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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
[ ] 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
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
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, 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act)
Yes [ ] No [X]
As of June 28, 2002, the aggregate market value of the registrant's common stock
held by non-affiliates was approximately $11,035,000 (based upon the closing
price of the registrant's common stock on that date).
As of March 24, 2003, the number of shares outstanding of the registrant's
common stock was 7,795,803.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders in
connection with the Annual Meeting of Shareholders to be held June 26, 2003 are
incorporated by reference into Part III.
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CATALYST INTERNATIONAL, INC.
FORM 10-K
For The Fiscal Year Ended December 31, 2002
INDEX
PART I............................................................................................................1
Item 1. Business..............................................................................................1
Item 2. Properties............................................................................................9
Item 3. Legal Proceedings.....................................................................................9
Item 4. Submission of Matters to a Vote of Security Holders..................................................10
PART II..........................................................................................................10
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................................10
Item 6. Selected Financial Data..............................................................................11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................12
Item 7A. Quantitative and Qualitative Disclosures about Market Risk...........................................17
Item 8. Financial Statements and Supplementary Data..........................................................18
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.................33
PART III.........................................................................................................33
Item 10. Directors and Executive Officers of the Registrant..................................................33
Item 11. Executive Compensation..............................................................................34
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters......34
Item 13. Certain Relationships and Related Transactions......................................................34
Item 14. Controls and Procedures.............................................................................34
PART IV..........................................................................................................34
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................34
SIGNATURES.......................................................................................................37
PART I
Forward-Looking Information/Risk Factors
Items 1, 2, 3, 5, 7 and 7A of this Form 10-K contain "forward-looking
statements," subject to protections under federal law. We intend words such as
"believes," "anticipates," "plans," "may," "will," "should," "expects" and
similar expressions to identify forward-looking statements. In addition,
statements regarding Catalyst's future revenues or financial performance and its
plans, objectives, vision, goals, expectations or intentions are forward-looking
statements, such as statements regarding Catalyst's liquidity; future
financings; software releases, upgrades and capabilities; future attainment of
corporate goals; and adequacy of capital resources and reserves. There are a
number of important factors that could cause Catalyst's results to differ
materially from those indicated by the forward-looking statements, including
among others, those risk factors described in Exhibit 99.1 attached to this 10-K
and incorporated herein by this reference. Forward-looking statements relate to
the date made, and Catalyst undertakes no obligation to update them.
Item 1. Business
GENERAL
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Company Background
Catalyst International, Inc. was founded in 1979 and incorporated in the State
of Delaware in 1982. Catalyst provides customer-driven software and services
that optimize supply chain performance. Catalyst offers an innovative suite of
supply chain execution (SCE) software products and services, called
CatalystComplete(TM), that help our customers implement, integrate, manage, and
operate fast, efficient supply chain networks.
Catalyst customizes SCE software products and services that add value to the
supply chain and minimize risks to mission-critica1 operations. We believe that
CatalystComplete benefits our customers by delivering both a return on
investment and a return on information. The return on investment is achieved
through enhanced operational efficiencies and improved capital utilization.
Catalyst software improves the operational efficiency of distribution centers by
increasing labor productivity through efficient employee scheduling, reduction
of downtime, and by streamlining product flow. The advanced features of our
software improve capital utilization by lowering inventory levels, increasing
inventory turns and warehouse efficiencies, and improving space utilization.
CatalystComplete also provides a return on information through improved customer
service, enhanced customer satisfaction, and shortened delivery times.
Catalyst's plan is to participate and grow within the consolidating SCE
marketplace. First, Catalyst plans to expand its product and services offering
to include additional components of SCE through both internal development and
through acquisition. Second, Catalyst plans to continue to add products and
services that supplement the SCE offerings of the major ERP (Enterprise Resource
Planning) companies, particularly SAP. Finally, Catalyst plans to expand its
customer base by combining with other SCE companies as part of the anticipated
industry consolidation.
Catalyst's website address is http://www.catalystwms.com. Our annual reports on
Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K are
all attainable, free of charge, on our website as soon as practicable after we
file the reports with the SEC. Information on our website is not part of this
report on Form 10-K.
Products and Technology
Catalyst's software products can be configured to meet the needs of individual
customers by utilizing the following key attributes:
o A standard warehouse management system (WMS) product that supports
both push and pull distribution models;
o A product roadmap designed to accommodate growth, provide ease of
upgrade, simplify modification, and conform to emerging standards;
o Standard interfaces to ERP systems, complementary supply chain
software solutions, automation technologies, and add-on third party
software products;
o A standard implementation methodology, and
o A value-driven support model.
CatalystCommand(TM)
Our flagship software product, CatalystCommand, manages inventory, space,
people, and equipment by controlling all aspects of warehouse operations, from
receiving and storing (putaway) to order selection (picking), loading, and
shipping. Complementary software products provide warehouse automation, add-on
warehouse functionality, supply chain collaboration, and supply chain
communication.
Catalyst's component-based architecture is easily integrated with all pieces in
a total SCE solution, including manufacturing resource planning and enterprise
resource planning (ERP) systems, such as SAP(TM) and Oracle(R); and supply chain
planning (SCP) and transportation management systems. CatalystCommand interfaces
with a wide range of automation technology interfaces, such as radio
frequency-based scanning and data collection devices, bar coding devices, and
material handling equipment (such as conveyors, sorters, and carousels).
CatalystCommand also interfaces with several add-on third party software
products that deliver specific functionality including shipping management,
warehouse optimization, and warehouse simulation.
Catalyst software operates in an open system environment allowing customers to
use various Unix(R) operating systems that work on multiple hardware platforms.
In the next few releases, Catalyst technology will become completely open with
regard to operating system platforms, databases, and user-interface devices.
CatalystCommand provides all the basic functions and benefits expected in WMS
software, plus the industry-specific features needed for effective supply chain
management in specific industries. While the CatalystCommand solution can be
applied cross-industry, we provide industry-specific features in the following
markets: motor vehicle/parts, retail, consumer goods, and process goods. We
continue to enhance our software with new releases and interim point releases
incorporating new core features and functionality as well as additional
components that allow our customers to facilitate competitiveness in their
industries.
CatalystCommand(TM) Release 9.0
CatalystCommand Release 9.0 became generally available in the second quarter of
2002. Release 9.0 significantly enhances CatalystCommand in four areas:
technology, material handling support, supply chain visibility, and WMS
functionality.
Technology - The Release 9.0 mid-tier is browser independent and runs our
application on a single Unix Server (logical mid-tier).
Material Handling Support - Release 9.0 supports a standard pick-to-light
interface. This module can be configured by zone and co-exist with other forms
of picking. Catalyst supports picking with three different user interfaces:
paper lists or labels, radio frequency, and pick-to-light.
Supply Chain Visibility - Release 9.0 introduced a full alerting and messaging
strategy to advise users of exception conditions within the warehouse and system
conditions that need to be addressed. Alerts are 100% user configurable and
outgoing messages can be sent to any SMTP device, including pagers, cellular
phones, hand-held devices, and email. Release 9.0 also provides the
functionality necessary to allow inventory control and order status checking via
the Internet.
WMS Functionality - Release 9.0 includes the security requirement necessary to
comply with 21 CFR Part 11 as mandated by the Federal Drug Administration (FDA).
This functionality lays the groundwork for the additional components including
record keeping/auditing and electronic signature, which are planned for release
in the coming versions of CatalystCommand. Release 9.0 also includes an optional
vendor quality management module that will significantly reduce receiving time
by eliminating detailed receipt checks for suppliers that have a proven record
of compliance without charge back. Release 9.0 has features to balance the
workload across those warehouses configured with multiple packing stations. The
vendor quality management component has an optional pre-shipment blind audit of
outbound shipping containers. The audit percentage can be configured by
warehouse zone or by employee to ensure maximum accuracy of outbound shipments.
CatalystCommand(TM)Release 9.1
We anticipate CatalystCommand Release 9.1 will become generally available in the
second quarter of 2003. This release is the next step in offering a fully
converged version of CatalystCommmand. It will allow the flexibility to flow
product through the warehouse and/or run the facility in standard put away mode.
WMS Functionality - Release 9.1 will provide enhanced functionality to Support
Lean Warehousing practices. Lean Warehousing is currently being deployed heavily
in the automotive vertical market. Included will be standard mapping to support
deployment of CatalystCommand in SAP R/3 and SAP/Retail environments.
Next Generation
Also completed in 2002 was a next generation vision and proof of concept.
Catalyst continues to look to the changing needs of the marketplace and maps new
technologies and best practices to meet those needs. The next generation
supports Catalyst's strategies of expanding the capabilities of Catalyst
solutions while using new and emerging technology to reduce the total cost of
ownership.
The next generation will focus on componentization of key functionalities, full
internationalization, and enhanced data mining capabilities.
