UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
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 No
As of August 8, 2002, 7,794,636 shares of the registrant’s common stock were outstanding.
CATALYST INTERNATIONAL, INC.
FORM 10-Q
For The Quarterly Period Ended June 30, 2002
INDEX
Page No.
PART I – FINANCIAL INFORMATION
Item 1.
Consolidated Financial Statements
3
Consolidated Balance Sheets – June 30, 2002 and December 31, 2001
3
Consolidated Statements of Operations – Three months ended
June 30, 2002 and 2001
5
Consolidated Statements of Operations – Six months ended
June 30, 2002 and 2001
6
Consolidated Statements of Cash Flows – Six months ended
June 30, 2002 and 2001
7
Notes to Consolidated Financial Statements
8
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
9
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
15
PART II – OTHER INFORMATION
Item 1.
Legal Proceedings
16
Item 4.
Submissions of Matter to a Vote of Stockholders
16
Item 6.
Exhibits and Reports on Form 8-K
16
Signatures
17
PART I – FINANCIAL INFORMATION
Item 1.
Consolidated Financial Statements
CATALYST INTERNATIONAL, INC.
Consolidated Balance Sheets
(in thousands, except share and per share data)
(unaudited)
June 30,
December 31,
2002
2001
Assets
Current Assets:
Cash and cash equivalents
$ 6,048
$ 7,906
Accounts receivable
5,232
8,950
Prepaid expenses and other
1,497
651
Total Current Assets
12,777
17,507
Equipment and Leasehold Improvements:
Computer hardware and software
7,075
7,170
Office equipment
2,370
2,372
Leasehold improvements
974
967
10,419
10,509
Less accumulated depreciation
(7,862)
(7,388)
Total Equipment and Leasehold Improvements
2,557
3,121
Capitalized software development costs, net of
accumulated amortization of $734 in 2002 and $479
in 2001
2,413
1,748
Intangible assets, net of accumulated
amortization of $2,466 in 2002 and $1,950 in 2001
1,179
1,515
Total Assets
$18,926
$23,891
See accompanying notes.
Note: The balance sheet at December 31, 2001 has been derived from the audited balance sheet at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.
CATALYST INTERNATIONAL, INC.
Consolidated Balance Sheets
(in thousands, except share and per share data)
(unaudited)
June 30,
December 31,
2002
2001
Liabilities and Shareholders’ Equity
Current Liabilities:
Accounts payable
$ 3,626
$ 3,606
Accrued liabilities
1,486
1,348
Accrued legal and professional fees
1,581
1,583
Accrued non-compete obligation
1,090
1,090
Deferred revenues
6,555
8,207
Current portion of capital lease obligations
57
119
Total Current Liabilities
14,395
15,953
Noncurrent Liabilities:
Capital lease obligations
30
30
Deferred revenues
1,565
1,566
Deferred rent
126
151
Total Noncurrent Liabilities
1,721
1,747
Shareholders’ Equity:
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: 9,214,911 in 2002 and 2001
921
921
Additional paid-in capital
43,688
43,686
Accumulated deficit
(36,005)
(32,622)
Treasury stock, at cost - 1,420,275 shares of
common stock in 2002 and 2001
(5,794)
(5,794)
Total Shareholders’ Equity
2,810
6,191
Total Liabilities and Shareholders’ Equity
$18,926
$23,891
See accompanying notes.
Note: The balance sheet at December 31, 2001 has been derived from the audited balance sheet at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.
CATALYST INTERNATIONAL, INC.
