UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from ________ to ________
Commission File Number 0-27138
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CATALYST INTERNATIONAL, INC.
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(Name of small business issuer in its charter)
Delaware 39-1415889
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State or other jurisdiction of I.R.S. Employer Identification No.
incorporation or organization)
8989 North Deerwood Drive, Milwaukee, Wisconsin 53223
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (414) 362-6800
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Securities registered under Section 12 (g) of the Exchange Act:
Common Stock, $0.10 par value
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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. Yes [X] No [ ]
Check if no disclosure of delinquent filers in response to Item 405
of Regulation S-B is contained in this form, and no disclosure is
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-KSB or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $21,166,722
State the number of shares outstanding of each of the issuer's
classes of common equity, as of March 14, 1997. 6,587,534
As of March 14, 1997, the aggregate market value of the registrant's
common stock held by non-affiliates was Thirteen Million, Six Hundred
Eighty Eight Thousand Seven Hundred Thirty Four Dollars ($13,688,734)
(based upon the closing price of the issuer's common stock on The
Nasdaq Stock Market on such date).
DOCUMENTS INCORPORATED BY REFERENCE
Part Item
1. Proxy Statement for the 1997 Annual
Meeting of Stockholders to be held
on April 28, 1997 III 9, 10, 11
Transitional Small Business Disclosure Format (check one):
Yes [ ]; No [X]
<PAGE> 2
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
General
Catalyst International, Inc. ("Catalyst" or the "Company"),
incorporated in 1982, develops, markets and supports advanced
warehouse management software solutions. The Company's primary
product, the Catalyst Warehouse Management System ("Catalyst WMS"),
is a complete, standard software solution operating in an open system
environment. Catalyst WMS manages inventory, storage locations,
people and equipment by controlling all aspects of warehouse
operations, from receiving and storing (putaway) to order selection
(picking), loading and shipping. The Company also provides related
services, including software modification and configuration, project
management, rapid prototyping, training and implementation support.
Catalyst WMS is a customer-configurable software solution capable of
satisfying each customer's unique business objectives and operational
requirements. The Company believes that organizations that have
implemented Catalyst WMS have realized increased customer
satisfaction, faster turnaround times, reduced labor costs, increased
space utilization and increased warehouse efficiency.
Warehouse management is complex. With thousands of raw materials and
finished goods moving through warehouses at any given time,
inventories, space, labor and equipment must be carefully managed.
These conditions have led many businesses to seek improvements in
their supply chain, including investments in software solutions to
cost-effectively manage their warehouses and enable them to provide
ongoing customer support and service.
Since 1979, Catalyst has focused its resources on the development and
enhancement of advanced warehouse management software solutions.
This focus has allowed the Company to introduce the first
configurable, standard software solution which captures the best
practice methodologies used in warehouse operations. Catalyst WMS
encapsulates a variety of warehouse management strategies that can be
configured rapidly to meet particular specifications and requirements
of individual customers by utilizing two key attributes: a standard
product and a standard implementation. Once implemented, Catalyst
WMS can be reconfigured through table-driven parameters by either
Catalyst or the customer to adjust to changes in operational
strategies and accommodate ongoing business process reengineering.
It is not the Company's intention to bid on or enter into license
agreements with customers who demand significant amounts of
modifications to the standard product which would result in a custom-
developed system.
Catalyst WMS operates in an open system environment allowing customers
to use various Unix operating systems, operate on multiple use hardware
platforms, run on multiple relational database management
<PAGE> 3
systems ("RDBMSs") (such as Ingres, Oracle, Sybase and Informix), and
interface with several third-party software applications, such as
manufacturing resources planning systems ("MRP II"), enterprise
resource planning systems ("ERP") (such as SAP and Oracle) and
Distribution Requirements Planning ("DRP") systems (such as Red
Pepper and PeopleSoft). Catalyst WMS supports a wide range of
interfaces to third-party peripherals, such as radio frequency-based
scanning devices, bar coding devices and host information systems.
The Company's implementation methodology is known as the "CIMPL"
process--the Catalyst Implementation Management and Plan. The CIMPL
process consists of training, business scenario development,
configuration of the software, a Conference Room Pilot ("CRP"),
project management and implementation support services. The CRP is a
critical element of the Catalyst approach which allows the customer
to work hands-on with its configured software in a practice
environment at the Company's headquarters. The CRP, along with the
Company's project methodology and training, offers a unique
opportunity to bring issues to the surface that a customer might face
in the actual operation of its warehouse, helping to solve potential
problems prior to live implementation.
The Company believes that Catalyst WMS benefits customers in three
key areas: improved customer service, operational efficiency and
capital utilization. Catalyst WMS should improve customer service by
reducing fulfillment time and increasing fulfillment accuracy through
the use of bar code and radio frequency technology to ensure
inventory accuracy and to provide information and labor guidance in
real time. Catalyst WMS should improve the operational efficiency of
warehouses by increasing labor productivity through efficient
employee scheduling and reduction of downtime, and by streamlining
product flow to permit a more efficient turnaround on customer
orders. The advanced features of Catalyst WMS improve capital
utilization of the warehouse by lowering inventory levels, increasing
inventory turns and warehouse efficiencies and improving space
utilization.
Strategy
The Company's objective is to continue to be a leading provider of
warehouse management software solutions and services. To achieve this
objective, the Company has adopted the following strategies:
Offer Advanced Warehouse Management Solutions. The Company intends to
continue to focus its resources on offering a configurable, standard
solution which captures best practice methodologies used in warehouse
operations. The Company believes that it is well-positioned in the
market because its standard solution allows it to leverage its
software over a broad customer base and reduce installation time
significantly relative to custom-developed solutions.
<PAGE> 4
Provide Superior System Implementation. The Company believes that the
efficiency of its implementation process allows the Company to
increase sales to prospective customers seeking standard, configurable
software solutions and to gain market share relative to
its competitors. The Company plans to continue to improve its
differentiated implementation process by further refining the CIMPL
methodology and Conference Room Pilot in order to shorten and
simplify the implementation process.
Develop Vertical Markets. Catalyst has customers in several different
industries, falling into vertical market categories including retail,
automotive, and consumer packaged goods (manufacturing). The Company
believes that the expertise it has developed in each of these markets
through its customer base provides it with a significant competitive
advantage in selling to prospective customers where similar
functionality is required. The Company is presently developing a pre-
configured version of Catalyst WMS to address the specific
requirements of one such vertical market and may develop pre-
configured versions to address the requirements of other vertical
markets.
Expand Worldwide Distribution. The Company plans to increase its
international business by expanding its direct sales force and
support staff in overseas offices, obtaining agreements for global,
multi-site installations with multinational customers, and partnering
with foreign distributors. In 1994, the Company established an office
in London to sell, service and support Catalyst WMS in international
markets. The Company opened an office in Rio de Janeiro, Brazil in
1995 to support South American sales and marketing efforts; this
office increased its staff in 1996. The Company opened an office in
France in 1996. Catalyst WMS has an international interface, is
available in French, Spanish, Portuguese and Italian, and provides
export documentation, currency exchange and metric conversion to
support international distribution.
Leverage Standard Technology. Catalyst WMS is designed to operate in
an open system environment enabling customers to use various Unix
operating systems, operate on multiple hardware platforms and RDBMSs
and interoperate with many third-party software applications, such as
MRP II, ERP and DRP. The Company intends to continue to utilize its
industry, customer and supplier relationships to keep abreast of
emerging standards, protocols and applications programming interfaces
as such trends are introduced and gain market acceptance.
Products
Catalyst WMS is designed to manage an entire warehouse operation and
incorporates numerous warehouse strategies to provide maximum
operating efficiency. The Company also leverages its Catalyst WMS
product with add-on products such as Flow-Through Support, Decision
Support System ("Catalyst DSS") and Yard Management System ("Catalyst
YMS"), and periodic new releases of Catalyst WMS incorporating new
<PAGE> 5
features. Catalyst WMS interfaces with an organization's current
material handling equipment and transaction-based systems, such as
purchasing electronic data interchanges ("EDI"), bar code labeling,
general ledger, MRP II, ERP and DRP. Catalyst WMS also utilizes
radio frequency communications and bar code technology to provide
real-time control and validation of task completion to ensure
inventory accuracy. Catalyst WMS directs employees and material
handling equipment and manages the inventory, space, radio terminals,
bar code scanners and printers in the warehouse for maximum
efficiency.
Catalyst WMS is a comprehensive application that manages the
receiving, putaway, outbound order processes, picking and general
warehouse operations. With each warehouse process, Catalyst WMS
provides a variety of tactical choices which can be configured to a
particular customer's requirements and which are designed to maximize
efficiency.
Catalyst WMS Release 6.0, which the Company introduced in the first
quarter of 1996, introduced native Microsoft Windows graphic user
interface ("GUI") implementation, which should improve the customers'
ease of use and offer improved help screen content. Catalyst WMS
Release 7.0, which the Company introduced in the first quarter of
1997, introduced the Warehouse Wizard, a PC-based configuration tool,
along with a direct interface to Oracle business solutions, new
functionality for public warehousing and post-pick value added work-
in process ("WIP") procedures.
Modular Products
The Company's Flow-Through Support Module enables warehouses to
"push" incoming stock directly from receiving to the outbound
shipping area without storing the items in the warehouse. While sold
as part of Catalyst WMS, it can be integrated with Catalyst WMS or
used as a stand-alone product.
Catalyst DSS is a management tool which analyzes warehouse operations
and allows management to improve the performance and efficiency of
the warehouse. Catalyst DSS operates in a three-tier architecture,
Windows NT environment, on an independent server from Catalyst WMS,
permitting analysis to be performed without affecting the performance
of Catalyst WMS. Catalyst DSS has a PC-based GUI and allows customers
to execute various hypothetical scenarios to test potential new
strategies for effectiveness. Catalyst DSS has two features: Advanced
Outbound Order Planning and Transaction History Analysis. Advanced
Outbound Order Planning offers tools for selecting and scheduling the
picking of orders. Transaction History Analysis allows customers to
analyze inbound and outbound order flow and identify trends that
impact the warehouse. This allows management to improve the
performance of the warehouse operation.
