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
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 0-27138
__________
CATALYST INTERNATIONAL, INC.
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(Name of small business issuer in its charter)
Delaware 39-1415889
- ----------------------------------------------- -----------------
State or other jurisdiction of incorporation I.R.S. Employer
or organization) Identification No.
8989 North Deerwood Drive, Milwaukee, Wisconsin 53223
- ----------------------------------------------- ----------------
(Address of principal executive office) (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
-----------------------------
(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. [X]
State issuer's revenues for its most recent fiscal year. $22,525,000
-----------
State the number of shares outstanding of each of the issuer's classes of
common equity, as of March 13, 1998. 6,663,071
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As of March 13, 1998, the aggregate market value of the registrant's common
stock held by non-affiliates was Twenty One Million Six Hundred Fifty Nine
Thousand Seven Hundred Twenty One Dollars ($21,659,720) (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 1998 Annual
Meeting of Stockholders to be held
on April 27, 1998 III 9, 10, 11
Transitional Small Business Disclosure Format (check one): Yes [ ]; No [X]
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(R) 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
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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 hardware platforms,
run on multiple relational database management systems ("RDBMSs") (such as
Oracle 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, Baan and Oracle)
and supply chain planning systems (such as Manugistics and I2). Catalyst WMS
supports a wide range of interfaces to third-party peripherals, such as radio
frequency-based scanning devices, bar coding devices and material handling
equipment (such as conveyors, sorters and carousels).
The Company's implementation methodology is known as the "CIMPL" process-the
Catalyst Implementation Methodology 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 should 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
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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.
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 CRP in order to address the needs of
different sized warehouses and distribution centers and shorten and simplify
the implementation process.
Develop Additional 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
plans to develop a mid-tier product that can be implemented in smaller
warehouse facilities and continue its efforts to sell and deliver a
"packaged" warehouse solution that requires fewer modifications.
Expand Worldwide Distribution. The Company plans to increase its
international business through a direct sales force and support staff in
overseas offices, obtaining agreements for global, multi-site installations
with multinational customers, and partnering with foreign distributors or
Value Added Resellers ("VARs"). 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; in France in 1996; and the Netherlands
in 1997. Catalyst WMS has an international interface, and is available in
French, Spanish, Portuguese and Italian.
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 supply
chain planning systems. 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 and Yard Management System ("Catalyst
YMS"), as well as with new major releases and interim point releases of
Catalyst WMS incorporating new features and functionality. Catalyst WMS
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interfaces with an organization's current material handling equipment and
transaction-based systems, such as electronic data interchanges ("EDI"), bar
code labeling, general ledger, MRP II, ERP and supply chain planning systems.
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 7.0, which the Company introduced in the first quarter
of 1997, utilizes a native MicroSoft(R) Windows(TM) graphic user interface
("GUI") implementation along with a direct interface to Oracle business
solutions, new functionality for public warehousing and post-pick value added
work-in process ("WIP") procedures. In 1997, the Company introduced the
Warehouse Wizard, a PC-based configuration tool, along with a training CD Rom
to aid implementation.
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.
Catalyst YMS is a three-tier, client/server product that optimizes
productivity in the shipping and receiving yard by prioritizing receipts and
managing inbound and outbound trailers. Catalyst YMS is available 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
for Post-Contract Support ("PCS") 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
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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. These departments include Professional
Services, Implementation Services, Product Distribution, Product Support,
Customer Education and Training, and Customer Service. The Company's
Professional Services Organization (made up of the Professional Services and
Implementation Services Groups) offers a structured implementation
methodology (the CIMPL process) which typically lasts four to eight months.
The CIMPL process consists of education, 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, prototype and validate customer
business requirements and resolve operating issues prior to live
implementation. The Company's Product Distribution and Product Support Groups
are responsible for managing and installing operating systems, hardware,
networks, communication links and RDBMSs. The Customer Education and Training
Group provides education and training on the use, administration and
configuration of Catalyst WMS at the Company's headquarters. The Catalyst
approach employs a mixture of "train the trainer" and "train the user."
Typically customer employees (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.
Customers
The Company's sales cycle typically ranges from six to nine months, but
large projects with multiple sites could span several years. As a result, the
Company may have a revenue backlog of several millions of dollars. 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 years ended
December 31, 1996 and 1997, 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 to
penetrate the mid-tier warehouse market by developing a product that can be
implemented in smaller warehouse facilities. In addition, the Company will
continue its efforts to sell and deliver a "packaged" warehouse solution that
requires fewer modifications. 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
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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 Brazil, Guatemala, France, Italy, Mexico, Spain, the
United Kingdom, Australia and Germany. 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; in
France in 1996 and in the Netherlands in 1997. The Company plans to
strengthen its local presence though its relationships with local offices of
the supply chain participants and enterprise software vendors and by
developing close relationships with local system integrators. Having strong
relationships with local partners should give the Company the insight into how
to most effectively focus its sales effort: through direct sales efforts or
through local VAR programs.
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 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 18 years in the warehouse management
software business and more than 60 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, 1997, the sales and marketing organization consisted of
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35 employees, including 7 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; Marknesse,
Holland (the Netherlands); Atlanta; Boston; Dallas; and Indianapolis.
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 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
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 or by contract personnel
under the Company's control. Product development costs were $2.6 million
1995, $4.5 million in 1996 and $2.7 million in 1997.
The Company is continually enhancing the features and functionality of
Catalyst WMS and developing new modules and products. Catalyst WMS Release
7.0 utilizes a native MicroSoft(R) Windows(TM) GUI implementation along with a
direct interface to Oracle business solutions, new functionality for public
warehousing and post-pick value added WIP procedures. In 1997, the Company
introduced the Warehouse Wizard, a PC-based configuration tool, along with a
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training CD Rom to aid implementation. 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. The Company
plans to develop a mid-tier product that can be implemented in smaller
warehouse facilities and continue its efforts to sell and deliver a "packaged"
warehouse solution that requires fewer modifications. These pre-configured
products would be pre-tested and marketed to prospective customers with
warehouses that do not require a customized software solution.
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 effectively with respect to these
factors, but there can be no assurance that it will continue to do so.
Employees
As of December 31, 1997, the Company had 236 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. The Company believes that its
existing facilities should be adequate for its needs through 1998.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceeding.
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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 1997.
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 $2.125 per share.
As of February 28, 1998 there were 6,657,172 shares of the Company's Common
Stock outstanding held by 165 stockholders of record and approximately 850
beneficial owners.
The following table represents the high and low price information for the
Company's Common Stock for each quarterly period within the two most recent
fiscal years.
<TABLE>
<CAPTION>
1997 1996
----------------------------------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
Quarters ended March 31, $4.625 $2.875 $11.375 $7.25
Quarters ended June 30, 4.00 2.125 12.00 7.75
Quarters ended September 30, 6.25 3.50 10.875 4.25
Quarters ended December 31, 6.00 3.75 7.25 4.125
</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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following selected financial data should be read in conjunction with the
consolidated financial statements and notes thereto and Management's
Discussion and Analysis included elsewhere in this Annual Report.
