UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(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, 1998 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.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 39-1415889
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(State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization) Identification No.
8989 North Deerwood Drive, Milwaukee, Wisconsin 53223
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(Address of Principal Executive Offices) (Zip Code)
(414) 362-6800
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.10 par value
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(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ]
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As of March 12, 1999, the aggregate market value of the registrant's common
stock held by non-affiliates was $35,389,719 (based upon the closing price
of the registrant's common stock on The Nasdaq Stock Market (R) on that
date).
As of March 12, 1999, the number of shares outstanding of the registrant's
common stock was 6,970,769.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1998 Annual Report to Stockholders are incorporated by
Reference into Parts I, II, and IV.
Portions of the definitive Proxy Statement dated March 24, 1999 to be
delivered to stockholders in connection with the Annual Meeting of
Stockholders to be held April 26, 1999 are incorporated by reference into
Part III.
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CATALYST INTERNATIONAL, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
INDEX
PART I
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<C> <S> <C>
Item 1. Business........................................................ 1
Item 2. Property........................................................ 8
Item 3. Legal Proceedings............................................... 9
Item 4. Submission of Matters to a Vote of Stockholders................. 9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters......................................................... 9
Item 6. Selected Financial Data......................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 10
Item 7a. Quantitative and Qualitative Disclosures about Market Risk...... 10
Item 8. Financial Statements and Supplementary Data..................... 11
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................ 11
PART III
Item 10. Directors and Executive Officers of the Registrant.............. 11
Item 11. Executive Compensation.......................................... 11
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 12
Item 13. Certain Relationships and Related Transactions.................. 12
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 12
Signatures............................................................... 15
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PART I
ITEM 1. BUSINESS
GENERAL
Catalyst International, Inc. ("Catalyst" or the "Company"), incorporated
in Delaware 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. Catalyst 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. Catalyst 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 Catalyst was founded in 1979, it has focused its resources on the
development and enhancement of advanced warehouse management software
solutions. This focus has allowed Catalyst 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 methodology. Once implemented, Catalyst WMS can be
reconfigured through table-driven parameters by either Catalyst, the
customer, or a third party integrator to adjust to changes in operational
strategies and accommodate ongoing business process reengineering. It is not
Catalyst'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
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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).
Catalyst's implementation methodology is known as the "CIMPL" process-
Catalyst Implementation Management and Planning. 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 enables Catalyst
and the customer to model warehouse management operations, prototype and
validate customer business requirements, and resolve operating issues prior
to live implementation.
During the second quarter of 1998, Catalyst introduced CatPack, which
is a downsized version of the Catalyst WMS product. CatPack is a packaged,
configurable system aimed at smaller companies across all industries in the
mid-tier market. CatPack runs on a UNIX server with Oracle RDBMS and
communicates with a Microsoft (R) Windows NT (R) operating system.
To deploy CatPack, Catalyst has developed the Catalyst FastTrack
implementation methodology. The FastTrack process is designed to implement a
no-modification package in the shortest amount of time, while ensuring a
complete and successful implementation. Customers can choose from a "do-it-
yourself" implementation or implementation by a certified third-party
integrator who has been trained, tested, and certified in the areas of
project management, warehousing and distribution operations, CatPack
configuration, Catalyst system installation, UNIX/NT system technology, and
the FastTrack implementation methodology.
During the third quarter of 1998, the Company acquired an NT-based WMS
package also targeted at the mid-tier market. Catalyst now offers an NT-
based WMS for companies who choose NT technology for their information
systems infrastructure. Catalyst WMS for Windows NT is based upon the
Microsoft BackOffice (R) family of products, developed from the "ground up"
using Microsoft tools and technologies. The system was developed and
optimized for the native Windows NT application-programming interface,
designed for quick deployment and ease-of-use. The Catalyst NT-based system
is installed on a Microsoft Windows NT-server communicating with a variety of
radio frequency equipment.
Catalyst believes that Catalyst WMS, CatPack, and Catalyst WMS for Windows
NT (the "WMS Products") benefit customers in three key areas: improved
customer service, operational efficiency, and capital utilization. The WMS
Products 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. The WMS Products 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
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advanced features of the WMS Products should improve capital utilization of
the warehouse by lowering inventory levels, increasing inventory turns and
warehouse efficiencies, and improving space utilization.
The forward-looking statements set forth on page 14 of the 1998 Annual
Report to Stockholders are incorporated herein by reference and filed
herewith as Exhibit 13.2.
STRATEGY
Catalyst's objective is to continue to be a leading provider of warehouse
management software solutions and services. To achieve this objective,
Catalyst has adopted the following strategies:
OFFER ADVANCED WAREHOUSE MANAGEMENT SOLUTIONS. Catalyst intends to
continue to focus its resources on offering configurable, standard solutions
which capture best practice methodologies used in warehouse operations. The
Company believes that it is well-positioned in the market because its
standard solutions allow it to leverage its software over a broad customer
base and reduce implementation time significantly relative to custom-developed
solutions.
PROVIDE SUPERIOR SYSTEM IMPLEMENTATION. Catalyst believes that the
efficiency of its implementation processes allow it 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 processes by further
refining the CIMPL and FastTrack methodologies 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 five major vertical market categories including
retail, consumer goods, motor vehicle and parts, industrial technology, and
process goods. Catalyst 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. Catalyst will expand into the mid-tier market
through its CatPack and Catalyst WMS for Windows NT products and continue its
efforts to sell and deliver a "packaged" warehouse solution that requires
fewer modifications.
EXPAND WORLDWIDE DISTRIBUTION. In 1994, Catalyst established an office in
London to sell, service, and support Catalyst WMS in international markets.
Catalyst plans to continue to increase its international business through an
aggressive effort to recruit and manage Value Added Resellers ("VARs") in
selected foreign markets. These VARs work together with Catalyst's US and
UK offices in obtaining agreements for global, multi-site installations
with multi-national customers. Catalyst has been successful in establishing
VARs in Brazil, Italy, Saudi Arabia, and Thailand and is currently working
on developing similar relationships in other countries. Catalyst WMS has an
international interface and is available in English, French, Italian,
Portuguese, and Spanish.
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LEVERAGE STANDARD TECHNOLOGY. The WMS Products are designed to operate in
an open system environment enabling customers to use various UNIX and NT
operating systems, operate on multiple hardware platforms and RDBMSs, and
inter-operate with many third-party software applications, such as MRP II,
ERP, and supply chain planning systems. Catalyst 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
The WMS Products are designed to manage an entire warehouse operation and
incorporate numerous warehouse strategies to provide maximum operating
efficiency. The Company also leverages its WMS Products with new major
releases and interim point releases incorporating new features and
functionality. The WMS Products interface with an organization's current
material handling equipment and transaction-based systems, such as electronic
data interchanges, bar code labeling, general ledger, MRP II, ERP, and supply
chain planning systems. The WMS Products also utilize radio frequency and
bar code technology to provide real-time control and validation of task
completion to ensure inventory accuracy. The WMS Products direct employees
and material handling equipment and manage the inventory, space, radio
terminals, bar code scanners, and printers in the warehouse for maximum
efficiency.
The WMS Products are comprehensive applications that manage the receiving,
putaway, outbound order processes, picking, and general warehouse operations.
With each warehouse process, the WMS Products provide a variety of tactical
choices which can be configured to a particular customer's requirements and
which are designed to maximize efficiency.
The information set forth on page 15 of the 1998 Annual Report to
Stockholders under the caption "Total Revenues" is incorporated herein by
reference and is filed herewith as Exhibit 13.2.
SERVICES AND MAINTENANCE
In addition to sales of the WMS Products, Catalyst offers certain services
and maintenance agreements to its customers. Services provided by Catalyst
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 customer support ("PCS") are typically sold to customers
for a one-year term at the time they initially license the WMS Products 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 the WMS Products, 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 Catalyst's license agreement
and fees for ongoing maintenance are included in the annual fee charged under
maintenance agreements.
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As a provider of warehouse management software, Catalyst recognizes the
importance of offering quality service and support to its customers.
Catalyst has several groups responsible for offering services and maintenance
to ensure customer satisfaction. These departments include Professional
Services, Implementation Services, Product Distribution, Product Support,
Complementary Services, Customer Education and Training, and Customer
Service.
The Professional Services Organization (made up of Professional Services
and Implementation Services) offers structured implementation methodologies
which typically last four to eight months.
