<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 21, 1998
REGISTRATION NO. 333-56627
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CATAPULT COMMUNICATIONS CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
NEVADA 3670 77-0086010
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>
160 SOUTH WHISMAN ROAD
MOUNTAIN VIEW, CALIFORNIA 94041
(650) 960-1025
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
RICHARD A. KARP
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CATAPULT COMMUNICATIONS CORPORATION
160 SOUTH WHISMAN ROAD
MOUNTAIN VIEW, CALIFORNIA 94041
(650) 960-1025
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
------------------------------
COPIES TO:
HENRY P. MASSEY, JR., ESQ. KENNETH L. GUERNSEY, ESQ.
DAVID C. DRUMMOND, ESQ. CYDNEY S. POSNER, ESQ.
DEBRA B. ROSLER, ESQ. JEFF B. FURCHTENICHT, ESQ.
JOANNA S. LIN, ESQ. Cooley Godward LLP
Wilson Sonsini Goodrich & Rosati One Maritime Plaza, 20th Floor
Professional Corporation San Francisco, California 94111
650 Page Mill Road (415) 693-2000
Palo Alto, California 94304
(650) 493-9300
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 (the "Securities Act"), check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / _____
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _____
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _____
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE(3)
<S> <C> <C> <C> <C>
Common Stock, par value $.001.............. 3,855,375 $11.00 $42,409,125.00 $12,511.00
</TABLE>
(1) Includes 502,875 shares of Common Stock issuable upon exercise of the
Underwriters' overallotment option.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(a) of the Securities Act of 1933.
(3) Previously paid.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 21, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
3,352,500 SHARES
[LOGO]
COMMON STOCK
Of the 3,352,500 shares of Common Stock offered hereby, 2,100,000 shares are
being sold by Catapult Communications Corporation ("Catapult" or the "Company")
and 1,252,500 shares are being sold by the Selling Stockholders. The Company
will not receive any of the proceeds from the sale of shares by the Selling
Stockholders. See "Principal and Selling Stockholders."
Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering price
will be between $9.00 and $11.00 per share. See "Underwriting" for a discussion
of the factors to be considered in determining the initial public offering
price. The Company has applied to have the Common Stock approved for quotation
on the Nasdaq National Market under the symbol CATT.
--------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 5.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PROCEEDS TO
UNDERWRITING PROCEEDS TO SELLING
PRICE TO PUBLIC DISCOUNT (1) COMPANY (2) STOCKHOLDERS
<S> <C> <C> <C> <C>
Per Share..................... $ $ $ $
Total (3)..................... $ $ $ $
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $725,000.
(3) A Selling Stockholder has granted to the Underwriters a 30-day option to
purchase up to 502,875 additional shares of Common Stock, solely to cover
over-allotments, if any. If all such shares are purchased, the total Price
to Public, Underwriting Discount and Proceeds to Selling Stockholders will
be $ , $ and $ , respectively. See "Underwriting."
--------------
The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1998, at the offices of the agent of Hambrecht
& Quist LLC in New York, New York.
HAMBRECHT & QUIST
CIBC OPPENHEIMER
C.E. UNTERBERG, TOWBIN
, 1998
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act")
with respect to the shares of Common Stock offered hereby. This Prospectus does
not contain all of the information set forth in the Registration Statement and
the exhibits and schedules thereto. For further information with respect to the
Company and such Common Stock, reference is made to the Registration Statement
and the exhibits and schedules filed as a part thereof. Statements contained in
this Prospectus as to the contents of any contract or any other document
referred to are not necessarily complete and, in each instance, if such contract
or document is filed as an exhibit, reference is made to the copy of such
document filed as an exhibit to the Registration Statement. The Registration
Statement, including exhibits and schedules thereto, may be inspected without
charge at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at Room 1228, Seven World Trade
Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials
may be obtained from the Public Reference Section of the Commission, Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and its public
reference facilities in New York, New York and Chicago, Illinois, at prescribed
rates. In addition, the Commission maintains a Website on the Internet that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The address
of the Commission's Website is http://www.sec.gov.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
Catapult, DCT and DCPL are trademarks of the Company. This Prospectus also
includes trade names, trademarks and registered trademarks of companies other
than the Company.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO
APPEARING ELSEWHERE IN THIS PROSPECTUS. THE COMMON STOCK OFFERED HEREBY INVOLVES
A HIGH DEGREE OF RISK. SEE "RISK FACTORS." CERTAIN TECHNICAL AND OTHER TERMS
USED IN THIS PROSPECTUS ARE DEFINED IN THE GLOSSARY LOCATED ON PAGE G-1.
THE COMPANY
Catapult Communications Corporation ("Catapult" or the "Company") designs,
develops, manufactures, markets and supports an advanced software-based test
system offering an integrated suite of testing applications for the global
telecommunications industry. Catapult's Digital Communications Tester ("DCT") is
a comprehensive test solution designed to enable equipment manufacturers and
network operators to deliver complex digital telecommunications equipment and
services more quickly and cost-effectively, while helping to ensure
interoperability and reliability. The Company's advanced software and hardware
assist customers in the design, integration, installation and acceptance testing
of a broad range of digital telecommunications equipment and services. The
Company markets its products through a direct sales force to industry leaders
such as Cable & Wireless Communications PLC ("Cable & Wireless"), Fujitsu
Limited ("Fujitsu"), LM Ericsson ("Ericsson"), Lucent Technologies, Inc.
("Lucent"), Motorola Inc. ("Motorola"), NEC Corporation ("NEC"), Northern
Telecom Limited ("Nortel"), Nippon Telephone and Telegraph ("NTT") and Tellabs
Inc. ("Tellabs").
Technological advances, increasing competition resulting from deregulation
and privatization and a proliferation of standards are fundamentally changing
the telecommunications industry. Today, network operators are able to choose
heterogeneous products from multiple equipment manufacturers to obtain the best
set of features and reduce network cost. Consequently, to remain competitive,
equipment manufacturers must be able to rapidly provide cost-effective equipment
with enhanced features. At the same time, manufacturers and operators must
ensure that these advanced new products satisfy the telecommunications
industry's rigorous standards of seamless interoperability and high reliability
under variable traffic conditions. To address these needs, manufacturers and
operators require versatile test systems that can identify and locate errors in
network equipment, enhance the performance of the network, verify conformance to
industry standards and help ensure the interoperability of equipment from
various vendors.
The DCT system performs a variety of test functions, including simulation,
load and stress testing, feature verification, conformance testing and
monitoring. Catapult maintains an extensive library of software modules that
support more than 100 variants of approximately 30 protocols. The Company's
emphasis is on complex, high-level and emerging protocols, including Signaling
System 7 (SS7), Intelligent Network (IN), Global Systems for Mobile
Communications (GSM), V5, Code Division Multiple Access (CDMA), Integrated
Services Digital Network (ISDN) and Frame Relay. The Company's extensive
technical know-how and proprietary software development tools enable the Company
to implement new protocols and protocol variants rapidly in response to customer
needs. With its extensive library of software protocol modules, large selection
of physical interfaces and versatile platform, the DCT system is easily
configured to support a wide variety of digital testing functions, thereby
reducing a customer's need for multiple test systems. In addition, the DCT
system's multi-protocol, multi-user capability allows multiple testing
operations to be performed simultaneously, helping the Company's customers to
accelerate their product development cycles.
The Company's objective is to become the leading supplier of advanced
software-based test systems for the global telecommunications industry. The
Company's strategy is to expand its direct sales and technical support presence
worldwide to increase market penetration, continue to support new and complex
protocols and variants, broaden the market for the DCT system by enhancing ease
of use through a graphical user interface and development of pre-programmed
applications, leverage its installed base of customers to gain access to
additional customers and pursue strategic acquisitions as appropriate
opportunities are identified.
The Company's predecessor was incorporated in California in October 1985 and
reincorporated in Nevada in June 1998. As used in this Prospectus, "Catapult"
and the "Company" refer to Catapult Communications Corporation and its three
wholly-owned subsidiaries, Catapult Communications Ltd., a corporation organized
under the laws of the United Kingdom, and Catapult Communications K.K., a
corporation organized under the laws of Japan, both of which provide sales and
technical support, and ISDN Technologies, Ltd., a foreign sales corporation
organized under the laws of Barbados. The Company's principal executive offices
are located at 160 South Whisman Road, Mountain View, California 94041. Its
telephone number is (650) 960-1025.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company............ 2,100,000 shares
Common Stock offered by the Selling 1,252,500 shares
Stockholders.................................
Common Stock to be outstanding after the 12,590,946 shares (1)
offering.....................................
Use of proceeds................................ For working capital and general corporate
purposes. See "Use of Proceeds."
Proposed Nasdaq National Market symbol......... CATT
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED SEPTEMBER 30, ENDED JUNE 30,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF INCOME DATA:
Total revenues....................... $ 2,307 $ 3,816 $ 6,869 $ 9,252 $ 13,352 $ 10,907 $ 13,080
Gross profit......................... 1,904 3,000 5,933 7,903 11,432 9,390 11,333
Operating income..................... 710 1,407 3,047 3,730 5,400 4,976 6,224
Net income........................... $ 485 $ 975 $ 2,172 $ 2,288 $ 3,338 $ 3,037 $ 3,617
Earnings per share--diluted (2)...... $ 0.05 $ 0.10 $ 0.22 $ 0.22 $ 0.31 $ 0.29 $ 0.33
Weighted average shares-- diluted.... 9,569 9,701 10,058 10,301 10,605 10,566 10,889
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------------
PRO FORMA
AS
ACTUAL ADJUSTED(3)
--------- -------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........................................................... $ 13,254 $ 32,059
Working capital..................................................................... 12,933 31,738
Total assets........................................................................ 18,597 37,402
Redeemable common stock (4)......................................................... 5,000 --
Total stockholders' equity.......................................................... 9,024 32,829
</TABLE>
- ------------------------
(1) Based on the number of shares outstanding at June 30, 1998. Excludes, as of
June 30, 1998, 696,850 shares of Common Stock issuable upon exercise of
outstanding options at a weighted average exercise price of $1.00 per share
and an aggregate of 2,873,578 shares reserved for future grant under the
Company's 1989 Stock Option Plan, 1998 Stock Plan and 1998 Employee Stock
Purchase Plan (the "Stock Plans"). See "Management--Stock Plans" and Note 4
of Notes to Consolidated Financial Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements for the method used
to calculate earnings per share.
(3) Adjusted to reflect (i) the reclassification of $5.0 million of redeemable
common stock which will no longer be redeemable upon completion of this
offering and (ii) the sale of 2,100,000 shares of Common Stock offered by
the Company hereby at an assumed initial public offering price of $10.00 per
share and the application of the estimated net proceeds therefrom. See "Use
of Proceeds" and "Capitalization."
(4) See Note 8 of Notes to Consolidated Financial Statements.
------------------------
UNLESS THE CONTEXT OTHERWISE INDICATES, ALL REFERENCES TO THE "COMPANY" AND
"CATAPULT" MEAN CATAPULT COMMUNICATIONS CORPORATION AND ITS SUBSIDIARIES,
CATAPULT COMMUNICATIONS LTD., A CORPORATION ORGANIZED UNDER THE LAWS OF THE
UNITED KINGDOM, CATAPULT COMMUNICATIONS K.K., A CORPORATION ORGANIZED UNDER THE
LAWS OF JAPAN, AND ISDN TECHNOLOGIES, LTD., A FOREIGN SALES CORPORATION
ORGANIZED UNDER THE LAWS OF BARBADOS. EXCEPT AS OTHERWISE NOTED, ALL INFORMATION
IN THIS PROSPECTUS (I) GIVES EFFECT TO THE REINCORPORATION OF THE COMPANY FROM
CALIFORNIA INTO NEVADA IN JUNE 1998 IN WHICH STOCKHOLDERS OF THE CALIFORNIA
CORPORATION RECEIVED THREE SHARES OF STOCK OF THE NEVADA CORPORATION FOR EVERY
TWO SHARES OF STOCK OF THE CALIFORNIA CORPORATION AND (II) ASSUMES NO EXERCISE
OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE "UNDERWRITING."
4
<PAGE>
RISK FACTORS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN
THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE
SET FORTH BELOW AND ELSEWHERE IN THIS PROSPECTUS. THE FOLLOWING RISK FACTORS
SHOULD BE CONSIDERED CAREFULLY IN ADDITION TO THE OTHER INFORMATION IN THIS
PROSPECTUS BEFORE PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; LENGTHY SALES CYCLE. The
Company has experienced, and anticipates that it will continue to experience,
significant fluctuations in quarterly revenues and operating results. The
Company's revenues and operating results are relatively difficult to forecast
for a number of reasons, including (i) the variable size and timing of
individual purchases by customers, (ii) seasonal factors that may affect capital
spending by customers, such as the varying fiscal year ends of customers and the
reduction in business during the summer months, particularly in Europe, (iii)
the relatively long sales cycles for the Company's products, (iv) the timing of
hiring sales and technical personnel, (v) changes in timing and amount of sales
incentive compensation, (vi) competitive conditions in the Company's markets,
(vii) exchange rate fluctuations, (viii) changes in the mix of products sold,
(ix) the timing of the introduction and market acceptance of new products or
product enhancements by the Company, its customers, competitors or suppliers,
(x) costs associated with developing and introducing new products, (xi) product
life cycles, (xii) changes in the level of operating expenses relative to
revenues, (xiii) software defects and other product quality problems, (xiv)
customer order deferrals in anticipation of new products, (xv) supply
interruptions, (xvi) changes in the regulatory environment and (xvii) changes in
global or regional economic conditions or in the telecommunications industry.
The Company's revenues in any period generally have been, and are likely to
continue to be, derived from relatively small numbers of sales and service
transactions with relatively high average revenues per order. Therefore, the
loss of any orders or delays in closing such transactions could have a more
significant impact on the Company's quarterly revenues and results of operations
than on those of companies with relatively high volumes of sales or low revenues
per order. The Company's products generally are shipped within 15 to 30 days
after orders are received and revenues are recognized upon shipment of the
products, provided no significant vendor obligations remain and collection of
the related receivable is deemed probable. As a result, the Company generally
does not have a significant backlog of orders, and revenues in any quarter are
substantially dependent on orders booked and shipped in that quarter.
A customer's decision to purchase the Company's products typically involves
a significant technical evaluation, internal procedural delays associated with
large capital expenditure approvals and testing and acceptance of new systems
that affect key operations. For these and other reasons, the sales cycle
associated with the Company's products is typically lengthy and subject to a
number of significant risks over which the Company has little or no control.
Historically, the period between initial customer contact and purchase of the
Company's products has typically ranged from two to nine months, with sales to
new customers (including new divisions within existing customers) at the longer
end of this range. Because of the lengthy sales cycle and the relatively small
number and large size of customers' orders, if revenues forecast from a specific
customer for a particular quarter are not realized in that quarter, the
Company's operating results for that quarter could be materially adversely
affected.
The Company's expectations for future revenues are predicated, to a large
extent, on the recruitment and hiring of a significant number of employees,
particularly experienced sales and technical personnel. Failure to hire, or
delays in hiring, sufficient sales and technical personnel could have a material
adverse effect on the Company's results of operations for any period.
Due to the relatively fixed nature of most of the Company's costs, including
personnel and facilities costs, and because operating expenses are based on
anticipated revenue, a decline in revenue from even a limited number of
transactions, failure to achieve expected revenue in any fiscal quarter or
unanticipated variations in the timing of recognition of specific revenues can
cause significant variations in operating results from quarter to quarter and
may in some future quarter result in losses or have a material adverse effect on
the Company's
5
<PAGE>
business, financial condition and results of operations. The Company believes,
therefore, that period-to-period comparisons of its operating results should not
be relied upon as an indication of future performance.
For all of the foregoing factors, as well as other unanticipated factors, it
is possible that in some future quarter the Company's results of operations
could fail to meet the expectations of public market analysts or investors. In
such event, or in the event that adverse conditions prevail or are perceived to
prevail generally or with respect to the Company's business, the price of the
Company's Common Stock will likely be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE ON LIMITED NUMBER OF CUSTOMERS. The Company's customer base is
highly concentrated, and a relatively small number of companies has accounted
for substantially all of the Company's revenues to date. Revenues from the top
four customers represented approximately 75%, 54% and 60% of total revenues in
fiscal 1995, 1996 and 1997, respectively. The Company's largest customer over
this period has been Motorola, which accounted for approximately 37%, 23% and
28% of total revenues in fiscal 1995, 1996 and 1997, respectively. In the nine
months ended June 30, 1998, the Company's top four customers represented
approximately 69% of total revenues. These customers, NTT, Motorola, NEC and
Lucent, accounted for approximately 24%, 19%, 15% and 11% of total revenues,
respectively, in that period. The Company's top four customers in fiscal 1997
were Motorola, NEC, NTT and Fujitsu, which accounted for approximately 28%, 17%,
7% and 7% of total revenues, respectively. The Company expects that it will
continue to depend upon a relatively limited number of customers for
substantially all of its revenues in future periods, although no customer is
presently obligated either to purchase a specific amount of products or to
provide the Company with binding forecasts of purchases for any period. The loss
of a major customer or the reduction, delay or cancellation of orders from one
or more of the Company's significant customers could materially adversely affect
the Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Customers."
COMPETITIVE MARKET FOR TECHNICAL AND SALES PERSONNEL. The Company's success
depends in part on its ability to attract, hire, train, retain and motivate
qualified technical and sales personnel with appropriate levels of managerial
and technical capabilities. The Company believes that a significant level of
expertise is required to develop and market the Company's products and services
effectively. The Company has in the past experienced, and expects to continue to
experience, difficulty in recruiting qualified technical and sales personnel.
The Company believes that the pool of potential applicants with the requisite
expertise is very limited. Recruiting qualified personnel is an intensely
competitive and time-consuming process. The Company competes for such personnel
with a number of other companies, many of which have substantially greater
resources than the Company. Such competition has also resulted in demands for
increased compensation from qualified applicants, and the Company may not be
able to compete effectively for such personnel with companies that provide more
attractive compensation arrangements. There can be no assurance that the Company
will be successful in attracting and retaining the technical and sales personnel
it requires to conduct and expand its operations successfully on a timely basis.
The failure to attract, hire, train, retain and motivate qualified technical and
sales personnel in the future would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Sales and Marketing."
RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS; FOREIGN EXCHANGE
RISK. International sales constituted approximately 54%, 55%, 53% and 69% of
the Company's total revenues in fiscal 1995, 1996 and 1997 and the nine months
ended June 30, 1998, respectively. The Company expects that international sales
will continue to account for a significant portion of its revenues in future
periods. The Company sells its products worldwide through its direct sales
force. The Company has offices located in Ottawa, Canada, Chippenham, United
Kingdom and Tokyo, Japan and plans to open new offices in continental Europe.
International sales and operations are subject to inherent risks, including
difficulties in staffing and managing foreign operations, longer customer
payment cycles, greater difficulty in accounts receivable collection, changes in
regulatory requirements or in economic or trade policy, costs related to
localizing products for foreign countries, potentially
6
<PAGE>
weaker protection for intellectual property in certain foreign countries, the
burden of complying with a wide variety of foreign laws and practices, tariffs
and other trade barriers, and potentially adverse tax consequences, including
restrictions on repatriation of earnings. During the last two fiscal years a
significant portion of the Company's sales has been to customers in Japan. If
economic conditions in Japan continue to deteriorate to a significant extent,
the Company's business, financial condition and results of operations could be
materially adversely affected. In addition, the Company cannot predict the
potential consequences to the Company's business of the adoption of the Euro as
a common currency in Europe. An inability to obtain necessary regulatory
approvals in foreign markets on a timely basis could also have a material
adverse effect on the Company's business, financial condition and results of
operations.
Most of the Company's international sales, including its sales in Japan, are
denominated in local currencies, and currently the Company does not engage in
significant currency hedging activities. The Company may elect in the future to
engage in hedging transactions; however, there can be no assurance that the
Company will do so or that it will be successful in doing so. Fluctuations in
foreign currency exchange rates may contribute to fluctuations in the Company's
operating results. For example, changes in foreign currency exchange rates could
adversely affect revenues, net income, earnings per share and cash flow of the
Company's operations in the affected markets. Similarly, such fluctuations may
cause the Company to raise prices, which could affect demand for the Company's
products and services. In addition, if exchange or price controls or other
restrictions are imposed in countries in which the Company does business, the
Company's business, financial condition and results of operations would be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation--Overview."
MANAGEMENT OF GROWTH. The Company's growth has placed, and is expected to
continue to place, significant demands on its management, administrative and
operational resources. During the first nine months of fiscal 1998, the
Company's employee base has grown by approximately 39%. To manage expansion
effectively, the Company needs to continue to develop and improve its
operational and financial systems, sales and marketing capabilities, and expand,
train, retain, manage and motivate its employee base. Some of the Company's
senior management have not previously managed a business of the Company's size,
and these individuals have limited or no experience managing a public company.
There can be no assurance that the Company's systems, procedures or controls
will be adequate to support the Company's operations or that the Company's
management will be able to exploit successfully future market opportunities or
successfully manage the Company's relationships with customers and other third
parties. There can be no assurance that the Company will continue to grow or, if
it does, that the Company will effectively manage such growth. Any failure to
manage growth would have a material adverse effect on the Company's business,
financial condition and results of operations.
DEPENDENCE ON CUSTOMER OUTSOURCING OF TEST SYSTEMS. The Company's success
will depend on continued growth in the market for telecommunications test
systems and services and the continued commercial acceptance of the Company's
products as a solution to address the testing requirements of telecommunications
equipment manufacturers and network operators. While most of the Company's
existing and potential customers have the technical capability and financial
resources to produce their own test systems and perform test services
internally, to date, many have chosen to outsource a substantial proportion of
their test system and service requirements. There can be no assurance that the
Company's customers will continue, or that new customers will choose, to
outsource any of their test systems and service requirements or that the
Company's products and services will be widely adopted. If the market for
telecommunications test systems and services, or the demand for outsourcing,
declines or fails to grow, or if the Company's products and services are not
widely adopted as a telecommunications test solution, the Company's business,
financial condition and results of operations would be materially adversely
affected. See "Business--Industry Background."
COMPETITION. The market for telecommunications test systems is
characterized by intense competition. The Company believes that its ability to
compete successfully depends on several factors, both within and outside its
control, including availability of a broad range of protocols and variants,
system performance, length
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of operating history and industry experience, product reliability, ease of use,
quality of service and support, status as an independent vendor and price. In
addition, the Company believes that potential customers consider other factors,
such as whether the test system vendor sells competing telecommunications
equipment.
The Company believes its principal competitors are Able Communications Inc.
("Able"), Hewlett-Packard Company ("HP"), IFR Systems Inc. ("IFR"), INET, Inc.
("INET"), Schlumberger, Ltd. ("Schlumberger"), Tekelec, Tektronix Inc.
("Tektronix") and Wavetek Corporation ("Wavetek"). Many of the Company's
existing and potential competitors are large domestic and international
companies that have substantially greater financial, manufacturing,
technological, marketing, sales, distribution and other resources, larger
installed customer bases, greater name recognition and longer-standing customer
relationships than the Company. Accordingly, such competitors or potential
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements or to devote greater resources to the
development, promotion and sales of their products than the Company.
The Company also competes with internal test system groups of its customers
and potential customers. Many of the Company's existing and potential customers
have the technical capability and financial resources to produce their own test
systems and perform test services internally. These systems and services would
be competitive with the test systems offered by the Company. There can be no
assurance that the Company's customers will continue, or that new customers will
choose, to outsource any of their test systems and service requirements or that
the Company's products and services will be widely adopted. If the market for
telecommunications test systems and services, or the demand for outsourcing,
declines or fails to grow, or if the Company's products and services are not
widely adopted as a telecommunications test solution, the Company's business,
financial condition and results of operations would be materially adversely
affected.
The Company expects competition to increase in the future from existing
competitors and from other companies that may enter this market with solutions
that may be less costly or provide higher performance or offer more features
than the Company's solutions. Current and potential competitors have established
or may establish cooperative relationships among themselves or with third
parties to develop new test solutions for internal use or for sale to third
parties in the Company's markets. Accordingly, it is possible that new
competitors may emerge and acquire significant market share. Increased
competition may result in price reductions, reduced gross margins and loss of
market share, any of which would have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business--Competition."
DEPENDENCE ON RAPIDLY EVOLVING TELECOMMUNICATIONS INDUSTRY. The Company's
future success is dependent upon the continued growth of the telecommunications
industry. The global telecommunications industry is evolving rapidly, and it is
difficult to predict its potential growth rate or future trends in technology
development. There can be no assurance that the deregulation, privatization and
economic globalization of the worldwide telecommunications market that has
resulted in increased competition and escalating demand for new technologies and
services will continue in a manner favorable to the Company or its business
strategies. In addition, there can be no assurance that the growth in demand for
Internet services and the resulting need for high speed or enhanced
telecommunications equipment will continue at its current rate or at all.
While the Company's operations are not directly regulated, the Company's
existing and potential customers are subject to a variety of United States and
foreign governmental regulations. Such regulations may adversely affect the
telecommunications industry, limit the number of potential customers for the
Company's products and services or otherwise have a material adverse effect on
the Company's business, financial condition and results of operations. Recently
enacted legislation deregulating the telecommunications industry, including the
Telecommunications Act of 1996 (the "Telecommunications Act"), has caused
significant changes in the telecommunications industry, including the entrance
of new competitors and possible industry consolidation, which could in turn
affect demand for the Company's telecommunications test solutions or otherwise
have a material adverse effect on the Company's business, financial condition
and results of operations. Currently, the Federal Communications Commission
("FCC") and state authorities are implementing the provisions of the
Telecommunications Act, and several of the decisions by the FCC and state
authorities are being challenged in
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court. Therefore, the Company cannot at this time predict the extent to which
such legislation and related litigation will affect the Company's current and
potential customers or ultimately affect the Company's business, financial
condition and results of operations. See "Business--Industry Background."
The Company's future success is dependent upon the increased utilization of
its test solutions by network operators and telecommunications equipment
manufacturers. Industry-wide network equipment and infrastructure development
driving the demand for the Company's products and services may be delayed or
prevented by a variety of factors, including cost, regulatory obstacles or the
lack of or reduction in consumer demand for advanced telecommunications products
and services. There can be no assurance that telecommunications equipment
manufacturers and network operators will develop new technology or enhance
current technology or, if developed, that such new technology or enhancements
will create demand for the Company's products or services. See
"Business--Industry Background."
DEPENDENCE ON KEY PERSONNEL. The Company's future growth and success depend
to a significant extent upon the continuing services of its executive officers
and other key employees. The Company does not have long-term employment
agreements or non-competition agreements with any of its employees. Competition
for qualified management and other high-level telecommunications industry
personnel is intense, and there can be no assurance that the Company will be
successful in attracting and retaining such personnel. The loss of services of
any key employees would have a material adverse effect on the Company's
business, financial condition and results of operations. The Company maintains
and is the beneficiary under a key person life insurance policy in the amount of
$2 million with respect to Dr. Richard A. Karp, the Company's President, Chief
Executive Officer and Chairman of the Board. See "Management."
RAPID TECHNOLOGICAL CHANGE; UNCERTAINTY OF ACCEPTANCE OF THE COMPANY'S
PRODUCTS AND SERVICES. The market for telecommunications test systems and
services is subject to rapid technological change, evolving industry standards,
rapid changes in customer requirements and frequent product and service
introductions and enhancements. The Company's future success will depend in part
on its ability to anticipate and respond to these changes by enhancing its
existing products and services and by developing and introducing, on a timely
and cost-effective basis, new products, features and services that address the
needs of its customer base. There can be no assurance that the Company will be
successful in identifying, developing and marketing new products, product
enhancements and related services that respond to technological change or
evolving industry standards or that adequately meet new market demands. In
addition, because of the rapid technological change characteristic of the
telecommunications industry, the Company may be required to support legacy
systems used by its customers, which may place additional demands on the
Company's personnel and other resources and may require the Company to maintain
an inventory of otherwise obsolete components.
The Company's test systems currently operate only on the UNIX operating
system. The Company's current and prospective customers may require other
operating systems to be used in their telecommunications test systems, such as
Windows 95, Windows NT or Windows 98 or may require the integration of other
industry standards. There can be no assurance that the Company would be able to
successfully adapt its products to such operating systems on a timely or
cost-effective basis, if at all. The failure of the Company to respond to
rapidly changing technologies and to develop and introduce new products and
services in a timely manner would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's success will depend in part on whether a large number of
telecommunications equipment manufacturers and network operators purchase the
Company's products and services. Because the telecommunications market is
rapidly evolving, it is difficult to predict the future success of products and
services in this market. The customers in this market use products from a number
of competing suppliers for various testing purposes, and there has not been
broad adoption of the products of one company. There can be no assurance that
the Company's current or future products or services will achieve widespread
acceptance among network operators, telecommunications equipment manufacturers
or other potential customers or that solutions developed by competitors will not
render the Company's products obsolete or uncompetitive. In the event the
telecommunications industry does not broadly adopt the Company's products or
services or does so less rapidly
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than expected by the Company, or in the event the Company's products are
rendered obsolete or uncompetitive by more advanced solutions, the Company's
business, financial condition and results of operations would be materially
adversely affected. See "Business--Competition."
