<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, 1998
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 March 31, 1998: 6,855,874
-1-
<PAGE>
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 Exhibit 14
Exhibit 27 EDGAR Requirements for the Format and
Input of Financial Schedules 15
-2-
<PAGE>
C*ATS SOFTWARE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- -----------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,125 $ 3,707
Short-term investments 18,375 16,446
Accounts receivable, net 3,722 5,100
Prepaid expenses 373 271
Deferred income taxes 2,583 2,607
-------- --------
Total current assets 26,178 28,131
-------- --------
PROPERTY AND EQUIPMENT:
Equipment 2,909 2,809
Leasehold improvements 125 125
Furniture and fixtures 405 403
-------- --------
3,439 3,337
Accumulated depreciation (2,612) (2,486)
-------- --------
Net property and equipment 827 851
-------- --------
Purchased software, at cost 1,541 1,516
Accumulated amortization (944) (879)
-------- --------
Net purchased software 597 637
-------- --------
Income tax refund receivable - long term 686 686
Other assets 335 335
-------- --------
$ 28,623 $ 30,640
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 548 $ 390
Accrued liabilities 676 674
Accrued compensation 1,258 1,604
Accrued taxes payable 310 281
Deferred revenue 5,604 8,007
-------- --------
Total current liabilities 8,396 10,956
-------- --------
STOCKHOLDERS' EQUITY:
Common stock 7 7
Additional paid in capital 23,370 23,282
Accumulated translation adjustment 177 228
Retained earnings (deficit) (3,327) (3,833)
-------- --------
Total stockholders' equity 20,227 19,684
-------- --------
$ 28,623 $ 30,640
-------- --------
-------- --------
-3-
</TABLE>
<PAGE>
C*ATS SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended March 31,
1998 1997
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues:
License revenue $ 5,439 $ 4,238
Service and other revenue 296 254
------- -------
Total revenues 5,735 4,492
Costs and expenses:
Cost of revenues 67 93
Research & development 1,727 1,583
Sales & marketing 2,845 2,602
General & administrative 760 693
------- -------
Total costs & expenses 5,399 4,971
------- -------
Operating income (loss) 336 (479)
Interest income 256 236
------- -------
Income (loss) before provision
for income taxes 592 (243)
Provision for income taxes 86 --
------- -------
Net income (loss) $ 506 $ (243)
------- -------
------- -------
Net income (loss) per share
basic $ .07 $ (0.04)
------- -------
------- -------
diluted $ .07 $ (0.04)
------- -------
------- -------
Weighted average common
shares outstanding:
basic 6,856 6,679
------- -------
------- -------
diluted 7,469 6,679
------- -------
------- -------
</TABLE>
-4-
<PAGE>
C*ATS SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1998 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 506 $ (243)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 191 228
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 1,378 1,806
(Increase) decrease in prepaid expenses (102) (200)
(Increase) decrease in deferred income taxes 24 105
(Increase) decrease in other assets -- 18
Increase (decrease) in accounts payable 158 (344)
Increase (decrease) in accrued liabilities 2 (168)
Increase (decrease) in accrued compensation (346) (353)
Increase (decrease) in accrued taxes payable 29 35
Increase (decrease) in deferred revenue (2,403) (1,706)
------- -------
Net cash used by operating activities (563) (822)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net sale (purchase) of short term investments (1,929) (3,180)
Purchase of property and equipment (127) (99)
------- -------
Net cash used in investing activities (2,056) (3,279)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 88 87
------- -------
Net cash provided by financing activities 88 87
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS (51) (162)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,582) (4,176)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 3,707 7,041
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,125 $ 2,865
------- -------
------- -------
</TABLE>
-5-
<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 has adopted the AICPA Statement of Position 97-2 "Software
Revenue Recognition", effective in the first quarter of 1998.
Historically, the Company has licensed its products to end users under
annual license agreements which included rights to maintenance support services
and product upgrades. Such license revenues are recognized ratably over the
twelve month contract period. The Company still offers such license agreements
on a renewal basis.
Beginning in the fourth quarter of 1997 the Company began offering
multi-year (typically five year) term licenses for its software products.
Maintenance support services and product upgrades are priced separately and
available for an additional fee. License revenue under these arrangements is
recognized upon execution of a license agreement and shipment of the product
if the fee is fixed and determinable, the arrangement does not include
significant customization of the software, and collectibility of the license
fee is probable. Maintenance and service revenues consist of fees that are
charged separately from product licenses. Maintenance revenue consists of
fees for on going support and product updates and is recognized ratably over
the term of the contract. Service revenue consists of training and
consulting services and is recognized upon the completion of the related
activity.
