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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
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) 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes / / No /X/
As of August 11, 2003, 7,830,095 shares of the registrant’s common stock were outstanding.
CATALYST INTERNATIONAL, INC.
FORM 10-Q
For The Quarterly Period Ended June 30, 2003
INDEX
Page No.
PART I – FINANCIAL INFORMATION
Item 1.
Consolidated Financial Statements
3
Consolidated Balance Sheets – June 30, 2003 and December 31, 2002
3
Consolidated Statements of Operations – Three months ended
June 30, 2003 and 2002
5
Consolidated Statements of Operations – Six months ended
June 30, 2003 and 2002
6
Consolidated Statements of Cash Flows – Six months ended
June 30, 2003 and 2002
7
Notes to Consolidated Financial Statements
8
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
9
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
16
Item 4.
Controls and Procedures
16
PART II – OTHER INFORMATION
Item 1.
Legal Proceedings
17
Item 4.
Submission of Matters to a Vote of Securities Holders
17
Item 6.
Exhibits and Reports on Form 8-K
17
Signatures
18
PART I – FINANCIAL INFORMATION
Item 1.
Consolidated Financial Statements
CATALYST INTERNATIONAL, INC.
Consolidated Balance Sheets
(in thousands, except share and per share data)
(unaudited)
June 30,
December 31,
2003
2002
Assets
Current Assets:
Cash and cash equivalents
$ 3,868
$ 3,005
Accounts receivable
3,447
9,214
Revenue in excess of billings
205
--
Prepaid expenses and other
709
508
Total Current Assets
8,229
12,727
Equipment and Leasehold Improvements:
Computer hardware and software
7,378
7,223
Office equipment
2,386
2,380
Leasehold improvements
888
981
10,652
10,584
Less accumulated depreciation
(8,959)
(8,518)
Total Equipment and Leasehold Improvements
1,693
2,066
Capitalized software development costs, net of
accumulated amortization of $1,682 in 2003 and $1,104
in 2002
1,784
2,362
Intangible assets, net of accumulated
amortization of $464 in 2003 and $308 in 2002
730
881
Total Assets
$12,436
$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)
June 30,
December 31,
2003
2002
Liabilities and Shareholders’ Equity (Deficit)
Current Liabilities:
Accounts payable
$ 2,752
$ 3,617
Accrued liabilities
1,995
1,678
Accrued legal and professional fees
1,041
1,143
Line of credit and note payable
1,600
602
Deferred revenues
7,472
10,051
Current portion of capital lease obligations
—
28
Total Current Liabilities
14,860
17,119
Noncurrent Liabilities:
Capital lease obligations
—
2
Deferred revenues
34
34
Deferred rent
82
102
Total Noncurrent Liabilities
116
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: 9,248,095 in 2003 and 9,214,911 in 2002
925
922
Additional paid-in capital
43,693
43,690
Accumulated deficit
(41,364)
(38,039)
Treasury stock, at cost — 1,420,275 shares of
common stock in 2003 and 2002
(5,794)
(5,794)
Total Shareholders’ Equity (Deficit)
(2,540)
779
Total Liabilities and Shareholders’ Equity (Deficit)
$12,436
$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 Statements of Operations
(in thousands, except per share data)
(unaudited)
Three Months Ended June 30,
2003
2002
Revenues:
Software
$ 1,174
$ 1,151
Services and post-contract customer support
4,760
5,650
Hardware
796
1,889
Total Revenues
6,730
8,690
Cost of Revenues:
Cost of software
256
511
Cost of services and post-contract customer support
2,660
3,680
Cost of hardware
711
1,486
Total Cost of Revenues
3,627
5,677
Gross Margin
3,103
3,013
Operating Expenses:
Product development
828
1,018
Sales and marketing
2,085
2,392
General and administrative
1,139
1,094
Separation costs
469
210
Total Operating Expenses
4,521
4,714
Loss From Operations
(1,418)
(1,701)
Other Income (Expense):
Interest expense
(29)
(3)
Investment income
7
26
Miscellaneous, net
(15)
22
Total Other Income (Expense), Net
(37)
45
Net Loss
($ 1,455)
($ 1,656)
Basic and diluted loss per share
($0.19)
($ 0.21)
Shares used in computing net loss per share
7,816
7,795
See accompanying notes.
CATALYST INTERNATIONAL, INC.