DEPENDENCE ON SOLE AND SINGLE SOURCE SUPPLIERS. The Company purchases many
key components, including certain microprocessors, workstations, bus interface
and other chips, connectors and other hardware, from the sole supplier of a
particular component. For other components, even though multiple vendors may
exist, the Company may purchase components from only a single source. The
Company does not have any long-term supply agreements with these vendors to
ensure uninterrupted supply of these components. An inability to develop
alternative sources for these components or to obtain sufficient quantities of
them could result in delays or reductions in product shipments. In the event of
reduction or an interruption in the supply of a key component, a significant
amount of time could be required to qualify alternative suppliers and receive an
adequate flow of replacement components. In addition, certain components used by
the Company are purchased from single source suppliers in Japan. As a result,
currency fluctuations may affect the pricing of such components, which could
require the Company to seek other vendors. Reconfiguration of the Company's
products to adapt to new components may also be required and could entail
substantial time and expense. In either event, the Company's business, financial
condition and results of operations would be materially adversely affected. In
addition, the process of manufacturing certain of these components is extremely
complex, and the Company's reliance on the suppliers of these components exposes
the Company to potential production difficulties and quality variations, which
could negatively affect cost and timely delivery of the Company's products. The
Company has from time to time in the past experienced supply problems as a
result of financial or operational difficulties of its suppliers,
discontinuations resulting from component obsolescence or other shortages or
allocations of supplies. For example, the supplier for the Company's portable
workstation has recently advised the Company that it plans to discontinue
manufacturing this product in the near future. While the Company intends to seek
an alternative workstation for the portable DCT system, it may be unable to
provide portable systems until an alternative supplier is qualified. To date,
sales of the portable DCT system have not accounted for a significant portion of
the Company's revenues. Although the Company, to date, has not experienced
material delays in product deliveries to its customers resulting from such
supply problems, there can be no assurance that supply problems will not recur
or, if such problems do recur, that satisfactory solutions would be found. Any
prolonged inability to obtain adequate amounts of fully functional components or
any other circumstances that would require the Company to seek alternative
sources of supply could have a material adverse effect on the Company's
relationship with its customers as well as on its business, financial condition
and results of operations. See "Business--The Catapult DCT System" and
"--Manufacturing."
DEPENDENCE ON THIRD-PARTY MANUFACTURERS. The Company relies on a limited
number of independent manufacturers, some of which are small, privately held
companies, to provide certain assembly services to the Company's specifications.
The Company does not have any long-term supply agreements with any third-party
manufacturer. In the event that the Company's subcontractors were to experience
financial, operational, production or quality assurance difficulties or allocate
production resources to others in lieu of the Company or experience a
catastrophic event that resulted in a reduction or interruption in assembly
services to the Company, the Company's business, financial condition and results
of operations would be materially adversely affected until the Company was able
to establish sufficient manufacturing supply from alternative sources. There can
be no assurance that alternative assembly services from alternative sources will
be able to meet the Company's future requirements or that existing or
alternative sources will continue to be available to the Company at favorable
prices. See "Business--Manufacturing."
RISK OF PRODUCT DEFECTS. Products as complex as that offered by the Company
may contain undetected errors or "bugs," particularly when first introduced or
when new versions are released. Although the Company conducts extensive testing,
the Company may discover errors only after a product has been installed and used
by customers, possibly resulting in a loss or delay in sales. Such errors or
"bugs" have been detected by the Company in the past both before and after
release of the Company's products. There can be no assurance that errors will
not be found in future releases of the Company's software or that any such
errors will not generate
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adverse publicity, impair the market acceptance of these products, create
customer concerns and adversely affect operating results due to product returns,
the costs of generating corrective releases or otherwise. The Company does not
maintain "errors and omissions" insurance. There can be no assurance that the
failure to maintain "errors and omissions" insurance, in the event of the
successful assertion against the Company of one or a series of large uninsured
claims, would not have a material adverse effect on the Company's business,
financial condition and results of operations. Difficulties encountered by
customers with the installation and implementation of new product releases or
problems with the performance of the Company's products, particularly in light
of the rigorous standards of low-fault tolerance characteristic of the
telecommunications industry, would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Product Development."
PRODUCT LIABILITY. The Company's license agreements with its customers
typically contain provisions designed to limit the Company's exposure to
potential product liability claims. However, it is possible that the limitation
of liability provisions contained in the Company's license agreements may not be
effective under the laws of certain jurisdictions, particularly since the
Company sells a majority of its products internationally. Although the Company
has not experienced any product liability claims to date, the sale and support
of products by the Company may entail the risk of such claims, and there can be
no assurance that the Company will not be subject to such claims in the future.
A successful product liability claim brought against the Company could have a
material adverse effect upon the Company's business, financial condition and
results of operations. The Company does not maintain product liability
insurance. There can be no assurance that the failure to maintain product
liability insurance, in the event of the successful assertion against the
Company of one or a series of large uninsured claims, would not have a material
adverse effect on the Company's business, financial condition and results of
operations.
PRODUCT CONCENTRATION. To date, substantially all of the Company's revenues
have been attributable to sales of the DCT family of products and related
services. The Company currently expects the DCT family of products and related
services to account for substantially all of its revenues for the foreseeable
future. As a result, factors adversely affecting the pricing of or demand for
DCT products, such as competition or technological change, could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company's future financial performance will depend, in
significant part, on the successful development, introduction and customer
acceptance of new and enhanced versions of the DCT family of products. There can
be no assurance that the Company will continue to be successful in developing
and marketing the DCT family of products and related services.
CONTROL BY PRINCIPAL STOCKHOLDER. Upon completion of this offering, Richard
A. Karp will beneficially own 7,800,000 shares or approximately 61.9% of the
Company's outstanding Common Stock (58.0% if the Underwriters' over-allotment
option is exercised in full), which will include 3,600,000 shares beneficially
owned by Nancy H. Karp (3,097,125 shares if the Underwriters' over-allotment
option is exercised in full). Dr. Karp will have voting control through a voting
trust, but not dispositive power, with respect to the shares beneficially owned
by Ms. Karp. As a result, upon completion of this offering, Dr. Karp will be
able to control matters requiring approval by the stockholders of the Company,
including the election of directors. Such a concentration of ownership may have
the effect of delaying or preventing a change in control of the Company. See
"Principal and Selling Stockholders" and "Certain Transactions."
LIMITED PROTECTION OF PROPRIETARY RIGHTS; ENFORCEMENT OF RIGHTS. The
Company's success and its ability to compete effectively is dependent in part
upon its proprietary technology. The Company relies on a combination of
trademark, copyright and trade secret laws, as well as nondisclosure agreements
and other contractual restrictions, to establish and protect its proprietary
rights. The Company generally enters into nondisclosure and invention assignment
agreements with its employees and consultants, and into nondisclosure agreements
with its customers and suppliers. To date, the Company has not sought patent
protection for its proprietary technology. However, there can be no assurance
that patent protection will not become a more significant factor in the
Company's industry in the future. Likewise, there can be no assurance that the
measures the Company
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undertakes will be adequate to protect its proprietary technology. To date, the
Company has not federally registered any of its trademarks or copyrights. The
Company's practice is to affix copyright notices on all software, hardware and
product literature in order to assert copyright protection for these works. The
Company is also in the process of applying to the U.S. Patent and Trademark
Office to register several trademarks. There can be no assurance that the lack
of federal registration of the Company's trademarks and copyrights would not
have a material adverse effect on the Company's intellectual property rights in
the future. Additionally, the Company may be subject to further risks as it
enters into transactions in countries where intellectual property laws are
unavailable, do not provide adequate protection or are difficult to enforce.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may attempt to duplicate aspects of the Company's products or to obtain
and use information that the Company regards as proprietary. There can be no
assurance that the steps taken by the Company to protect its proprietary
technology will be adequate to prevent misappropriation of such technology or
that they will preclude competitors from independently developing products with
functionality or features similar to the Company's products. The failure of the
Company to protect its proprietary technology would have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business--Intellectual Property."
RISKS OF THIRD PARTY CLAIMS OF INFRINGEMENT. The telecommunications
industry is characterized by a relatively high level of litigation based on
allegations of infringement of proprietary rights. While to date, the Company
has not been subject to claims of infringement or misappropriation of
intellectual property of third parties, there can be no assurance that third
parties will not assert infringement claims against the Company, that any such
assertion of infringement will not result in litigation or that the Company
would prevail in such litigation. Furthermore, any such claims, with or without
merit, could result in substantial cost to the Company and diversion of its
personnel, require the Company to develop new technology, or require the Company
to enter into royalty or licensing arrangements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the Company
or at all. Because the Company does not rely on patents to protect its
technology, the Company will not be able to offer a license for patented
technology in connection with any settlement of patent infringement lawsuits. In
the event of a successful claim of infringement or misappropriation against the
Company and failure or inability of the Company to develop non-infringing
technology or license the infringed, misappropriated or similar technology at a
reasonable cost, the Company's business, financial condition and results of
operations would be materially adversely affected. In addition, the Company
indemnifies its customers against claimed infringement of patents, trademarks,
copyrights and other proprietary rights of third parties. Any requirement for
the Company to indemnify a customer could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Intellectual Property."
RISKS RELATING TO POTENTIAL ACQUISITIONS. As part of its business strategy,
the Company may make acquisitions of, or significant investments in, companies,
products or technologies that it believes are complementary, although no such
acquisitions or investments are currently pending. Any such future transactions
would be accompanied by the risks commonly encountered in making acquisitions of
companies, products and technologies. Such risks include, among others, the
difficulties associated with assimilating the personnel and operations of
acquired companies, the potential disruption of the Company's ongoing business,
the distraction of management and other resources, the integration of personnel
and technology of an acquired Company, difficulties in evaluating the technology
of a potential target, inability to motivate and retain new personnel, the
maintenance of uniform standards, controls, procedures and policies, and the
impairment of relationships with employees and clients as a result of the
integration of new management personnel. The Company has no experience in
assimilating acquired companies or product lines into its operations. There can
be no assurance that the Company will be successful in overcoming these risks or
any other problems encountered in connection with any such acquisitions.
Furthermore, future acquisitions by the Company could result in the issuance of
dilutive equity securities, the incurrence of debt or contingent liabilities or
amortization expenses related to goodwill and other intangible assets, any of
which could have a material adverse effect on the Company's business, financial
condition and results of operation or on the market price of the Company's
Common Stock. See "Use of Proceeds."
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BENEFITS OF THIS OFFERING TO CURRENT STOCKHOLDERS. The completion of this
offering will provide significant benefits to the current stockholders of the
Company, including certain of the Company's directors and executive officers.
The Company will not receive any of the net proceeds from the sale of shares by
the Selling Stockholders, which will be $11,648,250 ($16,324,988 if the
Underwriters' over-allotment option is exercised in full), based upon an assumed
initial public offering price of $10.00 per share, after deducting estimated
underwriting discounts and commissions. The completion of this offering will
also create a public market for the Common Stock, which is likely to increase
the market value of the investment by the current stockholders in shares of the
Company. Upon the completion of the offering and after giving effect to the sale
of Common Stock by the Selling Stockholders, based upon an assumed initial
offering price of $10.00 per share, the present directors and executive officers
of the Company will beneficially own Common Stock of the Company having an
aggregate market value equal to approximately $87,397,700, and the current
stockholders of the Company will beneficially own Common Stock of the Company
having an aggregate market value equal to approximately $104,909,500. The total
consideration paid by the current stockholders for such shares was approximately
$270,000. See "Dilution" and "Principal and Selling Stockholders."
IMPACT OF YEAR 2000. Many currently installed computer systems and software
products are coded to accept only two digit entries in the date code field.
These date code fields will need to accept four digit entries to distinguish
21st century dates from 20th century dates. As a result, in less than two years,
computer systems and/ or software used by many companies may need to be upgraded
to comply with such "Year 2000" requirements. Currently, the Company believes
there are no material operational issues or costs associated with preparing its
internal systems for the Year 2000. There can be no assurance, however, that the
Company will not experience serious unanticipated negative consequences and/or
material costs caused by undetected errors or defects in the technology used in
its internal systems, which include third-party software and hardware
technology.
The Company generally represents to its customers that it has achieved Year
2000 compliance for its products and believes this to be the case. However,
there can be no assurance that the Company will not experience serious
unanticipated negative consequences and/or material costs caused by warranty
claims based upon undetected defects related to the Year 2000.
The Company's products may be integrated by the Company or its customers
with, or otherwise interact with, non-compliant software produced by other
companies, which may expose the Company to claims from its customers. The
foregoing could result in the loss of or delay in market acceptance of the
Company's products and services or increased service and warranty costs to the
Company, either of which would have a material adverse effect on the Company's
business, financial condition and results of operations.
BROAD MANAGEMENT DISCRETION OVER USE OF PROCEEDS. The principal purposes of
this offering are to obtain additional working capital, establish a public
market for the Company's Common Stock, facilitate future access to public
capital markets, provide liquidity to existing stockholders, provide increased
visibility and credibility, enhance the ability of the Company to acquire other
businesses or technologies and attract and retain key personnel. A significant
portion of the anticipated net proceeds to the Company from this offering has
not been designated for specific uses. Accordingly, management of the Company
will have broad discretion with respect to the use of these funds. See "Use of
Proceeds."
SHARES ELIGIBLE FOR FUTURE SALE; POTENTIAL ADVERSE EFFECT ON MARKET
PRICE. Sales of substantial numbers of shares of Common Stock in the public
market following this offering could adversely affect the market price for the
Common Stock. Upon completion of this offering, the Company will have an
aggregate of 12,590,946 shares of Common Stock outstanding, assuming no exercise
of outstanding options. Of these shares, all of the 3,352,500 shares sold in
this offering will be freely tradable without restriction or further
registration under the Securities Act, unless purchased by an affiliate of the
Company who may only sell such shares pursuant to the public information,
volume, manner of sale and notice requirements of Rule 144 under the Securities
Act. The remaining 9,238,446 shares outstanding upon completion of this offering
will be "restricted securities" as that term is defined in Rule 144 (the
"Restricted Shares"). Restricted Shares may be sold in the public market only if
registered or if they qualify for an exemption from registration under Rules
144, 144(k) or 701 promulgated
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under the Securities Act. Of these Restricted Shares, 9,076,883 are subject to
lock-up agreements under which the holders have agreed not to offer, sell,
contract to sell, or otherwise dispose of any of their shares for a period of
180 days following the offering, without the prior written consent of Hambrecht
& Quist LLC. All holders of options to purchase Common Stock of the Company (as
of June 30, 1998) are also bound by lock-up agreements. Taking into account the
lock-up agreements, the number of shares that will be available for sale in the
public market under the provisions of Rules 144, 144(k) and 701, including
certain shares issuable upon exercise of options, will be as follows: (i) 60,938
Restricted Shares will be eligible for sale immediately after the effective date
of the Registration Statement; (ii) 60,938 additional Restricted Shares will be
eligible for public resale beginning 90 days after the effective date of the
Registration Statement; and (iii) 9,116,570 additional Restricted Shares (plus
381,772 shares of Common Stock issuable upon exercise of outstanding options)
will be eligible for public resale beginning 180 days after the effective date
of the Registration Statement, subject in some cases to the public information,
volume, manner of sale and notice requirements of Rule 144 under the Securities
Act. See "Description of Capital Stock" and "Shares Eligible for Future Sale."
Except as described in "Shares Eligible for Future Sale" and "Underwriting,"
Hambrecht & Quist LLC does not have any agreements or understandings regarding
the release of any securities from the prohibitions on sales and other
dispositions imposed by these lock-up agreements. Hambrecht & Quist LLC,
however, retains the right at any time and without notice to release from the
scope of the lock-up restrictions all or any portion of the securities currently
subject to such restrictions. The release of any securities from such
prohibitions and the subsequent sale of such shares may have an adverse effect
on the ability of the Company to raise capital and could adversely affect the
market price of the Company's Common Stock. See "Shares Eligible for Future
Sale" and "Underwriting."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior to this
offering, there has been no public market for the Company's Common Stock, and
there can be no assurance that an active public trading market for the Common
Stock will develop or be sustained after the offering. The initial public
offering price will be determined through negotiations between the Company, the
Selling Stockholders and the representatives of the Underwriters based upon
several factors and is not necessarily indicative of the market price at which
the Common Stock of the Company will trade after this offering. The market
prices for securities of technology companies have been highly volatile and the
market has experienced significant price and volume fluctuations that are
unrelated to the operating performance of particular companies. Announcements of
technological innovations or new products or service offerings by the Company or
its competitors, developments concerning proprietary rights, domestic or
international regulatory developments affecting the telecommunications industry,
general market conditions, any shortfall in revenues or earnings from expected
levels or other failures by the Company to meet expectations of securities
analysts and other factors may have a significant impact on the market price of
the Common Stock. In addition, the stock market has from time to time
experienced significant price and volume fluctuations that have particularly
affected the market prices for the common stocks of emerging growth companies
and that have often been unrelated to the operating performance of such
companies. These broad market fluctuations may adversely affect the market price
of the Company's Common Stock. In the past, following periods of volatility in
the market price of a particular company's securities, securities class action
litigation has often been brought against that company. There can be no
assurance that such litigation will not occur in the future with respect to the
Company. Such litigation could result in substantial costs and a diversion of
management's attention and resources, which could have a material adverse effect
upon the Company's business, financial condition and results of operations. See
"Underwriting."
ANTI-TAKEOVER EFFECT OF NEVADA LAW AND CHARTER AND BYLAW PROVISIONS;
AVAILABILITY OF PREFERRED STOCK FOR ISSUANCE. Nevada law and the Company's
Articles of Incorporation and Bylaws contain provisions that could discourage a
proxy contest or make more difficult the acquisition of a substantial block of
the Company's Common Stock. In addition, the Board of Directors is authorized to
issue, without stockholder approval, up to 5,000,000 shares of Preferred Stock
with voting, conversion and other rights and preferences that may be superior to
those of the Common Stock and that could adversely affect the voting power or
other rights of the holders of Common Stock. The issuance of Preferred Stock or
of rights to purchase Preferred Stock could be used to discourage an unsolicited
acquisition proposal. See "Description of Capital Stock--Preferred Stock" and
"--Nevada Anti-Takeover Statutes."
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IMMEDIATE AND SUBSTANTIAL DILUTION. Investors purchasing shares of Common
Stock in this offering will incur immediate and substantial dilution in net
tangible book value of the Common Stock of $7.39 per share (based on an assumed
initial public offering price of $10.00). To the extent that currently
outstanding options to purchase the Company's Common Stock are exercised, there
will be further dilution. See "Dilution."
FORWARD-LOOKING STATEMENTS. This Prospectus contains forward-looking
statements, which may be deemed to include, but are not limited to, the
Company's business strategy, timing of and plans for the introduction of new
products, services and enhancements, plans for hiring additional personnel,
timing of and plans for opening new offices and the adequacy of anticipated
sources of cash, including the proceeds from this offering, to fund the
Company's operations through the next 18 months. Words such as "believes,"
"anticipates," "plans," "expects," "intends" and similar expressions are
intended to identify forward-looking statements, but are not the exclusive means
of identifying such statements. Actual results could differ materially from
those projected in any forward-looking statements for the reasons detailed in
other sections of this "Risk Factors" portion of the Prospectus, or elsewhere in
this Prospectus. The Company assumes no obligation to update any forward-looking
statement.
15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,100,000 shares of
Common Stock offered hereby are estimated to be approximately $18,805,000, after
deducting underwriting discounts and commissions and estimated offering
expenses. The principal purposes of this offering are to obtain additional
working capital, to establish a public market for the Company's Common Stock, to
facilitate future access to public capital markets, to provide liquidity to
existing stockholders, to provide increased visibility and credibility, to
enhance the ability of the Company to acquire other businesses, products or
technologies and to attract and retain key personnel.
The net proceeds of this offering will be used for general corporate
purposes, including working capital. Pending such uses, the proceeds will be
invested in short-term, investment-grade, interest-bearing securities. A portion
of the proceeds may also be used to acquire or invest in complementary
businesses or products or to obtain the right to use complementary technologies.
While from time to time the Company evaluates potential acquisitions of such
businesses, products or technologies, there are no present understandings,
commitments or agreements with respect to any acquisition of other businesses,
products or technologies. The Company will not receive any of the proceeds from
the sale of Common Stock by the Selling Stockholders. See "Risk Factors-- Broad
Management Discretion over Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Principal and Selling Stockholders."
DIVIDEND POLICY
The Company has never paid or declared any cash dividends. It is the present
policy of the Company to retain earnings to finance its business and, therefore,
the Company has not paid any cash dividends on its Common Stock to date and does
not anticipate paying any dividends on its Common Stock in the foreseeable
future.
16
<PAGE>
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
as of June 30, 1998, (ii) the pro forma capitalization after giving effect to
the reclassification of $5.0 million of redeemable common stock, which will no
longer be redeemable upon completion of this offering and (iii) the
capitalization as adjusted to reflect the sale by the Company of 2,100,000
shares of common stock offered hereby at an assumed initial public offering
price of $10.00 per share and the application of the estimated net proceeds
therefrom. This table should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1998
-----------------------------------
PRO FORMA,
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Redeemable Common Stock, 500,000 shares actual, no shares pro forma and pro
forma as adjusted........................................................... $ 5,000 $ -- $ --
Stockholders' equity:
Preferred Stock, $0.001 par value, 5,000,000 shares authorized;
none issued and outstanding............................................. -- -- --
Common Stock, $0.001 par value, 40,000,000 shares authorized, 9,990,946
issued and outstanding actual; 10,490,946 shares issued and outstanding
pro forma; 12,590,946 shares issued and outstanding pro forma as
adjusted(1)............................................................. 10 11 13
Additional paid-in capital................................................ -- 1,064 19,867
Deferred compensation..................................................... (660) (660) (660)
Retained earnings......................................................... 9,848 13,783 13,783
Cumulative translation adjustment......................................... (174) (174) (174)
--------- ----------- -----------
Total stockholders' equity.............................................. 9,024 14,024 32,829
--------- ----------- -----------
Total capitalization.................................................. $ 14,024 $ 14,024 $ 32,829
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
- ------------------------
(1) Excludes 696,850 shares of Common Stock issuable upon exercise of
outstanding options as of June 30, 1998 at a weighted average exercise price
of $1.00 per share and an aggregate of 2,873,578 shares reserved for future
grant under the Company's Stock Plans. See "Management--Stock Plans" and
Note 4 of Notes to Consolidated Financial Statements.
17
<PAGE>
DILUTION
As of June 30, 1998, the Company had a pro forma net tangible book value of
approximately $13,585,000 or approximately $1.29 per share of Common Stock. Pro
forma net tangible book value per share represents the amount of total tangible
assets less total liabilities divided by the number of shares of Common Stock
outstanding, after giving effect to reclassification of $5 million of redeemable
common stock which will no longer be redeemable upon completion of this
offering. After giving effect to the receipt by the Company of the net proceeds
from the sale of 2,100,000 shares of Common Stock offered by the Company hereby
at an assumed initial public offering price of $10.00 per share, the pro forma
net tangible book value of the Company as of June 30, 1998 would have been
approximately $32,829,000 or approximately $2.61 per share. This represents an
immediate increase in pro forma net tangible book value per share of $1.32 to
existing stockholders and an immediate dilution of $7.39 per share to new
investors. The following table sets forth this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share......................... $ 10.00
Pro forma net tangible book value per share as of June 30, 1998....... $ 1.29
Increase per share attributable to new investors...................... $ 1.32
---------
Pro forma net tangible book value per share after the offering.......... 2.61
---------
Dilution per share to new investors..................................... $ 7.39
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1998,
the differences between existing stockholders and new investors with respect to
the number of shares of Common Stock purchased from the Company, the total
consideration paid and average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------------- ------------------------ PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------------ ------------ ------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Existing Stockholders(1)..................... 10,490,946 83.3% $ 270,000 1.3% $ 0.03
New Investors(1)............................. 2,100,000 16.7 21,000,000 98.7% $ 10.00
------------ ------------ ------------- ---------
Total................................ 12,590,946 100.0% 21,270,000 100.0%
------------ ------------ ------------- ---------
------------ ------------ ------------- ---------
</TABLE>
The above calculations assume no exercise of stock options after June 30,
1998. As of June 30, 1998, there were options outstanding to purchase 696,850
shares of Common Stock under the Company's 1989 Stock Option Plan and the UK
Executive Share Option Scheme at a weighted average exercise price of $1.00 per
share and an aggregate of 2,873,578 shares remained available for future grant
under the Company's Stock Plans. To the extent outstanding options are
exercised, or shares reserved for future option grants are issued, there will be
further dilution to new investors. See "Management--Stock Plans" and Note 4 of
Notes to Consolidated Financial Statements.
- ------------------------
(1) Sales by the Selling Stockholders in this offering will reduce the number of
shares held by existing stockholders to 9,238,446 shares, or approximately
73.4% of the total shares of Common Stock after the offering (8,735,571
shares or approximately 69.4% if the Underwriters over-allotment option is
exercised in full), and will increase the number of shares held by new
investors to 3,352,500, or approximately 26.6% (3,855,375 shares or
approximately 30.6% if the Underwriters over-allotment option is exercised
in full) of the total shares of Common Stock outstanding after the offering.
See "Principal and Selling Stockholders."
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data is qualified by reference to and
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Consolidated Financial
Statements and Notes thereto included elsewhere in this Prospectus. The
consolidated statements of income for the fiscal years ended September 30, 1995,
1996 and 1997 and the consolidated balance sheets at September 30, 1996 and 1997
are derived from, and are qualified by reference to, the audited Consolidated
Financial Statements included elsewhere herein. The consolidated balance sheet
data at September 30, 1995 are derived from audited financial statements of the
Company not included herein. The consolidated statements of income for the
fiscal years ended September 30, 1993 and 1994 and the consolidated balance
sheet data at September 30, 1993 and 1994 are derived from unaudited financial
statements of the Company not included herein. The selected historical financial
data set forth below at June 30, 1998 and for the nine-month periods ended June
30, 1997 and 1998 were derived from unaudited consolidated financial statements
of the Company included elsewhere in this Prospectus. In the opinion of
management, the unaudited consolidated financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial position and results of operations for these
periods. The results for an interim period are not necessarily indicative of the
results to be expected for the full fiscal year.
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED SEPTEMBER 30, ENDED JUNE 30,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF INCOME DATA:
Revenues:
Product sales.................................... $ 1,801 $ 3,147 $ 5,857 $ 7,690 $ 11,519 $ 9,573 $ 11,385
Services......................................... 506 669 1,012 1,562 1,833 1,334 1,695
--------- --------- --------- --------- --------- --------- ---------
Total revenues................................. 2,307 3,816 6,869 9,252 13,352 10,907 13,080
--------- --------- --------- --------- --------- --------- ---------
Cost of revenues:
Product sales.................................... 306 674 804 1,103 1,576 1,266 1,258
Services......................................... 97 142 132 246 344 251 489
--------- --------- --------- --------- --------- --------- ---------
Total cost of revenues......................... 403 816 936 1,349 1,920 1,517 1,747
--------- --------- --------- --------- --------- --------- ---------
Gross profit....................................... 1,904 3,000 5,933 7,903 11,432 9,390 11,333
--------- --------- --------- --------- --------- --------- ---------
Operating expenses:
Research and development......................... 384 504 697 908 1,419 1,070 1,419
Sales and marketing.............................. 466 719 1,300 1,881 2,550 1,829 2,094
General and administrative....................... 344 370 889 1,384 2,063 1,515 1,596
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses....................... 1,194 1,593 2,886 4,173 6,032 4,414 5,109
--------- --------- --------- --------- --------- --------- ---------
Operating income................................... 710 1,407 3,047 3,730 5,400 4,976 6,224
Interest income.................................... 29 85 224 269 380 275 417
Other income (expense)............................. (10) 5 126 (209) (6) 3 (303)
--------- --------- --------- --------- --------- --------- ---------
Income before taxes................................ 729 1,497 3,397 3,790 5,774 5,254 6,338
Provision for taxes................................ 244 522 1,225 1,502 2,436 2,217 2,721
--------- --------- --------- --------- --------- --------- ---------
Net income......................................... $ 485 $ 975 $ 2,172 $ 2,288 $ 3,338 $ 3,037 $ 3,617
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Earnings per share(1):
Basic............................................ $ 0.05 $ 0.10 $ 0.23 $ 0.24 $ 0.35 $ 0.32 $ 0.35
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Diluted.......................................... $ 0.05 $ 0.10 $ 0.22 $ 0.22 $ 0.31 $ 0.29 $ 0.33
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted average shares:
Basic............................................ 9,569 9,569 9,581 9,621 9,630 9,630 10,328
Diluted.......................................... 9,569 9,701 10,058 10,301 10,605 10,566 10,889
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------------------- JUNE 30,
1993 1994 1995 1996 1997 1998
--------- --------- --------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 1,413 $ 2,903 $ 5,438 $ 7,171 $ 10,672 $ 13,254
Working capital......................................... 1,293 2,238 4,260 6,496 9,698 12,933
Total assets............................................ 2,236 3,289 6,760 9,542 14,035 18,597
Redeemable common stock(2).............................. -- -- -- -- -- 5,000
Total stockholders' equity.............................. 1,414 2,398 4,557 6,832 10,170 9,024
</TABLE>
- ------------------------------
(1) See Note 1 of Notes to Consolidated Financial Statements for the method used
to calculate earnings per share.
(2) See Note 8 of Notes to Consolidated Financial Statements.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED CONSOLIDATED FINANCIAL DATA" AND THE COMPANY'S CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. THE
FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES, INCLUDING WITHOUT LIMITATION, STATEMENTS OF THE COMPANY'S PLANS,
OBJECTIVES, EXPECTATIONS AND INTENTIONS. THE CAUTIONARY STATEMENTS MADE IN THIS
PROSPECTUS SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING
STATEMENTS WHEREVER THEY MAY APPEAR IN THIS PROSPECTUS. THE COMPANY'S ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED OR IMPLIED BY THE
FORWARD-LOOKING STATEMENTS DISCUSSED HERE. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES ARE DISCUSSED IN "RISK FACTORS," AS WELL AS
ELSEWHERE HEREIN.
