CATALYST INTERNATIONAL INC - 10-Q Quarterly Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________________________________

FORM 10-Q

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2003

/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

_________________________________________

Commission File Number 0-27138

[form10q0503001.gif]

CATALYST INTERNATIONAL, INC.

Delaware

39-1415889

(State of Incorporation)

(I.R.S. ID)

8989 North Deerwood Drive, Milwaukee, Wisconsin 53223

(414) 362-6800

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

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

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

CATALYST INTERNATIONAL, INC.

FORM 10-Q

For The Quarterly Period Ended March 31, 2003

INDEX

Page No.

PART I – FINANCIAL INFORMATION

Item 1.

Consolidated Financial Statements

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

Consolidated Statements of Operations – Three months ended

March 31, 2003 and 2002

Consolidated Statements of Cash Flows – Three months ended

March 31, 2003 and 2002

Notes to Consolidated Financial Statements

Item 2.

Management's Discussion and Analysis of Financial Condition and

Results of Operations

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Item 4.

Controls and Procedures

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

Item 6.

Exhibits and Reports on Form 8-K

Signatures

PART I – FINANCIAL INFORMATION

Item 1.

Consolidated Financial Statements

CATALYST INTERNATIONAL, INC.

Consolidated Balance Sheets

(in thousands, except share and per share data)

(unaudited)

________________________________________________________________________________________________________________________________

March 31,

December 31,

2003

2002

________________________________________________________________________________________________________________________________

Assets

Current Assets:

Cash and cash equivalents

$ 3,922

$ 3,005

Accounts receivable

5,096

9,214

Prepaid expenses and other

626

508

_________________________________________________________________________________________________________________________________

Total Current Assets

9,644

12,727

_________________________________________________________________________________________________________________________________

Equipment and Leasehold Improvements:

Computer hardware and software

7,223

Office equipment

2,377

2,380

Leasehold improvements

878

981

_________________________________________________________________________________________________________________________________

10,478

10,584

Less accumulated depreciation

(8,648)

(8,518)

___________________________________________________________________________________________________________________________________

Total Equipment and Leasehold Improvements

1,830

2,066

___________________________________________________________________________________________________________________________________

Capitalized software development costs, net of

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

in 2002

2,073

2,362

Intangible assets, net of accumulated

amortization of $387 in 2003 and $308 in 2002

802

881

___________________________________________________________________________________________________________________________________

Total Assets

$14,349

$18,036

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

See accompanying notes.

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

CATALYST INTERNATIONAL, INC.

Consolidated Balance Sheets

(in thousands, except share and per share data)

(unaudited)

___________________________________________________________________________________________________________________________________

March 31,

December 31,

2003

2002

___________________________________________________________________________________________________________________________________

Liabilities and Shareholders’ Equity (Deficit)

Current Liabilities:

Accounts payable

$ 2,662

$ 3,617

Accrued liabilities

1,617

1,678

Accrued legal and professional fees

1,048

1,143

Line of Credit

1,600

602

Deferred revenues

8,380

10,051

Current portion of capital lease obligations

___________________________________________________________________________________________________________________________________

Total Current Liabilities

15,313

17,119

___________________________________________________________________________________________________________________________________

Noncurrent Liabilities:

Capital lease obligations

Deferred revenues

Deferred rent

102

___________________________________________________________________________________________________________________________________

Total Noncurrent Liabilities

126

138

Commitments and Contigencies (Note 4)

Shareholders’ Equity (Deficit):

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

shares authorized; none issued or outstanding

—

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

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

922

Additional paid-in capital

43,691

43,690

Accumulated deficit

(39,909)

(38,039)

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

common stock in 2003 and 2002

(5,794)

___________________________________________________________________________________________________________________________________

Total Shareholders’ Equity (Deficit)

(1,090)

779

___________________________________________________________________________________________________________________________________

Total Liabilities and Shareholders’ Equity (Deficit)

$14,349

$18,036

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

See accompanying notes.

CATALYST INTERNATIONAL, INC.

Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

___________________________________________________________________________________________________________________________________

Three Months Ended March 31,

2003

2002

___________________________________________________________________________________________________________________________________

Revenues:

Software

$ 452

$ 1,149

Services and post-contract customer support

4,736

5,401

Hardware

1,092

1,618

___________________________________________________________________________________________________________________________________

Total Revenues

6,280

8,168

___________________________________________________________________________________________________________________________________

Cost of Revenues:

Cost of software

418

182

Cost of services and post-contract customer support

2,803

3,695

Cost of hardware

773

1,430

___________________________________________________________________________________________________________________________________

Total Cost of Revenues

3,994

5,307

___________________________________________________________________________________________________________________________________

Gross Margin

2,286

2,861

Operating Expenses:

Product development

1,038

1,327

Sales and marketing

2,119

2,059

General and administrative

1,026

1,001

Separation costs

—

193

___________________________________________________________________________________________________________________________________

Total Operating Expenses

4,183

4,580

___________________________________________________________________________________________________________________________________

Loss From Operations

(1,897)

(1,719)

Other Income (Expense):

Interest expense

(8)

(3)

Investment income

Miscellaneous, net

(30)

___________________________________________________________________________________________________________________________________

Total Other Income (Expense), Net

(8)

___________________________________________________________________________________________________________________________________

Net Loss

($ 1,870)

($ 1,727)

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

Basic and diluted loss per share

($0.24)

($ 0.22)

Shares used in computing net loss per share

7,796

7,794

See accompanying notes.

CATALYST INTERNATIONAL, INC.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

___________________________________________________________________________________________________________________________________

Three Months Ended March 31,

2003

2002

___________________________________________________________________________________________________________________________________

Operating Activities:

Net loss

$ (1,870)

$ (1,727)

Adjustments to reconcile net loss to net

cash provided by operating activities:

Depreciation

299

331

Amortization

368

373

Compensation expense on stock options

Loss on disposal of equipment

and leasehold improvements

Changes in operating assets and liabilities:

Accounts receivable

4,118

909

Prepaid expenses and other

(118)

(659)

Accounts payable

(955)

1,075

Accrued liabilities

(156)

(96)

Deferred revenues

(1,671)

(135)

Deferred rent

(12)

___________________________________________________________________________________________________________________________________

Total adjustments

1,875

1,800

___________________________________________________________________________________________________________________________________

Net cash provided by operating activities

Investing Activities:

Capital expenditures

(64)

(56)

Capitalized software development costs

—

(483)

Purchase of licensed technology

—

(167)

___________________________________________________________________________________________________________________________________

Net cash used in investing activities

(64)

(706)

Financing Activities:

Payments on capital lease obligations

(22)

(35)

Borrowings on line of credit, net

998

—

___________________________________________________________________________________________________________________________________

Net cash provided by/(used in) financing activities

976

(35)

___________________________________________________________________________________________________________________________________

Net increase/(decrease) in cash and cash equivalents

917

(668)

Cash and cash equivalents at beginning of period

3,005

7,906

___________________________________________________________________________________________________________________________________

Cash and cash equivalents at end of period

$ 3,922

$ 7,238

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

Supplemental Disclosure:

Cash paid for interest

See accompanying notes.

CATALYST INTERNATIONAL, INC.

Notes to Consolidated Financial Statements

March 31, 2003

(Unaudited)

1. Basis of Presentation

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

2. Net Loss Per Share of Common Stock

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

___________________________________________________________________________________________________________________________________

Three Months Ended March 31,

2003

2002

(in thousands)

___________________________________________________________________________________________________________________________________

DENOMINATOR

Denominator for basic loss per share –

weighted average common shares

7,796

7,794

Effect of dilutive securities – stock

options and warrants

------

___________________________________________________________________________________________________________________________________

Denominator for diluted loss per share

7,796

7,794

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

3. Stock-Based Compensation

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

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

___________________________________________________________________________________________________________________________________

Three Months ended March 31,

2003

2002

___________________________________________________________________________________________________________________________________

Net loss:

As reported

$(1,870)

$(1,727)

Stock-based employee compensation

expense determined under fair value based method

(214)

(328)

___________________________________________________________________________________________________________________________________

Pro forma

$(2,084)

$(2,055)

Net loss per share:

As reported, basic

$(0.24)

$(0.22)

Pro forma, basic

(0.27)

(0.26)

As reported, diluted

(0.24)

(0.22)

Pro forma, diluted

(0.27)

(0.26)

4. Contingencies

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

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

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

Item 2.