Product Distribution and Product Support are responsible for managing and
installing operating systems, hardware, networks, communication links, and
RDBMSs.
Complementary Services address meeting the post-implementation needs of
customers. This includes the sale of additional enhancements to subsequent
WMS sites, providing additional hardware, providing consulting and Year 2000
services, as well as providing possible upgrades of Catalyst WMS.
Customer Education and Training provides education and training
on the use, administration, and configuration of the WMS Products at the
Company's headquarters. Catalyst's 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 WMS Products. In
1998, Catalyst introduced Catalyst University, a series of continuing
education courses for current customers, VARs, and other partners.
Customer Service offers a fully staffed Response Center 24-hours per day,
seven days per week, 365 days per year.
CUSTOMERS
Catalyst's sales cycle typically ranges from three to nine months.
Software license fee revenues for each quarter depend in part on sales of
software licenses for which implementation began during that quarter and
sales of software licenses during previous quarters which continue to be
under implementation. In the three years ended December 31, 1998, Catalyst
had no customers which accounted for more than 10% of its total revenues.
Catalyst does not believe that the loss of any single customer would have a
material adverse effect upon its business, results of operations, or
financial condition.
Catalyst continues to target customers with warehouses that require highly
sophisticated warehouse management systems like the WMS Products. With
CatPack and Catalyst WMS for Windows NT, Catalyst plans on penetrating
the mid-tier warehouse market. In addition, Catalyst will continue its
efforts to sell and deliver a "packaged" warehouse solution that requires
fewer modifications.
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Catalyst typically has significant sales in each fiscal year to one or more
customers. This is primarily due to the cost of the WMS Products and the
associated revenues from professional services, hardware, and maintenance
agreements which result in a high percentage of revenue attributable to sales
to one or more customers.
Although Catalyst has historically relied on the retail, consumer goods,
motor vehicle and parts, industrial technology, and process goods vertical
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.
At the end of 1998, Catalyst had a backlog of license fee and modification
revenue of $7.4 million, which included $1.8 million for additional sites for
one customer. While this $1.8 million an option exercisable at the
discretion of the customer, Catalyst expects the customer to exercise this
option. At the end of 1997, Catalyst had a comparable backlog of $5.8
million. For both periods mentioned, Catalyst estimates that the respective
backlogs contained less than $1 million that would be carried forward more
than 12 months.
Catalyst does not include professional services in its backlog number as
the dollar amount is not certain under normal contract terms, and therefore,
professional services are invoiced monthly as they are actually performed.
Hardware sales are also excluded from the backlog as they are not a part of
Catalyst's normal software sales contracts, and therefore, often come post-
contract. Since Catalyst does not inventory hardware, sales for hardware are
normally invoiced as the third party vendor ships the hardware, often in the
same month it is ordered.
SALES AND MARKETING
Catalyst markets and sells its software and services in North America
and Europe through direct sales and channel partner organizations.
Catalyst is currently exporting its products to Australia, Brazil, Canada,
France, Germany, Guatemala, Holland, Italy, Mexico, Saudi Arabia, Spain, and
the United Kingdom. The London office is responsible for the sales, support,
and service of the WMS Products in certain international markets. In Brazil,
Italy, Saudi Arabia, and Thailand, Catalyst employs the sales assistance of a
VAR that sells and assists in implementation and support of the WMS Products.
Catalyst plans to continue strengthening its local presence though its
relationships with local offices of supply chain participants and
enterprise software vendors and by developing close relationships with local
system integrators. Having strong relationships with local partners should
give Catalyst the insight into how to most effectively focus its sales
effort: through direct sales efforts or through local VAR programs.
The information set forth on page 37 of the 1998 Annual Report to
Stockholders under the caption "9. Segment Disclosure and Major Customers" is
incorporated herein by reference and is filed herewith as Exhibit 13.3.
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To support its sales force, Catalyst 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 a
WMS Product, contract negotiation, and commitment. While the sales cycle
varies substantially from customer to customer, it is typically three to nine
months.
Catalyst believes that, with over 20 years in the warehouse management
software business and with more than 75 customers supporting over 125 sites
installed, it has, in Catalyst WMS, a product that is established, proven,
and accepted in the marketplace. The Company anticipates CatPack and
Catalyst WMS for Windows NT will gain similar stature in the mid-tier market.
Catalyst 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. Catalyst has created a team of
employees, vendors, and consultants who are experts and leaders in their
respective fields, which allows Catalyst to provide its customers with a
strong resource for products and knowledge. This resource for products and
knowledge should help Catalyst's customers stay competitive in their
respective industries.
As of December 31, 1998, the sales and marketing organization was based in
the Company's headquarters in Milwaukee, Wisconsin, in the London office, and
in territory sales offices located throughout the United States.
PROPRIETARY RIGHTS AND LICENSES
Catalyst 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. Catalyst
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 its business, results of operations, or financial
condition than factors such as the knowledge, ability, and experience of its
employees, frequent product enhancements, and timeliness and quality of
support services. Catalyst typically sells its WMS Products to its customers
under a perpetual license, which is generally non-transferable and solely for
the customer's internal operations at designated sites. Catalyst 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, Catalyst generally owns
all modifications to its software that are implemented for a customer.
Catalyst is not aware that its WMS Products, trademarks, or other
proprietary rights infringe the property rights of third parties, but has not
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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, Catalyst
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
Catalyst seeks to offer an extensive, integrated product line that provides
complete warehouse management functionality to warehouses worldwide. To
effect this strategy, Catalyst intends to continue to introduce new products
and upgrade the functionality of and enhance existing products. Through its
development and support personnel, Catalyst 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 Catalyst's product
development is performed by its employees or by contract personnel under the
Company's control. Product development costs were $4.5 million 1996, $2.7
million in 1997, and $3.4 million in 1998.
COMPETITION
The warehouse management software industry continues to be highly
fragmented with a number of competitors. Catalyst's competitors, including
publicly and privately held companies, focus either on warehouse management
software or offer a manufacturing software solution of which warehouse
management is a part. The competitive factors affecting the market for
Catalyst'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. Catalyst 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, 1998, Catalyst had 265 full-time employees worldwide,
none of which were represented by any collective bargaining organization.
Catalyst has never experienced a work stoppage and considers its relations
with its employees to be good.
ITEM 2. PROPERTY
Catalyst 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. Catalyst leases
approximately 6,000 square feet of office space in London, England, pursuant
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to a lease which expires in 2003. Catalyst leases approximately 2,000
square feet of office space in Orlando, Florida, the development center for
its NT-based WMS product, pursuant to a lease that expires in February 2000.
Catalyst believes that its existing facilities should be adequate for its
needs through 1999.
ITEM 3. LEGAL PROCEEDINGS
Catalyst is not a party to any material legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
No matters were submitted to a vote of stockholders during the fourth
quarter of 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Catalyst's common stock is listed on The Nasdaq Stock Market under the
symbol CLYS.
As of March 26, 1999, there were 6,970,819 shares of Catalyst's common
stock outstanding held by 170 stockholders of record and approximately 850
beneficial owners.
The following table represents the high and low price information for
Catalyst's common stock for each quarterly period within the two most recent
fiscal years.
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1998 1997
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High Low High Low
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Quarters ended March 31, $ 7.50 $3.75 $4.625 $2.875
Quarters ended June 30, 14.9375 6.25 4.00 2.125
Quarters ended September 30, 15.375 4.50 6.25 3.50
Quarters ended December 31, 13.9375 5.00 6.00 3.75
</TABLE>
Prices listed above are determined by the over-the-counter market and
as such, over-the-counter market quotations reflect inter-dealer prices,
without retail mark-up or commission, and may not necessarily represent
actual transactions.
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Source: The Nasdaq Stock Market.
Catalyst has never paid cash dividends on its common stock. Catalyst's
policy has been to retain cash from operations to provide funds for the
operation and expansion of its business. Accordingly, Catalyst does not
anticipate paying cash dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
Catalyst acquired all of the outstanding shares of Kearney Systems, Inc.
("KSI") on August 10, 1998. Aggregate consideration for this acquisition was
143,342 shares of Catalyst's common stock. The following is the list of
persons to whom the securities were sold:
* Robert J. Kearney
* Theodore H. Noe
* G. Arthur Herbert, Trustee of the G. Arthur Herbert Revocable Trust Dated
December 20, 1995
* G. Arthur Herbert, Trustee, CEO Advisors Employee Profit-Sharing Plan
* John W. Booth, Trustee of the John W. Boone Intervivos Plan
* Constantine Pappas
* Jack A. Kirschenbaum
* David Botelho
* P. Thomas Boroughs
* John R. Simpson, Jr.