<PAGE> 6
Catalyst YMS is a three-tier, client / server product that optimizes
productivity in the shipping yard by prioritizing receipts and
managing inbound and outbound trailers. Catalyst YMS is available
both as a stand-alone product and as an add-on to Catalyst WMS.
Catalyst YMS provides such benefits as real-time knowledge of all
trailers in the yard and complete control of which loads can be
stored at any dock or location. Catalyst YMS is also open for
extendible reporting.
Services and Maintenance
In addition to sales of Catalyst WMS, the Company offers certain
services and maintenance agreements to its customers. Services
provided by the Company include software modification and
configuration, project management, rapid prototyping, training and
implementation support. Customers are charged for services based on a
standard fee for each person-day. Maintenance agreements are
typically sold to customers for a one-year term at the time they
initially license Catalyst WMS and are available for newly-installed
software or for renewal on an on-going basis for an existing
installation. These agreements allow the customer, following
installation of Catalyst WMS, to receive 24-hour per day, 7-day per
week assistance with the operation of the software and to obtain on-
line support. Maintenance is not provided as part of the Company's
license agreement and fees for ongoing maintenance are included in
the annual fee charged under maintenance agreements.
As a provider of warehouse management software, the Company
recognizes the importance of offering quality service and support to
its customers. The Company has several groups responsible for
offering services and maintenance to ensure customer satisfaction,
including Implementation Services, Advanced Technologies and Training
and Customer Service. The Company's Implementation Services Group,
formerly comprised predominantly of Software Engineering, offers a
structured implementation methodology (the CIMPL process) which
typically lasts four to eight months. The CIMPL process consists of
training, business scenario development, configuration of the
software, a CRP, project management and implementation support
services. The CRP enables the Company and the customer to model
warehouse management operations and resolve operating issues prior to
live implementation. The Company's Advanced Technologies Group,
formerly known as the Product Support Group, is responsible for
managing and installing operating systems, hardware, networks,
communication links and RDBMSs. Catalyst provides training on the
use, administration and configuration of Catalyst WMS at the Company's
headquarters. Catalyst employs a "train the trainer"
approach, and typically several employees of a customer, including
representatives from operations and information systems departments,
participate in the training. Catalyst provides in-depth
documentation, structured training classes and hands-on training with
the software. The Company's Customer Service Group offers a fully-
staffed Customer Service Response Center 24-hours per day, seven days
per week.
<PAGE> 7
Customers
The Company's sales cycle has lengthened in the past year and now
typically ranges from six to nine months and is not seasonal in
nature. The Company does not maintain a significant backlog.
Software license fee revenues for each quarter depend in part on
sales of software licenses for which implementation began during that
quarter and on license agreements under implementation that were
executed in prior quarters. In the year ended December 31, 1995, the
Company had two customers which accounted for more than 10% of the
Company's total revenues and in the year ended December 31, 1996, the
Company had no customers which accounted for more than 10% of the
Company's total revenues. The Company does not believe that the loss
of any single customer would have a material adverse effect upon the
Company's business, results of operations or financial condition.
The Company continues to target customers with warehouses that
require highly sophisticated warehouse management systems like
Catalyst WMS and plans through the development of a vertical market
WMS package as well as an NT-based WMS, to penetrate the mid-tier
warehouse market. The Company typically has significant sales in
each fiscal year to one or more customers due to the cost of Catalyst
WMS and the associated revenues from professional services and
maintenance agreements which result in a high percentage of revenue
attributable to sales to one or more customers. Although the Company
has historically relied on the retail, automotive, and consumer
packaged goods (manufacturing) markets for a substantial portion of
its revenues, the Company does not intend to focus only on these
markets for future sales and does not anticipate that it will be
dependent on any single market for a substantial portion of its
sales.
Sales and Marketing
The Company markets and sells its software and services in North
America, South America and Europe through a direct sales organization
and is currently exporting its products to France, Italy, Mexico,
Spain and the United Kingdom. The Company's London office is
responsible for the sales, support and service of Catalyst WMS in
certain international markets. In Italy, the Company also employs the
sales assistance of a distributor that sells and assists in
implementation and support of Catalyst WMS. The Company opened an
office in Rio de Janeiro, Brazil in 1995 to support South American
sales and marketing efforts; this office increased its staff in 1996.
The Company opened an office in France in 1996.
To support its sales force, the Company conducts comprehensive
marketing programs which include direct mail, public relations,
advertising, seminars, trade shows, joint programs with vendors and
consultants and ongoing customer communication programs. The sales
cycle begins with the generation of a sales lead or the receipt of a
<PAGE> 8
request for proposal ("RFP") from a prospective customer, which is
typically followed by the qualification of the lead or prospect, an
analysis of the customer's needs, response to the RFP (if solicited by
the customer), one or more presentations or product demonstrations, a
visit to a similar or representative warehouse running the Company's
software system, contract negotiation and commitment. While the sales
cycle varies substantially from customer to customer, it has
lengthened in the past year and now is typically six to nine months.
The Company believes that, with over 17 years in the warehouse
management software business and more than 50 successful installs, it
has a product that is established, proven and accepted in the
marketplace. The Company further believes that the level of expertise
found throughout its organization includes some of the best in its
industry in design, development and implementation support. The
Company has created a team of employees, vendors and consultants who
are experts and leaders in their respective fields, which allows it to
provide its customers with a strong resource for products and
knowledge. This resource for products and knowledge should help the
Company's customers stay competitive in their respective industries.
As of December 31, 1996, the sales and marketing organization
consisted of 21 employees, including 8 field sales representatives.
The sales staff is based at the Company's headquarters in Milwaukee,
in the London office and in field sales offices located in Rio de
Janeiro, Lyon, France, Atlanta, Boston, Dallas and Philadelphia.
Proprietary Rights and Licenses
The Company relies on a combination of contract, copyright, trademark
and trade secret laws and other measures to protect its proprietary
information. The Company does not have any patents or patent
applications. The Company believes that, because of the rapid pace of
technological change in the computer software industry, trade secret
and copyright protection are less significant in affecting the
Company's business, results of operations or financial condition than
factors such as the knowledge, ability and experience of the Company's
employees, frequent product enhancements and timeliness and quality of
support services. The Company typically sells its products to its
customers under a perpetual license, which is generally non-
transferable and solely for the customer's internal operations at
designated sites. The Company makes available site and enterprise
licenses and source code to certain of its customers. The provision of
source code may increase the likelihood of misappropriation or other
misuse of the Company's intellectual property. Under the terms of the
Company's license agreements, the Company generally owns all
modifications to its software that are implemented for a customer.
The Company is not aware that its products, trademarks or other
proprietary rights infringe the property rights of third parties, but
has not performed any independent investigations to determine whether
such infringement exists. As the number of software products in the
<PAGE> 9
industry increases and the functionalities of these products further
overlap, the Company believes that software developers may become
increasingly subject to infringement claims. Any such claims, with or
without merit, can be time consuming and expensive to defend.
Product Development
The Company seeks to offer an extensive, integrated product line that
provides complete warehouse management functionality to warehouses
worldwide. To effect this strategy, the Company intends to continue
to introduce new modules and products, and upgrade the functionality
of and enhance existing products. The Company, through its
development and support personnel, works closely with its customers
and prospective customers to determine their requirements and to
design enhancements and new products to meet their needs. All of the
Company's product development is performed by its employees. Product
development costs were $2.6 million 1995 and $4.5 million in 1996.
The Company is continually enhancing the features and functionality
of Catalyst WMS and developing new modules and products. Catalyst WMS
Release 6.0, which the Company introduced during the first quarter of
1996, introduced native Microsoft Windows GUI implementation, which
should improve the customer's ease of use and offer improved help
screen content. Catalyst WMS Release 7.0, which the Company
introduced in the first quarter of 1997 introduced the Warehouse
Wizard, a PC-based configuration tool, along with a direct interface
to Oracle business solutions, new functionality for public
warehousing and post-pick value added WIP procedures. In addition,
since different industries fall into vertical market categories which
often require similar functionality, the Company may develop pre-
configured versions of Catalyst WMS to address the specific needs of
certain such vertical markets. These pre-configured products would
be pre-tested and marketed to prospective customers with warehouses
that do not require a customized software solution. The Company is
presently developing the first such package, which should be
completed and available for sale in 1997.
Competition
The Company has a large number of competitors, including privately
held companies focused on warehouse management software and several
competitors that offer a manufacturing software solution of which
warehouse management is a part. The competitive factors affecting
the market for the Company's software and services include: corporate
and product reputation, features and functionality, vertical market
expertise, customer configurability, effective and timely
implementation, availability of products on open computer platforms,
ability to interface with existing equipment and systems, ability to
support radio frequency and bar code technology, quality of support
services, real-time capabilities, RDBMS technology, scalability,
international capabilities, documentation and training, product
quality, performance and price. The Company believes that it competes
<PAGE> 10
effectively with respect to these factors, but there can be no
assurance that it will continue to do so.
Employees
As of December 31, 1996, the Company had 295 full-time employees
worldwide. The Company's employees are not represented by any
collective bargaining organization. The Company has never
experienced a work stoppage and considers its relations with its
employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company currently leases approximately 62,000 square feet of
office space which it uses as its corporate headquarters in
Milwaukee, Wisconsin. The term of the lease expires in January 2006,
but the Company has the option to extend such term for an additional
ten-year period. The Company leases approximately 6,000 square feet
of office space in London, England, pursuant to a lease which expires
in 1999; approximately 200 square meters in Brazil pursuant to a
lease which expires in 1999 and approximately 25 square meters in
France pursuant to a lease which expires in 1998. In addition, the
Company has short-term leases for its salespeople across the United
States. The Company believes that its existing facilities should be
adequate for its needs through 1997.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of 1996.
<PAGE> 11
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock is listed on The Nasdaq Stock Market under the
symbol CLYS. Since the initial public offering on November 16,
1995, the Common Stock has traded at a high of $14.00 per share
and a low of $2.875 per share.
As of February 28, 1997 there were 6,820,934 shares of the
Company's Common Stock outstanding held by 157 stockholders of
record and approximately 925 beneficial owners.
The following table represents the high and low price information
for the Company's Common Stock for each full quarterly period within
the two most recent fiscal years.
