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, 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.
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(Exact name of registrant as specified in its charter)
DELAWARE 77-0185283
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(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
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(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, 1998: 7,013,905
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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 Exhibit 14
Exhibit 27 EDGAR Requirements for the Format and
Input of Financial Schedules 15
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C*ATS SOFTWARE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
SEPTEMBER 30, DECEMBER 31,
1998 1997
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ASSETS (UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 2,670 $ 3,707
Short-term investments 17,737 16,446
Accounts receivable, net 3,490 5,100
Prepaid expenses 446 271
Deferred income taxes 2,583 2,607
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Total current assets 26,926 28,131
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PROPERTY AND EQUIPMENT:
Equipment 2,909 2,809
Leasehold improvements 121 125
Furniture and fixtures 361 403
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3,391 3,337
Accumulated depreciation (2,648) (2,486)
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Net property and equipment 743 851
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Purchased software, at cost 1,546 1,516
Accumulated amortization (1,071) (879)
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Net purchased software 475 637
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Income tax refund receivable 686 686
Other assets 323 335
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$ 29,153 $ 30,640
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 629 $ 390
Accrued liabilities 444 674
Accrued compensation 1,322 1,604
Accrued taxes payable 241 281
Deferred revenue 7,145 8,007
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Total current liabilities 9,781 10,956
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STOCKHOLDERS' EQUITY:
Common stock 7 7
Additional paid in capital 23,762 23,282
Accumulated comprehensive income 39 228
Accumulated deficit (4,436) (3,833)
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Total stockholders' equity 19,372 19,684
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$ 29,153 $ 30,640
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C*ATS SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Quarter ended September 30, Nine months ended September 30,
--------------------------- -------------------------------
1998 1997 1998 1997
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Revenues:
License revenue $ 3,436 $ 4,311 $ 13,274 $ 12,851
Service and other revenue 749 350 1,837 848
-------- -------- --------- ---------
Total revenues 4,185 4,661 15,111 13,699
-------- -------- --------- ---------
Costs and expenses:
Cost of revenues 90 72 200 236
Research & development 1,512 1,904 4,797 5,130
Sales & marketing 3,197 2,931 8,948 8,355
General & administrative 665 829 2,082 2,234
In process R&D and
one time project costs 0 585 0 585
-------- -------- --------- ---------
Total costs & expenses 5,464 6,321 16,027 16,540
-------- -------- --------- ---------
Operating loss (1,279) (1,660) (916) (2,841)
Interest & other income 255 248 783 717
-------- -------- --------- ---------
Loss before provision
for income taxes (1,024) (1,412) (133) (2,124)
Provision for income taxes 151 0 471 0
-------- -------- --------- ---------
Net loss $ (1,175) $ (1,412) $ (604) $ (2,124)
-------- -------- --------- ---------
-------- -------- --------- ---------
Net loss per share:
basic $ (0.17) $ (0.21) $ (0.09) $ (0.32)
-------- -------- --------- ---------
-------- -------- --------- ---------
diluted $ (0.17) $ (0.21) $ (0.09) $ (0.32)
-------- -------- --------- ---------
-------- -------- --------- ---------
Weighted average common
shares outstanding:
basic 6,937 6,766 6,886 6,720
-------- -------- --------- ---------
-------- -------- --------- ---------
diluted 6,937 6,766 6,886 6,720
-------- -------- --------- ---------
-------- -------- --------- ---------
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C*ATS SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
-----------------
September 30, September 30,
1998 1997
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(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(604) $(2,124)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 559 623
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 1,610 597
(Increase) decrease in prepaid expenses (175) 56
(Increase) decrease in tax refunds due 0 (2,062)
(Increase) decrease in deferred income taxes 24 1,566
(Increase) decrease in other assets 12 12
Increase (decrease) in accounts payable 239 (169)
Increase (decrease) in accrued liabilities (230) 255
Increase (decrease) in accrued compensation (282) 108
Increase (decrease) in accrued taxes payable (40) 0
Increase (decrease) in deferred revenue (862) (554)
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Net cash provided (used) by operating activities 251 (1,692)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchase of short term investments (1,291) (1,889)
Purchase of property and equipment (288) (379)
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Net cash used in investing activities (1,579) (2,268)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 480 509
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Net cash provided by financing activities 480 509
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EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS (189) (199)
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NET DECREASE IN CASH AND CASH EQUIVALENTS (1,037) (3,650)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 3,707 7,041
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $2,670 $3,391
------ ------
------ ------
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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 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 (ranging from three to five years) term licenses for its CARMA
software. 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 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-
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 unless the effect is anti-dilutive. Per share amounts for the
quarter ended September 30, 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 September
30, 1998 and September 30, 1997.
BUSINESS SEGMENT REPORTING
In 1998 the Company adopted SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information", which establishes requirements for
reporting reportable segments based upon the "management approach" for segments
which are discretely reported. Similar segments may be aggregated. The Company
does not currently report on discrete business segments. The adoption of SFAS
131 has no material impact on the Company.