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<TABLE>
<CAPTION>
Years Ended December 31, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------
(In thousands, except per share data)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Revenues:
Software license fees $ 7,007 $ 8,132 $10,372 $ 6,810 $ 3,131
Services and maintenance 14,637 12,902 10,180 7,942 5,180
Hardware and other 881 132 106 1,426 556
------ ------ ------ ------ ------
Total revenues 22,525 21,166 20,658 16,178 8,867
Operating expenses:
Cost of software license fees 524 288 479 471 245
Cost of services and maintenance 13,745 12,371 9,369 6,507 4,523
Cost of hardware and other 766 - 4 1,212 336
Sales and marketing 5,291 5,079 4,499 3,901 1,419
Product development 2,731 4,470 2,554 1,411 747
General and administrative 3,975 4,287 1,608 1,416 1,287
Write-off of purchased research
and development(1) - 2,002 - - -
Restructuring and severance
costs(2) - 597 - - -
------ ------ ------ ------ ------
Total operating expenses 27,032 29,094 18,513 14,918 8,557
Income (loss) from operations (4,507) (7,928) 2,145 1,260 310
------ ------ ------ ------ ------
Other income (expense) 308 867 (29) (138) (191)
------ ------ ------ ------ ------
Income (loss) before provision for
income taxes (4,199) (7,061) 2,116 1,122 119
Provision for income taxes - - 111 49 63
------ ------ ------ ------ ------
Net income (loss) $(4,199) $(7,061) $2,005 $1,073 $ 56
------ ------ ------ ------ ------
Net income (loss) per share(3) $ (0.63) $ (0.88) $ 0.30 $ - $ -
Shares used in computing net
income (loss) per share 6,630 7,996 6,784 - -
Balance Sheet Data:
Cash and cash equivalents $ 4,256 $9,321 $3,730 $1,359 $1,621
Working capital (deficit) 6,673 10,457 27,127 3,622 (262)
Total assets 17,692 20,199 34,084 8,678 3,262
Long-term debt, less current
portion 443 132 324 781 986
Redeemable preferred stock - - - 5,095 -
Total shareholders' equity
(deficit) 9,997 14,147 29,251 (1,371) (2,236)
</TABLE>
- ----------
(1) See Notes to Consolidated Financial Statements, Note 2.
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(2) See Notes to Consolidated Financial Statements, Note 10.
(3) Computed on the basis described in Note 1 of Notes to Consolidated
Financial Statements. Due to the effect of the public issuance of common
stock on the Company's capital structure, per share data for the years ended
prior to December 31, 1995 are not comparable to subsequent years and,
therefore, have not been presented.
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, 1997 1996 1995
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Software license fees 31.1% 38.4% 50.2%
Services and maintenance 65.0 61.0 49.3
Hardware and other 3.9 0.6 0.5
----- ----- -----
Total revenues 100.0 100.0 100.0
Operating expenses:
Cost of software license fees 2.3 1.4 2.3
Cost of services and maintenance 61.0 58.4 45.3
Cost of hardware and other 3.4 - -
Sales and marketing 23.5 24.0 21.8
Product development 12.1 21.1 12.4
General and administrative 17.7 20.3 7.8
Write-off of purchased research
and development - 9.5 -
Restructuring and severance costs - 2.8 -
----- ----- -----
Total operating expenses 120.0 137.5 89.6
----- ----- -----
Income (loss) from operations (20.0) (37.5) 10.4
Other income (expense) 1.4 4.1 (0.2)
----- ----- -----
Income (loss) before provision for
income taxes (18.6) (33.4) 10.2
Provision for income taxes - - 0.5
----- ----- -----
Net income (loss) (18.6)% (33.4)% 9.7%
===== ===== =====
</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
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involve certain risk factors beyond the Company's control. 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 27.7% to
$20.7 million in 1995, by 2.5% to $21.2 million in 1996 and by 6.4% to $22.5
million in 1997. The slower growth in total revenues in 1996 and 1997 was due
primarily to a nearly complete turnover of the Company's sales force during
that period. In addition, the revenues recognized do not reflect the fact
that the Company's backlog of software license fees and modifications grew
substantially during the year; $5.8 million at December 31, 1997 compared to
$2.0 million at December 31, 1996. 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)
1997 1996 1995 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Software license fees $ 7,007 $8,132 $10,372 (13.8)% (21.6)%
Services and maintenance 14,637 12,902 10,180 13.4 26.7
Hardware and other 881 132 106 567.4 24.5
</TABLE>
International revenues increased by 99.3% to $6.0 million in 1995, decreased
by 25.0% to $4.5 million in 1996 and decreased 15.6% to $3.8 million in 1997.
International revenues accounted for 29.0%, 21.2% and 16.7% of total revenues
in 1995, 1996 and 1997, respectively. The decrease in percentage of total
revenues in 1996 and 1997 was due primarily to the fact that two large
European projects are now nearing completion and were not replaced with new
projects. The increase in 1995 was due to the initial sale of these same
projects. In November 1995, the Company opened an office in Rio de Janeiro,
Brazil and in August 1996, opened an office in Lyon, France. In June 1997,
the Company also began to market its products in Holland. Although the
Company anticipated revenue growth from international markets in 1997, certain
of these markets did not perform to their expected potential. As a result,
the Company plans to concentrate its sales focus on those markets that
show the most potential. The Company believes that future international
revenues should remain constant or increase slightly as a percentage of total
revenues.
<PAGE>
Page 14
Software License Fees
Software license fee revenues consist of revenues from software license
agreements of Catalyst WMS, related add-on products and relational database
management systems (RDBMS). Software license fee revenues increased by 52.3%
to $10.4 million in 1995, decreased by 21.6% to $8.1 million in 1996 and
decreased by 13.8% to $7.0 million in 1997. The decrease in software license
fee revenues in 1996 and 1997 was due in part to the fewer number of software
licenses sold which resulted from a nearly complete turnover of its sales
force in 1996 and 1997. The software license revenue figures do not include
the backlog for license fees, which is $3.7 million at December 31, 1997
versus only $1.4 million at December 31, 1996. From 1996 to 1997, the Company
experienced a 15% increase in the average size of its license fee, and this
increase in the size of the projects has extended the delivery cycle and thus
added to the backlog. In 1997, the Company had no sales of "corporate-wide"
licenses.
Through December 31, 1997, the Company had been recognizing both software
license fees and modifications revenue using the straight line method over the
installation period. Beginning in January 1998, it has changed these
procedures in order to be in compliance with Statement of Position 97-2
recently issued by the American Institute of Certified Public Accountants, and
now uses project accounting procedures similar to percentage of completion for
all projects requiring "significant" modifications to the software. Revenue
for projects with no modifications or modifications costing less than 5% of
the software license fee will be recognized upon delivery of the software.