* Jacqueline R. Griffin
* William A. Grimm
* Thomas F. Kerney
* R. Lee Bennett
* Daniel L. DeCubellis
* Thor MacKenzie
The securities were issued in a merger, in which a subsidiary of Catalyst
was merged into KSI. In that transaction, Catalyst received all outstanding
shares of KSI which, based on the closing price of the Catalyst shares issued
in the merger, had a value of $1,415,502 (20% of the shares were placed in an
escrow account that were released on February 19, 1999). The securities were
issued exempt from registration under Section 4(2) of the Securities Act of
1933, as amended. The securities were issued based upon representations made
by the stockholders of KSI that they were acquiring the shares for their own
account, had no present intention to sell or transfer the securities, had the
financial ability to hold the securities for an indefinite period, and
certain other representations deemed acceptable by Catalyst.
Selected financial data is set forth on page 13 of the 1998 Annual Report
to Stockholders is incorporated herein by reference and is filed herewith as
Exhibit 13.1.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information set forth on pages 14-21 of the 1998 Annual Report to
Stockholders are incorporated herein by reference and are filed herewith as
Exhibit 13.2.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Catalyst does not believe it has material exposure to market risk with
respect to any of its investments; Catalyst does not utilize market rate
sensitive instruments for trading or other purposes. The information set
forth on page 30 of the 1998 Annual Report to Stockholders under the caption
"Cash and Cash Equivalents" is incorporated herein by reference and is filed
herewith as Exhibit 13.3.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statement set forth under the caption "Quarterly Results" on
page 21 of the Annual Report to Stockholders is incorporated herein by
reference and is filed herewith as Exhibit 13.2.
The following financial statements for Catalyst and the independent
auditors' report set forth on pages 22-37 of the 1998 Annual Report to
Stockholders is incorporated herein by reference and is filed herewith as
Exhibit 13.3.
* Report of Ernst & Young LLP, Independent Auditors
* Consolidated Statements of Operations for the years ended December 31,
1998, 1997, and 1996
* Consolidated Balance Sheets at December 31, 1998 and 1997
* Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997, and 1996
* Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997, and 1996
* Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Catalyst has no changes in and disagreements with accountants on accounting
and financial disclosure in 1998.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Catalyst incorporates by reference herein the information contained in the
Proxy Statement for the 1999 Annual Meeting of Stockholders under the
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captions "Election of Directors" on pages 2-3 and "Executive Officers" on
pages 5-7.
ITEM 11. EXECUTIVE COMPENSATION
Catalyst incorporates by reference herein the information contained under
the caption "Executive Compensation" on pages 7-10 of the Proxy Statement for
the 1999 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Catalyst incorporates by reference herein the information contained under
the caption "Security Ownership of Certain Beneficial Owners" on pages 4-5 of
the Proxy Statement for the 1999 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
The consolidated financial statements as set forth under Item 8 of
this report on Form 10-K and the Exhibit Listing as set forth under
Item 14(c) of this report on Form 10-K are incorporated herein by
reference.
The following consolidated financial statement schedule of Catalyst
International, Inc. is included in Item 14(d): II. Valuation and
Qualifying Accounts.
All other financial statement schedules have been omitted since the
required information is not present or is not present in amounts
sufficient to require submission of the schedule, or because the
information required is included in the consolidated financial
statements or the notes thereto.
(b) Reports on Form 8-K
No reports on Form 8-K were filing during the fourth quarter of 1998.
Page 12
<PAGE>
(c) Exhibit Listing
<TABLE>
<CAPTION>
Number Description
<S> <C>
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)
13.1 Selected Financial Data incorporated by reference to Page 13 of the
1998 Annual Report
13.2 Management's Discussion and Analysis of Results of Operations and
Financial Condition incorporated by reference to Pages 14-21 of the
1998 Annual Report
13.3 Financial Statements incorporated by reference to Pages 22-37 of the
1998 Annual Report
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule
</TABLE>
- ----------
* 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.
Pursuant to the requirements of Rule 14a-3(b)(10) of the Securities Act of
1934, as amended, Catalyst will, upon request and upon payment of a
reasonable fee not to exceed the rate at which such copies are available from
the Securities and Exchange Commission, furnish copies to its stockholders of
any Exhibits in the Exhibit Listing.
Page 13
<PAGE>
(d) Financial Statement Schedule
Valuation and Qualifying Accounts
(in thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Balance at Charged to Charged Balance
Beginning costs and to other Deductions at end of
Description of period expense accounts (Additions) period
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended
December 31, 1998
Allowance for
doubtful accounts $ 339 296 - 101 $ 534
Project cost reserves 700 235 - 235 700
----- ----- ----- ----- -----
$1,039 531 - 336 $1,234
===== ===== ===== ===== =====
Year ended
December 31, 1997
Allowance for
doubtful accounts $ 279 142 - 82 $ 339
Project cost reserves 300 540 - 140 700
----- ----- ----- ----- -----
$ 579 682 - 222 $1,039
===== ===== ===== ===== =====
Year ended
December 31, 1996
Allowance for
doubtful accounts $ - 602 - 323 $ 279
Project cost reserves - 300 - - 300
----- ----- ----- ----- -----
$ - 902 - 323 $ 579
===== ===== ===== ===== =====
</TABLE>
Page 14
<PAGE>
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, 1999.
Catalyst International, Inc.
By: /s/ Sean P. McGowan
- -----------------------------------
Sean P. McGowan
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Thomas G. Hickinbotham By: /s/ Linda D. Sullivan
- ---------------------------------- ----------------------------------
Thomas G. Hickinbotham Linda D. Sullivan
Vice President Finance & Administration Controller
and Chief Financial Officer (Principal Accounting Officer)
(Principal 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 indicated on March 31, 1999.
/s/ Douglas B. Coder
- -------------------------------------
Douglas B. Coder
Chairman of the Board
/s/ Sean P. McGowan
- -------------------------------------
Sean P. McGowan
President, Chief Executive Officer
/s/ Roy J. Carver
- -------------------------------------
Roy J. Carver, Director
/s/ James F. Goughenour
- -------------------------------------
James F. Goughenour, Director
/s/ Terrence L. Mealy
- -------------------------------------
Terrence L. Mealy, Director
Page 15
<PAGE>
<PAGE>
EXHIBIT 13.1
FINANCIAL HIGHLIGHTS
(In thousands, except per share data)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Years Ended December 31, 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Software license fees $ 8,741 $ 7,007 $ 8,132 $10,372 $ 6,810
Services and post-contract
customer support 21,890 14,637 12,902 10,180 7,942
Hardware and other 3,282 881 132 106 1,426
------ ------ ------ ------ ------
Total revenues 33,913 22,525 21,166 20,658 16,178
Operating expenses:
Cost of software license fees 525 524 288 479 471
Cost of services and post-
contract customer support 14,583 13,745 2,371 9,369 6,507
Cost of hardware and other 2,759 766 - 4 1,212
Sales and marketing 5,494 5,291 5,079 4,499 3,901
Product development 3,412 2,731 4,470 2,554 1,411
General and administrative 4,177 3,975 4,287 1,608 1,416
Write-off of purchased research
and development(1) - - 2,002 - -
Restructuring and severance
costs(2) - - 597 - -
------ ------ ------ ------ ------
Total operating expenses 30,950 27,032 29,094 18,513 14,918
Income (loss) from operations 2,963 (4,507) (7,928) 2,145 1,260
------ ------ ------ ------ ------
Other income (expense) 217 308 867 (29) (138)
------ ------ ------ ------ ------
Income (loss) before provision
for income taxes 3,180 (4,199) (7,061) 2,116 1,122
Provision for income taxes 100 - - 111 49
------ ------ ------ ------ ------
Net income (loss) $ 3,080 $(4,199) $(7,061) $ 2,005 $ 1,073
------ ------ ------ ------ ------
Net income (loss) per share(3) $ 0.42 $ (0.63) $ (0.88) $ 0.30 -
Shares used in computing net
income (loss) per share 7,383 6,630 7,996 6,784 -
BALANCE SHEET DATA:
Cash and cash equivalents $ 8,555 $ 4,256 $ 9,321 $ 3,730 $ 1,359
Working capital 9,530 6,673 10,457 27,127 3,622
Total assets 25,557 17,692 20,199 34,084 8,678
Long-term debt, less
current portion 412 443 132 324 781
Redeemable preferred stock - - - - 5,095
Total shareholders' equity
(deficit) 15,403 9,997 14,147 29,251 (1,371)
</TABLE>
- ----------
(1) See Notes to Consolidated Financial Statements, Note 2
(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 of the Company in 1995, per share data for 1994 is not comparable to
subsequent years and therefore, has not been presented.