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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:
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Revenues:
License revenue 82% 92% 88% 94%
Service and other revenue 18 8 12 6
---- ---- ---- ----
Total revenues 100 100 100 100
---- ---- ---- ----
Costs and expenses:
Cost of revenues 2 2 1 2
Research and development 36 41 32 38
Sales and marketing 76 63 59 61
General and Administrative 16 18 14 16
In process R&D and
one time project costs 0 11 0 4
---- ---- ---- ----
Total costs and expenses 130 135 106 121
---- ---- ---- ----
Operating loss (30) (35) (6) (21)
Interest income 6 5 5 5
---- ---- ---- ----
Loss before provision for
income taxes (24) (30) (1) (16)
Provision for income taxes 4 0 3 0
---- ---- ---- ----
Net loss (28)% ( 30)% (4)% (16)%
---- ---- ---- ----
---- ---- ---- ----
-8-
REVENUES
The Company's revenues are primarily a function of the renewal rates
for annual product licenses to existing C*atalyst clients, along with new
sales of Catalyst and CARMA products. Total revenues during the third quarter
of 1998 decreased to $4.2 million, a 10% decrease versus third quarter 1997
revenues of $4.7 million. This decrease is the result of the long sales
cycles associated with the CARMA product. International revenues accounted
for 85% of total revenues in the third quarter of 1998 compared to 87% during
the same period in 1997. Revenues for the first nine months of 1998
increased 10% compared with the same period in 1997.
LICENSE. License revenues of $3.4 million in the third quarter of
1998 decreased 20% compared with the third quarter of 1997. For the first
nine months of 1998 license revenues increased 3% from $12.9 million in the
first nine months of 1997 to $13.3 million in the first nine months of 1998.
SERVICE AND OTHER. Service and other revenues were approximately $0.7
million in the third quarter of 1998, an increase of 114% compared with the
corresponding quarter in 1997. This increase is attributable primarily to
increased consulting activities being provided by the C*ATS Consulting group
in support of the CARMA product implementations, and the provision of ongoing
maintenance and support activities. For the first nine months of 1998 these
revenues increased from $0.8 million in 1997 to $1.8 million in 1998, an
increase of approximately 117%.
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 quarters of 1998
and 1997.
RESEARCH AND DEVELOPMENT. The majority of research and development
expenditures are personnel related. Total expenditures for research and
development in the third quarter of 1998 was $1.5 million. This represents
a decrease in research and development expenditures from the corresponding
quarter in 1997. The majority of the decrease is attributable to a reduction
in the number of outside consultants and other purchased services in the
third quarter of 1998. New product development continued on future releases
of both the C*atalyst and CARMA product lines during the third 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 $3.2 million in the third quarter of 1998 compared
to 1997 expenditure levels of $2.9 million. The Company
-9-
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. Included in sales and marketing expense are costs associated with
consulting, maintenance and training services. During the quarter the
Company completed the consolidation of the Hong Kong office into the Tokyo
office. There were no significant costs associated with this consolidation.
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 decreased from $0.8 million in the third quarter of 1997 to
$0.7 million in the third quarter of 1998. The 1997 results included costs
associated with the acquisition of licensing rights to the C*ATS FX product.
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 third quarter of 1998 as compared to the
third quarter of 1997.
PROVISION FOR INCOME TAXES
The Company accounts for income taxes using 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 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 third quarter of 1998 there
was a provision of $0.2 million for taxes. There was no provision in 1997.
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.
FACTORS WHICH MAY AFFECT 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,
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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.
A majority of the Company's revenues are currently derived from annual
renewable license fees. These annual renewable licenses 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 (ranging from three to five years) term licenses for its CARMA
software. As a result, the Company may recognize substantial revenues upon
delivery of these products. 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.
-11-
UNCERTAINTY OF THE EFFECTS OF THE YEAR 2000 ON COMPUTER PROGRAMS AND SYSTEMS
Many 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 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. Based on internal analysis 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.
However, the Company has not completed 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 September 30, 1998 the Company had $20.4 million in cash, cash
equivalents and short-term investments, and no long term debt.
Net cash provided by operating activities was approximately $0.3
million in the first nine months of 1998 compared with $1.7 million used by
operating activities during the first nine months of 1997. The Company added
$0.3 million of property and equipment in the first nine months of 1998, a
decrease from $0.4 million for the same period in 1997. During the first
nine months of 1998 the company had net purchases of short term investments
in the amount of $1.3 million compared with $1.9 million in the first nine
months of 1997. The Company currently has no significant capital commitments.
Financing activities provided cash of $0.5 million in the first nine
months 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-
C*ATS SOFTWARE INC.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
No items were submitted to a vote of security holders during the
quarter ended September 30, 1998.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
On August 26, 1998 the Company filed a Form 8-K announcing the
resignation of Arthur Andersen LLP and the appointment of KPMG
Peat Marwick LLP as the Company's auditors.
*********************************************************************************
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: October 20, 1998 By: Rod A. Beckstrom
-----------------------------
Rod A. Beckstrom
Chief Executive Officer and
Chairman
(Principal Executive Officer)
Date: October 20, 1998 By: James E. Graber
-----------------------------
James E. Graber
Chief Financial Officer
(Principal Financial and
Principal Accounting Officer)
-13-
C*ATS SOFTWARE INC.
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
27 Requirements for the Format and Input of Financial
Data Schedules