UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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 LOGO]
CATALYST INTERNATIONAL, INC.
----------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 39-1415889
- --------------------------------- ------------------------------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
8989 North Deerwood Drive, Milwaukee, WI 53223
- ------------------------------------------------- -----------------
(Address of Principal Executive Offices) (Zip Code)
(414) 362-6800
----------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
As of May 5, 2000, 7,978,034 shares of the issuer's common stock were
outstanding.
<PAGE>
CATALYST INTERNATIONAL, INC.
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2000
INDEX
<TABLE>
<CAPTION>
Page No.
PART I - FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements 3
Balance Sheets - March 31, 2000 and December 31, 1999 3
Statements of Operations - Three months ended March
31, 2000 and 1999 5
Statements of Cash Flows - Three months ended March
31, 2000 and 1999 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures about Market
Risk 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 12
</TABLE>
Page 2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
BALANCE SHEETS
(in thousands)
ASSETS
March 31, Dec. 31,
2000 1999
------- -------
(unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $24,058 $21,169
Accounts receivable 9,013 10,107
Prepaid expenses 929 778
------- -------
Total Current Assets 34,000 32,054
Equipment and Leasehold Improvements:
Computer hardware and software 6,023 6,246
Office equipment 2,345 2,209
Leasehold improvements 851 853
------- -------
9,219 9,308
Less accumulated depreciation 5,879 5,799
------- -------
Total Equipment and Leasehold Improvements 3,340 3,509
------- -------
Total Assets $37,340 $35,563
======= =======
</TABLE>
See accompanying notes
Note: The balance sheet at December 31, 1999 has been derived from the
audited balance sheet at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
Page 3
<PAGE>
<TABLE>
<CAPTION>
CATALYST INTERNATIONAL, INC.
BALANCE SHEETS
(in thousands, except per share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31, Dec. 31,
2000 1999
(unaudited)
<S> <C> <C>
Current Liabilities:
Accounts payable $ 2,245 $ 2,237
Accrued liabilities 2,551 2,529
Deferred revenue 7,659 6,567
Current portion of long-term debt 448 333
------- -------
Total Current Liabilities 12,903 11,666
Non-Current Liabilities:
Long-term debt 140 181
Deferred services and post-contract
customer support 169 169
Deferred rent 252 266
------- -------
Total Non-Current Liabilities 561 616
------- -------
Total Liabilities 13,464 12,282
Shareholders' Equity:
Preferred stock, $.01 par value; 2,000,000 shares
authorized; none issued or outstanding - -
Common stock, $.10 par value; 25,000,000 shares
authorized; shares issued: 9,028,744 in 2000
and 8,939,264 in 1999 903 894
Additional paid-in capital 42,932 42,610
Accumulated deficit (15,195) (15,459)
Treasury stock, at cost: 1,063,263 shares of
common stock in 2000 and 1999 (4,764) (4,764)
------- -------
Total Shareholders' Equity 23,876 23,281
------- -------
Total Liabilities and Shareholders' Equity $37,340 $35,563
======= =======
</TABLE>
See accompanying notes
Note: The balance sheet at December 31, 1999 has been derived from the
audited balance sheet at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
Page 4
<PAGE>
<TABLE>
<CAPTION>
CATALYST INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Three months ended
March 31,
2000 1999
---- ----
(unaudited)
<S> <C> <C>
Revenues:
Software license fees $ 2,388 $ 2,861
Services and post-contract customer support 6,223 6,585
Hardware 1,710 1,281
------- -------
Total Revenues 10,321 10,727
Operating Expenses:
Cost of software license fees 143 147
Cost of services and post-contract
customer support 4,245 3,873
Cost of hardware 1,358 1,176
Product development 1,416 1,584
Sales and marketing 1,994 1,562
General and administrative 966 1,013
------- -------
Total Operating Expenses 10,122 9,355
------- -------
Income from operations 199 1,372
Other income 65 81
------- -------
Net income $ 264 $ 1,453
------- -------
Net income per share:
Basic $ 0.03 $ 0.21
Diluted $ 0.03 $ 0.19
Shares used in computing net income per share 8,555 7,686
</TABLE>
See accompanying notes
Page 5
<PAGE>
<TABLE>
<CAPTION>
CATALYST INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
Three months ended
March 31,
2000 1999
---- ----
(unaudited)
<S> <C> <C>
Operating Activities:
Net income $ 264 $ 1,453
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 630 426