CatalystCommand 9.0 and 9.1 continue to offer the following complementary
solutions:
CatalystCommand(TM) Simulator
Catalyst's warehouse simulation module is an engineering tool that allows
customers to experiment with proposed warehouse changes. Through simulation,
CatalystCommand Simulator offers customers a graphic real-time view of their
warehouse and distribution center operations. Able to simulate both current and
future envisioned environments, it interfaces with CatalystCommand to create a
baseline for prospective changes in warehouse operations. Users can simulate the
reconfiguration of warehouse layout, equipment, orders, items, staffing, methods
and procedures, and immediately assess the benefits of the intended change.
Designed to reduce risk and cut costs, CatalystCommand Simulator enables users
to gauge the impact of retooling functions prior to making financial or
logistical commitments to real world operations. It provides an accurate
barometer that enables users to:
o Fine-tune warehouse operations, layout, equipment, and strategies;
o Respond to business changes quickly and easily;
o Improve the quality and consistency of project justifications;
o Design phased introductions by determining the effects of intermediate
steps to operations;
o Establish benchmarks for the measurement and comparison of
departments, shifts and/or workgroups; and
o Test alternative designs for new distribution centers or upgraded
equipment.
CatalystCommand Simulator v 2.0 was made available during the third quarter of
2002. Enhancements include the ability to model carousels, pick to belt
operations, sortation, and AS/RS machines (unitload and miniload.) Also included
is the ability to simulate putaway operations and model personnel scheduling.
From the technology perspective, the system has been upgraded to run on
SQL/Server and take full advantage of ActiveX.
CatalystCommand(TM) VQM
The CatalystCommand Vendor Quality Management module (CatalystCommand VQM) helps
retailers save time and improve warehouse productivity, significantly enhancing
their business operations. CatalystCommand VQM provides a real-time tool that
identifies specific shipment discrepancies and frequency of issues, which can
then be communicated to the vendor to prevent future problems. A new class of
software, the system will reduce vendor charge backs, improve relationships
between retailers and vendors, and reduce costs by verifying the accuracy of
vendor advanced shipment notice (ASN) data.
This dynamic information exchange is necessary to keep pace with the industry's
needs. CatalystCommand VQM replaces more error-prone paper-based audits with an
electronic auditing procedure to certify vendors' ASN process and continually
monitor the accuracy of ASN data against actual shipment and carton contents.
The audits uncover vendor compliance issues, identifying the causes and
frequency of violations. Results can be used to keep vendors updated on how well
their ASN program is working, so errors can be eliminated before they turn into
charge back issues.
CatalystCommand(TM) YMS
The CatalystCommand Yard Management System module (CatalystCommand YMS) extends
control and visibility into the supply chain by providing real time access to
trailer content early in the supply chain and by providing control of carriers
and trailers in the yard. CatalystCommand YMS prioritizes receipts, manages
inbound and outbound trailers, and improves the customer's relationships with
carriers through objective compliance checking and rapid access to trailer
availability. CatalystCommand YMS provides the user with the ability to:
o Manage the flow of different types of trailers with varying
characteristics including length, tare weight, weight limit, and door
type;
o Automatically assign work in priority order to yard employees, which
is synchronized with warehouse activities;
o Simplify yard maintenance by supporting the process of receiving and
dispatching trailers for multiple warehouses based upon a single point
of entry or exit, as well as multiple points of entry or exit for a
single warehouse;
o Validate the trailers in the yard and their current locations to
maintain yard accuracy;
o Improve control of inbound inventory by automatically controlling
which trailers are moved to the docks using the trailer's priority,
keeping dock usage to maximize efficiency;
o Place docks, locations, or trailers on hold;
o Track key information about carriers that deliver to the warehouse;
and
o Improve gate functions by managing entry and exit of trailers from the
yard as radio frequency-driven processes.
CatalystCommand(TM) Wizard
The CatalystCommand Wizard is a PC-based set-up tool with a graphical user
interface that guides users through a step-by-step configuration of the WMS
based on the physical characteristics of their warehouse.
CatalystCommand Wizard works like any other wizard tool and requires the
CatalystCommand user to complete a series of choices in a pre-determined
sequence. CatalystCommand Wizard contains a graphical representation of actual
warehouse components, along with descriptions and default data to guide users
through a logical progression of setting up the physical characteristics of
their warehouse. Major features include the ability to:
o Set-up vehicles, zones, and storage devices within the warehouse;
o Assign vehicles and storage devices to specific zones and location
classes; and
o Define item families and item strategies.
Working in coordination with CatalystCommand, the tool performs a series of
validations and edit routines as user data is entered, ensuring that business
rules are enforced. Key benefits of CatalystCommand Wizard include reduced
set-up time and simplification of the set-up process.
Services Overview
Catalyst offers customers a broad array of implementation and SCE performance
improvement services to help customers take full advantage of our deep
understanding of the strategies, processes, and technology that underpin the
most successful distribution centers. We collaborate with our customers from the
onset of an engagement to make certain our software products and services
address their priority needs and will work effectively in their distribution
centers.
Catalyst has several groups responsible for offering services and customer
support to ensure customer satisfaction; these groups include Engagement
Services, Customer Education and Training, Customer Support, Consulting
Services, Facilities Management, and Enabling Technologies.
CatalystConnect(TM) Implement (Engagement Services)
Our Engagement Services group offers a proprietary implementation methodology to
ensure that the customer's SCE solution is delivered on time, on budget, and on
target to meets its business objectives. Catalyst's implementation methodology
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 that
allows our customers to work hands-on with configured software in a practice
environment at our headquarters. The CRP enables Catalyst and our customers to
model warehouse management operations, prototype and validate customer business
requirements, and resolve operating issues prior to live implementation.
As an SAP Logistics Execution Solution (LES) integrator, we plan to leverage our
focus on SAP LES and warehouse management to participate in TeamSAP(TM) projects
along with SAP and other SAP implementation partners, increasing implementation
success and long-term serviceability for SAP LES.
CatalystConsult(TM) Trainer (Customer Education and Training)
Catalyst's Customer Education and Training team provides education and training
on the use, administration, and configuration of our SCE software products. Our
approach employs a mixture of "train the trainer" and "train the user."
Typically, customer employees from operations and information systems
participate in the training. We provide in-depth documentation, structured
training classes, and hands-on training for our software products. Catalyst
University offers a series of continuing education courses for current
customers, value-added resellers (VARs), and other partners.
CatalystCare(TM) (Customer Support)
Our Customer Support group offers customers with assistance 24 hours a day/7
days a week. Following installation of CatalystCommand, customers receive
assistance with the operation of the software and obtain telephone support.
Customer support may be purchased at the customer's option. Catalyst offers
customers more choices through its multi-tiered CatalystCare Support Plans.
These flexible plans feature a comprehensive menu from which users can select
different levels of support in terms of telephone access, response times,
resolution times, reporting and value-added services.
Catalyst developed a world-class customer service center called the Supply Chain
Execution Competency Center (SCE Competency Center) in 1999. The SCE Competency
Center supports both SAP LES and Catalyst SCE software products. As a customer
support center for implementations of SAP LES and Catalyst SCE software
products, we provide training, consulting, and support services. Under our
alliance with SAP, we deploy our world-class service organization to implement
and provide support for customer and TeamSAP partner requests, including a
support hot line, implementation services, and on-site support for SAP LES in
North America. Ongoing customer support services monitor system performance and
facilitate software configurations, modifications, upgrades, and
troubleshooting, as needed.
CatalystConsult(TM) (Consulting Services)
With our Consulting Services team, we plan to address both the
pre-implementation and post-implementation needs of our customers. This includes
pre- and post-implementation audits, physical inventory, item measurement,
warehouse optimization, time-standards development, inbound packaging
evaluation, and warehouse simulation.
CatalystCare Complete(TM) (Facilities Management)
Our Facilities Management representatives provide the resources and expertise
necessary to help customers manage their supply chain systems and information
technology (IT) facilities more efficiently. Services include scheduled remote
machine or database management, full-time on-site WMS and IT infrastructure
management and support as well as temporary assistance from experienced staff.
Because each customer has different needs, we collaborate with each customer to
develop a customized service offering with the right level of hands-on support
and the right mix of dedicated and temporary resources, both on-site and
on-call.
Hardware and Enabling Technologies
We resell a variety of hardware products developed and manufactured by third
parties in order to provide our customers with an integrated distribution center
management solution. These products include computer hardware, radio frequency
terminal networks, bar code printers and scanners, and other peripherals. We
resell all third-party hardware products pursuant to agreements with
manufacturers or through distributor-authorized reseller agreements pursuant to
which we are entitled to purchase hardware products at discount prices and to
receive technical support in connection with product installations and any
subsequent product malfunctions. We generally purchase hardware from our vendors
only after receiving an order from a customer. As a result, we do not maintain
hardware inventory.