The Company does not believe that this change in revenue recognition
procedures will have a material impact on the recognition of future revenue.
The Company believes that license fee revenues should increase in the future
due to increased worldwide sales and marketing efforts, the maturation of its
new sales force, 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 28.2% to $10.2 million in 1995,
by 26.7% to $12.9 million in 1996 and by 13.4% to $14.6 million in 1997. The
following table sets forth the components of services and maintenance revenues
as a percentage of total revenues for the years indicated:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Software modifications 25.7% 28.6% 23.3%
Professional services 23.1 19.6 18.5
Maintenance agreements 16.2 12.8 7.5
---- ---- ----
Total services and maintenance 65.0% 61.0% 49.3%
</TABLE>
<PAGE>
Page 15
Software modifications are determined during the customer's Conference Room
Pilot (CRP) at the Company and consist of changes to the software to
facilitate specific functionality a customer desires. The Company believes
that while a certain amount of software modifications will continue, the
amount of future modifications will decrease due to the increased
functionality of its new Release 7.0 of Catalyst WMS. As is indicated by the
1997 trend, the Company believes that the percentages which software
modifications represent of total revenues will continue to decrease in the
future.
Professional services revenues are derived from training, technical
services, performance of the CRP, on-site support, project management and
implementation services. While the Company continues to improve its Catalyst
Implementation Methodology and Plan (CIMPL), professional services revenues
will continue to increase, partially because of increased daily rates the
Company is now charging for its services, and also because the Company should
continue to implement new customer sites and current customer multi-site roll-
outs. The increase in 1997 was due to an increased number of active projects,
consisting of both new and roll-out implementations, as well as some of the
impact of the rate increases. Revenue for professional services is recognized
monthly, based on the days of work actually performed.
Customers typically enter into a one-year maintenance agreement for Post-
Contract Support (PCS) at the time they first license Catalyst WMS and once
installed, pay for the first year of maintenance fees in advance. The increase
in maintenance revenues in 1997 was due primarily to growth in the installed
customer base for 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. Revenue on PCS is recognized
ratably over the term of the maintenance agreement, which is generally one
year.
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 decreased by
92.6% to $106,000 in 1995, increased by 24.5% to $132,000 in 1996 and
increased 567.4% to $881,000 in 1997. The increase in hardware and other
revenue in 1997 is primarily due to an increased focus on the resale of
hardware, which is being implemented to meet a desire by certain customers for
a "turnkey" solution.
Cost of Software License Fees
Cost of software license fees consists of the cost of third-party licenses
sold by the Company. The cost of software license fees was $479,000, $288,000
and $524,000 in 1995, 1996 and 1997, respectively. There is no cost of
software license fees for the Catalyst WMS because the costs to develop this
product have been expensed as incurred since the Company's product
development efforts have been directed at enhancing and improving the product.
<PAGE>
Page 16
The Company expects to continue to expense the cost of developing new releases
of the Catalyst WMS and related products and therefore anticipates that the
cost of software license fees in the future will remain approximately the same
as a percentage of 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 92.0%, 95.9% and 93.9% in 1995, 1996 and 1997,
respectively. The increase in cost of services and maintenance in 1995 and
1996 was attributable to increased staffing of the Company's service and
support organizations, coupled with below-market pricing for these services.
In 1997, the Company raised its daily rate for services to market levels, and
improved results are starting to be realized as the Company begins performing
services at the higher price levels. The Company's service and support
organizations consisted of 141, 171 and 154 employees at December 31, 1995,
1996 and 1997, respectively.
At the beginning of the fourth quarter of 1997, the Company completed the
installation of a new time reporting system that enables it to accurately
track time being spent on projects and make comparisons of budgeted effort to
actual effort. This should help to improve project profitability as well as
provide the needed tools to better determine the progress of modifications and
the related accounting consequences. 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 increased
prices which the Company will receive for performing services and improved
efficiencies in the process of providing such services.
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. There was no cost of hardware
and other expense in 1995 and 1996 because of the Company's decision not to
sell hardware at that time. The only hardware and other revenue for those
periods consisted of miscellaneous commissions and sales of user manuals. In
mid-1997, the Company changed its strategy regarding hardware, and began to
offer select items to its customers who were looking for a one-source or
"turnkey" solution. Because of low margins, the Company does not inventory,
service or discount these items, but makes them available if a customer so
desires. Several sales were made in late 1997, with a cost of $766,000 and a
profit margin of 13.5%. The Company expects these sales to increase in future
periods, with similar or improved costs and margins.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries and commissions
paid to sales personnel along with marketing, promotional and travel expenses.
<PAGE>
Page 17
Sales and marketing expenses increased by 15.3% to $4.5 million in 1995, by
12.9% to $5.1 million in 1996 and by 4.2% to $5.3 million in 1997. 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. Sales and marketing expenses represented 21.8%, 24.0% and 23.5% of
total revenues in 1995, 1996 and 1997, respectively. Although the amount of
sales and marketing expenses may increase in the future, it should remain
relatively the same as a percentage of total revenues. The sales and marketing
staff consisted of 25, 33 and 35 employees as of December 31, 1995, 1996 and
1997, 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 81.0% to $2.6 million in 1995, by 75.0%
to $4.5 million in 1996, and then decreased 38.9% to $2.7 million in 1997. The
reason for this pattern was the 1996 purchase of Information Strategies,
Incorporated (an NT-based WMS software company) ("ISI") in a non-related party
transaction, and subsequent abandonment of the Company's effort to develop
ISI's product into a complementary software offering. This effort was
abandoned in early 1997 when it was realized that further development costs
would far exceed the value of the product. Product development costs
represented 12.4%, 21.1% and 12.1% of total revenues in 1995, 1996 and 1997,
respectively. The product development staff consisted of 50, 67 and 24
employees as of December 31, 1995, 1996 and 1997, respectively. The Company
believes that product development costs should increase as a percentage of
total revenues 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 13.6% to $1.6 million in 1995, by 166.6% to $4.3 million
in 1996 and decreased 7.3% to $4.0 million in 1997. General and
administrative expenses represented 7.8% of total revenues in 1995, 20.3% in
1996 and 17.7% in 1997. The decrease in general and administrative expenses
in 1995 as a percentage of total revenues was attributable to the increase in
total revenues. In 1996, the size of the administrative staff was increased,
plus several one-time and other charges were taken, including receivable
allowances and write-offs of $766,000, resulting in an increase in general and
administrative expenses. Accruals for the closing of ISI of $347,000 and
accruals relating to the severance of the Company's former chief executive
officer of $250,000 were also made and classified as restructuring and
severance costs. In 1997, the general and administrative expenses included
$190,000 for receivable allowances and write-offs and $171,000 for severance
costs related to additional restructuring completed in the first quarter. The
Company's general and administrative staff consisted of 12, 24 and 23
<PAGE>
Page 18
employees as of December 31, 1995, 1996 and 1997, respectively. The Company
expects that general and administrative expenses may increase in the future,
but should continue to decrease as a percentage of total revenues.