Consolidated Statements of Operations
(in thousands, except share and per share data)
(unaudited)
Three Months Ended June 30,
2002
2001
Revenues:
Software
$ 1,151
$ 370
Services and post-contract customer support
5,650
6,317
Hardware
1,889
1,113
Total Revenues
8,690
7,800
Cost of Revenues:
Cost of software
511
178
Cost of services and post-contract customer support
3,680
4,578
Cost of hardware
1,486
999
Total Cost of Revenues
5,677
5,755
Gross Margin
3,013
2,045
Operating Expenses:
Product development
1,018
1,458
Sales and marketing
2,392
2,489
General and administrative
1,094
1,806
Separation costs
210
257
Total Operating Expenses
4,714
6,010
Loss From Operations
(1,701)
(3,965)
Other Income (Expense):
Interest expense
(3)
(8)
Investment income
26
159
Miscellaneous, net
22
(39)
Total Other Income, Net
45
112
Net Loss
($ 1,656)
($ 3,853)
Basic and diluted loss per share
($0.21)
($ 0.48)
Shares used in computing net loss per share
7,795
8,020
See accompanying notes.
CATALYST INTERNATIONAL, INC.
Consolidated Statements of Operations
(in thousands, except share and per share data)
(unaudited)
Six Months Ended June 30,
2002
2001
Revenues:
Software
$ 2,300
$ 1,419
Services and post-contract customer support
11,051
12,224
Hardware
3,507
2,445
Total Revenues
16,858
16,088
Cost of Revenues:
Cost of software
693
414
Cost of services and post-contract customer support
7,375
9,125
Cost of hardware
2,916
2,058
Total Cost of Revenues
10,984
11,597
Gross Margin
5,874
4,491
Operating Expenses:
Product development
2,345
2,646
Sales and marketing
4,451
4,981
General and administrative
2,095
4,555
Separation costs
403
708
Total Operating Expenses
9,294
12,890
Loss From Operations
(3,420)
(8,399)
Other Income (Expense):
Interest expense
(6)
(16)
Investment income
51
416
Miscellaneous, net
(8)
(66)
Total Other Income, Net
37
334
Net Loss
($ 3,383)
($ 8,065)
Basic and diluted loss per share
($ 0.42)
($ 1.00)
Shares used in computing net loss per share
7,795
8,030
See accompanying notes.
CATALYST INTERNATIONAL, INC.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Six Months Ended June 30,
2002
2001
Operating Activities:
Net loss
$ (3,383)
$ (8,065)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation
649
832
Amortization
771
1,050
Compensation expense on stock options
2
-
Loss on disposal of equipment
and leasehold improvements
31
37
Changes in operating assets and liabilities:
Accounts receivable
3,718
2,517
Prepaid expenses and other
(846)
(126)
Accounts payable
20
(1,145)
Accrued liabilities
136
153
Deferred revenues
(1,653)
4,708
Deferred rent
(25)
(24)
Total adjustments
2,803
8,002
Net cash used in operating activities
(580)
(63)
Investing Activities:
Capital expenditures
(117)
(788)
Capitalized software development costs
(920)
(616)
Purchase of licensed technology
(180)
(7,500)
Proceeds from sale of equipment
1
8
Proceeds from sale of internal use software
-
917
Net cash used in investing activities
(1,216)
(7,979)
Financing Activities:
Payments on capital lease obligations
(62)
(129)
Proceeds from exercise of stock options
-
18
Purchase of treasury stock
-
(202)
Net cash used in financing activities
(62)
(313)
Net decrease in cash and cash equivalents
(1,858)
(8,355)
Cash and cash equivalents at beginning of period
7,906
21,200
Cash and cash equivalents at end of period
$ 6,048
$ 12,845
Supplemental Disclosure:
Cash paid for interest
6
16
Noncash investing and financing activities:
During the first quarter of 2001, we entered into a non-compete agreement for $1,090.
See accompanying notes.
CATALYST INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
June 30, 2002
(Unaudited)
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for fiscal year end financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. For further information, refer to the financial statements and footnotes thereto included in th e Catalyst International, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 2001.
2. Net Loss Per Share of Common Stock
Catalyst International, Inc. (“Catalyst” or “we” or “our”) has presented net loss per share in accordance with Statement of Financial Accounting Standards (SFAS) No. 128, “Earnings Per Share.” The following table sets forth the computation of basic and diluted weighted average shares used in the per share calculations. The numerator for the calculation of basic and diluted loss per share is net loss in each period.