Product Strategy and Services
Catalyst's strategy is to provide customer-driven, value-added software products
and services based on an open, modular technology that are focused on our
customers' business goals. Our vision is to be the sole resource our customers
need to install, integrate, and manage world-class SCE software products that
minimize risk and maximize the long-term value of our customer's investment.
Customer-Driven Software Products And Services
Catalyst believes the two keys to world-class performance for scalable supply
chains are automating processes and enabling simple, real-time communication
among people, systems, and equipment. We help customers meet these needs through
software products and services designed for optimal reliability, performance,
and flexibility.
Our value-added strategy requires us to be ahead of the curve on industry trends
and developments. We see over time expansion of supply chain visibility software
applications to address the industry-wide information gap that currently exists
between SCP and SCE. Tools for tracking the location of inventory or the status
of orders throughout the supply chain will become commonplace. As collaborative
commerce becomes an integral component of world-class customer service, new
software applications will be developed featuring sophisticated capabilities for
planning, forecasting, and harvesting business intelligence - both from the SCP
and SCE sides of the enterprise. Such software, for example, will be able to
identify capacity constraints in all facets of the supply chain, including
transportation, global logistics, and distribution. Additionally Catalyst
acknowledges and embraces the focus of the major ERP providers in the SCE space.
To that end, Catalyst's strategy includes:
o Continuing to implement our technology vision toward a fully component
based architecture, database and platform independence, and
conformance to emerging technology standards;
o Enhancing the information flow between our existing supply chain
partners;
o Developing additional value-added software applications that transact
with multiple business partners within the supply chain;
o Providing functionality that will give users a corporate view of
inventory in a multiple distribution center environment with the
capability to view it at the store or customer level;
o Taking the next steps with our messaging and alerting capabilities and
developing actionable, intelligent response mechanisms to rapidly
handle exception events;
o Forging new partnerships to meet these needs and broadening our
footprint in the SCE market;
o Developing integrated feedback capabilities in our software products
to support predictive analysis and enable automatic rebalancing of
inventory, schedule, and order handling; and
o Developing expansion products that enhance CatalystCommand and have
the capability to be deployed in support of an ERP SCE solution.
The net effect of these anticipated developments will be significant increases
in inventory velocity and process efficiency while enabling customers to lower
system inventory carrying levels without increasing risk.
Within the "fence" of the distribution/warehouse facility, Catalyst will
continue to expand our deep product functionality to provide more attractive,
modular software products to our selected vertical markets. We expect to achieve
formal FDA certification compliance to 21 CFR Part 11 requirements for security,
electronic records validation, and electronic signature verification. We will
continue to focus on planning and simulation software tools that give a clearer,
more detailed picture of critical personnel, equipment, and space requirements
earlier in the cycle. Current add-on software products such as CatalystCommand
VQM, CatalystCommand Simulator, and CatalystCommand YMS modules will become WMS
independent, and CatalystCommand will also become platform and database
independent. We will continue to embrace new technologies - and work with
innovative partners - to maintain an industry leading position.
From a services and software products perspective, we will move aggressively to
expand our already robust services and implementation skills beyond our own
product offerings. Catalyst, which currently supplies multiple levels of support
for SAP's LES, will provide after-market support services for additional partner
products central to the supply chain. In addition, we will improve our skill
sets to provide implementation services and ongoing technology infrastructure
management options for our customers.
Strategic Alliances
Catalyst intends to provide expanded capabilities to our software products
through key strategic alliances. We have not only relied on our own innovations
and internal capabilities, but the technology, skills, and knowledge of other
leading vendors in the supply chain industry. Many components of
CatalystComplete are made available through our supply chain software partners.
In 1999, Catalyst and SAP AG, a leading supplier of ERP software, entered into
an advanced strategic alliance. In connection with this alliance, SAP America,
Inc., a subsidiary of SAP AG, acquired, at the time of purchase, a 9.7%
ownership position in Catalyst.
To provide a complete product offering for our customers, Catalyst and SAP
initiated joint programs to set a new standard for integration. These include
the joint development of the SAP advanced interface for integrating
CatalystCommand and SAP's LES with R/3(TM) and mySAP.com(TM), the designation of
Catalyst as a principal service provider for implementation and modification of
SAP's LES, and having Catalyst serve as a North American support center for
SAP's LES software products. We believe our customers will benefit from the
complementary expertise of the two companies and that we are well positioned to
extend our market presence.
Develop Additional Markets
Catalyst has customers in several different industries, falling into several
major vertical market categories. Our vertical market strategy targets
industries that have the most demanding supply chain requirements, since this
will enable us to leverage our expertise and experience for competitive
advantage. We have a dedicated sales group for each of our vertical markets -
motor vehicle/parts (including automotive, aerospace, and parts distribution),
retail, consumer goods, process goods (including pharmaceuticals and specialty
chemicals), and cross-industry applications - which will continue to be our
primary focus for the next 12 to 24 months. These sales teams will also explore
opportunities to expand our presence in sub-categories of these markets (e.g.,
discount stores and direct-to-consumer in the retail sector), as well as
selected horizontal markets (e.g., third party logistic providers).
Catalyst supports the needs of various distribution models including traditional
distribution, push/pull, flow, Internet fulfillment, and any combination. We
believe the expertise we have developed in each of these markets through our
customer base provides us with a significant competitive advantage in selling to
prospective customers where similar functionality is required.
Expand Worldwide Distribution
Catalyst's United Kingdom subsidiary, Catalyst WMS International Limited, was
established in 1994 in London, England to sell, service, and support Catalyst
software products in certain international markets. We plan to continue to
increase our international business through an aggressive effort to recruit and
manage VARsin selected foreign markets, such as the fast-growing markets of
Latin America and Europe. These VARs work together with Catalyst personnel in
obtaining agreements for global, multi-site installations with multi-national
customers. CatalystCommand is currently available in English, French, Italian,
Portuguese, German, and Spanish.
Evaluate Acquisition Opportunities
We intend to pursue strategic acquisitions of technologies, products, and
businesses that enable us to enhance and expand our software product and service
offerings.
Product Development
Catalyst offers a collaborative information-rich suite of products and services
that provides complete SCE functionality for supply chains worldwide. We intend
to continue to introduce new product and service offerings, upgrade the
functionality of our existing products, and establish partnerships to support
this strategy. We work closely with our customers and prospective customers to
understand their requirements and to design enhancements, new products, and
services that meet their needs. All product development is performed by our
employees or by contract personnel under our management. Product development
costs were $4.7 million in 2002, $5.2 million in 2001, and $5.3 million in 2000.
Sales and Marketing
Catalyst markets and sells software and services in North America, Europe, and
Latin America through direct sales and channel partner organizations. Our
products are operating in Australia, Brazil, Canada, El Salvador, France,
Germany, Guatemala, Holland, Ireland, Italy, Mexico, Spain, the United Kingdom,
and the United States. Our UK subsidiary is responsible for the sale, service,
and support of Catalyst software products in certain international markets.
In Latin America and Europe, Catalyst utilizes the assistance of VARs to sell
and assist in implementation and support of our software products. We plan to
continue strengthening our presence in these regions through our relationships
with supply chain participants and enterprise software vendors and by developing
close relationships with system integrators in those regions.
To support our sales force, we conduct comprehensive marketing programs which
include direct mail, public relations, seminars, trade shows, joint programs
with vendors and consultants, and ongoing customer communication programs. Our
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, one or more presentations or product
demonstrations, a visit to a similar or representative warehouse running our
software products, and finally, contract negotiation and execution.
Catalyst believes that, with over 20 years of experience in the WMS industry,
our software is established, proven, and accepted in the marketplace. We further
believe that the level of expertise found throughout our organization includes
some of the best in the industry in design, development, implementation, and
support. Catalyst has created a team of employees, vendors, and consultants who
are recognized as experts and leaders in their respective fields, which allows
us to provide our customers with a strong resource of products, services, and
knowledge. This resource should help our customers stay competitive in their
respective industries.
As of December 31, 2002, the sales and marketing organization was based in
Catalyst's headquarters in Milwaukee, Wisconsin, in the London office, and in
satellite 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 our proprietary information. We have no patents or patent
applications pending. Due to the rapid pace of change in the computer software
industry, we believe that trade secret and copyright protection are less
significant in affecting our business, results of our operations, or financial
condition than factors such as the knowledge, ability, and experience of our
employees, frequent product enhancements, and timeliness and quality of support
services. Catalyst typically grants the right to use Catalyst software 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 our
license agreements, Catalyst generally owns all modifications to our software
that are developed and implemented for a customer.
Customers
Catalyst's mission is to be the dominant firm in the tier-one market segment.
Tier-one customers are characterized by the size, complexity, and volume of
their distribution facilities and supply chain network. While most Fortune 1000
firms are tier-one, the segment is not limited to these firms. Tier-one
distribution facility characteristics typically include: size of 200,000 square
feet or more, volumes of 10,000 items per day or more, at least 75 concurrent
users, extensive use of automated material handing equipment, radio frequency
devices and bar coding,
complex warehousing strategies, and other non-standard requirements such as
hazardous materials, refrigeration, etc.
