United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] 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.
--------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 39-1415889
- ----------------------------------------------------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
8989 North Deerwood Drive, Milwaukee, WI 53223
- ----------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(414) 362-6800
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of August 13, 1999, 7,070,261 shares of the issuer's common
stock were outstanding.
<PAGE> 2
CATALYST INTERNATIONAL, INC.
FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 1999
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - June 30, 1999 and
December 31, 1998.............................. 3
Statements of Operations - Three months ended
June 30, 1999 and 1998......................... 7
Statements of Operations - Six months ended
June 30, 1999 and 1998......................... 9
Statements of Cash Flows - Six months ended
June 30, 1999 and 1998......................... 11
Notes to Financial Statements.................... 13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.... 14
Item 3. Quantitative and Qualitative Disclosures about
Market Risk...................................... 25
Item 4. Submission of Matters to a Vote of Security
Holders.......................................... 25
PART II-OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................. 27
Signatures....................................... 28
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
CATALYST INTERNATIONAL, INC.
Balance Sheets
(in thousands)
ASSETS
June 30, Dec. 31,
1999 1998
(unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 7,720 $ 8,555
Accounts receivable 11,976 9,739
Revenues in excess of billings 493 -
Prepaid expenses 684 503
------- -------
Total Current Assets 20,873 18,797
Equipment and Leasehold Improvements:
Computer hardware and software 6,050 5,421
Office equipment 2,299 2,330
Leasehold improvements 875 872
------- -------
9,224 8,623
Less accumulated depreciation 5,190 4,533
------- -------
Total Equipment and Leasehold
Improvements 4,034 4,090
Purchased software and capitalized
software development costs 1,471 1,025
Intangible assets, net of accumulated
amortization of $123 in 1999 and
$54 in 1998 490 559
<PAGE> 4
Goodwill, net of accumulated
amortization of $128 in 1999 and
$44 in 1998 1,002 1,086
------- -------
Total Assets $27,870 $25,557
======= =======
</TABLE>
See accompanying notes
<PAGE> 5
<TABLE>
<CAPTION>
CATALYST INTERNATIONAL, INC.
Balance Sheets
(in thousands, except per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, Dec. 31,
1999 1998
(unaudited)
<S> <C> <C>
Current Liabilities:
Accounts payable $ 2,101 $ 1,744
Income taxes payable - 100
Accrued liabilities 1,902 2,235
Deferred software license fees - 342
Deferred services and post-contract
customer support 5,141 4,457
Current portion of long-term debt 420 388
------- -------
Total Current Liabilities 9,564 9,266
Noncurrent Liabilities:
Long-term debt 305 412
Deferred services and post-contract
customer support 137 191
Deferred rent 275 285
------- -------
Total Non-Current Liabilities 717 888
------- -------
Total Liabilities 10,281 10,154
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: 8,848,000 in 1999
and 8,767,000 in 1998 885 877
Additional paid-in capital 33,358 32,743
<PAGE> 6
Accumulated deficit (8,283) (9,846)
Treasury stock, at cost: 1,823,000 shares
of common stock in 1999 and 1998 (8,371) (8,371)
------- -------
Total Stockholders' Equity 17,589 15,403
------- -------
Total Liabilities and Stockholders' Equity $27,870 $25,557
======= =======
</TABLE>
See accompanying notes
<PAGE> 7
<TABLE>
<CAPTION>
CATALYST INTERNATIONAL, INC.