<TABLE>
<CAPTION>
1996 1995
-------------------------------------
High Low High Low
<S> <C> <C> <C> <C>
Quarters ended March 31, $11.375 $7.25 $ 1.25 $ 1.25
Quarters ended June 30, 12.00 7.75 1.25 1.25
Quarters ended September 30, 10.875 4.25 10.00 10.00
Quarters ended December 31, 7.25 4.125 13.00 10.00
</TABLE>
Prices listed above are determined by the over-the-counter market and
therefore do not reflect broker's fees or commissions.
Source: The Nasdaq Stock Market.
<PAGE> 12
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following selected financial data should be read in conjunction
with the financial statements and notes thereto and Management's
Discussion and Analysis included elsewhere in this Annual Report.
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands, except share data)
Statement of Operations Data:
Revenues:
Software license fees $8,132 $10,372 $6,810 $3,131 $ 327
Services and maintenance 12,902 10,180 7,942 5,180 2,401
Hardware and other 132 106 1,426 556 1,355
Total revenues 21,166 20,658 16,178 8,867 4,083
Operating expenses:
Cost of software license fees 288 479 471 245 737
Cost of services and maintenance 12,371 9,369 6,507 4,523 2,403
Cost of hardware and other - 4 1,212 336 1,010
Sales and marketing 5,079 4,499 3,901 1,419 818
Product development 4,470 2,554 1,411 747 -
General and administrative 4,287 1,608 1,416 1,287 990
Write-off of purchased research
and development/1/ 2,002 - - - -
Restructuring and severance
costs/2/ 597 - - - -
Write-off of capitalized software
development costs/3/ - - - - 1,227
Total operating expenses 29,095 18,513 14,918 8,557 7,185
Income (loss) from operations (7,928) 2,145 1,260 310 (3,102)
Other income (expense) 867 (29) (138) (191) (214)
Income (loss) before provision for
income taxes (7,061) 2,116 1,122 119 (3,316)
Provision for income taxes - 111 49 63 -
Net income (loss) $(7,061) $2,005 $1,073 $56 $(3,316)
Net income (loss) per share/4/ $(0.88) $0.29 $0.16 - -
Shares used in computing net
income (loss) per share 7,996 6,889 6,854 - -
Balance Sheet Data:
Cash and cash equivalents $695 $3,730 $1,359 $1,621 $2
Working capital (deficit) 10,457 27,127 3,622 (262) (2,139)
Total assets 20,199 34,084 8,678 3,262 1,919
Long-term debt, less current
portion 132 324 781 986 1,779
Redeemable preferred stock - - 5,095 - -
Total shareholders' equity
(deficit) 14,147 29,251 (1,371) (2,236) (3,248)
</TABLE>
/1/See Notes to the Financial Statements, Note 2
/2/See Notes to the Financial Statements, Note 10
/3/During 1992, the Company determined that its original product
offering, an earlier, non-standard version of Catalyst WMS, was
not generally available for release to customers without
modification to meet customers' specifications. Accordingly, all
capitalized software development costs related to the Company's
original product offering were charged to operations during 1992.
/4/Computed on the basis described in Note 1 of Notes to Financial
Statements. Due to the effect of the recapitalization on the
Company's capital structure described in Note 5 of Notes to
Financial Statements, per share data for the years ended prior to
December 31, 1994 are not comparable to subsequent years and,
therefore, have not been presented.
<PAGE> 13
Results of Operations
The following table sets forth, for the periods indicated, certain
statement of operations data as a percentage of total revenues:
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Software license fees 38.4% 50.2% 42.1%
Services and maintenance 61.0 49.3 49.1
Hardware and other 0.6 0.5 8.8
Total revenues 100.0 100.0 100.0
Operating expenses:
Cost of software license fees 1.4 2.3 2.9
Cost of services and maintenance 58.4 45.3 40.2
Cost of hardware and other _ _ 7.5
Sales and marketing 24.0 21.8 24.1
Product development 21.1 12.4 8.7
General and administrative 20.3 7.8 8.8
Write-off of purchased research
and development 9.5 _ _
Restructuring and severance costs 2.8 _ _
Total operating expenses 137.6 89.6 92.2
Income (loss) from operations (37.5) 10.4 7.8
Other income (expense) 4.1 (0.2) (0.9)
Income (loss) before provision for
income taxes (33.4) 10.2 6.9
Provision for income taxes - 0.5 0.3
Net income (loss) (33.4)% 9.7% 6.6%
</TABLE>
The following discussion contains statements identified as "the
Company expects" or "the Company believes" or otherwise stated as the
Company's predictions for the future, which are forward-looking
statements and which involve certain risk factors. The Company's
actual results may differ materially from the results discussed in
the forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those herein identified,
those discussed in the Company's Registration Statement on Form SB-2,
filed with the SEC and other factors identified from time to time as
risks in the Company's reports filed with the SEC.
Total Revenues
The Company's revenues are derived from software license fees,
services and maintenance and hardware sales and other. Total revenues
increased by 82.5% to $16.2 million in 1994, by 27.7% to $20.7
million in 1995 and by 2.5% to $21.2 million in 1996. In 1994 and
1995, the growth in total revenues was a result of the increased
demand for warehouse management software, the expansion of the
Company's direct sales force, the growth experienced in multinational
and international sales and increased marketing efforts. The minimal
growth in total revenues in 1996 was due primarily to fewer new sales
<PAGE> 14
of Catalyst WMS as a result of a lengthening of the sales cycle as
compared to current installations. The following table sets forth,
by category, revenues and percentage change year over year for the
years indicated:
<TABLE>
<CAPTION>
Net Revenues Percentage Change
(In thousands) (Year over Year)
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1996 1995
------- ------- ------ ----- -----
Software license fees $ 8,132 $10,372 $6,810 (21.6)% 52.3%
Services and maintenance 12,902 10,180 7,942 26.7 28.2
Hardware and other 132 106 1,426 25.3 (92.6)
</TABLE>
International revenues decreased by 9.1% to $3.0 million in 1994,
increased by 99.3% to $6.0 million in 1995 and decreased by 25.0% to
$4.5 million in 1996. International revenues accounted for 18.6%,
29.0% and 21.2% of total revenues in 1994, 1995 and 1996,
respectively. The decrease in percentage of total revenues in 1994
and 1996 was due primarily to the increase in the Company's domestic
sales compared to international sales. The increase in 1995 was due
to an increase in multinational sales of Catalyst WMS. In November
1995, the Company opened an office in Rio de Janeiro, Brazil and in
August 1996, opened an office in Lyon, France. Although the Company
anticipated revenue growth from international markets in 1996,
certain of these markets did not perform to their expected potential.
The Company believes that future international revenues should remain
constant or increase slightly as a percentage of total revenues.
Software License Fees
Software license fee revenues consist of revenues from software
license agreements of the Catalyst WMS, related add on products and
relational database management systems (RDBMS). Software license fee
revenues increased by 117.5% to $6.8 million in 1994, by 52.3% to
$10.3 million in 1995 and decreased by 21.6% to $8.1 million in 1996.
The decrease in software license fee revenues in 1996 was due in
part, to the fewer number of software licenses sold which resulted
from a lengthening of the sales cycle and greater competitive
pressures. During the fourth quarter of 1996, the Company sold its
first stand-alone Conference Room Pilot (CRP) business which resulted
in professional service revenues only. The software license fee
revenues for these CRP customers should be realized during 1997. The
Company believes that license fee revenues should increase in the
future due to increased worldwide sales and marketing efforts and
continued market acceptance of Catalyst WMS.
Services and Maintenance
Services and maintenance revenues are derived from: (i) software
modifications, (ii) professional services and (iii) maintenance
agreements. Services and maintenance revenues increased by 53.3% to
$7.9 million in 1994, by 28.2% to $10.1 million in 1995 and by 26.7%
to $12.9 million in 1996. The following table sets forth the
components of services and maintenance revenues as a percentage of
total revenues for the years indicated:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
---- ---- ----
Software modifications 28.6% 23.3% 30.8%
Professional services 19.6 18.5 14.2
Maintenance agreements 12.8 7.5 4.1
Total services and maintenance 61.0% 49.3% 49.1%
</TABLE>
<PAGE> 15
Software modifications are determined during the CRP and consist
mainly of host communication and mechanical interfaces. The Company
believes that while some amount of software modifications will
continue, the amount of feature modifications will decrease due to
the increased functionality of each new release of the Catalyst WMS.
The increase in 1996 was due primarily to a small number of customers
who required large amounts of specific modifications. The Company
believes that software modifications as a percentage of total
revenues will decrease in the future subject to certain large clients
requesting large modifications.
Professional services revenues are derived from training, technical
services, performance of the CRP, on-site support, project management
and implementation services. As the Company continues to improve its
Catalyst Implementation Methodology and Plan (CIMPL), professional
services revenues may continue to increase as the Company implements
new customer sites and current customer multi-site roll outs. The
increase in 1996 was due to an increased number of active projects,
consisting of both new and roll-out implementations.
Customers typically enter into a one-year maintenance agreement at
the time they first license Catalyst WMS and pay for the first year
of maintenance fees in advance. The increase in 1996 was due
primarily to new customers installing the Catalyst WMS and current
customers renewing their maintenance agreement. The Company believes
that maintenance revenues will increase in the future as more
Catalyst WMS systems are implemented, resulting in the execution of
corresponding maintenance agreements along with the renewal of
current maintenance agreements.
Hardware and Other
Hardware and other revenues consist of products that the Company sold
to its customers on behalf of other manufacturers, including computer
hardware, radio frequency equipment and printers. Hardware and other
revenues increased by 156.5% to $1.4 million in 1994. Of the 1994
increase, $1.1 million was attributable to one customer's requirement
that it purchase radio frequency equipment from the Company. Without
this sale, hardware and other revenues would have decreased by 46.0%
to $300,000 in 1994. Hardware and other revenues decreased by 92.6%
to $106,000 in 1995 and increased by 25.3% to $132,000 in 1996. The
decrease in hardware and other revenues in 1995 was due primarily to
the Company no longer serving as a value-added reseller for various
hardware and radio frequency manufacturers. The increase in 1996 was
due primarily to the sale of products by Information Strategies
Incorporated (ISI), a company the Company acquired in April 1996. The
sale of hardware products by ISI has been discontinued and the
Company believes that it should not receive any significant revenues
from the sale of hardware in the future.