In the year ended December 31, 2002, Catalyst had one customer that accounted
for more than 10% of total revenues. The customer represented $4.2 million or
13.1% of our total revenues. This customer's spending increased during 2002 due
to the timing of a significant project. We anticipate that this customer will
not continue to exceed 10% of our revenues. We do not believe that the loss of
any single customer would have a material adverse effect upon our business,
results of operations, or financial condition.
Catalyst has historically relied on its key vertical markets for a substantial
portion of revenues. We do not, however, intend to focus solely on these markets
for future sales and do not anticipate that we will depend on any single market
for a substantial portion of our sales.
As of December 31, 2002, backlog was approximately $9.6 million, compared with
approximately $6.5 million as of December 31, 2001. We believe that all backlog
amounts should be filled in 2003. For these purposes, backlog is defined as
revenues to be recognized from contracts that have been signed.
Competition
The SCE software industry continues to be highly fragmented with a number of
competitors. Catalyst's competitors, including publicly and privately held
companies, focus either on WMS or SCE, or offer a comprehensive software
offering of which warehouse management is a part.
The competitive factors affecting the market for our 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 customer's 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. We believe that we compete
effectively with respect to these factors, but there can be no assurance that we
will continue to do so. See Competition in Exhibit 99.1.
Employees
As of December 31, 2002, Catalyst had 197 full-time employees worldwide, none of
whom were represented by any collective bargaining organization. We have never
experienced a work stoppage and consider relations with our employees to be
good.
Item 2. Properties
Catalyst's corporate headquarters is approximately 62,000 square feet of leased
office space 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. We lease approximately 6,500 square feet of additional office space in
Milwaukee, Wisconsin. The term of this lease also expires in January 2006.
Catalyst WMS International Limited leased approximately 6,000 square feet of
office space in London, England, pursuant to a lease that expired in March 2003.
Catalyst WMS International Limited now leases approximately 7,550 square feet of
office space in Uxbridge, England, pursuant to a lease that expires in 2008. We
believe that these existing facilities should be adequate for our needs through
at least 2003.
Item 3. Legal Proceedings
On October 8, 1999, a former customer (the Claimant) instituted an arbitration
proceeding against Catalyst with the American Arbitration Association in
Milwaukee, Wisconsin. The Claimant alleged breach of warranty and sought relief
in the form of monetary damages in excess of $1.9 million. An arbitration award
was issued on January 2, 2002 in favor of the Claimant in the amount of
$799,840, plus interest at 5% from December 7, 2001. We filed a motion to vacate
this award for non-compliance with the applicable arbitration procedures. On
January 29, 2002, the Claimant filed a petition to confirm the award. 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.
We believe that because we have adequately
reserved for this matter, the outcome of this proceeding will not have a
material effect on our financial position or results of operations.
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 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 2002.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Through February 26, 2003, shares of Catalyst's common stock were quoted on the
Nasdaq Stock Market under the symbol CLYS. Effective February 27, 2003, shares
of Catalyst's common stock are quoted on the Over-the-Counter Bulletin Board
exchange under the symbol CLYS.OB. 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.
- --------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------
High Low High Low
- --------------------------------------------------------------------------------
Quarters ended March 31, $ 3.27 $ 1.80 $ 8.063 $ 4.750
Quarters ended June 30, 3.25 1.60 5.500 2.120
Quarters ended September 30, 2.10 1.13 3.960 1.560
Quarters ended December 31, 1.70 0.41 3.910 1.520
- --------------------------------------------------------------------------------
Source: Yahoo (2002) Nasdaq Online(SM) (2001) Internet Site
On March 24, 2003, there were approximately 1,275 beneficial owners, 155 of
which were record holders.
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.
Catalyst has never paid cash dividends on its common stock. Our policy has been
to retain cash from operations to provide funds for the operation and expansion
of our business. Accordingly, we do not anticipate paying cash dividends in the
foreseeable future.
Item 6. Selected Financial Data
FINANCIAL HIGHLIGHTS
(In thousands, except per share data)
- ---------------------------------------------------------------------------------------------------------
Years Ended December 31, 2002 2001 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------
Consolidated Statements of Operations Data:
Revenues:
Software $ 4,817 $ 2,760 $ 8,451 $ 7,575 $ 8,741
Services and post-contract customer support 20,307 23,960 28,222 25,599 21,890
Hardware 7,146 5,784 5,337 7,386 3,282
- ---------------------------------------------------------------------------------------------------------
Total Revenues 32,270 32,504 42,010 40,560 33,913
- ---------------------------------------------------------------------------------------------------------
Cost of Revenues:
Software 1,233 963 797 606 525
Services and post-contract customer support 13,984 17,681 16,632 14,921 14,583
Hardware 5,794 4,840 4,361 6,260 2,759
- ---------------------------------------------------------------------------------------------------------
Total Cost of Revenues 21,011 23,454 21,790 21,787 17,867
- ---------------------------------------------------------------------------------------------------------
Gross Margin 11,259 9,020 20,220 18,773 16,046
Operating Expenses:
Product development 4,676 5,200 5,301 7,638 3,412
Sales and marketing 9,625 9,008 9,254 7,159 5,494
General and administrative 4,075 6,622 4,793 6,574 4,177
Restructuring and other charges 1,160 1,927 -- 398 --
Asset impairment charges -- 5,697 -- 3,190 --
- ---------------------------------------------------------------------------------------------------------
Total Operating Expenses 19,536 28,454 19,348 24,959 13,083
- ---------------------------------------------------------------------------------------------------------
Income (loss) from operations (8,277) (19,434) 872 (6,186) 2,963
- ---------------------------------------------------------------------------------------------------------
Other income, net 2,860 508 891 573 217
- ---------------------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes (5,417) (18,926) 1,763 (5,613) 3,180
Provision for income taxes -- -- -- -- 100
- ---------------------------------------------------------------------------------------------------------
Net Income (Loss) $ (5,417) $(18,926) $ 1,763 $ (5,613) $ 3,080
- ---------------------------------------------------------------------------------------------------------
Net Income (Loss) per share - diluted $ (0.69) $ (2.38) $ 0.21 $ (0.77) $ 0.42
=========================================================================================================
Shares used in computing diluted net
income (loss) per share 7,795 7,962 8,452 7,288 7,383
Consolidated Balance Sheet Data:
Cash and cash equivalents $ 3,005 $ 7,906 $ 21,201 $ 21,169 $ 8,555
Working capital (deficiency) (4,392) 1,554 19,773 20,388 9,530
Total assets 18,036 23,891 38,605 35,563 25,557
Long-term debt, less current portion 2 30 166 181 412
Total shareholders' equity 779 6,192 25,645 23,281 15,403
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's Discussion and Analysis contains statements that are
forward-looking. These statements are based upon current expectations and
assumptions that are subject to risks and uncertainties. Actual results could
differ materially due to of factors discussed in Exhibit 99.1.
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 will
exceed 50 days of effort, revenue is recognized using contract accounting on a
percentage completion method with progress to completion measured based upon
labor and time expended. When the modification is estimated to be fewer than 50
days, the 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 when we will exceed our budgeted number of days
on a project. The reserve 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 to us), our estimates of the recoverability of amounts due
us could be reduced by a material amount.
Legal Accruals
As discussed in Note 11 of our consolidated financial statements, as of December
31, 2002, 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 our
probable liability in this matter may change.
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.
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. There were no impairment charges for 2002, compared
to $5.7 million in 2001.
REVENUE
- --------------------------------------------------------------------------------
Catalyst's revenues are derived from software, services and PCS, and hardware.
Total revenues decreased by 0.7% to $32.3 million in 2002 and decreased by 22.6%
to $32.5 million in 2001. We believe that the flat revenues in 2002 were due
primarily to project delays and longer sales cycles tied to global economic
conditions. The following table sets forth, by category, revenues, percentage
change year-over-year, and percentage of total revenues for the years indicated:
- ----------------------------------------------------------------------------------------------------------
Net Revenues Percentage Change Percentage of
(In thousands) (Year-over-year) Total Revenues
- ----------------------------------------------------------------------------------------------------------
2002 2001 2000 2002 2001 2002 2001 2000
---------------------------------------------------------------------------------------
Software $ 4,817 $ 2,760 $ 8,451 74.5% (67.3)% 14.9% 8.5% 20.1%
Services and PCS 20,307 23,960 28,222 (15.3) (15.1) 62.9 73.7 67.2
Hardware 7,146 5,784 5,337 23.6 8.4 22.2 17.8 12.7
- ----------------------------------------------------------------------------------------------------------
International revenues increased 9.7% to $5.6 million in 2002 and decreased
18.8% to $5.1 million in 2001. International revenues accounted for 17.5%,
15.8%, and 15.1% of total revenues in 2002, 2001, and 2000, respectively. The
increase in international revenues in 2002 was due primarily to an increase in
UK sales. The decrease in 2001 occurred primarily to a decrease in software
revenues attributable to international customers.