<PAGE>
<PAGE>
EXHIBIT 13.2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain statements
of operations data as a percentage of total revenues:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Years Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Software license fees 25.8% 31.1% 38.4%
Services and post-contract
customer support 64.5 65.0 61.0
Hardware and other 9.7 3.9 0.6
----- ----- -----
Total revenues 100.0 100.0 100.0
Operating expenses:
Cost of software license fees 1.5 2.3 1.4
Cost of services and post-
contract customer support 43.0 61.0 58.4
Cost of hardware and other 8.1 3.4 -
Sales and marketing 16.2 23.5 24.0
Product development 10.1 12.1 21.1
General and administrative 12.4 17.7 20.3
Write-off of purchased research
and development - - 9.5
Restructuring and severance costs - - 2.8
----- ----- -----
Total operating expenses 91.3 120.0 137.5
Income (loss) from operations 8.7 (20.0) (37.5)
Other income 0.7 1.4 4.1
----- ----- -----
Income (loss) before provision
for income taxes 9.4 (18.6) (33.4)
Provision for income taxes 0.3 - -
----- ----- -----
Net income (loss) 9.1% (18.6)% (33.4)%
===== ===== =====
</TABLE>
<PAGE>
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," "believe," "estimate," "expects," 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 WMS 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 SB 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 increased by 6.4% to $22.5 million in 1997, and by 50.6% to $33.9
million in 1998. The slower growth in total revenues in 1997 was due
primarily to a nearly complete turnover of the Company's sales force during
that period. 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)
1998 1997 1996 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Software license fees $ 8,741 $ 7,007 $ 8,132 24.7% (13.8)%
Services and PCS 21,890 14,637 12,902 49.6 13.4
Hardware and other 3,282 881 132 272.5 567.4
</TABLE>
International revenues decreased 8.6% from $4.6 million in 1996 to $4.2
million in 1997 and increased by 56.1% to $6.5 million in 1998. International
revenues accounted for 21.6%, 18.6%, and 19.3% of total revenues in 1996,
1997, and 1998, respectively. The decrease in percentage of total revenues in
1996 and 1997 occurred primarily because two large European projects nearing
completion were not replaced with new projects of a comparable size.
International revenues grew in 1998 by 56.1%, primarily due to substantial
business in Canada during 1998, where the Company had sales of $2.0 million.
In addition, the Company had sales of $1.0 million in Holland, where the
first WMS site for a major customer in that country recently went live.
<PAGE>
In early 1998, the Company decided that direct sales of its products 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 Value Added Resellers (VARs) 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 in those markets. This has proven to be a successful
strategy for the Company for the past several years in Italy. 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. The Company believes that future international revenues should
remain constant or increase slightly as a percentage of total revenues.
SOFTWARE LICENSE FEES
Software license fee revenues consist of revenues from software license
agreements of Catalyst WMS, related add-on products, and relational database
management systems (RDBMS). Software license fee revenues decreased by 13.8%
to $7.0 million in 1997 and increased by 24.7% to $8.7 million in 1998. The
decrease in software license fee revenues in 1997 was due in part to the
fewer number of software licenses sold which resulted from a nearly complete
turnover of the Company's sales force. The increase in software license fee
revenues in 1998 was due to the higher number of new orders received and the
sale of additional site licenses to existing customers.
Through December 31, 1997, the Company recognized both software license
fees and modifications revenue using the straight-line method over the
installation period. Beginning in January 1998, the Company changed these
procedures to comply with Statement of Position 97-2, "Software Revenue
Recognition," issued by the American Institute of Certified Public
Accountants, and now uses contract accounting procedures based upon
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 are recognized
upon delivery of the software, to the extent that payment is fixed and
determinable and payment is likely due within 120 days. The Company does not
believe that this change in revenue recognition procedures has had a material
impact on the recognition of revenue, nor does it believe it 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,
its new products and efforts aimed at new markets, and continued market
acceptance of Catalyst WMS.
SERVICES AND PCS
Services and PCS revenues are derived from software modifications,
professional services, and PCS agreements. Services and PCS revenues
increased by 13.4% to $14.6 million in 1997 and by 49.6% to $21.9 million in
1998. The following table sets forth the components of services and PCS
revenues as a percentage of total revenues for the years indicated:
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Software modifications 15.0% 25.7% 28.6%
Professional services 32.5 23.1 19.6
PCS agreements 17.0 16.2 12.8
---- ---- ----
Total services and PCS 64.5% 65.0% 61.0%
</TABLE>
<PAGE>
Software modifications are determined during the customer's Conference Room
Pilot (CRP) 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, future modifications revenues
as a percentage of total revenues will decrease due to the increased
functionality of its newer releases of Catalyst WMS. As is indicated by the
1997 and 1998 trends, 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
expects to continue implementing new customer sites and current customer
multi-site roll-outs. The increase in 1998 professional services revenue was
due to the higher number of new orders, the impact of higher daily rates for
services, and 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 days of work actually
performed.
Customers typically enter into a one-year agreement for PCS at the time
they first license Catalyst WMS and, once installed, pay for the first year
of PCS fees in advance. The increase in PCS revenues in 1997 and 1998 was due
primarily to growth in the installed customer base for Catalyst WMS and
current customers renewing their PCS agreements. Revenue on PCS is recognized
ratably over the term of the PCS agreement, which is generally one year. The
Company believes that PCS revenues will increase in the future as more
Catalyst WMS systems are implemented, resulting in the execution of
corresponding PCS agreements along with the 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, including computer hardware,
radio frequency equipment, and printers. Hardware and other revenues
increased by 567.4% to $881,000 in 1997 and by 272.5% to $3.3 million in
<PAGE>
1998. The increase in hardware and other revenue in 1997 and 1998 is due to
the resale of hardware 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 software
licenses sold by the Company. The cost of software license fees was $288,000,
$524,000, and $525,000 in 1996, 1997, and 1998, respectively. There was no
cost of software license fees for the Catalyst WMS due to the fact that costs
to develop this product have been expensed as incurred, because the Company's
product development efforts have been directed at enhancing and improving the
product.
The Company expects to continue to expense the cost of developing new
releases of the Catalyst UNIX WMS and related products and therefore
anticipates that the cost of software license fees for those products and
their related RDBMS software in the future will remain approximately the same
as a percentage of total software license fee revenues. However, in
connection with the acquisition of the Company's new NT-based WMS product in
1998, certain amounts were capitalized based on an independent valuation of
the assets acquired. Subsequent costs of $302,000 expended to complete this
product were capitalized in 1998, and similar but probably smaller amounts
may also be capitalized in the future. Upon general release of the NT-based
WMS product, these amounts will be amortized over the future anticipated life
of the product, and will be expensed as costs of software license fees.
COST OF SERVICES AND PCS
Cost of services and PCS consists primarily of personnel costs for the
performance of software modifications, professional services, and PCS. Cost
of services and PCS as a percentage of total services and PCS revenues were
95.9%, 93.9%, and 66.6% in 1996, 1997, and 1998, respectively. The increase
in cost of services and PCS in 1996 and 1997 was attributable to increased
staffing of the Company's service and support organizations, coupled with
below-market pricing for these services. In mid-1997, the Company raised its
daily rate for services to market levels, which resulted in the profitability
improvements shown above.
The Company anticipates that, while the total number of employees in its
service and support organization may increase, the future cost of services
and PCS as a percentage of services and PCS revenues should decrease as a
result of increased rates which the Company will receive for performing
services and improved efficiencies in 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 1996 because of the Company's decision not to sell
hardware at that time. The only hardware and other revenue for that period
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 turnkey solution.