Statements of Operations
(in thousands, except per share amounts)
(unaudited)
Three months ended
June 30,
------------------
1999 1998
---- ----
<S> <C> <C>
Revenues:
Software license fees $ 3,194 $ 1,662
Services and post-contract
customer support 6,085 5,278
Hardware and other 2,230 881
------- -------
Total Revenues 11,509 7,821
Operating Expenses:
Cost of software license fees 233 128
Cost of services and post-contract
customer support 3,761 3,446
Cost of hardware and other 1,840 680
Product development 2,329 866
Sales and marketing 2,042 1,447
General and administrative 1,359 848
------- -------
Total Operating Expenses 11,564 7,415
------- -------
Income (loss) from operations (55) 406
Other income 164 41
------- -------
Net income $ 109 $ 447
======= =======
<PAGE> 8
Net income per share
Basic $ 0.02 $ 0.07
Diluted $ 0.01 $ 0.06
Shares used in computing net income
per share
Basic 6,987 6,727
Diluted 7,726 7,426
</TABLE>
See accompanying notes
<PAGE> 9
<TABLE>
<CAPTION>
CATALYST INTERNATIONAL, INC.
Statements of Operations
(in thousands, except per share amounts)
(unaudited)
Six months ended
June 30,
------------------
1999 1998
---- ----
<S> <C> <C>
Revenues:
Software license fees $ 6,055 $ 3,770
Services and post-contract
customer support 12,670 10,400
Hardware and other 3,511 1,116
------- -------
Total Revenues 22,236 15,286
Operating Expenses:
Cost of software license fees 380 160
Cost of services and post-contract
customer support 7,634 7,172
Cost of hardware and other 3,016 887
Product development 3,913 1,563
Sales and marketing 3,603 2,872
General and administrative 2,373 1,965
------- -------
Total Operating Expenses 20,919 14,620
------- -------
Income from operations 1,317 667
Other income 245 72
------- -------
Net income $ 1,562 $ 739
======= =======
<PAGE> 10
Net income per share
Basic $ 0.22 $ 0.11
Diluted $ 0.20 $ 0.10
Shares used in computing net income
per share
Basic 6,976 6,702
Diluted 7,716 7,293
</TABLE>
See accompanying notes
<PAGE> 11
<TABLE>
<CAPTION>
CATALYST INTERNATIONAL, INC.
Statements of Cash Flows
(in thousands)
(unaudited)
Six months ended
June 30,
------------------
1999 1998
---- ----
<S> <C> <C>
Operating Activities:
Net income $ 1,562 $ 739
Adjustments to reconcile net income to net
Cash provided by operating activities:
Depreciation and amortization 867 632
Compensation expense on stock options 337 12
Gain on disposal of fixed assets (11) -
Changes in operating assets and liabilities:
Accounts receivable (2,237) 166
Prepaid expenses (181) 5
Accounts payable 357 (83)
Accrued liabilities (433) (204)
Deferred services and maintenance 630 561
Revenues in excess of billings (835) (868)
Deferred rent (10) (9)
------- -------
Total adjustments (1,516) 212
------- -------
Net cash provided by operating activities 46 951
Investing Activities:
Purchase of equipment and leasehold improvements (506) (232)
Capitalization of software costs (446) -
------- -------
Net cash used in investing activities (952) (232)
Financing Activities:
Payments on long-term debt (216) (65)
Proceeds from exercise of stock options 287 234
------- -------
Net cash provided by financing activities 71 169
------- -------
Net increase (decrease) in cash (835) 888
Cash and cash equivalents at the beginning of period 8,555 4,256
------- -------
<PAGE> 12
Cash and cash equivalents at the end of the period $ 7,720 $ 5,144
======= =======
</TABLE>
Noncash investing and financing activities:
There were no capital lease transactions in the second quarter
of 1999. During the first quarter of 1999, the Company acquired
$141,000 of computer hardware under capital leases.
See accompanying notes
<PAGE> 13
CATALYST INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
(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-Q 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 1998 financial statements have
been reclassified to conform to 1999 presentation. Operating
results for the three- and six-month periods ended June 30, 1999
are not necessarily indicative of the results that may be
expected for the year ended December 31, 1999. For further
information, refer to the financial statements and footnotes
thereto included in the Catalyst International, Inc. Annual
Report on Form 10-K for the year ended December 31, 1998.
