<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, 1997
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, 1997: 6,660,263
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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 6-7
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,
1997 1996
------------ ------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 2,865 $ 7,041
Short-term investments 18,268 15,088
Accounts receivable, net 2,752 4,558
Prepaid expenses 658 457
Deferred taxes 3,685 3,790
------------ ------------
Total current assets 28,228 30,934
Property and equipment, at cost
Equipment 2,801 2,754
Leasehold improvements 132 134
Furniture and fixtures 438 457
------------ ------------
3,371 3,345
Accumulated depreciation (2,472) (2,367)
------------ ------------
Net property and equipment 899 978
Purchased software, at cost 1,472 1,464
Accumulated amortization (721) (660)
------------ ------------
Net purchased software 751 804
Other assets 265 283
------------ ------------
$ 30,143 $ 32,999
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 229 $ 573
Accrued liabilities 552 720
Accrued compensation 864 1,217
Accrued taxes payable 72 37
Deferred revenue 6,835 8,541
------------ ------------
Total current liabilities 8,552 11,088
Commitments:
Shareholders' equity:
Common stock 7 7
Additional paid in capital 22,844 22,758
Cumulative translation adjustment 236 398
Accumulated deficit (1,496) (1,252)
------------ ------------
Total shareholders' equity 21,591 21,911
------------ ------------
$ 30,143 $ 32,999
------------ ------------
------------ ------------
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C-ATS SOFTWARE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended March 31,
----------------------------
1997 1996
------------- -------------
(unaudited) (unaudited)
Revenues:
License revenue $4,238 $5,386
Service and other revenue 254 308
------------- ------------
Total revenues 4,492 5,694
Costs and expenses:
Cost of revenues 93 54
Research and development 1,583 1,224
Sales and marketing 2,602 2,669
General and administrative 693 710
Acquired in-process research and development -- 7,066
------------- ------------
Total costs and expenses 4,971 11,723
------------- ------------
Operating loss (479) (6,029)
Interest income 236 231
------------- ------------
Loss before provision for income taxes (243) (5,798)
Provision for income taxes -- 469
------------- ------------
Net loss $(243) $(6,267)
------------- ------------
------------- ------------
Net loss per share $ (0.04) $ (1.00)
------------- ------------
------------- ------------
Weighted average common shares outstanding 6,679 6,260
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C-ATS SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
---------------------
March 31, March 31,
1997 1996
---------- ----------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (243) $ (6,267)
Adjustments to reconcile net (loss) to
net cash used in operating activities:
Depreciation and amortization 228 206
Acquired in-process research and development -- 7,066
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 1,806 1,469
(Increase) decrease in prepaid expenses (200) (113)
(Increase) decrease in other assets 18 11
(Increase) decrease in deferred tax asset 105 124
Increase (decrease) in accounts payable (344) (905)
Increase (decrease) in accrued liabilities (168) (191)
Increase (decrease) in accrued compensation (353) 177
Increase (decrease) in accrued taxes payable 35 (417)
Increase (decrease) in deferred revenue (1,706) (1,179)
---------- ----------
Net cash provided (used) in operating activities (822) (19)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of short-term investments, net (3,180) 2,803
Investment in acquisition of LORGB -- (8,084)
Purchase of property and equipment (99) (159)
---------- ----------
Net cash used in investing activities (3,279) (5,440)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 87 4,445
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Net cash provided by financing activities 87 4,445
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS (162) (41)
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,176) (1,055)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,041 4,199
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,865 $ 3,144
---------- ----------
---------- ----------
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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. When performing long-term systems integration projects for its
clients, revenues are recognized based on the percentage-of-completion method.
and any anticipated losses would be recorded in the earliest period in which
such loss may become evident. The Company completed its most recent systems
project in the fourth quarter of 1995 and does not currently have a long-term
project in process.
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EARNINGS PER SHARE
Earnings per share is normally computed using the weighted average number
of shares of common stock and dilutive common equivalent shares from stock
options (using the treasury stock method). In the first quarter of 1996 and
1997, common share equivalents, would have an anti-dilutive effect on the net
loss per share calculation, and are therefore excluded from the calculation
for both 1996 and 1997.
The Financial Accounting Standards Board ("FASB") has issued Financial
Accounting Standards No. 128, "Accounting for Earnings Per Share" ("SFAS No.
128"). This statement is effective for financial statements with periods
beginning after December 31, 1997. Early adoption is not permitted. The Company
anticipates adoption of the pronouncement will not have a significant effect
upon the calculation of its earnings per share.
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C-ATS SOFTWARE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND 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.
RESULTS OF OPERATIONS:
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,
1997 1996
---------- ----------
(unaudited) (unaudited)
Revenues:
License revenue 94% 94%
Service and other revenue 6 6
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Total revenues 100 100
Costs and expenses:
Cost of revenues 2 1
Research and development 35 22
Sales and marketing 58 47
General and administrative 16 12
Acquired in process research and
development expense -- 124
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Total costs and expenses 111 206
---------- ----------
Operating (loss) (11) (106)
Interest income 5 4
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(Loss) before provision for income taxes (6) (102)
Provision for income taxes -- 8
---------- ----------
Net (loss) (6)% (110)%
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REVENUES
Total revenues during the first quarter of 1997 decreased to $4.5 million,
a 21% reduction versus 1996 first quarter 1996 revenues of $5.6 million. The
decrease reflects the lower renewal bookings of its Catalyst product line in
1996. International revenues accounted for 83% and 78% of total revenues in the
first quarter of 1997 and 1996, respectively. In the first quarter of 1997,
domestic revenues decreased by 33% while international revenues decreased by 17%
over the first quarter of 1996.