OVERVIEW
Catapult Communications Corporation ("Catapult" or the "Company") designs,
develops, manufactures, markets and supports an advanced software-based digital
telecommunications test system offering an integrated suite of testing
applications for equipment manufacturers and network operators. The Company
introduced the Digital Communications Tester (the "DCT") in 1985. Catapult
maintains an extensive library of software modules that support more than 100
variants of approximately 30 protocols. The DCT system performs simulation, load
and stress testing, feature verification, conformance testing and monitoring.
The DCT system consists of advanced software and hardware running on a
third-party UNIX-based workstation. In addition, the Company offers customer
support under software support contracts, as well as installation and training.
The Company's revenues are derived from product sales, which include both
licenses of the DCT system software and sales of hardware, and from services,
which includes customer support under software support contracts, as well as
installation and training. Prices for the DCT system vary widely depending upon
overall system configuration, including the number and type of software protocol
modules and the number of physical interfaces required by the customer. A DCT
system sale typically ranges in price from approximately $50,000 to $150,000. In
addition to the initial system purchase, customers also may upgrade their
systems by purchasing additional software protocol modules and hardware.
Customers have the option to purchase a third-party workstation from Catapult or
provide a workstation to the Company for configuration. Revenues from product
sales are recognized upon shipment to the customer, provided that no significant
obligations on the part of the Company remain and collection is considered
probable.
The Company offers product warranties for various lengths of time, depending
on the product and country of purchase or operation. Customers may elect to
purchase an annual software support contract, which includes both ongoing
technical support and any new software releases made available during the term
of the support contract. These software releases include protocol variants for
protocols already purchased by the customer. Revenues from software support
contracts are recognized ratably over the contract period, which is generally
one year. New customers typically purchase onsite installation and training,
which are charged on a fixed-price basis and recognized as the services are
performed.
The Company's overall gross margin is a result of gross margin on product
sales, gross margin on services and the relative percentages of revenues from
sales of products and services. Gross margin on services has declined each
fiscal year since fiscal 1995, from 87% to 81% and to 71% for the nine months
ended June 30, 1998. This decline has been offset by an increase in gross margin
on product sales from 86% to 89% over these same periods. In addition, the
relative contribution of services revenue to total revenues has declined over
these same periods from 15% to 13%. The combination of these factors has caused
the Company's overall gross margins to have been relatively constant in recent
periods. To date, the declining margin on services revenues has not materially
affected the Company's overall business strategy.
The Company derives a majority of its total revenues from international
customers. These revenues constituted approximately 54%, 55%, 53% and 69% of
total revenues for fiscal 1995, 1996 and 1997 and the nine months ended June 30,
1998, respectively. The Company expects that international sales will continue
to
20
<PAGE>
account for a significant portion of its revenues in future periods. Most of the
Company's international sales, including its sales in Japan, are denominated in
local currencies, and currently the Company does not engage in significant
currency hedging activities. The Company may elect in the future to engage in
hedging transactions; however, there can be no assurance that the Company will
do so or that it will be successful in doing so. Fluctuations in foreign
currency exchange rates may contribute to fluctuations in the Company's
operating results. For example, changes in foreign currency exchange rates could
adversely affect the Company's revenues, net income, earnings per share and cash
flow from operations. Similarly, such fluctuations may cause the Company to
raise prices, which could affect demand for the Company's products and services.
International sales are also subject to a number of inherent risks, such as
longer customer payment cycles, greater difficulty in accounts receivable
collection, tariffs and other trade barriers. During the last two fiscal years a
significant portion of the Company's sales has been to customers in Japan. If
economic conditions in Japan continue to deteriorate to a significant extent,
the Company's business, financial condition and results of operations could be
materially adversely affected. In addition, if exchange or price controls or
other restrictions are imposed in countries in which the Company does business,
the Company's business, financial condition and results of operations would be
materially adversely affected. See "Risk Factors--Risk Associated with
International Sales and Operations; Foreign Exchange Risk."
Revenues from the Company's top four customers represented approximately
75%, 54% and 60% of total revenues in fiscal 1995, 1996 and 1997, respectively.
The Company's largest customer over this period has been Motorola, which
accounted for approximately 37%, 23% and 28% of total revenues in fiscal 1995,
1996 and 1997, respectively. Total sales to Motorola were approximately $2.6
million, $2.2 million and $3.8 million in these same periods. In the nine months
ended June 30, 1998, the Company's top four customers represented approximately
69% of total revenues. These customers, NTT, Motorola, NEC and Lucent, accounted
for approximately 24%, 19%, 15% and 11% of total revenues, respectively, in that
period. Total sales to Motorola were approximately $2.6 million in the same
period. The Company's four largest customers in fiscal 1997 were Motorola, NEC,
NTT and Fujitsu, which accounted for approximately 28%, 17%, 7% and 7% of total
revenues, respectively. Separate engineering groups of the same customer at
different locations generally make independent decisions to purchase the
Company's products. The Company expects that it will continue to depend upon a
relatively limited number of customers for substantially all of its revenues in
future periods, although no customer is presently obligated either to purchase a
specific amount of products or to provide the Company with binding forecasts of
purchases for any period. The loss of a major customer or the reduction, delay
or cancellation of orders from one or more of the Company's significant
customers could materially adversely affect the Company's business, financial
condition and results of operations. See "Risk Factors--Dependence on Limited
Number of Customers."
21
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship of certain items from the Company's consolidated statements of
income to total revenues.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
-----------------------------------------------------
FISCAL YEAR ENDED SEPTEMBER 30, NINE MONTHS ENDED
JUNE 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales....................................................... 85.3% 83.1% 86.3% 87.8% 87.0%
Services............................................................ 14.7 16.9 13.7 12.2 13.0
--------- --------- --------- --------- ---------
Total revenues.................................................... 100.0 100.0 100.0 100.0 100.0
--------- --------- --------- --------- ---------
Cost of revenues:
Product sales....................................................... 11.7 11.9 11.8 11.6 9.6
Services............................................................ 1.9 2.7 2.6 2.3 3.8
--------- --------- --------- --------- ---------
Total cost of revenues............................................ 13.6 14.6 14.4 13.9 13.4
--------- --------- --------- --------- ---------
Gross profit.......................................................... 86.4 85.4 85.6 86.1 86.6
--------- --------- --------- --------- ---------
Operating expenses:
Research and development............................................ 10.2 9.8 10.6 9.8 10.8
Sales and marketing................................................. 18.9 20.3 19.1 16.8 16.0
General and administrative.......................................... 12.9 15.0 15.5 13.9 12.2
--------- --------- --------- --------- ---------
Total operating expenses.......................................... 42.0 45.1 45.2 40.5 39.0
--------- --------- --------- --------- ---------
Operating income...................................................... 44.4 40.3 40.4 45.6 47.6
Interest income....................................................... 3.3 2.9 2.8 2.4 3.2
Other income (expense)................................................ 1.8 (2.3) -- -- (2.3)
--------- --------- --------- --------- ---------
Income before taxes................................................... 49.5 40.9 43.2 48.2 48.5
Provision for taxes................................................... 17.9 16.2 18.2 20.4 20.8
--------- --------- --------- --------- ---------
Net income............................................................ 31.6% 24.7% 25.0% 27.8% 27.7%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Gross margin on product sales......................................... 86.3% 85.7% 86.3% 86.8% 89.0%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Gross margin on services.............................................. 87.0% 84.3% 81.2% 81.2% 71.2%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
NINE MONTHS ENDED JUNE 30, 1997 AND 1998
REVENUES. Revenues increased by approximately 20% from $10.9 million for
the nine months ended June 30, 1997 to $13.1 million for the nine months ended
June 30, 1998. Over the same period, product sales increased by approximately
19% from $9.6 million to $11.4 million, and services revenue increased by
approximately 27% from $1.3 million to $1.7 million. The increase in product
sales was primarily attributable to increased system sales to customers in Japan
as well as increased sales of the Company's Modular Physical Interface ("MPI")
cards. The increase in services revenue was primarily due to sales of software
support contracts associated with new system sales as well as contract renewals.
Services revenue will vary depending in part on the relative contribution of
each sales region. In Japan, the Company has historically received lower
services revenue in proportion to its product sales, principally due to market
factors affecting the pricing of such services.
COST OF REVENUES. Cost of product sales consists of the costs of board
assembly by independent contractors, purchased components, payroll and benefits
for personnel in product testing, purchasing, shipping and inventory management,
as well as supplies, media and freight. Cost of services consists primarily of
the costs of payroll and benefits for customer support personnel, installation
and training. Cost of product sales remained constant at $1.3 million for the
nine months ended June 30, 1997 and 1998. Gross margin on product sales
increased from 86.8% for the nine months ended June 30, 1997 to 89.0% for the
nine months ended June 30, 1998 as the Company's product sales in the first nine
months of 1998 included a greater proportion of higher margin
22
<PAGE>
products. Product sales increased by approximately 19% during the nine months
ended June 30, 1998 compared to the nine months ended June 30, 1997 while the
cost of product sales remained constant during the same periods. The resulting
margin increase was due primarily to a significantly higher proportion of sales
of higher margin proprietary products, such as MPI cards, during the nine months
ended June 30, 1998 compared to the nine months ended June 30, 1997. Cost of
services increased by approximately 95% from $251,000 for the nine months ended
June 30, 1997 to $489,000 for the nine months ended June 30, 1998 due to
personnel additions. Gross margin on services decreased from 81.2% for the nine
months ended June 30, 1997 to 71.2% for the nine months ended June 30, 1998 as
the Company added support personnel in anticipation of increased sales,
particularly in Japan. Gross margin on services will vary depending in part on
the amount of sales to Japan, where the Company has historically generated lower
margins on services revenue due to market factors affecting pricing.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of the costs of payroll and benefits for engineers, equipment and
consulting services. The Company's policy is to evaluate software development
projects for technological feasibility to determine if they meet capitalization
requirements. To date, all software development costs have been expensed as
research and development expenses as incurred. Research and development expenses
increased by approximately 33% from $1.1 million for the nine months ended June
30, 1997 to $1.4 million for the nine months ended June 30, 1998. As a
percentage of total revenues, research and development expenses increased from
9.8% to 10.8% over the same period. These increases were due primarily to an
increase in engineering personnel. The Company expects that research and
development expenses will increase in absolute dollars for the foreseeable
future as the Company intends to continue to invest in product development.
SALES AND MARKETING. Sales and marketing expenses consist primarily of the
costs of payroll, benefits, commissions and bonuses, and travel and promotional
expenses, such as brochures and trade shows. Sales and marketing expenses
increased from $1.8 million for the nine months ended June 30, 1997 to $2.1
million for the nine months ended June 30, 1998 as the Company hired additional
personnel. As a percentage of total revenues, sales and marketing expenses
decreased slightly from 16.8% for the nine months ended June 30, 1997 to 16.0%
for the corresponding period in 1998. The Company expects that sales and
marketing expenses will increase in absolute dollars for the foreseeable future
as the Company intends to invest in its sales and marketing capabilities.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include
costs associated with the Company's general management, human resources and
finance functions. General and administrative expenses increased slightly from
$1.5 million for the nine months ended June 30, 1997 to $1.6 million for the
nine months ended June 30, 1998. As a percentage of total revenues, general and
administrative expenses decreased from 13.9% to 12.2% over the same period. This
percentage decrease was due primarily to a decrease of approximately $300,000 in
executive bonuses, offset in part by three personnel additions, settlement of a
claim (see "Certain Transactions") and $125,000 of compensation expense related
to employee stock option grants. The Company anticipates hiring additional
administrative personnel and incurring additional costs as a public company,
including directors' and officers' liability insurance, investor relations
programs and professional services fees. Accordingly, the Company anticipates
that general and administrative expenses will increase for the foreseeable
future.
In the nine months ended June 30, 1998, the Company recorded amortization of
deferred compensation expense of $125,000 related to the issuance of options to
purchase the Company's Common Stock at exercise prices subsequently deemed to be
below fair market value. Total compensation expense related to options granted
in fiscal 1997 and 1998 aggregated $805,000, which will be amortized to general
and administrative expense over the respective four-year vesting periods of the
options.
INTEREST INCOME. Interest income consists primarily of interest earned on
cash balances. Interest income increased from $275,000 for the nine months ended
June 30, 1997 to $417,000 for the nine months ended June 30, 1998 due to an
increase in the Company's cash and cash equivalent balances and short-term
investments.
23
<PAGE>
OTHER INCOME (EXPENSE). Other income (expense) represents gains and losses
from fluctuations in exchange rates on transactions denominated in foreign
currencies and other miscellaneous expenses. Other income was $3,000 for the
nine months ended June 30, 1997 and other expense was $303,000 for the nine
months ended June 30, 1998 due to exchange losses related to transactions
denominated in foreign currencies.
PROVISION FOR INCOME TAXES. Provision for income tax consists of federal,
state and international income taxes. The Company's effective tax rate was 42.2%
for the nine months ended June 30, 1997 and 42.9% for the nine months ended June
30, 1998. These tax rates primarily reflect the significant percentage of
revenues derived by the Company from international operations, particularly its
operations in Japan, which has a relatively high tax rate. The Company expects
that its future tax rate may vary depending in part on the relative income
contribution by its domestic and foreign operations.
FISCAL YEARS ENDED SEPTEMBER 30, 1996 AND 1997
REVENUES. Revenues increased by approximately 44% from $9.3 million in
fiscal 1996 to $13.4 million in fiscal 1997. Over this period, product sales
increased by approximately 50% from $7.7 million in fiscal 1996 to $11.5 million
in fiscal 1997. The increase in product sales was primarily attributable to
increased sales to an expanded customer base in Japan and North America as well
as sales of the Company's MPI cards, which were introduced in late fiscal 1996.
Services revenue increased by approximately 17% from $1.6 million in fiscal 1996
to $1.8 million in fiscal 1997 due primarily to sales of software support
contracts associated with new system sales as well as contract renewals.
COST OF REVENUES. Cost of product sales increased by approximately 43% from
$1.1 million in fiscal 1996 to $1.6 million in fiscal 1997. Gross margin on
product sales increased slightly from 85.7% for fiscal 1996 to 86.3% for fiscal
1997 due primarily to increased sales of higher margin MPI cards, offset in part
by an increase in sales of lower margin workstations. Cost of services increased
by approximately 40% from $246,000 in fiscal 1996 to $344,000 in fiscal 1997 due
to personnel additions. Gross margin on services decreased from 84.3% in fiscal
1996 to 81.2% in fiscal 1997, reflecting increased lower margin services revenue
from customers in Japan and the addition of support personnel in anticipation of
increased sales.
RESEARCH AND DEVELOPMENT. Research and development expenses increased by
approximately 56% from $908,000 in fiscal 1996 to $1.4 million in fiscal 1997.
Research and development expenses as a percentage of total revenues increased
from 9.8% in fiscal 1996 to 10.6% in fiscal 1997. These increases in research
and development expenses were due primarily to an increase in engineering
personnel.
SALES AND MARKETING. Sales and marketing expenses increased by
approximately 36% from $1.9 million in fiscal 1996 to $2.6 million in fiscal
1997. Sales and marketing expenses as a percentage of total revenues decreased
from 20.3% in fiscal 1996 to 19.1% in fiscal 1997. Sales and marketing expenses
increased in absolute dollars due primarily to personnel additions to staff the
sales office in Japan and higher bonus payments to the Company's sales force in
fiscal 1997.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
by approximately 49% from $1.4 million in fiscal 1996 to $2.1 million in fiscal
1997. General and administrative expenses as a percentage of total revenues
increased from 15.0% in fiscal 1996 to 15.5% in fiscal 1997. These increases in
general and administrative expenses were due primarily to an increase of
$550,000 in executive bonuses and two personnel additions in fiscal 1997.
INTEREST INCOME. Interest income increased from $269,000 in fiscal 1996 to
$380,000 in fiscal 1997, reflecting an increase in the Company's cash and cash
equivalent balances and short-term investments.
OTHER INCOME (EXPENSE). Other expense was $209,000 in fiscal 1996 and
$6,000 in fiscal 1997, consisting primarily of exchange losses related to
transactions denominated in foreign currencies.
PROVISION FOR INCOME TAXES. The Company's effective tax rate was 39.6% in
fiscal 1996 and 42.2% in fiscal 1997. The increase in the tax rate primarily
reflects the higher percentage of revenues derived by the Company from
international operations in fiscal 1997, particularly its operations in Japan,
which has a relatively high tax rate.
24
<PAGE>
FISCAL YEARS ENDED SEPTEMBER 30, 1995 AND 1996
REVENUES. Revenues increased by approximately 35% from $6.9 million in
fiscal 1995 to $9.3 million in fiscal 1996. Over this same period, product sales
increased by approximately 31% from $5.9 million in fiscal 1995 to $7.7 million
in fiscal 1996. The increase in product sales was primarily attributable to an
increase in the number of system sales to customers in North America and Japan,
offset in part by decreased sales to customers in Europe. Over the same period,
services revenue increased approximately 54% from $1.0 million in fiscal 1995 to
$1.6 million in fiscal 1996. The increase in services revenue was primarily due
to sales of software support contracts associated with new system sales as well
as contract renewals.
COST OF REVENUES. Cost of product sales increased by approximately 37% from
$804,000 in fiscal 1995 to $1.1 million in fiscal 1996 commensurate with the
increase in product revenues. Gross margin on product sales decreased from 86.3%
in fiscal 1995 to 85.7% in fiscal 1996, due primarily to an increase in the
fixed costs of manufacturing personnel. Cost of services increased by
approximately 86% from $132,000 in fiscal 1995 to $246,000 in fiscal 1996 due to
personnel additions. Gross margin on services decreased from 87.0% to 84.3%,
reflecting increased lower margin services revenue from customers in Japan and
the addition of support personnel in anticipation of increased sales.
RESEARCH AND DEVELOPMENT. Research and development expenses increased by
approximately 30% from $697,000 in fiscal 1995 to $908,000 in fiscal 1996.
Research and development expenses as a percentage of total revenues decreased
from 10.2% in fiscal 1995 to 9.8% in fiscal 1996 as revenues increased at a
faster rate than research and development costs. Research and development costs
increased in absolute dollars primarily due to an increase in engineering
personnel.
SALES AND MARKETING. Sales and marketing expenses increased by
approximately 45% from $1.3 million in fiscal 1995 to $1.9 million in fiscal
1996. Sales and marketing expenses as a percentage of total revenues increased
from 18.9% in fiscal 1995 to 20.3% in fiscal 1996. Sales and marketing expenses
increased primarily due to additions in personnel to staff the sales and support
offices in Japan and Chicago. These offices did not significantly contribute to
revenues until fiscal 1996.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
by approximately 56% from $889,000 in fiscal 1995 to $1.4 million in fiscal
1996. General and administrative expenses increased as a percentage of total
revenues from 12.9% in fiscal 1995 to 15.0% in fiscal 1996. General and
administrative expenses increased due primarily to increases in executive
compensation and personnel additions.
INTEREST INCOME. Interest income increased from $224,000 in fiscal 1995 to
$269,000 in fiscal 1996 as the Company's cash and cash equivalent balances and
short-term investments increased over this period.
OTHER INCOME (EXPENSE). Other income was $126,000 in fiscal 1995 and other
expense was $209,000 in fiscal 1996, consisting primarily of exchange gains and
losses on transactions denominated in foreign currencies.
PROVISION FOR INCOME TAXES. The Company's effective tax rate increased from
36.1% in fiscal 1995 to 39.6% in fiscal 1996. The increase in the tax rate
primarily reflects the higher percentage of revenues derived by the Company from
international operations in fiscal 1996, particularly its operations in Japan,
which has a relatively high tax rate. The increase in the effective tax rate
reflects the Company's first full year of operations in Japan.
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited consolidated statements of
income data for each of the seven quarters through the quarter ended June 30,
1998, as well as such data expressed as a percentage of total revenues for the
periods indicated. This unaudited quarterly information has been prepared on the
same basis as the audited Consolidated Financial Statements and Notes thereto
contained herein and, in management's opinion, includes all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the information for the quarters presented when read in
conjunction with the Company's annual audited Consolidated Financial Statements
and Notes thereto presented elsewhere in this Prospectus. The results of
operations for any quarter are not necessarily indicative of results for any
subsequent period or for the entire fiscal year.
25
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1996 1997 1997 1997 1997 1998
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF INCOME DATA:
Revenues:
Product sales............................ $ 4,384 $ 2,333 $ 2,856 $ 1,946 $ 2,853 $ 4,440
Services................................. 483 444 407 499 593 573
----------- ----------- ----------- ----------- ----------- -----------
Total revenues......................... 4,867 2,777 3,263 2,445 3,446 5,013
----------- ----------- ----------- ----------- ----------- -----------
Cost of revenues:
Product sales............................ 652 250 364 310 310 379
Services................................. 87 82 82 93 110 129
----------- ----------- ----------- ----------- ----------- -----------
Total cost of revenues................. 739 332 446 403 420 508
----------- ----------- ----------- ----------- ----------- -----------
Gross profit............................... 4,128 2,445 2,817 2,042 3,026 4,505
----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Research and development................. 324 359 387 349 414 471
Sales and marketing...................... 624 583 622 721 670 677
General and administrative............... 530 475 510 548 450 597
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses............... 1,478 1,417 1,519 1,618 1,534 1,745
----------- ----------- ----------- ----------- ----------- -----------
Operating income........................... 2,650 1,028 1,298 424 1,492 2,760
Interest income............................ 81 88 106 105 114 135
Other income (expense)..................... (55) (95) 153 (9) (100) (37)
----------- ----------- ----------- ----------- ----------- -----------
Income before taxes........................ 2,676 1,021 1,557 520 1,506 2,858
Provision for taxes........................ 1,129 431 657 219 646 1,226
----------- ----------- ----------- ----------- ----------- -----------
Net income................................. $ 1,547 $ 590 $ 900 $ 301 $ 860 $ 1,632
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Earnings per share(1):
Basic.................................... $ 0.16 $ 0.06 $ 0.09 $ 0.03 $ 0.08 $ 0.16
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Diluted.................................. $ 0.15 $ 0.06 $ 0.08 $ 0.03 $ 0.08 $ 0.15
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Weighted average shares:
Basic.................................... 9,630 9,630 9,630 9,630 10,163 10,398
Diluted.................................. 10,332 10,667 10,697 10,724 10,809 10,925
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUES
----------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1996 1997 1997 1997 1997 1998
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product sales............................ 90.1% 84.0% 87.5% 79.6% 82.8% 88.6%
Services................................. 9.9 16.0 12.5 20.4 17.2 11.4
----------- ----------- ----------- ----------- ----------- -----------
Total revenues......................... 100.0 100.0 100.0 100.0 100.0 100.0
----------- ----------- ----------- ----------- ----------- -----------
Cost of revenues:
Product sales............................ 13.4 9.0 11.2 12.7 9.0 7.5
Services................................. 1.8 3.0 2.5 3.8 3.2 2.6
----------- ----------- ----------- ----------- ----------- -----------
Total cost of revenues................. 15.2 12.0 13.7 16.5 12.2 10.1
----------- ----------- ----------- ----------- ----------- -----------
Gross profit............................... 84.8 88.0 86.3 83.5 87.8 89.9
----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Research and development................. 6.7 12.9 11.8 14.3 12.0 9.4
Sales and marketing...................... 12.8 21.0 19.1 29.5 19.4 13.5
General and administrative............... 10.9 17.1 15.6 22.4 13.1 11.9
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses............... 30.4 51.0 46.5 66.2 44.5 34.8
----------- ----------- ----------- ----------- ----------- -----------
Operating income........................... 54.4 37.0 39.8 17.3 43.3 55.1
Interest income............................ 1.7 3.2 3.2 4.3 3.3 2.7
Other income (expense)..................... (1.1) (3.4) 4.7 (0.3) (2.9) (0.8)
----------- ----------- ----------- ----------- ----------- -----------
Income before taxes........................ 55.0 36.8 47.7 21.3 43.7 57.0
Provision for taxes........................ 23.2 15.5 20.1 9.0 18.7 24.4
----------- ----------- ----------- ----------- ----------- -----------
Net income................................. 31.8% 21.3% 27.6% 12.3% 25.0% 32.6%
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
JUNE 30,
1998
-----------
<S> <C>
CONSOLIDATED STATEMENTS OF INCOME DATA:
Revenues:
Product sales............................ $ 4,092
Services................................. 529
-----------
Total revenues......................... 4,621
-----------
Cost of revenues:
Product sales............................ 569
Services................................. 150
-----------
Total cost of revenues................. 719
-----------
Gross profit............................... 3,902
-----------
Operating expenses:
Research and development................. 534
Sales and marketing...................... 847
General and administrative............... 549
-----------
Total operating expenses............... 1,930
-----------
Operating income........................... 1,972
Interest income............................ 168
Other income (expense)..................... (166)
-----------
Income before taxes........................ 1,974
Provision for taxes........................ 849
-----------
Net income................................. $ 1,125
-----------
-----------
Earnings per share(1):
Basic.................................... $ 0.11
-----------
-----------
Diluted.................................. $ 0.10
-----------
-----------
Weighted average shares:
Basic.................................... 10,424
Diluted.................................. 10,933
JUNE 30,
1998
-----------
<S> <C>
Revenues:
Product sales............................ 88.6%
Services................................. 11.4
-----------
Total revenues......................... 100.0
-----------
Cost of revenues:
Product sales............................ 12.3
Services................................. 3.2
-----------
Total cost of revenues................. 15.5
-----------
Gross profit............................... 84.5
-----------
Operating expenses:
Research and development................. 11.6
Sales and marketing...................... 18.3
General and administrative............... 11.9
-----------
Total operating expenses............... 41.8
-----------
Operating income........................... 42.7
Interest income............................ 3.6
Other income (expense)..................... (3.6)
-----------
Income before taxes........................ 42.7
Provision for taxes........................ 18.4
-----------
Net income................................. 24.3%
-----------
-----------
</TABLE>
- ------------------------------
(1) See Note 1 of Notes to Consolidated Financial Statements for the method used
to calculate earnings per share.
Although the Company's total revenues have increased on an annual basis over
each of the last five years, the Company has experienced significant quarterly
fluctuations in total revenues. Total revenues in the quarters
26
<PAGE>
ended March 31, 1997 and September 30, 1997 were unusually low due to a decision
by the Company to manage its growth in fiscal 1996 and 1997 in order to build
the infrastructure necessary to support its growing base of customers. The
decline in sales in the quarter ended March 31, 1997 resulted from the unusually
high sales volume in the previous quarter as shipments of customer orders were
delayed by the Company from the last quarter of fiscal 1996 to the first quarter
of fiscal 1997 so that it could expand its customer support operations. Sales in
the quarter ended September 30, 1997 were lower than the previous quarter for
similar reasons. Quarterly gross profits as a percentage of total revenues vary
from quarter to quarter due to changes in product mix, including variations in
configurations of DCT systems. During the quarter ended September 30, 1997,
sales and marketing expenses were relatively higher than in previous quarters,
due primarily to an increase in marketing personnel and related recruiting
expenses.
The Company has experienced, and anticipates that it will continue to
experience, significant fluctuations in quarterly revenues and operating
results. The Company's revenues and operating results are relatively difficult
to forecast for a number of reasons, including (i) the variable size and timing
of individual purchases by customers, (ii) seasonal factors that may affect
capital spending by customers, such as the varying fiscal year ends of customers
and the reduction in business during the summer months, particularly in Europe,
(iii) the relatively long sales cycles for the Company's products, (iv) the
timing of hiring of sales and technical personnel, (v) changes in timing and
amount of incentive compensation, (vi) competitive conditions in the Company's
markets, (vii) exchange rate fluctuations, (viii) changes in the mix of products
sold, (ix) the timing of the introduction and market acceptance of new products
or product enhancements by the Company, its customers, competitors or suppliers,
(x) costs associated with developing and introducing new products, (xi) product
life cycles, (xii) changes in the level of operating expenses relative to
revenues, (xiii) software defects and other product quality problems, (xiv)
customer order deferrals in anticipation of new products, (xv) supply
interruptions, (xvi) changes in the regulatory environment and (xvii) changes in
global or regional economic conditions or in the telecommunications industry.
The Company's revenues in any period generally have been, and are likely to
continue to be, derived from relatively small numbers of sales and service
transactions with relatively high average revenues per order. Therefore, the
loss of any orders or delays in closing such transactions could have a more
significant impact on the Company's quarterly revenues and results of operations
than on those of companies with relatively high volumes of sales or low revenues
per order. The Company's products generally are shipped within 15 to 30 days
after orders are received and revenues are recognized upon shipment of the
products, provided no significant vendor obligations remain and collection of
the related receivable is deemed probable. As a result, the Company generally
does not have a significant backlog of orders, and revenues in any quarter are
substantially dependent on orders booked and shipped in that quarter.
A customer's decision to purchase the Company's products typically involves
a significant technical evaluation, internal procedural delays associated with
large capital expenditure approvals and testing and acceptance of new systems
that affect key operations. For these and other reasons, the sales cycle
associated with the Company's products is typically lengthy and subject to a
number of significant risks over which the Company has little or no control.
Historically, the period between initial customer contact and purchase of the
Company's products has typically ranged from two to nine months, with sales to
new customers (including new divisions within existing customers) at the longer
end of this range. Because of the lengthy sales cycle and the relatively small
number and large size of customers' orders, if revenues forecast from a specific
customer for a particular quarter are not realized in that quarter, the
Company's operating results for that quarter could be materially adversely
affected.
The Company's expectations for future revenues are predicated, to a large
extent, on the recruitment and hiring of a significant number of employees,
particularly experienced sales and technical personnel. Failure to hire, or
delays in hiring, sufficient sales and technical personnel could have a material
adverse effect on the Company's results of operations for any period.