Write-off of Purchased Research and Development
In April 1996, the Company purchased 100% of the stock of ISI for $1.5
million cash and the assumption of certain liabilities. This was a non-
related party transaction. After the purchase price was allocated to the
acquired assets and assumed liabilities based upon their respective fair
market values, excess purchase price of approximately $2.0 million remained to
be allocated as an intangible asset. The Company, after considering various
methods of presentation for this transaction, allocated the entire $2.0
million of excess purchase price to in-process research and development, which
was immediately charged to operations in the second quarter of 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.
Income Tax Expense
In 1995, the Company's effective income tax rate was 5.3%, and differed from
the expected statutory rate due to the utilization of net operating loss
carryforwards and general business credits. In 1996 and 1997, 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 sale of common stock, borrowings and cash generated from operations.
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.
The Company generated $1.3 million of net cash from operating activities in
1995. Net cash used in operating activities was $3.3 million in 1996 and $3.2
million in 1997. The increase in cash flows in 1995 was due to net income and
an increase in 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. The Company used $5.1 million in cash in
1997, of which $3.2 million was used in operating activities, and $1.1 million
was used to purchase treasury stock from its former chief executive officer.
<PAGE>
Page 19
The Company expended $1.6, $2.1 and $0.8 million in 1995, 1996 and 1997,
respectively, for purchases of property and equipment. The Company employed
229, 295 and 236 employees as of December 31, 1995, 1996 and 1997,
respectively. This increase in employees in 1996 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; in 1997, the Company upgraded much
of its computer and network equipment, which it financed under a capital
lease. As of December 31, 1997, the aggregate amount owing under capital
leases, including interest, was $589,000. The Company anticipates making
similar expenditures for new hardware during 1998. Such expenditures will be
funded from cash flows from operations and from additional capital leases.
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. At this
time, the Company does not anticipate purchasing additional shares of its
common stock in the open market, or concluding any redemptions of its common
stock, in the foreseeable future.
As of December 31, 1997, the Company had $4,256,000 in cash and cash
equivalents and working capital of $6.7 million. In addition, the Company has
a line of credit (the "Revolving Credit Facility") with Bank One, West Bend,
Wisconsin, N.A. of $1.0 million. As of December 31, 1997, there were no
amounts outstanding under the Revolving Credit Facility.
At December 31, 1997, accounts receivable increased by 35.6% or $2.1
million, compared to December 31, 1996. Part of this increase was due to
nearly $1.0 million in year-end invoicing to one of the Company's largest
customers, of which $0.6 million was invoiced to accommodate the customer's
request to include the billing into their 1997 budget, and on which the
Company will not recognize revenue until April 1998. In addition, another
$1.0 million was subsequently collected in the first week of January 1998.
The Company believes that much of this payment was delayed because of our
customers' consideration of their own year-end cash positions. At December
31, 1997, the Company has reserves of $339,000 for doubtful accounts and
$700,000 for known and possible project cost overruns. This compares to
$279,000 and $300,000 for these same reserve items at December 31, 1996. The
Company feels it has adequately provided for the potential risks.
Management believes that liquidity provided by cash generated from its
ongoing operations, the balance of 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
<PAGE>
Page 20
expenditure requirements through 1998.
The Company has never paid cash dividends on its Common Stock. The Company's
policy has been to retain cash from operations 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.
Impact of Year 2000
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs, either internal or sold to customers, that have
time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company's primary software offering, Catalyst WMS, is written to store
the year in the database using four digits to allow data entry in an
unambiguous manner with four digits, and to process program functions in four
digits. The Company does not expect problems with the year 2000 compliance of
Catalyst WMS.
However, in mid-1997, the Company began a proactive program to help address
the Year 2000 Issue and to verify the year 2000 compliance of Catalyst WMS and
software used internally by the Company. Its Quality Assurance department
was given the compliance responsibility, both for the Catalyst WMS as well as
for the internal systems used by the Company. The Company has certified that
its most recent product offering, Release 7.0 of Catalyst WMS, is year 2000
compliant. The Company has extensively tested this Release 7.0 and has
not to date found any errors which could affect year 2000 compliance.
The Company has also contacted all customers with prior releases of the
product and notified them that, because their systems interface with other
systems, their entire operation should be reviewed for compliance now, before
there could be any serious problems. This effort was begun in September 1997
and is still ongoing. Catalyst customers may have Catalyst coordinate an
assessment of the customer's system at Catalyst's standard professional
services rate, the output of which will be a written analysis that identifies
areas of risk and estimates a cost for making the system compliant. The
customer will then have the option to have the compliance effort coordinated
by Catalyst or others, or to do the work themselves. To date several
customers have elected to have the Company do both the assessment and the
work.
The Company has also begun an effort to review all internal systems, tools
and facilities in order to verify that they are year 2000 compliant. An
inventory of all internal software, tools and facilities has been created,
and each vendor is being contacted to provide written documentation on their
products. Responses are being collected and evaluated by the Company's
Quality Assurance department, with the goal that all appropriate actions will
be coordinated by this group so that any issues are addressed before the end
of 1998.
<PAGE>
Page 21
ITEM 7. FINANCIAL STATEMENTS.
Form 10-KSB
Contents Page Numbers
Report of Ernst & Young LLP, Independent Auditors . . . . . . . . . . 21
Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . 23
Balance Sheets at December 31, 1997 and 1996 . . . . . . . . . . . . 24
Statements of Stockholders' Equity (Deficit) for
the years ended December 31, 1997, 1996 and 1995 . . . . . . . . . . 26
Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . 29
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . 32
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
Catalyst International, Inc.
We have audited the accompanying consolidated balance sheets of Catalyst
International, Inc. (the Company) as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Company at December 31, 1997 and 1996, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
Milwaukee, Wisconsin
January 24, 1998
<PAGE>
Page 23
<TABLE>
<CAPTION>
Catalyst International, Inc.
