United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-27138
CATALYST INTERNATIONAL, INC.
--------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 39-1415889
- - -----------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8989 North Deerwood Drive, Milwaukee, WI 53223
- - -----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(414) 362-6800 FAX (414) 377-6263
- - ----------------------------------------------------------------
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, 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 [ ]
As of August 7, 1998, 6,784,502 shares of the issuer's common
stock were outstanding.
This report contains 17 pages. There is 1 exhibit.
<PAGE> 2
CATALYST INTERNATIONAL, INC.
FORM 10-QSB
INDEX
Page No.
PART I. Financial Information
Item 1. Financial Statements:
Balance Sheets - June 30, 1998
and December 31, 1997 . . . . . . . . . . . 3
Statements of Operations - Three months
ended June 30, 1998 and 1997 . . . . . . . . 5
Statements of Operations - Six months
ended June 30, 1998 and 1997 . . . . . . . . 6
Statements of Cash Flows - Six months
ended June 30, 1998 and 1997 . . . . . . . . 7
Notes to Financial Statements . . . . . . . . 8
Item 2. Management's Discussion and Analysis or
Plan of Operation . . . . . . . . . . . . . 9
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . 15
PART II. Other Information:
Item 6. Exhibits and Reports on Form 8-K . . . . . . . 16
Signatures . . . . . . . . . . . . . . . . . . 17
<PAGE> 3
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
<TABLE>
<CAPTION>
CATALYST INTERNATIONAL, INC.
Balance Sheets
(in thousands)
ASSETS
June 30, Dec. 31,
1998 1997
(unaudited)
---------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 5,144 $ 4,256
Accounts receivable 7,942 8,108
Revenues in excess of billings 1,217 349
Prepaid and other assets 574 579
------- -------
Total Current Assets 14,877 13,292
Equipment and Leasehold Improvements:
Computer hardware and software 4,703 4,492
Office equipment 2,309 2,288
Leasehold improvements 862 862
------- -------
7,874 7,642
Less accumulated depreciation 3,874 3,242
------- -------
Total Equipment and
Leasehold Improvements 4,000 4,400
------- -------
Total Assets $18,877 $17,692
======= =======
</TABLE>
See accompanying notes
<PAGE> 4
<TABLE>
<CAPTION>
CATALYST INTERNATIONAL, INC.
Balance Sheets
(in thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, Dec. 31,
1998 1997
(unaudited)
----------------------
<S> <C> <C>
Current Liabilities:
Accounts payable $ 1,838 $ 1,921
Accrued liabilities 1,614 1,818
Deferred services and maintenance 3,362 2,662
Current portion of long-term debt 244 218
------- -------
Total Current Liabilities 7,058 6,619
Noncurrent Liabilities:
Long-term debt 352 443
Deferred services and maintenance 190 329
Deferred rent 295 304
------ -------
Total Non-Current Liabilities 837 1,076
------ -------
Total Liabilities 7,895 7,695
Stockholders' Equity:
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: 8,728,145 in 1998
and 8,622,029 in 1997 873 862
Additional paid-in capital 31,348 31,112
Accumulated deficit (12,187) (12,925)
Treasury stock, at cost: 1,966,090 shares
of common stock in 1998 and 1997 (9,052) (9,052)
------- -------
Total Stockholders' Equity 10,982 9,997
------- -------
Total Liabilities and Stockholders' Equity $18,877 $17,692
======= =======
</TABLE>
See accompanying notes
<PAGE> 5
<TABLE>
<CAPTION>
CATALYST INTERNATIONAL, INC.
Statements of Operations
(in thousands, except per share amounts)
(unaudited)
Three Months Ended
June 30,
------------------
1998 1997
---- ----
<S> <C> <C>
Revenues:
Software license fees $ 1,662 $ 1,812
Services and maintenance 5,278 3,169
Hardware and other 881 52
------- -------
Total Revenues 7,821 5,033
Operating Expenses:
Cost of license fees 128 188
Cost of services and maintenance 3,446 3,363
Cost of hardware and other 680 -
Product development 866 615
Sales and marketing 1,447 1,371
General and administrative 848 1,004
------- -------
Total Operating Expenses 7,415 6,541
------- -------
Income (loss) from operations 406 (1,508)
Other income 41 54
------- -------
Net income (loss) $ 447 $(1,454)
======= =======
Net income (loss) per share
Basic $ 0.07 $ (0.22)
Diluted $ 0.06 $ (0.22)
Shares used in computing net
income (loss) per share 7,426 6,633
</TABLE>
See accompanying notes
<PAGE> 6
<TABLE>
<CAPTION>
CATALYST INTERNATIONAL, INC.