Compensation expense on stock options - 7
Loss on disposal of equipment 152 -
Changes in operating assets and liabilities:
Accounts receivable 1,094 1,150
Prepaid expenses and other assets (151) (243)
Accounts payable 8 530
Accrued liabilities 22 (459)
Deferred revenue 1,092 119
Deferred rent (14) (5)
Total adjustments 2,833 1,525
Net cash provided by operating activities 3,097 2,978
Investing Activities:
Purchase of equipment and leasehold improvements (437) (307)
Capitalization of software costs - (193)
Proceeds from sale of equipment 1 -
Net cash used in investing activities (436) (500)
Financing Activities:
Payments on long-term debt (103) (93)
Proceeds from exercise of stock options 331 93
Net cash provided by financing activities 228 -
Net increase in cash and cash equivalents 2,889 2,478
Cash and cash equivalents at the beginning of period 21,169 8,555
Cash and cash equivalents at the end of the period $24,058 $11,033
Noncash investing and financing activities:
During the first quarters of 2000 and 1999, the Company acquired $177,000
and $141,000, respectively, of computer hardware under capital leases.
</TABLE>
See accompanying notes
Page 6
<PAGE>
CATALYST INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 2000
(Unaudited)
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for fiscal
year end financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Certain amounts in the 1999 financial
statements have been reclassified to conform to 2000 presentation. Operating
results for the three-month period ended March 31, 2000 are not necessarily
indicative of the results that may be expected for the year ending December
31, 2000. For further information, refer to the financial statements and
footnotes thereto included in the Catalyst International, Inc. Annual Report
on Form 10-K for the year ended December 31, 1999.
2. Net Income Per Share of Common Stock
Catalyst International, Inc. ("Catalyst" or the "Company") has presented
net income per share in accordance with Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share." The following table sets
forth the computation of basic and diluted earnings per share.
<TABLE>
<CAPTION>
March 31,
2000 1999
(in thousands)
<S> <C> <C>
DENOMINATOR
Denominator for basic earnings per share - weighted
average common shares 7,910 6,964
Effect of dilutive securities - stock options and warrants 645 722
----- -----
Denominator for diluted earnings per share 8,555 7,686
===== =====
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 and are based on
information available at the time that they were made. These statements use
words such as "anticipates," "believes," "estimates," or "expects," or are
otherwise stated as the Company's predictions for the future. These
statements, as with any predictions of the future, involve certain risks,
uncertainties, and other factors beyond the Company's control. The Company's
actual results may differ materially from the results discussed in the
forward-looking statements, and any such differences could have a material
negative impact on the Company's share price. Factors that might cause such
a difference include, but are not limited to, a decrease in demand for the
Company's products, delays in the timely availability of new features and
releases of the Company's products, a too-rapid increase in the Company's
level of spending, actions taken by competitors, technological changes, those
herein identified, those discussed in the Company's Registration Statement on
Form SB-2 filed with the SEC, and other factors identified from time to time
as risks in the Company's reports filed with the SEC.
Page 7
<PAGE>
Total Revenues
The Company's revenues are derived from software license fees, services and
post-contract customer support ("PCS"), and hardware sales. Total revenues
for the first quarter of 2000 were $10.3 million, which represented a
decrease of 3.8% compared to first quarter 1999 total revenues of $10.7
million. The decrease in total revenues for the three-month period was due
primarily to a decrease in the number of projects sold.
International revenues were $1.6 million in the first quarter of 2000
compared to $2.6 million in the first quarter of 1999. International
revenues represented 15.8% of total revenues for the first quarter of 2000
compared to 24.3% in the same period of 1999. The decrease in international
revenues occurred primarily because two large European projects were not
replaced with projects of comparable size. The Company believes that
international revenues may increase with the presence of a new director of
international sales.
