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, 1999 or
[ ] Transition Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ________ to ________
Commission File Number 0-27138
(Catalyst Logo)
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 I.R.S. Employer
of 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
-----------------------------
(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 [X]
As of March 17, 2000, the aggregate market value of the
registrant's common stock held by non-affiliates was $82,247,335
(based upon the closing price of the registrant's common stock
on The Nasdaq Stock Market(R) On that date).
As of March 17, 2000, the number of shares outstanding of the
registrant's common stock was 7,961,669.
<PAGE>
Documents Incorporated By Reference
* Portions of the 1999 Annual Report to Shareholders
are incorporated by reference into Parts I, II, and IV.
* Portions of the definitive Proxy Statement dated April
7, 2000 to be delivered to shareholders in connection
with the Annual Meeting of Shareholders to be held April
25, 2000 are incorporated by reference into Part III.
<PAGE>
CATALYST INTERNATIONAL, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
INDEX
Part I
Item 1. Business . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . 7
Item 3. Legal Proceedings. . . . . . . . . . . . . . . 7
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . 7
Part II
Item 5. Market for Registrant's Common Equity
and Related Security Holder Matters. . . . . . 8
Item 6. Selected Financial Data. . . . . . . . . . . . 8
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 9
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk. . . . . . . . . . . . . . . 9
Item 8. Financial Statements and Supplementary Data. . 9
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . . . 9
Part III
Item 10. Directors and Executive Officers of
the Registrant . . . . . . . . . . . . . . . . 9
Item 11. Executive Compensation . . . . . . . . . . . . 9
Item 12. Security Ownership of Certain
Beneficial Owners and Management . . . . . . . 10
Item 13. Certain Relationships and Related
Transactions . . . . . . . . . . . . . . . . . 10
Part IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K. . . . . . . . . . . . 10
Signatures. . . . . . . . . . . . . . . . . . . . . . . 12
<PAGE>
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.
Catalyst'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, post-contract customer
support (PCS), 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 allow them to concentrate on customer support and
service.
With the explosive growth of e-commerce, warehouses have become
a critical link in the supply chain. Internet fulfillment
requires the movement of goods at unprecedented efficiencies and
accuracy levels to meet increasing customer demands. Catalyst
believes it is changing the warehouse from a storage facility
into a digital distribution center. The digital distribution
center is able to execute a wide range of dynamic activities
critical to supply chain performance. The Catalyst WMS software
can be delivered as a web-based solution that allows visibility
into the transactions so the warehouse can deliver value added
services to the customer. Catalyst WMS is designed to provide
the speed, accuracy, and responsiveness required to meet the
challenges of e-commerce.
Since Catalyst was founded in 1979, it has focused its resources
on the development and enhancement of advanced warehouse
management software solutions. This focus allowed Catalyst to
introduce the first configurable, standard software solution
that captured the best practice methodologies used in warehouse
operations. Catalyst WMS encapsulates a variety of warehouse
management strategies that can be rapidly configured to meet the
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 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 ("RDBMS") (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
<PAGE>
Manugistics and I2). Catalyst WMS supports a wide range of
interfaces to third-party peripherals, such as radio frequency-
based scanning and data collection devices, bar coding devices,
and material handling equipment (such as conveyors, sorters, and
carousels).
The Catalyst WMS 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 Catalyst'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.
In 1998, Catalyst introduced CatPack, which is a scaled down
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 Microsoft(R)
Windows NT(R).
For CatPack, Catalyst developed the Rapid Deployment
implementation methodology. The Rapid Deployment process is
designed to implement a no-modification package in the least
amount of time, while ensuring a complete and successful
implementation.
During the third quarter of 1999, Catalyst and SAP AG of
Walldorf, Germany entered into an advanced strategic alliance
(the "Alliance"). In connection with the Alliance, Catalyst and
SAP America, Inc., a subsidiary of SAP AG, announced that SAP
America, Inc. acquired a 9.7% stake (759,485 shares of
Catalyst's common stock at a price of $17 per share) in
Catalyst. In the same quarter, Catalyst recorded a
restructuring charge of $3.6 million related to the
discontinuation of its Windows NT WMS product, as part of the
Alliance. The restructuring charge included $398,000 relating
to the closing of the Orlando, Florida office and the termination
of employment of employees. In addition, there was
a $3.2 million non-cash charge for the write-off of capitalized
software and other intangibles related to the Windows NT WMS
product, the future value of which was impaired by the
restructuring actions. Catalyst believes that all material
restructuring actions were completed by the end of 1999.
Catalyst believes that Catalyst WMS and CatPack (the "WMS
Products") benefit customers in three key areas: improved
customer service, operational efficiency, and capital
utilization. Catalyst's newest release, WMS 8.0, is a web-based
solution which provides the speed, accuracy, and responsiveness
required for e-commerce and high-volume customers enabling them
to meet the high demands of Internet fulfillment. 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 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 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
"anticipates," "believes," "estimates," "expects," or "future,"
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
<PAGE>
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 filed with the Securities and Exchange Commission (SEC), and
other factors identified from time to time as risks in the
Company's reports filed with the SEC.
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. Catalyst 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.
EXPAND ON STRATEGIC ALLIANCES. Catalyst intends to provide
expanded capabilities to warehouse operations through key
strategic alliances. Catalyst entered into an alliance with SAP
AG, a leading supplier of enterprise software solutions in
September 1999. Catalyst is now introduced as the preferred
solution for high volume, complex systems for SAP's 12,000 North
American customers. Catalyst believes customers will benefit
from the complimentary expertise of the two companies and that
Catalyst is well positioned to extend its market presence.
<PAGE>
PROVIDE SUPERIOR SYSTEM IMPLEMENTATION. Catalyst believes that
the efficiencies 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. Catalyst plans to continue to
improve its differentiated implementation processes by further
refining the CIMPL and Rapid Deployment methodologies and CRP
process 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 six major vertical market
categories including retail, consumer goods, motor vehicle and
parts, Internet fulfillment, 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 product
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, France, India, Italy,
Saudi Arabia, and Thailand and is currently working on
developing similar relationships in other countries. The
Catalyst WMS is currently available in English, French, Italian,
Portuguese, and Spanish.
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 RDBMS, 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. Catalyst also leverages
its WMS Products with new 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
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 1999 Annual Report
to Shareholders under the caption "Total Revenues" is
incorporated herein by reference and is filed herewith as
Exhibit 13.2.
SERVICES AND PCS
In addition to sales of the WMS Products, Catalyst offers
certain services and PCS 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. PCS agreements 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. PCS 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. PCS is a service that
may be purchased at the customer's option.
To support the consistent delivery of quality installations,
Catalyst developed a world-class customer service center called
the Supply Chain Execution Competency Center (SCE Competency
Center). Opened in 1999, it will support both the SAP Logistics
Execution Solution (LES) and Catalyst WMS. As the main customer
support center for implementations of SAP LES and Catalyst WMS,
the SCE Competency Center will provide customer training,
customer consulting, and product customization services. Under
the Alliance, Catalyst deployed its world-class services
organization to implement and provide primary support for all
customer and TeamSAP(tm) partner requests, including a 24x7 hot
line, customization and on-site support for SAP LES in North
America.
As a provider of warehouse management software, Catalyst
recognizes the importance of offering quality service and
support to its customers. Catalyst has several groups
<PAGE>
responsible for offering services and PCS to ensure customer
satisfaction; these groups include Professional Services,
Product Distribution, Customer Strategic Solutions, Customer
Education and Training, and Customer Support.
Professional Services offers the CIMPL and Rapid Deployment
processes which typically last four to eight months.
Implementations on no-modification jobs can be even faster.