Because of low margins, the Company does not inventory, service, or discount
<PAGE>
these items, but makes them available if a customer desires a turnkey
solution. Several sales were made in late 1997 with a cost of $766,000 and a
profit margin of 13.1%. Sales made in 1998 had a cost of $2.8 million and a
profit margin of 15.9%. The Company expects these sales to increase in future
periods with similar or improved 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. Sales and marketing expenses increased by 4.2% to $5.3 million in
1997 and by 3.8% to $5.5 million in 1998. In general, the increase in sales
and marketing expenses in each year 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 24.0%, 23.5%, and 16.2% of total revenues in 1996, 1997, and
1998, respectively. These expenses were a lower percentage in 1998 due to the
large increase in revenue. The marketing component of this expense category
increased 38.5% in 1998 over the previous year, but in total, the combined
expense did not grow more than 3.8% due to the savings realized by the
closing of several of the Company's foreign sales offices. It is the
intention of the Company to reinvest these savings into more marketing
efforts, a larger domestic direct sales force, and the development of a
global VAR organization.
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 decreased by 38.9% to $2.7 million in 1997 and
increased 24.9% to $3.4 million in 1998. In April 1996, the Company purchased
Information Strategies, Incorporated (ISI) (an NT-based WMS software
company). The Company abandoned and discontinued development of the ISI
product in early 1997 when it realized that further development costs would
far exceed the value of the product. The growth in research and development
expenditures in 1998 reflects the Company's efforts to expand its product
offering into vertical markets, to develop new products suitable for the mid-
tier market, and to continuously improve upon and add additional
functionality to its existing products. Product development costs represented
21.1%, 12.1%, and 10.1% of total revenues in 1996, 1997, and 1998,
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 decreased by 7.3% to $4.0 million in 1997 and increased by 5.1% to
$4.2 million in 1998. General and administrative expenses represented 20.3%
of total revenues in 1996, 17.7% in 1997, and 12.3% in 1998. In 1997, the
size of the administrative staff was decreased as a result of a
restructuring. In 1998, general and administrative expenses were higher due
to the inclusion of management bonuses, an increase in the Company's matching
<PAGE>
percentage for employee 401(k) contributions, and the amortization of
intangible assets recorded in the purchase of Kearney Systems, Inc. (KSI).
The Company expects that general and administrative expenses may increase in
the future, but should continue to decrease as a percentage of total
revenues.
TREATMENT OF ACQUISITION COSTS
In August 1998, in a non-related party transaction, the Company acquired
100% of the stock of KSI in exchange for approximately 143,000 shares of the
Company's stock. The Company acquired KSI in order to obtain KSI's NT-based
WMS software, which had been in development for several years. The
acquisition was treated as a purchase. Based upon an independent valuation of
the intangible assets of KSI, the NT-based WMS software was valued at
$723,000. This value was capitalized by the Company because the software was
determined to have reached technological feasibility and to have substantial
future value to the Company. While the technological feasibility of the NT-
based WMS product had been established prior to the KSI purchase, the product
did require further development of functionality in order to meet the needs
of the first beta customer. These development efforts were completed by a
team of Catalyst and KSI developers and the beta product was successfully
installed at the customer in mid-December, 1998. Costs of $302,000 related to
the completion of the development were capitalized at year-end and added to
the value of the product recorded upon the purchase of KSI. General release
of the NT-based WMS product is expected in 1999.
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
since invested cash balances are increasing but interest rates earned have
been decreasing.
INCOME TAX EXPENSE
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. In
1998, the Company was not subject to regular federal income taxes, because it
had approximately $8.2 million in net operating loss carryforwards. However,
because of its 1998 net income, Catalyst was subject to an alternative
minimum tax (AMT), an income tax on its UK subsidiary, and certain state tax
amounts. No net deferred tax expense was recorded in any of the three years
reported as the Company continues to record a valuation allowance to reserve
for the net deferred tax asset.
LIQUIDITY AND CAPITAL RESOURCES
The Company used cash of $14.3 million in 1996, of which $3.3 million was
used in operating activities, mostly due to a net loss of $7.1 million for
the year. Also in 1996, $3.6 million was used for capital expenditures and
the purchase of ISI, and $7.0 million was used to purchase common stock for
the treasury due to stock repurchase transactions. In 1997, the Company used
$5.1 million in cash, of which $3.2 million was used in operating activities
<PAGE>
(largely relating to a $4.2 million net loss for the year), $770,000 was used
for capital expenditures, and $1.1 million was used to purchase treasury
stock from the Company's former president and chief executive officer. In
1998, the Company generated $4.3 million in cash, of which $5.0 million was
generated by operating activities, and $800,000 was used for capital
expenditures and capitalization of software development costs. In addition,
cash of $335,000 was generated by the employees' exercise of stock options.
Capital expenditures totaled $2.1 million, $770,000, and $505,000 in 1996,
1997, and 1998, respectively. In 1996, an increase in employees led to a
higher level of expenses related to equipment, software, and furniture. In
1997, the Company upgraded certain of its computer and internal network
equipment, which it financed under capital leases. As of December 31, 1997,
the aggregate amount owing under capital leases, including interest, was
$589,000. As of December 31, 1998, the aggregate amount owing under capital
leases, including interest, was $879,000. The Company anticipates making
similar expenditures for new hardware during 1999. 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 approximately 234,000 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 approximately 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
president and 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. In 1998, the Company issued approximately 143,000 shares of its
common stock previously held in treasury for the purchase of KSI.
As of December 31, 1998, the Company had $8.6 million in cash and cash
equivalents and working capital of $9.5 million. In addition, the Company has
a $1.0 million line of credit (the "Revolving Credit Facility") with Bank
One, Milwaukee, Wisconsin, N.A. As of December 31, 1998, there were no
amounts outstanding under the Revolving Credit Facility.
At December 31, 1998, accounts receivable increased by 20.1% or $1.6
million, compared to December 31, 1997. This increase was due to the higher
level of revenues recognized by the Company. At December 31, 1998, the
Company had reserves of $534,000 for doubtful accounts and $700,000 for known
and estimated project cost overruns. This compares to $339,000 and $700,000
for the same reserve amounts at December 31, 1997. The Company feels it has
adequately provided for potential risks.
The Company believes that liquidity provided by cash generated from its
ongoing operations, existing cash balances, and borrowings under the
Revolving Credit Facility will be sufficient to meet the Company's currently
anticipated working capital and capital expenditure requirements through
1999.
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
<PAGE>
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 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, Flowthrough
Release 6.0/Build 17, Release 7.0/Build 8, and later releases of the Catalyst
WMS, are Year 2000 compliant. The Company has extensively tested these
releases and has not to date found any material errors which could affect
Year 2000 compliance. Because the Catalyst WMS was originally developed using
four digit coding, the Company does not expect problems with the Year 2000
compliance of prior releases of the Catalyst WMS. However, due to the fact
that the Catalyst WMS is 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 Catalyst WMS 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
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 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.
<PAGE>
In addition to assessing its internal systems, the Company has initiated
communications with its vendors, service providers, and third party business
partners to assess their Year 2000 readiness. Many of these entities have
responded in writing to the Company's Year 2000 readiness inquiries. The
Company plans to continue assessing its vendors, service suppliers, and third
party 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 $250,000 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 $100,000.
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 amount of potential liability or
loss of revenue to the Company cannot be reasonably estimated at this time.
During the first quarter of 1999, the Company intends to retain an external
auditor to review the procedures used by the Company in assessing its Year
2000 readiness. Upon completion of this external audit, the Company intends
to address any potential exposures raised by the auditors and commence
developing its Year 2000 contingency plan. The Company believes that this is
an appropriate time frame for developing the contingency plan and that
efforts prior to that time should be focused on the remediation and testing
phases of the Company's Year 2000 readiness plan.
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.
<PAGE>
QUARTERLY RESULTS
The following table sets forth unaudited statements of operations data for
each of the quarters in the years ended December 31, 1997 and 1998. This
unaudited quarterly information has been prepared on the same basis as the
annual information presented elsewhere herein and, in the Company's opinion,
includes all adjustments (consisting only of normal recurring entries)
necessary for a fair presentation of the information for the quarter
presented. The operating results for any quarter are not necessarily
indicative of the results for any future period.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Quarters Ended Dec. Sept. June Mar. Dec. Sept. June Mar.
