151
<DEPRECIATION> 3,166
<TOTAL-ASSETS> 34,125
<CURRENT-LIABILITIES> 13,093
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 21,025
<TOTAL-LIABILITY-AND-EQUITY> 34,125
<SALES> 5,694
<TOTAL-REVENUES> 5,694
<CGS> 54
<TOTAL-COSTS> 4,657
<OTHER-EXPENSES> 7,066<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 231
<INCOME-PRETAX> (5,798)
<INCOME-TAX> 469
<INCOME-CONTINUING> (6,267)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,267)
<EPS-PRIMARY> (1.00)
<EPS-DILUTED> (1.00)<F2>
<FN>
<F1>In connection with the acquisition of Lor/Geske Bock Associates, Inc., the
Company recognized a one-time expense amounting to $7.1 million of in
process research and development.
<F2>In the first quarter of 1996, common share equivalents, if included, would
have an anti-dilutive effect on the net loss per share calculation, and
are therefor excluded from the fully diluted calculation. If included, the
net loss per share would be $0.94 per share.
</FN>
</TABLE>