Consolidated Statements of Operations
Years ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues:
Software license fees $ 7,006,776 $ 8,132,367 $10,372,146
Services and maintenance 14,637,358 12,901,947 10,180,188
Hardware and other 880,994 132,408 105,663
----------- ----------- ----------
Total revenues 22,525,128 21,166,722 20,657,997
Operating expenses:
Cost of software license fees 523,894 288,220 479,017
Cost of services and maintenance 13,744,466 12,371,157 9,368,486
Cost of hardware and other 765,755 - 4,165
Sales and marketing 5,291,116 5,078,557 4,498,774
Product development 2,731,489 4,470,304 2,554,165
General and administrative 3,975,087 4,286,848 1,607,723
Write-off of purchased research
and development costs (Note 2) - 2,002,280 -
Restructuring and severance costs
(Note 10) - 597,338 -
---------- ---------- ----------
Total operating expenses 27,031,807 29,094,704 18,512,330
---------- ---------- ----------
Income (loss) from operations (4,506,679) (7,927,982) 2,145,667
Other income (expense):
Interest expense (26,219) (67,395) (133,536)
Investment income 309,007 948,973 142,028
Miscellaneous, net 24,597 (14,703) (37,741)
---------- ---------- ----------
Total other income (expense) 307,385 866,875 (29,249)
---------- ---------- ----------
Income (loss) before provision
for income taxes (4,199,294) (7,061,107) 2,116,418
Provision for income taxes (Note 8) - - (111,000)
---------- ---------- ----------
Net income (loss) (4,199,294) (7,061,107) 2,005,418
Preferred dividends - - 437,028
---------- ---------- ----------
Net income (loss) applicable
to common stock $(4,199,294) $(7,061,107) $ 1,568,390
========== ========== ==========
Earnings (loss) per share (Note 1):
Basic $ (0.63) $ (0.88) $ 0.73
Diluted (0.63) (0.88) 0.30
</TABLE>
<PAGE>
Page 24
<TABLE>
<CAPTION>
Catalyst International, Inc.
Consolidated Balance Sheets
December 31,
1997 1996
---- ----
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 4,256,244 $ 9,321,451
Accounts receivable, net of allowance
for doubtful accounts of $338,614 in
1997 and $279,174 in 1996 8,108,076 5,978,738
Refundable income taxes - 212,642
Revenues in excess of billings for
software license fees 348,425 -
Prepaid expenses 579,329 408,338
---------- ----------
Total current assets 13,292,074 15,921,169
Equipment and leasehold improvements:
Computer hardware and software 4,492,435 3,405,559
Office equipment 2,287,910 2,193,919
Leasehold improvements 862,021 780,407
---------- ----------
7,642,366 6,379,885
Less accumulated depreciation and
amortization 3,242,335 2,137,625
Total equipment and leasehold improvements 4,400,031 4,242,260
Other assets - 35,216
---------- ----------
Total assets $17,692,105 $20,198,645
========== ==========
</TABLE>
<PAGE>
Page 25
<TABLE>
<CAPTION>
Catalyst International, Inc.
Consolidated Balance Sheets (continued)
December 31,
1997 1996
---- ----
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 1,920,489 $ 1,043,333
Accrued liabilities 1,818,337 1,572,919
Reserve for restructuring and severance
costs (Note 10) - 597,338
Deferred software license fees - 12,453
Deferred services and maintenance 2,662,392 1,113,365
Redemption price of common stock (Note 10) - 1,073,239
Current portion of long-term debt (Note 4) 218,286 51,047
---------- ----------
Total current liabilities 6,619,504 5,463,694
Long-term debt (Note 4) 442,549 131,832
Deferred services and maintenance 328,711 132,195
Deferred rent (Note 4) 304,685 324,217
---------- ----------
Total noncurrent liabilities 1,075,945 588,244
---------- ----------
Total liabilities 7,695,449 6,051,938
Commitments (Note 4)
Stockholders' equity (Notes 5 and 6):
Preferred stock, $.01 par value; 2,000,000
shares authorized, none issued
or outstanding - -
Common stock, $.10 par value; 25,000,000
shares authorized; shares issued:
8,622,029 in 1997 and 8,501,217 in 1996 862,203 850,122
Additional paid-in capital 31,112,079 31,074,917
Accumulated deficit (12,925,502) (8,726,208)
Treasury stock, at cost - 1,966,090
shares of common stock in 1997 and
1,740,145 shares of common stock in 1996 (9,052,124) (7,978,885)
Common stock to be redeemed for treasury
(Note 10) - (1,073,239)
---------- ----------
Total stockholders' equity 9,996,656 14,146,707
---------- ----------
Total liabilities and stockholders' equity $ 17,692,105 $20,198,645
========== ==========
</TABLE>
<PAGE>
Page 26
<TABLE>
<CAPTION>
Catalyst International, Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
Preferred Stock- Preferred Stock-
Series A Series B
---------------- ----------------
Shares Dollars Shares Dollars
---------------- ----------------
<S> <C> <C> <C> <C>
Balances at December 31, 1994 1,965,517 $982,759 1,273,473 $636,737
Shares issued in connection
with initial public offering - - - -
Conversion of Series A and B
preferred stock in connection
with initial public offering (1,965,517) (982,759) (1,273,473) (636,737)
Conversion of Series C and D
redeemable preferred stock in
connection with initial public
offering - - - -
Stock options exercised - - - -
Warrants exercised - - - -
Compensation expense on stock
Options - - - -
Dividends on preferred stock
($.0455 per share of Series A
and $.9568 per share of Series
D preferred stock) - - - -
Net income - - - -
--------- -------- ---------- --------
Balances at December 31, 1995 - - - -
Purchase of common stock for
Treasury - - - -
Common Stock to be redeemed for
treasury (Note 10) - - - -
Stock options exercised - - - -
Compensation expense on stock
options - - - -
Issuance costs of initial public
Offering - - - -
Net loss - - - -
--------- -------- ---------- --------
Balances at December 31, 1996 - - - -
Purchase of common stock for
Treasury - - - -
Stock options exercised - - - -
Compensation expense on stock
options - - - -
Net loss - - - -
-----------------------------------------
Balances at December 31, 1997 - $ - - $ -
======= ======= ======= =======
</TABLE>
<PAGE>
Page 27
<TABLE>
<CAPTION>
Catalyst International, Inc.
Consolidated Statements of Stockholders' Equity (Deficit) (continued)
Additional
Common Stock Paid-in Accumulated
Shares Dollars Capital Deficit
------------------- -----------------------
<S> <C> <C> <C> <C>
Balances at December 31, 1994 1,611,501 $161,150 $1,132,281 $(3,233,491)
Shares issued in connection
with initial public offering 2,000,000 200,000 23,378,212 -
Conversion of Series A and B
preferred stock in connection
with initial public offering 3,238,992 323,899 1,295,597 -
Conversion of Series C and D
redeemable preferred stock in
connection with initial public
offering 1,525,261 152,526 5,292,405 -
Stock options exercised 35,569 3,557 274 -
Warrants exercised 10,000 1,000 - -
Compensation expense on stock
Options - - 24,908 -
Dividends on preferred stock
($.0455 per share of Series A
and $.9568 per share of Series
D preferred stock) - - - (437,028)
Net income - - - 2,005,418
--------- ------- ---------- -----------
Balances at December 31, 1995 8,421,323 842,132 31,123,677 (1,665,101)
Purchase of common stock for
treasury - - - -
Common Stock to be redeemed for
treasury (Note 10) - - - -
Stock options exercised 79,894 7,990 7,757 -
Compensation expense on stock
Options - - 29,419 -
Issuance costs of initial public
offering - - (85,936) -
Net loss - - - (7,061,107)
--------- ------- ---------- -----------
Balances at December 31, 1996 8,501,217 850,122 31,074,917 (8,726,208)
Purchase of common stock for
treasury - - - -
Stock options exercised 120,812 12,081 7,946 -
Compensation expense on stock
options - - 29,216 -
Net loss - - - (4,199,294)
--------- ------- ---------- -----------
Balances at December 31, 1997 8,622,029 $862,203 $31,112,079 $(12,925,502)
========= ======= ========== ===========
</TABLE>
<PAGE>
Page 28
<TABLE>
<CAPTION>
Catalyst International, Inc.