31, 30, 30, 31, 31, 30, 30, 31,
1998 1998 1998 1998 1997 1997 1997 1997
- -----------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software license fees $2,661 $2,311 $1,662 $2,107 $2,067 $1,781 $1,863 $1,296
Services and post-contract
customer support 6,310 5,180 5,298 5,123 4,525 4,118 3,169 2,825
Hardware and other 837 1,329 881 235 626 253 - 2
----- ----- ----- ----- ----- ----- ----- -----
Total revenues 9,808 8,819 7,821 7,465 7,218 6,152 5,032 4,123
Operating expenses:
Cost of software license fees 178 187 128 32 234 5 188 97
Cost of services and post-
contract customer support 3,717 3,695 3,447 3,724 3,786 3,700 3,363 2,896
Cost of hardware and other 807 1,064 680 208 536 230 - -
Sales and marketing 1,439 1,182 1,447 1,424 1,266 1,405 1,371 1,249
Product development 1,034 814 866 698 605 568 615 943
General and administrative 1,163 1,048 848 1,118 771 933 1,004 1,267
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses 8,339 7,990 7,416 7,204 7,198 6,841 6,541 6,452
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from operations 1,468 829 405 261 20 (689) (1,509) (2,329)
Other income 88 57 41 31 128 52 54 74
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before provision
for income taxes 1,556 886 446 292 148 (637) (1,455) (2,255)
Provision for income taxes 100 - - - - - - -
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss) $1,456 $ 886 $ 446 $ 292 $ 148 $ (637) $(1,455)$(2,255)
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss) per share $ 0.19 $ 0.12 $ 0.06 $ 0.04 $ 0.02 $(0.10) $(0.22) $(0.34)
----- ----- ----- ----- ----- ----- ----- -----
Shares used in computing net
income (loss) per share 7,517 7,377 7,426 6,988 7,035 6,644 6,633 6,591
</TABLE>
<PAGE>
<PAGE>
EXHIBIT 13.3
CATALYST INTERNATIONAL, INC.
FINANCIAL STATEMENTS
* Report of Ernst & Young LLP, Independent Auditors
* Consolidated Statements of Operations for the years ended December 31,
1998, 1997, and 1996
* Consolidated Balance Sheets at December 31, 1998 and 1997
* Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997, and 1996
* Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997, and 1996
* Notes to Consolidated Financial Statements
<PAGE>
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, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998. Our
audits also include the financial statement schedule listed in Item 14(a).
These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and the schedule 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, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
/s/ Ernst & Young LLP
Milwaukee, Wisconsin
January 30, 1999
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Years ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Software license fees $ 8,740,730 $ 7,006,776 $ 8,132,367
Services and post-contract
customer support 21,890,275 14,637,358 12,901,947
Hardware and other 3,281,596 880,994 132,408
---------- ---------- ----------
Total revenues 33,912,601 22,525,128 21,166,722
Operating expenses:
Cost of software license fees 524,754 523,894 288,220
Cost of services and post-
contract customer support 14,583,554 13,744,466 12,371,157
Cost of hardware and other 2,758,838 765,755 -
Sales and marketing 5,493,319 5,291,116 5,078,557
Product development 3,412,217 2,731,489 4,470,304
General and administrative 4,177,175 3,975,087 4,286,848
Write-off of purchased research
and development costs (Note 2) - - 2,002,280
Restructuring and severance
costs (Note 10) - - 597,338
---------- ---------- ----------
Total operating expenses 30,949,857 27,031,807 29,094,704
---------- ---------- ----------
Income (loss) from operations 2,962,744 (4,506,679) (7,927,982)
Other income (expense):
Interest expense (54,313) (26,219) (67,395)
Investment income 266,297 309,007 948,973
Miscellaneous, net 5,271 24,597 (14,703)
---------- ---------- ----------
Total other income 217,255 307,385 866,875
Income (loss) before provision
for income taxes 3,179,999 (4,199,294) (7,061,107)
Provision for income taxes (Note 8) 100,000 - -
---------- ---------- ----------
Net income (loss) $ 3,079,999 $(4,199,294) $(7,061,107)
========== ========== ==========
Earnings (loss) per share (Note 1):
Basic $0.45 $(0.63) $(0.88)
Diluted 0.42 (0.63) (0.88)
</TABLE>
See accompanying notes.
The common stock is listed on the Nasdaq Stock Market (R) under the symbol
CLYS. Since the initial public offering on November 16, 1995, the common
stock has traded at a high of $18.875 per share and a low of $2.125 per
share.
As of February 12, 1999, there were 6,969,067 shares of the Company's
common stock outstanding held by 210 stockholders of record and approximately
900 beneficial owners.
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
December 31, 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,555,205 $ 4,256,244
Accounts receivable, net of allowance
for doubtful accounts of $533,615
in 1998 and $338,614 in 1997 9,738,934 8,108,076
Revenues in excess of billings for
software license fees - 348,425
Prepaid expenses 502,656 579,329
Total current assets 18,796,795 13,292,074
Equipment and leasehold improvements:
Computer hardware and software 5,420,970 4,492,435
Office equipment 2,330,061 2,287,910
Leasehold improvements 871,541 862,021
---------- ----------
8,622,572 7,642,366
Less accumulated depreciation and
amortization 4,532,967 3,242,335
Total equipment and leasehold
improvements 4,089,605 4,400,031
Purchased software and capitalized
software development costs 1,024,980 _
Intangible assets, net of accumulated
amortization of $53,855 559,145 -
Goodwill, net of accumulated amortization
of $43,567 1,086,406 -
---------- ----------
Total assets $25,556,931 $17,692,105
========== ==========
</TABLE>
<PAGE>
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
December 31, 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,743,990 $ 1,920,489
Income taxes payable 100,000 -
Accrued liabilities 2,235,276 1,818,337
Deferred software license fees 342,345 -
Deferred services and post-contract
customer support 4,457,140 2,662,392
Current portion of long-term debt (Note 4) 388,074 218,286
---------- ----------
Total current liabilities 9,266,825 6,619,504
Long-term debt (Note 4) 411,531 442,549
Deferred services and post-contract
customer support 190,052 328,711
Deferred rent (Note 4) 285,153 304,685
Total noncurrent liabilities 886,736 1,075,945
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:
8,767,373 in 1998 and 8,622,029 in 1997 876,737 862,203
Additional paid-in capital 32,743,264 31,112,079
Accumulated deficit (9,845,503) (12,925,502)
Treasury stock, at cost-1,822,748 shares
of common stock in 1998 and 1,966,090
shares of common stock in 1997 (8,371,128) (9,052,124)
---------- ----------
Total stockholders' equity 15,403,370 9,996,656
---------- ----------
Total liabilities and
stockholders' equity $25,556,931 $17,692,105
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Additional
Common Stock Paid-in
Shares Dollars Capital Deficit
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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)
Purchase of Kearney Systems,
Inc. - - 1,285,588 -
Stock options exercised 145,344 14,534 320,259 -
Compensation expense on
stock options - - 25,338 -
Net income - - - 3,079,999
---------- -------- ---------- ----------
Balances at December 31, 1998 8,767,373 $ 876,737 $32,743,264 $(9,845,503)
</TABLE>
See accompanying notes.
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Common Stock
Treasury to be redeemed
Stock for Treasury Total
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
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
Purchase of Kearney Systems,
Inc. 680,996 - 1,966,584
Stock options exercised - - 334,793
Compensation expense on
stock options - - 25,338
Net income - - 3,079,999
---------- ----------- ----------
Balances at December 31, 1998 $(8,371,128) $ - $15,403,370
========== =========== ==========
</TABLE>
See accompanying notes.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Years ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 3,079,999 $(4,199,294) $(7,061,107)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,351,947 1,161,845 1,015,359
Compensation expense on stock options 25,338 29,216 29,419
Loss on disposal of equipment and
leasehold improvements - 27,175 574
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, net of acquisition:
Accounts receivable (1,552,134) (2,129,338) 949,364
Prepaid expenses 85,149 (170,991) (27,977)
Accounts payable (395,422) 877,156 (129,133)
Accrued liabilities 119,692 (351,920) 69,386
Income taxes 100,000 212,642 (92,191)
Deferred software license fees 690,770 (360,878) (284,083)
Deferred services and post-
contract customer support 1,558,319 1,745,543 (358,933)
Deferred rent (19,532) (19,532) (19,532)
---------- ---------- ----------
Total adjustments 1,964,127 1,020,918 3,751,871
---------- ---------- ----------
Net cash provided by (used in)
operating activities 5,044,126 (3,178,376) (3,309,236)
INVESTING ACTIVITIES
Capital expenditures (504,951) (769,886) (2,094,781)
Capitalized software development costs (301,980) - -
Proceeds from fixed asset disposals - - 12,279
Purchase of Information Strategies,
Inc. (Note 2) - - (1,499,456)
---------- ---------- ----------
Net cash used in investing activities (806,931) (769,886) (3,581,958)
FINANCING ACTIVITIES
Payments on long-term debt (273,027) (63,733) (401,143)
Costs related to initial public
offering of common stock - - (85,936)
Proceeds from exercise of
stock options 334,793 20,027 15,747
<PAGE>
Purchase of common stock for treasury - (1,073,239) (6,928,885)
---------- ---------- ----------
Net cash provided by (used in)
financing activities 61,766 (1,116,945) (7,400,217)
---------- ---------- ----------
Net increase (decrease) in cash
and cash equivalents 4,298,961 (5,065,207) (14,291,411)
Cash and cash equivalents at
beginning of year 4,256,244 9,321,451 23,612,862
---------- ---------- ----------
Cash and cash equivalents at
end of year $ 8,555,205 $ 4,256,244 $ 9,321,451
========== ========== ==========
Supplemental disclosure:
Cash paid for interest $ 54,313 $ 33,062 $ 59,566
Cash paid (received) for income taxes - (286,697) 127,000
</TABLE>
Noncash investing and financing activities:
During 1998 and 1997, the Company acquired $388,017 and $541,689,
respectively, of computer hardware under capital leases.