Statements of Operations
(in thousands, except per share amounts)
(unaudited)
Six Months Ended
June 30,
------------------
1998 1997
---- ----
<S> <C> <C>
Revenues:
Software license fees $ 3,770 $ 3,045
Services and maintenance 10,400 5,994
Hardware and other 1,116 116
------- -------
Total Revenues 15,286 9,155
Operating Expenses:
Cost of license fees 160 285
Cost of services and maintenance 7,172 6,259
Cost of hardware and other 887 -
Product development 1,563 1,557
Sales and marketing 2,872 2,619
General and administrative 1,965 2,272
------- -------
Total Operating Expenses 14,620 12,992
------- -------
Income (loss) from operations 667 (3,837)
Other income 72 128
------- -------
Net income (loss) $ 739 $(3,709)
======= =======
Net income (loss) per share
Basic $ 0.11 $ (0.56)
Diluted $ 0.10 $ (0.56)
Shares used in computing net
Income (loss) per share 7,293 6,612
</TABLE>
See accompanying notes
<PAGE> 7
<TABLE>
<CAPTION>
CATALYST INTERNATIONAL, INC.
Statements of Cash Flows
(in thousands)
(unaudited)
Six months ended
June 30,
------------------
1998 1997
---- ----
<S> <C> <C>
Operating Activities:
Net income (loss) $ 739 $(3,709)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 632 572
Compensation expense on stock options 12 -
Gain on disposal of equipment - (12)
Changes in operating assets and liabilities:
Accounts receivable 166 (760)
Prepaid expenses and other assets 5 (52)
Accounts payable (83) (256)
Deferred services and maintenance 561 1,696
Restructuring costs - (441)
Deferred rent (9) (10)
Deferred software license fees (868) 170
Income taxes - 272
Accrued liabilities (204) (56)
------- -------
Total adjustments 212 1,123
------- -------
Net cash provided by (used in) operating activities 951 (2,586)
Investing Activities:
Purchase of equipment and leasehold improvements (232) (517)
------- -------
Net cash used in investing activities (232) (517)
Financing Activities:
Payments on long-term debt (65) (26)
Proceeds from stock options exercised 234 36
Purchase of treasury stock - (1,073)
------- -------
Net cash provided by (used) in financing activities 169 (1,063)
------- -------
Net increase (decrease) in cash 888 (4,166)
Cash and cash equivalents at beginning of period 4,256 9,321
------- -------
Cash and cash equivalents at end of period $ 5,144 $ 5,155
======= =======
</TABLE>
See accompanying notes
<PAGE> 8
CATALYST INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
1. Basis of Presentation
The accompanying unaudited financial statements have been
prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-QSB and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for fiscal year end financial statements. In the opinion of
management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Certain amounts in the 1997 and June 30, 1998
financial statements have been reclassified to conform to the
1998 presentation. Operating results for the six month period
ended June 30, 1998 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1998. For
further information, refer to the financial statements and
footnotes thereto included in the Catalyst International, Inc.
Annual Report on Form 10-KSB for the year ended December 31,
1997.
2. Net Income (Loss) Per Share of Common Stock
The Company has presented net income (loss) per share in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings Per Share." The following table sets
forth the computation of basic and diluted earnings per share.
<PAGE> 9
<TABLE>
For the For the
Three Months Six Months
ended June 30, ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Denominator
- - -----------
Denominator for basic earnings
per share - weighted average
common shares 6,727 6,633 6,702 6,612
Effect of diluted securities -
stock options and warrants 699 - 591 -
----- ----- ----- -----
Denominator for diluted
earnings per share -
adjusted weighted average
common shares 7,426 6,633 7,293 6,612
</TABLE>
In the second quarter of 1997, securities that could potentially
dilute basic earnings per share were not included in the
computation of diluted earnings per share because their impact
was antidilutive.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion contains statements identified as "the
Company expects" or "the Company believes" or otherwise stated as
the Company's predictions for the future, which are forward-
looking statements and which involve certain risk factors. The
Company's actual results may differ materially from the results
discussed in the forward-looking statements and could adversely
affect the Company's share price. 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.