(in thousands)
For the
For the
Three Months
Six Months
Ended June 30,
Ended June 30,
2002
2001
2002
2001
DENOMINATOR
Denominator for basic loss per share –
weighted average common shares
7,795
8,020
7,795
8,030
Effect of dilutive securities – stock
options and warrants
-
-
-
-
Denominator for diluted loss per share
7,795
8,020
7,795
8,030
3. Contingencies
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 for approximately $800,000, plus interest at 5% from December 7, 2001. Catalyst 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. It is believed that the Court could make a ruling on this matter during the second half of 2002. At this point in time, it is not possible to predict the probable outcome of this proceeding.
Catalyst believes that because it has adequately reserved for this matter, the outcome of this proceeding will not have a material effect on our 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 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, 2001. 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 3 of our consolidated financial statements, as of June 30, 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 the 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. In the year ended December 31, 2001, we 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.
REVENUE
Catalyst's revenues are derived from software licenses, services and post-contract customer support, and hardware sales. Total revenues for the second quarter of 2002 were $8.7 million, which represented an 11.4% increase over second quarter of 2001 total revenues of $7.8 million. For the first six months of 2002, total revenues were $16.9 million, up 4.8% compared to 2001 total revenues of $16.1 million for the same period. The increase in total revenues for the three- and six-month periods was due primarily to an increase in software and hardware revenue as discussed below.
International revenues were $756,000 in the second quarter of 2002 compared to $1.2 million in the second quarter of 2001. International revenues represented 8.7% of total revenues for the second quarter of 2002 compared to 15.0% in the same period of 2001. International revenues were $2.1 million and $2.7 million for the six-month periods ended June 30, 2002 and 2001, respectively. We expect that international revenues should increase due to recent investments in international sales and marketing.
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 second quarter of 2002 were $1.2 million, representing an increase of 211.1% compared to the second quarter of 2001 software license fees of $370,000. Software license fees were $2.3 million and $1.4 million for the six-month periods ended June 30, 2002 and 2001, respectively. These increases were primarily attributable to higher value license fees and an increase in third party software sales.
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 have recently experienced lengthening sales cycles and deferrals of a number of anticipated orders, which we believe have been 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. We believe that revenues may increase due to enhanced worldwide sales and marketing efforts, our strategic alliance with SAP America, Inc. and SAP AG, the introduction of new products, efforts to deliver standard packaged solutions that meet the requirements of our vertical markets, and the maturation of our sales force. We expect that as economic conditions improve and prospective customers begin to benefit from that improvement, we will see an increase in new sales activity.
Catalyst follows the software revenue recognition practices set forth in Statement of Position (SOP) 97-2, “Software Revenue Recognition,” 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 10.6% to $5.7 million in the second quarter of 2002 from $6.3 million in the second quarter of 2001. For the six-month period ended June 30, 2002, services and PCS revenues were $11.1 million, a decrease of 9.6%, compared to revenues of $12.2 million for the first six months of 2001. The components of services and PCS revenues as a percentage of total revenues in the second quarter of 2002 were 24.0% for software modifications, 11.9% for professional services, and 29.2% for PCS agreements compared with 21.6%, 30.9%, and 28.5%, respectively, in the second quarter of 2001. Services and PCS revenues decreased in the second quarter of 2002 due to fewer new customer contracts signed in the first and second quarters 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. We believe that future professional services revenues could increase as new customer contracts are signed and as we sell services to SAP customers.
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. We believe that PCS revenues should increase as existing PCS agreements are renewed and additional license agreements are sold but should remain relatively constant as a percentage of total revenues.