Using the Rapid Deployment process, Catalyst successfully
installed its Catalyst WMS in less than eight weeks in a
customer's Internet fulfillment center.
As a principal SAP LES integrator, Professional Services will
utilize its focus on SAP LES and warehouse management to
participate in TeamSAP projects along with SAP and other SAP
implementation partners, increasing implementation success and
long-term serviceability for SAP LES.
Product Distribution is responsible for managing and installing
operating systems, hardware, networks, communication links, and
RDBMS.
Customer Strategic Solutions addresses meeting the post-
implementation needs of customers. This includes the sale of
additional enhancements to subsequent WMS sites, reselling
hardware, providing consulting 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. Catalyst University offers a series of continuing
education courses for current customers, VARs, and other
partners.
Customer Support offers a fully staffed SCE Competency Center
24-hours per day, seven days per week, 365 days per year.
Through the SCE Competency Center, both SAP LES and Catalyst
customers benefit greatly from Catalyst's 20 years of experience
in implementing and supporting warehouse management operations.
CUSTOMERS
In the year ended December 31, 1999, Catalyst had one customer
which accounted for more than 10% of its total revenues.
However, 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 has historically relied on its six key vertical markets
for a substantial portion of its revenues. Catalyst does not,
however, intend to focus solely on these markets for future
sales and does not anticipate that it will depend on any single
market for a substantial portion of its sales.
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, France, India, Italy, Saudi Arabia, and Thailand,
Catalyst utilizes the sales assistance of VARs that sell and
assist 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
<PAGE>
participants and enterprise software vendors and by developing
close relationships with local system integrators.
The information set forth on page 35 of the 1999 Annual Report
to Shareholders under the caption "9. Segment Disclosure and
Major Customers" is incorporated herein by reference and is
filed herewith as Exhibit 13.3.
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.
Catalyst believes that, with over 20 years of experience in the
warehouse management software business, the Catalyst WMS is
product that is established, proven, and accepted in the
marketplace. Catalyst anticipates CatPack 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 the 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 of products and
knowledge. This resource should help Catalyst's customers stay
competitive in their respective industries.
As of December 31, 1999, the sales and marketing organization
was based in Catalyst'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 copyright, trademark and
trade secret laws, confidentiality procedures, license
agreements, and other contractual provisions to protect its
proprietary information. Catalyst has no patents or patent
applications pending. 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 grants the right to use the WMS Products under a
perpetual license, which is generally non-transferable and
solely for the customer's internal operations at designated
sites. Under the terms of Catalyst's license agreements,
Catalyst generally owns all modifications to its software that
are developed and implemented for a customer.
Catalyst is not aware that its WMS Products, trademarks, or
other proprietary rights infringe the property rights of third
parties. 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
infringement claims, with or without merit, could be time
consuming and result in costly litigation or damages.
Product Development
Catalyst seeks to offer an extensive, integrated product that
provides complete warehouse management functionality to
warehouses worldwide. To effect this strategy, Catalyst intends
<PAGE>
to continue to introduce new products and upgrade the
functionality of 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 Catalyst's control. Product
development costs were $7.6 million in 1999, $3.4 million in
1998, and $2.7 million in 1997.
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, 1999, Catalyst had 294 full-time employees
worldwide, none of whom were represented by any collective
bargaining organization. Catalyst has never experienced a work
stoppage and considers relations with its employees to be good.
Item 2. Properties
Catalyst 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
Catalyst 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 to a lease
which expires in 2003. Catalyst believes that its existing
facilities should be adequate for its needs through 2000.
Item 3. Legal Proceedings
On October 8, 1999, a former customer (the "Claimant")
instituted arbitration proceedings against Catalyst with the
American Arbitration Association in Milwaukee, Wisconsin. The
Claimant attempts to revoke its 1998 acceptance of Catalyst's
software product and alleges that Catalyst breached its warranty
obligations under its agreement with Catalyst. Claimant seeks
relief in the form of monetary damages in an amount not less
than $1,944,887. Catalyst 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 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during
the fourth quarter of 1999.
<PAGE>
PART II
Item 5. Market For Registrant's Common Equity and Related
Security Holder Matters
The Nasdaq Stock Market (Nasdaq) is a highly regulated
electronic securities market utilizing a sophisticated computer
and telecommunications network. Market participants are
comprised of competing market makers, independent dealers who
commit capital to stocks and compete with each other for orders,
and Electronic Communications Networks (ECNs), trading systems
recently integrated into Nasdaq which bring additional orders
into the market. This market structure provides visibility of
orders and allows market participants to compete for order flow.
Trading is supported by a communications network linking the
market participants to quotations dissemination, trade
reporting, and order execution systems. This market also
provides specialized automation services for screen-based
negotiations of transactions, online comparison of transactions,
and a range of information services tailored to the needs of the
securities industry, investors, and issuers.
The Nasdaq Stock Market consists of two distinct market tiers:
the Nasdaq National Market and The Nasdaq SmallCap Market. The
Nasdaq Stock Market is operated by The Nasdaq Stock Market,
Inc., a subsidiary of The Nasdaq-Amex Market Group, Inc. The
Nasdaq-Amex Market Group, Inc. is a subsidiary of the National
Association of Securities Dealers, Inc.
Catalyst's common stock is listed on the Nasdaq Stock Market
under the symbol CLYS.
As of March 6, 2000, there were 7,954,700 shares of Catalyst's
common stock outstanding held by 156 shareholders of record and
approximately 1000 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.
<TABLE>
1999 1998
High Low High Low
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<S> <C> <C> <C> <C>
Quarters ended March 31, $18.875 $ 9.938 $ 7.500 $ 3.750
Quarters ended June 30, 21.000 10.000 14.938 6.250
Quarters ended September 30, 21.625 10.250 15.375 4.500
Quarters ended December 31, 15.500 7.250 13.938 5.000
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</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.
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
The selected financial data set forth on page 13 of the 1999
Annual Report to Shareholders is incorporated herein by
reference and is filed herewith as Exhibit 13.1.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The information set forth on pages 14 through 21 of the 1999
Annual Report to Shareholders 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 28 of the 1999
Annual Report to Shareholders 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 Shareholders 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 through 35 of
the 1999 Annual Report to Shareholders are 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, 1999, 1998, and 1997
- Consolidated Balance Sheets at December 31, 1999 and 1998
- Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1999, 1998, and 1997
- Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998, and 1997
- Notes to Consolidated Financial Statements
Item 9. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure
Catalyst had no changes in and disagreements with its
accountants on accounting and financial disclosure in 1999.
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 2000 Annual Meeting of
Shareholders under the captions "Election of Directors" on page
2 and "Executive Officers" on page 5.
Item 11. Executive Compensation
Catalyst incorporates by reference herein the information
contained under the caption "Executive Compensation" on pages
7 through 11 of the Proxy Statement for the 2000 Annual Meeting
of Shareholders.
<PAGE>
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 and 5 of the Proxy Statement
for the 2000 Annual Meeting of Shareholders.
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 filed during the fourth quarter of
1999.
(c) Exhibit Listing
Number Description
3.1 Amended and Restated Certificate of Incorporation (1)
3.2 Amended and Restated By-Laws (1)
10.1 1993 Stock Option Plan, as amended, of Catalyst USA,
Inc.* (1)
10.2 1997 Director Stock Option Plan of Catalyst
International, Inc.* (2)
13.1 Selected Financial Data incorporated by reference to
Page 13 of the 1999 Annual Report to Shareholders
13.2 Management's Discussion and Analysis incorporated by
reference to Pages 14 through 21 of the 1999 Annual
Report to Shareholders
13.3 Independent Auditors Report and Financial Statements
incorporated by reference to Pages 22 through 35 of the
1999 Annual Report to Shareholders
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule
- - ----------
* Represents a compensation plan.