<PAGE> 10
Total Revenues
The Company's total revenues for the second quarter of 1998 were
$7.8 million, which represented an increase of 55.4% over second
quarter 1997 total revenues of $5.0 million. For the first six
months of 1998, total revenues were $15.3 million, up 67.0%, over
1997 total revenues of $9.2 million for the same period.
Revenues for the second quarter of 1998 increased over the first
quarter of 1998 revenues of $7.5 million by 4.8%, or $356,000,
due to an increased focus on third party software and hardware
sales and increased professional services revenues.
International revenues were $1.0 million in the second quarter of
1998, which represented an increase of 17.8% over second quarter
1997 international revenues of $889,000. International
revenues represented 13.4% of total revenues for the second
quarter of 1998 compared to 17.7% in the same period of 1997. The
increase in international revenues from 1997 to 1998 is due to an
increase in service agreement revenues resulting from more
installed customers.
Software License Fees
The second quarter of 1998 software license fee revenues of $1.7
million represented a decrease of 8.3% from the second quarter
of 1997 software license fee revenues of $1.8 million. Second
quarter 1998 license fee revenue decreased by 21.1% over the
first quarter of 1998 license fee revenues of $2.1 million. For
the first six months of 1998, license fee revenues increased by
$725,000 or 23.8% over 1997 license fee revenues of $3.0 million
for the same period. The decrease shown in the current quarter
was primarily the result of one customer's delay in project
implementation. While work on this project continues, the pace
has slowed considerably, impacting on the recognition of the
license fee revenue.
Services and Maintenance
Services and maintenance revenues increased 66.6% to $5.3 million
in the second quarter of 1998, up from $3.2 million in the
<PAGE> 11
second quarter of 1997. For the six month period, services and
maintenance revenues were $10.4 million, an increase of 73.5%
over $6.0 million for the first six months of 1997. The
increases are attributable to an increased number of
installations, higher service rates and an increased number of
installed customers paying maintenance fees. The components of
services and maintenance revenues as a percentage of total
services and maintenance revenues in the second quarter of 1998
were 21.4% for software modifications, 53.3% for professional
services and 25.3% for maintenance agreements compared with
34.5%, 38.3% and 27.2%, respectively, in the second quarter of
1997. The Company believes that the increase in professional
services revenues as a percentage of total services and
maintenance revenues is attributable to the increased rate the
Company is now charging for these services. The decrease in
modification revenues as a percentage of total services and
maintenance revenues is due to fewer modifications to the
Catalyst WMS performed during second quarter of 1998 versus the
second quarter of 1997. The Company expects this trend to
continue as the implementation of new versions of the Catalyst
WMS should require fewer modifications.
Hardware and Other
Hardware and other revenues were not a material percentage of
total revenues during the first half of 1997; however, this has
changed in more recent periods due to the Company's decision to
sell selected hardware items to meet certain customers' demand.
The Company does not expect to inventory hardware but expects to
sell hardware on a selective basis. Hardware sales were $235,000
and $881,000 in the first and second quarters of 1998,
respectively. Hardware sales amounted to 7.3% of total revenues
for the first half of 1998.
Cost of Software License Fees
In the second quarter of 1998, cost of software license fees
decreased by 31.9% to $128,000 from $188,000 in the same
period of 1997. Year to date cost of software license fees
decreased by 43.9% to $160,000 in 1998 from $285,000 in 1997.
<PAGE> 12
This decrease in cost of software license fees results
from the Company's increased focus on sales of third party
database software, which provides higher profit margins. The
Company expects this cost to remain consistent as a percentage of
sales in future periods.
Cost of Services and Maintenance
Cost of services and maintenance increased by $83,000, or 2.5%,
in the second quarter of 1998 compared to the second quarter of
1997. Year to date cost of services and maintenance increased
14.6%, or $913,000, to $7.2 million in 1998, from $6.3 million
for the same period of 1997. For both the quarter and six
months, the increased costs were reflective of the Company's
higher volume of business. Cost of services and maintenance was
69% of revenues for the six months ended June 30, 1998 compared
to 104% of revenues for the six months ended June 30, 1997. This
improvement was the result of cost control efforts coupled with
higher service rates the Company is now charging for services.
