CATALYST INTERNATIONAL INC - 10-Q Quarterly Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________________________________

FORM 10-Q

/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2003

/ / 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

[form10q0503001.gif]

CATALYST INTERNATIONAL, INC.

Delaware

39-1415889

(State of Incorporation)

(I.R.S. ID)

8989 North Deerwood Drive, Milwaukee, Wisconsin 53223

(414) 362-6800

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / /

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes / / No /X/

As of May 13, 2003, 7,806,570 shares of the registrant’s common stock were outstanding.

CATALYST INTERNATIONAL, INC.

FORM 10-Q

For The Quarterly Period Ended March 31, 2003

INDEX

Page No.

PART I – FINANCIAL INFORMATION

Item 1.

Consolidated Financial Statements

Consolidated Balance Sheets – March 31, 2003 and December 31, 2002

Consolidated Statements of Operations – Three months ended

March 31, 2003 and 2002

Consolidated Statements of Cash Flows – Three months ended

March 31, 2003 and 2002

Notes to Consolidated Financial Statements

Item 2.

Management's Discussion and Analysis of Financial Condition and

Results of Operations

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Item 4.

Controls and Procedures

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

Item 6.

Exhibits and Reports on Form 8-K

Signatures

PART I – FINANCIAL INFORMATION

Item 1.

Consolidated Financial Statements

CATALYST INTERNATIONAL, INC.

Consolidated Balance Sheets

(in thousands, except share and per share data)

(unaudited)

________________________________________________________________________________________________________________________________

March 31,

December 31,

2003

2002

________________________________________________________________________________________________________________________________

Assets

Current Assets:

Cash and cash equivalents

$ 3,922

$ 3,005

Accounts receivable

5,096

9,214

Prepaid expenses and other

626

508

_________________________________________________________________________________________________________________________________

Total Current Assets

9,644

12,727

_________________________________________________________________________________________________________________________________

Equipment and Leasehold Improvements:

Computer hardware and software

7,223

Office equipment

2,377

2,380

Leasehold improvements

878

981

_________________________________________________________________________________________________________________________________

10,478

10,584

Less accumulated depreciation

(8,648)

(8,518)

___________________________________________________________________________________________________________________________________

Total Equipment and Leasehold Improvements

1,830

2,066

___________________________________________________________________________________________________________________________________

Capitalized software development costs, net of

accumulated amortization of $1,393 in 2003 and $1,104

in 2002

2,073

2,362

Intangible assets, net of accumulated

amortization of $387 in 2003 and $308 in 2002

802

881

___________________________________________________________________________________________________________________________________

Total Assets

$14,349

$18,036

====================================================================================================================

See accompanying notes.

Note: The balance sheet at December 31, 2002 has been derived from the audited balance sheet at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

CATALYST INTERNATIONAL, INC.

Consolidated Balance Sheets

(in thousands, except share and per share data)

(unaudited)

___________________________________________________________________________________________________________________________________

March 31,

December 31,

2003

2002

___________________________________________________________________________________________________________________________________

Liabilities and Shareholders’ Equity (Deficit)

Current Liabilities:

Accounts payable

$ 2,662

$ 3,617

Accrued liabilities

1,617

1,678

Accrued legal and professional fees

1,048

1,143

Line of Credit

1,600

602

Deferred revenues

8,380

10,051

Current portion of capital lease obligations

___________________________________________________________________________________________________________________________________

Total Current Liabilities

15,313

17,119

___________________________________________________________________________________________________________________________________

Noncurrent Liabilities:

Capital lease obligations

Deferred revenues

Deferred rent

102

___________________________________________________________________________________________________________________________________

Total Noncurrent Liabilities

126

138

Commitments and Contigencies (Note 4)

Shareholders’ Equity (Deficit):

Preferred stock, $0.01 par value; 2,000,000

shares authorized; none issued or outstanding

—

Common stock, $0.10 par value; 25,000,000 shares

authorized; shares issued: 9,218,078 in 2003 and 9,216,078 in 2002

922

Additional paid-in capital

43,691

43,690

Accumulated deficit

(39,909)

(38,039)

Treasury stock, at cost — 1,420,275 shares of

common stock in 2003 and 2002

(5,794)

___________________________________________________________________________________________________________________________________

Total Shareholders’ Equity (Deficit)

(1,090)

779

___________________________________________________________________________________________________________________________________

Total Liabilities and Shareholders’ Equity (Deficit)

$14,349

$18,036

=======================================================================================================================

See accompanying notes.

CATALYST INTERNATIONAL, INC.

Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

___________________________________________________________________________________________________________________________________

Three Months Ended March 31,

2003

2002

___________________________________________________________________________________________________________________________________

Revenues:

Software

$ 452

$ 1,149

Services and post-contract customer support

4,736

5,401

Hardware

1,092

1,618

___________________________________________________________________________________________________________________________________

Total Revenues

6,280

8,168

___________________________________________________________________________________________________________________________________

Cost of Revenues:

Cost of software

418

182

Cost of services and post-contract customer support

2,803

3,695

Cost of hardware

773

1,430

___________________________________________________________________________________________________________________________________

Total Cost of Revenues

3,994

5,307

___________________________________________________________________________________________________________________________________

Gross Margin

2,286

2,861

Operating Expenses:

Product development

1,038

1,327

Sales and marketing

2,119

2,059

General and administrative

1,026

1,001

Separation costs

—

193

___________________________________________________________________________________________________________________________________

Total Operating Expenses

4,183

4,580

___________________________________________________________________________________________________________________________________

Loss From Operations

(1,897)

(1,719)

Other Income (Expense):

Interest expense

(8)

(3)

Investment income

Miscellaneous, net

(30)

___________________________________________________________________________________________________________________________________

Total Other Income (Expense), Net

(8)

___________________________________________________________________________________________________________________________________

Net Loss

($ 1,870)

($ 1,727)

====================================================================================================================

Basic and diluted loss per share

($0.24)

($ 0.22)

Shares used in computing net loss per share

7,796

7,794

See accompanying notes.

CATALYST INTERNATIONAL, INC.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

___________________________________________________________________________________________________________________________________

Three Months Ended March 31,

2003

2002

___________________________________________________________________________________________________________________________________

Operating Activities:

Net loss

$ (1,870)

$ (1,727)

Adjustments to reconcile net loss to net

cash provided by operating activities:

Depreciation

299

331

Amortization

368

373

Compensation expense on stock options

Loss on disposal of equipment

and leasehold improvements

Changes in operating assets and liabilities:

Accounts receivable

4,118

909

Prepaid expenses and other

(118)

(659)

Accounts payable

(955)

1,075

Accrued liabilities

(156)

(96)

Deferred revenues

(1,671)

(135)

Deferred rent

(12)

___________________________________________________________________________________________________________________________________

Total adjustments

1,875

1,800

___________________________________________________________________________________________________________________________________

Net cash provided by operating activities

Investing Activities:

Capital expenditures

(64)

(56)

Capitalized software development costs

—

(483)

Purchase of licensed technology

—

(167)

___________________________________________________________________________________________________________________________________

Net cash used in investing activities

(64)

(706)

Financing Activities:

Payments on capital lease obligations

(22)

(35)

Borrowings on line of credit, net

998

—

___________________________________________________________________________________________________________________________________

Net cash provided by/(used in) financing activities

976

(35)

___________________________________________________________________________________________________________________________________

Net increase/(decrease) in cash and cash equivalents

917

(668)

Cash and cash equivalents at beginning of period

3,005

7,906

___________________________________________________________________________________________________________________________________

Cash and cash equivalents at end of period

$ 3,922

$ 7,238

=======================================================================================================================

Supplemental Disclosure:

Cash paid for interest

See accompanying notes.

CATALYST INTERNATIONAL, INC.

Notes to Consolidated Financial Statements

March 31, 2003

(Unaudited)

1. Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for fiscal year end financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. For further information, refer to the financial statements and footnotes thereto included in the Catalyst International, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 2002.

2. Net Loss Per Share of Common Stock

Catalyst International, Inc. (“Catalyst” or “we” or “our”) has presented net loss per share in accordance with Statement of Financial Accounting Standards (SFAS) No. 128, “Earnings Per Share.” The following table sets forth the computation of basic and diluted weighted average shares used in the per share calculations. The numerator for the calculation of basic and diluted loss per share is net loss in each period.

___________________________________________________________________________________________________________________________________

Three Months Ended March 31,

2003

2002

(in thousands)

___________________________________________________________________________________________________________________________________

DENOMINATOR

Denominator for basic loss per share –

weighted average common shares

7,796

7,794

Effect of dilutive securities – stock

options and warrants

------

___________________________________________________________________________________________________________________________________

Denominator for diluted loss per share

7,796

7,794

====================================================================================================================

3. Stock-Based Compensation

Catalyst has stock-based employee compensation plans. Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. Catalyst has chosen to continue using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, in accounting for its stock option plans.