During 1998, the Company issued 143,342 shares of the Company's common
stock previously held in treasury with a fair market value of $1,966,584 for
the acquisition of Kearney Systems, Inc. (see Note 2).
See accompanying notes.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
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, 1998 and 1997. There were no realized gains or losses during
any of the three years in the period ended December 31, 1998.
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.
INTANGIBLE ASSETS AND GOODWILL
Intangible assets consist of customer list and assembled workforce. Goodwill
and customer list are being amortized over a seven-year period. Assembled
workforce is being amortized over a three-year period.
<PAGE>
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
As required by generally accepted accounting principles, the Company
capitalizes costs incurred to develop new software products upon
determination that technological feasibility has been established for the
product, whereas costs incurred prior to the establishment of technological
feasibility are charged to expense. When the software product is available
for general release to customers, capitalization ceases and such costs are
amortized on a product-by-product basis based on current and anticipated
future revenue.
Development of the Company's UNIX-based product focuses on enhancing the
features and functionality of the existing core software and a working model
of the enhancements does not exist until the product is ready for general
release. Therefore, the Company has not capitalized any software development
costs related to its UNIX-based product. Capitalized software development
costs related to the Company's NT-based product were $302,000 in 1998. Once
the NT-based product is available for general release to customers,
capitalization will cease and costs will be amortized over a seven-year
period.
REVENUE RECOGNITION
The Company derives revenue from software licenses, post-contract customer
support (PCS), services, and the sale of implementation-related hardware. PCS
includes telephone support, bug fixes, and rights to upgrades on a when-and-
if-available basis. Services range from installation, training, and basic
consulting to software modification and customization to meet specific
customer needs. In software arrangements that include rights to multiple
software products, specified upgrades, PCS, and/or other services, the
Company allocates the total arrangement fee to each deliverable based on the
relative fair value of each of the deliverables determined based on vendor-
specific objective evidence.
SOFTWARE LICENSE FEES
The Company recognizes the revenue allocable to software licenses and
specified upgrades upon delivery of the software product or upgrade to the
end user, unless the fee is not fixed or determinable or collectibility is
not probable. The Company considers all arrangements with payment terms
extending beyond 120 days and other arrangements with payment terms longer
than normal to not be fixed or determinable. If the fee is not fixed or
determinable, revenue is recognized as payments become due from the customer.
If collectibility is not considered probable, revenue is recognized when the
fee is collected.
POST-CONTRACT CUSTOMER SUPPORT
Revenue allocable to PCS is recognized on a straight-line basis over the
period the PCS is provided.
SERVICES
Arrangements that include software services are evaluated to determine
whether those services are for modification of the software product or for
<PAGE>
the normal implementation of the WMS system. When software services are
considered part of the normal implementation process, revenue is recognized
monthly, as these services are invoiced. When software services are for the
modification of the software itself, an evaluation is made to determine if
these modifications will take more than 50 person-days of work. If the work
will exceed 50 days of effort, revenue is recognized using contract
accounting (see below). When the work is estimated to be under 50 days, the
revenue allocable to the software services is recognized as the services are
invoiced.
HARDWARE
Revenue on hardware is recognized when the hardware is drop-shipped by the
hardware vendor.
CONTRACT ACCOUNTING
For arrangements that include customization or modification of the software,
revenue is recognized using contract accounting. Revenue from these software
arrangements is recognized on a percentage-of-completion method with
progress-to-completion measured based upon labor time expended. The Company
reserves for project cost overruns when such overruns are identified.
Included in accrued liabilities at December 31, 1998 and 1997, are reserves
for project cost overruns of $700,000 in each year.
ADVERTISING
Advertising costs are expensed as incurred and amounted to approximately
$371,000, $267,000, and $329,000 in 1998, 1997, and 1996, 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
The numerator for the calculation of basic and diluted earnings per share is
net income (loss) in each year. The following table sets forth the
computation of basic and diluted weighted average shares used in the per
share calculations:
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Denominator for basic earnings per share-
weighted average shares outstanding 6,786,728 6,630,200 7,995,766
Effect of dilutive options and warrants 596,159 - -
--------- --------- ---------
Denominator for diluted earnings per
share 7,382,887 6,630,200 7,995,766
========= ========= =========
</TABLE>
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which is required to be adopted in years beginning after June
15, 1999. Because the Company has not previously used derivatives, management
does not anticipate that the adoption of the new Statement will have a
significant effect on results of operations or the financial position of the
Company.
Effective January 1, 1998, the Company adopted FASB Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
(Statement No. 131). Statement No. 131 establishes standards for the way that
public enterprises report information about operating segments, products and
services, geographic areas and major customers (see Note 9). The adoption of
Statement No. 131 did not affect results of operations or financial position
of the Company.
Effective January 1, 1998, the Company adopted FASB Statement No. 130,
"Comprehensive Income." This Statement establishes standards for the
reporting and display of comprehensive income and its components in the
financial statements. Comprehensive income for the Company is the same as net
income for all periods presented.
2. ACQUISITIONS
In August 1998, the Company acquired all of the outstanding common stock of
Kearney Systems, Inc. (KSI), a Windows NT-based developer of warehouse
management system software. Aggregate consideration for the acquisition
consisted of 143,342 shares of the Company's common stock previously held in
treasury. The acquisition was accounted for as a purchase and, accordingly,
the purchase price was allocated to assets acquired and liabilities assumed
based upon fair value at the date of acquisition. The results of operations
of KSI have been included in the consolidated statements of operations since
the date of acquisition. Pro forma results of operations have not been
presented because the effects of this acquisition were not significant.
In April 1996, the Company acquired all of the outstanding common stock of
Information Strategies, Inc. (ISI), a Windows NT-based software developer,
<PAGE>
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 results of operations of ISI have been included in the
consolidated statements of operations since the date of acquisition.
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 (7.75% at December 31, 1998) and is secured by substantially all
of the Company's assets. No amounts were outstanding under the line of credit
at December 31, 1998 or 1997.
4. LONG-TERM DEBT AND LEASE COMMITMENTS
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Capital lease obligations $ 799,605 $ 660,835
Less current portion (388,074) (218,286)
-------- --------
$ 411,531 $ 442,549
======== ========
</TABLE>
The Company leases computer equipment and a telephone system under capital
leases requiring monthly payments in varying amounts through February 2002
with effective interest rates ranging from 7.5% to 10.5%. At December 31,
1998, the gross amount of office equipment recorded under capital leases and
related accumulated amortization was approximately $984,000 and $306,000,
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 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, 1998, future payments under capital and operating leases with
remaining terms in excess of one year were as follows:
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Capital Leases Operating Leases
- -----------------------------------------------------------------------------
<S> <C> <C>
1999 $454,371 $ 608,000
2000 319,538 611,000
2001 101,442 611,000
2002 3,804 611,000
2003 - 561,000
Thereafter - 1,087,000
------- ---------
Total minimum lease obligations 879,155 $4,089,000
Amounts representing interest 79,550 =========
-------
Capital lease obligation $799,605
=======
</TABLE>
Total rent expense, including executory costs, on all operating leases was
approximately $1,150,000, $1,310,000, and $1,183,000 in 1998, 1997, and 1996,
respectively.