-6-
<PAGE>
EARNINGS PER SHARE
In 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS No.
128 requires the replacement of previously reported primary and fully diluted
earnings per share required by Accounting Principles Board Opinion No. 15 with
basic earnings per share and diluted earnings per share. The calculation of
basic earnings per share excludes any dilutive effect of stock options, while
diluted earnings per share includes the dilutive effect of stock options. Per
share amounts for the quarter ended March 31, 1997 have been restated to conform
to the requirements of SFAS No. 128.
REPORTING COMPREHENSIVE INCOME
In 1998 the Company adopted SFAS No. 130, "Reporting Comprehensive Income",
which established standards for reporting and displaying comprehensive income
and its components in a financial statement that is displayed with the same
prominence as other financial statements. There are no material items of
comprehensive income for the quarters ended March 31, 1998 and March 31, 1997.
-7-
<PAGE>
C*ATS SOFTWARE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THIS SECTION,
AS WELL AS IN THE SECTION "RISK FACTORS" AND "BUSINESS" IN THE COMPANY'S
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997.
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-
LOOKING STATEMENTS WHICH REFLECT MANAGEMENT'S ANALYSIS ONLY AS OF THE DATE
HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULTS
OF ANY REVISION TO THESE FORWARD-LOOKING STATEMENTS WHICH MAY BE MADE TO
REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE
OCCURRENCE OF UNANTICIPATED EVENTS.
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
------------------------
March 31, March 31,
1998 1997
--------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues:
License revenue 95% 94%
Service and other revenue 5 6
--------- ---------
Total revenues 100 100
--------- ---------
Costs and expenses:
Cost of revenues 1 2
Research and development 30 35
Sales and marketing 50 58
General and Administrative 13 16
--------- ---------
Total costs and expenses 94 111
--------- ---------
Operating income (loss) 6 (11)
Interest income 4 5
--------- ---------
Income (loss) before provision
(benefit) for income taxes 10 ( 6)
Provision (benefit) for income taxes 1 0
--------- ---------
Net income (loss) 9% ( 6)%
--------- ---------
--------- ---------
</TABLE>
-8-
<PAGE>
REVENUES
The Company's revenues are primarily a function of the renewal rates for
annual product licenses to existing C*atalyst and CARMA clients, along with new
sales of these products. Total revenues during the first quarter of 1998
increased to $5.7 million, a 28% increase versus first quarter 1997 revenues of
$4.5 million. This increase is the result of continued renewal of annual
license agreements as well as new term licensing agreements where license
revenues are recognized up front. International revenues accounted for 85% of
total revenues in the first quarter of 1998 compared to 83% during the same
period in 1997.
LICENSE. License revenue increased by 28% to $5.4 million in the first
quarter of 1998 from $4.2 million in the first quarter of 1997. License revenue
increased primarily as a result of new client contracts.
SERVICE AND OTHER. Service and other revenues were approximately $0.3
million in the first quarter of 1998, essentially the same as the corresponding
quarter in 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 first quarter of 1998 and 1997.
RESEARCH AND DEVELOPMENT. Most of research and development expenditures
are personnel related. Total expenditures for research and development
increased to $1.7 million in the first quarter of 1998 compared with $1.6
million in the first quarter of 1997. The increase is attributable to
additional personnel costs for the continued development of CARMA. New product
development continued on future releases of both the C*atalyst and CARMA product
lines during the first quarter of 1998. 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 1998.
SALES AND MARKETING. Sales and marketing expenses consist principally of
salary, commissions and facilities-related costs. Sales and marketing
expenditures increased to $2.8 million in the first quarter of 1998 compared to
1997 expenditure levels of $2.6 million. The Company anticipates that sales and
marketing expenses will increase in dollar amount during the remainder of 1998
as the Company expands its sales and service organization to support the
expanded distribution and servicing of the CARMA products.
-9-
<PAGE>
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 first quarter increased to
$0.8 million from $0.7 million in 1997. The Company anticipates that general
and administrative expenses will remain at current levels during the remainder
of 1998.
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 during the first quarter of 1998 as compared to the first quarter
of 1997.
PROVISION FOR INCOME TAXES
The Company accounts for income taxes using a liability approach under
which deferred income taxes are provided for based upon enacted laws and
rates applicable to the periods in which the taxes become payable. 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. In the first
quarter of 1998 there was a provision of $0.1 million for taxes. There was
no provision in 1997.