Had compensation cost been determined based upon the fair value at the grant date for awards under the plans based on the provisions of SFAS No. 123, the Company’s pro forma net loss and net loss per share would have been as follows (in thousands, except per share data):

___________________________________________________________________________________________________________________________________

Three Months ended March 31,

2003

2002

___________________________________________________________________________________________________________________________________

Net loss:

As reported

$(1,870)

$(1,727)

Stock-based employee compensation

expense determined under fair value based method

(214)

(328)

___________________________________________________________________________________________________________________________________

Pro forma

$(2,084)

$(2,055)

Net loss per share:

As reported, basic

$(0.24)

$(0.22)

Pro forma, basic

(0.27)

(0.26)

As reported, diluted

(0.24)

(0.22)

Pro forma, diluted

(0.27)

(0.26)

4. Contingencies

The Company has been involved in a dispute with a former customer. In January 2002, an arbitration panel issued an award in favor of the former customer for $800,000 plus 5% interest. The Company challenged the validity of the award on the basis that it was not issued by the arbitration panel in a timely manner consistent with the rules of arbitration.

On November 22, 2002, the District Court ruled in favor of Catalyst’s motion to vacate the arbitration award and denied the Claimant’s petition to confirm the award. The claimant appealed this decision to the 7th Circuit Court of Appeals. During 2002, the Company reduced its accrual for this matter by $525,000 as a result of management’s assessment of the probable liability relating to this matter.

Catalyst is involved in various other claims and legal matters of a routine nature which are being handled in the ordinary course of business. Although it is not possible to predict with certainty the outcome of these unresolved claims and legal matters or the range of possible loss or recovery, we believe that these unresolved claims and legal matters will not have a material effect on our financial position or results of operations.

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

The Securities and Exchange Commission encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed decisions. This document contains such “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “anticipate,” “estimate,” “intend,” “expect,” “believe” and words and terms of similar substance used in connection with any discussion of future operating or financial performance identify such forward-looking statements. These forward-looking statements are based on management’s present expectations about future events. As with any projection or forecast, they are inherently susceptible to uncertainty and changes in circumstances. Our actual results may differ materially from the results discussed in such forward-looking statements. Factors that may cause such a difference include, but are not limited to, the factors identified in Exhibit 99.1 of Catalyst’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002. The Company is under no obligation to (and expressly disclaims any such obligation to) update or alter its forward-looking statements whether as a result of such changes, new information, future events or otherwise.

CRITICAL ACCOUNTING POLICIES

___________________________________________________________________________________________________________________________________

Revenue Recognition

Catalyst derives revenue from the sale of software, services and post-contract customer support (PCS), and 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, Catalyst 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

For software with insignificant modifications, Catalyst recognizes that portion of the revenue allocable to software and specified upgrades upon delivery of the software product or upgrade to the end user, provided that it is considered collectible. For software with significant modifications, Catalyst recognizes the revenue allocable to the software on a percentage of completion method, with progress to completion measured based upon labor time expended.

Post-Contract Customer Support

Revenue allocable to PCS is recognized on a straight-line basis over the period the PCS is provided.

Services

Arrangements that include professional services are evaluated to determine whether those services are for modification of the software product or for the normal implementation of Catalyst software products. When professional services are considered part of the normal implementation process, revenue is recognized monthly as these services are invoiced. When professional services are for a modification of the software itself, an evaluation is made to determine if the modification requires more than 50 person-days of work. If the modification is estimated to exceed 50 days, revenue is recognized using contract accounting on a percentage completion method with progress to completion measured based upon labor time expended. When the modification is estimated to be fewer than 50 days, revenue is recognized as invoiced.

Hardware

Revenue on hardware is recognized when the hardware is shipped by the hardware vendor and title has transferred to the customer.

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. Catalyst reserves for project cost overruns when such overruns are identified. We recognize project cost overruns where we will exceed our budgeted number of days on a project. The overrun is based on a standard cost per day.

Allowance for Doubtful Accounts

We evaluate the collectibility of our accounts receivable based on a combination of factors. We recognize reserves for bad debts based on the length of time the receivables are past due ranging from 5% to 100% for amounts more than 120 days past due for which a corresponding deferred revenue does not exist. Specific customer reserves are based upon our assessment of deviations in historical payment trends, the age of the account, and ongoing communications with our customers by both the finance and sales departments. For amounts less than 120 days past due, a small percentage is typically reserved based upon our historical experience. If circumstances change (i.e., higher than expected defaults or an unexpected material adverse change in a major customer’s ability to meet its financial obligations), our estimates of the recoverability of amounts due us could be reduced by a material amount.

Legal Accruals

As discussed in Note 4 of our consolidated financial statements, as of March 31, 2003, we have accrued our best estimate of the probable cost for the resolution of a claim with a former customer. This estimate has been developed in consultation with outside counsel. To the extent additional information arises or our strategies change, it is possible that our best estimate of the probable liability in this matter may change.

Impairment Charges

We review our long-lived assets for impairment whenever events or circumstances occur which indicate that we may be unable to recover the recorded value of the affected long-lived assets.

REVENUE

___________________________________________________________________________________________________________________________________