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

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

CRITICAL ACCOUNTING POLICIES

___________________________________________________________________________________________________________________________________

Revenue Recognition

Catalyst derives revenue from the sale of software, services and post-contract customer support (PCS), and hardware. PCS includes telephone support, bug fixes, and rights to upgrades on a when-and-if-available basis. Services range from installation, training, and basic consulting to software modification and customization to meet specific customer needs. In software arrangements that include rights to multiple software products, specified upgrades, PCS and/or other services, Catalyst allocates the total arrangement fee to each deliverable based on the relative fair value of each of the deliverables determined based on vendor-specific objective evidence.

Software

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

Post-Contract Customer Support

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

Services

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

Hardware

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

Contract Accounting

For arrangements that include significant customization or modification of the software, revenue is recognized using contract accounting. Revenue from these software arrangements is recognized on a percentage of completion basis, with progress to completion measured based upon labor time expended. Catalyst reserves for project cost overruns when such overruns are identified. We recognize project cost overruns where we will exceed our budgeted number of days on a project. The overrun is based on a standard cost per day.

Allowance for Doubtful Accounts

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

Legal Accruals

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

Impairment Charges

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

REVENUE

___________________________________________________________________________________________________________________________________

Catalyst's revenues are derived from software licenses, services and post-contract customer support, and hardware sales. Total revenues for the first quarter of 2003 were $6.3 million, which represented a 23.1% decrease from first quarter of 2002 total revenues of $8.2 million. In management’s view, the net decrease in total revenues for the three-month period was due primarily to global economic uncertainties which delayed customers’ purchasing decisions.

International revenues were $1.3 million in the first quarter of 2003 compared to $1.4 million in the first quarter of 2002. International revenues represented 20.8% of total revenues for the first quarter of 2003 compared to 16.8% in the same period of 2002.

Software

Software consists of revenues from software license agreements for Catalyst's primary product, CatalystCommand™, related add-on products, and relational database management systems. Software license fees in the first quarter of 2003 were $452,000, representing a decrease of 60.7% compared to the first quarter of 2002 software license fees of $1.1 million. These decreases were primarily attributable to fewer license fee contracts. Catalyst has been affected by global economic uncertainties, due to Catalyst’s global tier 1 customer base and the large capital investment required for its software products.

Our quarterly revenues are subject to fluctuation because they depend on the sale of a relatively small number of orders for our products and related services. Many of these orders are realized at the end of the quarter. As a result, our quarterly operating results may fluctuate significantly if we are unable to complete several substantial sales in any given quarter. We continue to experience lengthening sales cycles and deferrals of a number of anticipated orders, which we believe are affected by general economic uncertainty and our potential customers’ concerns over making significant capital expenditures in light of this uncertainty. Software revenues may fluctuate based upon the size of new or add-on license agreements, as well as 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 (SOP) 97-2, “Software Revenue Recognition,” as amended, 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. Revenue for projects with few or no modifications are recognized upon reaching contract milestones, to the extent that payment is fixed and determinable and considered collectible.

Services and PCS

Services and post-contract customer support (PCS) revenues are derived from software modifications, professional services, and PCS agreements. Services and PCS revenues decreased 12.3% to $4.7 million in the first quarter of 2003 from $5.4 million in the first quarter of 2002. The components of services and PCS revenues as a percentage of total revenues in the first quarter of 2002 were 10.8% for software modifications, 20.2% for professional services, and 44.4% for PCS agreements compared with 18.9%, 16.5%, and 30.7%, respectively, in the first quarter of 2002. Services and PCS revenues decreased in the first quarter of 2003 due to fewer new customer contracts signed in the fourth quarter of 2002, which resulted in fewer projects requiring software modifications and professional services.

Software modifications are determined during the customer’s Conference Room Pilot (CRP) and consist of changes to the software to facilitate specific functionality desired by the customer. We believe that future modification revenues as a percentage of total revenues could decrease due to increased functionality of newer releases of CatalystCommand; however, the relationship is dependent upon the variety of modifications that the individual customer specifies.