<PAGE>
(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 shareholders of any Exhibits
in the Exhibit Listing.
(d) Financial Statement Schedule
<TABLE>
<CAPTION>
Valuation and Qualifying Accounts
(in thousands)
Balance
Balance at Charged to Charged at
beginning costs and to other Deductions end of
Description of period expense accounts (additions) period
- - -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December
31, 1999
Allowance for
doubtful accounts $ 534 2,013 - 1,291 $1,256
Year ended December
31, 1998
Allowance for
doubtful accounts $ 339 296 - 101 $ 534
Year ended December
31, 1997
Allowance for
doubtful accounts $ 279 142 - 82 $ 339
</TABLE>
<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 30, 2000.
Catalyst International, Inc.
By: /s/ Sean P. McGowan
---------------------------------
Sean P. McGowan
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Timothy Sherlock
---------------------------------
Timothy Sherlock
Vice President Finance and Chief Financial 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 30, 2000.
/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, Jr.
- - ---------------------------------
Roy J. Carver, Jr.
Director
/s/ James F. Goughenour
- - ---------------------------------
James F. Goughenour
Director
/s/ Terrence L. Mealy
- - ---------------------------------
Terrence L. Mealy
Director
/s/ Elizabeth J. Reeves
- - ---------------------------------
Elizabeth J. Reeves
Director
<PAGE>
EXHIBIT 13.1
SELECTED FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997 1996 1995
- - -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Revenues:
Software license fees $ 7,575 $ 8,741 $ 7,007 $ 8,132 $10,372
Services and post-contract
customer support 25,599 21,890 14,637 12,902 10,180
Hardware 7,386 3,282 881 132 106
- - -----------------------------------------------------------------------------
Total revenues 40,560 33,913 22,525 21,166 20,658
Operating expenses:
Cost of software license fees 606 525 524 288 479
Cost of services and post-
contract customer support 14,921 14,583 13,745 12,371 9,369
Cost of hardware 6,260 2,759 766 - 4
Product development 7,638 3,412 2,731 4,470 2,554
Sales and marketing 7,159 5,494 5,291 5,079 4,499
General and administrative 6,574 4,177 3,975 4,287 1,608
Write-off of purchased
research and development - - - 2,002 -
Restructuring and other charges 3,588 - - 597 -
- - -----------------------------------------------------------------------------
Total operating expenses 46,746 30,950 27,032 29,094 18,513
- - -----------------------------------------------------------------------------
Income (loss) from operations (6,186) 2,963 (4,507) (7,928) 2,145
Other income (expense) 573 217 308 867 (29)
- - -----------------------------------------------------------------------------
Income (loss) before provision
for income taxes (5,613) 3,180 (4,199) (7,061) 2,116
Provision for income taxes - 100 - - 111
- - -----------------------------------------------------------------------------
Net income (loss) $(5,613) $ 3,080 $(4,199) $(7,061) $2,005
- - -----------------------------------------------------------------------------
Net income (loss) per share $ (0.77) $ 0.42 $ (0.63) $ (0.88) $ 0.30
- - -----------------------------------------------------------------------------
Shares used in computing net
income (loss) per share 7,288 7,383 6,630 7,996 6,784
- - -----------------------------------------------------------------------------
Balance Sheet Data:
Cash and cash equivalents $21,169 $ 8,555 $ 4,256 $ 9,321 $ 3,730
Working capital 20,388 9,530 6,673 10,457 27,127
Total assets 35,563 25,557 17,692 20,199 34,084
Long-term debt, less
current portion 181 412 443 132 324
Total shareholders' equity 23,281 15,403 9,997 14,147 29,251
- - -----------------------------------------------------------------------------
</TABLE>
1999 Annual Report - Page 13
<PAGE>
EXHIBIT 13.2
MANAGEMENT'S DISCUSSION AND ANALYSIS
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, 1999 1998 1997
- - -----------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Software license fees 18.7% 25.8% 31.1%
Services and post-contract customer support 63.1 64.5 65.0
Hardware 18.2 9.7 3.9
- - -----------------------------------------------------------------------------
Total revenues 100.0 100.0 100.0
Operating expenses:
Cost of software license fees 1.5 1.5 2.3
Cost of services and post-contract
customer support 36.8 43.0 61.0
Cost of hardware 15.4 8.1 3.4
Product development 18.8 10.1 12.1
Sales and marketing 17.7 16.2 23.5
General and administrative 16.2 12.4 17.7
Restructuring and other charges 8.9 - -
- - -----------------------------------------------------------------------------
Total operating expenses 115.3 91.3 120.0
Income (loss) from operations (15.3) 8.7 (20.0)
Other income, net 1.5 0.7 1.4
- - -----------------------------------------------------------------------------
Income (loss) before provision for income taxes (13.8) 9.4 (18.6)
Provision for income taxes - 0.3 -
- - -----------------------------------------------------------------------------
Net income (loss) (13.8)% 9.1% (18.6)%
- - -----------------------------------------------------------------------------
</TABLE>
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
"anticipates," "believes," "estimates," "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 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 Securities and Exchange Commission (SEC), and
other factors identified from time to time as risks in the
Company's reports filed with the SEC.
1999 Annual Report - Page 14
<PAGE>
ALLIANCE WITH SAP
During the third quarter of 1999, the Company and SAP America,
Inc. announced that SAP America, Inc. acquired 760,000 shares
representing a 9.7% stake in the Company and that the Company
and SAP AG (the parent company of SAP America, Inc.) entered
into an advanced strategic alliance (the SAP Alliance). The SAP
Alliance is described in more detail on page 10.
TOTAL REVENUES
The Company's revenues are derived from software license fees,
services and post-contract customer support (PCS), and hardware
sales. Total revenues increased by 19.6% to $40.6 million in
1999 and by 50.6% to $33.9 million in 1998. The Company
believes that the slower growth in total revenues in 1999 was
due primarily to potential customers' reluctance to invest in
major application software in the second half of 1999. The
Company believes that the SAP Alliance could lead to increased
license fee and professional service revenues. 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)
1999 1998 1997 1999 1998
- - -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Software license fees $ 7,575 $ 8,741 $ 7,007 (13.3)% 24.7%
Services and PCS 25,599 21,890 14,637 16.9 49.6
Hardware 7,386 3,282 881 125.0 272.5
- - -----------------------------------------------------------------------------
</TABLE>
International revenues increased 15.8% to $7.6 million in 1999
from $6.5 million in 1998 and increased 56.1% in 1998 from $4.2
million in 1997. International revenues accounted for 18.7%,
19.3%, and 18.6% of total revenues in 1999, 1998, and 1997,
respectively. The decrease in the growth of international
revenues in 1999 occurred primarily because two large European
projects nearing completion were not replaced with new projects
of comparable size. The Company believes that future
international revenues may increase with the presence of a new
director of international sales and the addition of a value-
added reseller in France. International revenues increased in
1998 from 1997 primarily due to new business in Canada where the
Company had sales of $2.0 million.
SOFTWARE LICENSE FEES
Software license fees consist of revenues from software license
agreements of the Catalyst WMS, related add-on products, and
relational database management systems (RDBMS). Software
license fee revenues decreased by 13.3% to $7.6 million in 1999
and increased by 24.7% to $8.7 million in 1998. Software
license fees may fluctuate based upon the size and quantity of
new or add-on software license fee contracts as well as the
progress toward completion for contracts that are accounted for
using contract accounting.