2. Net Income Per Share of Common Stock
The Company has presented net income 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> 14
<TABLE>
<CAPTION>
For the For the
Three Months Six Months
ended June 30, ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Denominator
- -----------
Denominator for basic earnings
per share - weighted average
common shares 6,987 6,727 6,976 6,702
Effect of diluted securities -
stock options and warrants 739 699 740 591
----- ----- ----- -----
Denominator for diluted
earnings per share -
adjusted weighted average
common shares 7,726 7,426 7,716 7,293
===== ===== ===== =====
</TABLE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation
The following discussion contains forward-looking statements
that are subject to risks and uncertainties that could cause
actual results to differ materially from those anticipated by
such statements. These statements use words such as
"anticipate," "estimate," or "future," or may be identified as
"the Company expects" or "the Company believes" or otherwise
stated as the Company's predictions for the future. These
statements, as with any predictions of the future, 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, and any such
differences could have a material negative impact on the
Company's share price. Factors that might cause such a
difference include, but are not limited to, a decrease in demand
for the Company's products, delays in the timely availability of
new features and releases of the Company's products, a too rapid
increase in the Company's level of spending, actions taken by
competitors, technological changes, those herein identified,
those discussed in the Company's Registration Statement on Form
<PAGE> 15
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 post-contract customer support ("PCS"), and
hardware sales and other. Total revenues for the second quarter
of 1999 were $11.5 million, which represented an increase of
47.2% over second quarter 1998 total revenues of $7.8 million.
For the first six months of 1999, total revenues were $22.2
million, up 45.5% over 1998 total revenues of $15.3 million for
the same period. The increase in total revenues for the six-
month period was due primarily to an increase in third party
hardware sales to customers who desire a turnkey solution,
a greater base of installed customers who provided PCS revenues,
and an increase in revenues from projects sold.
International revenues were $2.2 million in the second quarter
of 1999, compared to international revenues of $1.9 million in
the second quarter of 1998. International revenues represented
19.4% of total revenues for the second quarter of 1999 compared
to 24.5% in the same period of 1998. International revenues
increased slightly at June 30, 1999 compared to June 30, 1998
due to the addition of new customers in the UK, Canada, and
Saudi Arabia. The Company anticipates continued growth of sales
to foreign customers as it adds to its sales force and base of
Value Added Resellers (VARs).
In early 1998, the Company decided that direct sales of its
product in most foreign markets had both high cost and high
risk. A decision was made to close the direct sales offices in
Brazil, France, and Holland and focus on creating a global
network of VAR who would sell, translate, and implement the WMS
products in their respective countries. This strategy reduced
cost and risk substantially, while offering a good opportunity
to sell the WMS product in those markets. The Company now has
such VAR relationships either in place or in progress in Europe,
the Middle East, South America, and Asia, and has plans for
further expansion elsewhere.
<PAGE> 16
Software License Fees
Software license fee revenues consist of revenues from software
license agreements for the Company's products, related add-on
products, and third party software. The second quarter of 1999
software license fee revenues of $3.2 million represented an
increase of 92.2% over second quarter of 1998 software license
fee revenues of $1.7 million. For the first six months of 1999,
license fee revenues increased by $2.3 million, or 60.6%, over
1998 license fee revenues of $3.8 million for the same period.
This was attributable to increased sales of licenses requiring
fewer modifications and additional license sales to existing
customers.
The Company follows the software revenue recognition practices
set forth in Statement of Position 97-2, "Software Revenue
Recognition," issued by the American Institute of Certified
Public Accountants. For projects requiring "significant"
modifications (modifications costing more than 5% of the
software license fee) to the software, the Company uses contract
accounting procedures based upon percentage of completion to
recognize revenue, provided that such amounts are reasonably
collectable. Revenue for projects with no modifications or
modifications costing less than 5% of the software license fee
are recognized upon reaching contract milestones, to the
extent that payment is fixed and determinable and payment is
likely within 120 days. The Company believes that license fee
revenues should increase in the future due to increased
worldwide sales and marketing efforts, the introduction of new
products, and efforts to deliver standard packaged solutions
that meet the requirements of its six vertical markets (retail,
consumer goods, motor vehicle and parts, industrial technology,
process goods, and Internet fulfillment).