As of March 31, 1998, the Company had a $7.0 million gross deferred tax
asset. Due to certain limitations of benefits related to the tax carrybacks,
the Company has provided a valuation allowance related to a portion of the
deferred tax asset.
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 a majority of its revenues from the licensing of
software products and services for derivatives risk management. 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. In addition, the Company offers other
products for firm-wide integrated market, credit and liquidity risk management.
The market for these products is at an early stage of development. Failure of a
significant market for firm-wide integrated market, credit and liquidity 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.
-10-
<PAGE>
The Company's revenues are currently derived primarily from annual
renewable license fees. These annual renewable license will continue to be an
important part of the company's revenues. As such, 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. Beginning
in the fourth quarter of 1997 the Company began offering multi-year (typically
five year) term licenses for it's software products. As a result, the company
will recognize substantial revenues upon delivery of the products. A failure of
the Company to enter into new license agreements would have a material adverse
effect on the business, operating results and financial condition of the
Company. Additionally, because of the potential impact of new term licenses on
total revenue recognized there may be volatility of reported revenues based upon
the timing of delivery of the products.
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 periodically in amounts equal to
the operating expenses estimated to be payable in such currencies during the
next several 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 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.
UNCERTAINTY OF THE EFFECTS OF THE YEAR 2000 ON COMPUTER PROGRAMS AND SYSTEMS
Many universally currently installed computer systems and software
programs were designed to use only a two digit date field. These date code
fields will need to accept four digit entries to distinguish 21st century
dates from 20th century dates. Until the date fields are updated, the
systems and programs could fail or give erroneous results when referencing
dates following December 31, 1999. Such failure or
-11-
<PAGE>
errors could occur prior to the actual change in century. The Company
relies on computer applications to manage and monitor its accounting, sales,
development and administrative functions. In addition, the Company's
customers, suppliers and service providers (particularly financial
institutions) are reliant upon computer applications, some of which may
contain software that may fail as a result of the upcoming change in century,
with respect to functions that materially affect their interactions with the
Company's products. While the Company does not believe its products, or its
computer systems or applications currently in use will be adversely affected
by the upcoming change in century, the Company has not made an assessment as
to whether any of its customers, suppliers or service providers will be so
affected. Failure of the Company's software or that of its customers,
suppliers or service providers could have a material adverse impact on the
Company's business, financial condition and result of operations.
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, 1998 the Company had $19.5 million in cash, cash equivalents and
short-term investments, and no long term debt.
Net cash used by operating activities totaled $0.6 million in the first
quarter of 1998, compared with $0.8 million used by operating activities during
the first quarter of 1997. The Company added $0.1 million of property and
equipment in the first quarter of 1998, the same as the first quarter of 1997.
During the first quarter of 1998 the company had net purchases of short term
investments in the amount of $1.9 million compared with $3.2 million in the
first quarter of 1997. The Company currently has no significant capital
commitments.
Financing activities provided cash of $0.1 million in the first quarter of
1998 resulting from the exercise of stock options and purchases under the
employee stock purchase plan.
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.
-12-
<PAGE>
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 March 31, 1998
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, 1998.
******************************************************************************
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: April 21, 1998 By: Rod A. Beckstrom
------------------------------
Rod A. Beckstrom
Chief Executive Officer and
Chairman
(Principal Executive Officer)
Date: April 21, 1998 By: James E. Graber
------------------------------
James E. Graber
Chief Financial Officer
(Principal Financial and
Principal Accounting Officer)
-13-
<PAGE>
C*ATS SOFTWARE INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT TITLE PAGE
NUMBER NUMBER
<S> <C> <C>
27 Requirements for the Format and Input of Financial Data Schedules 15
</TABLE>
-14-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,125
<SECURITIES> 18,375
<RECEIVABLES> 3,722
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 26,178
<PP&E> 4,980
<DEPRECIATION> 3,556
<TOTAL-ASSETS> 28,623
<CURRENT-LIABILITIES> 8,396
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 20,220
<TOTAL-LIABILITY-AND-EQUITY> 28,623
<SALES> 5,735
<TOTAL-REVENUES> 5,735
<CGS> 67
<TOTAL-COSTS> 5,399
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 256
<INCOME-PRETAX> 592
<INCOME-TAX> 86
<INCOME-CONTINUING> 506
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 506
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