Through December 31, 1997, the Company recognized both software
license fee and modification revenue using the straight-line
method over the installation period. Since 1998, the Company has
followed 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 software, the Company uses contract accounting procedures,
based upon percentage of completion, to recognize revenue,
provided that such amounts are reasonably collectable. Revenue
for projects with few or no modifications are recognized upon
reaching contract milestones, to
1999 Annual Report - Page 15
<PAGE>
the extent that payment is fixed and determinable and considered
collectable. Although it experienced a significant slowdown in
new contracts signed in the second half of 1999, the Company
believes that software license fees should increase in 2000 due
to increased worldwide sales and marketing efforts, the
ending of Year 2000 (Y2K) concerns, the SAP Alliance, 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 increased by 16.9% to $25.6 million in
1999 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:
<TABLE>
<CAPTION>
1999 1998 1997
- - -----------------------------------------------------------------------------
<S> <C> <C> <C>
Software modifications 17.2% 15.0% 25.7%
Professional services 28.7 32.5 23.1
PCS agreements 17.2 17.0 16.2
- - -----------------------------------------------------------------------------
63.1% 64.5% 65.0%
- - -----------------------------------------------------------------------------
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 modifications revenue as a
percentage of total revenues should decrease due to the
increased functionality of its newer releases of the Catalyst
WMS; however, the relationship is dependent upon the variety of
modifications that the individual customer specifies.
Professional services revenues are derived from training,
technical services, performance of the CRP, on-site support,
project management, and implementation services. The increase
in dollars in 1999 professional services revenues was due to
increased efforts by the Company to sell upgrades, training,
and other services to new and existing customers. Professional
services revenues are 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 the Catalyst WMS and, once
installed, pay for the first year of PCS fees in advance. The
increase in PCS revenues in 1999 and 1998 was due primarily to
growth in the installed customer base for Catalyst WMS and
renewal of current customers' PCS agreements. PCS revenues are
recognized ratably over the term of the PCS agreement, which is
generally one year. The Company believes that PCS revenues
should continue to 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
Hardware revenues consist primarily of computer hardware, radio
frequency equipment, and printers that the Company sold to
customers on behalf of the equipment manufacturers. Hardware
revenues increased by $4.1 million to $7.4 million in 1999 and
by $2.4 million to $3.3 million in 1998. The increase in hard-
ware revenue in 1999 and 1998 was due to a continued desire by
certain customers for a turnkey solution.
1999 Annual Report - Page 16
<PAGE>
COST OF SOFTWARE LICENSE FEES
Cost of software license fees consists primarily of the cost of
third-party software licenses sold by the Company. The cost of
software license fees was $606,000, $525,000, and $524,000 in
1999, 1998, and 1997, respectively. There was no cost of
software license fees for the Catalyst WMS as costs to develop
this product have been expensed as incurred.
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 should 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 and
related 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 58.3%, 66.6%,
and 93.9% in 1999, 1998, and 1997, respectively. The
decrease in cost of services and PCS as a percentage of total
services and PCS revenues was due to increased efficiencies in
the delivery of these services. However, the Company believes
that the cost of services and PCS as a percentage of related
revenues could increase in the future due to increased
personnel costs and the decline in new contracts during the
second half of 1999.
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.
Cost of hardware was $6.3 million, $2.8 million, and $766,000 in
1999, 1998, and 1997, respectively. As a percentage of hardware
sales, the cost was 84.8%, 84.1%, and 86.9% in 1999, 1998, and
1997, respectively. The Company expects hardware costs to
increase ratably as hardware sales increase; however, the
Company anticipates that hardware costs as a percentage of total
hardware revenues should remain relatively constant.
PRODUCT DEVELOPMENT
Product development costs include expenses associated with
research and development, including costs of engineering
personnel and related development expenses such as the
development of software tools, training, and documentation.
Product development costs increased by 124% to $7.6 million and
by 24.9% to $3.4 million in 1999 and 1998, respectively. In
1999, product development costs included expenses related to
developing WMS Release 8.0 and new features and functions in key
verticals.
The Company expensed all software development costs related to
its UNIX product as incurred. Development costs for the NT
product were capitalized until the product was discontinued in
September 1999 at which time they were written off. See Notes
to Consolidated Financial Statements, Note 10.
Product development costs represented 18.8%, 10.1%, and 12.1% of
total revenues in 1999, 1998, and 1997, respectively. The
Company believes that product development costs may decrease
slightly as a percentage of total revenues in the future due to
the discontinuance of the NT product.
1999 ANNUAL REPORT - PAGE 17
<PAGE>
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 30.3% to $7.2 million in 1999 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 17.7%, 16.2%, and 23.5%
of total revenues in 1999, 1998, and 1997, respectively. The
Company anticipates that sales and marketing expenses as a
percentage of total revenues should increase due to the
anticipated expansion of the sales and marketing function.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of the
salaries of administrative, executive, finance, and quality
assurance personnel. General and administrative expenses
increased by 57.4% to $6.6 million in 1999 and increased by 5.1%
to $4.2 million in 1998. General and administrative expenses
represented 16.2% of total revenues in 1999, 12.3% in 1998, and
17.7% in 1997. In 1999, general and administrative expense
increased compared to 1998 due to a provision for potentially
uncollectible accounts receivable, a provision for legal costs
associated with a former customer's arbitration proceeding (see
Notes to Consolidated Financial Statements, Note 11), and
compensation expense for the former chief financial officer.
Because these one-time charges are not expected to recur, the
Company believes that general and administrative expenses should
decrease in the future 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 Kearney Systems, Inc. (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. The Company
capitalized the software because it was determined to have
reached technological feasibility and would have substantial
future value to the Company. During the third quarter of 1999,
the Company initiated a restructuring plan to discontinue
development of its NT-based WMS product and close its Orlando,
Florida office. The restructuring plan was put in place due to
the SAP Alliance. Because of the SAP Alliance, the Company made
significant management changes and plans to further expand its
marketing efforts to increase exposure of its UNIX WMS products
and services.
Restructuring and other charges as of December 31, 1999 were
$3.6 million. See Notes to Consolidated Financial Statements,
Note 10 for further discussion of expenses associated with the
restructuring plan.
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 increasing invested cash balances and
interest rates earned.
1999 Annual Report - Page 18
<PAGE>
INCOME TAX EXPENSE
In 1999 and 1997, no income tax expense was recorded as the
Company incurred a net loss for both financial and income tax
reporting purposes. At December 31, 1999, the Company had net
operating loss carry-forwards of approximately $12.3 million and
$10.2 million for federal and state income tax purposes,
respectively. 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, the Company was subject to an alternative
minimum tax, 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
In 1999, the Company generated $12.6 million in cash, of which
$1.3 million was provided by operating activities and $1.4
million was used in investing activities. Financing activities
generated $12.7 million, mostly due to proceeds from the sale of
common stock to SAP America, Inc. In 1998, the Company
generated $4.3 million in cash, of which $5.0 million was
generated by operating activities, $800,000 was used in
operating activities for capital expenditures and capitalization
of software development costs, $335,000 was generated by
employees' exercise of stock options, and $273,000 was used for
payments on long-term debt.
Capital expenditures totaled $837,000, $505,000, and $770,000 in
1999, 1998, and 1997, respectively. Since 1997, the Company has
financed the upgrade of certain computer and internal network
equipment through capital leases and continues to upgrade the
equipment as the leases expire. The aggregate amount owing
under capital leases, including interest, was $515,000,
$412,000, and $589,000 as of December 31, 1999, 1998, and 1997,
respectively. The Company anticipates that expenditures for new
hardware and software will increase during 2000. Such
expenditures will be funded by cash flows from operations and
from additional capital leases.
In September 1999, the Company sold 760,000 of its shares of
common stock previously held in treasury to SAP America, Inc.
for $12.9 million. In 1998, the Company issued approximately
143,000 shares of its common stock previously held in treasury
for the purchase of KSI. In January 1997, the Company redeemed
226,000 shares of its common stock at a cost of $1.1 million as
a part of a negotiated agreement between the Company and its
former president and chief executive officer.