LICENSE. License revenue decreased to $4.2 million in the first quarter of
1997 from $5.4 million in the first quarter of 1997. License revenue decreased
primarily as a result of an decrease in the number of sites where the Company's
products are licensed.
SERVICE AND OTHER. Service and other revenues remained at approximately
$0.3 million in both the first quarters of 1997 and 1996.
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
remained at approximately $0.1 million in the first quarter of 1997 and in the
first quarter of 1996.
RESEARCH AND DEVELOPMENT. Most of research and development expenditures
are personnel related. Total expenditures for research and development
increased to $1.6 million in the first quarter of 1997 from $1.2 million in the
first quarter of 1996. The increase in research and development expenditures
was due primarily to increases in expenditures for new product development. The
increase also includes 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 during the first quarter of 1996, 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 continuing research and development
expenditures at a similar level of activity during the remainder of 1997.
SALES AND MARKETING. Sales and marketing expenses consist principally of
salary, commissions and facilities-related costs. Sales and marketing
expenditures decreased to $2.6 million in the first quarter of 1997 from $2.7
million in 1996. The decrease in sales and marketing expenditures was due
primarily to adjustments in personnel-related costs. The Company anticipates
that sales and marketing expenses will increase in dollar amount during the
remainder of 1997 as the Company expands its sales and service organization to
support the introduction of new products.
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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
the first quarter of 1997 and in 1996. The Company anticipates that general and
administrative expenses will remain at current levels during the remainder of
1997.
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 remained level at $0.2 million in the first quarter of 1997 and
1996.
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 0% and 37% in the first
quarter of 1997 and 1996, 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 and foreign tax credits in
both years.
As of March 31, 1997, the Company had $5.2 million of gross deferred tax.
Due to certain limitations of benefits related to tax carrybacks and
carryforwards, the Company has provided a valuation allowance of $1.5 million
related to the deferred tax asset.
The Company's tax returns for 1990 through 1993 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 derivative 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. In
addition, the Company offers other products to facilitate firm-wide risk
management. 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 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.
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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
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 nine to twelve months in
amounts equal to the operating expenses estimated to be payable in such
currencies during the next nine 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 a
reserve will be adequate to cover any liabilities. Results of past quarters
should not be relied on as an indication of future results.
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<PAGE>
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, 1997, the Company had $21.1 million in cash, cash equivalents
and short-term investments, and no long term debt.
Net cash used in operating activities totaled $799,000 in the first quarter
of 1997 compared to $19,000 in the first quarter of 1996. The Company used $3.2
million during the first quarter of 1997 for investing activities while during
the first quarter of 1996, the Company used $8.1 million of net cash for
acquisitions and sold $2.8 million of short-term investments. The Company added
$0.1 million of property and equipment in the first quarter of 1997 versus $0.2
million added during the first quarter of 1996. The Company has no significant
capital commitments and currently anticipates that additions to property and
equipment for 1997 will be approximately $0.7 million.
Financing activities provided cash of $0.1 million in the first quarter of
1997 resulting from the exercise of stock options. During the first quarter of
1996, the Company issued $4.2 million of common stock in connection with the
acquisition of LORGB in addition to receiving an additional $0.3 million from
common stock issuances..
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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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, 1997.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended March 31, 1997.
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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, 1997 By:
------------------
Rod A. Beckstrom
Chief Executive Officer and
Chairman
(Principal Executive Officer)
Date: May 14, 1997 By:
-------------------
David Gilbert
President, Chief Operating and
Chief Financial Officer
(Principal Financial and
Principal Accounting Officer)
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C-ATS SOFTWARE INC.
INDEX TO EXHIBITS
EXHIBIT EXHIBIT TITLE PAGE
NUMBER NUMBER
27 Requirements for the Format and Input of 16
Financial Data Schedules
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,865
<SECURITIES> 18,268
<RECEIVABLES> 2,752
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 28,228
<PP&E> 4,843
<DEPRECIATION> 3,193
<TOTAL-ASSETS> 30,143
<CURRENT-LIABILITIES> 8,552
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 21,591
<TOTAL-LIABILITY-AND-EQUITY> 30,143
<SALES> 4,492
<TOTAL-REVENUES> 4,492
<CGS> 93
<TOTAL-COSTS> 4,971
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 236
<INCOME-PRETAX> (243)
<INCOME-TAX> 0
<INCOME-CONTINUING> (243)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (243)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)<F1>
<FN>
<F1>In the first quarter of 1997, common share equivalents, if included, would have
an anitdilutive effect on the net loss per share calculation, and are therefore
excluded from the fully diluted calculation. If included, the net loss per
share would be $0.03 per share
</FN>
</TABLE>