Services and PCS
Services and PCS revenues are derived from software
modifications, professional services, and PCS agreements.
Services and PCS revenues increased 15.3% to $6.1 million in the
second quarter of 1999, up from $5.3 million in the second
quarter of 1998. For the six-month period ended June 30, 1999,
services and PCS revenues were $12.7 million, an increase of
<PAGE> 17
$2.3million, or 21.8%, over $10.4 million for the first six
months of 1998. The components of services and PCS revenues as
a percentage of total revenues in the second quarter of 1999
were 11.7% for software modifications, 26.4% for professional
services, and 14.8% for PCS agreements compared with 14.4%,
36.0%, and 17.0%, respectively, in the second quarter of
1998. Services and PCS revenues increased in the second
quarter of 1999 due to the combined effect of an increased
number of the Company's product implementations at new customer
sites, multi-site rollouts for existing customers, upgrades to
new releases of the Company's products, and renewals of PCS
agreements.
Software modifications are determined during the customer's
Conference Room Pilot (CRP) and consist of changes to the
software to facilitate specific functionality desired by a
customer. The Company believes that while a certain amount of
software modifications will always be necessary, future
modifications revenues as a percentage of total revenues
should decrease due to the increased functionality of newer
releases of the Company's products.
Professional services revenues are derived from training,
technical services, performance of the CRP, project management,
and implementation services. The Company expects that future
professional services revenues should continue to increase due
to expected implementations of new customer sites and multi-site
roll-outs for existing customers. The increase in professional
services revenue was due to an effort on the part of the Company
to sell upgrades, training, and other services to existing
customers. Revenue for professional services is recognized
based on the number of hours of work actually performed.
Customers may enter into a one-year agreement for PCS at the
time they first license the products and, once the software
is installed and the warranty period has expired, pay for the
first year of PCS fees in advance. The increase in PCS revenues
was due primarily to growth in the installed customer base for
the Company's products and current customers renewing their PCS
agreements. PCS revenues are recognized ratably over the term of
the PCS agreement. The Company believes that PCS revenues may
increase in the future as more of the Company's products are
<PAGE> 18
implemented, resulting in the execution of corresponding PCS
agreements and renewal of existing PCS agreements.
Hardware and Other
Hardware and other revenues consist of products that the Company
sold to its customers on behalf of other manufacturers.
Hardware and other revenues consist of computer hardware, radio
frequency equipment, and printers. Hardware and other revenues
increased $1.3 million to $2.2 million in the second quarter of
1999 from $881,000 during the same period of 1998. Hardware
sales represented 15.8% of total revenues in the first half of
1999 compared to 7.3% for the same period in 1998. The
increase in hardware and other revenue was due to 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 software products sold by the Company. In the second
quarter of 1999, cost of software license fees increased to
$233,000 from $128,000 in the second quarter of 1998 due to an
increase in revenues from the sale of third party software.
Year to date cost of software license fees increased by 137.5%
to $380,000 in 1999 from $160,000 in 1998.
The Company expects to continue to expense the cost of
developing new releases of its primary product offering, the
Catalyst WMS for UNIX, and therefore anticipates that the cost
of software license fees for that product and related third
party software should remain approximately the same in the
future as a percentage of total software license fee revenues.
Cost of Services and PCS
Cost of services and PCS consists primarily of personnel and
related costs for the performance of software modifications,
professional services, and PCS. The cost of services and PCS
increased 9.1% to $3.8 million in the second quarter of 1999
from $3.4 million for the second quarter of 1998. However, as a
<PAGE> 19
percentage of services and PCS revenues, the cost of services
and PCS decreased to 61.8% for the second quarter of 1999 from
65.3% for the second quarter of 1998, reflecting improvement and
efficiencies in the delivery of these services. Year to date
cost of services and PCS increased 6.4% to $7.6 million in 1999,
from $7.2 million for the same period in 1998 and decreased as a
percent of related revenues to 60.3% at June 30, 1999 from 69.0%
at June 30, 1998. The cost of services and PCS increased in
relation to the growth in revenues from these 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.