Software License Fees
Software license fee revenues consist of revenues from software license
agreements for Catalyst's primary product, the Catalyst(TM) Warehouse
Management System ("Catalyst WMS"); related add-on products; and relational
database management systems. The first quarter of 2000 software license fee
revenues of $2.4 million represented a decrease of 16.5% compared to the
first quarter of 1999 software license fee revenues of $2.9 million. This
decrease was attributable to lower sales and installation activity compared
to the first quarter of 1999.
The Company follows the software revenue recognition practices set forth in
Statement of Position 97-2, "Software Revenue Recognition," issued by the
American Institute of Certified Public Accountants. For projects requiring
"significant" modifications to the Catalyst WMS, the Company uses contract
accounting procedures, based upon percentage of completion, to recognize
revenue, provided that such amounts are reasonably collectable. Revenue for
projects with few or no modifications are recognized upon reaching contract
milestones, to the extent that payment is fixed and determinable and
considered collectable. The Company believes that software license fees
should continue to increase due to enhanced worldwide sales and marketing
efforts, the Company's strategic alliance with SAP America, Inc. and SAP AG,
the introduction of new products, and efforts to deliver standard packaged
solutions that meet the requirements of its vertical markets.
Services and PCS
Services and PCS revenues are derived from software modifications,
professional services, and PCS agreements. Services and PCS revenues
decreased 5.5% to $6.2 million in the first quarter of 2000, from $6.6
million in the first quarter of 1999. The components of services and PCS
revenues as a percentage of total revenues in the first quarter of 2000 were
16.1% for software modifications, 25.2% for professional services, and 19.0%
for PCS agreements compared with 18.1%, 28.1%, and 15.2%, respectively, in
the first quarter of 1999. Services and PCS revenues decreased in the first
quarter of 2000 due to fewer new customer contracts signed in the third and
fourth quarters of 1999, which resulted in fewer projects requiring
software modifications and professional services.
Software modifications are determined during the customer's Conference Room
Pilot (CRP) and consist of changes to the software to facilitate specific
functionality desired by the customer. The Company believes that as the
number of new contracts increases, future modification revenues as a
percentage of total revenues should decrease due to the increased
functionality of new releases of the Company's products; however, the
relationship is dependent upon the variety of modifications that the
individual customer specifies.
Page 8
<PAGE>
Professional services revenues are derived from training, technical
services, performance of the CRP, on-site support, project management, and
implementation services. Professional services revenues are recognized based
on the number of days of work actually performed. The Company believes that
future professional services revenues could increase as new customer
contracts are signed.
Customers typically enter into an agreement for PCS at the time they first
license the Catalyst WMS and, once installed, pay for the first year of PCS
in advance. PCS revenues are recognized ratably over the term of the PCS
agreement, which is generally one year. The increase in PCS revenues was due
primarily to growth in the installed customer base for the Company's products
and current customers renewing their PCS agreements. The Company believes
that PCS revenues should continue to increase in the future as existing PCS
agreements are renewed and more of the Company's products are installed,
resulting in the execution of corresponding PCS agreements.
Hardware
Hardware revenues consist primarily of computer hardware, radio frequency
equipment, and printers that the Company sold to its customers on behalf of
hardware and other equipment manufacturers. Hardware revenues increased to
$1.7 million in the first quarter of 2000 from $1.3 million in the same
period of 1999. The increase in hardware revenue was due to a continued
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. In the first quarter of 2000, cost of software
license fees decreased to $143,000 compared to $147,000 in the same period of
1999 due to a decrease in revenues from the sale of third-party software.
The Company anticipates that the cost of software license fees for the
Catalyst WMS and related third-party software should decrease in the future
as a percentage of total software license fee revenues and remain relatively
constant as a percentage of related third-party software revenues.
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.
The cost of services and PCS increased 9.6% to $4.2 million in the first
quarter of 2000 from $3.9 million for the first quarter of 1999. The cost of
services and PCS increased due to increased personnel costs. As a percentage
of services and PCS revenues, the cost of services and PCS increased to 68.2%
of related revenues for the first quarter of 2000 from 58.8% for the first
quarter of 1999. The Company believes that the cost of services and PCS as a
percentage of related revenues will depend on the quantity and value of new
contracts signed in 2000.
