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, 1996
------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _____________ to ___________
Commission File Number: 0-25526
C-ATS SOFTWARE INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0185283
(State or other jurisdiction of (I.R.S. Employer
incorporated 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 October 31, 1996: 6,638,410
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)
September 30, December 31,
1996 1995
------------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,469 $ 4,199
Short-term investments 20,086 22,502
Accounts receivable, net 3,890 7,153
Prepaid expenses 1,680 430
Deferred taxes 2,690 2,888
-------- --------
Total current assets 29,815 37,172
Property and equipment, at cost
Equipment 2,974 2,472
Leasehold improvements 307 306
Furniture and fixtures 449 470
-------- --------
3,730 3,248
Accumulated depreciation (2,651) (2,293)
-------- --------
Net property and equipment 1,079 955
Purchased software, at cost 1,447 376
Accumulated amortization (596) (321)
-------- --------
Net purchased software 851 55
Other assets 297 318
-------- --------
$ 32,042 $ 38,500
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 122 $ 1,093
Accrued liabilities 773 1,159
Accrued compensation 1,568 1,019
Accrued taxes payable 53 1,058
Deferred revenue 7,791 11,279
-------- --------
Total current liabilities 10,307 15,608
Shareholders' equity:
Common stock 7 6
Additional paid in capital 22,756 18,205
Cumulative translation adjustment 301 319
Retained earnings (accumulated deficit) (1,329) 4,362
-------- --------
Total shareholders' equity 21,735 22,892
-------- --------
$ 32,042 $ 38,500
-------- --------
-------- --------
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C-ATS SOFTWARE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Quarter ended September 30, Nine months ended September 30,
1996 1995 1996 1995
------------ ----------- ------------- ------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues:
License revenue $ 4,599 $ 5,114 $ 14,924 $ 14,852
Service and other revenue 304 661 746 1,572
-------- -------- --------- ---------
Total revenues 4,903 5,775 15,670 16,424
Costs and expenses:
Cost of revenues 78 422 206 901
Research and development 1,692 933 4,484 2,677
Sales & marketing 2,959 2,662 8,388 7,541
General & administrative 645 703 2,005 2,105
In-Process R&D expense - - 7,066 -
-------- -------- --------- ---------
Total costs & expenses 5,374 4,720 22,149 13,224
-------- -------- --------- ---------
Operating income (loss) (471) 1,055 (6,479) 3,200
Interest income 198 273 669 674
-------- -------- --------- ---------
Income (loss) before provision
for income taxes (273) 1,328 (5,810) 3,874
Provision (benefit) for income
taxes (101) 465 465 1,356
-------- -------- --------- ---------
Net income (loss) $ (172) $ 863 $ (6,275) $ 2,518
-------- -------- --------- ---------
-------- -------- --------- ---------
Net income (loss) per share $ (0.03) $ 0.14 $ (0.97) $ 0.42
-------- -------- --------- ---------
-------- -------- --------- ---------
Weighted average common
shares outstanding 6,623* 6,387 6,491* 5,989
*excludes anti-dilutive
common share equivalents.
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C-ATS SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
------------------
September 30, September 30,
1996 1995
------------- ------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (6,275) $ 2,518
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 674 393
Acquired in-process research and development 7,066 --
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 3,263 2,600
(Increase) in prepaid expenses (681) (36)
(Increase) decrease in other assets 21 (136)
(Increase) decrease in deferred tax asset 198 118
Increase (decrease) in accounts payable (971) 117
(Decrease) in accrued liabilities (386) (246)
Increase (decrease) in accrued compensation 549 (83)
(Decrease) in accrued taxes payable (1,004) (881)
Increase (decrease) in deferred revenue (3,488) (1,094)
--------- --------
Net cash provided by (used in) operating
activities (1,034) 3,270
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of short-term investments, net 2,417 (20,020)
Investment in acquisition of LORGB (8,084) --
Purchase of property and equipment (641) (519)
--------- --------
Net cash used in investing activities (6,308) (20,539)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 4,606 14,172
--------- --------
Net cash provided by financing activities 4,606 14,172
--------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS 6 170
--------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,730) (2,927)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 4,199 7,689
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,469 $ 4,762
--------- --------
--------- --------
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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 computed using the weighted average number of
shares of common stock and dilutive common share equivalents from stock
options (using the treasury stock method). Pursuant to the Securities and
Exchange Commission Staff Accounting Bulletin No. 83, common and common share
equivalents issued during the twelve-month period prior to the Company's
March 1995 public offering are included in the calculation of common and
common share equivalents as if they were outstanding for all periods prior to
the initial public offering. Furthermore, common share equivalents from
convertible stock that converted upon the Company's initial public offering
were included in the calculation as if they had been converted on March 28,
1995.