Due to the relatively fixed nature of most of the Company's costs, including
personnel and facilities costs and because operating expenses are based on
anticipated revenue, a decline in revenue from even a limited
27
<PAGE>
number of transactions, failure to achieve expected revenue in any fiscal
quarter, or unanticipated variations in the timing of recognition of specific
revenues can cause significant variations in operating results from quarter to
quarter and may in some future quarter result in losses or have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company believes, therefore, that period-to-period comparisons
of its operating results should not be relied upon as an indication of future
performance. For all of the foregoing factors, as well as other unanticipated
factors, it is possible that in some future quarter the Company's results of
operations could fail to meet the expectations of public market analysts or
investors. In such event, or in the event that adverse conditions prevail or are
perceived to prevail generally or with respect to the Company's business, the
price of the Company's Common Stock will likely be materially adversely
affected.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its operations, including increases
in accounts receivable and capital equipment acquisitions, primarily through
cash generated from operations.
The Company's operating activities provided cash of $2.7 million, $2.3
million, $3.4 million and $2.9 million in fiscal 1995, 1996 and 1997 and the
nine months ended June 30, 1998, respectively, principally from cash flow from
operations. Investment activities, consisting primarily of purchases and sales
of short-term investments and additions to property and equipment, used cash of
$1.0 million in fiscal 1995, provided cash of $257,000 and $167,000 in fiscal
1996 and 1997, respectively, and used cash of $423,000 in the nine months ended
June 30, 1998.
As of June 30, 1998, the Company had working capital of $12.9 million and
cash and cash equivalents of $13.3 million. As of June 30, 1998, the Company had
no bank indebtedness and no long-term commitments other than operating lease
obligations. The Company expects that capital expenditures will total
approximately $800,000 through fiscal 1999. Accounts receivable increased from
$892,000 at September 30, 1997 to $2.8 million at June 30, 1998 due primarily to
an increase in sales and the timing of sales within each quarter.
The Company believes that the net proceeds from this offering, together with
existing cash, cash equivalents and short-term investments and funds generated
from operations, will provide the Company with sufficient funds to finance its
operations for at least the next 18 months. The Company may require additional
funds to support its working capital requirements or for other purposes. There
can be no assurance that additional financing will be available or that, if
available, such financing will be obtainable on terms favorable to the Company
or its stockholders.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). This statement will be effective for the Company's fiscal
year ending September 30, 1999. The statement establishes presentation and
disclosure requirements for reporting comprehensive income. Comprehensive income
includes charges or credits to equity that are not the result of transactions
with stockholders. The Company expects there will be no material impact on its
consolidated financial position or results of operations as a result of the
adoption of this new accounting standard.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). This statement will be effective for the Company's fiscal year
ending September 30, 1999. The statement requires the Company to report certain
financial information about operating segments. It also requires that the
Company report certain information about its services, the geographic areas in
which it operates and its major customers. The method specified in SFAS 131 for
determining information to be reported is referred to as the "management
approach." The management approach is based on the way that management organizes
the segments within the enterprise for making operating decisions and assessing
performance. The adoption of SFAS 131 is not expected to have a significant
impact on the Company's financial statement disclosures.
28
<PAGE>
In October 1997 and March 1998, the American Institute of Certified Public
Accountants ("AICPA") issued Statements of Position ("SOP") 97-2 and 98-4,
"Software Revenue Recognition," which provide guidance on applying generally
accepted accounting principles in recognizing revenue on software transactions.
SOP 97-2 and 98-4 are effective for the Company's fiscal year ending September
30, 1999. Earlier application is encouraged as of the beginning of fiscal year
or interim periods for which financial statements or information have not been
issued. Retroactive application of the provisions of this SOP is prohibited. The
Company has assessed the provisions of SOP 97-2 and 98-4 and does not expect
that adoption will have a material impact on its financial statements.
In March 1998, the AICPA issued SOP 98-1, "Software for Internal Use," which
provides guidance in accounting for the costs of computer software developed or
obtained for internal use. SOP 98-1 is effective for the Company's fiscal year
ending September 30, 1999. The Company does not expect the adoption of SOP 98-1
to have a material impact on its financial statements.
29
<PAGE>
BUSINESS
OVERVIEW
Catapult Communications Corporation ("Catapult" or the "Company") designs,
develops, manufactures, markets and supports an advanced software-based test
system offering an integrated suite of testing applications for the global
telecommunications industry. Catapult's Digital Communications Tester ("DCT") is
a comprehensive test solution designed to enable equipment manufacturers and
network operators to deliver complex digital telecommunications equipment and
services more quickly and cost-effectively, while helping to ensure
interoperability and reliability. The Company's advanced software and hardware
assist customers in the design, integration, installation and acceptance testing
of a broad range of digital telecommunications equipment and services. The
Company markets its products through a direct sales force to industry leaders
such as Cable & Wireless Communications PLC ("Cable & Wireless"), Fujitsu
Limited ("Fujitsu"), LM Ericsson ("Ericsson"), Lucent Technologies, Inc.
("Lucent"), Motorola Inc. ("Motorola"), NEC Corporation ("NEC"), Northern
Telecom Limited ("Nortel"), Nippon Telephone and Telegraph ("NTT") and Tellabs
Inc. ("Tellabs").
The Company's predecessor was incorporated in California in October 1985 and
reincorporated into Nevada in June 1998. The Company has three subsidiaries,
Catapult Communications Ltd., a corporation organized under the laws of the
United Kingdom and Catapult Communications K.K., a corporation organized under
the laws of Japan, both of which provide sales and technical support, and ISDN
Technologies, Ltd., a foreign sales corporation organized under the laws of
Barbados.
INDUSTRY BACKGROUND
Consumer demand for new wireless telecommunications services and enhanced
wireline services has created significant need for new telecommunications
equipment and infrastructure. Technological advances have made wireless
telecommunications services more widely available and increasingly affordable,
resulting in the build-out of a significant number of new wireless networks to
meet consumer demand. At the same time, the explosive growth of the Internet and
the convergence of telephony and computing are driving demand for high-speed
telecommunications services, as well as enhanced services integrating voice,
data and video. In addition, the deregulation and the increasing privatization
and globalization of the telecommunications industry are intensifying
competition among existing operators of telecommunications networks and
promoting the entrance of new telecommunications equipment manufacturers and
service providers, such as Competitive Local Exchange Carriers (CLECs). The
entry of new market participants has resulted in an increased demand for more
equipment to satisfy infrastructure needs.
As a result of these trends, operators of telecommunications networks are
investing aggressively in new technologies such as SS7, CDMA, Frame Relay and
Asynchronous Transfer Mode (ATM); new services, including IN-based services such
as Caller ID, voice messaging and Local Number Portability (LNP); satellite
telecommunications services such as Iridium; and digital wireless services such
as Personal Communications Services (PCS). These new technologies and services
have led to a proliferation of standards, protocols (sets of rules relating to
transmissions between two devices) and protocol variants, making the design and
operation of telecommunications networks even more complex.
The technological advances in wireless and wireline telecommunications,
increasing competition between existing service providers and new entrants, and
the proliferation of standards, are fundamentally changing the
telecommunications industry. Historically, one equipment provider would
typically supply the network operator with most of the equipment necessary for
the network, with the result that interoperability problems were relatively
minimal. However, the recent entry of many new telecommunications equipment
manufacturers into the market has complicated the operation of
telecommunications networks, increasing the problem of interoperability among
equipment from multiple vendors. Today, network operators are able to choose
heterogeneous products from multiple equipment manufacturers to obtain the best
set of features and reduce network cost. Consequently, to remain competitive,
equipment manufacturers must be able to rapidly provide cost-effective equipment
with enhanced features. At the same time, manufacturers and operators are
required to ensure that
30
<PAGE>
these products satisfy the telecommunications industry's rigorous standards of
seamless interoperability and high reliability under variable traffic
conditions.
To address these needs, telecommunications equipment manufacturers and
network operators require versatile test systems that can help ensure the
interoperability of equipment from various vendors, identify and locate errors
in network equipment, enhance the performance of the network and verify
conformance to industry standards. In order to address these requirements
effectively, test systems should:
- PROVIDE A COMPLETE SOLUTION. Equipment manufacturers must be able to test
their products efficiently and rigorously throughout design, development,
network integration, installation and acceptance testing. A single test
system that can be used in each of these phases can lower test costs and
allow personnel to develop familiarity with the test system, enabling them
to progress more efficiently through the entire development and testing
process.
- ACCELERATE TEST CYCLES. Because of customers' needs to develop and
introduce new products and services rapidly, test systems must perform a
wide variety of test functions quickly and reliably.
- RAPIDLY SUPPORT A BROAD RANGE OF NEW AND INCREASINGLY COMPLEX
PROTOCOLS. As the number of technologies, services, protocols and protocol
variants grows, equipment manufacturers and network operators increasingly
require a powerful and versatile test system capable of supporting a broad
range of testing applications. In addition, manufacturers and operators
require access to a broad range of protocols and protocol variants, as
well as timely support of new protocols and protocol variants.
- ADAPT TO A VARIETY OF TESTING ENVIRONMENTS. Because equipment
manufacturers and network operators may already use a variety of test
systems, any new test system must be sufficiently adaptable to function on
a stand-alone basis or to be integrated into customers' diverse test
environments.
- INCREASE PRODUCTIVITY AMONG A BROAD RANGE OF USERS. In view of the
increasing scarcity of skilled technical personnel, users with less
technical sophistication often become involved in the testing process. As
a result, test systems must be usable by personnel with varying degrees of
technical skills.
Although many equipment manufacturers and network operators have used
internally developed test systems, manufacturers and operators increasingly
recognize that developing these systems internally may not allow them to
introduce reliable new products and services as rapidly and cost effectively as
desired. The Company believes that the shortage of skilled and experienced
technical staff caused by the rapid growth of the telecommunications industry
has caused companies in this industry to utilize scarce personnel in design
rather than in testing of new products. In addition, internal development by the
same manufacturer of both the test system and the device under test may
perpetuate rather than reduce design error. As a result, network operators are
increasingly requesting equipment manufacturers to use independently developed
test systems. These and other factors are causing equipment manufacturers and
network operators to outsource their telecommunications test systems needs,
creating a market opportunity for companies that provide independently developed
test systems.
THE CATAPULT SOLUTION
Catapult designs, develops, manufactures, markets and supports an advanced
software-based test system offering an integrated suite of testing applications
for the global telecommunications industry. Catapult's DCT is a comprehensive
test solution designed to enable equipment manufacturers and network operators
to deliver complex digital telecommunications equipment and services faster and
more cost-effectively, while helping to ensure reliability and interoperability.
The Company's advanced software and hardware assist its customers in the design,
development, network integration, installation and acceptance testing of new and
existing telecommunications equipment and services. The DCT system is designed
for use principally in the following applications: (i) simulation, which enables
the DCT system to emulate a networking environment; (ii) load and stress
testing, which tests the performance of a device under high traffic loads; (iii)
feature verification, which verifies that the features of a device function
correctly; (iv) conformance testing, which validates operation of a device to
31
<PAGE>
published specifications; and (v) monitoring, which is used to determine whether
devices are functioning properly within a network.
The DCT system provides the following key customer benefits:
- COMPREHENSIVE DIGITAL TELECOMMUNICATIONS TEST SOLUTION. With its extensive
library of software protocol modules, large selection of physical
interfaces and a platform designed to support multi-protocol, multi-user
testing, the DCT system is easily configured to support a wide variety of
digital testing needs. The DCT system can be used throughout the design,
development, network integration, installation and acceptance testing of
digital telecommunications equipment and services, thereby reducing a
customer's need for multiple test systems.
- IMPROVED TIME TO MARKET. The DCT system's multi-protocol, multi-user
capability allows multiple testing operations to be performed
simultaneously by different users, helping customers to accelerate their
product development cycles. The system also supports automated testing,
further reducing development and test cycles.
- ACCESS TO AN EXTENSIVE RANGE OF PROTOCOLS AND VARIANTS. Catapult maintains
an extensive library of software modules that support more than 100
variants of approximately 30 protocols, with an emphasis on complex,
high-level and emerging protocols. Using its extensive library of software
protocol test modules, the technical expertise and know-how of its
engineers and its proprietary software development tools, the Company can
rapidly implement new protocols and protocol variants in response to the
needs of its customers.
- IMPROVED PRODUCT RELIABILITY. By simulating a wide range of operating
situations, including protocol errors, network failures and heavy network
traffic, the Company's products can help to detect, diagnose and isolate
network telecommunications problems. This simulation helps ensure that
telecommunications equipment will operate reliably, thereby reducing
costly failures after installation. In addition, the Company believes that
the independent development of test solutions can reduce errors that may
occur when the same manufacturer develops both the test system and the
device under test.
- ADAPTABILITY TO DIVERSE TESTING ENVIRONMENTS. While the DCT system can
serve as a powerful and versatile stand-alone test solution, the system's
UNIX-based platform and flexible design facilitate integration of the
system into customers' diverse test environments. The DCT system is also
designed to provide customers with a migration path to future testing
needs.
- FLEXIBLE PROGRAMMING CAPABILITIES. In order to run test scenarios,
particularly on advanced test systems, users may need to create customized
test scripts. To make the DCT system accessible to a broad range of users,
the Company offers a number of programming options. The Company's fully
featured Digital Communications Programming Language ("DCPL") allows users
to write their own code to customize their testing applications. The
Company also provides a Graphical User Interface ("GUI") to make it easier
and faster for customers to develop these applications. In addition, the
Company offers pre-programmed conformance test suites to reduce the amount
of programming required by its customers.
- COMPREHENSIVE TECHNICAL SUPPORT. The Company believes its high level of
customer support provides a key competitive advantage. Catapult employs
highly skilled applications engineers in each of its locations to provide
pre- and post-sales support to its customers. Applications engineers
provide on-site training and installation and assist customers in
developing test applications and troubleshooting problems. Further,
Catapult develops protocol variants at the request of existing customers
and typically releases several software updates per year.
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STRATEGY
The Company's objective is to become the leading supplier of advanced
software-based test systems for the global telecommunications industry.
Catapult's strategy to achieve this objective includes the following key
elements:
- EXPAND DIRECT SALES AND TECHNICAL SUPPORT PRESENCE. In order to increase
its market penetration and to capitalize on opportunities in the global
market, the Company plans to continue to expand its sales, marketing and
support capabilities. The Company believes that a physical presence in key
customer locations provides an important advantage in developing and
maintaining new and existing customer relationships. In addition to
expanding each of its current offices, the Company plans to open new
offices in North America and Europe. The Company opened an office in
Ottawa, Canada in January 1998 and an office in Dallas, Texas in July
1998.
- CONTINUE TO SUPPORT NEW AND COMPLEX PROTOCOLS AND VARIANTS. Catapult plans
to continue to capitalize on its expertise and software development tools
to develop software modules rapidly as new and more complex protocols and
protocol variants are introduced. The Company believes that its extensive
library of software-based protocol modules, together with its proprietary
software development tools and extensive technical know-how, provide a
significant competitive advantage.
- BROADEN MARKET BY ENHANCING EASE OF USE. The Company is continually
seeking to make the DCT system easier to use in order to expand its market
to include a broader range of users. The Company recently introduced a GUI
to reduce the time and resources needed by customers to develop test
scripts. In addition, the Company has recently begun to develop
pre-programmed applications, such as load generators and network entity
simulators. Catapult believes that these additional product offerings will
appeal to companies with limited programming resources.
- LEVERAGE INSTALLED BASE OF CUSTOMERS. The Company intends to continue to
leverage its existing customer base not only for follow-on and upgrade
sales but also to gain access to new customers. For example, because users
of identical test systems can benefit from sharing test scripts and
results, an initial sale to one customer can facilitate subsequent sales
to other equipment manufacturers and network operators.
- PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES. The Company intends to pursue
strategic acquisitions of complementary businesses or technologies to
expand its product offerings, to obtain additional customer relationships
and to add technical and sales personnel, as appropriate opportunities are
identified. The Company may also seek to create alliances with companies
that supply technologies and products that are complementary to the
capabilities of the DCT system.
- SPECIALIZE IN PROVIDING TEST SOLUTIONS FOR THE TELECOMMUNICATIONS
INDUSTRY. The Company intends to continue its focus on providing
telecommunications test solutions. Some of the Company's competitors also
offer telecommunications equipment that, in many instances, competes with
their customers' products. Because some customers may prefer not to buy
products from competitors, the Company believes that its sole focus on
test solutions provides it with a competitive advantage.
THE CATAPULT DCT SYSTEM
Catapult designs, develops, manufactures, markets and supports an advanced
software-based digital telecommunications test system offering an integrated
suite of testing applications under the DCT system family name. The Company's
advanced software and hardware can be used both in the lab and in the field to
assist its customers in the design, development, network integration,
installation and acceptance testing of new and existing digital
telecommunications equipment and services. The DCT system's multi-protocol,
multi-user capability allows multiple testing operations to be performed
simultaneously by different users, helping customers to accelerate their product
development cycles.
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The DCT system consists of advanced software and hardware running on a
third-party UNIX-based workstation. In a system sale, customers typically
license one or more software modules and purchase hardware and ongoing software
support. Customers may upgrade their systems by purchasing additional software
protocol modules and hardware to meet future testing needs. Customers have the
option to purchase a third-party workstation from Catapult or provide a
workstation to the Company for configuration. Prices for the DCT system vary
widely depending upon the overall system configuration, including the number and
type of software protocol modules and the number of physical interfaces required
by the customer. A DCT system sale typically ranges in price from approximately
$50,000 to $150,000.
APPLICATIONS
The principal applications of the DCT system are simulation, load and stress
testing, feature verification, conformance testing and monitoring.
SIMULATION. The simulation function of the DCT system enables it to act
like one or more network devices, emulating their actions and responses. By
simulating various network devices, such as digital switches, wireless base
stations, network access nodes and network databases, the Company's products
assist engineers to cost-effectively develop equipment that will be compatible
with the networks within which they will be deployed. This helps ensure that
equipment will interoperate reliably, thereby reducing costly failures after
installation.
LOAD AND STRESS TESTING. Load and stress testing enables the DCT system to
verify that a device under test can successfully handle its designed traffic
capacity and that its performance will degrade gradually, rather than fail
completely, when stressed beyond its specifications. Distributed interface
processing and a high-performance UNIX-based platform enable the DCT system to
initiate and maintain high traffic volumes.
FEATURE VERIFICATION. The DCT system performs feature verification by
simulating one or more network devices and testing a wide variety of possible
scenarios to verify that the device under test handles all features specified by
the protocol. The user is able to initiate multiple simultaneous calls across
one or many links, create correct call scenarios, send messages out of sequence
to verify error response mechanisms and use the DCT system's traffic channel
facilities to verify a voice or data path.
CONFORMANCE TESTING. The DCT system tests for conformance by enabling
manufacturers and network operators to verify that devices meet specified
standards. Conformance test suites validate the implementation of new features
and the functionality of existing features against a standardized set of
predefined criteria. Catapult provides pre-packaged V5 and SS7 conformance test
suites which assist in this testing.
MONITORING. The DCT system monitors network links and stores network
activity information for future analysis, typically without affecting network
traffic. By collecting and analyzing traffic, the DCT system helps ensure that
the link has been brought into service and that the devices connected by the
link are functioning properly. The DCT system also provides notice of network
device failure. The DCT system can be used to set traps and triggers, count
error messages and filter packets by address or selected field criteria. The DCT
system can simultaneously monitor multiple links, each of which may be using
different protocols.
DCT SYSTEM SOFTWARE
The DCT system software, based on a UNIX operating system, consists of
protocol encoders and decoders, protocol state machines, protocol validation
tests and conformance test suites. The DCT system supports more than 100
variants of approximately 30 protocols, enabling the DCT system to be configured
for many different test applications. The Company's customers can choose to
program the DCT system using Catapult's GUI or by writing their own code using
the Company's DCPL, a fully featured optimized communications language. Finally,
customers can also choose to integrate their own libraries of subroutines
written in industry standard programming languages such as C or C++.
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Protocols supported by the DCT system software include:
<TABLE>
<S> <C> <C> <C>
SIGNALING SYSTEM 7 (SS7) ASYNCHRONOUS TRANSFER MODE (ATM)
Message Transfer Part (MTP) SSCOP/AAL5*
Signaling Connection Control Part (SCCP) SSCF-NNI*
Telephone User Part (TUP) ACCESS NETWORK--V5
ISDN User Part (ISUP) V5.1
Transaction Capabilities Application Part (TCAP) V5.2
SIGNALING SYSTEM 7 VALIDATION TESTS V5 VALIDATION TESTS
MTP Layer 2 (V5.1 and V5.2)
SCCP Layer 3 (V5.1 and V5.2)
ISUP DATA TELECOMMUNICATIONS
TUP Frame relay
TCAP* Data packet switching--X.25
INTELLIGENT NETWORK TRAFFIC CHANNEL
Intelligent Network Applications Part (INAP) CS1 VOX voice channel testing
Intelligent Network Applications Part (INAP) CS2 B-channel data piping
DIGITAL CELLULAR--GSM, CDMA, PDC, PCS AND IS-41 ISDN
Mobile Applications Part (MAP) Primary rate interface (PRI)
CAMEL Applications Part (CAP)* Basic rate interface (BRI)
Base Station Application Part (BSSAP)
Abis interface
IS-41A, B and C
EIA-TIA 41-D*
WACS-C
* IN DEVELOPMENT AND PLANNED FOR DELIVERY IN
CALENDAR 1998.
</TABLE>
DCT SYSTEM HARDWARE
The DCT system employs a modular hardware architecture that supports a wide
variety of physical interfaces which connect the DCT system to the device under
test. The Company provides this flexibility through its protocol-independent MPI
co-processor cards, which are inserted into the workstation or an expansion
chassis. The DCT system is hosted on a Sun or compatible workstation. Using up
to three expansion chassis, a single workstation may also support up to 19 MPI
cards or 76 signaling channels. The Company offers MPI cards for a variety of
physical interfaces, including industry standards such as E-1, T-1, serial port,
ISDN Basic Rate and Japanese CII.
The Company also offers a number of auxiliary cards to increase the
versatility of the DCT system. For example, the VOX card adds voice channel
testing capability on up to 64 channels of E-1 and T-1 links. The Timeslot
Interchange (TSI) card supports individual dynamic or static channel selection
for up to 240 timeslots. The Subscriber Line Interface Card (SLIC) converts
two-wire analog subscriber line interfaces to four-wire handset interfaces.
Catapult provides a converter for CMI, the Japanese physical interface.
CUSTOMERS
The Company's customers in the United States and Canada are primarily
telecommunications equipment manufacturers, and outside North America, its
customer base also includes network operators. The following is a
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list of the Company's customers that accounted for an aggregate of at least
$100,000 in total revenues in either fiscal 1997 or the nine months ended June
30, 1998:
<TABLE>
<S> <C> <C> <C>
Aethos Communication Systems Limited Motorola, Inc.
Cable & Wireless Communications PLC NEC CorporationNippon Telephone and Telegraph
DSC Communications Corporation Northern Telecom Limited
Fujitsu Limited Tandem Computers, Inc.
GPT Limited (a division of Compaq Computer Corporation)
LM Ericsson Tellabs Inc.
Lucent Technologies, Inc.
</TABLE>
Revenues from the Company's top four customers represented approximately
75%, 54% and 60% of total revenues in fiscal 1995, 1996 and 1997, respectively.
The Company's largest customer over this period has been Motorola, which
accounted for approximately 37%, 23% and 28% of total revenues in fiscal 1995,
1996 and 1997, respectively. In the nine months ended June 30, 1998, the
Company's top four customers represented approximately 69% of total revenues.
These customers, NTT, Motorola, NEC and Lucent, accounted for 24%, 19%, 15% and
11% of total revenues, respectively, in that period. In fiscal 1997, sales to
Motorola and NEC accounted for approximately 28% and 17% of total revenues,
respectively. In fiscal 1996, sales to Motorola, DDI Tokyo Pocket Telephone,
Inc. and Lucent accounted for approximately 23%, 12% and 10% of total revenues,
respectively. In fiscal 1995, sales to Motorola, Nortel and Lucent accounted for
approximately 37%, 17% and 12% of total revenues, respectively. Separate
engineering groups of the same customer at different locations generally make
independent decisions to purchase the Company's products. For example, several
divisions of one major customer have independently installed DCT systems at
multiple locations in the United States as well as in Ireland, the United
Kingdom, Israel, India and China.
The Company expects that it will continue to depend upon a relatively
limited number of customers for substantially all of its revenues in future
periods, although no customer is presently obligated either to purchase a
specific amount of products or to provide the Company with binding forecasts of
purchases for any period. The loss of a major customer or the reduction, delay
or cancellation of orders from one or more of the Company's significant
customers could materially adversely affect the Company's business, financial
condition and results of operations. See "Risk Factors--Dependence on Limited
Number of Customers."
SALES AND MARKETING
The Company markets its products and services through its direct sales
force, a majority of whom have technical degrees. As of June 30, 1998,
Catapult's direct sales force consisted of 10 employees (four in the United
States, three in Europe and three in Japan). The Company does not anticipate
entering into independent distributor arrangements for the foreseeable future
and intends to sell exclusively through direct sales personnel because of the
high level of technical expertise and support required by customers. Pursuant to
a special agreement, one of the Company's customers has the right to re-market
the Company's test systems as part of an integrated product sale.
The Company's sales strategy is to focus on the functional groups related to
the customer's product development cycle, including research and development,
network integration and final test. Sales to a new customer have often led to
sales at other facilities of the customer, as often a customer performs
development at multiple sites in order to adapt its telecommunications equipment
to local requirements and standards. The Company intends to continue to leverage
its existing customer base not only for follow-on and upgrade sales but also to
gain access to new customers. For example, because users of identical test
systems can benefit from sharing test scripts and results, an initial sale can
facilitate a subsequent sale to other equipment manufacturers and network
operators.
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<PAGE>
The Company has implemented a number of marketing initiatives to support the
sales of its products and services. These efforts are intended to inform
customers of the capabilities and benefits of the Company's advanced
software-based test systems. Marketing programs include direct mail, on-site
customer seminars, limited participation in industry trade shows and forums, and
dissemination of information concerning products through the Company's website.
Customers generally purchase on an as-needed basis, and none of the
Company's customers has entered into agreements that require minimum purchases.
The Company's products generally are shipped within 15 to 30 days after orders
are received. As a result, the Company generally does not have a significant
backlog of orders, and revenues in any quarter are substantially dependent on
orders booked and shipped in that quarter.
A customer's decision to purchase the Company's products typically involves
a significant technical evaluation, internal procedural delays associated with
large capital expenditure approvals and testing and acceptance of new systems
that affect key operations. For these and other reasons, the sales cycle
associated with the Company's products is typically lengthy and subject to a
number of significant risks over which the Company has little or no control.
Historically, the period between initial customer contact and purchase of the
Company's products has typically ranged from two to nine months, with sales to
new customers (including new divisions within existing customers) at the longer
end of this range. Because of the lengthy sales cycle and the relatively small
number and large size of customers' orders, if revenues forecast from a specific
customer for a particular quarter are not realized in that quarter, the
Company's operating results for that quarter could be materially adversely
affected. See "Risk Factors--Fluctuations in Quarterly Operating Results;
Lengthy Sales Cycle."
International sales constituted approximately 54%, 55%, 53% and 69% of the
Company's total revenues in fiscal 1995, 1996 and 1997 and the nine months ended
June 30, 1998, respectively. The Company expects that international sales will
continue to account for a significant portion of its revenues in future periods.
The Company sells its products worldwide through its direct sales force. In
addition, the Company has offices located in Ottawa, Canada, Chippenham, United
Kingdom and Tokyo, Japan and plans to open new offices in continental Europe.
International sales and operations are subject to inherent risks, including
difficulties in staffing and managing foreign operations, longer customer
payment cycles, greater difficulty in accounts receivable collection, changes in
regulatory requirements or in economic or trade policy, costs related to
localizing products for foreign countries, potentially weaker protection for
intellectual property in certain foreign countries, the burden of complying with
a wide variety of foreign laws and practices, tariffs and other trade barriers,
and potentially adverse tax consequences, including restrictions on repatriation
of earnings. During the last two fiscal years a significant portion of the
Company's sales have been to customers in Japan. If economic conditions in Japan
continue to deteriorate to a significant extent, the Company's business,
financial condition and results of operations could be materially adversely
affected. In addition, the Company cannot predict the potential consequences to
the Company's business of the adoption of the Euro as a common currency in
Europe. An inability to obtain necessary regulatory approvals in foreign markets
on a timely basis could also have a material adverse effect on the Company's
business, financial condition and results of operations. See "Risk
Factors--Risks Associated with International Sales and Operations; Foreign
Exchange Risk." For information regarding export sales and international
operations, see Note 7 of Notes to Consolidated Financial Statements.
The Company's success depends in part on its ability to attract, hire,
train, retain and motivate qualified technical and sales personnel with
appropriate levels of managerial and technical capabilities. The Company
believes that a significant level of expertise is required to develop and market
the Company's products and services effectively. The Company has in the past
experienced, and expects to continue to experience, difficulty in recruiting
qualified technical and sales personnel. The Company believes that the pool of
potential applicants with the requisite expertise is very limited. Recruiting
qualified personnel is an intensely competitive and time-consuming process. The
Company competes for such personnel with a number of other companies, many of
which have substantially greater resources than the Company. Such competition
has also resulted in demands for increased compensation from qualified
applicants, and the Company may not be able to compete effectively
37
<PAGE>
for such personnel with companies that provide more attractive compensation
arrangements. There can be no assurance that the Company will be successful in
attracting and retaining the technical and sales personnel it requires to
conduct and expand its operations successfully on a timely basis. The failure to
attract, hire, train, retain and motivate qualified technical and sales
personnel in the future would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Risk
Factors--Competitive Market for Technical and Sales Personnel."
