<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 September 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)
650-321-3000
(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 September 30, 1997: 6,814,213
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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 and Results of Operations 8-12
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)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,391 $ 7,041
Short-term investments 16,977 15,088
Accounts receivable, net 3,961 4,558
Prepaid expenses 401 457
Current income tax refunds due 1,279 --
Deferred income taxes 2,224 3,790
--------- ---------
Total current assets 28,233 30,934
Property and equipment, at cost
Equipment 2,923 2,754
Leasehold improvements 132 134
Furniture and fixtures 441 457
--------- ---------
3,496 3,345
Accumulated depreciation (2,669) (2,367)
--------- ---------
Net property and equipment 827 978
Purchased software, at cost 1,550 1,464
Accumulated amortization (848) (660)
--------- ---------
Net purchased software 702 804
Income tax refunds due - longer term 783 --
Other assets 279 283
--------- ---------
$ 30,824 $ 32,999
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 404 $ 573
Accrued liabilities 1,012 757
Accrued compensation 1,325 1,217
Deferred revenue 7,987 8,541
--------- ---------
Total current liabilities 10,728 11,088
Commitments:
Shareholders' equity:
Common stock 7 7
Additional paid in capital 23,267 22,758
Cumulative translation adjustment 199 398
Accumulated deficit (3,377) (1,252)
--------- ---------
Total shareholders' equity 20,096 21,911
--------- ---------
$ 30,824 $ 32,999
--------- ---------
--------- ---------
</TABLE>
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<PAGE>
C*ATS SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Quarter ended September 30, Nine months ended September 30,
1997 1996 1997 1996
-------------- ------------- -------------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
License revenue $ 4,311 $ 4,599 $ 12,851 $ 14,924
Service and other revenue 350 304 848 746
--------- --------- ---------- ----------
Total revenues 4,661 4,903 13,699 15,670
Costs and expenses:
Cost of revenues 72 78 236 206
Research and development 1,904 1,692 5,130 4,484
Sales & marketing 2,931 2,959 8,355 8,388
General & administrative 829 645 2,234 2,005
In-process R&D and
one-time project costs 585 - 585 7,066
--------- --------- ---------- ----------
Total costs & expenses 6,321 5,374 16,540 22,149
--------- --------- ---------- ----------
Operating loss (1,660) (471) (2,841) (6,479)
Interest income 248 198 717 669
--------- --------- ---------- ----------
Loss before provision for income taxes (1,412) (273) (2,124) (5,810)
Provision for income taxes 0 (101) 0 465
--------- --------- ---------- ----------
Net loss $ (1,412) $ (172) $ (2,124) $ (6,275)
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Net loss per share $ (0.21) $ (0.03) $ (0.32) $ (0.97)
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Weighted average common
shares outstanding 6,766* 6,623* 6,720* 6,491*
* excludes anti-dilutive
common share equivalents
</TABLE>
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<PAGE>
C*ATS SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 30,
1997 1996
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,124) $ (6,275)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 623 674
Acquired in-process research and development -- 7,066
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 597 3,263
(Increase) decrease in prepaid expenses 56 (681)
(Increase) decrease in tax refunds due (2,062) --
(Increase) decrease in deferred tax asset 1,566 198
(Increase) decrease in other assets 12 21
Increase (decrease) in accounts payable (169) (971)
Increase (decrease) in accrued liabilities 255 (1,390)
Increase (decrease) in accrued compensation 108 549
Increase (decrease) in deferred revenue (554) (3,488)
---------- -----------
Net cash used by operating activities (1,692) (1,034)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net sale (purchase) of short-term investments (1,889) 2,417
Investment in acquisition of LORGB -- (8,084)
Purchase of property and equipment (379) (641)
---------- -----------
Net cash used in investing activities (2,268) (6,308)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 509 4,606
---------- -----------
Net cash provided by financing activities 509 4,606
---------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS (199) 6
---------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,650) (2,730)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 7,041 4,199
---------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,391 $ 1,469
---------- -----------
---------- -----------
</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. 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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<PAGE>
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 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 calculations 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 Nine Months Ended
----------------------------- ----------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
------------- ------------- ------------ -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
License revenue 92% 94% 94% 95%
Service and other revenue 8 6 6 5
-------- -------- -------- -------
Total revenues 100 100 100 100
Costs and expenses:
Cost of revenues 2 2 2 1
Research and development 41 35 38 29
Sales and marketing 63 60 61 53
General and administrative 18 13 16 13
In process R&D and one-time project
costs 11 -- 4 45
-------- -------- -------- -------
Total costs and expenses 135 110 121 141
-------- -------- -------- -------
Operating loss (35) (10) (21) (41)
Interest income 5 4 5 4
-------- -------- -------- -------
Loss before provision (benefit) for
income taxes (30) (6) (16) (37)
Provision (benefit) for income taxes 0 (2) 0 3
-------- -------- -------- -------
Net loss (30)% (4)% (16)% (40)%
</TABLE>
-8-
<PAGE>
REVENUES
The Company's revenues are primarily a function of the renewal rates for
annual product licenses to existing Catalyst and CARMA clients, along with
new sales of these products. Total revenues during the third quarter of 1997
decreased to $4.7 million, a 5% reduction versus third quarter 1996 revenues
of $4.9 million. The decrease reflected lower renewal bookings of the
Company's Catalyst product line in late 1996 and the first three quarters of
1997, which are amortized on an annual basis and reflected as revenue over
the succeeding twelve month period. Revenues for the first nine months of
1997 decreased by 13% to $13.7 million from $15.7 million in 1996.