<PAGE> 16
Cost of Software License Fees
Cost of software license fees consists of the amortization of capitalized
software development costs and cost of third-party licenses sold
by the Company. The costs to develop Catalyst WMS have been
expensed as incurred since the Company's product development
efforts have been directed at enhancing and improving the Catalyst
WMS. The cost of software license fees was $471,000, $479,000 and
$288,000 in 1994, 1995 and 1996, respectively. In 1994 and 1995, the
Company capitalized approximately $141,000 of the product development
cost for its Decision Support System, which it began amortizing in
the third quarter of 1995. Cost of software license fees decreased
as a percentage of software license fee revenues from 6.9% in 1994 to
4.6% in 1995 and to 3.5% in 1996. This decrease was due primarily to
the expensing of software development costs for the Catalyst WMS. The
Company expects to continue to expense the cost of developing new
releases of the Catalyst WMS and related products and anticipates
that the cost of software license fees will remain approximately the
same in relation to total software license fee revenues.
Cost of Services and Maintenance
Cost of services and maintenance consists primarily of personnel
costs for the performance of software modifications, professional
services and customer support. Cost of services and maintenance as a
percentage of total services and maintenance revenues were 81.9%,
92.0% and 95.9% in 1994, 1995 and 1996, respectively. Cost of
services and maintenance decreased as a percentage of services and
maintenance revenues to 81.9% in 1994 due primarily to the reduced
amount of software modifications and increased amount of professional
services required by customers. The increase in cost of services and
maintenance in 1995 and 1996 was primarily attributable to increased
staffing of the Company's service and support organizations in the
United States and London in anticipation of continued growth in the
sales of licenses of Catalyst WMS. In addition, during 1996 the
Company incurred charges of approximately $550,000 for projected cost
overruns related to certain projects. The Company's service and
support organizations consisted of 99, 141 and 171 employees at
December 31, 1994, 1995 and 1996, respectively. The Company
anticipates that, while the total number of employees in its service
and support organization may increase, the future cost of services
and maintenance as a percentage of services and maintenance revenues
should decrease as a result of process efficiencies and more
experienced service personnel.
Cost of Hardware and Other
Cost of hardware and other consists primarily of the cost of products
sold by the Company on behalf of other manufacturers. Cost of hardware
and other as a percentage of total revenues was 7.5% in 1994, 3.8% in
1995 and 0% in 1996. The increase in 1994 was the result of $1.0 million
of costs related to one customer's requirement to purchase
radio frequency equipment from the Company. The decrease in 1995 and
1996 was the result of the Company's termination of its value-added
reseller agreements with hardware and radio frequency manufacturers.
The Company does not anticipate any significant costs associated with
hardware and other revenue in the future.
<PAGE> 17
Sales and Marketing
Sales and marketing expenses consist primarily of salaries and
commissions paid to sales personnel along with marketing, promotional
and travel expenses. Sales and marketing expenses increased 174.9% to
$3.9 million in 1994, by 15.3% to $4.5 million in 1995 and by 12.9% to
$5.1 million in 1996. In general, the increase in sales and marketing
expenses in each of the three years was due to the expansion of the
Company's sales and marketing staff and increased marketing and
promotional expenses in the domestic and international markets. During
1996, the Company opened an office in Lyon, France and increased its
staff in Rio de Janeiro, Brazil. The Company expensed all
organizational and start up costs related to those offices as
incurred. Sales and marketing expenses represented 24.1%, 21.8% and
24.0% of total revenues in 1994, 1995 and 1996, respectively. The
Company anticipates that the amount of its sales and marketing
expenses may continue to increase in the future as a result of recent
organizational changes that have led to the introduction of several
Product Marketing Managers within the sales and marketing department.
Although the amount of sales and marketing expenses should increase,
it should remain relatively constant in relation to total revenues.
The sales and marketing staff consisted of 25, 25 and 33 employees as
of December 31, 1994, 1995 and 1996, respectively.
Product Development
Product development costs include expenses associated with research
and development, including costs of engineering personnel and related
development expenses such as development software tools, training and
documentation. Product development costs increased by 88.9% to $1.4
million in 1994, by 81.0% to $2.6 million in 1995 and by 75% to $4.4
million in 1996. The increase in product development costs were
primarily due to an increase in the number of software engineers
employed by the Company to make enhancements to the Catalyst WMS,
develop related add-on products and research potential future
products and enhancements. Product development costs represented
8.7%, 12.4% and 21.1% of total revenues in 1994, 1995 and 1996
respectively. The increase in 1996 was primarily due to the Company's
acquisition of ISI in Dallas, Texas. The Dallas operation was
expected to continue as a research facility and the product
development staff consisted of 31, 50 and 67 employees as of December
31, 1994, 1995 and 1996, respectively. The costs associated with the
operations represented $469,000 for 1996. In December 1996, the
Company discontinued its research efforts in Dallas, Texas. The Company
believes that product development costs should decline as a
percentage of total revenue in the future.
General and Administrative
General and administrative expenses consist primarily of the salaries
of administrative, executive and finance personnel. General and
administrative expenses increased by 10% to $1.4 million in 1994, by
13.6% to $1.6 million in 1995 and by 166.6% to $4.3 million in 1996.
General and administrative expenses represented 8.8% of total
revenues in 1994, 7.8% in 1995 and 20.3% in 1996. The decrease in
general and administrative expenses in 1995 as a percentage of total
revenue was attributable to the increase in total revenues. In 1996,
<PAGE> 18
the Company began to isolate and account for the costs of its information
technology and other executive expenses as a part of
general and administrative expenses. In addition, during the fourth
quarter of 1996, several one-time and other charges of approximately
$827,000 were taken including receivable allowances and other
organizational charges resulting in the increase seen in 1996 in
general and administrative expenses. The Company's general and
administrative staff consisted of 12, 12 and 24 as of December 31,
1994, 1995 and 1996, respectively. The Company expects that
administrative expenses may increase as a percentage of total
revenues in the future, due to current reorganizational changes
resulting from the change in Senior Management.
Write-off of Purchased Research and Development
The Company incurred a one-time charge of $2.0 million in the second
quarter of 1996 related to its purchase of ISI. This charge
represented the purchase of research and development and was
immediately charged to operations.
Restructuring and Severance Costs
The Company incurred a charge of $597,000 related to its decision to
close its operations in Dallas, Texas representing lease, severance
and related office closing expenses. The charges also include a
negotiated agreement with the Company's former Chief Executive
Officer. The Company included all costs and payments due under these
arrangements in 1996.
Other income and expense
Other income and expense consists primarily of interest income and
interest expense and does not have a material impact on operating
results. The Company expects other income and expense to remain
relatively constant in the future due to the interest received from
the Company's investments of the proceeds from their initial public
offering.
Income Tax Expense
In 1994 and 1995, the Company's effective income tax rate was 4.4%
and 5.5%, respectively, and differed from the expected statutory rate
due to the utilization of net operating loss carryforwards and
general business credits. In 1996, no income tax expense was recorded
as the Company incurred a net loss for both financial and income tax
reporting purposes. No net deferred tax expense was recorded in any
of the three years as the Company continues to record a valuation
allowance to reserve for the net deferred tax asset.
Liquidity and Capital Resources
Over the last three years, the Company has funded its operations
primarily through sales of common and preferred stock, borrowings and
cash generated from operations. The Company received an aggregate of
$4.9 million from the sale of preferred stock in 1994. In addition,
the Company raised approximately $23.6 million from the sale of
2,000,000 shares of its common stock in an initial public offering in
November 1995. A portion of the proceeds from the initial
public offering was used to repay two term notes to Bank One, West
Bend, Wisconsin, N.A. totaling $1.1 million.
<PAGE> 19
Net cash used in operating activities was $2.2 million in 1994 and
$3.3 million in 1996. The Company generated $1.3 million of net cash
from operating activities in 1995. The decrease in cash flows from
operations during 1994 was due primarily to an increase in accounts
receivable and a decrease in the amount of deferred software license
fees, which were partially offset by increases in net income,
accounts payable, deferred services and maintenance revenues and
deferred rent. The increase in accounts receivable was attributable
to the increase in total revenues. The increase in cash flows in 1995
was due to increased net income and deferred services and maintenance
revenues, which were partially offset by increased accounts
receivable and accrued liabilities. The decrease in cash flows in
1996 was due to the Company's net loss including the write-off of
purchased research and development, which were partially offset by
decreased accounts receivable, and increase in accounts payable.
The Company expended $1.3, $1.6 and $2.1 million in 1994, 1995 and
1996, respectively, for purchases of property and equipment. The
Company employed 167, 229, and 295 employees as of December 31, 1994,
1995 and 1996, respectively. This increase in employees has led to an
increase in expenses related to equipment, software and furniture.
The Company relocated its corporate offices to a new building in
1994, which it leases for a term expiring in 2006. In 1995, the
Company acquired a phone system under a capital lease. As of December
31, 1996, the aggregate amount owing under capital leases, including
interest, was $183,000. The Company did not have any material
commitments for capital expenditures as of December 31, 1996. The
Company anticipates making expenditures of approximately $100,000 for
renovations of its sales and marketing facility within its
headquarters during the second quarter of 1997. The Company will
continue to purchase equipment, software and furniture for new
employees as needed throughout 1997. Such expenditures will be funded
from cash flows from operations and the proceeds received by the
Company in its initial public offering.
During 1996, the Company instituted a stock buy-back program through
which it purchased 234,132 shares of its common stock at various
market prices. The aggregate cash used to purchase the stock was $1.2
million. In November 1996, the Company redeemed 1.2 million shares of
its common stock from Summit Partners for $5.7 million in cash. In
January, 1997, the Company redeemed approximately 226,000 shares of
its common stock as a part of a negotiated agreement between
the Company and its former Chief Executive Officer. The Company does
not anticipate purchasing additional shares of its common stock in
the open market in the future.
As of December 31, 1996, the Company had $695,000 in cash and cash
equivalents and working capital of $10.5 million, which was generated
primarily through proceeds from the Company's initial public
offering. In addition, the Company has a line of credit (the
"Revolving Credit Facility") with Bank One, West Bend, Wisconsin of
$1.0 million. As of December 31, 1996, there were no amounts
outstanding under the Revolving Credit Facility.