DCT SYSTEM SUPPORT
Due to the complexity of its customers' testing needs, the Company offers
its customers support and training from highly skilled technical personnel. As
of June 30, 1998, the Company had 14 applications engineers worldwide who
provide full-time technical support to the Company's customers, including
technical assistance and development support. The Company provides ongoing
training, generally at the customer's site, and technical assistance from all of
its offices. Support is generally offered during normal business hours
applicable to each office. The Company also offers product warranties for
various lengths of time, depending on the product and country of purchase or
operation.
The Company provides periodic software releases that contain new features,
new protocol variants and other improvements. Each new software release is
carefully designed not only to enhance performance and flexibility, but also to
maximize compatibility with the Company's earlier software releases, enabling
the DCT system to continue to be used as customer needs and applications evolve.
As part of its ongoing software support, the Company may also develop protocol
variants at the request of its customers.
PRODUCT DEVELOPMENT
The Company's development efforts are directed at improving the capability,
performance and ease of use of the DCT system. The Company intends to continue
to devote a large portion of its engineering resources to the enhancement of its
suite of software protocol modules in order to meet current and projected
customer requirements. The Company also intends to continue to develop and
enhance its proprietary internal tools and techniques for supporting new
protocols in the DCT system.
The Company is continually seeking to make the DCT system easier to use in
order to expand its market to include a broad range of users. In order to run
test scenarios, particularly on advanced test systems, users may need to create
customized test scripts, a process that may require significant technical
expertise. The Company has recently begun to develop pre-programmed
applications, such as load generators and network entity simulators. Catapult
believes that these additional product offerings will permit expansion of its
market to include companies with limited programming resources. The Company
plans to expand and refine its GUI and pre-programmed applications to continue
to improve the ease of use of the DCT system. In addition, the Company is
continuing to implement a number of test suites specified by telecommunications
standards bodies, such as ITU-T (International), ETSI (European) and EIA-TIA
(North American). The Company believes that these new solutions will provide the
opportunity to capture more revenues and sell to companies with fewer
programming resources.
Most of the Company's hardware development program is directed towards
designing protocol co-processors and associated physical interfaces. The Company
has initiated these projects to increase the performance and capabilities of the
DCT system and expand the range of devices to which the DCT system can be
directly connected for testing purposes.
Research and product development expenses were approximately $697,000,
$908,000, $1.4 million and $1.4 million in fiscal 1995, 1996 and 1997 and the
nine months ended June 30, 1998, respectively. The Company's policy is to
evaluate software development projects for technological feasibility to
determine if they meet capitalization requirements. To date, all software
development costs have been expensed as research and development expenses as
incurred. As of June 30, 1998, 15 of the Company's engineers were engaged in or
provided support to research and development, an increase from 8 engineers at
September 30, 1996. The
38
<PAGE>
Company believes that recruiting and retaining highly skilled engineering
personnel is essential to its continued success. To the extent that the Company
is not successful in attracting and retaining a highly skilled technical staff,
its business, financial condition and results of operations would be materially
adversely affected.
The Company's future success will depend in part on its ability to
anticipate and respond to changing industry standards and customer requirements
by enhancing its existing products and services and by developing and
introducing, on a timely and cost-effective basis, new products, features and
services that address the needs of its customer base. There can be no assurance
that the Company will be successful in identifying, developing and marketing new
products, product enhancements and related services that respond to
technological change or evolving industry standards or that adequately meet new
market demands. See "Risk Factors-- Rapid Technological Change; Uncertainty of
Acceptance of the Company's Products and Services."
Products as complex as those offered by the Company may contain undetected
errors or "bugs," particularly when first introduced or when new versions are
released. There can be no assurance that errors will not be found in future
releases of the Company's software or that any such errors will not generate
adverse publicity, impair the market acceptance of these products, create
customer concerns and adversely affect operating results due to product returns,
the costs of generating corrective releases or otherwise. See "Risk
Factors--Risk of Product Defects."
MANUFACTURING
The Company's manufacturing operations consist of the procurement and
inspection of components, final assembly, quality control tests and packaging.
Workstations that host the Company's products are either purchased by customers
directly or purchased by the Company on behalf of its customers. Printed circuit
boards, chassis and most of the other major components used in the Company's
products are sub-assembled to the Company's specifications by independent
contractors. The sub-assembled components are then delivered to the Company's
facilities for final assembly, quality control and testing against product
specifications and product configuration, including installation of the
Company's software and proprietary hardware. The Company believes that its use
of independent contractors for sub-assembly combined with in-house final
assembly improves production planning, increases efficiency, reduces costs and
improves quality.
The Company has a computerized manufacturing inventory control system that
is integrated with its financial bookkeeping system. This manufacturing control
system monitors purchasing, inventory control and production.
The Company purchases many key components, including certain
microprocessors, workstations, bus interface and other chips, connectors and
other hardware, from the sole supplier of a particular component. For other
components, even though multiple vendors may exist, the Company may purchase
components from only a single source. The Company does not have any long-term
supply agreements with these vendors to ensure uninterrupted supply of these
components. In the event of a reduction or interruption in the supply of a key
component, a significant amount of time could be required to qualify alternative
suppliers and receive an adequate flow of replacement components.
Reconfiguration of the Company's products to adapt to new components may also be
required and could entail substantial time and expense. In addition, the process
of manufacturing certain of these components is extremely complex, and the
Company's reliance on the suppliers of these components exposes the Company to
potential production difficulties and quality variations, which could negatively
affect cost and timely delivery of the Company's products. The Company has from
time to time in the past experienced supply problems as a result of financial or
operational difficulties of its suppliers, shortages, discontinuations resulting
from component obsolescence or other shortages or allocations of supplies. For
example, the supplier for the Company's portable workstation has recently
advised the Company that it plans to discontinue manufacturing this product in
the near future. While the Company intends to seek an alternative workstation
for the portable DCT system, it may be unable to provide portable systems until
an alternative supplier is qualified. To date, sales of the portable DCT system
have not accounted for a significant portion of the Company's revenues. Although
the Company, to date, has not experienced material delays in
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<PAGE>
product deliveries to its customers resulting from such supply problems, there
can be no assurance that supply problems will not recur or, if such problems do
recur, that satisfactory solutions would be found. Any prolonged inability to
obtain adequate amounts of fully functional components or any other
circumstances that would require the Company to seek alternative sources of
supply could have a material adverse effect on the Company's relationship with
its customers as well as on its business, financial condition and results of
operations. See "Risk Factors--Dependence on Sole and Single Source Suppliers."
The Company relies on a limited number of independent manufacturers, some of
which are small, privately held companies, to provide certain assembly services
to the Company's specifications. The Company does not have any long-term supply
agreements with any third-party manufacturer. In the event of a reduction or
interruption in assembly services to the Company, the Company's business,
financial condition and results of operations would be materially adversely
affected until the Company was able to establish sufficient assembly services
supply from alternative sources. There can be no assurance that alternative
manufacturing sources will be able to meet the Company's future requirements or
that existing or alternative sources will continue to be available to the
Company at favorable prices. See "Risk Factors--Dependence on Third-Party
Manufacturers."
COMPETITION
The market for telecommunications test systems is characterized by intense
competition. The Company believes that the principal competitive factors
affecting its market include availability of a broad range of protocols and
protocol variants, system performance, length of operating history and industry
experience, product reliability, ease of use, quality of service and support,
status as an independent vendor and price/ performance. In addition, the Company
believes that potential customers consider other factors, such as the number of
protocols required and whether the test system vendor sells competing
telecommunications products. The Company believes that it competes favorably
with respect to these factors.
The Company believes its principal competitors are Able, HP, IFR, INET,
Schlumberger, Tekelec, Tektronix and Wavetek. Many of the Company's existing and
potential competitors are large domestic and international companies that have
substantially greater financial, manufacturing, technological, marketing, sales,
distribution and other resources, larger installed customer bases, greater name
recognition and longer-standing customer relationships than the Company.
Accordingly, such competitors or potential competitors may be able to respond
more quickly to new or emerging technologies and changes in customer
requirements or to devote greater resources to the development, promotion and
sales of their products than the Company. The Company believes that the market
for high-end testing systems is fragmented geographically. For example, Tekelec,
INET, Tektronix and Schlumberger are the Company's primary competitors in North
America, while in Europe Tektronix, Wavetek, Schlumberger and IFR are the
Company's primary competitors. In Japan, Able and Tekelec are the Company's
primary competitors. The Company also faces competition from several relatively
small companies.
The Company also competes with internal test system groups of its customers
and potential customers. Many of the Company's existing and potential customers
have the technical capability and financial resources to produce their own test
systems and perform test services internally. These systems and services would
be competitive with the test systems offered by the Company. There can be no
assurance that the Company's customers will continue, or that new customers will
choose, to outsource any of their test systems and service requirements or that
the Company's products and services will be widely adopted. If the market for
telecommunications test systems and services, or the demand for outsourcing,
declines or fails to grow, or if the Company's products and services are not
widely adopted as a telecommunications test solution, the Company's business,
financial condition and results of operations would be materially adversely
affected.
The Company expects competition to increase in the future from existing
competitors and from other companies that may enter this market with solutions
that may be less costly or provide higher performance or offer more features
than the Company's solutions. Current and potential competitors have established
or may establish cooperative relationships among themselves or with third
parties to develop new test solutions for
40
<PAGE>
internal use or for sale to third parties in the Company's markets. Accordingly,
it is possible that new competitors may emerge and acquire significant market
share. Increased competition may result in price reductions, reduced gross
margins and loss of market share, any of which would have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Risk Factors--Competition."
INTELLECTUAL PROPERTY
The Company relies on a combination of trademark, copyright and trade secret
laws, as well as nondisclosure agreements and other contractual restrictions, to
establish and protect its proprietary rights. The Company generally enters into
nondisclosure and invention assignment agreements with its employees and
consultants, and into nondisclosure agreements with its customers and suppliers.
To date, the Company has not sought patent protection for its proprietary
technology. The Company believes that, historically, because of the rapid pace
of technological change in the telecommunications test system market, patent
protection has been a less significant factor than the knowledge, ability and
experience of the Company's employees, the nature and frequency of product
enhancement and the quality of the Company's support services. However, there
can be no assurance that patent protection will not become a more significant
factor in the Company's industry in the future. Likewise, there can be no
assurance that the measures the Company undertakes will be adequate to protect
its proprietary technology. To date, the Company has not federally registered
any of its trademarks or copyrights. The Company's practice is to affix
copyright notices on all software, hardware and product literature in order to
assert copyright protection for these works. The Company is also in the process
of applying to the U.S. Patent and Trademark Office to register several
trademarks. There can be no assurance that the lack of federal registration of
the Company's trademarks and copyrights would not have a material adverse effect
on the Company's intellectual property rights in the future. Additionally, the
Company may be subject to further risks as it enters into transactions in
countries where intellectual property laws are unavailable, do not provide
adequate protection or are difficult to enforce. Despite the Company's efforts
to protect its proprietary rights, unauthorized parties may attempt to duplicate
aspects of the Company's products or to obtain and use information that the
Company regards as proprietary. There can be no assurance that the steps taken
by the Company to protect its proprietary technology will be adequate to prevent
misappropriation of such technology or that they will preclude competitors from
independently developing products with functionality or features similar to the
Company's products. The failure of the Company to protect its proprietary
technology would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors--Limited
Protection of Proprietary Rights; Enforcement of Rights."
While to date, the Company has not been subject to claims of infringement or
misappropriation of intellectual property of third parties, there can be no
assurance that third parties will not assert infringement claims against the
Company, that any such assertion of infringement will not result in litigation
or that the Company would prevail in such litigation. Furthermore, any such
claims, with or without merit, could result in substantial cost to the Company
and diversion of its personnel, require the Company to develop new technology,
or require the Company to enter into royalty or licensing arrangements. Such
royalty or licensing agreements, if required, may not be available on terms
acceptable to the Company or at all. Because the Company does not rely on
patents to protect its technology, the Company will not be able to offer a
license for patented technology in connection with any settlement of patent
infringement lawsuits. In the event of a successful claim of infringement or
misappropriation against the Company and failure or inability of the Company to
develop non-infringing technology or license the infringed, misappropriated or
similar technology at a reasonable cost, the Company's business, financial
condition and results of operations would be materially adversely affected. In
addition, the Company indemnifies its customers against claimed infringement of
patents, trademarks, copyrights and other proprietary rights of third parties.
Any requirement for the Company to indemnify a customer could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Risks of Third Party Claims of Infringement."
41
<PAGE>
EMPLOYEES
As of June 30, 1998, the Company employed 57 full-time employees, including
15 in research and development, 14 in technical customer support, 18 in sales
and marketing, seven in administration and three in manufacturing. Of these
employees, 39 were employed in North America, eight in the United Kingdom and 10
in Japan. The Company is not subject to any collective bargaining agreement and
has not experienced any work stoppages. The Company believes that its relations
with its employees are good. See "Risk Factors--Competitive Market for Technical
and Sales Personnel" and "--Dependence on Key Personnel."
FACILITIES
The Company's executive offices, product development, and primary support
and production operations are located in Mountain View, California, where the
Company occupies approximately 17,750 square feet pursuant to a lease that
expires early in 2002. The annual rent for the property is approximately
$165,000. The Company believes that this facility will be adequate for its
planned purposes.
In addition, the Company leases professional services office space in the
following locations with the following approximate square footage: 2,000 square
feet in Schaumburg, Illinois; 1,500 square feet in Dallas, Texas; 523 square
feet in Ottawa, Canada; 1,950 square feet in Chippenham, England; and 2,000
square feet in Tokyo, Japan.
42
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information, as of June 30, 1998,
with respect to the directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ----------------------------------- --- ----------------------------------------------------------------------
<S> <C> <C>
Richard A. Karp.................... 54 President, Chief Executive Officer and Chairman of the Board
Joan M. Varrone.................... 47 Vice President of Finance, Chief Financial Officer and Treasurer
Barry R. Hoglund................... 49 Vice President of Sales
Glenn Stewart...................... 48 Vice President of Engineering
Guy R. Simpson..................... 39 Vice President of Applications Development
Barbara J. Fairhurst............... 50 Director of Operations
Nancy H. Karp...................... 53 Secretary and Director
John M. Scandalios (1)(2).......... 67 Director
Charles L. Waggoner (1)(2)......... 58 Director
</TABLE>
- ------------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
RICHARD A. KARP founded the Company in 1985 and has served as President,
Chief Executive Officer and Chairman of the Board of the Company since
inception. Prior to founding Catapult in 1985, Dr. Karp was Vice President of
Software Development for Tri-Data, Inc., a supplier of protocol conversion
equipment, from 1982 to 1985. Previously, he was a founder and Vice President of
Software of Sequoia Systems, a fault-tolerant computer systems manufacturer. Dr.
Karp has also served as an independent software consultant, and he spent five
years as a systems programmer and project leader at Burroughs Corporation. Dr.
Karp holds a Ph.D. in computer science from Stanford University, an M.S. in
mathematics from the University of Wisconsin and a B.S. in science from the
California Institute of Technology.
JOAN M. VARRONE joined Catapult in September 1997 as Vice President,
Finance, Chief Financial Officer and Treasurer. From 1994 to 1997, Ms. Varrone
was Treasurer of Watkins-Johnson Company, a semiconductor equipment
manufacturer, where she was responsible for finance, real estate, employee
benefits and environmental compliance. From 1985 to 1993, she was employed by
Raychem Corporation, where she held a number of financial positions in the areas
of planning, international tax and treasury management. Prior to that, Ms.
Varrone was employed at Exxon Corporation. Ms. Varrone holds an M.B.A. in
finance and international business from New York University, an M.S. in
operations research from Purdue University and a B.A. in mathematics from the
College of New Rochelle.
BARRY R. HOGLUND joined Catapult in 1993 as Vice President of Sales. From
1992 to 1993, he was Vice President of North American Sales and Service at
Spectra-Physics Lasers. Prior to that, he was employed for 17 years by
Watkins-Johnson Company, where his last position was Vice President of Sales and
Marketing. Mr. Hoglund received an M.S. in physics from the University of
Illinois and a B.S. in physics from the University of Minnesota.
GLENN STEWART joined the Company in 1992 as Vice President of Engineering.
Prior to joining the Company, he was Director of Engineering at Tektronix/LP
Com. Previously, he spent nine years at Bell Northern Research as a manager of
development of telecommunications products and services. Mr. Stewart holds an
M.Sc. and a B.Sc. in computer science from the University of Toronto.
GUY R. SIMPSON has served as Deputy Chairman of Catapult Communications
Ltd., the Company's UK subsidiary ("CCL"), since October 1996 and was elected
Vice President of Applications Development of the Company in May 1998. Mr.
Simpson joined the Company in 1989 and has held a number of technical and
management positions with the Company and CCL since that time. From October 1996
to April 1998,
43
<PAGE>
Mr. Simpson was the Director of Field Test Systems for the Company. From July
1994 to September 1996, Mr. Simpson was Managing Director of CCL. From July 1992
to June 1994, he was Secretary of CCL. Prior to joining the Company, Mr. Simpson
was employed for eight years by AT&T Bell Laboratories, where he held a variety
of engineering and management positions in the area of advanced digital
switching systems. Mr. Simpson holds a B.Sc. degree in computer science from
Hatfield Polytechnic at the University of Hertfordshire, United Kingdom.
BARBARA J. FAIRHURST joined Catapult in June 1995 as Director of Operations.
From 1994 to 1995, Ms. Fairhurst was Principal at BJF Consulting, a consulting
firm, where she developed business plans and implemented operating systems. From
1990 to 1993, Ms. Fairhurst was Corporate Vice President at Intersource
Technologies, Inc., where she was responsible for operations and manufacturing.
Prior to that time, Ms. Fairhurst spent 10 years as President and Chief
Operating Officer of Sequential Circuits, a manufacturer of electronic music
equipment. Ms. Fairhurst holds an M.B.A. from the University of Santa Clara and
a B.A. from San Jose State University.
NANCY H. KARP has served as director and Secretary of the Company since its
inception and served as the Company's Treasurer from inception to September
1997. In addition, from time to time during that period, she provided a variety
of services to the Company. Beginning in June 1998, she also entered into a
three-year consulting agreement with the Company. See "Certain Transactions."
Ms. Karp holds an M.B.A. from Claremont Graduate School, an M.A. in public
health from the University of California at Berkeley and a B.S. from Texas
Technical University.
JOHN M. SCANDALIOS has served as a director of the Company since November
1987. Since 1994, Mr. Scandalios has been a director and Vice President of Sales
at Flowpoint Corporation, a computer networking company ("Flowpoint"). From 1993
to 1994, he served as Vice President of Sales of Combinet Inc., a computer
networking company. From 1990 to 1993, Mr. Scandalios was President of LIR
Corporation ("LIR"), a network software company. From 1987 to 1990, he served as
Vice-President of Sales of ARIX Corporation, a UNIX-based computer manufacturing
company. Mr. Scandalios is also a director of Ancot Corporation, a SCSI and
fiber channel test equipment company. Mr. Scandalios holds an M.B.A. and a B.A.
from the University of Chicago.
CHARLES L. WAGGONER has served as a director of Catapult since January 1991.
Since 1993, Mr. Waggoner has served as President of Flowpoint. From 1992 to
1993, Mr. Waggoner was Vice President of Development of LIR. From 1990 to 1992,
he was an independent consultant at Waggoner Associates. From 1986 to 1990, Mr.
Waggoner served as Vice President of Operations of GRiD Systems, Inc., a
portable laptop computer company. Mr. Waggoner holds a B.S. in electrical
engineering from South Dakota State University.
Each director holds office until the next annual meeting of the stockholders
of the Company or until his or her successor is duly elected and qualified. Each
officer serves at the discretion of the Board of Directors. Richard A. Karp and
Nancy H. Karp are husband and wife and are in the process of seeking a divorce.
DIRECTOR COMPENSATION
The Company's non-employee directors do not currently receive any cash
compensation for service on the Company's Board of Directors or any committee
thereof, but directors may be reimbursed for certain expenses incurred in
connection with attendance at Board and committee meetings. Pursuant to the 1989
Stock Option Plan (the "1989 Plan"), in fiscal 1997 Messrs. Scandalios and
Waggoner were each granted an option to purchase 37,500 shares of Common Stock
at an exercise price of $0.83 per share. In addition, non-employee directors
will be eligible for option grants under the Company's 1998 Stock Plan (the
"1998 Plan"), which was adopted by the Board of Directors and approved by the
stockholders in June 1998. Beginning in June 1998, Ms. Karp entered into a
three-year consulting agreement with the Company. See "Management--Stock Plans"
and "Certain Transactions."
44
<PAGE>
BOARD OF DIRECTORS COMMITTEES
The Board of Directors has an Audit Committee and a Compensation Committee,
each consisting of Messrs. Waggoner and Scandalios. The Audit Committee was
formed in June 1998 and makes recommendations to the Company's Board of
Directors regarding the selection of independent auditors, reviews the results
and scope of annual audit and reviews and evaluates the Company's internal
control functions.
The Compensation Committee was formed in June 1998 and makes recommendations
to the Board of Directors concerning salaries and incentive compensation for the
Company's executive officers and administers the Company's Stock Plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is currently composed of Messrs. Scandalios and
Waggoner. Neither of these individuals has at any time been an officer or
employee of the Company. Prior to formation of the Compensation Committee,
determinations regarding compensation were made by the entire Board of
Directors. No member of the Compensation Committee of the Company serves as a
member of the board of directors or compensation committee of any entity that
has one or more executive officers serving as a member of the Company's Board of
Directors or Compensation Committee. In June 1998, in connection with the
settlement of divorce proceedings between Dr. and Ms. Karp, the Company and Dr.
and Ms. Karp entered into a Voting Trust Agreement governing the voting of
shares of the Company's Common Stock held by Ms. Karp. Concurrently, the Company
and Ms. Karp entered into a Severance Agreement and Mutual Release providing for
full settlement of claims asserted by Ms. Karp against the Company in early 1998
for compensation for past services rendered by her to the Company. The Company
and Ms. Karp also concurrently entered into a Consulting and Non-Competition
Agreement under which the Company would retain Ms. Karp as a consultant for a
period of three years. See "Certain Transactions."
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Articles of Incorporation limit, to the maximum extent
permitted by Section 78.751 of the Nevada General Corporation Law, the personal
liability of directors and officers for monetary damages for breach of their
fiduciary duties as directors and officers (other than liabilities arising from
acts or omissions which involve intentional misconduct, fraud or knowing
violations of law or the payment of distributions in violation of Nevada General
Corporation Law). The Articles of Incorporation provide further that the Company
shall indemnify to the fullest extent permitted by Nevada General Corporation
Law any person made a party to an action or proceeding by reason of the fact
such person was a director, officer, employee or agent of the Company. Subject
to the Company's Articles of Incorporation, the Bylaws provide that the Company
shall indemnify directors and officers for all costs reasonably incurred in
connection with any action, suit or proceeding in which such director or officer
is finally adjudged to have been derelict in the performance of his duties as
such director or officer. The Company has entered into indemnification
agreements with its officers and directors containing provisions which may
require the Company, among other things, to indemnify the officers and directors
against certain liabilities that may arise by reason of their status or service
as directors or officers (other than liabilities arising from willful misconduct
of a culpable nature), and to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified.
At the present time, there is no pending material litigation or proceeding
involving a director, officer, employee or other agent of the Company in which
indemnification would be required or permitted. The Company is not aware of any
threatened material litigation or proceeding which may result in a claim for
such indemnification.
45
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the
compensation earned by the Company's Chief Executive Officer and other executive
officers whose aggregate salary and bonus exceeded $100,000 during the fiscal
year ended September 30, 1997 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
------------------------ UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($)(1) OPTIONS(#)(2)
- ---------------------------------------------------------------- ---------- ------------ -------------
<S> <C> <C> <C>
Richard A. Karp ................................................ $ 360,000 $ 1,050,000 --
President, Chief Executive Officer
and Chairman of the Board
Barry R. Hoglund ............................................... 132,533 156,122 75,000
Vice President of Sales
Glenn Stewart .................................................. 132,553 80,122 --
Vice President of Engineering
Barbara J. Fairhurst ........................................... 88,000 46,122 --
Director of Operations
</TABLE>
- ----------------
(1) Includes bonuses paid in fiscal 1998 for services rendered in fiscal 1997.
(2) The Company has not granted any SARs.
OPTION GRANTS DURING FISCAL YEAR 1997
The following table sets forth certain information concerning the stock
option granted to the only Named Executive Officer who received an option in the
fiscal year ended September 30, 1997.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------------------------- POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED ANNUAL
SECURITIES PERCENT OF TOTAL RATES OF STOCK
UNDERLYING OPTIONS GRANTED EXERCISE DEEMED VALUE PER PRICE APPRECIATION($)(6)
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION SHARE FOR DATE OF ------------------------
NAME GRANTED(#)(1) 1997(2) ($/SH)(3) DATE(4) GRANT(5) 0% 5%
- ------------------------ --------------- ---------------- ----------- ----------- ------------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Barry R. Hoglund........ 75,000 25.3% $ 1.27 05/14/07 $ 3.33 $ 155,000 $ 312,224
<CAPTION>
NAME 10%
- ------------------------ -----------
<S> <C>
Barry R. Hoglund........ $ 553,436
</TABLE>
- ----------------
(1) This option is an incentive stock option granted pursuant to the 1989 Stock
Plan and has a term of 10 years, subject to earlier termination in certain
events related to termination of employment. This option vests as to 1/8th
of the underlying shares six months after the date of grant, and as to
1/48th of the shares each month thereafter.
(2) Based on an aggregate of 296,475 shares subject to options granted in fiscal
1997.
(3) Exercise price is equal to fair market value as determined by the Board of
Directors at the time of grant. In determining the fair market value of the
Company's Common Stock, the Board of Directors considered various factors,
including the Company's financial condition and business prospects, its
operating results, the absence of a market for its Common Stock and the
risks normally associated with technology companies.
(4) Options may terminate before their expiration dates if the optionee's status
as an employee or consultant is terminated or upon the optionee's death or
disability.
46
<PAGE>
(5) The deemed value for the date of grant was determined after the date of
grant solely for financial accounting purposes.
(6) The potential realizable value is calculated based on the term of the option
(10 years) and assumes that the deemed value at the date of grant
appreciates at the indicated annual rate, compounded annually for the entire
term of the option, and that the option is exercised and sold on the last
day of its term for the appreciated stock price. The 0%, 5% and 10% assumed
annual rates of compounded stock price appreciation are mandated by rules of
the Commission and do not represent the Company's estimate or projection of
the Company's future Common Stock prices. The assumed rate of appreciation
of 0% indicates the value at the effective date of the offering based on the
deemed value for financial accounting purposes less the exercise price.
FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information regarding exercisable and
unexercisable stock options held by the Named Executive Officers as of September
30, 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE-
UNDERLYING UNEXERCISED MONEY OPTIONS AT
OPTIONS AT 9/30/97 (#) 9/30/97 ($)(2)
---------------------------- -----------------------------
NAME(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------------------------ ------------ -------------- ------------- --------------
<S> <C> <C> <C> <C>
Barry R. Hoglund.................................................. 390,000 75,000 $ 3,827,200 $ 655,000
Glenn Stewart..................................................... 255,625 21,875 2,506,313 208,688
Barbara J. Fairhurst.............................................. 23,435 21,565 223,565 205,735
</TABLE>
- ------------------------
(1) None of the Named Executive Officers exercised options in fiscal 1997.
(2) Value of unexercised in-the-money options is based on the assumed initial
public offering price of $10.00 per share less the exercise price payable
for such shares.
STOCK PLANS
1989 STOCK OPTION PLAN. The Company's 1989 Stock Option Plan (the "1989
Plan") was adopted by the Board of Directors and approved by the stockholders of
the Company in August 1989. As of June 30, 1998, options to purchase a total of
934,072 shares of Common Stock had been exercised, options to purchase a total
of 542,350 shares at a weighted average exercise price of $1.35 per share were
outstanding and 323,578 shares remained available for future option grants.
The 1989 Plan provides for the grant to employees of the Company and its
subsidiaries (including officers and employee-directors) of "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"), and for the grant of options which do not so qualify
("nonstatutory stock options") to employees, officers, directors and
consultants, advisors and other independent contractors to the Company. The 1989
Plan is administered by the Board of Directors or a committee of the Board of
Directors (the "Administrator"). The exercise price of all incentive stock
options granted under the 1989 Plan must be at least equal to the fair market
value of the Common Stock of the Company on the date of grant. The exercise
price of nonstatutory stock options cannot be less than 85% of the fair market
value of the Common Stock of the Company on the date of grant. Generally,
options granted under the 1989 Plan provide that they must be exercised within
30 days of the end of optionee's status as an employee or consultant of the
Company, or within 12 months after such optionee's termination by death or
disability, but in no event later than the expiration of the option's 10-year
term. The term of any stock option granted under the 1989 Plan may not exceed 10
years. Options granted to employees under the 1989 Plan generally become
exercisable as to 1/8th of the total number of shares subject to the option six
months after the date of grant, and as to 1/48th of the shares each month
thereafter.
47
<PAGE>
In the event of certain changes in control of the Company, the 1989 Plan
requires that each outstanding option be assumed or substituted by the successor
corporation. If the successor corporation does not assume or substitute an
option, the vesting and exercise period of such option will be accelerated as of
a date prior to the change in control, as the Administrator so determines. Any
options not assumed or exercised as of the date of the change in control of the
Company will terminate, effective as of the date of such change in control. If
not terminated earlier, the 1989 Plan will terminate in 1999.