There were 166 employees in services and maintenance at June 30,
1998 and 1997.
Product Development
Product development expenses as a percentage of total revenues
for the second quarter of 1998 decreased to 11.1% from 12.2% in
the second quarter of 1997. Actual product development expenses
were $866,000 in the second quarter of 1998 compared to $615,000
in the second quarter of 1997, representing an increase of
40.8%. The decrease in product development expense as a
percentage of sales was due to the high increase in revenue for
this quarter compared to the same period last year. The increase
in product development costs is due to an increased focus on new
product development. The Company plans to continue this
increased focus into future periods.
The Company continues to expense all software development costs
as product development expenditures as incurred. The product
development staff consisted of the equivalent of 30 full-time
employees at June 30, 1998 and 30 employees at June 30, 1997.
Sales and Marketing
Sales and marketing expenses as a percentage of total revenues
<PAGE> 13
for the second quarter of 1998 decreased to 18.5% from 27.2% in
the second quarter of 1997. Actual sales and marketing expenses
were $1.4 million for both the second quarters of 1998 and 1997.
The decrease in sales and marketing expenses as a percentage of
total revenues in the second quarter of 1998 is due to
substantially higher revenues in the second quarter of 1998.
There were 28 and 33 sales and marketing employees at June 30,
1998 and June 30, 1997, respectively. The reason for the drop in
employees in the current quarter was the closing of sales offices
in several foreign countries. Instead of using direct sales in
these markets, the Company will maintain its local presence
through the use of Value Added Resellers (VARs). This VAR method
has been very successful for the Company in Italy and has lower
costs associated with it. This VAR method, combined with closing
the sales offices, gives the Company the potential to reduce
costs while increasing sales opportunities in these countries.
General and Administrative
General and administrative expenses as a percentage of total
revenues for the second quarter of 1998 decreased to 10.8% from
19.9% in the second quarter of 1997. Actual general and
administrative expenses decreased 15.5% to $848,000 in the second
quarter of 1998 from $1.0 million in the second quarter of 1997.
For the six month period general and administrative expenses
were $2.0 million for 1998 compared to $2.3 million for 1997.
The reduction in expenses in 1998 is the result of cost
containment efforts initiated in the second half of 1997.
At March 31, 1998, the Company reserved $150,000 for the
restructuring of its international offices. The majority of this
restructuring has now been accomplished, thus $100,000 of that
general reserve was reversed in the second quarter.
There were 21 employees in general and administrative roles at
June 30, 1998 and 1997, respectively.
<PAGE> 14
Other Income and Expense
Interest income for the second quarter of 1998 was $58,000,
offset by $17,000 of interest and other expenses compared to
$62,000 of interest income offset by $8,000 of interest and other
expenses in the second quarter of 1997. The decrease in other
income was due to higher interest expense in 1998, which was a
result of new capital leases the Company entered into when it
upgraded much of its computer hardware in the second half of
1997.
Income Tax Expense
No federal or state tax expense was recorded for the quarter or
six month period ended June 30, 1998 due to the Company's federal
and state net operating loss position. No deferred tax expense
has been recorded in the quarter or six month period ended June
30, 1998 as the Company continues to record a valuation allowance
to reserve in full for the net deferred tax assets.
Liquidity and Capital Resources
Net cash provided by operating activities was $951,000 for the
six months ended June 30, 1998, compared to $2.6 million used
during the same period in 1997. The increase in net cash
provided by operations in the first six months of 1998 from the
first six months of 1997 is due primarily to the net loss
incurred for the quarter ended June 30, 1997, compared to net
income for the first six months of 1998.
The decrease in cash used for investing activities to $232,000
during the six months ended June 30, 1998 from $517,000 during
the six months ended June 30, 1997 was due to decreased
equipment and leasehold improvement purchases. This number is
decreasing because the Company upgraded much of its equipment
through capital leases during the second half of 1997.