Consolidated Statements of Stockholders' Equity (Deficit) (continued)
Common Stock
Treasury Redeemed for
Stock Treasury Stock Total
----------- -------------- -----------
<S> <C> <C> <C>
Balances at December 31, 1994 $(1,050,000) $ - $(1,370,564)
Shares issued in connection
with initial public offering - - 23,578,212
Conversion of Series A and B
preferred stock in connection
with initial public offering - - -
Conversion of Series C and D
redeemable preferred stock in
connection with initial public
offering - - 5,444,931
Stock options exercised - - 3,831
Warrants exercised - - 1,000
Compensation expense on stock
Options - - 24,908
Dividends on preferred stock
($.0455 per share of Series A
and $.9568 per share of Series
D preferred stock) - - (437,028)
Net income - - 2,005,418
---------- ---------- ----------
Balances at December 31, 1995 (1,050,000) - 29,250,708
Purchase of common stock for
Treasury (6,928,885) - (6,928,885)
Common Stock to be redeemed for
treasury (Note 10) - (1,073,239) (1,073,239)
Stock options exercised - - 15,747
Compensation expense on stock
Options - - 29,419
Issuance costs of initial public
Offering - - (85,936)
Net loss - - (7,061,107)
---------- --------- ----------
Balances at December 31, 1996 (7,978,885) (1,073,239) 14,146,707
Purchase of common stock for
Treasury (1,073,239) 1,073,239 -
Stock options exercised - - 20,027
Compensation expense on stock
Options - - 29,216
Net loss - - (4,199,294)
---------- --------- ---------
Balances at December 31, 1997 $(9,052,124) $ - $9,996,656
========== ========= =========
</TABLE>
<PAGE>
Page 29
<TABLE>
<CAPTION>
Catalyst International, Inc.
Consolidated Statements of Cash Flows
Years ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Operating activities
Net income (loss) $(4,199,294) $(7,061,107) $ 2,005,418
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,161,845 1,015,359 672,015
Compensation expense on stock options 29,216 29,419 24,908
Loss on disposal of equipment and
leasehold improvements 27,175 574 17,485
Provision for restructuring and
severance costs - 597,338 -
Write-off of purchased research and
development costs - 2,002,280 -
Changes in operating assets and
liabilities:
Accounts receivable (2,129,338) 949,364 (1,651,403)
Prepaid expenses (170,991) (27,977) (256,900)
Accounts payable 877,156 (129,133) (47,151)
Accrued liabilities and reserve for
restructuring and severance costs (351,920) 69,386 (265,957)
Income taxes 212,642 (92,191) 64,500
Deferred software license fees (360,878) (284,083) (191,592)
Deferred services and maintenance 1,745,543 (358,933) 888,339
Deferred rent (19,532) (19,532) 59,247
--------- --------- ---------
Total adjustments 1,020,918 3,751,871 (686,509)
--------- --------- ---------
Net cash provided by (used in)
operating activities (3,178,376) (3,309,236) 1,318,909
Investing activities
Capital expenditures (769,886) (2,094,781) (1,571,533)
Capitalized software development costs - - (64,125)
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 used in investing activities (769,886) (3,581,958) (1,613,543)
Financing activities
Proceeds from long-term debt - - 500,000
Payments on long-term debt (63,733) (401,143) (1,446,838)
<PAGE>
Page 30
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 20,027 15,747 4,831
Dividends paid to preferred stockholders - - (87,439)
Purchase of common stock for treasury (1,073,239) (6,928,885) -
--------- --------- ---------
Net cash provided by (used in)
financing activities (1,116,945) (7,400,217) 22,548,766
--------- --------- ----------
</TABLE>
<PAGE>
Page 31
<TABLE>
<CAPTION>
Catalyst International, Inc.
Consolidated Statements of Cash Flows (continued)
Years ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net increase (decrease) in cash
and cash equivalents (5,065,207) (14,291,411) 22,254,132
Cash and cash equivalents at
beginning of year 9,321,451 23,612,862 1,358,730
--------- ---------- ----------
Cash and cash equivalents at end
of year $ 4,256,244 $ 9,321,451 $23,612,862
=========== ========== ==========
Supplemental disclosure:
Cash paid for interest $ 33,062 $ 59,566 $ 133,533
Cash paid (received) for income taxes (286,697) 127,000 46,500
</TABLE>
Noncash investing and financing activities:
During 1997, the Company acquired $541,689 of computer hardware under capital
leases.
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.
<PAGE>
Page 32
CATALYST INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997
1. Significant Accounting Policies
Consolidation
The accompanying consolidated financial statements include the accounts of
Catalyst International, Inc. (the Company) and its subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Business and Concentration of Credit Risk
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. 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 and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid investments with a maturity of three months or
less when purchased to be cash equivalents. Cash equivalents consist
principally of investments in corporate debt securities and repurchase
agreements. The cost of these securities, which are considered as "available
for sale" for financial reporting purposes, approximates fair value at both
December 31, 1997 and 1996. There were no realized gains or losses during any
of the three years in the period ended December 31, 1997.
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 - 7 years;
and leasehold improvements - 10 years.
Capitalized Software Development Costs
Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
<PAGE>
Page 33
requires companies to capitalize 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. SFAS No. 86 does not materially affect the
Company.
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 date for software activation. The estimated software activation
dates are reviewed and revised monthly during the contract, and adjustments,
if any, are recorded ratably through the software activation 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 sold three corporate software licenses which provide
the customer the ability to install the software at an unlimited number of
sites, as defined. Such revenue was recognized upon delivery of the software,
as the Company had no significant remaining obligations. During 1997, there
were no corporate software license sales.
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 software activation. The estimated
software activation dates are reviewed and revised monthly during the
contract, and adjustments, if any, are recorded ratably through the software
activation 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. The Company reserves for project cost overruns when such
overruns are identified. Included in accrued liabilities at December 31, 1997
and 1996, are reserves for project cost overruns of $700,000 and $300,000,
respectively.
Professional services are recognized as revenue as time and material costs
are incurred and billed to the customer.
<PAGE>
Page 34
Maintenance fees are prepaid by customers and are recognized as revenue
ratably over the term of the maintenance agreement, which is generally one
year.