UK EXECUTIVE SHARE OPTION SCHEME. The Company's UK Executive Share Option
Scheme (the "UK Plan") was adopted by the Board of Directors and approved by the
stockholders of the Company in August 1989. As of June 30, 1998, no options to
purchase shares of Common Stock had been exercised, and options to purchase a
total of 154,500 shares at a weighted average exercise price of $0.22 per share
were outstanding. As of such date, the Board had authorized no additional shares
for future option grants under the UK Plan.
The UK Plan provides for the grant to employees of the Company and its
subsidiaries who satisfy certain criteria as set forth in the 1989 Plan. The UK
Plan contains restrictions intended to comply with UK taxation laws, including
restrictions on exercise, limitations on the size of option grants, requirements
with respect to changes in capitalization and other matters.
The UK Plan is administered by the Board of Directors or a committee of the
Board of Directors (the "Administrator"). The Administrator determines the terms
of options granted under the UK Plan, including the number of shares subject to
the option, exercise price, term and exercisability. Payment of the exercise
price may be made in cash or other consideration determined by the
Administrator. An option may not be transferred by the optionee. Options granted
to each employee under the UK Plan generally vest at the rate of 1/36th of the
total number of shares subject to such option each month, commencing on the
first anniversary of the date of grant. Options granted under the UK Plan must
generally be exercised at the end of the optionee's status as an employee of the
Company, or within 12 months after such optionee's termination by retirement,
disability or death but in no event after the 10-year term of the option.
In the event of certain changes in control of the Company, optionees under
the UK Plan have the right to exercise or substitute their options for six
months from the date of a change in control of the Company. The Administrator
has the authority to alter the UK Plan as long as such action does not adversely
affect any outstanding option, subject to approval of the Board of Inland
Revenue as well as stockholder approval for any amendment which materially
increases benefits accruing to participants.
1998 STOCK PLAN. The Company's 1998 Stock Plan (the "1998 Plan") was
adopted by the Board of Directors and approved by the stockholders of the
Company in June 1998. A total of 1,800,000 shares of Common Stock has been
reserved for issuance under the 1998 Plan. The 1998 Plan provides for the grant
to employees of the Company (including officers and employee directors) of
incentive stock options within the meaning of Section 422 of the Code, and for
the grant of nonstatutory stock options to employees, officers, directors
(including non-employee directors) and consultants of the Company. Stock
purchase rights may also be granted under the 1998 Plan.
The 1998 Plan is administered by the Board of Directors or a committee of
the Board of Directors (the "Administrator"). The Administrator determines the
terms of options and stock purchase rights granted under the 1998 Stock Option
Plan, including the number of shares subject to the option or right, exercise
price, term and exercisability. No employee may be granted options to purchase
more than 300,000 shares in any fiscal year. The exercise price of options and
stock purchase rights granted under the 1998 Plan must be at least equal to the
fair market value of the Common Stock of the Company on the date of grant. The
term of an incentive stock option granted under the 1998 Plan may not exceed 10
years. Options granted under the 1998 Plan must generally be exercised within 30
days of the end of optionee's status as an employee or consultant of the
Company, or within 12 months after such optionee's termination by death or
disability, but in no event later than the expiration of the option's 10-year
term. Options granted to employees under the 1998 Plan generally become
exercisable at the rate of 1/8th of the total number of shares subject to the
option six months after the date of grant, and as to 1/48th each month
thereafter. Stock purchased upon exercise of stock purchase rights is subject
48
<PAGE>
to repurchase upon the termination of the purchaser's employment with the
Company for any reason (including death or disability). The repurchase option
lapses at a rate determined by the Administrator.
The 1998 Plan provides that in the event of certain changes in control of
the Company, each option or right must be assumed or an equivalent option or
right substituted by the successor corporation. If the outstanding options or
rights are not assumed or substituted, the vesting and exercise period of such
option or stock purchase right will be accelerated for a period of 15 days, and
the option or stock purchase right will terminate upon the expiration of such
period. If not terminated earlier, the 1998 Plan will terminate in 2008.
1998 EMPLOYEE STOCK PURCHASE PLAN. The Company's 1998 Employee Stock
Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors and
the stockholders in June 1998. A total of 750,000 shares of Common Stock has
been reserved for issuance under the Purchase Plan. In addition, the number of
shares under the Purchase Plan will be increased automatically each year by an
amount equal to the lesser of (i) 52,500 shares, (ii) 1% on the outstanding
shares on such date or (iii) a lesser amount determined by the Board. The
Purchase Plan, which is intended to qualify under Section 423 of the Code, has
consecutive six-month offering periods. The offering periods generally begin on
the first trading day on or after May 1 and November 1 of each year, except that
the first offering period commences 91 days after the effective date of this
offering and ends on the last trading day on or before April 30, 1999. The
Purchase Plan will be administered by the Board of Directors or by a committee
appointed by the Board. Employees will be eligible to participate if they are
customarily employed by the Company or any participating subsidiary for at least
30 hours per week and more than five months in any calendar year. However, any
employee who (i) immediately after grant owns stock possessing 5% or more of the
total combined voting power or value of all classes of the capital stock of the
Company, or (ii) whose rights to purchase stock under all employee stock
purchase plans of the Company accrues at a rate which exceeds $25,000 for each
calendar year may not be granted an option to purchase stock under the Purchase
Plan. The Purchase Plan permits eligible employees to purchase Common Stock
through payroll deductions of up to 7% of an employee's total compensation. The
price of stock purchased under the Purchase Plan will generally be 85% of the
lower of the fair market value of the Common Stock at the beginning of the
offering period or at the end of the relevant purchase period. The maximum
number of shares a participant may purchase during a single offering period is
200 shares. Employees may end their participation at any time during an offering
period, and they will be paid their payroll deductions to date. Participation
ends automatically upon termination of employment with the Company. The Purchase
Plan will terminate in 2008.
49
<PAGE>
CERTAIN TRANSACTIONS
In connection with a divorce proceeding, in June 1998 Richard A. Karp and
Nancy H. Karp entered into a Voting Trust Agreement. Under the Agreement, Ms.
Karp placed all shares of the Company's Common Stock that she owned into a
voting trust of which Dr. Karp is the trustee. She also agreed to place shares
that she acquires in the future into the trust. The agreement gives Dr. Karp the
power to vote the shares while they are in the trust. Ms. Karp has the ability
to sell the shares which are the subject of the voting trust, which would
terminate the voting trust as to any shares sold. Unless sooner terminated by
Dr. Karp's resignation as trustee, his death or permanent disability, or a sale
or merger of the Company, the voting trust will expire in June 2013.
In early 1998, Ms. Karp asserted a claim against the Company for
compensation for past services rendered by her to the Company. In June 1998, to
settle these claims, the Company and Ms. Karp entered into a Severance Agreement
and Mutual Release under which the Company paid her (i) $80,000 in full and
complete settlement of her claims and (ii) payments totalling $17,500 for
attorney's fees and costs she may incur in retaining a career counseling firm.
The Company has also agreed to reimburse her up to $500 per month for up to one
year for expenses related to conversion of her health and life insurance
coverages to an individual plan.
The Company and Ms. Karp also concurrently entered into a Consulting and
Non-Competition Agreement under which Ms. Karp is retained as a consultant to
the Company for three years to assist in the areas of human resources,
facilities expansion and relocation, marketing and general business at a rate of
not less than $4,500 per month regardless of the nature and amount of services
rendered. She has agreed during this period in exchange for a lump sum payment
of $18,000 not to engage in certain activities which would be competitive with
the Company. She continues to serve without pay as a director and Secretary of
the Company.
The Company will pay the expenses of the Selling Stockholders in connection
with the offering made by this Prospectus, excluding underwriting discounts and
commissions. Sales by Dr. and Ms. Karp will account for substantially all of the
shares to be sold by Selling Stockholders, including any shares that may be sold
by Ms. Karp upon exercise of the over-allotment option granted by her to the
Underwriters.
The Company has entered into indemnification agreements with its executive
officers and directors containing provisions that may require the Company, among
other things, to indemnify its executive officers and directors against certain
liabilities that may arise by reason of their status or service as executive
officers or directors (other than liabilities arising from willful misconduct of
a culpable nature) and to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified. The Company also
intends to execute such agreements with its future directors and executive
officers. See "Management--Limitation of Liability and Indemnification Matters."
50
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of June 30, 1998 (except
as indicated) and as adjusted to reflect the sale of Common Stock offered hereby
for (i) each person or entity who is known to the Company to beneficially own 5%
or more of the outstanding Common Stock of the Company; (ii) each of the
Company's directors; (iii) each of the Named Executive Officers; (iv) all
directors and executive officers of the Company as a group, and (v) the Selling
Stockholders.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO
OFFERING(1) NUMBER OF OWNED AFTER OFFERING(1)
----------------------- SHARES -----------------------
DIRECTORS, EXECUTIVE OFFICERS AND 5% STOCKHOLDERS NUMBER PERCENT OFFERED NUMBER PERCENT
- --------------------------------------------------------- ---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Richard A. Karp(2)....................................... 9,000,000 85.8% 243,000 7,800,000 61.9%
Nancy H. Karp(2)......................................... 4,557,000 43.4 957,000 3,600,000 28.6
Barry R. Hoglund(3)...................................... 413,436 3.9 -- 413,436 3.3
Glenn Stewart(3)......................................... 262,498 2.5 -- 262,498 2.1
Barbara J. Fairhurst(3).................................. 33,746 * -- 33,746 *
John M. Scandalios(3).................................... 24,685 * -- 24,685 *
Charles L. Waggoner(3)................................... 24,685 * -- 24,685 *
All executive officers and directors as a group (9
persons)(3)............................................ 9,939,769 92.5 1,200,000 8,739,769 68.0
OTHER SELLING STOCKHOLDERS
- ---------------------------------------------------------
Katherine F. Dollard..................................... 60,000 * 52,500 7,500 *
</TABLE>
- ------------------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Commission. In computing the number of shares beneficially owned by a person
and the percentage ownership of that person, shares of Common Stock subject
to options held by that person that are currently exercisable or are
exercisable within 60 days of June 30, 1998 are deemed outstanding. Such
shares, however, are not deemed outstanding for the purposes of computing
the percentage ownership of any other individual. Percentage ownership of
shares is based on 10,490,946 shares outstanding as of June 30, 1998 before
the offering and 12,590,946 shares outstanding after the offering. Except as
indicated in the footnotes to this table and pursuant to applicable
community property laws, each stockholder named in the table has sole voting
and investment power with respect to the shares set forth opposite such
stockholder's name.
(2) Includes in the case of Dr. Karp 4,500,000 shares beneficially owned by Ms.
Karp with respect to which Dr. Karp has sole voting power pursuant to a
voting trust agreement. Ms. Karp has retained dispositive power over such
shares. See "Certain Transactions." The shares shown as beneficially owned
by Ms. Karp include 57,000 shares beneficially owned by Dr. Karp at June 30,
1998 which he will transfer to Ms. Karp for sale by her in the offering made
by this Prospectus. The information with respect to shares beneficially
owned by Dr. and Ms. Karp after the offering assumes no exercise of the
over-allotment option granted to the Underwriters by Ms. Karp with respect
to a total of 502,875 shares of Common Stock beneficially owned by her. The
address for Dr. and Ms. Karp is c/o Catapult Communications Corporation, 160
South Whisman Road, Mountain View, California 94041.
(3) Includes the following shares subject to options exercisable within 60 days
of June 30, 1998: Barry R. Hoglund 23,436; Glenn Stewart 7,498; Barbara J.
Fairhurst 18,746; John M. Scandalios 17,185; Charles L. Waggoner 24,685; and
all executive officers and directors as a group (9 persons) 252,581.
51
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, the authorized capital stock of the
Company will consist of 40,000,000 shares of Common Stock, $0.001 par value, and
5,000,000 shares of undesignated Preferred Stock, $0.001 par value.
COMMON STOCK
As of June 30, 1998, there were 10,490,946 shares of Common Stock
outstanding that were held of record by 20 stockholders. There will be
12,590,946 shares of Common Stock outstanding (assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options after
June 30, 1998) after giving effect to the sale of Common Stock offered hereby.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Subject to
preferences that may be applicable to any outstanding shares of Preferred Stock,
the holders of Common Stock are entitled to receive ratably such dividends, if
any, as may be declared by the Board of Directors out of funds legally available
for the payment of dividends. See "Dividend Policy." In the event of a
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities, subject to preferences of Preferred Stock then outstanding, if any.
The Common Stock has no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
Common Stock. All outstanding shares of Common Stock are fully paid and
non-assessable, and the shares of Common Stock to be issued upon completion of
this offering will be fully paid and non-assessable.
PREFERRED STOCK
Pursuant to the Company's Restated Certificate of Incorporation, the Board
of Directors has the authority, without further action by the stockholders, to
issue up to 5,000,000 shares of Preferred Stock in one or more series and to fix
the designations, powers, preferences, privileges, and relative participating,
optional or special rights and the qualifications, limitations or restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption and liquidation preferences, any or all of which may be greater than
the rights of the Common Stock. The Board of Directors, without stockholder
approval, can issue Preferred Stock with voting, conversion or other rights that
could adversely affect the voting power and other rights of the holders of
Common Stock. Preferred Stock could thus be issued quickly with terms calculated
to delay or prevent a change in control of the Company or make removal of
management more difficult. Additionally, the issuance of Preferred Stock may
have the effect of decreasing the market price of the Common Stock, and may
adversely affect the voting and other rights of the holders of Common Stock.
Effective upon completion of this offering, there will be no shares of Preferred
Stock outstanding, and the Company has no plans to issue any Preferred Stock.
NEVADA ANTI-TAKEOVER STATUTES
The Company is subject to the provisions of Sections 78.411 through 78.444
of the General Corporation Law of Nevada. In general, this statute prohibits a
publicly held Nevada corporation from engaging in a "business combination" with
an "interested stockholder" for a period of three years after the date of the
transaction in which the person becomes an interested stockholder, unless the
business combination is approved in a prescribed manner. An "interested
stockholder" is a person who, directly or indirectly, owns (or within the prior
three years did own) 10% or more of the corporation's voting stock.
Nevada has also adopted a "control shares" statute which limits the
acquisition of a "controlling interest" in the corporation, as defined in the
statute. This statute is designed to prevent an "acquiring person" from gaining
voting control of the corporation without the approval of the corporation's
stockholders. It provides that an acquiring person obtains only such voting
rights in the control shares as are conferred by a resolution of the
52
<PAGE>
stockholders. Nevada's control shares statute applies to any issuing corporation
which has 200 or more stockholders, at least 100 of whom are stockholders of
record and residents of Nevada. The Company did not meet this requirement prior
to this offering.
EFFECT OF THE CALIFORNIA GENERAL CORPORATION LAW
The General Corporation Law of the State of California includes provisions
that govern the operation of corporations incorporated in states other than
California if such corporations are doing a majority of their business in
California and have a majority of their outstanding voting securities held of
record by persons residing in California. These provisions, which are generally
more restrictive than their counterparts under Nevada law, presently apply by
their terms to the Company and are expected to continue to apply following
completion of this offering. In some cases, these provisions conflict with the
laws of the State of Nevada.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock in
ChaseMellon Shareholder Services, L.L.C., and its telephone number is (415)
743-1444.
53
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common Stock
of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect market prices prevailing from time to time.
Furthermore, since only a limited number of shares will be available for sale
shortly after this offering because of certain contractual and legal
restrictions on resale described below, sales of substantial amounts of Common
Stock of the Company in the public market after the restrictions lapse could
adversely affect the prevailing market price and the ability of the Company to
raise equity capital in the future.
Upon completion of this offering, the Company will have an aggregate of
12,590,946 shares of Common Stock outstanding, assuming no exercise of options
after June 30, 1998. Of these shares, the 3,352,500 shares sold in this offering
will be freely tradable without restriction or further registration under the
Securities Act, unless purchased by an affiliate of the Company who may only
sell such shares pursuant to the public information, volume, manner of sale and
notice requirements of Rule 144 under the Securities Act. The remaining
9,238,446 shares outstanding upon completion of this offering will be
"restricted securities" as that term is defined under Rule 144 ("Restricted
Shares"). Restricted Shares may be sold in the public market only if registered
or if they qualify for an exemption from registration under Rules 144, 144(k) or
701 promulgated under the Securities Act, which are summarized below.
The Company's officers, directors, certain stockholders and all holders of
options to purchase Common Stock of the Company have agreed, during the 180-day
period after the date of this Prospectus (the "Lock-Up Period"), that they will
not, without the prior written consent of Hambrecht & Quist LLC, directly or
indirectly offer, sell, contract to sell or otherwise dispose of any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock. The Company has agreed that it will not, without the prior
written consent of Hambrecht & Quist LLC, directly or indirectly offer, sell,
contract to sell or otherwise dispose of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock
during such 180-day period except for the sale of the shares of Common Stock in
this offering and the issuance of options and shares of Common Stock pursuant to
employee benefit plans described in this Prospectus. Any shares subject to the
lock-up agreements may be released at any time, without notice, by Hambrecht &
Quist LLC. See "Underwriting."
Taking into account the lock-up agreements, the number of shares that will
be available for sale in the public market under the provisions of Rules 144,
144(k) and 701, including certain shares issuable upon exercise of options, will
be as follows: (i) approximately 60,938 Restricted Shares will be eligible for
public resale immediately after the effective date of the Registration
Statement; (ii) approximately 60,938 additional Restricted Shares will be
eligible for public resale beginning 90 days after the effective date of the
Registration Statement; and (iii) approximately 9,116,570 additional Restricted
Shares (as well as an additional 381,772 shares issuable upon exercise of
outstanding options) will be eligible for public resale beginning 180 days after
the effective date of the Registration Statement, subject in some cases to the
public information, volume, manner of sale and notice requirements of Rule 144
under the Securities Act.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares at least one year
(including the holding period of any prior owner other than an Affiliate) is
entitled to sell in "broker's transactions" or to market makers, within any
three-month period commencing 90 days after the date of this Prospectus, a
number of shares that does not exceed the greater of (i) one percent of the
number of shares of Common Stock then outstanding (approximately 125,909 shares
immediately after this offering) or (ii) the average weekly trading volume of
the Common Stock during the four calendar weeks preceding the required filing of
a Form 144 with respect to such sale. Sales under Rule 144 are generally subject
to certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an Affiliate at any time during the 90
days preceding a sale, and who has beneficially owned the shares proposed to be
sold for at least two years (including the holding period of any prior owner
other than an Affiliate), is entitled to sell
54
<PAGE>
such shares without having to comply with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Under Rule 701 promulgated under the Securities Act, employees, officers or
directors of or consultants to the Company who purchased or were awarded shares
or options to purchase shares pursuant to a written compensatory plan or
contract are entitled to sell such shares 90 days after the effective date of
this offering, without having to comply with the holding period requirements of
Rule 144 and, in the case of non-affiliates, without having to comply with the
public information, volume limitation or notice provisions of Rule 144.
The Company intends to file a registration statement on Form S-8 under the
Securities Act covering approximately 3,415,928 shares of Common Stock reserved
for issuance under the Stock Plans. Such registration statement is expected to
be filed and become effective as soon as practicable after the effective date of
this offering. Accordingly, shares registered under such registration statement
will, subject to Rule 144 volume limitations applicable to Affiliates, be
available for sale in the open market 180 days after the effective date of the
offering, except to the extent that such shares are subject to vesting
restrictions. As of June 30, 1998, options to purchase 696,850 shares were
issued and outstanding under the Stock Plans. See "Management--Stock Plans."
55
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their Representatives, Hambrecht & Quist LLC,
CIBC Oppenheimer Corp. and C.E. Unterberg, Towbin, have severally agreed to
purchase from the Company and the Selling Stockholders the following respective
numbers of shares of Common Stock.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ---------------------------------------------------------------- -----------
<S> <C>
Hambrecht & Quist LLC...........................................
CIBC Oppenheimer Corp...........................................
C.E. Unterberg, Towbin..........................................
-----------
Total........................................................... 3,352,500
-----------
-----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company, its counsel and independent
auditors. The nature of the Underwriters' obligation is such that they are
committed to purchase all shares of Common Stock offered hereby if any of such
shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow and such dealers may reallow a
concession not in excess of $ per share to certain other dealers. After the
initial public offering of the shares, the offering price and other selling
terms may be changed by the Representatives of the Underwriters. The
Representatives have informed the Company that the Underwriters do not intend to
confirm discretionary sales in excess of 5% of the shares of Common Stock
offered hereby.
Nancy H. Karp, a Selling Stockholder, has granted to the Underwriters an
option, exercisable no later than 30 days after the date of this Prospectus, to
purchase up to 502,875 additional shares of Common Stock at the initial public
offering price, less the underwriting discount, set forth on the cover page of
this Prospectus. To the extent that the Underwriters exercise this option, each
of the Underwriters will have a firm commitment to purchase approximately the
same percentage thereof which the number of shares of Common Stock to be
purchased by it shown in the above table bears to the total number of shares of
Common Stock offered hereby. Ms. Karp will be obligated, pursuant to the option,
to sell shares to the Underwriters to the extent the option is exercised. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of shares of Common Stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the Underwriters may be required
to make in respect thereof.
The Selling Stockholders, certain other stockholders and certain holders of
options to purchase Common Stock of the Company, including the executive
officers and directors, who will own (or have the right to purchase) in the
aggregate 9,498,342 shares (including shares issuable upon exercise of options
to purchase
56
<PAGE>
Common Stock) after the offering, have agreed that they will not, without the
prior written consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose
of any shares of Common Stock, options or warrants to acquire shares of Common
Stock or securities exchangeable for or convertible into shares of Common Stock
owned by them during the 180-day period following the date of this Prospectus.
The Company has agreed that it will not, without the prior written consent of
Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares of Common
Stock, options or warrants to acquire shares of Common Stock or securities
exchangeable for or convertible into shares of Common Stock during the 180-day
period following the date of this Prospectus, except that the Company may issue
shares upon the exercise of options granted prior to the date hereof, and may
grant additional options under its stock option plans.
Prior to the offering, there has been no public market for the Common Stock.
The initial public offering price for the shares of Common Stock will be
determined by negotiation among the Company, the Selling Stockholders and the
Representatives. Among the factors to be considered in determining the initial
public offering price are prevailing market and economic conditions, revenues
and earnings of the Company, estimates of the business potential and prospects
of the Company, the present state of the Company's business operations, the
Company's management and other factors deemed relevant. The estimated initial
public offering price range set forth on the cover of this Preliminary
Prospectus is subject to change as a result of market conditions and other
factors.
Certain persons participating in this offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of the Common Stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the offering. A penalty bid means an arrangement that permits the Underwriters
to reclaim a selling concession from a syndicate member in connection with the
offering when shares of Common Stock sold by the syndicate member are purchased
in syndicate covering transactions. Such transactions may be effected on the
Nasdaq Stock Market, in the over-the-counter market or otherwise. Such
stabilizing, if commenced, may be discontinued at any time.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the securities
being offered hereby will be passed upon for the Company and the Selling
Stockholders by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Certain legal matters in connection with this offering will be
passed upon for the Underwriters by Cooley Godward LLP, San Francisco,
California.
EXPERTS
The consolidated financial statements of Catapult Communications Corporation
as of September 30, 1996 and 1997 and for each of the three years in the period
ended September 30, 1997 included in this Prospectus have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
CHANGE IN ACCOUNTANTS
In December 1997, the Company retained PricewaterhouseCoopers LLP as the
Company's independent accountants and replaced Ireland San Filippo, LLP
("Ireland San Filippo"), the Company's former accountants. The decision to
change independent accountants was ratified by the Company's Board of Directors.
During the periods audited by Ireland San Filippo through December 1997, there
were no disagreements with Ireland San Filippo regarding any matters with
respect to accounting principles or practices, financial statement disclosure or
audit scope or procedure, which disagreements, if not resolved to the
satisfaction of the former accountants,
57
<PAGE>
would have caused Ireland San Filippo to make reference to the subject matter of
the disagreement in connection with its report. The former accountants reports
for the years audited by them are not a part of the financial statements of the
Company included in this Prospectus and the related financial statement
schedules included elsewhere in the Registration Statement. Such reports did not
contain an adverse opinion or disclaimer of opinion or qualifications or
modifications as to uncertainty, audit scope or accounting principles. Prior to
retaining PricewaterhouseCoopers LLP, the Company had not consulted with
PricewaterhouseCoopers LLP regarding the application of accounting principles.
58
<PAGE>
GLOSSARY
<TABLE>
<S> <C>
Asynchronous Transfer A cell-based network technology protocol that supports
Mode (ATM) simultaneous transmission of data, voice and video typically at
T-1 or higher speeds.
Code Division Multiple A digital wireless technology that uses a modulation technique
Access (CDMA) in which many channels are independently coded for transmission
over a single wideband channel.
E-1 A digital transmission link used by European carriers to
transmit thirty-two 64 Kbps digital channels for voice or data.
Frame Relay An access standard which employs a form of packet switching to
facilitate high-speed data communications.
Global System for Mobile A digital wireless technology that is widely deployed in Europe
Communications (GSM) and, increasingly, in other parts of the world.
Graphical User Interface A graphics-based computer interface that usually incorporates
(GUI) icons, pull- down menus and a mouse.
Intelligent Network (IN) A network that allows functionality to be distributed flexibly
to a variety of nodes on and off the network and allows that
architecture to be modified to control network services.
Integrated Services An international telecommunications standard for transmitting
Digital Network (ISDN) voice, data and video over digital lines at transmission speeds
of up to 142 Kbps.
IS-41 (Interim Standard A signalling protocol used in the North American cellular
41) applications.
Personal Communication A digital cellular communication service offered by some North
Service (PCS) American operators.
Personal Digital A digital cellular communication service used in Japan.
Cellular (PDC)
Protocol A specific set of rules, procedures or conventions governing the
format, means and timing of transmissions between two devices.
System Signalling 7 A message-based protocol for exchanging signalling and control
(SS7) information between telephony network entities.
T-1 A point-to-point dedicated line with transmission speeds of up
to 1.544 Mbps widely used for private networks and high-speed
links to the Internet.
V5 A European standard protocol for the interface between the
access network and the carrier switch principally for basic
telephony.
Variant A specific implementation of a protocol, typically unique to a
country or region.
X.25 A switched communications protocol that defines how data streams
are to be assembled into packets, controlled, routed and
protected as they cross a network.