International revenues accounted for 85% of total revenues in the third
quarter and the first nine months of 1997 compared to 81% and 80% during the
same periods in 1996. Domestic revenues increased by 21% and 28% in the third
quarter and first three quarters of 1997, respectively versus 1996, while
international revenues decreased by 7% in the third quarter and 8%
year-to-date over the same period of 1996. The increase in domestic revenues
is primarily attributable to trial installations of the Company's CARMA
product line.
LICENSE. License revenue declined by 6% to $4.3 million in the third
quarter of 1997 from $4.6 million in the third quarter of 1996. For the first
nine months of 1997, license revenue decreased by 14% to $12.9 million from
$14.9 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 remained at approximately
$0.3 million in the third quarter of 1997 and 1996. Service and other revenues
increased to $0.8 million in the first nine months of 1997 versus year earlier
service revenues of $0.7 million. In the first three quarters 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 future quarters of 1997 and 1998.
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 third quarter of 1997 and 1996
and $0.2 million in the first three quarters of 1997 and 1996.
RESEARCH AND DEVELOPMENT. Most of research and development expenditures
are personnel related. Total expenditures for research and development
increased to $1.9 million in the third quarter compared with $1.7 million in
the third quarter of 1996. The increase is attributable to additional
development costs of the C*ATS FX product for which license rights were
acquired during the third quarter of 1997. For the first three quarters of
1997, research and development expenditures increased to $5.1 million from $4.5
million in the first three quarters of 1996 when CARMA related research
encompassed only eight 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
acquisition of licensing rights of the C*ATS FX product in the third quarter of
1997, the company expensed $0.6 million of one time project costs. In
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<PAGE>
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 declined slightly to $2.9 million in the third quarter of 1997
relative to 1996 expenditure levels of $3.0 million. Year-to-date sales and
marketing expenses remained constant at approximately $8.4 million in 1997
and 1996. The Company anticipates that sales and marketing expenses will
increase in dollar amount during the remainder of 1997 and 1998 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 third quarter
increased to $0.8 million from $0.6 million in 1996 and to $2.2 million in
first three quarters of 1997 from $2.0 million during the same period 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. Interest income remained
constant at $0.2 million and $0.7 million in the third quarter and first
three quarters 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 third quarter and the first three quarters of 1997. In 1996, the Company
recognized a 37% benefit in the third quarter and a 37% provision for the
first nine months. 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 September 30, 1997, the Company had a $7.0 million gross deferred
tax asset. Due to certain limitations of benefits related to the tax credit
and net operating loss carryback rules, the Company has provided a valuation
allowance of $0.8 million related to the deferred tax asset.
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<PAGE>
The Company's tax returns for 1990 through 1993 are being examined by
the Internal Revenue Service relative to the treatment of foreign withholding
taxes on the Company's software license revenue under tax treaties in effect
during those years. The examination may result in adjustments to previously
filed tax returns. The Company is currently undertaking competent authority
relief, which, if successful, will eliminate any potential double taxation.
The Company believes that it has reserves sufficient to cover any actual tax
liabilities as a result of this examination; however, no assurance can be
given that the reserves will be adequate.
FUTURE OPERATING RESULTS
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
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<PAGE>
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
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 September 30, 1997, the Company had $20.3 million in cash, cash
equivalents and short-term investments, and no long term debt.
Net cash used by operating activities totaled $1.7 million in the first
three quarters of 1997 compared to $1.0 million used by operating activities
during the first three quarters of 1996. During the first three quarters of
1997, the Company used $2.3 million for net investing activities. During the
first three quarters of 1996, the Company used $8.1 million of net cash for
acquisitions and netted $2.4 million from the purchase and sale of short-term
investments. The Company added $0.4 million of property and equipment in the
first three quarters of 1997 versus $0.6 million added during the first three
quarters of 1996. The Company has no significant capital commitments and
currently anticipates that additions to property and equipment for 1997 will
be approximately $0.5 million.
Financing activities provided cash of $0.5 million in the first three
quarters of 1997 resulting from the exercise of stock options. During the
first three quarters of 1996, the Company issued $4.2 million of common stock
in connection with the acquisition of LORGB in addition to receiving an
additional $0.4 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
No items were submitted to a vote of security holders during the
quarter ended September 30, 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 September 30, 1997.
*******************************************************************************
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: November 13, 1997 By: Rod A. Beckstrom
------------------------------------
Rod A. Beckstrom
Chief Executive Officer and Chairman
(Principal Executive Officer)
Date: November 13, 1997 By: David Gilbert
------------------------------------
David Gilbert
President, Chief Operating and
Chief Financial Officer
(Principal Financial and
Principal Accounting Officer)
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<PAGE>
C*ATS SOFTWARE INC.
INDEX TO EXHIBITS
EXHIBIT EXHIBIT TITLE PAGE
NUMBER NUMBER
27 Requirements for the Format and Input of Financial
Data Schedules 15
-14-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,391
<SECURITIES> 16,977
<RECEIVABLES> 3,961
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 28,233
<PP&E> 5,046
<DEPRECIATION> 3,517
<TOTAL-ASSETS> 30,824
<CURRENT-LIABILITIES> 10,728
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 20,096
<TOTAL-LIABILITY-AND-EQUITY> 30,824
<SALES> 13,699
<TOTAL-REVENUES> 13,699
<CGS> 236
<TOTAL-COSTS> 15,955
<OTHER-EXPENSES> 585
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 717
<INCOME-PRETAX> (2,124)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,124)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,124)
<EPS-PRIMARY> (.32)
<EPS-DILUTED> (.32)<F1>
<FN>
<F1>In the first three quarters 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 $0.30 per share.
</FN>
</TABLE>