Software
Software consists of revenues from the sale of Catalyst's products and related
add-on third party software products. Software revenues increased by 74.5% to
$4.8 million in 2002 and decreased by 67.3% to $2.8 million in 2001. Software
revenues may fluctuate based upon the size and quantity of new or add-on license
agreements, as well as the progress toward completion for contracts that are
accounted for using contract accounting.
Catalyst follows the software revenue recognition practices set forth in
Statement of Position 97-2, "Software Revenue Recognition," as amended, as
issued by the American Institute of Certified Public Accountants. For projects
requiring "significant" modifications to our products, we use contract
accounting procedures based upon percentage of completion to recognize revenue,
provided that such amounts are reasonably collectible. Software revenue for
projects with few or no modifications is recognized upon reaching contract
milestones, to the extent that payment is fixed and determinable and considered
collectible.
Services and PCS
Services and PCS revenues are derived from software modifications, professional
services, and PCS agreements. Services and PCS revenues decreased by 15.3% to
$20.3 million in 2002 and decreased by 15.1% to $24.0 million in 2001. The
following table sets forth the components of services and PCS revenues as a
percentage of total revenues for the years indicated:
----------------------------------------------------------------------
2002 2001 2000
----------------------------------------------------------------------
Software modifications 18.1% 20.1% 17.8%
Professional services 12.8 25.2 28.0
PCS agreements 32.0 28.4 21.4
----------------------------------
62.9% 73.7% 67.2%
=====================================================================
Software modifications are determined during the customer's CRP and consist of
changes to the software to facilitate specific functionality desired by the
customer. We believe that as we sell CatalystCommand and other products, future
modification revenues as a percentage of total revenues could decrease due to
the increased functionality of newer releases of our products; however, the
relationship is dependent upon the variety of modifications that the individual
customer specifies.
Professional services revenues are derived from implementation services,
performance of the CRP, technical services, project management, and education
services. Professional services revenues decreased in 2002 due to fewer new
products sold. Professional services revenues are recognized based on the number
of days of work actually performed.
Customers typically enter into an agreement for PCS at the time they license
CatalystCommand and, generally pay for the first year of PCS in advance. PCS
revenues are recognized ratably over the term of the PCS agreement. The increase
in PCS revenues in 2002 was due primarily to new PCS (CatalystCare) agreements
and renewal of existing PCS agreements.
Hardware
Hardware consists primarily of computer hardware, radio frequency equipment, and
printers that we sell to our customers on behalf of hardware and other equipment
manufacturers. Hardware revenues increased by 23.6% to $7.1 million in 2002 and
increased by 8.4% to $5.8 million in 2001.
COST OF REVENUES
- --------------------------------------------------------------------------------
Cost of Software
Cost of software consists of the cost of related add-on third party software
products and the amortization of capitalized software development costs. The
cost of software was $1,233,000, $963,000, and $797,000 in 2002, 2001, and 2000,
respectively. As a percentage of software revenue, the costs were 25.6%, 34.9%,
and 9.4% in 2002, 2001, and 2000 respectively. The increase in cost of software
was due to the amortization of certain capitalized software costs.
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 services and PCS revenues were 68.9%,
73.8%, and 58.9% in 2002, 2001, and 2000, respectively. Cost of services and PCS
decreased in 2002 as a percentage of total services and PCS revenues due to
fewer new services and PCS contracts.
Cost of Hardware
Cost of hardware consists of the cost of computer hardware, radio frequency
equipment, and printers sold by us on behalf of the equipment manufacturers. We
do not inventory or service hardware items, but make them available to customers
who desire a turnkey solution. Cost of hardware was $5.8 million, $4.8 million,
and $4.4 million in 2002, 2001, and 2000, respectively. As a percentage of
hardware sales, the cost was 81.1%, 83.7%, and 81.7% in 2002, 2001, and 2000,
respectively.
OPERATING EXPENSES
- --------------------------------------------------------------------------------
Product Development
Product development costs are expenses associated with research and development,
including costs of engineering personnel and related development expenses such
as software tools, training, and documentation. Product development costs
decreased 10.1% to $4.7 million in 2002 and decreased slightly to $5.2 million
in 2001. Product development costs decreased in 2002 due primarily to fewer
products being developed. Product development costs represented 14.5%, 16.0%,
and 12.6% of total revenues in 2002, 2001, and 2000, respectively.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries; commissions; and
marketing, promotional and travel expenses paid to or on behalf of sales and
marketing personnel. Sales and marketing expenses increased 6.8% to $9.6 million
in 2002 and decreased slightly to $9.0 million in 2001. In general, the increase
in sales and marketing expenses in 2002 was due to the company re-branding and
increased focus on international sales. Sales and marketing expenses represented
29.8%, 27.7%, and 22.0% of total revenues in 2002, 2001, and 2000, respectively.
General and Administrative
General and administrative expenses consist primarily of the salaries of
administrative, executive, finance, human resource, and quality assurance
personnel. General and administrative expenses decreased by 38.5% to $4.1
million in 2002 and increased by 38.2% to $6.6 million in 2001. General and
administrative expenses represented 12.6% of total revenues in 2002, 20.4% in
2001, and 11.4% in 2000. In 2002, general and administrative expenses decreased
as a percentage of total revenue compared to 2001 due to a reduction of $1.7
million in legal expense and a reduction of $900,000 in charges to the allowance
for doubtful accounts, which were incurred during the same period in 2001.
OTHER OPERATING EXPENSES, INVESTMENT INCOME (LOSS), AND INCOME TAXES
- --------------------------------------------------------------------------------
Restructuring, Impairment, and Other Charges
During 2002, restructuring charges decreased by 39.9% to $1.2 million. During
2002, Catalyst recorded an aggregate charge of $1.2 million which consisted of
non-compete amortization of $515,000 related to the former president's
non-compete agreement and $645,000 related to severance payments and
outplacement services related to workforce reductions in 2002. The severance
payments and outplacement services were paid in cash during 2002, except for
approximately $189,000 which was paid in 2003. The obligations under the
non-compete agreement were also paid in 2002.
During 2001, there were several events that resulted in an aggregate charge of
$7.6 million, which represented restructuring and other charges of $1.9 million
and asset impairment charges of $5.7 million. The former president and chief
executive officer resigned in March 2001. Catalyst recorded charges aggregating
$1.1 million relating to amortization of a non-compete agreement and other
expenses related to his resignation. In the third quarter of 2001, Catalyst
initiated a restructuring plan and overall workforce reduction of approximately
15%. Charges of $796,000 were recorded for severance payments and outplacement
services related to this workforce reduction. Catalyst also reviewed the
carrying values of certain licensed technology and capitalized software
development costs and recorded an impairment charge of $5.7 million to adjust
the carrying values of such assets to their estimated fair market values. All
cash expense amounts were disbursed in the year ended December 31, 2001, except
for approximately $183,000, which was paid in 2002. The obligations under the
non-compete agreement were also paid in 2002.
Other Income and Expense
Other income consists primarily of interest income and interest expense and does
not have a material impact on operating results.
During 2002, miscellaneous income included a $2.8 million gain resulting from
the termination of an agreement with Kewill Systems, PLC (Kewill). Under the
termination agreement, Kewill agreed that no further obligations
were required to be performed by Catalyst in connection with the previously
executed services agreement. Accordingly, deferred revenue that had previously
been recorded related to the future obligations was written off.
Income Tax Expense
At December 31, 2002, Catalyst was not subject to regular income taxes because
we had net operating loss carry-forwards of approximately $38 million for
federal and state income tax purposes. We were not subject to alternative
minimum tax (AMT) in 2000. In 2002 and 2001, no income tax expense was recorded
as we incurred a net loss for both financial and income tax reporting purposes.
No net deferred tax expense (credit) was recorded in any of the three years
reported as we continue to record a valuation allowance to reserve for the net
deferred tax asset.
Liquidity and Capital Resources
In 2002, Catalyst used $4.9 million in cash; $3.7 million was used in operating
activities, $1.7 million was used in investing activities for capital
expenditures, capitalized software development costs, and the purchase of
licensed technology; $602,000 was provided by a borrowing on the line of credit;
and $118,000 was used for payments on capital lease obligations. In 2001, we
used $13.3 million in cash; $3.9 million was used in operating activities, $8.6
million was used in investing activities for capital expenditures, capitalized
software development costs, and the purchase of licensed technology offset by
the proceeds from the sale of equipment and internal use software; $263,000 was
used for payments on capital lease obligations; and $548,000 was used to
purchase common stock for treasury. In 2000, we generated $31,000 in cash; $4.3
million was generated by operating activities, $4.5 million was used in
investing activities for capital expenditures and capitalized software
development costs, $1.1 million was generated by employees' exercise of stock
options, $404,000 was used for payments on capital lease obligations and
$482,000 was used to purchase common stock for treasury.