The Company does not inventory, service, or discount hardware
items, but makes them available to customers who desire a
turnkey solution. Cost of third party hardware in the
second quarter of 1999 was $1.8 million compared to $680,000 for
the second quarter of 1998. The increase in cost is
attributable to the increase in sales of third party hardware.
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 expenses as a percentage of total revenues for the
second quarter of 1999 increased to 20.2% from 11.1% in the
second quarter of 1998. Actual product development expenses
were $2.3 million in the second quarter of 1999, representing an
increase of 168.9%. The increase in product development costs
was primarily due to the Company's current efforts to develop
new products and enhance its current product offerings as well
as develop new features and functions in its key verticals. The
Company continues to expense all software development costs
related to its UNIX product as incurred. On its NT-based
product, the Company capitalized approximately $250,000 in
additional development costs for the second quarter of 1999, and
also expects there may be additional capitalization before the
<PAGE> 20
product is available for general release. The Company believes
that product development costs should decrease as a percentage
of total revenues in the future.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries and
commissions, marketing and promotional tools and expenses, and
travel expenses. Sales and marketing expenses as a percentage
of total revenues for the second quarter of 1999 decreased to
17.7% from 18.5% in the second quarter of 1998. Actual sales
and marketing expenses increased to $2.0 million in the second
quarter of 1999 compared to $1.4 million in the second quarter
of 1998. The decrease in sales and marketing expenses as a
percentage of total revenues in the second quarter of 1999 was
due to the increase in revenues generated over the comparable
quarter. The increase in actual sales and marketing expenses
was primarily due to increased trade show and promotional
activities and the addition of sales and marketing personnel.
General and Administrative
General and administrative expenses consist primarily of the
salaries of administrative, executive, finance, and quality
assurance personnel. General and administrative expenses as a
percentage of total revenues for the second quarter of 1999
increased slightly to 11.8% from 10.8% in the second quarter of
1998. Actual general and administrative expenses increased to
$1.4 million in the second quarter of 1999 from $848,000 in the
second quarter of 1998. The increase in general and
administrative expenses in the current period was a combination
of several factors, including compensation expense for the
former chief financial officer and an increase in employee
procurement expenses. For the six-month period, general and
administrative expenses were $2.4 million for 1999 compared to
$2.0 million for 1998. The Company expects that general and
administrative expenses may increase in the future, but should
continue to decrease as a percentage of total revenues.
<PAGE> 21
Other Income and Expense
Included in other income and expense for the second quarter of
1999 was $115,000 of interest income on investments and $17,000
interest expense on equipment leases. Other income and expenses
also consisted of a foreign currency translation gain of
approximately $28,000 and other income of approximately $38,000.
This compares to $58,000 of interest income offset by $17,000 of
interest and other expense in the first quarter of 1998. The
increase in interest income in 1999 was due to higher cash
balances and better interest rates earned compared to the second
quarter of 1998. Interest expense in the second quarter of 1999
decreased compared to the second quarter of 1998 as there were
no new computer equipment leases entered into in the second
quarter of 1999 and interest expense became a smaller component
of lease payments.
Income Tax Expense
No federal and state tax expense was recorded for the quarter or
six-month period ended June 30, 1999 and 1998 due to the
Company's federal and state net operating loss position. No
deferred tax expense was recorded in the quarters ended June 30,
1999 and 1998 as the Company continues to have a substantial net
operating loss carryforward. The Company recorded a valuation
allowance to reserve for the net deferred tax assets.