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
Six Months Ended June 30,
2003
2002
Revenues:
Software
$ 1,626
$ 2,300
Services and post-contract customer support
9,496
11,051
Hardware
1,888
3,507
Total Revenues
13,010
16,858
Cost of Revenues:
Cost of software
674
693
Cost of services and post-contract customer support
5,463
7,375
Cost of hardware
1,484
2,916
Total Cost of Revenues
7,621
10,984
Gross Margin
5,389
5,874
Operating Expenses:
Product development
1,866
2,345
Sales and marketing
4,204
4,451
General and administrative
2,165
2,095
Separation costs
469
403
Total Operating Expenses
8,704
9,294
Loss From Operations
(3,315)
(3,420)
Other Income (Expense):
Interest expense
(37)
(6)
Investment income
15
51
Miscellaneous, net
12
(8)
Total Other Income (Expense), Net
(10)
37
Net Loss
($ 3,325)
($ 3,383)
Basic and diluted loss per share
($0.43)
($ 0.43)
Shares used in computing net loss per share
7,806
7,795
See accompanying notes.
CATALYST INTERNATIONAL, INC.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Six Months Ended June 30,
2003
2002
Operating Activities:
Net loss
$ (3,325)
$ (3,383)
Adjustments to reconcile net loss to net
cash provided by/(used in) operating activities:
Depreciation
575
649
Amortization
729
771
Compensation expense on stock options
2
2
Loss on disposal of equipment
and leasehold improvements
1
31
Changes in operating assets and liabilities:
Accounts receivable
5,767
3,718
Prepaid expenses and other
(201)
(846)
Accounts payable
(865)
20
Accrued liabilities
215
136
Deferred revenues and revenue in excess of billings
(2,784)
(1,653)
Deferred rent
(20)
(25)
Total adjustments
3,419
2,803
Net cash provided by/(used in) operating activities
94
(580)
Investing Activities:
Capital expenditures
(203)
(117)
Capitalized software development costs
—
(920)
Purchase of licensed technology
—
(180)
Proceeds from sale of equipment
—
1
Net cash used in investing activities
(203)
(1,216)
Financing Activities:
Payments on capital lease obligations
(30)
(62)
Proceeds from exercise of options
4
—
Borrowings on line of credit and note payable, net
998
—
Net cash provided by/(used in) financing activities
972
(62)
Net increase/(decrease) in cash and cash equivalents
863
(1,858)
Cash and cash equivalents at beginning of period
3,005
7,906
Cash and cash equivalents at end of period
$ 3,868
$ 6,048
Supplemental Disclosure:
Cash paid for interest
37
6
See accompanying notes.
CATALYST INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
June 30, 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 six-month period ended June 30, 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 th e 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.
(in thousands)
For the
For the
Three Months
Six Months
Ended June 30,
Ended June 30,
2003
2002
2003
2002
DENOMINATOR
Denominator for basic loss per share –
weighted average common shares
7,816
7,795
7,806
7,795
Effect of dilutive securities – stock
options and warrants
—
—
—
—
Denominator for diluted loss per share
7,816
7,795
7,806
7,795
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):
Six Months ended June 30,
2003
2002
Net loss:
As reported
$(3,325)
$(3,383)
Stock-based employee compensation
expense determined under fair value based method
(331)
(569)
Compensation expense on stock options as reported
2
2
Pro forma
$(3,654)
$(3,950)
Net loss per share:
As reported, basic
$(0.43)
$(0.43)
Pro forma, basic
(0.47)
(0.51)
As reported, diluted
(0.43)
(0.43)
Pro forma, diluted
(0.47)
(0.51)
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.
5. Subsequent event
Effective July 1st, 2003, Catalyst completed the asset purchase of Catalyst Consulting Services, Inc., a leading independent provider of consulting, implementation and support services for the SAP Logistics execution System (SAP LES). The purchase price, subject to adjustments, was $2,018,640 of which $600,000 was paid upon the closing of the transaction. The balance will be paid in installments as follows; $218,640 within 75 days of the closing, $600,000 on March 31, 2004 and $600,000 on March 31,2005. Approximately $1,200,000 of net working capital was acquired in this asset purchase.
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
This document contains “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 Exhi bit 99.1 of Catalyst’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002, which is incorporated herein by reference. The Company is under no obligation to (and expressly disclaims any such obligation to) update or alter its forward-looki