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
$267,000, $329,000 and $325,000 in 1997, 1996 and 1995, respectively.
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.
Earnings (Loss) Per Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS
No. 128 replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Earnings per share amounts for all
periods have been presented and, where appropriate, restated to conform to
SFAS No. 128 requirements.
The following table sets forth the computation of basic and diluted weighted-
average shares used in the per share calculations:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------
<S> <C> <C> <C>
Numerator for basic earnings per share $(4,199,294) $(7,061,107) $1,568,390
Dividends on preferred stock - - 437,028
----------- ----------- ----------
Numerator for diluted earnings per share $(4,199,294) $(7,061,107) $2,005,418
=========== =========== ==========
Denominator for basic earnings per share 6,630,200 7,995,766 2,151,082
Effect of dilutive options and warrants - - 471,183
Net effect of conversion of preferred stock - - 4,162,177
----------- ----------- -----------
Denominator for diluted earnings per share 6,630,200 7,995,766 6,784,442
=========== =========== ==========
</TABLE>
<PAGE>
Page 35
Reclassifications
Certain amounts in 1996 and 1995 have been reclassified to conform with the
1997 presentation.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which establishes the standards for
reporting and displaying comprehensive income and its components (revenues,
expenses, gains and losses) as part of a full set of financial statements.
SFAS No. 130 requires that all elements of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. The statement is effective for years beginning after
December 15, 1997. Since this statement applies only to the presentation of
comprehensive income, it will not affect the Company's results of operations,
financial position or cash flows.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
is effective for years beginning after December 15, 1997. SFAS No. 131
establishes standards for the manner in which public enterprises report
financial and descriptive information about their operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The adoption of SFAS No. 131 will not
affect the Company's results of operations, financial position or cash flows,
but will affect the disclosure of segment information.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 97-2, "Software Revenue Recognition," which
supersedes SOP 91-1 for transactions entered into for fiscal years beginning
after December 15, 1997. The Company is modifying its revenue recognition
practices to be in compliance with SOP 97-2 effective January 1, 1998.
Following are examples of changes expected to be made to the Company's
previous revenue recognition policies:
1) For software arrangements not requiring significant production,
modification, or customization of software, revenue will be recognized when
evidence of an arrangement exists, delivery has occurred, the fee is fixed
or determinable, and collectibility is probable.
2) For software arrangements requiring significant production,
modification, or customization of software, the Company will defer both
license fees and modification fees until certain milestones are achieved
(which differs from the Company's previous practice of recognizing license
fees and modification fees straight-line over the period between contract
execution and software activation). The milestones will be based on a
recently installed time reporting system.
<PAGE>
Page 36
The period of time between issuance of SOP 97-2 and its effective date was
unusually short, causing considerable uncertainty surrounding specific
implementation issues. As the Company continues to analyze the provisions of
SOP 97-2, other areas requiring change may be identified which could impact
the Company's revenue recognition policies.
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 for 1996 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 (8.5% at December 31, 1997) and is secured by substantially all of
the Company's assets. No amounts were outstanding under the line of credit at
December 31, 1997 or 1996.
4. Long-Term Debt and Lease Commitments
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---------------------------
<S> <C> <C>
Capital lease obligations $ 660,835 $182,879
Less current portion (218,286) (51,047)
--------- --------
$ 442,549 $131,832
========= ========
</TABLE>
The Company leases a phone system and various computer equipment under
capital leases requiring monthly payments in varying amounts through October
2000 with effective interest rates ranging from 8.2% to 9.0%. At December 31,
1997, the gross amount of office equipment recorded under capital leases and
related accumulated amortization was $705,000 and $153,000, 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
<PAGE>
Page 37
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.
At December 31, 1997, future payments under capital and operating leases with
remaining terms in excess of one year were as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
---------------------------
<S> <C> <C>
1998 $266,551 $ 582,000
1999 300,913 609,000
2000 172,939 612,000
2001 - 612,000
2002 - 612,000
Thereafter - 1,648,000
---------------------------
Total minimum lease obligations 740,403 $4,675,000
Amounts representing interest 79,568 ==========
--------
Capital lease obligation $660,835
========
</TABLE>
Total annual rent expense, including executory costs, on all operating
leases was approximately $1,310,000, $1,183,000 and $816,000 in 1997, 1996 and
1995, respectively.
5. Stockholders' Equity
The Company issued 2,000,000 new shares of common stock to the public in an
IPO during 1995. 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.
In November 1996, the Company redeemed 1,206,013 shares of the Company's
common stock held by affiliated shareholders at $4.75 per share. The
redemption terminated any prior stock agreements between the Company and the
shareholders. In January 1997, the Company repurchased 225,945 shares of the
Company's stock held by its former president and chief executive officer at
$4.75 per share.
6. Stock Options and Warrants
The 1993 Stock Option Plan (the "Employee Plan"), as amended, provides for
granting by the Company of up to 3,000,000 incentive stock options and/or
<PAGE>
Page 38
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. 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.
In March 1997 and April 1996, the Company modified 965,000 and 726,100,
respectively, of employee stock options granted previously. The modifications
included reducing the exercise price to the market price of the underlying
stock as of the modification date, extending the term to ten years after the
modification date, and resetting the five-year vesting period.
The Company has a 1997 Director Stock Option Plan (Director Plan) whereby
each director is granted options to purchase 10,000 shares of common stock on
the effective date of the plan and 5,000 shares of common stock on each
anniversary of the plan thereafter. The exercise price of each grant will be
equal to the market price of the Company's common stock on the date of grant.
The Director Plan provides for the issuance of 250,000 nonqualified stock
options to directors. The options are exercisable for ten years from the date
of grant.
The following table summarizes information with respect to the Company's
Employee and Director Plans for the three years ended December 31, 1997:
<TABLE>
<CAPTION>
Number of Weighted-Average
Shares Option Price per Share
------------------------------------
<S> <C> <C>
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
Granted 544,520 $3.62
Exercised (120,810) $0.17
Canceled (561,706) $6.78
--------- -----
Outstanding at December 31, 1997 1,680,131 $3.28
========= =====
</TABLE>
<PAGE>
Page 39
At December 31, 1997, 1,222,095 options are available for grant under the
Employee and Director Plans. As of December 31, 1997, the range of exercise
prices on outstanding options was $.10 to $10.00 per share, and the remaining
contractual lives ranged from 7 to 10 years. The number of options exercisable
at December 31, 1997, 1996 and 1995 was 309,865, 254,386 and 177,030,
respectively.
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. During 1997, the warrant was modified to reduce the
exercise price to $3.50 per share, the market price of the underlying stock as
of the modification date. The term was extended to 10 years after the
modification date and the vesting period was reset so that the warrant vests
20% one year after the modification date and then ratably over the following
48 months.
The Company has reserved 2,912,226 shares of common stock at December 31,
1997, to provide for the exercise of outstanding stock options and warrants
and the granting of stock options.