Liquidity and Capital Resources
Net cash provided by operating activities was $46,000 for the
six months ended June 30, 1999, compared to $951,000 during the
six months ended June 30, 1998. The decrease during this period
was due primarily to the increase in accounts receivable.
Cash used for investing activities increased to $952,000 during
the six months ended June 30, 1999 from $232,000 during the six
months ended June 30, 1998 due to increased equipment and
leasehold improvement purchases as well as capitalized
software costs.
<PAGE> 22
Financing activities generated cash of $71,000 in the first
six months of 1999 compared to $169,000 in the first six months
of 1998. The decrease in net cash provided by financing
activities in 1999 was due to an increase in payments on leases
compared to 1998.
As of June 30, 1999, the Company had $7.7 million in cash and
cash equivalents, which consisted primarily of money market
funds and commercial paper. In addition, the Company has a $1.0
million line of credit (the "Revolving Credit Facility") with
Bank One, Milwaukee, Wisconsin. As of June 30, 1999, there
were no amounts outstanding under the Revolving Credit Facility.
Accounts receivable was $12.0 million as of June 30, 1999. This
compares to $9.7 million at December 31, 1998. The increase from
the December 31, 1998 balance was due to increased sales in the
latter part of the second quarter of 1999. At June 30, 1999,
the Company had reserves for doubtful accounts of $379,000 and
feels it has adequately provided for any risks known or
anticipated at this time.
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, and available line of credit, along with
anticipated cash generated from operations, should be
sufficient to satisfy its cash requirements for at least the
next 12 months.
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 cash
dividends in the foreseeable future.
Impact of Year 2000
The Year 2000 issue is the result of computer programs using two
digits rather than four to define the applicable year. Any of
<PAGE> 23
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 normal business activities.
The Company's primary software offering, the Catalyst WMS, is
written to store the year in the database using four digits to
allow data entry in an unambiguous manner and to process program
functions in four digits. The Company has certified that its
most recent product offerings are capable of processing date-
related data in four digits. The Company has extensively tested
these products and has not to date found any material errors
which could affect Year 2000 processing. However, due to the
fact that the Company's products are integrated with different
combinations of third party software and hardware products, any
Year 2000 problem occurring within these third party software
and hardware products may impact the operation of the Company's
products which, in turn, may lead to claims against the Company.
The potential for and outcome of such claims and impact on the
Company cannot be estimated at this time.
In mid-1997, the Company began a proactive program of offering
to its existing customers assistance in assessing whether the
customer's fully integrated system is Year 2000 compliant and
coordinating the remediation of non-compliant systems. The
Company has contacted all customers with pre-release 7.0 of the
Catalyst WMS and notified them that, because their systems
interface with third party software and hardware products, their
entire system should be reviewed for compliance. This effort is
ongoing and certain customers have retained the Company to
perform an assessment of and/or a coordination of the
remediation work for their entire system.
With respect to the Company's internal computer systems and
equipment, the Company continues to conduct a comprehensive
review to ensure that all such systems are, or prior to the end
of 1999 will be, Year 2000 compliant. The Company's Year 2000
readiness plan includes the following phases: (i) conducting an
inventory of the Company's internal systems, including
information technology systems and non-information technology
<PAGE> 24
systems (which include office and facilities' environment-
related systems) and the systems acquired or to be acquired by
the Company from third parties; (ii) assessing and prioritizing
any required remediation; (iii) remediating any problems by
repairing or, if appropriate, replacing the non-compliant
systems; (iv) testing of all remediated systems; and (v)
developing a contingency plan. The Company has completed its
inventory and assessment phases of this plan and is actively
engaged in completing the remaining phases. The Company expects
to complete all phases of its readiness plan before the end of
1999.
In addition to assessing its internal systems, the Company has
initiated communications with its material service providers,
suppliers, and critical business partners to assess their Year
2000 readiness. The Company plans to continue assessing its
service providers, suppliers, and business partners to ensure
Year 2000 readiness. Despite the Company's diligence, there can
be no guarantee that the non-compliant systems of other entities
which the Company relies upon in its day to day operations will
not have a material adverse impact on the Company. The actual
impact on the Company resulting therefrom cannot be determined
at this time.