5. STOCKHOLDERS' EQUITY
In November 1996, the Company redeemed approximately 1.2 million shares of
the Company's common stock held by affiliated stockholders at $4.75 per
share. The redemption terminated any prior stock agreements between the
Company and such stockholders. In January 1997, the Company repurchased
approximately 226,000 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, as amended (Employee Plan), allows the Company to
grant up to 3,000,000 incentive stock options and/or nonqualified stock
options to employees. Each option entitles the holder to purchase one share
of common stock at the specified option price. The option term is ten years.
With certain exceptions, options vest 20% on the first anniversary of either
the date of employment or the date of grant and then ratably over the
following 48 months. For all options granted to date, the exercise price was
equal to the market price (or estimated fair value prior to the Company's IPO
in November 1995) of the underlying stock on the date of grant.
In March 1997 and April 1996, the Company and certain option holders modified
965,000 and 726,100, respectively, 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 was granted options to purchase 10,000 shares of common stock
<PAGE>
on the effective date of the plan and is granted options to purchase 5,000
shares of common stock on each anniversary of the plan. The exercise price of
each grant is 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, 1998:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Number of Weighted-Average
Shares Option Price per Share
- -----------------------------------------------------------------------------
<S> <C> <C>
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
Granted 401,355 $8.55
Exercised (145,344) $2.30
Canceled (131,045) $4.06
--------- -----
Outstanding at December 31, 1998 1,805,097 $4.47
========= =====
</TABLE>
At December 31, 1998, 951,783 options were available for grant under the
Employee and Director Plans. As of December 31, 1998, the range of exercise
prices on outstanding options were as follows:
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Weighted
Number Average Number of
of Exercise Options
Options Price Exercisable
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Price range $0.10 to $3.50, weighted
average contractual life of 7.87 years 1,150,425 $ 2.99 602,709
Price range $3.88 to $8.25, weighted
average contractual life of 9.09 years 557,128 $ 6.10 162,708
Price range $10.00 to $13.94, weighted
average contractual life of 9.35 years 97,544 $12.66 4,725
</TABLE>
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 2,766,880 shares of common stock at December 31,
1998 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 income (loss) and pro forma
income (loss) per share would have been as follows (for purposes of pro forma
disclosures, the estimated fair value of the options is amortized to expense
over the options vesting period):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Pro forma net income (loss) $2,340,594 $(4,395,991)
Pro forma income (loss) per share $ 0.32 $ (0.66)
</TABLE>
The weighted average grant date fair values used in the above pro forma
disclosures were $7.55 and $1.99 per share for 1998 and 1997 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
<PAGE>
until the new rules are applied to all outstanding nonvested awards (i.e.,
the above pro forma amounts give effect to 1998, 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
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: risk-free interest rates of 5.5% in 1998 and 5.4% in 1997; dividend
yields of 0%; expected common stock market price volatility factor of 0.87;
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 $219,000, $69,000, and
$78,000 in 1998, 1997, and 1996, respectively.
8. INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Years ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 38,000 $ - $ -
State 30,000 - -
Foreign 32,000 - -
-------- --------- ----------
100,000 - -
Deferred (735,000) 1,814,000 2,010,000
Change in valuation reserve 735,000 (1,814,000) (2,010,000)
-------- --------- ----------
$ 100,000 $ - $ -
======== ========= ==========
</TABLE>
The provision for income taxes differs from the statutory U.S. federal income
tax rate due to the following:
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Years ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Provision (benefit) at U.S.
statutory rate $1,081,000 $(1,428,000) $(2,401,000)
State income taxes, net of
federal tax 30,000 - -
Foreign income taxes 32,000 - -
General business credits (329,000) (54,000) (105,000)
Change in valuation allowance (735,000) 1,814,000 2,010,000
Permanent differences, net 21,000 (332,000) 495,000
Other - - 1,000
$ 100,000 $ - $ -
</TABLE>
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $8,156,000 and $5,353,000 for federal and state income tax
purposes, respectively, which expire between 2007 and 2012. Of these net
operating loss carryforwards, $2,664,000 was created by deductions from the
exercise of nonqualified stock options during 1998, 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, 1998, the Company had general
business credit carryforwards of $580,000 and $306,000 for federal and state
income tax purposes, respectively, which expire from 2006 through 2011. At
December 31, 1998, the Company had $99,000 of alternative minimum tax (AMT)
credits which do not expire. Annual limitations on the use of these loss and
credit carryforwards due to changes in ownership are not expected to
materially impact the Company.
The tax effects of temporary differences between financial reporting and
income tax bases of assets and liabilities were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
December 31, 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
AMT and general business credits $ 985,000 $ 656,000
Net operating loss carryforwards 3,051,000 4,187,000
Deferred revenues and accrued project costs 404,000 298,000
Accrued compensation and restructuring 72,000 105,000
Deferred rent 111,000 118,000
Allowance for doubtful accounts 208,000 132,000
Other 8,000 14,000
---------- ----------
4,839,000 5,510,000
<PAGE>
Deferred tax liabilities:
Depreciation (312,000) (326,000)
Capitalized software costs (118,000) -
Other (6,000) (46,000)
---------- ----------
(436,000) (372,000)
---------- ----------
Net deferred tax assets 4,403,000 5,138,000
Valuation allowance (4,403,000) (5,138,000)
---------- ----------
$ - $ -
========== ==========
</TABLE>
The valuation allowance at December 31, 1998 and 1997 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. There were no sales to
individual customers that exceeded 10% of revenues in the years ended
December 31, 1998, 1997, or 1996.
International revenues accounted for 19%, 19%, and 22% of total revenues in
1998, 1997, and 1996, respectively. Revenues by geographic area for the years
ended December 31, 1998, 1997, and 1996, were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Years ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
United States $27,376,159 $18,337,385 $16,586,111
International 6,536,442 4,187,740 4,580,611
---------- ---------- ----------
$33,912,601 $22,525,125 $21,166,722
========== ========== ==========
</TABLE>
Revenues in individual foreign countries which exceed $1 million are as
follows:
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Years ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
United Kingdom $2,252,045 $3,093,201 $3,648,260
Canada 2,041,276 * *
Holland 1,024,019 * *
</TABLE>
*Revenues did not exceed $1 million.
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 had their employment 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 ran 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 the employment of its former president and chief executive
officer. Severance costs of $250,000 were accrued at December 31, 1996.
<PAGE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF CATALYST INTERNATIONAL, INC.
Name: Catalyst WMS International, Limited
Jurisdiction of Incorporation: United Kingdom
Status: Active and in Good Standing
Name: Kearney Systems, Inc.
Jurisdiction of Incorporation: Delaware
Status: Active and in Good Standing
<PAGE>
<PAGE>
EXHIBIT 23
Catalyst International, Inc.:
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-1394) pertaining to the 1993 Stock Option Plan, as amended,
of Catalyst USA, Inc. and (Form S-8 No. 33-97522C) pertaining to the 1997
Director Stock Option Plan of Catalyst International, Inc. of our report
dated January 30, 1999, with respect to the financial statements and schedule
of Catalyst International, Inc. included in this Annual Report (Form 10-K)
for the year ended December 31, 1998.
/s/ Ernst & Young LLP
Ernst & Young LLP
Milwaukee, Wisconsin
March 26, 1999
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 8555 4256
<SECURITIES> 0 0
<RECEIVABLES> 9739 8108
<ALLOWANCES> 534 339
<INVENTORY> 0 0
<CURRENT-ASSETS> 18797 13292
<PP&E> 8623 7642
<DEPRECIATION> 4533 3242
<TOTAL-ASSETS> 25557 17692
<CURRENT-LIABILITIES> 9267 6620
<BONDS> 0 0
0 0
0 0
<COMMON> 877 862
<OTHER-SE> 14526 9135
<TOTAL-LIABILITY-AND-EQUITY> 25557 17692
<SALES> 33913 22525
<TOTAL-REVENUES> 33913 22525
<CGS> 17867 15035
<TOTAL-COSTS> 30950 27032
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 54 26
<INCOME-PRETAX> 3180 (4199)
<INCOME-TAX> 100 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3080 (4199)
<EPS-PRIMARY> 0.45 (0.63)
<EPS-DILUTED> 0.42 (0.63)
</TABLE>