Capital expenditures totaled $257,000, $1.1 million, and $2.7 million in 2002,
2001, and 2000, respectively. Capital expenditures decreased in 2002 due to cost
control measures implemented during the second half of 2001.
In 2001, Catalyst repurchased 257,944 shares of common stock under provisions of
a stock repurchase program adopted by the board of directors on March 21, 1996.
In 2000, Catalyst repurchased 99,068 shares of common stock under this program.
As of December 31, 2002, Catalyst had $3.0 million in cash and cash equivalents
and negative working capital of $4.4 million. In March 2003, we entered into a
$1.0 million line of credit (the Revolving Credit Facility) with First National
Bank of Muscatine. The Revolving Credit Facility bears interest at 3.5% and
expires on March 17, 2004. Advances under this line are contingent upon First
National Bank of Muscatine at all times having collateral in its control in the
form of cash. As a result, this facility cannot be relied upon as a material
source of continuing liquidity. In March 2003, Catalyst also obtained a $1
million term loan with First National Bank of Muscatine. This loan bears
interest at the prime rate plus 1.25 %, requires quarterly interest payments and
is secured by substantially all of Catalyst's assets. The minimum interest rate
under this facility is 5.25% and expires on March 17, 2004. Proceeds from this
facility were used to pay off $602,000 of borrowings outstanding under a
previous line of credit. In conjunction with this agreement, Catalyst entered
into a collateral fee and security agreement with certain directors who pledged
additional collateral to secure this loan. The annual fee to the pledgors is
3.5% of their respective share of pledged collateral.
At December 31, 2002, accounts receivable increased by 2.9%, or $265,000,
compared to December 31, 2001. In addition, at December 31, 2002, Catalyst had
reserves of $475,000 for doubtful accounts and $105,000 for known and estimated
project cost overruns. This compares to $900,000 and $147,000, respectively, for
the same reserves at December 31, 2001. We believe we have adequately provided
for potential risks with respect to accounts receivable and project reserves
known or anticipated at this time.
Our future capital requirements will depend on numerous factors including the
level and timing of revenue, the resources we devote to marketing and selling
our products and services, and our future investments in product development. We
currently anticipate that our current cash and cash equivalents will be
sufficient to meet our anticipated needs for working capital and capital
expenditures for at least the next 12 months. However, any projections of future
cash needs in cash flows are subject to uncertainty. Based on our current
strategy, we believe we will require funds to finance our longer term strategy.
It is our current intention to raise approximately $3-5 million dollars of
additional financing via private placement or a registered stock offering for
general corporate purposes and potential acquisitions. Additional financing may
not be available to us on favorable terms, or at all. If
adequate funds are not available on acceptable terms, we may not be able to
continue to expand our business operations and execute our strategy which could
harm our business, results of operations, and financial condition.
The following summarizes our contractual obligations at December 31, 2002 and
the effect those obligations are expected to have on our liquidity and cash flow
in future periods (in thousands):
Less Than Years Years Over
Contractual Obligations Total 1 Year 1-3 4-5 5 Years
- -------------------------------------------------------------------------------------------------
Non-cancelable operating lease obligations $ 3,168 $ 763 $ 1,695 $ 664 $ 46
Non-cancelable capital lease obligations 32 29 3 -- --
Bank line of credit 602 602 -- -- --
- -------------------------------------------------------------------------------------------------
Total contractual obligations $ 3,802 $ 1,394 $ 1,698 $ 664 $ 46
=================================================================================================
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Catalyst does not believe that we have material exposure to market risk with
respect to any investments as we do not use market rate-sensitive instruments
for trading or other purposes. For purposes of the consolidated statements of
cash flows, we consider 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 money market funds and commercial paper. The cost
of these securities, which are considered as "available for sale" for financial
reporting purposes, approximated fair value at both December 31, 2002 and 2001.
There were no realized gains or losses in any of the three years in the period
ended December 31, 2002.
Item 8. Financial Statements and Supplementary Data
Quarterly Results
The following table sets forth unaudited consolidated statements of operations
data for each of the quarters in the years ended December 31, 2002 and 2001.
This unaudited quarterly information has been prepared on the same basis as the
annual information presented elsewhere herein and, in our opinion, includes all
adjustments (consisting only of normal recurring entries) necessary for a fair
presentation of the information for the quarter presented. Certain amounts in
the first and second quarters of 2001 were reclassified to conform to the
December 31, 2001 presentation. The operating results for any quarter are not
necessarily indicative of the results for any future period.
- -------------------------------------------------------------------------------------------------------------------------------
Quarters Ended 12/31/02 09/30/02 06/30/02 03/31/02 12/31/01 09/30/01 06/30/01 03/31/01
- -------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
Revenues:
Software $ 729 $ 1,788 $ 1,151 $ 1,149 $ 908 $ 433 $ 370 $ 1,049
Services and post-contract
customer support 4,120 5,136 5,650 5,401 5,298 6,438 6,317 5,907
Hardware 2,812 827 1,889 1,618 2,327 1,012 1,113 1,332
- -------------------------------------------------------------------------------------------------------------------------------
Total Revenues 7,661 7,751 8,690 8,168 8,533 7,883 7,800 8,288
- -------------------------------------------------------------------------------------------------------------------------------
Cost of Revenues:
Software 341 199 511 182 330 219 178 236
Services and post-contract
customer support 3,220 3,389 3,680 3,695 4,216 4,340 4,578 4,547
Hardware 2,204 674 1,486 1,430 1,991 791 999 1,059
- -------------------------------------------------------------------------------------------------------------------------------
Total Cost of Revenues 5,765 4,262 5,677 5,307 6,537 5,350 5,755 5,842
- -------------------------------------------------------------------------------------------------------------------------------
Gross Margin 1,896 3,489 3,013 2,861 1,996 2,533 2,045 2,446
Operating Expenses:
Product development 1,151 1,180 1,018 1,327 1,312 1,242 1,458 1,188
Sales and marketing 2,560 2,615 2,392 2,059 1,762 2,265 2,489 2,492
General and administrative 873 1,106 1,094 1,001 916 1,151 1,355 3,200
Restructuring and other charges 309 448 210 193 367 852 708 --
Asset impairment charges -- -- -- -- 5,697 -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 4,893 5,349 4,714 4,580 10,054 5,510 6,010 6,880
- -------------------------------------------------------------------------------------------------------------------------------
Loss from operations (2,997) (1,860) (1,701) (1,719) (8,058) (2,977) (3,965) (4,434)
Other income (expense), net (10) 2,833 45 (8) 62 112 112 222
- -------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ (3,007) $ 973 $ (1,656) $ (1,727) $ (7,996) $ (2,865) $ (3,853) $ (4,212)
===============================================================================================================================
Net income (loss) per share:
Basic $ (0.39) $ 0.12 $ (0.21) $ (0.22) $ (1.03) $ (0.36) $ (0.48) $ (0.52)
Diluted $ (0.39) $ 0.12 $ (0.21) $ (0.22) $ (1.03) $ (0.36) $ (0.48) $ (0.52)
Shares used in computing net
income (loss) per share:
Basic 7,795 7,795 7,795 7,797 7,797 7,991 8,020 8,040
Diluted 7,795 7,841 7,795 7,797 7,797 7,991 8,020 8,040
- -------------------------------------------------------------------------------------------------------------------------------
The common stock is listed on the Over-the-Counter Bulletin Board(R) under the
symbol "CLYS.OB." 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 $0.41 per
share. As of March 24, 2003, there were 7,795,803 shares of common stock
outstanding held by approximately 1,275 beneficial owners, 155 of which were
record holders.
Consolidated Statements of Operations
- ----------------------------------------------------------------------------------------------------
Years Ended December 31, 2002 2001 2000
- ----------------------------------------------------------------------------------------------------
Revenues:
Software $ 4,816,763 $ 2,759,913 $ 8,451,526
Services and post-contract customer support 20,307,187 23,960,234 28,222,224
Hardware 7,146,243 5,783,723 5,336,708
- ----------------------------------------------------------------------------------------------------
Total Revenues 32,270,193 32,503,870 42,010,458
- ----------------------------------------------------------------------------------------------------
Cost of Revenues:
Cost of software 1,232,778 962,830 797,117
Cost of services and post-contract customer support 13,984,357 17,681,132 16,632,253
Cost of hardware 5,794,409 4,840,001 4,361,113
- ----------------------------------------------------------------------------------------------------
Total Cost of Revenues 21,011,544 23,483,963 21,790,483
- ----------------------------------------------------------------------------------------------------
Gross Margin 11,258,649 9,019,907 20,219,975
Operating Expenses:
Product development 4,676,048 5,200,691 5,300,762
Sales and marketing 9,625,196 9,007,688 9,254,354
General and administrative 4,075,100 6,622,065 4,793,251
Restructuring and other charges (Note 10) 1,159,268 1,927,098 --
Asset impairment charges (Note 10) -- 5,696,866 --
- ----------------------------------------------------------------------------------------------------
Total Operating Expenses 19,535,612 28,454,408 19,348,367
- ----------------------------------------------------------------------------------------------------
Income (Loss) From Operations (8,276,963) (19,434,501) 871,608
Other Income (Expense):
Interest expense (18,684) (26,535) (53,235)
Investment income 87,405 565,050 1,389,546
Miscellaneous income (expense) net (Note 12) 2,791,567 (30,437) (444,773)
- ----------------------------------------------------------------------------------------------------
Total Other Income, Net 2,860,288 508,078 891,538
- ----------------------------------------------------------------------------------------------------
Net Income (Loss) $ (5,416,675) $(18,926,423) $ 1,763,146
====================================================================================================
Earnings (loss) per share (Note 1):
Basic $ (0.69) $ (2.38) $ 0.22
Diluted $ (0.69) $ (2.38) $ 0.21
See accompanying notes.