In the first quarter and the first nine months of 1996, common share
equivalents, if included, would have an anti-dilutive effect on the net loss
per share calculation, and therefore are excluded from the calculation for
these periods. The Financial Accounting Standards Board is currently
considering a proposal to eliminate common share equivalents from all future
earnings per share calculations beginning in 1997.
STOCK EXCHANGE; COMMON STOCK
The Company was reincorporated in Delaware, effective March 1995.
Pursuant to the reorganization, the Delaware successor Company issued one
share of stock for each share of outstanding Common Stock and Preferred
Stock. During March 1995, the Company completed its initial public offering
of stock and sold an aggregate of 1.3 million shares of Common Stock
generating net proceeds to the Company, after underwriting and other costs,
of approximately $13.8 million.
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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 Nine Months Ended
---------------------------- ----------------------------
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues:
License revenue 94% 89% 95% 90%
Service and other revenue 6 11 5 10
--- --- --- ---
Total revenues 100 100 100 100
Costs and expenses:
Cost of revenues 2 7 1 6
Research and development 35 16 29 16
Sales and marketing 60 47 53 46
General and administrative 13 12 13 13
In process R&D expense -- -- 45 --
--- --- --- ---
Total costs and expenses 110 82 141 81
--- --- --- ---
Operating income (loss) (10) 18 (41) 19
Interest income 4 5 4 4
--- --- --- ---
Income (loss) before provision
for income taxes (6) 23 (37) 23
Provision (benefit) for income
taxes (2) 8 3 8
--- --- --- ---
Net income (loss) (4)% 15% (40)% 15%
REVENUES
Total revenues during the third quarter of 1996 decreased to $4.9
million, a 15% decline versus third quarter of 1995 revenues of $5.8 million.
Primary contributors to the decline were the loss of several renewal
customers who converted to internally developed systems and the reduction in
service and other revenues described below. Revenues for the first nine
months of 1996 decreased by
-8-
5% to $15.7 million from $16.4 million in 1995. International revenues
accounted for 81% of total revenues in the third quarter and 80% in the first
nine months of 1996, compared to 79% during the same periods in 1995.
Domestic revenues decreased by 21% and 14% in the third quarter and first
nine months, respectively versus 1995, while international revenues decreased
by 11% in the third quarter and decreased by 1% year-to-date over the same
period of 1995.
LICENSE. License revenue was reduced by 10% to $4.6 million in the
third quarter of 1996 from $5.1 million in the third quarter of 1995. For the
first nine months of 1996, license revenue remained level at $14.9 million
with the first nine months revenue of 1995. The decline in the third quarter
was due primarily to the loss of several renewal clients who converted to
internally developed systems.
SERVICE AND OTHER. Service and other revenues declined to $0.3 million
and $0.7 million in the third quarter and the first nine months of 1996
versus year earlier service revenues of $0.7 million and $1.6 million,
respectively. Service and other revenues decreased primarily due to the
completion of a systems integration project that was undertaken and
subcontracted by the Company in the middle of 1994 and concluded in the
fourth quarter of 1995.
COSTS AND EXPENSES
COST OF REVENUES. Cost of revenues includes the cost of documentation
materials, royalties and the cost of subcontracted services. Cost of
revenues decreased to $0.1 million in the third quarter of 1996, from $0.4
million in the third quarter of 1995. Cost of revenues decreased to $0.2
million in the first nine months of 1996 from $0.9 million in the first nine
months of 1995. These decreases were due primarily to the reduction in
subcontracted services related to the systems integration project, referred
to above.
RESEARCH AND DEVELOPMENT. Most of research and development expenditures
are personnel related. Total expenditures for research and development
increased to $1.7 million in the third quarter of 1996 and $4.5 million in
the first nine months of 1996, from $0.9 million and $2.7 million in the
third quarter and first nine months of 1995, respectively. The increase in
research and development expenditures was due primarily to increases in
expenditures for continuation and completion of in-process research and
development ($0.6 million and $1.4 million in the third quarter and first
nine months of 1996, respectively) and new product development. The increase
includes the addition of research staff from the acquired firm of Lor/Geske
Bock Associates, Inc. ("LORGB") during the first quarter of 1996. In
connection with the LORGB acquisition, the Company recognized a one-time
expense amounting to $7.1 million of in process research and development. The
amounts of ongoing software development costs which could have been
capitalized were immaterial and, therefore, no internal software development
costs have been capitalized by the Company to date. The Company believes that
significant investment for product research and development is essential to
product and technical leadership, and the Company anticipates that it will
continue to commit substantial resources to research and development in the
future. The focus of this increased research and development spending will
be to expand the platforms upon which the Company's products operate; to
integrate the acquired products from LORGB; and to continue to enhance the
features and functionality of the
-9-
company's core capital and treasury market products. The Company anticipates
that research and development expenditures will continue to increase in
dollar amount during the remainder of 1996.