<PAGE> 20
Management believes that liquidity provided by cash generated from
its ongoing operations, the proceeds from the initial public
offering, as well as borrowings under the Revolving Credit Facility
will be sufficient to meet the Company's currently anticipated
working capital and capital expenditure requirements through 1997.
The Company has never paid cash dividends on its Common Stock. The
Company's policy has been to retain earnings to provide funds for the
operation and expansion of its business. Accordingly, the Company
does not anticipate paying any cash dividends in the foreseeable
future.
<PAGE> 21
ITEM 7. FINANCIAL STATEMENTS.
Form 10-KSB
Page Number
Report of Ernst & Young LLP, Independent Auditors 21
Statements of Operations for the years ended December
31, 1996, 1995 and 1994 22
Balance Sheets at December 31, 1996 and 1995 23 - 24
Statement of Stockholders' Equity (Deficit) for
the years ended December 31, 1996, 1995 and 1994 22 - 23
Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 25 - 28
Notes to Financial Statements 29 - 40
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
Catalyst International, Inc.
We have audited the accompanying balance sheets of Catalyst
International, Inc. (the Company) as of December 31, 1996 and 1995,
and the related statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of the
Company at December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted
accounting principles.
Milwaukee, Wisconsin
January 27, 1997
<PAGE> 22
Catalyst International, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994
--------------------------------------
<S> <C> <C> <C>
Revenues:
Software license fees $ 8,132,367 $10,372,146 $ 6,810,549
Services and maintenance 12,901,947 10,180,188 7,942,307
Hardware and other 132,408 105,663 1,425,558
-------------------------------------
Total revenues 21,166,722 20,657,997 16,178,414
-------------------------------------
Operating expenses:
Cost of software license fees 288,220 479,017 470,536
Cost of services and maintenance 12,371,157 9,368,486 6,507,460
Cost of hardware and other - 4,165 1,212,228
Sales and marketing 5,078,557 4,498,774 3,901,159
Product development 4,470,304 2,554,165 1,410,967
General and administrative 4,286,848 1,607,723 1,415,933
Write-off of purchased research and
development costs (Note 2) 2,002,280 - -
Restructuring and severance costs
(Note 10) 597,338 - -
-------------------------------------
Total operating expenses 29,094,704 18,512,330 14,918,283
-------------------------------------
Income (loss) from operations (7,927,982) 2,145,667 1,260,131
Other income (expense):
Interest expense (67,395) (133,536) (152,805)
Investment income 948,973 142,028 20,822
Miscellaneous, net (14,703) (37,741) (5,794)
-------------------------------------
Total other income (expense) 866,875 (29,249) (137,777)
-------------------------------------
Income (loss) before provision for
income taxes (7,061,107) 2,116,418 1,122,354
Provision for income taxes (Note 8) - 111,000 49,000
-------------------------------------
Net income (loss) (7,061,107) 2,005,418 1,073,354
Preferred dividends - 437,028 193,896
-------------------------------------
Net income (loss) applicable to
common stock $(7,061,107) $ 1,568,390 $ 879,458
=====================================
Net income (loss) per share (Note 1) $ (0.88) $ 0.29 $ 0.16
=====================================
Shares used in computing net income
(loss) per share 7,995,766 6,889,003 6,854,326
</TABLE>
See accompanying notes.
<PAGE> 23
Catalyst International, Inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31,
1996 1995
------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 694,836 $ 3,729,705
Short-term investments 8,626,615 19,883,157
Accounts receivable, net of allowance for
doubtful accounts of $279,174 in 1996 5,978,738 6,834,871
Refundable income taxes 212,642 87,500
Prepaid expenses 408,338 373,624
------------------------
Total current assets 15,921,169 30,908,857
Equipment and leasehold improvements:
Computer hardware and software 3,405,559 2,141,205
Office equipment 2,193,919 1,729,759
Leasehold improvements 780,407 476,200
--------------------------
6,379,885 4,347,164
Less accumulated depreciation and
amortization 2,137,625 1,277,390
------------------------
Total equipment and leasehold improvements 4,242,260 3,069,774
Other assets--
Capitalized software development costs,
net of accumulated amortization of
$70,431 in 1996 and $35,216 in 1995 35,216 105,647
------------------------
Total assets $20,198,645 $34,084,278
========================
</TABLE>
<PAGE> 24
Catalyst International, Inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31,
1996 1995
------------------------
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 1,043,333 $ 1,114,045
Accrued liabilities 1,022,919 477,438
Reserve for restructuring and severance
costs (Note 10) 597,338 -
Deferred software license fees 12,453 296,536
Deferred services and maintenance 1,663,365 1,769,973
Redemption price of common stock (Note 10) 1,073,239 -
Current portion of long-term debt (Note 4) 51,047 123,423
------------------------
Total current liabilities 5,463,694 3,781,415
Long-term debt (Note 4) 131,832 323,886
Deferred services and maintenance 132,195 384,520
Deferred rent (Note 4) 324,217 343,749
------------------------
Total noncurrent liabilities 588,244 1,052,155
------------------------
Total liabilities 6,051,938 4,833,570
Commitments (Note 4)
Stockholders' equity (Notes 5 and 6):
Common stock, $.10 par value; 25,000,000
shares authorized; shares issued:
8,501,217 in 1996 and 8,421,323 in 1995 850,122 842,132
Additional paid-in capital 31,074,917 31,123,677
Accumulated deficit
Treasury stock, at cost--1,740,145 shares
of common stock in 1996 and 300,000
shares of common stock in 1995 (7,978,885) (1,050,000)
Common stock to be redeemed for treasury
(Note 10) (1,073,239) -
------------------------
Total stockholders' equity 14,146,707 29,250,708
------------------------
Total liabilities and stockholders' equity $20,198,645 $34,084,278
=========================
/TABLE>
See accompanying notes.
<PAGE> 25
</TABLE>
<TABLE>
<CAPTION>
Catalyst International, Inc.
Statements of Stockholders' Equity
Preferred Stock- Preferred Stock-
Preferred Stock Series A Series B Common Stock
------------------- -------------------- -------------------- --------------------
Shares Dollars Shares Dollars Shares Dollars Shares Dollars
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1994 1,089,108 $ 544,554 - $ - - $ - 1,500,000 $150,000
Issuance costs of redeemable
preferred stock - - - - - - - -
Exchange of preferred stock (1,089,108) (544,554) 1,965,517 982,759 - - - -
Exchange for preferred stock
held by minority interest - - - - 1,273,473 636,737 - -
Dividends on preferred stock
($.0375 per share of Series A
preferred stock, $.26 per share
of Series D preferred stock and
$.023 per share of preferred
stock) - - - - - - - -
Purchase of common stock for
treasury - - - - - - - -
Stock options exercised - - - - - - 111,501 11,150
Net income - - - - - - - -
-----------------------------------------------------------------------------------------------
Balances at December 31, 1994 - - 1,965,517 982,759 1,273,473 636,737 1,611,501 161,150
Shares issued in connection with
initial public offering - - - - - - 2,000,000 200,000
Conversion of Series A and B
preferred stock in connection
with initial public offering - - (1,965,517) (982,759) (1,273,473) (636,737) 3,238,992 323,899
Conversion of Series C and D
redeemable preferred stock in
connection with initial public
offering - - - - - - 1,525,261 152,526
Stock options exercised - - - - - - 35,569 3,557
Warrants exercised - - - - - - 10,000 1,000
Compensation expense on stock
options - - - - - - - -
</TABLE>
<TABLE>
<CAPTION>
Common Stock
Additional to be
Paid-in Accumulated Treasury Redeemed for
Capital Deficit Stock Treasury Total
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1994 $ 1,182,296 $(4,112,949) $ - $ - $ (2,236,099)
Issuance costs of redeemable
preferred stock (60,073) - - - (60,073)
Exchange of preferred stock (438,205) - - - -
Exchange for preferred stock
held by minority interest (448,263) - - - 1,085,000
Dividends on preferred stock
($.0375 per share of Series A
preferred stock, $.26 per share
of Series D preferred stock and
($.023 per share of preferred
stock) - (193,896) - - (193,896)
Purchase of common stock for
treasury - - (1,050,000) - (1,050,000)
Stock options exercised - - - - 11,150
Net income - 1,073,354 - - 1,073,354
--------------------------------------------------------------
Balances at December 31, 1994 1,132,281 (3,233,491)(1,050,000) - (1,370,564)
Shares issued in connection with
initial public offering 23,378,212 - - - 23,578,212
Conversion of Series A and B
preferred stock in connection
with initial public offering 1,295,597 - - - -
Conversion of Series C and D
redeemable preferred stock in
connection with initial public
offering 5,292,405 - - - 5,444,931
Stock options exercised 274 - - - 3,831
Warrants exercised - - - - 1,000
Compensation expense on stock
options 24,908 - - - 24,908
</TABLE>
<PAGE> 26
Catalyst International, Inc.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Preferred Stock-- Preferred Stock--
Preferred Stock Series A Series B Common Stock
----------------- ----------------- ----------------- -----------------
Shares Dollars Shares Dollars Shares Dollars Shares Dollars
----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dividends on preferred stock
($.0445 per share of Series A
preferred stock and $.9568 per
share of Series D preferred - - - - - - - -
stock)
Net income - - - - - - - -
----------------------------------------------------------
Balances at December 31, 1995 - - - - - - 8,421,323 842,132
Purchase of common stock for - - - - - - - -
treasury
Common stock to be redeemed for
treasury (Note 10) - - - - - - - -
Stock options exercised - - - - - - 79,894 7,990
Compensation expense on stock - - - - - - - -
options
Issuance costs of initial public - - - - - - - -
offering
Net loss - - - - - - - -
----------------------------------------------------------
Balances at December 31, 1995 - - - - - - $8,501,217 $850,122
==========================================================
Common Stock
Additional To Be
Paid-in Accumulated Treasury Redeemed
Capital Deficit Stock for Treasury Total
----------------------------------------------------------
<C> <C> <C> <C> <C>
Dividends on preferred stock
($.0445 per share of Series A
preferred stock and $.9568 per
share of Series D preferred - (437,028) - - (437,028)
stock)
Net income - 2,005,418 - - 2,005,418
----------------------------------------------------------
Balances at December 31, 1995 31,123,677 (1,665,101) (1,050,000) - 29,250,708
Purchase of common stock for - - (6,928,885) - (6,928,885)
treasury
Common stock to be redeemed for
treasury (Note 10) - - - (1,073,239) (1,073,239)
Stock options exercised 7,757 - - - 15,747
Compensation expense on stock 29,419 - - - 29,419
options
Issuance costs of initial public (85,936) - - - (85,936)
offering
Net loss - (7,061,107) - - (7,061,107)
----------------------------------------------------------
Balances at December 31, 1995 $31,074,917 $(8,726,208) $(7,978,885) $(1,073,239) $14,146,707
==========================================================
</TABLE>
<PAGE> 27