Financing activities generated cash of $169,000 in the first
six months of 1998 compared to $1.1 million used in the first six
months of 1997. The cash used in the first six months of 1997
<PAGE> 15
for financing activities was due to the repurchase of
approximately 226,000 shares of the Company's common stock from
the Company's former president and chief executive officer for
$1.1 million.As of June 30, 1998, the Company had $5.1 million
in cash, cash equivalents and short-term investments, which
consisted primarily of money market funds and commercial paper.
In addition, the Company has a line of credit (the "Revolving
Credit Facility") with Bank One, West Bend, Wisconsin of $1.0
million. As of June 30, 1998, there were no amounts outstanding
under the Revolving Credit Facility.
Accounts receivable was $7.9 million as of June 30, 1998. This
compares to $8.1 million at December 31, 1997 and $6.7 million as
of June 30, 1997. The increase in receivables over the prior
year is due to the higher volume of business in 1998. The
decrease from the December 31, 1997 balance is due to improved
collections. At June 30, 1998, the Company has reserves for
doubtful accounts of $350,000 and feels it has adequately
provided for any risks.
Longer term cash requirements, other than normal operating
expenses, are anticipated for the development of new software
products and enhancement of existing products, the financing of
anticipated growth and possible acquisition of software products
or technologies complementary to the Company's business. The
Company believes that its existing cash, cash equivalents, short-
term investments, and available line of credit, along with
anticipated cash generated from operations, will be sufficient to
satisfy its cash requirements for at least the next 12 months.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's 1998 Annual Meeting of Stockholders was held on
Monday, April 27, 1998. At the meeting, the first matter acted
upon by the stockholders was the re-election of Roy J. Carver as
a Class III Director for a three-year term expiring at the 2001
Annual Meeting of Stockholders and until his successor is duly
qualified and elected. The terms of all other then-serving
<PAGE> 16
directors continued after the meeting, including Douglas B.
Coder, James F. Goughenour, Sean P. McGowan, and Terrence L.
Mealy. As of March 31, 1998, record date for the Annual Meeting,
6,663,071 shares of Common Stock were outstanding and eligible to
vote. Of the 5,926,306 shares of Common Stock voted at the
meeting, in person or by proxy, 5,907,531 were for the re-
election and 18,775 abstained from voting for the election of Mr.
Carver.
The second matter acted upon by the stockholders was the
ratification of the appointment by the Company's Audit Committee
of Ernst & Young LLP as the Company's independent auditors for
1998. Of the 6,663,071 shares of Common Stock outstanding and
eligible to vote, 5,914,031 were voted in favor of the
ratification, 2,600 were voted against the ratification and 8,375
abstained from a vote on the ratification.
No other matters were brought before the meeting for a
stockholder vote.
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the second quarter of 1998.
<PAGE> 17
SIGNATURES
In accordance with the requirement of the Securities Exchange Act
of 1934, as amended, the registrant caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
CATALYST INTERNATIONAL, INC.
Dated: August 13, 1998 By: /s/ Sean P. McGowan
--------------------------
Sean P. McGowan
President and Chief Executive
Officer
Signing on behalf of the
registrant and as principal
executive officer.
Dated: August 13, 1998 By: /s/ Thomas G. Hickinbotham
--------------------------
Thomas G. Hickinbotham
Vice President Finance and
Administration, Chief
Financial Officer
Signing on behalf of the
registrant and as principal
financial officer.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 5144
<SECURITIES> 0
<RECEIVABLES> 7942
<ALLOWANCES> 350
<INVENTORY> 0
<CURRENT-ASSETS> 14877
<PP&E> 7874
<DEPRECIATION> 3874
<TOTAL-ASSETS> 18877
<CURRENT-LIABILITIES> 7058
<BONDS> 0
0
0
<COMMON> 873
<OTHER-SE> 10109
<TOTAL-LIABILITY-AND-EQUITY> 18877
<SALES> 7821
<TOTAL-REVENUES> 7821
<CGS> 5120
<TOTAL-COSTS> 7416
<OTHER-EXPENSES> (41)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17
<INCOME-PRETAX> 738
<INCOME-TAX> 0
<INCOME-CONTINUING> 738
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 738
<EPS-PRIMARY> .11
<EPS-DILUTED> .10
</TABLE>