Cost of Hardware
Cost of hardware consists primarily of the cost of computer hardware, radio
frequency equipment, and printers sold by the Company on behalf of the
equipment manufacturers. The Company does not inventory, service, or
discount hardware items, but makes them available to customers who desire a
turnkey solution. Sales of hardware in the first quarter of 2000 had a cost
of $1.4 million compared to $1.2 million in the first quarter of 1999. The
increase in cost for the first quarter of 2000 was attributable to the
increase in sales of hardware. The Company expects hardware costs to
increase ratably as hardware sales increase, however, the Company anticipates
that hardware costs as a
Page 9
<PAGE>
percentage of total hardware revenues should remain relatively constant.
Product Development
Product development costs are expenses associated with research and
development, including costs of engineering personnel and related development
expenses such as software tools, training, and documentation. Product
development costs as a percentage of total revenues for the first quarter of
2000 decreased to 13.7% from 14.8% in the first quarter of 1999. Actual
product development expenses were $1.4 million in the first quarter of 2000,
compared to $1.6 million in the first quarter of 1999. Product development
costs were higher in 1999 due to the Company's development efforts on
Catalyst WMS Release 8.0, which was available during the second quarter of
1999. The Company believes that product development costs on a consolidated
basis may increase in the future due to the new product offering from
Catalyst-Exchange.com, Inc. (see Liquidity and Capital Resources section for
discussion of Catalyst-Exchange.com, Inc.).
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 as a percentage of total revenues for
the first quarter of 2000 increased to 19.3% from 14.6% in the first quarter
of 1999. Actual sales and marketing expenses increased to $2.0 million in
the first quarter of 2000 from $1.6 million in the first quarter of 1999.
The increase in sales and marketing expenses as a percentage of total
revenues in the first quarter of 2000 was due to the decline in revenues over
the comparable quarter. The increase in actual sales and marketing expense
was primarily due to increased marketing activities in domestic and
international markets and an increase in personnel and related costs. The
Company anticipates that sales and marketing expenses should increase in the
future due to the anticipated expansion of the sales and marketing teams.
General and Administrative
General and administrative expenses consist primarily of the salaries of
administrative, executive, finance, human resources, and quality assurance
personnel. General and administrative expenses as a percentage of total
revenues were 9.4% for the first quarter of 2000 and 1999. Actual general
and administrative expenses decreased slightly to $966,000 in the first
quarter of 2000 from $1.0 million in the first quarter of 1999. The Company
expects that general and administrative expenses may increase in the future,
but should decrease as a percentage of total revenues.
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 and expects interest income to increase due to additional invested
cash balances and higher interest rates earned.
Income Tax Expense
No federal, state, or deferred tax expenses were recorded for the quarters
ended March 31, 2000 and 1999 due to the Company's federal and state net
operating loss carryforward position. The Company has recorded a valuation
allowance to reserve for the net deferred tax assets.
Page 10
<PAGE>
Liquidity and Capital Resources
Net cash provided by operating activities was $3.1 million for the three
months ended March 31, 2000, compared to $3.0 million during the three months
ended March 31, 1999.
Cash used in investing activities was $436,000 during the three months
ended March 31, 2000 compared to $500,000 during the three months ended March
31, 1999. This was due to increased fixed asset purchases in the quarter
ended March 31, 2000 and capitalization of software costs for the NT product
in the quarter ended March 31, 1999. As of March 31, 1999, the Company
capitalized $193,000 of NT software costs. Development of the NT product was
discontinued in the third quarter of 1999.
Net cash provided by financing activities was $228,000 at March 31, 2000
and $0 at March 31, 1999. The increase was due primarily to proceeds on the
exercise of stock options. In 1999, payments on long-term debt were offset
by proceeds from the exercise of stock options.