</TABLE>
G-1
<PAGE>
CATAPULT COMMUNICATIONS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Consolidated Balance Sheets................................................................................ F-3
Consolidated Statements of Income.......................................................................... F-4
Consolidated Statements of Stockholders' Equity............................................................ F-5
Consolidated Statements of Cash Flows...................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Catapult Communications Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Catapult
Communications Corporation and its subsidiaries at September 30, 1996 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended September 30, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
May 29, 1998, except as to
the second paragraph of Note 1
and Note 8, which are as of June 19, 1998
F-2
<PAGE>
CATAPULT COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, PRO FORMA
-------------------- JUNE 30, JUNE 30,
1996 1997 1998 1998
--------- --------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................................... $ 7,171 $ 10,672 $ 13,254
Short-term investments.............................................. 402 --
Accounts receivable, net of allowances of $0, $59 and $59
(unaudited)....................................................... 495 892 2,769
Inventories......................................................... 592 421 485
Prepaid expenses.................................................... 33 992 669
Deferred income taxes............................................... 494 556 309
--------- --------- ---------
Total current assets.............................................. 9,187 13,533 17,486
Property and equipment, net........................................... 321 442 745
Other assets.......................................................... 34 60 366
--------- --------- ---------
Total assets...................................................... $ 9,542 $ 14,035 $ 18,597
--------- --------- ---------
--------- --------- ---------
LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................................... $ 184 $ 150 $ 397
Accrued liabilities................................................. 1,731 2,720 2,817
Deferred revenue.................................................... 776 965 1,339
--------- --------- ---------
Total current liabilities......................................... 2,691 3,835 4,553
Deferred income taxes................................................. 19 30 20
--------- --------- ---------
Total liabilities................................................. 2,710 3,865 4,573
--------- --------- ---------
Redeemable Common Stock (Note 8)...................................... -- -- 5,000 $ --
--------- --------- --------- -----------
Commitments (Note 6)
Stockholders' Equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized; none
issued and outstanding............................................ -- -- -- --
Common stock, $0.001 par value, 40,000,000 shares authorized;
9,629,281, 9,629,443 and 9,990,496 (unaudited) issued and
outstanding actual; 10,490,496 (unaudited) issued and outstanding
pro forma......................................................... 10 10 10 11
Additional paid-in capital.......................................... 48 264 -- 1,064
Deferred compensation............................................... -- (196) (660) (660)
Retained earnings................................................... 6,828 10,166 9,848 13,783
Cumulative translation adjustment................................... (54) (74) (174) (174)
--------- --------- --------- -----------
Total stockholders' equity........................................ 6,832 10,170 9,024 14,024
--------- --------- --------- -----------
Total liabilities, redeemable common stock and stockholders'
equity.......................................................... $ 9,542 $ 14,035 $ 18,597 $ 18,597
--------- --------- --------- -----------
--------- --------- --------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
CATAPULT COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales............................................ $ 5,857 $ 7,690 $ 11,519 $ 9,573 $ 11,385
Services................................................. 1,012 1,562 1,833 1,334 1,695
--------- --------- --------- --------- ---------
6,869 9,252 13,352 10,907 13,080
--------- --------- --------- --------- ---------
Cost of revenues:
Product sales............................................ 804 1,103 1,576 1,266 1,258
Services................................................. 132 246 344 251 489
--------- --------- --------- --------- ---------
936...... 1,349 1,920 1,517 1,747
--------- --------- --------- --------- ---------
Gross profit........................................... 5,933 7,903 11,432 9,390 11,333
--------- --------- --------- --------- ---------
Operating expenses:
Research and development................................. 697 908 1,419 1,070 1,419
Sales and marketing...................................... 1,300 1,881 2,550 1,829 2,094
General and administrative............................... 889 1,384 2,063 1,515 1,596
--------- --------- --------- --------- ---------
2,886 4,173 6,032 4,414 5,109
--------- --------- --------- --------- ---------
Operating income........................................... 3,047 3,730 5,400 4,976 6,224
--------- --------- --------- --------- ---------
Other income and expense:
Interest income.......................................... 224 269 380 275 417
Other income (expense), net.............................. 126 (209) (6) 3 (303)
--------- --------- --------- --------- ---------
350 60 374 278 114
--------- --------- --------- --------- ---------
Income before provision for income taxes................... 3,397 3,790 5,774 5,254 6,338
Provision for income taxes................................. 1,225 1,502 2,436 2,217 2,721
--------- --------- --------- --------- ---------
Net income................................................. $ 2,172 $ 2,288 $ 3,338 $ 3,037 $ 3,617
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Earnings per share:
Basic.................................................... $ 0.23 $ 0.24 $ 0.35 $ 0.32 $ 0.35
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted.................................................. $ 0.22 $ 0.22 $ 0.31 $ 0.29 $ 0.33
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Shares used in computing earnings per share:
Basic.................................................... 9,581 9,621 9,630 9,630 10,328
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted.................................................. 10,058 10,301 10,605 10,566 10,889
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CATAPULT COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE
----------------------- PAID-IN DEFERRED RETAINED TRANSLATION
SHARES AMOUNT CAPITAL COMPENSATION EARNINGS ADJUSTMENT
---------- ----------- ----------- --------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1994.............. 9,568,905 $ 10 $ 36 $ -- $ 2,368 $ (16)
Issuance of common stock................... 26,189 -- 5 -- -- --
Currency translation adjustment............ -- -- -- -- -- (18)
Net income................................. -- -- -- -- 2,172 --
--
---------- ----------- ----- --------- -----
Balance at September 30, 1995.............. 9,595,094 10 41 -- 4,540 (34)
Issuance of common stock................... 34,187 -- 7 -- -- --
Currency translation adjustment............ -- -- -- -- -- (20)
Net income................................. -- -- -- -- 2,288 --
--
---------- ----------- ----- --------- -----
Balance at September 30, 1996.............. 9,629,281 10 48 -- 6,828 (54)
Issuance of common stock................... 162 -- -- -- -- --
Deferred stock compensation................ -- -- 216 (216) -- --
Amortization of deferred stock
compensation............................. -- -- -- 20 -- --
Currency translation adjustment............ -- -- -- -- -- (20)
Net income................................. -- -- -- -- 3,338 --
--
---------- ----------- ----- --------- -----
Balance at September 30, 1997.............. 9,629,443 10 264 (196) 10,166 (74)
Issuance of common stock (unaudited)....... 861,503 1 211 -- -- --
Deferred stock compensation (unaudited).... -- -- 589 (589) -- --
Amortization of deferred stock compensation
(unaudited).............................. -- -- -- 125 -- --
Redeemable common stock (unaudited)........ (500,000) (1) (1,064) -- (3,935) --
Currency translation adjustment
(unaudited).............................. -- -- -- -- -- (100)
Net income (unaudited)..................... -- -- -- -- 3,617 --
--
---------- ----------- ----- --------- -----
Balance at June 30, 1998 (unaudited)....... 9,990,946 $ 10 $ -- $ (660) $ 9,848 $ (174)
--
--
---------- ----------- ----- --------- -----
---------- ----------- ----- --------- -----
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
------------
<S> <C>
Balance at September 30, 1994.............. $ 2,398
Issuance of common stock................... 5
Currency translation adjustment............ (18)
Net income................................. 2,172
------------
Balance at September 30, 1995.............. 4,557
Issuance of common stock................... 7
Currency translation adjustment............ (20)
Net income................................. 2,288
------------
Balance at September 30, 1996.............. 6,832
Issuance of common stock................... --
Deferred stock compensation................ --
Amortization of deferred stock
compensation............................. 20
Currency translation adjustment............ (20)
Net income................................. 3,338
------------
Balance at September 30, 1997.............. 10,170
Issuance of common stock (unaudited)....... 212
Deferred stock compensation (unaudited).... --
Amortization of deferred stock compensation
(unaudited).............................. 125
Redeemable common stock (unaudited)........ (5,000)
Currency translation adjustment
(unaudited).............................. (100)
Net income (unaudited)..................... 3,617
------------
Balance at June 30, 1998 (unaudited)....... $ 9,024
------------
------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
CATAPULT COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE
YEAR ENDED SEPTEMBER 30, 30,
------------------------------- ----------------------
1995 1996 1997 1997 1998
--------- --------- --------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................................. $ 2,172 $ 2,288 $ 3,338 $ 3,037 3,617
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................ 85 120 121 91 120
Amortization of deferred stock compensation.............. -- -- 20 20 125
Deferred income taxes.................................... (254) (184) (51) 4 237
Gain on sale of fixed assets............................. -- (4) (7) -- --
Change in current assets and liabilities:
Accounts receivable.................................... (244) (207) (397) (1,572) (1,877)
Inventories............................................ (299) (172) 171 72 (64)
Prepaid expenses....................................... 3 (30) (959) (49) 323
Other assets........................................... (39) 5 (26) (55) (306)
Accounts payable....................................... (1) 107 (34) (55) 247
Accrued liabilities.................................... 1,134 55 989 643 97
Deferred revenue....................................... 177 337 189 369 374
--------- --------- --------- ----------- ---------
Net cash provided by operating activities............ 2,734 2,315 3,354 2,505 2,893
--------- --------- --------- ----------- ---------
Cash flows from investing activities:
Proceeds from sale of investments, net................... -- 425 402 402 --
Purchase of property and equipment....................... (185) (182) (242) (182) (423)
Purchase of investments, net............................. (827) -- -- -- --
Proceeds from sale of property and equipment............. -- 14 7 -- --
--------- --------- --------- ----------- ---------
Net cash provided (used) by investing activities..... (1,012) 257 167 220 (423)
--------- --------- --------- ----------- ---------
Cash flows from financing activities:
Stock issuances.......................................... 5 7 -- -- 212
--------- --------- --------- ----------- ---------
Effect of exchange rate changes............................ (19) (19) (20) 67 (100)
--------- --------- --------- ----------- ---------
Net change in cash and cash equivalents.................... 1,708 2,560 3,501 2,792 2,582
Cash and cash equivalents, beginning of period............. 2,903 4,611 7,171 7,171 10,672
--------- --------- --------- ----------- ---------
Cash and cash equivalents, end of period................... $ 4,611 $ 7,171 $ 10,672 $ 9,963 $ 13,254
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Supplemental disclosures of cash flow information
Cash paid during the period for:
Income taxes........................................... $ 1,185 $ 1,666 $ 3,291 $ 2,475 $ 1,113
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
CATAPULT COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
Catapult Communications Corporation (the "Company") designs, develops,
manufactures, markets and supports an advanced software-based test system
offering an integrated suite of testing applications for the global
telecommunications industry. The Company's advanced test systems assist its
customers in the design, integration, installation and acceptance testing of a
broad range of digital telecommunications equipment and services. The Company
was incorporated in California in October 1985 and has operations in the United
States, the United Kingdom and Japan.
REINCORPORATION IN NEVADA AND RECAPITALIZATION
On June 19, 1998, the Company reincorporated in Nevada. In connection with
the reincorporation, the Company authorized 45,000,000 shares of capital stock,
consisting of 40,000,000 shares of Common Stock, $0.001 par value, and 5,000,000
shares of undesignated Preferred Stock, $0.001 par value. In addition,
stockholders of the California corporation received three shares of common stock
of the Nevada corporation for every two shares of common stock of the California
corporation. All share and per share amounts have been restated to give
retroactive effect to the changes in authorized shares and par values, and the
three-for-two stock exchange.
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, Catapult Communications Limited,
Catapult Communications K.K., and ISDN Technologies, Ltd. All significant
intercompany balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of 90 days or less to be cash equivalents. At September 30, 1996 and
1997, cash equivalents consisted principally of U.S. treasury bills with fair
values which approximate cost. The Company maintains its cash in bank deposit
accounts at high credit quality financial institutions in the United States,
United Kingdom and Japan. Approximately $546,000 and $657,000 of cash at
September 30, 1996 and 1997, respectively, were held in financial institutions
in Japan which exceeded insured levels.
SHORT-TERM INVESTMENTS
The Company's investments are classified as available for sale and are
reported at fair market value which approximates cost. Investments consist of
U.S. treasury bills with maturities of less than one year at the balance sheet
date. Realized gains and losses are based on the book value of the investments
sold and have been immaterial.
F-7
<PAGE>
CATAPULT COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
REVENUE RECOGNITION
Product sales are recognized upon shipment provided that no significant
vendor obligations remain and collection is considered probable.
Services revenue consists primarily of post-contract customer support,
training, consulting and installation services. Post-contract customer support
revenues are recognized ratably over the support period, which is generally one
year. Revenues from training, consulting services and installation are
recognized as the services are performed.
FOREIGN CURRENCY TRANSLATION
The functional currencies of the Company's foreign subsidiaries are the
respective local currencies. In consolidation, assets and liabilities are
translated at year-end exchange rates and revenue and expense items are
translated at average rates prevailing during the year. Gains and losses from
foreign currency translation are accumulated as a separate component of
stockholders' equity. Gains and losses resulting from foreign currency
transactions are included in the consolidated statement of income.
FAIR VALUE
The carrying value of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, accounts payable and accrued
liabilities approximate their fair values due to their relatively short
maturities. The Company does not hold or issue financial instruments for trading
purposes.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, cash equivalents, short-term
investments and accounts receivable. The Company's accounts receivable are
derived from revenue earned from customers located in the United States, Europe
and Japan. The Company performs ongoing credit evaluations of its customers'
financial condition and, generally, requires no collateral from its customers.
The Company maintains an allowance for doubtful accounts receivable based upon
the expected collectibility of its accounts receivable.
The following table summarizes the revenues from customers in excess of 10%
of total revenues:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Customer A............................................................................... 37% 23% 28%
Customer B............................................................................... -- -- 17%
Customer C............................................................................... -- 12% --
Customer D............................................................................... 17% -- --
Customer E............................................................................... 12% 10% --
Customer F............................................................................... -- -- --
</TABLE>
At September 30, 1996, three customers accounted for 45%, 18% and 11% of
total accounts receivable, respectively. At September 30, 1997, three customers
accounted for 53%, 17% and 14% of total accounts receivable, respectively.
F-8
<PAGE>
CATAPULT COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost or market, using the first-in
first-out ("FIFO") method.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Software development costs not qualifying for capitalization are included in
research and development and are expensed as incurred. After technological
feasibility is established, material software development costs are capitalized.
The capitalized cost is then amortized on a straight-line basis over the greater
of the estimated product life or on the ratio of current revenues to total
projected product revenues. The Company defines technological feasibility as the
establishment of a working model, which typically occurs upon completion of the
first beta version. To date, the period between achieving technological
feasibility, and the general availability of such software has been short and
software development costs qualifying for capitalization have been
insignificant. Accordingly, the Company has not capitalized any software
development costs.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over estimated useful lives, generally four years, or
the lease term of the respective assets.
WARRANTY
The Company provides a limited warranty for its products. A provision for
the estimated warranty cost is recorded at the time revenue is recognized based
on the Company's historical experience.
INCOME TAXES
The Company accounts for income taxes under the liability method, which
requires recognition of deferred tax assets and liabilities for the future tax
consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB 25") and complies with the
disclosure provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation ("SFAS 123").
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard No. 128, "Earnings per Share" ("SFAS 128"). The
Company has presented earnings per share for all periods in accordance with the
new standard. SFAS 128 requires the presentation of basic and diluted earnings
per share. Basic earnings per share is computed using the weighted average
number of Common Shares outstanding during the period. Diluted earnings per
share includes the effect of dilutive potential Common Shares (options) issued
during the period (using the treasury stock method). The following data is
presented in thousands except per share data:
F-9
<PAGE>
CATAPULT COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE
YEAR ENDED SEPTEMBER 30, 30,
------------------------------- ----------------------
1995 1996 1997 1997 1998
--------- --------- --------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income.................................................... $ 2,172 $ 2,288 $ 3,338 $ 3,037 $ 3,617
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Weighted average shares outstanding........................... 9,581 9,621 9,630 9,630 10,328
Dilutive options.............................................. 477 680 975 936 561
--------- --------- --------- ----------- ---------
Weighted average shares assuming dilution..................... 10,058 10,301 10,605 10,566 10,889
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Earnings per share:
Basic....................................................... $ 0.23 $ 0.24 $ 0.35 $ 0.32 $ 0.35
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Diluted..................................................... $ 0.22 $ 0.22 $ 0.31 $ 0.29 $ 0.33
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" ("SFAS 130"). This statement will be effective for the Company's fiscal
year ending September 30, 1999. The statement establishes presentation and
disclosure requirements for reporting comprehensive income. Comprehensive income
includes charges or credits to equity that are not the result of transactions
with shareholders. The Company expects there will be no material impact on its
consolidated financial position or results of operations as a result of the
adoption of this new accounting standard.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). This statement will be effective for the Company's fiscal year
ending September 30, 1999. The statement requires the Company to report certain
financial information about operating segments. It also requires that the
Company report certain information about its services, the geographic areas in
which it operates and its major customers. The method specified in SFAS 131 for
determining what information to report is referred to as the "management
approach". The management approach is based on the way that management organizes
the segments within the enterprise for making operating decisions and assessing
performance. The adoption of SFAS 131 is not expected to have a significant
impact on the Company's financial statement disclosures.
In October 1997 and March 1998, the American Institute of Certified Public
Accountants ("AICPA") issued Statements of Position ("SOP") 97-2 and 98-4, which
provide guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions. SOP 97-2 and 98-4 are effective
for the Company's fiscal year ending September 30, 1999. Earlier application is
encouraged as of the beginning of fiscal year or interim periods for which
financial statements or information have not been issued. Retroactive
application of the provisions of these SOP's is prohibited. The Company has
assessed the provisions of SOP 97-2 and 98-4 and does not expect that adoption
will have a material impact on its financial statements.
In March 1998, the AICPA issued SOP 98-1, "Software for Internal Use," which
provides guidance in accounting for the costs of computer software developed or
obtained for internal use. SOP 98-1 is effective for the Company's fiscal year
ending September 30, 1999. The Company does not expect the adoption of SOP 98-1
to have a material impact on its financial statements.
F-10
<PAGE>
CATAPULT COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INTERIM RESULTS (UNAUDITED)
The accompanying consolidated balance sheet as of June 30, 1998, the
consolidated statements of income and of cash flows for the nine months ended
June 30, 1997 and 1998 and the consolidated statements of stockholders' equity
for the nine months ended June 30, 1998 are unaudited.
In the opinion of management, these statements have been prepared on the
same basis as the audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
statement of the results of interim periods. The data disclosed in notes to the
consolidated financial statements for these periods are unaudited.
PRO FORMA BALANCE SHEET
On June 10, 1998, the Company entered into a settlement of a claim by an
officer and director. As a result of this settlement, common shares held by this
individual will be redeemable, up to $5 million, if the Company does not
complete its planned initial public offering by December 31, 1998 (See Note 8).
500,000 shares have been reclassified as redeemable common stock based on the
assumed offering price of $10 per share. If the planned offering is consummated,
these shares will no longer be redeemable. The pro forma balance sheet as of
June 30, 1998 reflects the reclassification of the redeemable securities as
equity which will occur upon the effectiveness of the planned offering.
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------- JUNE 30,
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
PREPAID EXPENSES:
Income taxes................................................................... $ -- $ 874 $ 178
Deferred offering costs........................................................ -- -- 439
Other.......................................................................... 33 118 52
--------- --------- -----------
$ 33 $ 992 $ 669
--------- --------- -----------
--------- --------- -----------
INVENTORIES:
Raw materials.................................................................. $ 441 $ 364 $ 328
Work-in-process................................................................ 1 21 62
Finished goods................................................................. 150 36 95
--------- --------- -----------
$ 592 $ 421 $ 485
--------- --------- -----------
--------- --------- -----------
PROPERTY AND EQUIPMENT:
Equipment...................................................................... $ 847 $ 992 $ 1,186
Leasehold improvements......................................................... 23 120 349
--------- --------- -----------
870 1,112 1,535
Less accumulated depreciation.................................................. (549) (670) (790)
--------- --------- -----------
$ 321 $ 442 $ 745
--------- --------- -----------
--------- --------- -----------
ACCRUED LIABILITIES:
Payroll and related expenses................................................... $ 1,075 $ 1,708 $ 945
Income taxes................................................................... 548 666 1,125
Other.......................................................................... 108 346 747
--------- --------- -----------
$ 1,731 $ 2,720 $ 2,817
--------- --------- -----------
--------- --------- -----------
</TABLE>
F-11
<PAGE>
CATAPULT COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--INCOME TAXES:
Consolidated income before income taxes includes non-U.S. income of
approximately $911,000, $807,000, and $1,260,000 in fiscal 1995, 1996 and 1997,
respectively.
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
CURRENT:
U.S. federal....................................................................... $ 1,039 $ 1,100 $ 1,591
State.............................................................................. 116 168 311
Foreign............................................................................ 324 418 585
--------- --------- ---------
1,479 1,686 2,487
--------- --------- ---------
DEFERRED:
U.S. federal....................................................................... (254) (149) (21)
Foreign............................................................................ -- (35) (30)
--------- --------- ---------
(254) (184) (51)
--------- --------- ---------
$ 1,225 $ 1,502 $ 2,436
--------- --------- ---------
--------- --------- ---------
</TABLE>
A reconciliation of the U.S. federal income tax rate to the Company's effective
tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------
1995 1996
--- ---
<S> <C> <C>
Tax at federal rate........................................................................... 34% 34%
State taxes, net of federal benefit........................................................... 5 5
Excess (benefit) foreign tax rate............................................................. (1) 1
Other......................................................................................... (2) --
-- --
36% 40%
-- --
-- --
<CAPTION>
1997
---
<S> <C>
Tax at federal rate........................................................................... 34%
State taxes, net of federal benefit........................................................... 5
Excess (benefit) foreign tax rate............................................................. 2
Other......................................................................................... 1
--
42%
--
--
</TABLE>
Deferred tax assets and liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
DEFERRED TAX ASSETS:
Accruals and reserves......................................................................... $ 271 $ 426
Other......................................................................................... 223 130
--- ---
494 556
--- ---
DEFERRED TAX LIABILITIES:
Excess tax depreciation....................................................................... (19) (30)
--- ---
Net deferred tax assets......................................................................... $ 475 $ 526
--- ---
--- ---
</TABLE>
NOTE 4--STOCK OPTION PLANS:
At September 30, 1997, 1,800,000 shares and 154,500 shares of common stock
had been reserved for issuance to employees under the 1989 Incentive Stock
Option Plan (the "1989 Plan") and the UK Executive Share Option Scheme (the "UK
Scheme"), respectively. The Board of Directors has the authority to determine
F-12
<PAGE>
CATAPULT COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--STOCK OPTION PLANS: (CONTINUED)
optionees, the number of shares, the term of each option and the exercise price.
Options under the 1989 Plan generally become exercisable at a rate of 1/8th of
the option shares six months after the option grant date and then at a rate of
1/48th per month thereafter. Options under the UK Scheme become exercisable at
the rate of 1/36th of the option shares per month following twelve months after
the option grant date. Options will expire, if not exercised, upon the earlier
of 10 years from the date of grant or 30 days after termination as an employee
of the Company. Options are granted with exercise prices equal to the fair value
of the common stock as determined by the Board of Directors.
In the year ended September 30, 1997 and the nine months ended June 30,
1998, the Company recorded deferred compensation expense of approximately
$216,000 and $589,000 (unaudited), respectively, related to the issuance of
stock options at prices subsequently determined to be below fair market value.
These expenses are being amortized over a period of four years from the date of
option issuance. Amortization of deferred compensation expense related to these
options of approximately $20,000 and $125,000 (unaudited) was included in
general and administrative expenses in the year ended September 30, 1997, and
nine months ended June 30, 1998, respectively.
Information with respect to stock option activity from September 30, 1994
through June 30, 1998 is set forth below:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- -------------------
<S> <C> <C>
Balance, September 30, 1994........................................................ 1,010,250 $ 0.19
Options granted.................................................................. 140,250 0.38
Options exercised................................................................ (26,188) 0.20
Options canceled................................................................. (45,062) 0.22
---------- -----
Balance, September 30, 1995........................................................ 1,079,250 0.22
Options granted.................................................................. 135,750 0.71
Options exercised................................................................ (34,456) 0.21
Options canceled................................................................. (24,044) 0.33
---------- -----
Balance, September 30, 1996........................................................ 1,156,500 0.27
Options granted.................................................................. 296,475 0.99
Options exercised................................................................ (162) 0.46
Options canceled................................................................. (94,713) 0.85
---------- -----
Balance, September 30, 1997........................................................ 1,358,100 0.39
Options granted (unaudited)...................................................... 201,000 1.90
Options exercised (unaudited).................................................... (861,500) 0.25
Options canceled (unaudited)..................................................... (750) 1.27
---------- -----
Balance, June 30, 1998 (unaudited)................................................. 696,850 $ 1.00
---------- -----
---------- -----
</TABLE>
As of June 30, 1998, 323,578 (unaudited) options remained available for
grant.
F-13
<PAGE>
CATAPULT COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--STOCK OPTION PLANS: (CONTINUED)
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AT
SEPTEMBER 30, 1997 OPTIONS EXERCISABLE AT
--------------------------------------- SEPTEMBER 30, 1997
WEIGHTED ------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICE OUTSTANDING LIFE PRICE OUTSTANDING PRICE
- ---------------------------------------------------- ----------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$0.19 - $0.23....................................... 939,000 5.26 $ 0.19 895,751 $ 0.19
$0.46............................................... 154,500 8.06 0.46 70,468 0.46
$0.83 - $1.27....................................... 264,600 9.22 1.02 51,710 0.83
----------- -----------
1,358,100 0.39 1,017,929 0.24
----------- -----------
----------- -----------
</TABLE>
FAIR VALUE DISCLOSURES
The Company calculated the fair value of each option grant on the date of
grant using the minimum value method with the following assumptions: dividend
yield at 0%; weighted average expected option life of five years; and risk free
interest rate of 6.6%, 6.1% and 6.2% for the years ended September 30, 1995,
1996 and 1997, respectively. The weighted average fair value of options granted
during 1995 and 1996 was $0.10 and $0.17 per share, respectively.
The weighted average fair values of options granted during 1997 were as
follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICE FAIR VALUE
------------------- -------------------
<S> <C> <C>
Exercise price equal to market value......................................... $ 0.83 $ 0.22
Exercise price less than market value........................................ 1.27 2.37
</TABLE>
Had compensation cost for the Company's stock-based compensation plan been
determined based on the fair value at the grant dates for the awards under the
minimum value method prescribed by SFAS No. 123, the Company's net income would
not have been materially different.
NOTE 5--PROFIT-SHARING PLAN:
The Company maintains a qualified profit-sharing plan for eligible
employees. Contributions to the profit-sharing plan are discretionary and are
determined by the Board of Directors. There were no contributions to the plan
during the years ended September 30, 1995, 1996 and 1997.
NOTE 6--COMMITMENTS:
The Company leases its facility in Mountain View, California under a
noncancelable operating lease agreement which expires in 2002. The lease
agreement provides for minimum annual rent of $90,000. Under this agreement, the
Company pays certain shared operating expenses of the facility. The agreement
provides for rent increases at scheduled intervals. The Company leases other
facilities in Illinois, Japan and the United Kingdom under leases that expire
through January 1999.
Rent expense for all facilities for the years ended September 30, 1995, 1996
and 1997 was approximately $73,000, $123,000 and $197,000, respectively.
F-14
<PAGE>
CATAPULT COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--COMMITMENTS: (CONTINUED)
Future minimum annual rental payments under noncancelable operating leases as of
September 30, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1998................................................................ $ 283
1999................................................................ 269
2000................................................................ 208
2001................................................................ 212
2002................................................................ 62
---------
$ 1,034
---------
---------
</TABLE>
NOTE 7--SEGMENT REPORTING:
The Company operates in one industry segment: the design, development
manufacture, marketing and support of digital telecommunications test equipment.
The Company's operations and assets by geographical region as of and for
each fiscal year end were as follows (in thousands):
<TABLE>
<CAPTION>
UNITED UNITED CONSOLIDATED
STATES KINGDOM JAPAN TOTAL
--------- ----------- --------- ------------
<S> <C> <C> <C> <C>
1995
- -------------------------------------------------
Sales to unaffiliated customers.................. $ 3,190 $ 3,370 $ 309 $ 6,869
Net income....................................... 1,572 625 (25) 2,172
1996
- -------------------------------------------------
Sales to unaffiliated customers.................. $ 4,136 $ 1,719 $ 3,397 $ 9,252
Net income....................................... 1,868 298 122 2,288
Total assets..................................... 7,640 1,745 157 9,542
1997
- -------------------------------------------------
Sales to unaffiliated customers.................. $ 6,261 $ 2,716 $ 4,375 $ 13,352
Net income....................................... 2,642 405 291 3,338
Total assets..................................... 9,714 2,669 1,652 14,035
</TABLE>
The result of operations by geographic region includes significant sales
principally from the United States to the Company's foreign locations at agreed
upon transfer prices. Transfers to other geographic regions from the United
States for the years ended September 30, 1995, 1996 and 1997 were $2.2 million,
$3.7 million and $4.1 million, respectively.
NOTE 8--SUBSEQUENT EVENTS:
REDEEMABLE SECURITIES
In connection with the settlement on June 10, 1998 of claims by an officer
and director of the Company asserted against the Company in early 1998 for
compensation for past services rendered to the Company, the Company agreed that,
if it does not complete its planned initial public offering by December 31,
1998, it will repurchase common stock held by this individual at a rate of up to
50,000 shares per annum, in quarterly
F-15
<PAGE>
CATAPULT COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--SUBSEQUENT EVENTS: (CONTINUED)
installments of up to 12,500 shares, beginning on March 31, 1999, until the
earliest of certain events, including the cumulative receipt of $5 million by
the individual from sales of the individual's stock, an initial public offering
of stock by the Company, an acquisition of the Company or 12 years from March
31, 1999. The repurchase price will be the fair market value of the shares as
determined by the Board of Directors. As a result of this agreement, 500,000
shares of common stock with a fair market value of $5 million, based on the
assumed offering price of $10 per share, are reflected as redeemable securities
beginning as of the date of this settlement.
1998 STOCK PLAN
In June 1998, the Board of Directors and stockholders adopted the 1998 Stock
Plan and the 1998 Employee Stock Purchase Plan under which 1,800,000 shares and
750,000 shares of common stock, respectively, have been reserved for issuance.
F-16
<PAGE>
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION, MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMTANCES, CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Information.................................................... 2
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 5
Use of Proceeds........................................................... 16
Dividend Policy........................................................... 16
Capitalization............................................................ 17
Dilution.................................................................. 18
Selected Consolidated Financial Data...................................... 19
Management's Discussion and
Analysis of Financial Condition and
Results of Operations................................................... 20
Business.................................................................. 30
Management................................................................ 43
Certain Transactions...................................................... 50
Principal and Selling Stockholders........................................ 51
Description of Capital Stock.............................................. 52
Shares Eligible for Future Sale........................................... 54
Underwriting.............................................................. 56
Legal Matters............................................................. 57
Experts................................................................... 57
Change in Accountants..................................................... 57
Glossary.................................................................. G-1
Index to Consolidated Financial Statements................................ F-1
</TABLE>
--------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THE PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
3,352,500 SHARES
[LOGO]
COMMON STOCK
--------------
PROSPECTUS
--------------
HAMBRECHT & QUIST
CIBC OPPENHEIMER
C.E. UNTERBERG, TOWBIN
, 1998
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, including all costs
and expenses of the Selling Stockholders, other than underwriting discounts and
commissions, payable by the Registrant in connection with the sale of Common
Stock being registered. All amounts are estimates except the SEC registration
fee, the NASD filing fee and the Nasdaq National Market filing fee.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
-----------
<S> <C>
SEC Registration Fee.............................................................. $ 12,511
NASD Filing Fee................................................................... 4,741
Nasdaq National Market Listing Fee................................................ 85,000
Blue Sky Fees and Expenses........................................................ 5,000
Printing and Engraving Expenses................................................... 125,000
Legal Fees and Expenses........................................................... 250,000
Accounting Fees and Expenses...................................................... 180,000
Transfer Agent, Registrar's and Custodian Fees.................................... 1,500
Miscellaneous Expenses............................................................ 61,248
-----------
Total........................................................................... $ 725,000
-----------
-----------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 78.751 of the Nevada General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the "Securities
Act"). The Registrant's Bylaws provide that the Registrant shall indemnify its
directors and officers to the fullest extent permitted by Nevada law, including
circumstances in which indemnification is otherwise discretionary under Nevada
law. The Registrant has entered into indemnification agreements with its
directors and officers containing provisions which are in some respects broader
than the specific indemnification provisions contained in the Nevada General
Corporation Law. The indemnification agreements may require the Registrant,
among other things, to indemnify its directors and officers against certain
liabilities that may arise by reason of their status or service as directors or
officers (other than liabilities arising from willful misconduct of a culpable
nature), to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified, and to obtain directors' and
officers' insurance if available on reasonable terms. Article VI of the
Registrant's Articles of Incorporation (Exhibit 3.1 hereto) provides for
indemnification of its directors and officers to the maximum extent permitted by
the Nevada General Corporation Law and Article 26 of the Registrant's Bylaws
(Exhibit 3.2 hereto) provides for indemnification of its directors, officers,
employees and other agents to the maximum extent permitted by the Nevada General
Corporation Law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
1. From June 1995 to June 30, 1998, the Registrant has granted stock
options under the 1989 Plan to purchase an aggregate of 714,975 shares of the
Registrant's Common Stock to 50 employees at exercise prices ranging from $0.46
to $8.00, including stock options to three Named Executive Officers, namely, to
Mr. Hoglund in May 1997 to purchase 75,000 shares of Common Stock at $1.27 per
share, to Mr. Stewart in August 1996 to purchase 30,000 shares of Common Stock
at $0.83 per share, and to Ms. Fairhurst in August 1995 to purchase 45,000
shares of Common Stock at $0.46 per share.