Catalyst International, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994
-------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income (loss) $ (7,061,107) $ 2,005,418 $ 1,073,354
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization 1,015,359 672,015 399,052
Compensation expense on stock options 29,419 24,908 -
Loss on disposal of equipment and
leasehold improvements 574 17,485 15,164
Provision for restructuring and
severance costs 597,338 - -
Write-off of purchased research and
development 2,002,280 - -
Changes in operating assets and
liabilities:
Accounts receivable 949,364 (1,651,403) (4,387,338)
Prepaid expenses (27,977) (256,900) 4,323
Accounts payable (129,133) (47,151) 828,120
Accrued liabilities 69,386 (265,957) 31,699
Income taxes (92,191) 64,500 (195,000)
Deferred software license fees (284,083) (191,592) (398,372)
Deferred services and maintenance (358,933) 888,339 158,498
Deferred rent (19,532) 59,247 284,502
-----------------------------------------
Total adjustments 3,751,871 (686,509) (3,259,352)
-----------------------------------------
Net cash provided by (used in) operating
activities (3,309,236) 1,318,909 (2,185,998)
Investing activities
Purchase of short-term investments (206,017,668) (19,883,157) -
Sales of short-term investments 217,274,210 - -
Capital expenditures (2,094,781) (1,571,533) (1,310,603)
Capitalized software development costs - (64,125) (76,738)
Proceeds from fixed asset disposals 12,279 22,115 -
Purchase of Information Strategies, Inc.,
net of cash acquired of $544 (Note 2) (1,499,456) - -
-----------------------------------------
Net cash provided by (used in) investing
activities 7,674,584 (21,496,700) (1,387,341)
Financing activities
Proceeds from long-term debt - 500,000 640,000
Payments on long-term debt (401,143) (1,446,838) (1,131,831)
Net proceeds from sale of preferred stock - - 4,939,927
Net proceeds from (costs related to)
initial public offering of common stock (85,936) 23,578,212 -
Proceeds from exercise of stock options
and warrants 15,747 4,831 11,150
Dividends paid to preferred stockholders - (87,439) (98,554)
Purchase of common stock for treasury (6,928,885) - (1,050,000)
-----------------------------------------
Net cash provided by (used in) financing
activities (7,400,217) 22,548,766 3,310,692
-----------------------------------------
</TABLE>
See accompanying notes.
<PAGE> 28
Catalyst International, Inc.
Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994
---------------------------------------
<S> <C> <C> <C>
Net increase (decrease) in cash and cash equivalents (3,034,869) 2,370,975 (262,647)
Cash and cash equivalents at beginning of year 3,729,705 1,358,730 1,621,377
--------------------------------------
Cash and cash equivalents at end of year $ 694,836 $3,729,705 $1,358,730
=======================================
Supplemental disclosure:
Cash paid for interest $ 59,566 $ 133,533 $ 158,811
Cash paid for income taxes 127,000 46,500 244,000
</TABLE>
Noncash investing and financing activities:
During 1994, the Company acquired $146,771 of computer hardware and
a $22,932 prepaid maintenance agreement under a capital lease. Also
during 1994, the Company issued Series A preferred stock in exchange
for original preferred stock and issued Series B preferred stock in
exchange for the preferred stock of a consolidated subsidiary held by
third parties.
During 1995, the Company acquired $267,868 of office equipment and
$116,869 of computer hardware under capital leases. Also during 1995,
the Company issued common stock in exchange for Series A, B, C and D
preferred stock in connection with the Company's initial public
offering of common stock.
See accompanying notes.
<PAGE> 29
Catalyst International, Inc.
Notes to Financial Statements
Three Years Ended December 31, 1996
1. Significant Accounting Policies
Business and Concentration of Credit Risk
Catalyst International, Inc. (the Company) develops, markets and
supports advanced warehouse management software solutions. The
Company also provides related services, including software
modification and configuration, project management, rapid
prototyping, training and implementation support for customers
throughout the United States and certain foreign countries who meet
the Company's credit policies. All domestic and international sales
are denominated in U.S. dollars. The Company performs periodic credit
evaluations of its customers' financial condition and does not
require collateral.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the accompanying
financial statements and notes. Actual results could differ from
those estimates.
Cash Equivalents
The Company invests excess funds not required for operations in
highly liquid investments such as money market funds or repurchase
agreements. These investments are considered cash equivalents for
financial reporting purposes.
Short-Term Investments
The following is a summary of short-term investments at December 31:
<TABLE>
<CAPTION>
1996
--------------------------------------
<S> <C> <C> <C>
Gross Unrealized Estimated
Cost Gains (Losses) Fair Value
--------------------------------------
Corporate debt securities $8,626,615 $ -- $8,626,615
======================================
</TABLE>
<PAGE> 30
Catalyst International, Inc.
Notes to Financial Statements (continued)
1. Significant Accounting Policies (continued)
<TABLE>
<CAPTION>
1995
-----------------------------------------
<S> <C> <C> <C>
Gross Unrealized Estimated
Cost Gains (Losses) Fair Value
-----------------------------------------
Obligations of the U.S. government $19,883,157 $ -- $19,883,157
=========================================
</TABLE>
The cost of these securities, which are considered as "available-for-
sale" for financial reporting purposes, approximates fair value at
both December 31, 1996 and 1995. Management determines the
appropriate classification of debt securities at the time of purchase
and reevaluates such designation as of each balance sheet date. All
of the available-for-sale securities are due in less than one year.
The cost of securities sold is based on the specific identification
method. There were no realized gains or losses during 1996 or
1995.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are recorded at cost and are
depreciated on the straight-line basis over their estimated useful
lives as follows: computer hardware and software: 5 years; office
equipment: 5 -- 10 years; and leasehold improvements: 10 years.
Capitalized Software Development Costs
In accordance with Statement of Financial Accounting Standards (SFAS)
No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed," the Company capitalizes costs incurred
to develop new software products upon determination that
technological feasibility has been established for the product,
whereas costs incurred prior to the establishment of technological
feasibility are charged to expense. When the software product is
available for general release to customers, capitalization ceases and
such costs are amortized on a product-by-product basis based on
current and anticipated future revenue with an annual minimum equal
to straight-line amortization over the remaining estimated economic
useful life of the software product.
<PAGE> 31
Catalyst International, Inc.
Notes to Financial Statements (continued)
1. Significant Accounting Policies (continued)
Revenue Recognition
Software License Fees
Software license fees on a customer's initial installation (which may
include single or multiple sites) are recognized as revenue using the
straight-line method beginning upon contract execution and ending
upon the estimated completion date for installation of the software.
The estimated completion dates are reviewed and revised monthly
during the contract, and adjustments, if any, are recorded ratably
through the installation date. Software license fees for sales of
additional licenses to existing customers are recognized upon
customer authorization to proceed with the subsequent installation.
In 1996, the Company began selling corporate software license fees
which provide the customer the ability to install the software at an
unlimited number of sites, as defined. Such revenue is recognized
upon delivery of the software as the Company has no remaining
significant obligations.
Relational database management systems software from third-party
vendors is utilized by the Company's software product. The Company
recognizes revenue and the related cost of the database software upon
billing to the customer.
Services and Maintenance
Software modification fees are recognized as revenue using the
straight-line method beginning upon definition of the modifications
required and customer authorization to proceed, and ending upon
installation. The estimated completion dates are reviewed and revised
monthly during the contract, and adjustments, if any, are recorded
ratably through the installation date. Management considers such
methodology to be the best available measure of progress on these
contracts and believes such methodology approximates the same results
which would be obtained under a percentage-of-completion method.
Professional services are recognized as revenue as time and material
costs are incurred and billed to the customer.
Maintenance fees are prepaid by customers and are recognized as
revenue ratably over the term of the maintenance agreement, which is
generally one year.
<PAGE> 32
Catalyst International, Inc.
Notes to Financial Statements (continued)
1. Significant Accounting Policies (continued)
Hardware and Other
Hardware and other revenues are recognized when the units are shipped
to the customer.
Advertising
Advertising costs are expensed as incurred and amounted to
approximately $329,000, $325,000 and $367,000 in 1996, 1995 and 1994,
respectively.
Compensated Absences
In 1995, the Company changed its policy for employees so that
vacation pay must be used in the same year it is earned. The accrued
liability at December 31, 1995 was reduced by $228,000 to eliminate
vacation pay no longer required to be accrued under the new policy.
Income Taxes
Deferred income taxes are provided for temporary differences between
the financial reporting and income tax basis of assets and
liabilities and are measured using currently enacted tax rates and
laws.
Net Income (Loss) Per Common Share
Net income (loss) per common share is computed based on the weighted
average number of shares of common stock and common stock equivalents
outstanding for each respective period and assumes the conversion on
January 1, 1994 and 1995 of all outstanding shares of Series A, B, C
and D preferred stock into common stock. Net income per common share
includes the dilutive effect of stock options and warrants calculated
using the "treasury stock" method (using initial public offering
(IPO) price per share prior to the effective date of the IPO and
actual market prices thereafter). Pursuant to Securities and Exchange
Commission Staff Accounting Bulletin No. 83, common stock sold and
stock options granted by the Company during the 12 months immediately
preceding the initial filing of the Registration Statement for the
IPO have been included as common stock equivalents as if they were
outstanding for each period presented, whether or not dilutive,
because the sale or option price per share was below the IPO price
per share.