As of December 31, 1999, the Company had $21.2 million in cash
and cash equivalents and working capital of $20.4 million. In
addition, the Company signed a $5.0 million line of credit (the
"Revolving Credit Facility"), which superseded a $1.0 million
line of credit, with Bank One, Milwaukee, Wisconsin in October
1999. The Revolving Credit Facility bears interest at the prime
rate subject to changes found in the Revolving Credit Facility
agreement and expires in October 2000. As of December 31, 1999,
there were no amounts outstanding under the Revolving Credit
Facility.
At December 31, 1999, accounts receivable increased by 3.8%, or
$368,000, compared to December 31, 1998. In addition, the
Company had reserves of $1.3 million for doubtful accounts and
$610,000 for known and estimated project cost overruns. This
compares to $534,000 and $700,000 for the same reserves at
December 31, 1998. The increase in the allowance for doubtful
accounts was largely due to specific accounts past due or in
dispute. The Company believes it has adequately provided for
potential risks.
1999 Annual Report - Page 19
<PAGE>
The Company expects that 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 year 2000.
The Company has never paid cash dividends on its common stock.
The Company's policy has been to retain cash from operations to
provide funds for the operation and expansion of its business.
Accordingly, the Company does not anticipate paying cash
dividends in the foreseeable future.
IMPACT OF YEAR 2000
The Company completed all Y2K readiness procedures prior to
December 31, 1999 and, to date, has not experienced any
significant, adverse effects on its systems or operations from
the transition to Y2K. In addition, the Company has not been
made aware that any third party systems on which the Company
relies, the systems of the Company's vendors, or the systems of
the Company's customers suffered any material disruptions.
However, due to the fact that the Catalyst WMS is integrated
with different combinations of third party software and hardware
products, any Y2K problem occurring within these third party
software and hardware products could have an impact on the
operation of the Catalyst WMS which, in turn, may lead to claims
against the Company.
The Company estimates the total cost of preparing for and
resolving Y2K issues was approximately $250,000. These costs
were expensed as incurred. At this time, the Company does not
expect to incur future expenditures relating to Y2K compliance
matters. However, if unanticipated Y2K issues arise, additional
unanticipated costs may be incurred. These unanticipated costs,
or the Company's failure to correct any unanticipated issues in
a timely manner, could have a material adverse effect on the
Company's business, financial condition, and results of
operations.
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.
1999 Annual Report - Page 20
<PAGE>
QUARTERLY RESULTS
The following table sets forth unaudited statements of
operations data for each of the quarters in the years ended
December 31, 1999 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>
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------
Quarters Ended Dec. Sept. June Mar. Dec. Sept. June Mar.
31, 30, 30, 31, 31, 30, 30, 31,
1999 1999 1999 1999 1998
1998 1998 1998
- - -----------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software license fees $ 870 $ 650 $ 3,194 $ 2,861 $ 2,661
$ 2,311 $ 1,662 $ 2,107
Services and post-contract
customer support 6,416 6,513 6,085 6,585 6,310
5,179 5,278 5,123
Hardware 2,148 1,727 2,230 1,281 837
1,329 881 235
- - -----------------------------------------------------------------------------
Total revenues 9,434 8,890 11,509 10,727 9,808
8,819 7,821 7,465
Operating expenses:
Cost of software license fees 157 69 233 147 178
187 128 32
Cost of services and post-
contract customer support 3,162 4,125 3,761 3,873 3,719
3,695 3,446 3,724
Cost of hardware 1,761 1,483 1,840 1,176 806
1,064 680 208
Product development 1,831 1,894 2,329 1,584 1,034
814 866 698
Sales and marketing 1,749 1,806 2,042 1,562 1,438
1,184 1,447 1,424
General and administrative 2,708 1,494 1,359 1,013 1,165
1,047 848 1,118
Restructuring and other charges - 3,588 - - -
- - -
- - -----------------------------------------------------------------------------
Total operating expenses 11,368 14,459 11,564 9,355 8,340
7,991 7,415 7,204
- - -----------------------------------------------------------------------------
Income (loss) from operations (1,934) (5,569) (55) 1,372 1,468
828 406 261
Other income, net 200 128 164 81 88
57 41 31
- - -----------------------------------------------------------------------------
Income (loss) before provision
for income taxes (1,734) (5,441) 109 1,453 1,556
885 447 292
Provision for income taxes - - - - 100
- - -
- - -----------------------------------------------------------------------------
Net income (loss) $(1,734) $(5,441) $ 109 $ 1,453 $ 1,456
$ 885 $ 447 $ 292
- - -----------------------------------------------------------------------------
Net income (loss) per share
Diluted $ (0.22) $ (0.74) $ 0.01 $ 0.19 $ 0.19
$ 0.12 $ 0.06 $ 0.04
Shares used in computing net
income (loss) per share
Diluted 7,868 7,320 7,726 7,686 7,517
7,377 7,426 6,988
- - -----------------------------------------------------------------------------
</TABLE>
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 $21.625 per
share and a low of $2.125 per share.
As of March 6, 2000, there were 7,954,700 shares of the
Company's common stock outstanding held by 156 stockholders of
record and approximately 1,000 beneficial owners.
1999 Annual Report - Page 21
<PAGE>
EXHIBIT 13.3
FINANCIAL STATEMENTS
Catalyst International, Inc.
Consolidated Financial Statements
Years ended December 31, 1999, 1998, and 1997
Contents
* Report of Ernst & Young LLP, Independent Auditors
* Consolidated Financial Statements
* Consolidated Statements of Operations
* Consolidated Balance Sheets
* Consolidated Statements of Shareholders' Equity
* Consolidated Statements of Cash Flows
* Notes to Consolidated Financial Statements
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Catalyst International, Inc.
We have audited the accompanying consolidated balance sheets of
Catalyst International, Inc. (the Company) as of December 31,
1999 and 1998, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. 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, 1999 and 1998, and the
results of its operations and its cash flows for each of the
three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
Milwaukee, Wisconsin
January 28, 2000
1999 Annual Report - Page 22
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31, 1999 1998 1997
- - -----------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Software license fees $ 7,575,529 $ 8,740,730 $ 7,006,776
Services and post-contract
customer support 25,598,635 21,890,275 14,637,35
Hardware 7,385,996 3,281,596 880,994
- - -----------------------------------------------------------------------------
Total revenues 40,560,160 33,912,601 22,525,128
Operating expenses:
Cost of software license fees 606,429 524,754 523,894
Cost of services and post-
contract customer support 14,921,412 14,583,554 13,744,466
Cost of hardware 6,259,894 2,758,838 765,755
Product development 7,637,636 3,412,217 2,731,489
Sales and marketing 7,158,726 5,493,319 5,291,116
General and administrative 6,574,804 4,177,175 3,975,087
Restructuring and other
charges (Note 10) 3,587,665 - -
- - -----------------------------------------------------------------------------
Total operating expenses 46,746,566 30,949,857 27,031,807
- - -----------------------------------------------------------------------------
Income (loss) from operations (6,186,406) 2,962,744 (4,506,679)
Other income (expense):
Interest expense (63,057) (54,313) (26,219)
Investment income 685,692 266,297 309,007
Miscellaneous, net (49,560) 5,271 24,597
- - -----------------------------------------------------------------------------
Total other income, net 573,075 217,255 4 307,385
Income (loss) before provision
for income taxes (5,613,331) 3,179,999 (4,199,294)
Provision for income taxes (Note 8) - 100,000 -
- - -----------------------------------------------------------------------------
Net income (loss) $ (5,613,331) $ 3,079,999 $ (4,199,294)
- - -----------------------------------------------------------------------------
Earnings (loss) per share (Note 1):
Basic $ (0.77) $ 0.45 $ (0.63)
Diluted (0.77) 0.42 (0.63)
- - -----------------------------------------------------------------------------
</TABLE>
See accompanying notes.