Consolidated Balance Sheets
- ----------------------------------------------------------------------------------------------
December 31, 2002 2001
- ----------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 3,004,620 $ 7,906,342
Accounts receivable, net of allowance for doubtful
accounts of $475,000 in 2002 and $900,000 in 2001 9,214,112 8,949,582
Prepaid expenses and other 508,606 650,971
- ----------------------------------------------------------------------------------------------
Total Current Assets 12,727,338 17,506,895
- ----------------------------------------------------------------------------------------------
Equipment and Leasehold Improvements:
Computer hardware and software 7,223,289 7,169,718
Office equipment 2,380,231 2,372,316
Leasehold improvements 981,194 966,703
- ----------------------------------------------------------------------------------------------
10,584,714 10,508,737
Less accumulated depreciation 8,518,237 7,387,677
- ----------------------------------------------------------------------------------------------
Total Equipment and Leasehold Improvements 2,066,477 3,121,060
- ----------------------------------------------------------------------------------------------
Capitalized software development costs, net of accumulated
amortization of $1,103,837 in 2002 and $479,376 in 2001 2,361,893 1,748,278
Intangible assets, net (Note 2) 880,668 1,514,718
- ----------------------------------------------------------------------------------------------
Total Assets $ 18,036,376 $ 23,890,951
==============================================================================================
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 3,616,993 $ 3,606,493
Accrued liabilities 1,678,448 1,347,886
Accrued professional and legal fees 1,142,683 1,583,084
Accrued non-compete obligation -- 1,090,000
Line of credit (Note 3) 601,599 --
Deferred revenues 10,050,869 8,206,654
Current portion of capital lease obligations (Note 4) 28,363 118,454
- ----------------------------------------------------------------------------------------------
Total Current Liabilities 17,118,955 15,952,571
- ----------------------------------------------------------------------------------------------
Noncurrent Liabilities:
Capital lease obligations (Note 4) 2,442 30,495
Deferred revenues 33,763 1,565,281
Deferred rent (Note 4) 101,974 150,922
- ----------------------------------------------------------------------------------------------
Total Noncurrent Liabilities 138,179 1,746,698
- ----------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 4 and 11)
Shareholders' Equity (Notes 5 and 6):
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: 9,216,078 in 2002 and 9,214,744 in 2001 921,608 921,474
Additional paid-in capital 43,690,241 43,686,140
Accumulated deficit (38,038,786) (32,622,111)
Treasury stock, at cost-- 1,420,275 shares of common stock (5,793,821) (5,793,821)
- ----------------------------------------------------------------------------------------------
Total Shareholders' Equity 779,242 6,191,682
- ----------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 18,036,376 $ 23,890,951
==============================================================================================
See accompanying notes.
Consolidated Statements of Shareholders' Equity
- ---------------------------------------------------------------------------------------------------------------------------------
Additional
Common Stock Paid-in Accumulated Treasury
Shares Dollars Capital Deficit Stock Total
- ---------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1999 8,939,264 $ 893,926 $ 42,609,592 $(15,458,834) $ (4,763,574) $ 23,281,110
=================================================================================================================================
Purchase of common stock
for treasury (Note 5) -- -- -- -- (481,910) (481,910)
Stock options exercised 261,679 26,168 1,056,843 -- -- 1,083,011
Net income -- -- -- 1,763,146 -- 1,763,146
- ---------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2000 9,200,943 920,094 43,666,435 (13,695,688) (5,245,484) 25,645,357
=================================================================================================================================
Purchase of common stock
for treasury (Note 5) -- -- -- -- (548,337) (548,337)
Stock options exercised 13,801 1,380 17,796 -- -- 19,176
Compensation expense on
stock options -- -- 1,909 -- -- 1,909
Net loss -- -- -- (18,926,423) -- (18,926,423)
- ---------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2001 9,214,744 921,474 43,686,140 (32,622,111) (5,793,821) 6,191,682
=================================================================================================================================
Stock options exercised 1,334 134 285 -- -- 419
Compensation expense on
stock options -- -- 3,816 -- -- 3,816
Net loss -- -- -- (5,416,675) -- (5,416,675)
- ---------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2002 9,216,078 $ 921,608 $ 43,690,241 $(38,038,786) $ (5,793,821) $ 779,242
=================================================================================================================================
See accompanying notes
Consolidated Statements of Cash Flows
- ----------------------------------------------------------------------------------------------------
Years Ended December 31, 2002 2001 2000
- ----------------------------------------------------------------------------------------------------
Operating Activities
Net income (loss) $ (5,416,675) $(18,926,423) $ 1,763,146
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 1,274,200 1,543,936 1,780,715
Amortization 1,446,857 2,394,218 35,440
Compensation expense on stock options 3,816 1,909 --
(Gain) loss on disposal of equipment
and leasehold improvements 35,532 (5,447) 181,128
Asset impairment charges -- 5,696,866 --
Changes in operating assets and
liabilities:
Accounts receivable (264,530) 1,319,938 (162,712)
Prepaid expenses and other 142,365 (108,253) 235,298
Accounts payable 10,500 300,967 1,068,640
Accrued liabilities (1,199,839) 74,515 327,649
Deferred revenues 312,697 3,855,308 (819,155)
Deferred rent (48,948) (48,946) (65,753)
- ----------------------------------------------------------------------------------------------------
Total adjustments 1,712,650 15,025,011 2,581,250
- ----------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (3,704,025) (3,901,412) 4,344,396
Investing Activities
Capital expenditures (257,441) (1,134,301) (2,714,796)
Capitalized software development costs (1,238,076) (1,004,383) (1,795,137)
Purchase of licensed technology (188,346) (7,500,000) --
Proceeds from sale of equipment 2,292 120,447 --
Proceeds from sale of internal use software -- 917,380 --
- ----------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,681,571) (8,600,857) (4,509,933)
Financing Activities
Payments on capital lease obligations (118,144) (262,890) (404,081)
Borrowings on line of credit 601,599 -- --
Proceeds from exercise of stock options 419 19,176 1,083,011
Purchase of common stock for treasury -- (548,337) (481,910)
- ----------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 483,874 (792,051) 197,020
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents (4,901,722) (13,294,320) 31,483
Cash and cash equivalents at beginning of year 7,906,342 21,200,662 21,169,179
- ----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 3,004,620 $ 7,906,342 $ 21,200,662
====================================================================================================
Supplemental disclosure:
Cash paid for interest $ 18,684 $ 26,535 $ 53,235
Noncash investing and financing activities:
During 2001, the Company entered into a non-compete agreement for $1,090,000. In
2000, the Company acquired $300,993 of computer hardware under capital leases.
See accompanying notes.
Notes To Consolidated Financial Statements / December 31, 2002
1. SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
Consolidation
The accompanying consolidated financial statements include the accounts of
Catalyst and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
The functional currency of the Company's subsidiary in the United Kingdom is the
U.S. dollar; accordingly, monetary assets and liabilities are translated into
United States dollars at the rate of exchange existing at the end of the period,
and nonmonetary assets and liabilities are translated into United States dollars
at historical exchange rates. Income and expense amounts, except for those
related to assets translated at historical rates, are translated at the average
exchange rates during the period. Adjustments resulting from the remeasurement
of the financial statements into the functional currency are charged to income.
Business and Concentration of Credit Risk
Catalyst develops, markets, and supports supply chain execution software
products. Catalyst also provides related services, including engagement
services, customer education and training, customer support, consulting
services, facilities management, and enabling technologies for customers
throughout the United States and certain foreign countries. Catalyst performs
periodic credit evaluations of its customers' financial condition and does not
require collateral. Catalyst evaluates the collectibility of its accounts
receivables based on a combination of factors. Catalyst recognizes an allowance
for doubtful accounts based on the length of time the receivables are past due.