Hardware
Hardware revenues consist primarily of computer hardware, radio frequency equipment, and printers that Catalyst sold 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 increased by 69.7% to $1.9 million in the second quarter of 2002 from $1.1 million in the same period of 2001. Hardware revenues represented 20.8% of total revenues in the first half of 2002 compared to 15.2% for the same period in 2001. The increase in hardware revenue was due to an increase in hardware sales to existing customers.
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 second quarter of 2002, cost of software increased to
$511,000 compared to $178,000 in the same period of 2001 due primarily to an increase in third-party software sales.
Year-to-date cost of software increased by 67.4% to $693,000 in 2002 from $414,000 in 2001, reflecting an increase in third party software sales. We anticipate that the cost of software for third-party products should remain relatively constant in the future as a percentage of total software revenues and as a percentage of related third-party software revenues.
Cost of Services and PCS
Cost of services and PCS consists primarily of personnel and related costs for the performance of software modifications, professional services, and PCS. The cost of services and PCS decreased to $3.7 million in the second quarter of 2002 from $4.6 million for the second quarter of 2001. As a percentage of services and PCS revenues, the cost of services and PCS decreased to 65.1% of related revenues for the second quarter of 2002 from 72.5% for the second quarter of 2001. The cost of services and PCS decreased due primarily to decreased personnel costs.
Year-to-date cost of services and PCS decreased 19.2% to $7.4 million in 2002 from $9.1 million for the same period in 2001 and decreased as a percent of related revenues to 66.7% at June 30, 2002 from 74.6% at June 30, 2001. We believe that the cost of services and PCS as a percentage of related revenues will depend on the quantity and value of new customer contracts signed in 2002.
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 second quarter of 2002 was $1.5 million compared to $999,000 in the second quarter of 2001. Cost of hardware was $2.9 million and $2.1 million for the six-month periods ended June 30, 2002 and 2001, respectively. The increase in cost for the quarter and six-month period ending June 30, 2002 was attributable to the increase 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 second quarter of 2002 decreased to 11.7% from 18.7% in the second quarter of 2001. Product development costs were $1.0 million in the second quarter of 2002, compared to $1.5 million in the second quarter of 2001. Year to date product development expenses decreased by 11.4% to $2.3 million for the six months ended June 30, 2002. Product development decreased due primarily to decreased personnel costs. We believe that product development costs may increase in the future as more resources are devoted to existing and anticipated new product offerings.
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 second quarter of 2002 decreased to 27.5% from 31.9% in the second quarter of 2001. Sales and marketing expenses decreased to $2.4 million in the second quarter of 2002 from $2.5 million in the second quarter of 2001 and decreased to $4.5 million for the six months
ended June 30, 2002 compared to $5.0 million for the same period in 2001. The decrease in sales and marketing expenses for the current quarter was due primarily to a reduction in marketing personnel and improved cost control measures. We believe that sales and marketing expenses may increase in the future due to the anticipated expansion of the sales and marketing teams.
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 12.6% for the second quarter of 2002 and 23.2% for the second quarter of 2001. General and administrative expenses decreased to $1.1 million in the second quarter of 2002 from $1.8 million in the second quarter of 2001. For the six-month period, general and administrative expenses were $2.1 million for 2002 compared to $4.6 million for 2001. General and administrative expenses decreased for the three- and six-month periods of 2002 due primarily to a reduction in bad debt and legal expense. We anticipate that general and administrative expenses may decrease in the future as a percentage of total revenues.
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. We expect that other income and expense may decrease in the future as interest income decreases due to lower invested cash balances and lower interest rates.
Income Tax Expense
No federal or state tax expense was recorded for the six-month periods ended June 30, 2002 and 2001 due to our federal and state net operating loss position. No deferred tax credit was recorded in the six-month periods ended June 30, 2002 and 2001 as we continue to record a valuation allowance to reserve for the net deferred tax assets.
Liquidity and Capital Resources
Net cash used in operating activities was $580,000 for the six months ended June 30, 2002, compared to net cash used in operating activities of $63,000 during the six months ended June 30, 2001.