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 SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's pro forma net loss and pro forma 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):
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Pro forma net loss $(4,395,991) $(7,517,865)
Pro forma loss per share (0.66) (0.94)
</TABLE>
The weighted average grant date fair values used in the above pro forma
disclosures were $1.99 and $3.09 per share for 1997 and 1996 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 1997, 1996 and 1995 grants only).
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
<PAGE>
Page 40
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 1997 and 1996, respectively: risk-free interest rates of 5.4%-1997
and 6.3%-1996; dividend yields of 0%; expected common stock market price
volatility factor of 0.529 and a weighted-average expected life of the option
of five years.
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 $69,000, $78,000 and
$51,000 in 1997, 1996 and 1995, respectively.
8. Income Taxes
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
--------- ----------- ---------
<S> <C> <C> <C>
Current:
Federal $ - $ - $ 101,000
State - - 10,000
--------- ----------- ----------
- - 111,000
Deferred 1,814,000 2,010,000 616,000
Change in valuation reserve (1,814,000) (2,010,000) (616,000)
---------- ---------- ----------
$ - $ - $ 111,000
========== ========== ==========
</TABLE>
<PAGE>
Page 41
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,
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Provision (benefit) at U.S.
statutory rate $(1,428,000) $(2,401,000) $ 720,000
State income taxes, net of federal tax - - 7,000
General business credits (54,000) (105,000) -
Change in valuation allowance 1,814,000 2,010,000 (616,000)
Permanent differences, net (332,000) 495,000 (2,000)
Other - 1,000 2,000
---------- ---------- ----------
$ - $ - $ 111,000
========== ========== ==========
</TABLE>
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $10,850,000 and $9,550,000 for federal and state income tax
purposes, respectively, which expire between 2007 and 2012. Of these net
operating loss carryforwards, $1,345,000 were created by deductions from the
exercise of nonqualified stock options during 1997, 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, 1997, the Company had general business credit
carryforwards of $456,000 and $200,000 for federal and state income tax
purposes, respectively, which expire from 2006 through 2011. At December 31,
1997, 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:
<PAGE>
Page 42
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
AMT and general business credits $ 656,000 $ 602,000
Net operating loss carryforwards 4,187,000 2,170,000
Deferred revenues and accrued project costs 298,000 247,000
Accrued compensation and restructuring 105,000 267,000
Deferred rent 118,000 126,000
Allowance for doubtful accounts 132,000 109,000
Other 14,000 32,000
----------- -----------
5,510,000 3,553,000
Deferred tax liabilities:
Depreciation (326,000) (172,000)
Capitalized software costs - (14,000)
Other (46,000) (43,000)
----------- -----------
(372,000) (229,000)
----------- -----------
Net deferred tax assets 5,138,000 3,324,000
Valuation allowance (5,138,000) (3,324,000)
----------- -----------
$ - $ -
=========== ===========
</TABLE>
The valuation allowance at December 31, 1997 and 1996, 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. There were no
sales to individual customers that exceeded 10% of revenues in 1997 or 1996.
International revenues accounted for 17%, 21% and 29% of total revenues in
1997, 1996 and 1995, respectively. Revenues by geographic area for the years
ended December 31, 1997, 1996 and 1995, were as follows:
<PAGE>
Page43
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
North America $18,761,208 $16,681,142 $14,660,341
International 3,763,917 4,485,580 5,997,656
----------- ----------- -----------
$22,525,125 $21,166,722 $20,657,997
=========== =========== ===========
</TABLE>
10. Restructuring and Severance Costs
In December 1996, the Company initiated a restructuring plan to close its
operations in Dallas, Texas. In connection with the restructuring, six
employees at the facility were terminated. Estimated employee termination
costs of $234,318 were accrued at December 31, 1996. Additional costs of
$113,020 associated with the restructuring were also 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
operation.
Based upon a decision by the Board of Directors, in December 1996, the Company
terminated its former president and chief executive officer. Severance costs
of $250,000 were accrued at December 31, 1996.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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 Director" on pages 2 and 3 of the Proxy Statement for
the 1998 Annual Meeting of Stockholders and "Executive Officers" on pages 5
and 6 of the Proxy Statement for the 1997 Annual Meeting of Stockholders.
ITEM 10. EXECUTIVE COMPENSATION.
The Company incorporates by reference herein the information contained under
<PAGE>
Page 44
the caption "Executive Compensation" on pages 7 through 10 of the Proxy
Statement for the 1998 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 1998 Annual Meeting of Stockholders.
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 Stock Option Plan of Catalyst USA, Inc., incorporated by
reference to Exhibit 10.1 of the Registration Statement.*
10.2 1997 Director Stock Option Plan of Catalyst International, Inc.
incorporated by reference to Exhibit 4.1 of the Company's Registration
Statement on Form S-8 (No. 33-97522C) dated September 26, 1997*
21 Subsidiaries.
23 Consent of Ernst & Young LLP.
27 Article 5 Financial Data Schedule.
*Represents compensation plan or arrangements required to be filed as an
Exhibit to the Form 10-KSB.
Reports On Form 8-K.
None.
<PAGE>
Page 45
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 31, 1998.
Catalyst International, Inc.
By: /s/ Sean P. McGowan
-----------------------------------
Sean P. McGowan
President and Chief Executive Officer
By: /s/ Thomas G. Hickinbotham
----------------------------------
Thomas G. Hickinbotham
Vice President Finance &
Administration and Chief Financial
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 31, 1998
- -------------------------------------
Douglas B. Coder
Chairman of the Board
/s/ Sean P. McGowan Date: March 31, 1998
- -------------------------------------
Sean P. McGowan
President, Chief Executive Officer
(Principal Executive Officer)
/s/ Roy J. Carver Date: March 31, 1998
- -------------------------------------
Roy J. Carver, Director
/s/ James F. Goughenour Date: March 31, 1998
- -------------------------------------
James F. Goughenour, Director
/s/ Terrence L. Mealy Date: March 31, 1998
- -------------------------------------
Terrence L. Mealy, Director
<PAGE>
Page 46
EXHIBIT 21
SUBSIDIARY OF CATALYST INTERNATIONAL, INC.
Name: Catalyst WMS International, Limited
Jurisdiction of Incorporation: United Kingdom
Status: Inactive and in Good Standing
Name: Catalyst do Brasil Distribuidora de Software Ltda.
Jurisdiction of Incorporation: Brazil
Status: Active and in Good Standing
<PAGE>
Page 47
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. and (Form S-8 No. 93-97522C) pertaining to the 1997 Director Stock
Option Plan of Catalyst International, Inc. of our report dated January 24,
1998, with respect to the financial statements of Catalyst International, Inc.
included in this Annual Report (Form 10-KSB) for the year ended December 31,
1997.
Ernst & Young LLP
Milwaukee, Wisconsin
March 27, 1998
10
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