1999 Annual Report - Page 23
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1999 1998
- - -----------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $21,169,179 $ 8,555,205
Accounts receivable, net of allowance
for doubtful accounts of $1,256,137
in 1999 and $533,615 in 1998 10,106,808 9,738,934
Prepaid expenses 778,016 502,656
- - -----------------------------------------------------------------------------
Total current assets 32,054,003 18,796,795
Equipment and leasehold improvements:
Computer hardware and software 6,246,910 5,420,970
Office equipment 2,208,819 2,330,061
Leasehold improvements 852,767 871,541
- - -----------------------------------------------------------------------------
9,308,496 8,622,572
Less accumulated depreciation and amortization 5,799,367 4,532,967
- - -----------------------------------------------------------------------------
Total equipment and leasehold improvements 3,509,129 4,089,605
Purchased software and capitalized
software development costs - 1,024,980
Intangible assets, net of accumulated
amortization of $53,855 in 1998 - 559,145
Goodwill, net of accumulated
amortization of $43,567 in 1998 - 1,086,406
- - -----------------------------------------------------------------------------
Total assets $35,563,132 $25,556,931
- - -----------------------------------------------------------------------------
</TABLE>
1999 Annual Report - Page 24
<PAGE>
<TABLE>
<CAPTION>
December 31, 1999 1998
- - -----------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,236,886 $ 1,743,990
Income taxes payable - 100,000
Accrued liabilities 2,528,806 2,235,276
Deferred software license fees 969,369 342,345
Deferred services and post-contract
customer support 5,597,600 4,457,140
Current portion of long-term debt (Note 4) 333,702 388,074
- - -----------------------------------------------------------------------------
Total current liabilities 11,666,363 9,266,825
Long-term debt (Note 4) 181,225 411,531
Deferred services and post-contract
customer support 168,813 190,052
Deferred rent (Note 4) 265,621 285,153
- - -----------------------------------------------------------------------------
Total noncurrent liabilities 615,659 886,736
Commitments and contingencies (Notes 4 and 11)
Shareholders' 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 s
authorized; shares issued: 8,939,264 in 1999
and 8,767,373 in 1998 893,926 876,737
Additional paid-in capital 42,609,592 32,743,264
Accumulated deficit (15,458,834) (9,845,503)
Treasury stock, at cost-1,063,263 shares of
common stock in 1999 and 1,822,748 shares
of common stock in 1998 (4,763,574) (8,371,128)
- - -----------------------------------------------------------------------------
Total shareholders' equity 23,281,110 15,403,370
- - -----------------------------------------------------------------------------
Total liabilities and shareholders' equity $35,563,132 $25,556,931
- - -----------------------------------------------------------------------------
</TABLE>
See accompanying notes.
1999 Annual Report - Page 25
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Accumulated
Shares Dollars Capital Deficit
- - -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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)
Sale of common stock
(Note 5) - - 8,770,815 -
Stock options exercised 171,891 17,189 754,089 -
Compensation expense
on stock options - - 341,424 -
Net loss - - - (5,613,331)
- - -----------------------------------------------------------------------------
Balances at December 31, 1999 8,939,264 $893,926 $42,609,592 $(15,458,834)
- - -----------------------------------------------------------------------------
</TABLE>
See accompanying notes.
1999 Annual Report - Page 26
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (continued)
<TABLE>
<CAPTION>
Common
Stock to be
Treasury Redeemed
Stock for Treasury Total
- - -----------------------------------------------------------------------------
<S> <C> <C> <C>
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
Sale of common stock
(Note 5) 3,607,554 - 12,378,369
Stock options exercised - - 771,278
Compensation expense
on stock options - - 341,424
Net loss - - (5,613,331)
- - -----------------------------------------------------------------------------
Balances at December 31, 1999 $(4,763,574) $ - $23,281,110
- - -----------------------------------------------------------------------------
</TABLE>
See accompanying notes.
1999 Annual Report - Page 26 (continued)
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31, 1999 1998 1997
- - -----------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (5,613,331) $ 3,079,999 $ (4,199,294)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and amortization 1,660,703 1,351,947 1,161,845
Compensation expense on
stock options 341,424 25,338 29,216
Loss on disposal of equipment and
leasehold improvements 87,436 - 27,175
Provision for restructuring and
other charges 3,587,665 - -
Changes in operating assets and
liabilities, net of acquisition:
Accounts receivable (392,491) (1,552,134) (2,129,338)
Prepaid expenses (284,000) 85,149 (170,991)
Accounts payable 492,896 (395,422) 877,156
Income taxes (100,000) 100,000 212,642
Accrued liabilities (197,014) 119,692 (351,920)
Deferred software license fees 627,024 690,770 (360,878)
Deferred services and post-
contract customer support 1,119,221 1,558,319 1,745,543
Deferred rent (19,532) (19,532) (19,532)
- - -----------------------------------------------------------------------------
Total adjustments 6,923,332 1,964,127 1,020,918
- - -----------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 1,310,001 5,044,126 (3,178,376)
INVESTING ACTIVITIES
Capital expenditures (837,446) (504,951) (769,886)
Capitalized software development costs (566,119) (301,980) -
- - -----------------------------------------------------------------------------
Net cash used in investing activities (1,403,565) (806,931) (769,886)
FINANCING ACTIVITIES
Payments on long-term debt (442,109) (273,027) (63,733)
Proceeds from exercise of stock options 771,278 334,793 20,027
Proceeds from sale of common stock 12,378,369 - -
Purchase of common stock for treasury - - (1,073,239)
- - -----------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 12,707,538 61,766 (1,116,945)
- - -----------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents 12,613,974 4,298,961 (5,065,207)
Cash and cash equivalents at
beginning of year 8,555,205 4,256,244 9,321,451
- - -----------------------------------------------------------------------------
Cash and cash equivalents at
end of year $21,169,179 $ 8,555,205 $ 4,256,244
Supplemental disclosure:
Cash paid for interest $ 63,057 $ 54,313 $ 33,062
Cash paid (received) for income taxes 74,950 - (286,697)
- - -----------------------------------------------------------------------------
</TABLE>
Noncash investing and financing activities:
During 1999 and 1998, the Company acquired $157,431 and
$388,017, 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 value of
$1,966,584 for the acquisition of Kearney Systems, Inc.
See accompanying notes.
1999 Annual Report - Page 27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
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
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 commercial paper.
The cost of these securities, which are considered as "available
for sale" for financial reporting purposes, approximates fair
value at both December 31, 1999 and 1998. There were no
realized gains or losses during any of the three years in the
period ended December 31, 1999.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are recorded at cost and
are depreciated on the straight-line basis over their estimated
useful lives as follows: computer hardware and software-5 years;
office equipment-7 years; and leasehold improvements-10 years.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
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
product focuses on enhancing the features and functionality of
the existing core software and a working model of the
enhancement 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 $566,119 and $301,980 in 1999 and 1998,
respectively. The NT-based product was discontinued in 1999 and
all amounts previously capitalized were written off (see Note
10).
1999 Annual Report - Page 28
<PAGE>
REVENUE RECOGNITION
The Company derives revenue from software license fees, services
and post-contract customer support (PCS), 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
For software license fees with insignificant modifications, the
Company recognizes that portion of the revenue allocable to
software licenses and specified upgrades upon delivery of the
software product or upgrade to the end user, provided that the
fee is considered collectable. For software licenses with
significant modifications, the Company recognizes the revenue
allocable to the software licenses on a percentage of completion
method with progress to completion measured based upon labor
time expended.