SALES AND MARKETING. Sales and marketing expenses consist principally
of salary, commissions and facilities-related costs. Sales and marketing
expenditures increased to $3.0 million in the third quarter and $8.4 million
in the first nine months of 1996, up from $2.7 million and $7.5 million in
the third quarter and first nine months of 1995, respectively. The increase
in sales and marketing expenditures was due primarily to increases in
personnel-related costs. The Company anticipates that sales and marketing
expenses will continue to increase in dollar amount in 1996 as the Company
expands its sales and service organization.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
of personnel costs for finance, contract administration, human resources and
general management and administration, as well as legal, accounting and
auditing expenses. General and administrative expenses in the third quarter
and first nine months dropped to $0.6 million in the third quarter and $2.0
million in the first nine months of 1996, down from $0.7 million and $2.1
million, respectively, in 1995. The Company anticipates that general and
administrative expenses will remain level in dollar amount during the
remainder of 1996.
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 was reduced to $198,000 in the third quarter of 1996
from $273,000 in the third quarter of 1995. Interest income decreased as a
result of lower cash and short term investment balances, and lower effective
yields available on short-term investments. Interest income remained level at
$0.7 million first nine months of 1996 versus the first nine months of 1995.
Cash balances available for investment were lower in the first quarter of
1995 prior to the company's initial public offering on March 27, 1995.
PROVISION FOR INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
provides for a liability approach under which deferred income taxes are
provided based upon enacted laws and rates applicable to the periods in which
the taxes become payable. The provision for income taxes was 37% and 35% in
the third quarter of 1996 and 1995, respectively. The provision for income
taxes takes into account the effects of foreign income taxes and state income
taxes, offset by utilization of research and development credits in 1995 and
foreign tax credits in both years.
As of September 30, 1996, the Company had $4.4 million of deferred tax
assets, primarily associated with its deferred revenue liability, for
application against future income. Due to certain limitations of benefits
related to tax carrybacks, the Company has provided a valuation allowance of
$1.8 million related to the deferred tax asset. Accrued taxes payable
include reserves for tax liabilities. The Company's tax returns for 1990
through 1994 are currently being examined by the Internal
-10-
Revenue Service. Such examination may result in adjustments to previously
filed tax returns. While the Company has sufficient financial resources to
cover such adjustment and 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 offer 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. 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
-11-
developing and marketing the LORGB products, then the Company's earnings will
be adversely affected.
The Company's quarterly operating results may fluctuate substantially as
a result of a variety of factors including the volume and timing of license
renewals by existing clients, license agreements with new clients, the timing
and market acceptance of new products or technological advances by the
Company or its competitors, price levels, and unexpected expenses. The
Company's expense levels are based, in part, on expectations of future
revenues. If revenues in a particular quarter do not meet expectations,
operating results could be adversely affected. The Company expects that its
operating results will fluctuate in the future as a result of these and other
factors. Additionally, the Company has accrued a reserve for tax liabilities
in connection with an Internal Revenue Service examination. There can be no
assurance that such reserve will be adequate to cover any liabilities.
Results of past quarters should not be relied on as an indication of future
results.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date through cash flow from
operations and its initial public offering of stock effective March 20, 1995.
As of September 30, 1996, the Company had $21.6 million in cash, cash
equivalents and short-term investments, and no long term debt.
Net cash used by operating activities during the first nine months of
1996 totaled $1.0. In the first nine months of 1995, operating activities
provided $3.3 million to net cash. During the first nine months of 1996 the
Company utilized $6.3 million of net cash for investing activities including
$8.1 million for acquisitions. Other investing activities in the first nine
months of 1996 provided cash of $2.4 million from the sale of short-term
investments. In the first nine months of 1995, the Company's investments in
short-term investments increased by $20.0 million. The Company added $0.6 and
$0.5 million of property and equipment in the first nine months of 1996 and
1995, respectively. The Company has no significant capital commitments and
currently anticipates that additions to property and equipment for 1996 will
be approximately $0.8 million. In April 1995, the Company's existing lease
for its Palo Alto, California facilities expired and the Company signed a new
lease for another facility in Palo Alto, California in close proximity to its
previous office. The facility lease is for approximately 30,000 square feet
of space and expires in April 2001.
In financing its activities, the Company issued $4.6 million of common
stock in connection with the acquisition of LORGB and stock option
exercises. This compares to the $14.2 million provided by financing
activities in the first nine months of 1995 which is primarily attributable
to the completion of the Company's initial public offering of stock in March
of 1995.
The Company believes that the liquidity provided by existing cash, cash
equivalents and short-term investment balances 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-
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 September 30, 1996.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were required to be filed by the Company during
the quarter ended September 30, 1996.
-13-
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: November 1, 1996 By: ______________________________
Rod A. Beckstrom
President, Chief
Executive Officer and
Chairman
(Principal Executive
Officer)
Date: November 1, 1996 By: ______________________________
G. Bradford Solso
Vice President,
Chief Financial Officer and
Treasurer
(Principal Financial and
Principal Accounting Officer)
-14-
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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