Professional services revenues are derived from training, performance of the CRP, technical services, project management, and implementation services. Professional services revenues are generated based on the number of days of work actually performed.

Customers typically enter into an agreement for PCS at the time they license our software and, once installed, pay for the first year of PCS in advance. PCS revenues are recognized ratably over the term of the PCS agreement.

Hardware

Hardware revenues consist primarily of computer hardware, radio frequency equipment, and printers that Catalyst sells to its customers on behalf of hardware and other equipment manufacturers. Hardware purchases by customers may vary significantly from period to period and may depend on the customers’ own purchasing power. Hardware revenues decreased by 32.5% to $1.1 million in the first quarter of 2003 from $1.6 million in the same period of 2002. The decrease in hardware revenue was due to a decrease in new customer contracts signed.

OPERATING EXPENSE

___________________________________________________________________________________________________________________________________

Cost of Software

Cost of software consists of the cost of related third-party software licenses sold by Catalyst and the amortization of capitalized software costs. In the first quarter of 2003, cost of software increased to $418,000 compared to $182,000 in the same period of 2002 due primarily to an increase in capitalized software costs subject to amortization. Software amortization in 2003 was $298,000 versus $130,000 in 2002.

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. The cost of services and PCS decreased to $2.8 million in the first quarter of 2003 from $3.7 million for the first quarter of 2002. As a percentage of services and PCS revenues, the cost of services and PCS decreased to 59.2% of related revenues for the first quarter of 2003 from 68.4% for the first quarter of 2002. The cost of services and PCS decreased due primarily to decreased personnel costs.

Cost of Hardware

Cost of hardware consists primarily of the cost of computer hardware, radio frequency equipment, and printers sold by Catalyst on behalf of the equipment manufacturers. We do not inventory, service, or discount hardware items, but make them available to customers who desire a turnkey solution. Cost of hardware in the first quarter of 2003 was $773,000 compared to $1.4 million in the first quarter of 2002. The decrease in cost for the quarter was attributable to a decrease in sales of hardware.

Product Development

Product development costs are expenses associated with research and development, including costs of engineering personnel and related development expenses such as software tools, training, and documentation. Product development costs as a percentage of total revenues for the first quarter of 2003 increased to 16.5% from 16.2% in the first quarter of 2002. Product development costs were $1.0 million and $1.3 million in the first quarter of 2003 and 2002, respectively. Product development decreased due primarily to decreased personnel costs.

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 as a percentage of total revenues for the first quarter of 2003 increased to 33.7% from 25.2% in the first quarter of 2002. Sales and marketing expenses remained flat at $2.1 million in the first quarter of 2003 as compared to the first quarter of 2002.

General and Administrative

General and administrative expenses consist primarily of the salaries of administrative, executive, finance, human resources, and quality assurance personnel. General and administrative expenses as a percentage of total revenues were 16.5% for the first quarter of 2003 and 12.3% for the first quarter of 2002. General and administrative expenses were flat at $1.0 million in the first quarter of 2003 and 2002.

OTHER OPERATING EXPENSES, INVESTMENT INCOME (LOSS), AND INCOME TAXES

___________________________________________________________________________________________________________________________________

Other Income and Expense

Other income and expense consists primarily of interest income and interest expense and does not have a material impact on operating results.

Income Tax Expense

No federal or state tax expense was recorded for the three-month periods ended March 31, 2003 and 2002 due to our federal and state net operating loss position. No deferred tax credit was recorded in the three-month periods ended March 31, 2003 and 2002 as we continue to record a valuation allowance to reserve for the net deferred tax assets.

Liquidity and Capital Resources

Net cash provided by operating activities was $5,000 for the three months ended Month 31, 2003, compared to net cash provided by operating activities of $73,000 during the three months ended March 31, 2002.

Cash used in investing activities was $64,000 during the three months ended March 31, 2003 compared to $706,000 during the three months ended March 31, 2002. The decrease was due primarily to the reduction in purchases of licensed technology products and capitalized software development costs.