POST-CONTRACT CUSTOMER SUPPORT (PCS)
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 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 an
individual modification of the software itself, an evaluation is
made to determine if the modification will take more than 50
person-days of work. If the work will exceed 50 days of effort,
revenue is recognized using contract accounting. When the work
is estimated to be fewer than 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 shipped
by the hardware vendor.
CONTRACT ACCOUNTING
For arrangements that include significant customization or
modification of the software, revenue is recognized using
contract accounting. Revenue from these software arrangements
is recognized on a percentage-of-completion basis 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 are reserves
for project cost overruns of $610,000 and $700,000 at December
31, 1999 and 1998, respectively.
ADVERTISING
Advertising costs are expensed as incurred and amounted to
approximately $739,000, $363,000, and $267,000 in 1999, 1998,
and 1997, 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.
1999 Annual Report - Page 29
<PAGE>
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:
<TABLE>
1999 1998 1997
- - -----------------------------------------------------------------------------
<S> <C> <C> <C>
Denominator for basic earnings per share -
weighted average shares outstanding 7,288,157 6,786,728 6,630,200
Effect of dilutive options and warrants - 596,159 -
- - -----------------------------------------------------------------------------
Denominator for diluted earnings per share 7,288,157 7,382,887 6,630,200
- - -----------------------------------------------------------------------------
Options that could potentially dilute earnings
per share in the future that are not included
in the computation of diluted loss per share
as their impact is antidilutive 653,203 N/A N/A
- - -----------------------------------------------------------------------------
</TABLE>
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB)
issued Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which was amended by Statement No. 137.
The provisions of these standards are required to be adopted in
years beginning after June 15, 2000. Because of the Company's
minimal use of derivatives, management does not anticipate that
the adoption of the Statement will have a significant effect on
the results of operations or on the financial position of the
Company.
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. In September 1999, the Company discontinued
development of its Windows NT-based product (see Note 10).
3. BANK LINE OF CREDIT
The Company has a $5,000,000 bank line of credit. The line of
credit, which is due on demand, requires monthly interest
payments at rates tied to the prime rate or LIBOR and is secured
by substantially all of the Company's assets. The line of credit
agreement requires the Company to maintain a ratio of debt to
tangible net worth of less than 1.50 to 1.00. No amounts were
outstanding under the line of credit at December 31, 1999 or
1998.
4. LONG-TERM DEBT AND LEASE COMMITMENTS
<TABLE>
Long-term debt consisted of the following at December 31:
1999 1998
- - -----------------------------------------------------------------------------
<S> <C> <C>
Capital lease obligations $ 514,927 $ 799,605
Less current portion (333,702) (388,074)
- - -----------------------------------------------------------------------------
$ 181,225 $ 411,531
- - -----------------------------------------------------------------------------
</TABLE>
1999 Annual Report - Page 30
<PAGE>
The Company leases computer equipment and a telephone system
under capital leases requiring monthly payments in varying
amounts through April 2004 with effective interest rates ranging
from 7.5% to 10.5%. At December 31, 1999, the gross amount of
office equipment recorded under capital leases and related
accumulated amortization was approximately $1,270,000 and
$572,000, 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, 1999, future payments under capital and
operating leases with remaining terms in excess of one year were
as follows:
<TABLE>
Capital Leases Operating Leases
- - -----------------------------------------------------------------------------
<S> <C> <C>
2000 $ 364,554 $ 618,000
2001 156,966 616,000
2002 20,256 613,000
2003 12,413 559,000
2004 4,541 504,000
Thereafter - 583,000
- - -----------------------------------------------------------------------------
Total minimum lease obligations 558,730 $ 3,493,000
Amounts representing interest (43,803)
- - -----------------------------------------------------------------------------
Capital lease obligation $ 514,927
- - -----------------------------------------------------------------------------
</TABLE>
Total rent expense, including executory costs, on all operating
leases was approximately $1,148,000, $1,150,000 and $1,310,000,
in 1999, 1998 and 1997, respectively.
5. SHAREHOLDERS' EQUITY
In September 1999, the Company sold 759,485 shares of its common
stock to SAP America, Inc. (SAP) for $12,378,369, net of
issuance costs of $532,876. In addition, the Company and SAP AG
(the parent company of SAP) entered into a Strategic Alliance
Agreement to integrate the Company's warehouse management system
with software systems already sold by SAP, and form a support
center to help customers implement the Company's software and
SAP's Logistics Execution Solution Software.
In January 1997, the Company repurchased 225,945 shares of the
Company's stock held by its former president and chief executive
officer at $4.75 per share.
6. STOCK OPTIONS AND WARRANTS
The 1993 Stock Option Plan, 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.
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 on the effective date of the
Director Plan and is entitled to be granted options to purchase
5,000 shares of common stock on each anniversary of the
1999 Annual Report - Page 31
<PAGE>
Director 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, 1999:
<TABLE>
Weighted Number
Number of Average Option of Options
Options Price per Share Exercisable
- - -----------------------------------------------------------------------------
<S> <C> <C> <C>
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 3.28 309,865
Granted 401,355 8.55
Exercised (145,344) 2.30
Canceled (131,045) 4.06
- - -----------------------------------------------------------------------------
Outstanding at December 31, 1998 1,805,097 4.47 770,142
Granted 547,086 11.82
Exercised (171,891) 4.49
Canceled (126,915) 8.62
- - -----------------------------------------------------------------------------
Outstanding at December 31, 1999 2,053,377 $ 6.18 967,312
- - -----------------------------------------------------------------------------
</TABLE>
At December 31, 1999, 531,612 options were available for grant
under the Employee and Director Plans. As of December 31, 1999,
the range of exercise prices on outstanding options is as
follows:
<TABLE>
Weighted Number
Number of Average of Options
Options Exercise Price Exercisable
- - -----------------------------------------------------------------------------
<S> <C> <C> <C>
Price range $0.10 to $3.50,
weighted average contractual
life of 6.89 years 1,046,964 $ 3.00 725,838
Price range $3.88 to $8.50,
weighted average contractual
life of 8.68 years 629,244 $ 6.82 198,922
Price range $10.00 to $13.94,
weighted average contractual
life of 9.08 years 250,277 $13.09 41,910
Price range $14.00 to $17.88,
weighted average contractual
life of 9.44 years 126,892 $15.62 642
- - -----------------------------------------------------------------------------
</TABLE>
The Company has an outstanding warrant for the purchase of
10,000 shares of its common stock at $3.50 per share, the market
price of the underlying stock as of the modification date in
1997. The term was extended to ten 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
2,594,989 shares of common stock at December 31, 1999, to
provide for the exercise of outstanding stock options and
warrants and the granting of stock options.
1999 Annual Report - Page 32
<PAGE>
As permitted by Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (Statement No.
123), 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 as set forth in
Statement No. 123, 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>
1999 1998 1997
- - -----------------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net income (loss) $ (6,518,779) $ 2,340,594 $ (4,395,991)
Pro forma income (loss) per share $ (0.89) $ 0.32 $ (0.66)
- - -----------------------------------------------------------------------------
</TABLE>
The weighted average grant date fair values used in the above
pro forma disclosures were $9.99, $7.55, and $1.99 per share for
1999, 1998, and 1997 option grants, respectively. It should be
noted that the effects of applying Statement No. 123 for
providing pro forma disclosure may not be indicative of future
amounts until the new rules are applied to all outstanding
nonvested awards.