<PAGE> 33
Catalyst International, Inc.
Notes to Financial Statements (continued)
2. Acquisition of Information Strategies, Inc. ("ISI")
In April 1996, the Company acquired all of the outstanding common
stock of ISI, a Windows NT based software developer, for $1,500,000
in cash. The acquisition was accounted for as a purchase and,
accordingly, the purchase price was allocated to the assets acquired
and liabilities assumed (including bank debt of $136,713) based upon
fair value at the date of acquisition. The assets acquired included
purchased research and development costs totaling $2,002,000 which
were immediately charged to operations. The operating results of ISI
have been included in the statement of operations since the date of
acquisition. Pro forma results of operations have not been presented
because the effects of this acquisition were not significant.
3. Bank Line of Credit
The Company has a $1,000,000 bank line of credit. The line of credit,
which is due on demand, requires monthly interest payments at the
bank's prime rate of interest (8.25% at December 31, 1996) plus 0.25%
and is secured by substantially all of the Company's assets. No
amounts were outstanding under the line of credit at December 31,
1996 or 1995.
4. Long-Term Debt and Lease Commitments
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
-------------------
<S> <C> <C>
Capital lease obligation $ 182,879 $ 447,309
Less current portion (51,047) (123,423)
-------------------
$ 131,832 $ 323,886
===================
</TABLE>
The Company leases a phone system under capital leases requiring
monthly payments in varying amounts through August 2000 with an
effective interest rate of 8.327%. At December 31, 1996, the gross
amount of office equipment recorded under capital leases and related
accumulated amortization was $268,991 and $96,043, respectively.
The Company also leases its corporate office space under an operating
lease which extends through January 2006. The Company is recognizing
rent expense on a straight-line basis which differs from the pattern
of payments required by the lease. The Company is required to pay
real estate taxes, maintenance, utilities and insurance on the leased
building.
<PAGE> 34
Catalyst International, Inc.
Notes to Financial Statements (continued)
4. Long-Term Debt and Lease Commitments (continued)
At December 31, 1996, future payments under capital and
noncancellable operating leases were as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
----------------------
<S> <C> <C>
1997 $ 64,046 $ 619,000
1998 64,046 585,000
1999 64,046 611,000
2000 16,358 615,000
2001 -- 615,000
Thereafter -- 2,264,000
----------------------
Total minimum lease obligations 208,496 5,309,000
=========
Amounts representing interest 25,617
--------
Capital lease obligation $182,879
========
</TABLE>
Total annual rent expense, including executory costs, on all
operating leases was approximately $1,183,000, $816,000 and $465,000
in 1996, 1995 and 1994, respectively.
5. Stockholders' Equity
In November 1996, the Company entered into an agreement with
affiliated shareholders to redeem all 1,206,013 shares of the
Company's common stock held by the shareholders at $4.75 per share.
The redemption agreement terminated any prior stock agreements
between the Company and the shareholders.
The Company issued 2,000,000 new shares of common stock to the public
in the IPO and received net proceeds of approximately $23,600,000. In
connection with the IPO, the Company completed a recapitalization in
which all outstanding shares of Series A, B, C and D preferred stock
were converted into an aggregate of 4,764,253 shares of common stock
and the number of authorized shares of common stock was increased to
25,000,000.
Series A preferred stock received cumulative annual dividends equal
to the greater of $.05 per share or the per share amount of dividends
paid on common stock or Series B preferred stock. Series D preferred
stock received cumulative annual dividends equal to 10% of the
original amount paid for such stock. Series B and C preferred stock
received dividends equal to the greater of dividends declared by the
Board of Directors or the per share amount of any dividends paid
on common stock.
<PAGE> 35
Catalyst International, Inc.
Notes to Financial Statements (continued)
5. Stockholders' Equity (continued)
In October 1994, certain venture capital partnerships entered into a
preferred stock purchase agreement with the Company to purchase
1,159,880 shares of the Company's Series C preferred stock for
$1,000,000 and 365,381 shares of the Company's Series D preferred
stock for $4,000,000.
In April 1994, the Company, pursuant to a Share Exchange Agreement,
exchanged 1,273,473 shares of the Series B preferred stock for all
outstanding shares of preferred stock of the former Catalyst
International, Inc. The Company had previously owned 100% of the
common stock of the former Catalyst International, Inc. As a result
of the exchange of preferred stock, the former Catalyst became a
wholly owned subsidiary of the Company. Catalyst International, Inc.
has subsequently merged into its parent. In addition, in April 1994,
the Company exchanged 1,956,519 shares of Series A preferred stock
for 1,089,108 shares of the Company's original preferred stock, which
is no longer authorized for issuance.
6. Stock Options and Warrants
The 1993 Stock Option Plan (the Plan), as amended, provides for
granting by the Company of up to 3,000,000 incentive stock options
and/or nonqualified stock options to employees. Each option entitles
the holder to purchase one share of common stock at the specified
option price. The option term is ten years. With certain exceptions,
options vest 20% on the first anniversary of either the date of
employment or the date of grant and then ratably over the following
48 months. At December 31, 1996, 954,909 options are available for
grant under the Plan. For all options granted to date, the exercise
price was equal to the market price (or estimated fair value prior
to going public) of the underlying stock on the date of grant. No
expense was recognized relating to the option grants in 1996.
<PAGE> 36
Catalyst International, Inc.
Notes to Financial Statements (continued)
6. Stock Options and Warrants (continued)
The following table summarizes information with respect to the
Company's stock option plan for the three years ended December 31,
1996:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Option Price Per Share
------------------------------------
<S> <C> <C>
Outstanding at January 1, 1994 - $ -
Granted 733,500 $0.15
Exercised (111,501) $0.10
Canceled (60,508) $0.10
------------------------------------
Outstanding at December 31, 1994 561,491 $0.17
Granted 946,750 $8.40
Exercised (35,569) $0.11
Canceled (80,220) $2.18
------------------------------------
Outstanding at December 31, 1995 1,392,452 $2.84
Granted 740,600 $7.09
Exercised (79,894) $0.20
Canceled (235,031) $7.41
------------------------------------
Outstanding at December 31, 1996 1,818,127 $5.75
====================================
</TABLE>
As of December 31, 1996, the range of exercise prices on outstanding
options was $0.10 to $13.00 per share, and the remaining contractual
lives ranged from 7 to 10 years. The number of options exercisable at
December 31, 1996, 1995 and 1994 were 254,386 and 177,030,
respectively.
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," in accounting for
its employee stock option plan. Had the Company accounted for its
employee stock option plan based upon the fair value at the grant
date for options granted under the plan, based on the provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123), the Company's pro forma net
income (loss) and pro forma net income (loss) per share would have
been as follows (for purposes of pro forma disclosures, the estimated
fair value of the options is amortized to expense over the options'
vesting period):
1996 1995
--------------------------
Pro forma net income (loss) $(7,517,865) $1,464,855
Pro forma net income (loss) per share $(0.94) $0.21
<PAGE> 37
Catalyst International, Inc.
Notes to Financial Statements (continued)
The weighted average grant date fair values used in the above pro
forma disclosures were $3.09 and $2.94 per share for 1996 and 1995
option grants, respectively. It should be noted that the effects of
applying SFAS No. 123 for providing pro forma disclosure may not be
indicative of future amounts until the new rules are applied to all
outstanding, nonvested awards (i.e., the above pro forma amounts give
effect to 1995 and 1996 grants only).
6. Stock Options and Warrants (continued)
As required by SFAS No. 123, the Company has determined the pro forma
information as if the Company had accounted for stock options granted
since January 1, 1995 under the SFAS No. 123 fair value method. For
grants made prior to the Company becoming a public company, the
minimum value method was used to estimate the fair value of the
options. For grants made after the Company's initial public offering
in November 1995, the Black-Scholes method was used. With the
exception of volatility (which is ignored in the case of the minimum
value method), the following weighted-average assumptions were used
for 1996 and 1995, respectively: risk-free interest rates of 6.3%-
1996 and 6.1%-1995; dividend yields of 0%; expected common stock
market price volatility factors of 0.529; and a weighted-average
expected life of the option of five years.
In April 1996, the Company modified 726,100 employee stock options
granted in 1995 and 1996. The modifications included reducing the
exercise price to the market price of the underlying stock as of the
modification date ($8.50 per share), extending the term to ten years
after the modification date, and resetting the five-year vesting
period.
During July 1994, the Company issued warrants to each of two parties
to purchase 5,000 shares of common stock exercisable at any time at
$.10 per share. The warrants were exercised in September 1995. In
addition, in November 1995 the Company issued a warrant to purchase
10,000 shares of common stock at $13.00 per share. The warrant term
is 10 years and vests at 20% one year after date of grant and then
ratably over the following 48 months.
The Company has reserved 2,783,036 shares of common stock at December
31, 1996, to provide for the exercise of outstanding stock options
and warrants and the granting of stock options.
7. Retirement Plan
The Company sponsors an employee savings and retirement plan in which
all employees over 21 years of age with one month of service are
eligible to participate. Participants can elect to defer up to 15% of
their compensation in accordance with Section 401(k) of the Internal
Revenue Code. The Company, at its discretion, can match up to 100% of
the employees' contributions. Company contributions to the plan were
approximately $78,000, $51,000 and $36,000 in 1996, 1995 and 1994,
respectively.
<PAGE> 38
Catalyst International, Inc.
Notes to Financial Statements (continued)
8. Income Taxes
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994
------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ - $ 101,000 $ 25,000
State - 10,000 24,000
------------------------------------------
- 111,000 49,000
Deferred 2,010,000 616,000 363,000
Change in valuation reserve (2,010,000) (616,000) (363,000)
-------------------------------------------
$ - $ 111,000 $ 49,000
===========================================
</TABLE>
The provision for income taxes differs from the statutory U.S.
federal income tax rate due to the following:
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994
----------------------------------------
<S> <C> <C> <C>
Provision (benefit) at U.S.
statutory rate $(2,401,000) $ 720,000 $ 382,000
State income taxes (benefit),
net of federal tax - 7,000 12,000
General business credits (105,000) - (4,000)
Change in valuation allowance 2,010,000 (616,000) (363,000)
Nondeductible expenses
(nontaxable income) 495,000 (2,000) 24,000
Other 1,000 2,000 (2,000)
----------------------------------------
$ _ $ 111,000 $ 49,000
========================================
</TABLE>
At December 31, 1996, the Company had net operating loss
carryforwards of $5,490,000 and $5,818,000 for federal and Wisconsin
income tax purposes, respectively, which expire between 2007 and
2011. Of these net operating loss carryforwards, $964,000 were
created by deductions from the exercise of nonqualified stock options
during 1996 and 1995. The tax benefit realized upon the use of net
operating loss carryforwards in future years related to such
deductions will be credited directly to additional paid-in capital.