Cash used in investing activities was $1.2 million during the six months ended June 30, 2002 compared to $8.0 million during the six months ended June 30, 2001. The decrease was due primarily to the reduction in purchases of licensed technology products and a reduction in capital expenditures.
Net cash used in financing activities was $62,000 and $313,000 at June 30, 2002 and June 30, 2001, respectively. The decrease was due primarily to lower outstanding capital lease obligations and a reduction of the purchase of treasury stock.
As of June 30, 2002, we had $6.0 million in cash and cash equivalents and negative working capital of $1.6 million. Cash and cash equivalents consist primarily of investments in money market funds and commercial paper. We have a $5.0 million line of credit (the Revolving Credit Facility) with Bank One, Milwaukee, Wisconsin. The Revolving Credit Facility bears interest at the prime rate or LIBOR, subject to terms and conditions found in the Revolving Credit Facility agreement, and expires on January 1, 2003. Borrowings on the Revolving Credit Facility are limited by a borrowing base related to a percentage of
our eligible cash and cash equivalents, less outstanding amounts owed to Bank One. As of June 30, 2002, there were no amounts outstanding under the Revolving Credit Facility, nor have there been any borrowings on the Revolving Credit Facility since it was established. Because availability under the Revolving Credit Facility is tied to the amount of our cash, the Revolving Credit Facility would not serve as a source of liquidity at a time when we would most need it. We are currently in the process of securing a more favorable asset based credit facility, which we believe will allow us access to additional liquidity.
Accounts receivable were $5.2 million as of June 30, 2002. This compares to $9.0 million at December 31, 2001. The decrease from December 31, 2001 was due to enhanced collection efforts, which resulted in an improvement in days sales outstanding. At June 30, 2002, we had a reserve for doubtful accounts of $750,000 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 and capital expenditures through at least December 31, 2002. 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 and the timing and amounts of expenditures on new and enhanced products and services.
If current cash, cash equivalents, and projected available borrowings under the planned asset based credit facility are deemed insufficient to satisfy our liquidity requirements, we will likely seek to sell additional equity or debt securities. Moreover, we may determine to sell additional equity or debt for the purpose of further enhancing our cash resources. 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 equity or debt securities. There can be no assurance that financing will be available in amounts acceptable to us, or at all.
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 June 30, 2002 and December 31, 2001. There were no realized gains or losses in the periods ended June 30, 2002 and 2001.
PART II – OTHER INFORMATION
Item 1.
Legal Proceedings
See Note 3 to our consolidated financial statements as of June 30, 2002 for information regarding legal proceedings.
Item 4.
Submission of Matters to a Vote of Shareholders
(a)
Catalyst’s 2002 Annual Meeting of Shareholders was held on May 17, 2002.
(b)
Messrs. James F. Goughenour, William G. Nelson, and James B. Treleaven were each elected as a Class I director for a term of three years. Messrs. Douglas B. Coder and Terrence L. Mealy were elected at the annual meeting held in 2000 for a term of three years and continue as Class II directors. Mr. Roy J. Carver, Jr. was elected at the annual meeting held in 2001 for a term of three years and continues as a Class III director.
(c)
The shareholders voted on the following matters:
(i)
Election of three directors. Management proposed the election of Messrs. Goughenour, Nelson, and Treleaven.
Authority
Authority
Authority
Nominee
Granted
Withheld
Abstained
James F. Goughenour
4,951,466
0
1,000
William G. Nelson
4,951,916
0
0
James B. Treleaven
4,963,968
0
1,000
Steven D. Landauer
380,992
0
0
(ii)
Ratification of the appointment Ernst & Young LLP as independent auditors for 2002.
Authority
Authority
Authority
Granted
Withheld
Abstained
Ratification of Ernst & Young LLP
7,389,880
17,600
10,162
No other matters were acted upon by the shareholders at the Annual Meeting.
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 second quarter of 2002.
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: August 14, 2002
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: August 14, 2002
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.