As required by Statement 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 Statement 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 for 1999, 1998,
and 1997, respectively: risk-free interest rates of 5.9%, 5.5%,
and 5.4%; dividend yields of 0%; expected common stock market
price volatility factors of 0.94, 0.87, and 0.53, and a weighted
average expected life of the options 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 $293,000, $219,000, and $69,000 in 1999, 1998, and
1997, respectively.
8. INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
Years ended December 31, 1999 1998 1997
- - -----------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ - $ 38,000 $ -
State - 30,000 -
Foreign - 32,000 -
- - -----------------------------------------------------------------------------
- 100,000 -
Deferred 2,554,000 (735,000) 1,814,000
Change in valuation allowance (2,554,000) 735,000 (1,814,000)
- - -----------------------------------------------------------------------------
$ - $ 100,000 $ -
- - -----------------------------------------------------------------------------
</TABLE>
1999 Annual Report - Page 33
<PAGE>
The provision for income taxes differs from the statutory U.S.
federal income tax rate due to the following:
<TABLE>
Years ended December 31, 1999 1998 1997
- - -----------------------------------------------------------------------------
<S> <C> <C> <C>
Provision (benefit) at U.S.
statutory rate $ (1,908,000) $ 1,081,000 $ (1,428,000)
State income taxes, net of
federal tax - 30,000 -
State effect of change in
deferred tax assets (216,000) - (208,000)
Foreign income taxes - 32,000 -
General business credits (478,000) (329,000) (54,000)
Change in valuation allowance 2,554,000 (735,000) 1,814,000
Permanent differences, net 48,000 21,000 (124,000)
- - -----------------------------------------------------------------------------
$ - $ 100,000 $ -
- - -----------------------------------------------------------------------------
</TABLE>
At December 31, 1999, the Company had net operating loss
carryforwards of approximately $12,273,000 and $10,240,000 for
federal and state income tax purposes, respectively, which
expire between 2008 and 2019. Of these net operating loss
carryforwards, $4,456,000 were created by deductions from the
exercise of nonqualified stock options from 1995 through 1999.
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, 1999, the Company had general business credit carryforwards
of $983,000 and $384,000 for federal and state income tax
purposes, respectively, which expire from 2006 through 2019. At
December 31, 1999, the Company had $96,000 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>
Years ended December 31, 1999 1998
- - -----------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
AMT and general business credits $ 1,463,000 $ 985,000
Net operating loss carryforwards 4,706,000 3,051,000
Deferred revenues and accrued project costs 387,000 404,000
Allowance for doubtful accounts 489,000 208,000
Deferred rent 103,000 111,000
Accrued compensation 68,000 72,000
Other 43,000 8,000
- - -----------------------------------------------------------------------------
7,259,000 4,839,000
Deferred tax liabilities:
Depreciation (302,000) (312,000)
Capitalized software costs - (118,000)
Other - (6,000)
- - -----------------------------------------------------------------------------
(302,000) (436,000)
- - -----------------------------------------------------------------------------
Net deferred tax assets 6,957,000 4,403,000
Valuation allowance (6,957,000) (4,403,000)
- - -----------------------------------------------------------------------------
$ - $ -
- - -----------------------------------------------------------------------------
</TABLE>
The valuation allowance at December 31, 1999 and 1998 was
provided because of uncertainty based on the Company's
historical operating results, with respect to realization of
deferred tax assets.
1999 Annual Report - Page 34
<PAGE>
9. SEGMENT DISCLOSURE AND MAJOR CUSTOMERS
The Company operates in one industry segment. Sales to one
customer in the year ended December 31, 1999, totaled 10% of
revenues. There were no sales to individual customers that
exceeded 10% of revenues in the years ended December 31, 1998 or
1997.
International revenues accounted for 19% of total revenues in
1999, 1998, and 1997. Revenues by geographic area for the years
ended December 31, 1999, 1998, and 1997, were as follows:
<TABLE>
Years ended December 31, 1999 1998 1997
- - -----------------------------------------------------------------------------
<S> <C> <C> <C>
United States $32,988,868 $27,376,159 $18,337,385
United Kingdom 2,580,679 2,252,045 3,093,201
Canada 1,276,174 2,041,276 *
Holland 1,834,100 1,024,019 *
Countries which did not
exceed $1 million 1,880,339 1,219,102 1,094,542
- - -----------------------------------------------------------------------------
$40,560,160 $33,912,601 $22,525,128
- - -----------------------------------------------------------------------------
*Revenues did not exceed $1 million.
10. RESTRUCTURING AND OTHER CHARGES
During the third quarter of 1999, the Company initiated a
restructuring plan to discontinue development of its Windows NT-
based product and close its Orlando, Florida office. The
restructuring plan was put in place due to the Strategic
Alliance Agreement with SAP AG (see Note 5). Because of
the Strategic Alliance Agreement, the Company made significant
management changes and plans to further expand its marketing
efforts to increase exposure of its UNIX WMS products and
services.
Restructuring charges during the year ended December 31, 1999,
amounted to $3,587,665 and included severance payments made to
seven employees ($325,000); office and equipment lease
cancellations ($25,000); write-off of intangible assets,
including purchased software and capitalized software
development costs, assembled workforce, customer list and
goodwill ($3,190,000); and other miscellaneous expenses
($48,000). All amounts were disbursed in the year ended
December 31, 1999.
11. CONTINGENCIES
On October 8, 1999, a former customer (the Claimant) instituted
an arbitration proceeding against the Company with the American
Arbitration Association in Milwaukee, Wisconsin. The Claimant
is seeking to revoke its 1998 acceptance of the Company's
software product and alleges that the Company breached its
warranty obligations. The Claimant seeks relief in the form of
monetary damages totaling approximately $1.9 million. The
Company believes that the allegations of the Claimant are
Without merit and intends to vigorously defend against them.
The potential outcome of this legal proceeding cannot be
determined at this time and accordingly, no estimate for
potential settlement and arbitration costs have been included in
the accompanying financial statements.
The Company guarantees borrowings under a bank line of credit in
the amount of $600,000 for an officer of the Company.
1999 Annual Report - Page 35
<PAGE>
</TABLE>
EXHIBIT 21
SUBSIDIARIES
Name: Catalyst WMS International, Limited
Jurisdiction of Incorporation: United Kingdom
Status: Active and in Good Standing
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITOR'S CONSENT
Catalyst International, Inc.
We consent to the incorporation by reference in this Annual
Report on Form 10-K of Catalyst International, Inc. (the
Company) of our report dated January 28, 2000, included in the
1999 Annual Report to Shareholders of the Company.
Our audits also included the financial statement schedule of the
Company listed in item 14(a). This schedule is the
responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion,
the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
We also consent to the incorporation by reference in the
Registration Statements (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 28, 2000, with respect to the financial statements
incorporated herein by reference, and our report included in the
preceding paragraph with respect to the financial statement
schedule included in this Annual Report (Form 10-K) of the
Company.
/s/ Ernst & Young LLP
Milwaukee, Wisconsin
March 28, 2000
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 21169
<SECURITIES> 0
<RECEIVABLES> 10107
<ALLOWANCES> 1256
<INVENTORY> 0
<CURRENT-ASSETS> 32054
<PP&E> 9308
<DEPRECIATION> 5799
<TOTAL-ASSETS> 35563
<CURRENT-LIABILITIES> 11666
<BONDS> 0
0
0
<COMMON> 894
<OTHER-SE> 22387
<TOTAL-LIABILITY-AND-EQUITY> 35563
<SALES> 40560
<TOTAL-REVENUES> 40560
<CGS> 21787
<TOTAL-COSTS> 46746
<OTHER-EXPENSES> (573)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 63
<INCOME-PRETAX> (5613)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5613)
<EPS-BASIC> (.77)
<EPS-DILUTED> (.77)
</TABLE>