Net cash provided by financing activities was $976,000 and used in financing activities was $35,000 during the three months ended March 31, 2003 and March 31, 2002, respectively. The increase was due primarily to borrowings on our lines of credit.

As of March 31, 2003, we had $3.9 million in cash and cash equivalents and negative working capital of $5.7 million. Cash and cash equivalents consist primarily of investments in money market funds.

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. At December 31, 2002, $602,000 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. At March 31, 2002, $600,000 is outstanding under the line of credit facility. 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 and directors 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 now terminated $5,000,000 bank line of credit.

Accounts receivable were $5.1 million as of March 31, 2003. This compares to $9.2 million at December 31, 2002. The decrease from December 31, 2002 was due to enhanced collection efforts, which resulted in an improvement in days sales outstanding and the decreased revenue during the first quarter. At March 31, 2003, we had a reserve for doubtful accounts of $475,000 and believe we have adequately provided for any risks with respect to our accounts receivable 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 an d capital expenditures through at least December 31, 2003. However, any projections of future cash needs and cash flows are subject to uncertainty. Our long-term capital needs will depend on numerous factors, including the rate at which we are able to obtain new business from customers, the timing and amounts of expenditures on new and enhanced products and services, and the timing and size of acquisitions that we may pursue.

We are in the process of raising additional financing via a private placement or registered stock offering for general corporate purposes and potential acquisitions. Moreover, we may consider additional interim financing, prior to completion of permanent financing, for the purpose of further enhancing our cash resources. There can be no assurance that financing will be available in amounts or on terms acceptable to us, or at all. Any such future financing could result in very substantial dilution to existing shareholders. In addition, we will, from time to time, consider the acquisition of or investment in complementary businesses, products, services, and technologies, which might impact our liquidity requirements or cause us to issue additional equity or debt securities.

We have signed a letter of intent to acquire Catalyst Consulting Services, Inc., an independent provider of consulting, implementation and support services for the SAPÒ Logistics Execution System. We expect to sign a definitive agreement in 2003, subject to approval by our board of directors. The Company believes that Catalyst Consulting Services business would not have a material impact on the company’s net working capital position.

We have never paid cash dividends on our 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 3.

Quantitative and Qualitative Disclosures about Market Risk

Catalyst does not believe it has material exposure to market risk with respect to any of its investments 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 "available for sale" for financial reporting purposes, approximates fair value at both March 31, 2003 and December 31, 2002. There were no realized gains or losses in the periods ended March 31, 2003 and 2002.

Item 4. Controls and Procedures

Catalyst maintains a set of disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports filed by us under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Within the 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and President and our Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-14 of the Exchange Act. Based on that evaluation, our Chief Executive Officer and President and our Executive Vice President and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

There have been no significant changes in our internal controls or other factors that could significantly affect those controls subsequent to the conclusion of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

See Note 4 to our consolidated financial statements as of March 31, 2003 for information regarding legal proceedings.

Item 6.

Exhibits and Reports on Form 8-K

(a)

Exhibits

99.1

Statement of James B. Treleaven, President and Chief Executive Officer

99.2

Statement of David H. Jacobson, Executive Vice President and Chief Financial Officer

(b)

Reports on Form 8-K

No reports on Form 8-K were filed during the first quarter of 2003.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CATALYST INTERNATIONAL, INC.

Dated: May 15, 2003

By:/s/ James B. Treleaven

James B. Treleaven

President and Chief Executive Officer

Signing on behalf of the registrant and as

principal executive officer.

Dated: May 15, 2003

By:/s/ David H. Jacobson

David H. Jacobson

Executive Vice President and Chief Financial Officer

Signing on behalf of the registrant and as

principal financial officer.

CERTIFICATION

I, James B. Treleavan, certify that:

I have reviewed this quarterly report on Form 10-Q of Catalyst International, Inc.;

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 15, 2003

/s/ James B. Treleaven

By:

James B. Treleavan

Title:

President and Chief Executive Officer

CERTIFICATION

I, David H. Jacobson, certify that:

I have reviewed this quarterly report on Form 10-Q of Catalyst International, Inc.;

b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

Date: May 15, 2003

/s/ David H. Jacobson

By:

David H. Jacobson

Title:

Executive Vice President and Chief Financial Officer