<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 June 30, 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 July 30, 1997: 6,715,634
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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 13
. Index to Exhibits 14
.Exhibit 27 EDGAR Requirements for the Format and Input of 15-16
Financial Data Schedules
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C-ATS SOFTWARE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
1997 1996
----------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 2,637 $ 7,041
Short-term investments 19,389 15,088
Accounts receivable, net 2,794 4,558
Prepaid expenses 724 457
Deferred taxes 4,049 3,790
-------- --------
Total current assets 29,593 30,934
Property and equipment, at cost
Equipment 2,933 2,754
Leasehold improvements 139 134
Furniture and fixtures 445 457
-------- --------
3,517 3,345
Accumulated depreciation (2,634) (2,367)
-------- --------
Net property and equipment 883 978
Purchased software, at cost 1,477 1,464
Accumulated amortization (783) (660)
-------- --------
Net purchased software 694 804
Other assets 286 283
-------- --------
$ 31,456 $ 32,999
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 390 $ 573
Accrued liabilities 676 757
Accrued compensation 1,136 1,217
Deferred revenue 8,089 8,541
-------- --------
Total current liabilities 10,291 11,088
Commitments:
Shareholders' equity:
Common stock 7 7
Additional paid in capital 22,849 22,758
Cumulative translation adjustment 272 398
Accumulated deficit (1,963) (1,252)
-------- --------
Total shareholders' equity 21,165 21,911
-------- --------
$ 31,456 $ 32,999
-------- --------
-------- --------
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C-ATS SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Quarter ended June 30, Six months ended June 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
License revenue $4,302 $4,939 $ 8,540 $10,325
Service and other revenue 244 134 498 442
------ ------ ------- -------
Total revenues 4,546 5,073 9,038 10,767
Costs and expenses:
Cost of revenues 71 74 164 128
Research and development 1,643 1,567 3,226 2,791
Sales & marketing 2,821 2,761 5,424 5,430
General & administrative 713 650 1,405 1,360
In-process R&D expense - - - 7,066
------ ------ ------- -------
Total costs & expenses 5,248 5,052 10,219 16,775
------ ------ ------- -------
Operating income (loss) (702) 21 (1,181) (6,008)
Interest income 233 240 469 471
------ ------ ------- -------
Income (loss) before provision
for income taxes (469) 261 (712) (5,537)
Provision for income taxes 0 97 0 566
------ ------ ------- -------
Net income (loss) $ (469) $ 164 $ (712) $(6,103)
------ ------ ------- -------
------ ------ ------- -------
Net income (loss) per share $(0.07) $ 0.02 $ (0.11) $ (0.95)
------ ------ ------- -------
------ ------ ------- -------
Weighted average common
shares outstanding 6,714* 6,797 6,695* 6,425*
</TABLE>
*excludes anti-dilutive
common share equivalents
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C-ATS SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
June 30, June 30,
1997 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (712) $(6,103)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 434 434
Acquired in-process research and development -- 7,066
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 1,764 (146)
(Increase) decrease in prepaid expenses (267) (238)
(Increase) decrease in other assets (3) 17
(Increase) decrease in deferred tax asset (259) 124
Increase (decrease) in accounts payable (183) (494)
Increase (decrease) in accrued liabilities (81) (1,295)
Increase (decrease) in accrued compensation (81) 470
Increase (decrease) in deferred revenue (452) (1,216)
------- -------
Net cash provided (used) by operating activities 160 (1,381)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments (4,301) (215)
Investment in acquisition of LORGB -- (8,084)
Purchase of property and equipment (228) (373)
------- -------
Net cash used in investing activities (4,529) (8,672)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of short-term investments -- 2,803
Proceeds from issuance of common stock 91 4,455
------- -------
Net cash provided by financing activities 91 7,258
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS (126) (41)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,404) (2,836)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,041 4,199
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,637 $ 1,363
------- -------
------- -------
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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. Any anticipated losses would be recorded in the earliest period in
which such loss may become evident. The Company 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 second quarter of 1996
and the first half 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 these periods.
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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- --------------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
License revenue 95% 97% 94% 96%
Service and other revenue 5 3 6 4
--- --- --- ---
Total revenues 100 100 100 100
Costs and expenses:
Cost of revenues 2 1 2 1
Research and development 36 31 36 26
Sales and marketing 62 55 60 50
General and administrative 15 13 15 13
In process R&D expense -- -- -- 66
--- --- --- ---
Total costs and expenses 115 100 113 156
--- --- --- ---
Operating loss (15) 0 (13) (56)
Interest income 5 5 5 4
--- --- --- ---
Profit/(loss) before provision for
income taxes (10) 5 (8) (52)
Provision for income taxes 0 2 0 5
--- --- --- ---
Net income / (loss) (10)% 3% (8)% (57)%
</TABLE>
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<PAGE>
REVENUES
Total revenues during the second quarter of 1997 decreased to $4.5
million, a 10% reduction versus second quarter 1996 revenues of $5.1 million.
The decrease reflects the lower renewal bookings of the Company's Catalyst
product line in 1996 which are amortized on an annual basis and reflected as
revenue over the succeeding twelve month period. Revenues for the first six
months of 1997 decreased by 16% to $9.0 million from $10.8 million in 1996.