As of March 31, 2000, the Company had $24.1 million in cash and cash
equivalents, and working capital of $21.1 million. Cash and cash equivalents
consist primarily of money market funds and commercial paper. In addition,
the Company has a $5.0 million line of credit (the "Revolving Credit
Facility") with Bank One, Milwaukee, Wisconsin. As of March 31, 2000, there
were no amounts outstanding under the Revolving Credit Facility.
Longer term cash requirements, other than normal operating expenses, are
anticipated for the development of new software products, enhancement of
existing products, and the financing of anticipated growth. The Company
expects that its existing cash and cash equivalents and available line of
credit, along with anticipated cash generated from operations, should be
sufficient to satisfy its cash requirements for at least the next 12 months.
On April 18, 2000, the Company announced the formation of a separate
subsidiary to be known as Catalyst-Exchange.com, Inc., which was incorporated
on May 3, 2000. Catalyst-Exchange.com, Inc. was formed to deliver a true
Business-to-Business product and service offering for the retail and consumer
packaged goods industries. There were no revenues earned or expenses
incurred in the first quarter of 2000 relating to Catalyst-Exchange.com, Inc.
The Company has never paid cash dividends on its common stock. The
Company's policy has been to retain cash from operations to provide funds for
the operation and expansion of its business. Accordingly, the Company does
not anticipate paying cash dividends in the foreseeable future.
Economic and Monetary Union in Europe (EMU)
EMU refers to the movement toward economic and monetary union in Europe
with the ultimate goal of introducing a single currency called the euro.
While the European monetary union will have profound financial and political
implications, the Company believes that the formation of EMU will not impact
the Company's earnings in any material way.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not believe it has material exposure to market risk with
respect to any of its investments as the Company does not use market rate
sensitive instruments for trading or other purposes. For purposes of the
Consolidated Statements of Cash Flows, the Company considers all highly
liquid investments with a maturity of three months or less when purchased to
be cash equivalents. Cash equivalents consist principally of commercial
paper. The cost of these securities, which are considered as
Page 11
<PAGE>
"available for sale" for financial reporting purposes, approximated fair
value at both March 31, 2000 and 1999. There were no realized gains or
losses in the periods ended March 31, 2000 or 1999.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 8, 1999, a former customer (the "Claimant") instituted
arbitration proceedings against the Company with the American Arbitration
Association in Milwaukee, Wisconsin. The Claimant attempts to revoke its
acceptance of the Catalyst WMS and alleges that the Company breached its
warranty obligations under Claimant's agreement with the Company. The
Claimant seeks relief in the form of monetary damages. The Company believes
that the allegations of the Claimant are without merit and intends to
vigorously defend against them. The potential outcome for this legal
proceeding cannot be determined at this time and accordingly, no estimate for
such potential settlement and arbitration costs have been included in the
accompanying financial statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Number Description
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the first quarter of 2000.
SIGNATURES
Pursuant to the requirements 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.
CATALYST INTERNATIONAL, INC.
Dated: May 10, 2000 By: /s/ Sean P. McGowan
---------------------------
Sean P. McGowan
President and Chief Executive Officer
Signing on behalf of the registrant and
as principal executive officer.
Dated: May 10, 2000 By: /s/ Timothy Sherlock
---------------------------
Timothy Sherlock
Vice President and Chief Financial Officer
Signing on behalf of the registrant and
as principal financial officer.
Page 12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 24058
<SECURITIES> 0
<RECEIVABLES> 10313
<ALLOWANCES> 1300
<INVENTORY> 0
<CURRENT-ASSETS> 34000
<PP&E> 9219
<DEPRECIATION> 5879
<TOTAL-ASSETS> 37340
<CURRENT-LIABILITIES> 12903
<BONDS> 0
0
0
<COMMON> 903
<OTHER-SE> 22973
<TOTAL-LIABILITY-AND-EQUITY> 37340
<SALES> 10321
<TOTAL-REVENUES> 10321
<CGS> 5746
<TOTAL-COSTS> 10122
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11261
<INCOME-PRETAX> 264
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 264
<EPS-BASIC> 0.03
<EPS-DILUTED> 0.03
</TABLE>