Specific customer reserves are based upon Catalyst's assessment of deviations in
historical payment trends, the age of the account, and ongoing communications
with its customers.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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 Equivalents
Catalyst 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 money market funds and commercial paper. The cost
of these securities, which are considered "available for sale" for financial
reporting purposes, approximates fair value at both December 31, 2002 and 2001.
There were no realized gains or losses during any of the three years in the
period ended December 31, 2002.
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--three to five years; office equipment--five to seven
years; and leasehold improvements--ten years (though no longer than the term of
the lease).
Capitalized Software Development Costs
As required by accounting principles generally accepted in the United States,
Catalyst 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. The establishment of technological
feasibility and the ongoing assessment of recoverability of software costs
require considerable judgment by management with respect to certain external
factors, including, but not limited to, product feasibility, anticipated future
gross revenues, estimated economic life, and changes in software and hardware
technologies.
When the software product is available for general release to customers,
capitalization ceases and such costs are amortized on a product-by-product
basis. The annual amortization is the greater of the amount computed using (a)
the ratio that current gross revenues for the product bear to the total of
current and anticipated future gross revenues
for the product or (b) the straight-line method over the estimated economic life
of the product or three years. Amortization expense was $624,459, $443,936, and
$35,440 in 2002, 2001, and 2000, respectively. Catalyst compares the net
realizable value on a product by product basis to the unamortized capitalized
software development costs and writes off any items that are not considered
recoverable.
Intangible Assets
Catalyst's identifiable intangible assets are amortized on a straight-line basis
over their estimated useful lives which range from three to five years.
Impairment of Long-Lived Assets
Equipment and leasehold improvements and identifiable intangible assets are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. If the sum of the expected
undiscounted future cash flows is less than the carrying value of the related
asset or group of assets, a loss is recognized for the difference between the
fair value and the carrying value of the asset or group of assets. Such analysis
necessarily involve significant judgment. See Note 10 for impairment charges in
2001.
Revenue Recognition
Catalyst derives revenue from the sale of software, services and 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 will
exceed 50 days of effort, 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, the 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. Included
in accrued liabilities are reserves for project cost overruns of $105,000 and
$147,000 at December 31, 2002 and 2001, respectively.
Advertising
Advertising costs are expensed as incurred and amounted to approximately
$376,000, $837,000, and $878,000 in 2002, 2001, and 2000, 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.
Fair Value of Finanical Instruments
The carrying amounts of Catalyst's financial instruments, which includes cash
and cash equivalents, accounts receivable, accounts payable, and line of credit
obligations are considered to approximate their respective fair values.
Stock-Based Compensation
Catalyst has stock-based employee compensation plans (see Note 6). 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 income and net loss per share would have been as
follows:
----------------------------------------------------------------------------------------------------------
Years ended December 31, 2002 2001 2000
----------------------------------------------------------------------------------------------------------
Net income (loss):
As reported $ (5,416,675) $ (18,926,423) $ 1,763,146
Stock-based employee compensation
expense determined under fair value based method (935,919) (577,343) (920,540)
--------------------------------------------------------------------------------------------------
Proforma $ (6,352,594) $ (19,503,766) $ 842,606
Net income (loss) per share:
As reported, basic $ (0.69) $ (2.38) $ 0.22
Pro forma, basic $ (0.82) (2.45) 0.11
As reported, diluted $ (0.69) (2.38) 0.21
Proforma, diluted $ (0.82) (2.45) 0.10
Comprehensive Income
Comprehensive income (loss) equals net income (loss) in 2002, 2001, and 2000.
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:
--------------------------------------------------------------------------------------
Years ended December 31, 2002 2001 2000
--------------------------------------------------------------------------------------
Denominator for basic earnings per share--
weighted average shares outstanding 7,794,812 7,961,676 8,023,380
Effect of dilutive options and warrants -- -- 428,167
-------------------------------------------------------------------------------
Denominator for diluted earnings
(loss) per share 7,794,812 7,961,676 8,451,547
Options that could potentially dilute
earnings per share in the future that
are not included in the computation of
diluted earnings (loss) per share, as
their impact is antidilutive 59,192 200,905 N/A
--------------------------------------------------------------------------------------
Accounting Pronouncements
During 2002, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations," SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities," and SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS No.
143 became effective for Catalyst on January 1, 2003, and adoption of this
statement is not expected to have any impact on Catalyst's consolidated
financial statements. The provisions of SFAS No. 144, which was adopted on
January 1, 2002, did not have a material impact on Catalyst's consolidated
financial statements. SFAS No. 146 will be effective for exit or disposal
activities initiated after December 31, 2002. Adoption of this statement is not
expected to have a material impact on Catalyst's consolidated financial
statements. Effective December 31, 2002, Catalyst made the disclosures required
under SFAS No. 148.
2. INTANGIBLE ASSETS
- --------------------------------------------------------------------------------
Amortizable intangible assets consisted of the following at December 31:
--------------------------------------------------------------------------------------
2002 2001
--------------------------------------------------------------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
--------------------------------------------------------------------------------------
Licensed technology $ 1,188,346 $ 307,678 $ 2,375,000 $ 1,375,000
Non-compete agreement 1,090,000 1,090,000 1,090,000 575,282
--------------------------------------------------------------------------------------
$ 2,278,346 $ 1,397,678 $ 3,465,000 $ 1,950,282
======================================================================================
Amortization expense related to intangible assets was $552,604 in 2002 and
$1,950,282 in 2001.
The estimated future amortization expense related to intangible assets for the
years subsequent to December 31, 2002 is as follows:
2003 $ 312,782
2004 312,782
2005 255,104
3. BANK LINE OF CREDIT
- --------------------------------------------------------------------------------
Catalyst had a $5,000,000 bank line of credit. The line of credit, which was due
on demand, required monthly interest payments at rates tied to the prime rate or
LIBOR and was secured by substantially all of Catalyst's assets. The line of
credit expired on January 1, 2003. Borrowings on the line of credit were limited
by a borrowing base related to a percentage of Catalyst's eligible investments,
less outstanding amounts owed under the line of credit. The Company was required
to have $2.5 million of cash at the bank at December 31, 2002. This requirement
was not met at December 31, 2002. No amount was outstanding under the line of
credit at December 31, 2001.
At December 31, 2002, $601,599 was outstanding under the line of credit bearing
interest at 3.75%.
On March 17, 2003, Catalyst entered into a $1.0 million new line of credit
facility with a bank. The line of credit is due March 17, 2004, requires
quarterly interest payments at 3.5% and is secured by substantially all of
Catalyst's assets. Borrowings require the Company to have cash collateral at the
bank at all times borrowings under this facility are outstanding.
On March 17, 2003, Catalyst also obtained a $1.0 million term loan with a bank.
The term loan is due March 17, 2004 and requires quarterly interest payments at
the greater of 5.25% or prime plus 1.25%. Advances under this loan are
contingent upon the bank having collateral in the form of cash, bonds or
securities with a market value equal to or greater than the amount outstanding
under the loan. Catalyst entered into collateral fee and security
agreements with certain shareholders who pledged collateral to secure this loan
for an annual fee of 3.5% of the collateral pledged. Proceeds from this facility
were used to repay the $602,000 outstanding on the previous bank line of credit.
4. CAPITAL LEASE OBLIGATIONS AND LEASE COMMITMENTS
- --------------------------------------------------------------------------------
Capital lease obligations consisted of the following at December 31:
-----------------------------------------------------------------------
2002 2001
-----------------------------------------------------------------------
Capital lease obligations $ 30,805 $ 148,949
Less current portion (28,363) (118,454)
-----------------------------------------------------------------------
$ 2,442 $ 30,495
=======================================================================
Catalyst 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, 2002, the gross
amount of equipment recorded under capital leases and related accumulated
amortization was approximately $305,000 and $283,000, respectively. At December
31, 2001, the cost and accumulated amortization of equipment recorded under
capital leases were approximately $824,000 and $673,000, respectively.
Catalyst also leases its corporate office space under two operating leases that
extend through January 2006. Catalyst is recognizing rent expense on a
straight-line basis, which differs from the pattern of payments required by the
lease. Catalyst is required to pay real estate taxes, maintenance, utilities,
and insurance on the leased buildings.
At December 31, 2002, future payments under capital and operating leases with
remaining terms in excess of one year were as follows:
--------------------------------------------------------------------------
Capital Leases Operating Leases
--------------------------------------------------------------------------
2003 $28,864 $ 763,000
2004 2,826 820,000
2005 -- 875,000
2006 -- 359,000
2007 -- 305,000
Thereafter -- 46,000
--------------------------------------------------------------------------
Total minimum lease obligations 31,690 $3,168,000
Amounts representing interest 885
----------------------------------------------------
Capital lease obligation $30,805
====================================================
Total rent expense, including executory costs, on all operating leases was
approximately $1,446,000, $1,369,000, and $1,211,000 in 2002, 2001, and 2000
respectively.
5. SHAREHOLDERS' EQUITY