International revenues accounted for 87% and 84% of total revenues in the
second quarter and the first six months of 1997 compared to 80% and 80%
during the same periods in 1996. Domestic revenues decreased by 27% and 11%
in the second quarter and first half of 1997, respectively versus 1996, while
international revenues decreased by 7% in the second quarter and 18%
year-to-date over the same period of 1996.
LICENSE. License revenue declined by 13% to $4.3 million in the second
quarter of 1997 from $4.9 million in the second quarter of 1996. For the
first six months of 1997, license revenue decreased by 17% to $8.5 million
from $10.3 million in 1996. License revenue decreased primarily as a result
of a decrease in the number of sites where the Company's products are
licensed.
SERVICE AND OTHER. Service and other revenues increased to approximately
$0.2 million in the second quarter of 1997 versus $0.1 million in the first
quarter of 1996. Service and other revenues increased to $0.5 million in the
first six months of 1997 versus year earlier service revenues of $0.4
million. In the first half of 1997, the Company began a series of paid CARMA
trial installations at new customer sites. There is an opportunity for these
sites to become licensed CARMA customers during the second half of 1997.
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 second quarter of 1997
and 1996. Cost of revenues increased slightly to $0.16 million in the first
half of 1997 from $0.13 million in the first half of 1996 due to higher third
party software costs associated with the CARMA trial installations.
RESEARCH AND DEVELOPMENT. Most of research and development expenditures
are personnel related. Total expenditures for research and development
remained level at $1.6 million in the second quarter compared with the second
quarter of 1996 and increased to $3.2 million in the first half of 1997 from
$2.8 million in the first half of 1996 when CARMA related research
encompassed only four and one-half months of activity following the
acquisition of LORGB in February 1996. New product development continues on
future releases of both the Catalyst and CARMA product lines during 1997. 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
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<PAGE>
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 remained relatively constant with 1996 expenditure levels at
$2.8 million in the second quarter of 1997 and $5.4 million in the first half
of 1997. 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 expanded distribution and
servicing of the CARMA products.
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 in the second quarter
and first half of 1997 remained relatively level at $0.7 million and $1.4
million as compared with the same periods 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 cash and short term investment balances, net of interest expense.
Interest income remained constant at $0.2 million and $0.5 million in the
second quarter and first half of 1997 and 1996, respectively.
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 second quarter and first half 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 June 30, 1997, the Company had $5.5 million of gross deferred tax.
Due to certain limitations of benefits related to certain tax credits, 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
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<PAGE>
The Company has derived most of its revenues from the licensing of
software products and services for derivatives risk management. 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.
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. Continued
development of the CARMA product line will be required. There is also no
assurance that the LORGB products will win broad market acceptance. The
addition of the LORGB personnel and related overhead has increased the
Company's expenses. If the Company is not successful in marketing the LORGB
products, then the Company's earnings will be adversely affected.
The Company's quarterly operating results may fluctuate 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
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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.
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 June 30, 1997, the Company had $22.0 million in cash, cash equivalents
and short-term investments, and no long term debt.
Net cash provided by operating activities totaled $0.2 million in the
first half of 1997 compared to $1.4 million used by operating activities
during the first half of 1996. During the first half of 1997, the Company
used $4.5 for net investing activities. During the first half of 1996, the
Company used $8.7 million of net cash for acquisitions and netted $2.8
million from the purchase and sale of short-term investments. The Company
added $0.2 million of property and equipment in the first half of 1997 versus
$0.4 million added during the first half of 1996. The Company has no
significant capital commitments and currently anticipates that additions to
property and equipment for 1997 will be approximately $0.6 million.
Financing activities provided cash of $0.1 million in the first half of
1997 resulting from the exercise of stock options. During the first half 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 option exercises.
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 STOCK HOLDERS
At the Annual Shareholders Meeting held on May 20, 1997 stock holders
voted and approved the election of six directors of the Company for
the ensuing year and until their successors are duly elected and
qualified; approved an amendment to the Company's 1995 Stock Plan to
increase the number of shares available for grant under the plan by
1,000,000 shares; and ratified the appointment of Arthur Andersen LLP
as independent auditors for the fiscal year ending December 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 June 30, 1997.
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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: August 11, 1997 By: Rod A. Beckstrom
-----------------------------
Rod A. Beckstrom
Chief Executive Officer
and Chairman
(Principal Executive Officer)
Date: August 11, 1997 By: David Gilbert
-----------------------------
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 PAGE
NUMBER EXHIBIT TITLE NUMBER
27 Requirements for the Format and Input of Financial Data Schedules 16
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,637
<SECURITIES> 19,389
<RECEIVABLES> 2,794
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 29,593
<PP&E> 4,994
<DEPRECIATION> 3,417
<TOTAL-ASSETS> 31,456
<CURRENT-LIABILITIES> 10,291
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 21,158
<TOTAL-LIABILITY-AND-EQUITY> 31,456
<SALES> 9,038
<TOTAL-REVENUES> 9,038
<CGS> 498
<TOTAL-COSTS> 10,219
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 469
<INCOME-PRETAX> (712)
<INCOME-TAX> 0
<INCOME-CONTINUING> (712)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (712)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.10)<F1>
<FN>
<F1> In the first half of 1997, common share equivalents,
if included, would have an anti-dilutive 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 $0.01 per share.
</FN>
</TABLE>