At December 31, 1996, the Company had general business credit
carryforwards of $424,000 and $177,000 for federal and Wisconsin
<PAGE> 39
Catalyst International, Inc.
Notes to Financial Statements (continued)
income tax purposes, respectively, which expire from 2006 through
2009. At December 31, 1996, the Company had $61,000 of alternative
minimum tax (AMT) credits which do not expire. Annual limitations on
the use of these loss and credit carryforwards due to changes in
ownership are not expected to materially impact the Company.
The tax effects of temporary differences between financial reporting
and income tax bases of assets and liabilities were as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995
--------------------------
<S> <C> <C>
Deferred tax assets:
AMT and general business credits $ 602,000 $ 707,000
Net operating loss carryforwards 2,170,000 76,000
Deferred revenues 247,000 291,000
Intercompany deferred license fees - 217,000
Accrued compensation and restructuring 267,000 33,000
Deferred rent 126,000 134,000
Allowance for doubtful accounts 109,000 -
Other 32,000 16,000
--------------------------
3,553,000 1,474,000
Deferred tax liabilities:
Depreciation (172,000) (88,000)
Capitalized software costs (14,000) (41,000)
Other (43,000) (31,000)
---------------------------
(229,000) (160,000)
---------------------------
Net deferred tax assets 3,324,000 1,314,000
Valuation allowance (3,324,000) (1,314,000)
---------------------------
$ - $ -
===========================
</TABLE>
The valuation allowance at December 31, 1996 and 1995, was provided
because of uncertainty, based on the Company's historical operating
results, with respect to realization of deferred tax assets.
9. Segment Disclosure and Major Customers
The Company operates in one industry segment. Sales to individual
customers that exceeded 10% of revenues in each year ending December
31 were as follows: 1995: two customers - 15% and 13% of revenues,
respectively; and 1994: two customers - 17% and 10% of revenues,
respectively. There were no sales to individual customers that
exceeded 10% of revenues in 1996.
<PAGE> 40
Catalyst International, Inc.
Notes to Financial Statements (continued)
9. Segment Disclosure and Major Customers (continued)
International revenues accounted for 21%, 29% and 19% of total
revenues in 1996, 1995 and 1994, respectively. Revenues by geographic
area for the years ended December 31, 1996, 1995 and 1994, were as
follows:
Years ended December 31,
1996 1995 1994
--------------------------------------
North America $16,681,142 $14,660,341 $13,170,488
International 4,485,580 5,997,656 3,007,926
--------------------------------------
$21,166,722 $20,657,997 $16,178,414
======================================
10. Restructuring and Severance Costs
In December 1996, the Company initiated a restructuring plan to close
its division in Dallas, Texas. Shutdown of this facility is expected
to be completed by the end of the first quarter of 1997. In
connection with the restructuring, six employees at the facility have
been or will be terminated. Estimated employee termination costs of
$234,318 have been accrued at December 31, 1996. Additional costs of
$113,020 associated with the restructuring have also been accrued at
December 31, 1996. These costs primarily relate to the termination of
a facility lease in Dallas which runs through February 1998, and
other costs to shut down the division.
The Company, based upon a decision by the Board of Directors in
December 1996, entered into a termination agreement with its former
president and chief executive officer. Severance costs of $250,000
have been accrued at December 31, 1996. In conjunction with the
termination agreement, the Company agreed to repurchase 225,945
shares of the Company's stock held by this individual at $4.75 per
share. These shares were purchased for the treasury on January 7,
1997.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
<PAGE> 41
Part III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS
The Company incorporates by reference herein the information
contained under the caption "Election of Directors" on page 2 of the
Proxy Statement for the 1997 Annual Meeting of Stockholders and
"Executive Officers" on page 6 of the Proxy Statement for the 1997
Annual Meeting of Stockholders.
Departure of Chief Financial Officer. As of March 12, 1997, Lisa K.
Sanregret is no longer employed by the Company as its Chief
Financial Officer. Ms. Sanregret also held the title of Vice
President of Finance and Administration. The Company has commenced a
search for a replacement Chief Financial Officer; in the interim, Mr.
McGowan will assume Ms. Sanregret's responsibilities as Chief
Financial Officer.
ITEM 10. EXECUTIVE COMPENSATION.
The Company incorporates by reference herein the information
contained under the caption "Executive Compensation" on pages 7
through 9 of the Proxy Statement for the 1997 Annual Meeting of
Stockholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The Company incorporates by reference herein the information
contained under the caption "Security Ownership of Certain Beneficial
Owners" on pages 4 and 5 of the Proxy Statement for the 1997 Annual
Meeting of Stockholders.
<PAGE> 42
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBIT INDEX
Exhibit
Number Description
- ---------------------------------------------------------------------
3.1 Form of Amended and Restated Certificate of
Incorporation, incorporated by reference to Exhibit 3.1
of the Company's Registration Statement on Form SB-2 (No.
33-97522C) (the "Registration Statement").
3.2 Form of Amended and Restated By-Laws, incorporated by
reference to Exhibit 3.2 of the Registration Statement.
10.1 1993 Stock Option Plan of Catalyst USA, Inc.,
incorporated by reference to Exhibit 10.1 of the
Registration Statement.*
10.2 Employment Agreement dated August 1, 1992 between the
Company and James Stowers, incorporated by reference to
Exhibit 10.3 of the Registration Statement.*
10.3 1995 Management Bonus Plan, incorporated by reference to
Exhibit 10.4 of the Registration Statement.*
11 Statement re: Computation of Per Share Earnings.
21 Subsidiaries.
23 Consent of Ernst & Young, LLP.
27 Article 5 Financial Data Schedule.
* Represents management contract or compensation plan or
arrangements required to be filed as an Exhibit to the Form 10-KSB.
REPORTS ON FORM 8-K.
One report on Form 8-K was filed during the fourth quarter of 1996.
On a report on Form 8-K dated December 3, 1996, the Company disclosed
that it announced on November 29, 1996 that the Company had entered
into a definitive agreement to redeem approximately 1.2 million
shares of its Common Stock from Summit Ventures III, L.P. and Summit
Investors II, L.P. of Boston in a privately-negotiated transaction.
<PAGE> 43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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,
in the City of Milwaukee, State of Wisconsin, on March 26, 1997.
Catalyst International, Inc.
By: /s/ Sean P. McGowan
--------------------------------------
Sean P. McGowan
President and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates stated:
/s/ Douglas B. Coder Date: March __, 1996
Douglas B. Coder
Chairman of the Board
(Principal Executive Officer)
/s/ Sean P. McGowan Date: March __, 1996
Sean P. McGowan
President, Chief Operating Officer
and Acting Chief Financial Officer
(Principal Accounting Officer)
/s/ Roy J. Carver Date: March __, 1996
Roy J. Carver, Director
/s/ Vaemond H. Crane Date: March __, 1996
Vaemond H. Crane, Director
/s/ James F. Goughenour Date: March __, 1996
James F. Goughenour, Director
/s/ Terrence L. Mealy Date: March __, 1996
Terrence L. Mealy, Director
<PAGE> 44
Exhibit 11
<TABLE>
<CAPTION>
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Year ended December 31,
1996 1995
<S> <C> <C>
Average shares outstanding.............. 7,995,766 2,151,082
Conversion of options and warrants (a).. - 271,674
Conversion of preferred stock (b)....... - 4,162,177
Stock, options and warrants issued
within one year of initial filing (c). - 304,070
Total.................................. 7,995,766 6,889,003
Net income (loss) applicable to
common stock.......................... $(7,061,107) $1,568,390
Dividends on preferred stock............ - 437,028
$(7,061,107) $2,005,418
Net income (loss) per share of
common stock.......................... $(0.88) $0.29
</TABLE>
(a) Computed using the "treasury stock" method
(b) Computed using the "if-converted" method
(c) Computed in accordance with Staff Accounting Bulletin
No. 83
<PAGE> 45
Exhibit 21
Subsidiaries of Catalyst International, Inc.
Name: Catalyst WMS International, Limited
Jurisdiction of Incorporation: United Kingdom
Status: Inactive and in Good Standing
Name: Catalyst do Brasil Disbtribuidora de Software Ltda.
Jurisdiction of Incorporation: Brazil
Status: Active and in Good Standing
Name: Information Strategies Incorporated
Jurisdiction of Incorporation: State of Texas
Status: Inactive and in Good Standing
<PAGE> 46
Exhibit 23
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-1394) pertaining to the 1993 Stock Option Plan of
Catalyst USA, Inc. of our report dated January 27, 1997, with respect to
the financial statements of Catalyst International, Inc. included in this
Annual Report (Form 10-KSB) for the year ended December 31, 1996.
Milwaukee, WI ERNST & YOUNG LLP
March 24, 1997
<PAGE> 47
Exhibit 27
ARTICLE 5 FINANCIAL DATA SCHEDULE
(amounts in thousands, except per share amounts)
Period type 12 mos.
Fiscal year end December 31, 1996
Period end December 31, 1996
Cash $ 695
Securities 8,626
Receivables 5,979
Allowances 279
Inventory -
Current assets 15,921
PP&E 6,380
Depreciation 2,138
Total assets 20,199
Current liabilities 5,464
Bonds -
Preferred mandatory -
Preferred -
Common 850
Other SE 13,297
Total liability and equity 20,199
Sales 21,167
Total revenues 21,167
CGS 12,659
Total costs 29,095
Other expenses -
Loss provision -
Interest expense 67
Loss pretax (7,061)
Income tax -
Income continuing -
Discontinued -
Extraordinary -
Changes -
Net loss (7,061)
EPS primary (.88)
EPS diluted (.88)