To date, the Company has expended approximately $275,000 in
conjunction with its Year 2000 readiness plan. The Company
expects that the cost of completing this Year 2000 readiness
plan, including replacement of all necessary computer systems,
will not exceed an additional $75,000.
The Company has limited the scope of its risk assessment to
those factors upon which it can reasonably be expected to have
an influence. The Company has made the assumption that
government agencies, utility companies, and national
telecommunication providers will continue to operate. The lack
of such services could have a material impact on the Company's
ability to operate; however, the Company has little, if any,
ability to influence such an outcome, or to make alternative
arrangements in advance for such services if they are
unavailable. Additionally, the Company believes that
disruptions in the economy generally resulting from Year 2000
issues could have a material adverse impact on the Company. The
<PAGE> 25
amount of potential liability or loss of revenue to the Company
cannot be reasonably estimated at this time.
The information contained herein, as well as all information
previously filed by the Company regarding its Year 2000
readiness, are designated as Year 2000 readiness disclosures as
defined by the Year 2000 Information and Readiness Disclosure
Act.
Economic and Monetary Union in Europe (EMU)
EMU refers to the movement toward economic and monetary union in
Europe with the ultimate goal of introducing a single currency
called the euro. While the European monetary union will have
profound financial and political implications, the Company
believes that the formation of EMU will not impact the Company's
earnings in any material way.
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
The Company does not believe it has material exposure to market
risk with respect to any of its investments as the Company does
not use market rate sensitive instruments for trading or other
purposes. 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 June 30, 1999 and 1998. There
were no realized gains or losses in the periods ended June 30,
1999 or 1998.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's 1999 Annual Meeting of Stockholders was held on
Monday, April 26, 1999. At the meeting, the first matter acted
upon by the stockholders was the re-election of James F.
<PAGE> 26
Goughenour and Sean P. McGowan as Class I Directors for three-
year terms expiring at the 2002 Annual Meeting of Stockholders
or until their successors are duly qualified and elected. The
terms of all other then-serving directors continued after the
meeting, including Roy J. Carver, Jr., Douglas B. Coder, and
Terrence L. Mealy. As of March 12, 1999, record date for the
Annual Meeting, 6,970,679 shares of Common stock were
outstanding and eligible to vote. Of the 6,376,877 shares of
Common stock voted at the meeting, in person or by proxy,
at least 6,363,327 were for the re-election and no more than
13,550 shares voted against the election of Messrs. Goughenour
and McGowan.
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 6,376,877 shares of Common stock voted at the
meeting, in person or by proxy, 6,376,469 were voted in favor of
the ratification and 200 shares abstained from a vote on the
ratification.
No other matters were brought before the Annual Meeting for a
stockholder vote.
<PAGE> 27
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
3.1 Amended and Restated Certificate of Incorporation (1)
3.2 Amended and Restated By-Laws (1)
10.1 1993 Stock Option Plan, as amended, of Catalyst USA,
Inc.* (1)
10.2 1997 Director Stock Option Plan of Catalyst
International, Inc.* (2)
27 Financial Data Schedule
- ----------
* Represents a compensation plan.
(1) Incorporated by reference to Registration Statement 33-
97522C on Form SB-2.
(2) Incorporated by reference to Exhibit 4.1 of Registration
Statement 33-97522C on Form S-8 dated September 26, 1997.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the second quarter of
1999.
<PAGE> 28
SIGNATURES
Pursuant the requirements of the Securities Exchange Act of
1934, the registrant had duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CATALYST INTERNATIONAL, INC.
Dated: August 16, 1999 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 16, 1999 By: /s/ Timothy Sherlock
--------------------------
Timothy Sherlock
Vice President, Finance and
Chief Financial Officer
Signing on behalf of the
registrant and as principal
financial officer.
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