II-1
<PAGE>
2. From June 1995 to June 30, 1998, the Registrant granted options under
the UK Plan to purchase an aggregate of 1,500 shares of the Registrant's Common
Stock at an exercise price of $0.46.
3. Since June 1995, the Registrant has issued and sold 898,170 shares of
Common Stock to employees at prices ranging from $0.19 to $8.00 per share, in
cash, upon exercise of stock options pursuant to the 1989 Plan.
4. On June 19, 1998, the Registrant effected a reincorporation from the
state of California to the state of Nevada. The Registrant, as a California
corporation, merged with and into a new corporation incorporated in Nevada, with
the new corporation surviving the merger (the "Surviving Entity"). As a result,
every two shares of Common Stock of the Registrant, as a California corporation,
converted into three fully paid and nonassessable share of Common Stock of the
Surviving Entity. Such issuances were exempt from registration under the
Securities Act under Section 2(3) thereof on the basis that the transaction did
not involve a sale of securities.
The sales of the above securities referred to in paragraphs 1 through 3
above were deemed to be exempt from registration under the Securities Act in
reliance on Section 4(2) of the Securities Act or Rule 701 promulgated under
Section 3(b) of the Securities Act as transactions by an issuer not involving a
public offering or transactions pursuant to the compensatory benefit plans and
contracts relating to compensation as provided under such Rule 701. The
recipients of securities in each such transaction represented their intention to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were attached
to the share certificates issued in such transactions. All recipients had
adequate access to information about the Registrant.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement by and among the Registrant and Hambrecht & Quist
LLC, CIBC Oppenheimer Corp. and C.E. Unterberg, Towbin.
2.1+ Agreement and Plan of Merger dated June 10, 1998 between Catapult Communications
Corporation, a California corporation, and Registrant.
3.1+ Articles of Incorporation of Registrant.
3.2+ Bylaws of Registrant.
4.1+ Specimen Common Stock Certificate of Registrant.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati regarding the legality of the
securities being issued.
9.1+ Voting Trust Agreement dated June 8, 1998 between Nancy Hood Karp, Richard A. Karp,
the Registrant and a depositary.
10.1+ Form of Indemnification Agreement entered into by Registrant with each of its
directors and executive officers.
10.2+ Form of Restricted Stock Purchase Agreement.
10.3+ 1989 Stock Option Plan and related agreements.
10.4+ UK Executive Share Option Scheme and related agreements.
10.5+ 1998 Stock Plan and related agreements.
10.6+ 1998 Employee Stock Purchase Plan and related agreements.
10.7+ Fiscal 1998 Officer and Key Employee Profit Sharing Plan.
10.8+ Lease for office space located at 160 Whisman Road, Mountain View, CA.
10.9+ Form of Software Support Agreement.
10.10+ Severance Agreement and Mutual Release of All Claims dated June 8, 1998 between
Nancy Hood Karp and Registrant.
10.11+ Consulting and Non-Competition Agreement dated June 9, 1998 between Nancy Hood Karp
and Registrant.
11.1 Calculation of Earnings per Common Share (contained in Note 1 of the Notes to
Financial Statements).
16.1+ Letter dated June 11, 1998 from Ireland San Filippo, LLP.
21.1+ Subsidiaries of the Registrant.
23.1 Consent of Wilson Sonsini Goodrich & Rosati (included in Exhibit 5.1).
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants (see page II-6).
24.1+ Power of Attorney.
27.1+ Financial Data Schedule (Fiscal 1997).
27.2+ Financial Data Schedule (Six months ended March 31, 1998).
27.3 Financial Data Schedule (Nine months ended June 30, 1998).
</TABLE>
- ------------------------
+ Previously filed.
+ Confidential treatment has been requested for certain portions which have
been blacked out in the copy of the exhibit filed with the Securities and
Exchange Commission. The omitted information has been filed separately with
the Securities and Exchange Commission pursuant to the application for
confidential treatment.
II-3
<PAGE>
(b) Financial Statement Schedule.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions of this Registration
Statement, or otherwise, the Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Company of expenses incurred or paid by a director, officer
or controlling person of the Company in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Company will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
(b) The Company hereby understands that it will:
(1) For the purpose of determining any liability under the Securities
Act of 1933, treat the information omitted from the form of prospectus filed
as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Company under Rule 424(b)(1)
or (4) or 497(h) under the Securities Act of 1933 as part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, treat each post-effective amendment that contains a form of
prospectus as a new registration statement for the securities offered in the
Registration Statement, and that offering of such securities at that time
shall be deemed to be as the initial bona fide offering thereof.
(c) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement on Form S-1
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Mountain View, State of California, on July 21, 1998.
CATAPULT COMMUNICATIONS CORPORATION
By: /s/ JOAN M. VARRONE
--------------------------------------
Joan M. Varrone
Vice President of Finance, Chief
Financial
Officer and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
has been signed below by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------------- -------------------------------------------- --------------
<C> <S> <C>
* President, Chief Executive Officer and
---------------------------------------- Chairman of the Board July 21, 1998
Richard A. Karp (Principal Executive Officer)
/s/ JOAN M. VARRONE Vice President of Finance, Chief Financial
---------------------------------------- Officer and Treasurer (Principal Financial July 21, 1998
Joan M. Varrone and Accounting Officer)
*
---------------------------------------- Director July 21, 1998
Charles L. Waggoner
*
---------------------------------------- Director July 21, 1998
John M. Scandalios
*
---------------------------------------- Director July 21, 1998
Nancy H. Karp
*By /s/ JOAN M. VARRONE
------------------------------------
Joan M. Varrone
Attorney-in-Fact
</TABLE>
II-5
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated May 29, 1998, except as
to the second paragraph of Note 1 and Note 8, which are as of June 19, 1998,
relating to the financial statements of Catapult Communications Corporation,
which appears in such Prospectus. We also consent to the reference to us under
the heading "Experts" in such Prospectus.
/S/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
July 20, 1998
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement by and among the Registrant and Hambrecht & Quist
LLC, CIBC Oppenheimer Corp. and C.E. Unterberg, Towbin.
2.1+ Agreement and Plan of Merger dated June 10, 1998 between Catapult Communications
Corporation, a California corporation, and Registrant.
3.1+ Articles of Incorporation of Registrant.
3.2+ Bylaws of Registrant.
4.1+ Specimen Common Stock Certificate of Registrant.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati regarding the legality of the
securities being issued.
9.1+ Voting Trust Agreement dated June 8, 1998 between Nancy Hood Karp, Richard A. Karp,
the Registrant and a depositary.
10.1+ Form of Indemnification Agreement entered into by Registrant with each of its
directors and executive officers.
10.2+ Form of Restricted Stock Purchase Agreement.
10.3+ 1989 Stock Option Plan and related agreements.
10.4+ UK Executive Share Option Scheme and related agreements.
10.5+ 1998 Stock Plan and related agreements.
10.6+ 1998 Employee Stock Purchase Plan and related agreements.
10.7+ Fiscal 1998 Officer and Key Employee Profit Sharing Plan.
10.8+ Lease for office space located at 160 Whisman Road, Mountain View, CA.
10.9+ Form of Software Support Agreement.
10.10+ Severance Agreement and Mutual Release of All Claims dated June 8, 1998 between
Nancy Hood Karp and Registrant.
10.11+ Consulting and Non-Competition Agreement dated June 9, 1998 between Nancy Hood Karp
and Registrant.
11.1 Calculation of Earnings per Common Share (contained in Note 1 of the Notes to
Financial Statements).
16.1+ Letter dated June 11, 1998 from Ireland San Filippo, LLP.
21.1+ Subsidiaries of the Registrant.
23.1 Consent of Wilson Sonsini Goodrich & Rosati (included in Exhibit 5.1).
23.2 Consent of PricewaterhouseCoopers LLP, Independent Accountants (see page II-6).
24.1+ Power of Attorney.
27.1+ Financial Data Schedule (Fiscal 1997).
27.2+ Financial Data Schedule (Six months ended March 31, 1998).
27.3 Financial Data Schedule (Nine months ended June 30, 1998).
</TABLE>
- ------------------------
+ Previously filed.
+ Confidential treatment has been requested for certain portions which have
been blacked out in the copy of the exhibit filed with the Securities and
Exchange Commission. The omitted information has been filed separately with
the Securities and Exchange Commission pursuant to the application for
confidential treatment.
<PAGE>
EXHIBIT 1.1
CATAPULT COMMUNICATIONS CORPORATION
3,352,500 SHARES(1)
COMMON STOCK
UNDERWRITING AGREEMENT
__________, 1998
HAMBRECHT & QUIST LLC
CIBC OPPENHEIMER CORP.
C.E. UNTERBERG, TOWBIN
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104
Ladies and Gentlemen:
Catapult Communications Corporation, a Nevada corporation (herein called
the Company), proposes to issue and sell 2,100,000 shares of its authorized
but unissued Common Stock, $0.001 par value (herein called the Common Stock),
and the stockholders of the Company named in Schedule II hereto (herein
collectively called the Selling Securityholders) propose to sell an aggregate
of 1,252,500 shares of Common Stock of the Company (said 3,352,500 shares of
Common Stock being herein called the Underwritten Stock). References herein
to the Company shall also include its predecessor California corporation,
where appropriate, prior to is reincorporation from California to Nevada.
Nancy H. Karp proposes to grant to the Underwriters (as hereinafter defined)
an option to purchase up to 502,875 additional shares of Common Stock (herein
called the Option Stock and with the Underwritten Stock herein collectively
called the Stock). The Common Stock is more fully described in the
Registration Statement and the Prospectus hereinafter mentioned.
The Company and the Selling Securityholders severally hereby confirm the
agreements made with respect to the purchase of the Stock by the several
underwriters, for whom you are acting, named in Schedule I hereto (herein
collectively called the Underwriters, which term shall also include any
underwriter purchasing Stock pursuant to Section 3(b) hereof). You represent
and warrant that you have been authorized by each of the other Underwriters
to enter into this Agreement on its behalf and to act for it in the manner
herein provided.
1. REGISTRATION STATEMENT. The Company has filed with the Securities
and Exchange Commission (herein called the Commission) a registration
statement on Form S-1 (No. 333-56627), including the related preliminary
prospectus, for the registration under the Securities Act of 1933, as amended
(herein called the Securities Act) of the Stock. Copies of such registration
statement and of each amendment thereto, if any, including the related
preliminary prospectus (meeting the requirements of Rule 430A of the rules
and regulations of the Commission) heretofore filed by the Company with the
Commission have been delivered to you.
The term Registration Statement as used in this agreement shall mean
such registration statement, including all exhibits and financial statements,
all information omitted therefrom in reliance upon Rule 430A and contained in
the Prospectus referred to below, in the form in which it became effective,
and any registration statement filed pursuant to Rule 462(b) of the rules and
regulations of the Commission with respect to the Stock (herein called a Rule
462(b) registration statement), and, in the event of any amendment thereto
after the effective date of such registration statement (herein called the
Effective Date), shall also mean (from and after the effectiveness of such
amendment) such registration
- ----------------
(1) Plus an option to purchase from a Selling Securityholder up to 502,875
additional shares to cover over-allotments.
1.
<PAGE>
statement as so amended (including any Rule 462(b) registration statement).
The term Prospectus as used in this Agreement shall mean the prospectus
relating to the Stock first filed with the Commission pursuant to Rule 424(b)
and Rule 430A (or if no such filing is required, as included in the
Registration Statement) and, in the event of any supplement or amendment to
such prospectus after the Effective Date, shall also mean (from and after the
filing with the Commission of such supplement or the effectiveness of such
amendment) such prospectus as so supplemented or amended. The term
Preliminary Prospectus as used in this Agreement shall mean each preliminary
prospectus included in such registration statement prior to the time it
becomes effective.
The Registration Statement has been declared effective under the
Securities Act, and no post-effective amendment to the Registration Statement
has been filed as of the date of this Agreement. The Company has caused to be
delivered to you copies of each Preliminary Prospectus and has consented to
the use of such copies for the purposes permitted by the Securities Act.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE PRINCIPAL
SELLING SECURITYHOLDERS.
(a) Each of the Company, Richard A. Karp and Nancy H. Karp
(collectively, the "Principal Selling Securityholders") hereby represents and
warrants as follows:
(i) Each of the Company and its subsidiaries has been
duly incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has full corporate
power and authority to own or lease its properties and conduct its business
as described in the Registration Statement and the Prospectus and as being
conducted, and is duly qualified as a foreign corporation and in good
standing in all jurisdictions in which the character of the property owned or
leased or the nature of the business transacted by it makes qualification
necessary (except where the failure to be so qualified would not have a
material adverse effect on the business, properties, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole).
(ii) Since the respective dates as of which information
is given in the Registration Statement and the Prospectus, there has not been
any materially adverse change in the business, properties, financial
condition or results of operations of the Company and its subsidiaries, taken
as a whole, whether or not arising from transactions in the ordinary course
of business, other than as set forth in the Registration Statement and the
Prospectus, and since such dates, except in the ordinary course of business,
neither the Company nor any of its subsidiaries has entered into any material
transaction not referred to in the Registration Statement and the Prospectus.
(iii) The Registration Statement and the Prospectus
comply, and on the Closing Date (as hereinafter defined) and any later date
on which Option Stock is to be purchased, the Prospectus will comply, in all
material respects, with the provisions of the Securities Act and the rules
and regulations of the Commission thereunder; on the Effective Date, the
Registration Statement did not contain any untrue statement of a material
fact and did not omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not misleading;
and, on the Effective Date the Prospectus did not and, on the Closing Date
and any later date on which Option Stock is to be purchased, will not contain
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; PROVIDED, HOWEVER,
that none of the representations and warranties in this subparagraph (iii)
shall apply to statements in, or omissions from, the Registration Statement
or the Prospectus made in reliance upon and in conformity with information
herein or otherwise furnished in writing to the Company by or on behalf of
the Underwriters for use in the Registration Statement or the Prospectus.
(iv) The Stock is duly and validly authorized, is (or, in
the case of shares of the Stock to be sold by the Company, will be, when
issued and sold to the Underwriters as provided herein) duly and validly
issued, fully paid and nonassessable and conforms to the description thereof
in the Prospectus. No further approval or authority of the stockholders or
the Board of Directors of the
2.
<PAGE>
Company will be required for the transfer and sale of the Stock to be sold by
the Selling Securityholders or the issuance and sale of the Stock as
contemplated herein.
(v) Prior to the Closing Date, the Stock will be
authorized for listing by the Nasdaq National Market upon official notice of
issuance.
(vi) There is not any pending or, to the best of the
Company's knowledge, threatened action, suit, claim or proceeding against the
Company, any of its subsidiaries or any of their respective officers or any
of their respective properties, assets or rights before any court, government
or governmental agency or body, domestic or foreign, having jurisdiction over
the Company or any of its subsidiaries or over their respective officers or
properties or otherwise which (i) could reasonably be expected to result in
any material adverse change in the condition (financial or otherwise),
earnings, operations, business or properties of the Company and its
subsidiaries taken as a whole, (ii) could reasonably be expected to prevent
consummation of the transactions contemplated hereby or (iii) is required to
be disclosed in the Registration Statement or Prospectus and is not so
disclosed.
(vii) The Company is not, and after giving effect to the
offering and sale of the Stock, will not be an "investment company" as such
term is defined in the Investment Company Act of 1940, as amended.
(b) Each of the Selling Securityholders, severally and not jointly,
hereby represents and warrants as follows:
(i) Such Selling Securityholder has good and marketable
title to all the shares of Stock to be sold by such Selling Securityholder
hereunder, free and clear of all liens, encumbrances, equities, security
interests and claims whatsoever, with full right and authority to deliver the
same hereunder, subject, in the case of each Selling Securityholder, to the
rights of ChaseMellon Shareholder Services, LLC, as Custodian (herein called
the Custodian), and that upon the delivery of and payment for such shares of
the Stock hereunder, the several Underwriters will receive good and
marketable title thereto, free and clear of all liens, encumbrances,
equities, security interests and claims whatsoever.
(ii) Certificates in negotiable form for the shares of
the Stock to be sold by such Selling Securityholder have been placed in
custody under a Custody Agreement for delivery under this Agreement with the
Custodian; such Selling Securityholder specifically agrees that the shares of
the Stock represented by the certificates so held in custody for such Selling
Securityholder are subject to the interests of the several Underwriters and
the Company, that the arrangements made by such Selling Securityholder for
such custody, including the Power of Attorney provided for in such Custody
Agreement, are to that extent irrevocable, and that the obligations of such
Selling Securityholder shall not be terminated by any act of such Selling
Securityholder or by operation of law, whether by the death or incapacity of
such Selling Securityholder (or, in the case of a Selling Securityholder that
is not an individual, the dissolution or liquidation of such Selling
Securityholder) or the occurrence of any other event; if any such death,
incapacity, dissolution, liquidation or other such event should occur before
the delivery of such shares of the Stock hereunder, certificates for such
shares of the Stock shall be delivered by the Custodian in accordance with
the terms and conditions of this Agreement as if such death, incapacity,
dissolution, liquidation or other event had not occurred, regardless of
whether the Custodian shall have received notice of such death, incapacity,
dissolution, liquidation or other event.
(iii) Each Selling Securityholder who is not a Principal
Selling Securityholder (the "Other Selling Securityholders") hereby
represents and warrants that such Selling Securityholder has reviewed the
Registration Statement and Prospectus and, although such Selling
Securityholder has not independently verified the accuracy or completeness of
all the information contained therein, nothing has come to the attention of
such Selling Securityholder that would lead such Selling Securityholder to
believe that on the Effective Date, the Registration Statement contained any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary in order to make the statements
therein not misleading; and, on the Effective Date the Prospectus contained
and, on the Closing Date, and any later date on which the Option Stock is to
be purchased, contains any untrue statement of a material fact or omitted or
omits to state any material fact
3.
<PAGE>
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
3. PURCHASE OF THE STOCK BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties and subject
to the terms and conditions herein set forth, the Company agrees to issue and
sell 2,100,000 shares of the Underwritten Stock to the several Underwriters,
each Selling Securityholder agrees to sell to the several Underwriters the
number of shares of the Underwritten Stock set forth in Schedule II opposite
the name of such Selling Securityholder, and each of the Underwriters agrees
to purchase from the Company and the Selling Securityholders the respective
aggregate number of shares of Underwritten Stock set forth opposite its name
in Schedule I. The price at which such shares of Underwritten Stock shall be
sold by the Company and the Selling Securityholders and purchased by the
several Underwriters shall be $___ per share. The obligation of each
Underwriter to the Company and each of the Selling Securityholders shall be
to purchase from the Company and the Selling Securityholders that number of
shares of the Underwritten Stock which represents the same proportion of the
total number of shares of the Underwritten Stock to be sold by each of the
Company and the Selling Securityholders pursuant to this Agreement as the
number of shares of the Underwritten Stock set forth opposite the name of
such Underwriter in Schedule I hereto represents of the total number of
shares of the Underwritten Stock to be purchased by all Underwriters pursuant
to this Agreement, as adjusted by you in such manner as you deem advisable to
avoid fractional shares. In making this Agreement, each Underwriter is
contracting severally and not jointly; except as provided in paragraphs (b)
and (c) of this Section 3, the agreement of each Underwriter is to purchase
only the respective number of shares of the Underwritten Stock specified in
Schedule I.
(b) If for any reason one or more of the Underwriters shall fail
or refuse (otherwise than for a reason sufficient to justify the termination
of this Agreement under the provisions of Section 8 or 9 hereof) to purchase
and pay for the number of shares of the Stock agreed to be purchased by such
Underwriter or Underwriters, the Company or the Selling Securityholders shall
immediately give notice thereof to you, and the non-defaulting Underwriters
shall have the right within 24 hours after the receipt by you of such notice
to purchase, or procure one or more other Underwriters to purchase, in such
proportions as may be agreed upon between you and such purchasing Underwriter
or Underwriters and upon the terms herein set forth, all or any part of the
shares of the Stock which such defaulting Underwriter or Underwriters agreed
to purchase. If the non-defaulting Underwriters fail so to make such
arrangements with respect to all such shares and portion, the number of
shares of the Stock which each non-defaulting Underwriter is otherwise
obligated to purchase under this Agreement shall be automatically increased
on a pro rata basis to absorb the remaining shares and portion which the
defaulting Underwriter or Underwriters agreed to purchase; PROVIDED, HOWEVER,
that the non-defaulting Underwriters shall not be obligated to purchase the
shares and portion which the defaulting Underwriter or Underwriters agreed to
purchase if the aggregate number of such shares of the Stock exceeds 10% of
the total number of shares of the Stock which all Underwriters agreed to
purchase hereunder. If the total number of shares of the Stock which the
defaulting Underwriter or Underwriters agreed to purchase shall not be
purchased or absorbed in accordance with the two preceding sentences, the
Company and the Selling Securityholders shall have the right, within 24 hours
next succeeding the 24-hour period above referred to, to make arrangements
with other underwriters or purchasers satisfactory to you for purchase of
such shares and portion on the terms herein set forth. In any such case,
either you or the Company and the Selling Securityholders shall have the
right to postpone the Closing Date determined as provided in Section 5 hereof
for not more than seven business days after the date originally fixed as the
Closing Date pursuant to said Section 5 in order that any necessary changes
in the Registration Statement, the Prospectus or any other documents or
arrangements may be made. If neither the non-defaulting Underwriters nor the
Company and the Selling Securityholders shall make arrangements within the
24-hour periods stated above for the purchase of all the shares of the Stock
which the defaulting Underwriter or Underwriters agreed to purchase
hereunder, this Agreement shall be terminated without further act or deed and
without any liability on the part of the Company or the Selling
Securityholders to any non-defaulting Underwriter and without any liability
on the part of any non-defaulting Underwriter to the Company or the Selling
Securityholders. Nothing in this paragraph (b), and no action taken
hereunder, shall relieve any defaulting Underwriter from liability in respect
of any default of such Underwriter under this Agreement.
4.
<PAGE>
(c) On the basis of the representations, warranties and covenants
herein contained, and subject to the terms and conditions herein set forth,
Nancy H. Karp grants an option to the several Underwriters to purchase,
severally and not jointly, up to 502,875 shares in the aggregate of the
Option Stock from Nancy H. Karp at the same price per share as the
Underwriters shall pay for the Underwritten Stock. Said option may be
exercised only to cover over-allotments in the sale of the Underwritten Stock
by the Underwriters and may be exercised in whole or in part at any time (but
not more than once) on or before the thirtieth day after the date of this
Agreement upon written or telegraphic notice by you to the Company setting
forth the aggregate number of shares of the Option Stock as to which the
several Underwriters are exercising the option. Delivery of certificates for
the shares of Option Stock, and payment therefor, shall be made as provided
in Section 5 hereof. The number of shares of the Option Stock to be
purchased by each Underwriter shall be the same percentage of the total
number of shares of the Option Stock to be purchased by the several
Underwriters as such Underwriter is purchasing of the Underwritten Stock, as
adjusted by you in such manner as you deem advisable to avoid fractional
shares.
4. OFFERING BY UNDERWRITERS.
(a) The terms of the initial public offering by the Underwriters
of the Stock to be purchased by them shall be as set forth in the Prospectus.
The Underwriters may from time to time change the public offering price
after the closing of the initial public offering and increase or decrease the
concessions and discounts to dealers as they may determine.
(b) The information set forth in the last paragraph on the front
cover page and under "Underwriting" in the Registration Statement, any
Preliminary Prospectus and the Prospectus relating to the Stock filed by the
Company (insofar as such information relates to the Underwriters) constitutes
the only information furnished by the Underwriters to the Company for
inclusion in the Registration Statement, any Preliminary Prospectus, and the
Prospectus, and you on behalf of the respective Underwriters represent and
warrant to the Company that the statements made therein are correct.
5. DELIVERY OF AND PAYMENT FOR THE STOCK.
(a) Delivery of certificates for the shares of the Underwritten
Stock and the Option Stock (if the option granted by Section 3(c) hereof
shall have been exercised not later than 7:00 A.M., San Francisco time, on
the date two business days preceding the Closing Date), and payment therefor,
shall be made at the office of Wilson, Sonsini, Goodrich & Rosati, 650 Page
Mill Road, Palo Alto, California, at 7:00 a.m., San Francisco time, on the
[fourth](2) business day after the date of this Agreement, or at such time on
such other day, not later than seven full business days after such [fourth]
business day, as shall be agreed upon in writing by the Company, the Selling
Securityholders and you. The date and hour of such delivery and payment
(which may be postponed as provided in Section 3(b) hereof) are herein called
the Closing Date.
(b) If the option granted by Section 3(c) hereof shall be
exercised after 7:00 a.m., San Francisco time, on the date two business days
preceding the Closing Date, delivery of certificates for the shares of Option
Stock, and payment therefor, shall be made at the office of Wilson Sonsini
Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California, at 7:00 a.m.,
San Francisco time, on the third business day after the exercise of such
option.
(c) Payment for the Stock purchased from the Company shall be made
to the Company or its order, and payment for the Stock purchased from the
Selling Securityholders shall be made to the Custodian, for the account of
the Selling Securityholders, in each case by one or more certified or
official bank check or checks in same day funds. Such payment shall be made
upon delivery of certificates for the Stock to you for the respective
accounts of the several Underwriters against receipt therefor signed by you.
Certificates for the Stock to be delivered to you shall be registered in such
name or names and shall be in such denominations as you may request at least
one business day before the
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(2) This assumes that the transaction will be priced after the close of
market and that T+4 will apply to the transaction. If the pricing took place
before or during market hours (which will generally not be the case), the
closing would be three business days after pricing.
5.
<PAGE>
Closing Date, in the case of Underwritten Stock, and at least one business
day prior to the purchase thereof, in the case of the Option Stock. Such
certificates will be made available to the Underwriters for inspection,
checking and packaging at the offices of Lewco Securities Corporation, 2
Broadway, New York, New York 10004 on the business day prior to the Closing
Date or, in the case of the Option Stock, by 3:00 p.m., New York time, on the
business day preceding the date of purchase.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
and the Selling Securityholders for shares to be purchased by any Underwriter
whose check shall not have been received by you on the Closing Date or any
later date on which Option Stock is purchased for the account of such
Underwriter. Any such payment by you shall not relieve such Underwriter from
any of its obligations hereunder.
6. FURTHER AGREEMENTS OF THE COMPANY AND THE SELLING SECURITYHOLDERS.
Each of the Company and the Selling Securityholders respectively covenants
and agrees as follows:
(a) The Company will (i) prepare and timely file with the
Commission under Rule 424(b) a Prospectus containing information previously
omitted at the time of effectiveness of the Registration Statement in
reliance on Rule 430A and (ii) not file any amendment to the Registration
Statement or supplement to the Prospectus of which you shall not previously
have been advised and furnished with a copy or to which you shall have
reasonably objected in writing or which is not in compliance with the
Securities Act or the rules and regulations of the Commission.
(b) The Company will promptly notify each Underwriter in the event
of (i) the request by the Commission for amendment of the Registration
Statement or for supplement to the Prospectus or for any additional
information, (ii) the issuance by the Commission of any stop order suspending
the effectiveness of the Registration Statement, (iii) the institution or
notice of intended institution of any action or proceeding for that purpose,
(iv) the receipt by the Company of any notification with respect to the
suspension of the qualification of the Stock for sale in any jurisdiction, or
(v) the receipt by it of notice of the initiation or threatening of any
proceeding for such purpose. The Company and the Selling Securityholders
will make every reasonable effort to prevent the issuance of such a stop
order and, if such an order shall at any time be issued, to obtain the
withdrawal thereof at the earliest possible moment.
(c) The Company will (i) on or before the Closing Date, deliver to
you a signed copy of the Registration Statement as originally filed and of
each amendment thereto filed prior to the time the Registration Statement
becomes effective and, promptly upon the filing thereof, a signed copy of
each post-effective amendment, if any, to the Registration Statement
(together with, in each case, all exhibits thereto unless previously
furnished to you) and will also deliver to you, for distribution to the
Underwriters, a sufficient number of additional conformed copies of each of
the foregoing (but without exhibits) so that one copy of each may be
distributed to each Underwriter, (ii) as promptly as possible deliver to you
and send to the several Underwriters, at such office or offices as you may
designate, as many copies of the Prospectus as you may reasonably request,
and (iii) thereafter from time to time during the period in which a
prospectus is required by law to be delivered by an Underwriter or dealer,
likewise send to the Underwriters as many additional copies of the Prospectus
and as many copies of any supplement to the Prospectus and of any amended
prospectus, filed by the Company with the Commission, as you may reasonably
request for the purposes contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer any event
relating to or affecting the Company, or of which the Company shall be
advised in writing by you, shall occur as a result of which it is necessary,
in the opinion of counsel for the Company or of counsel for the Underwriters,
to supplement or amend the Prospectus in order to make the Prospectus not
misleading in the light of the circumstances existing at the time it is
delivered to a purchaser of the Stock, the Company will forthwith prepare and
file with the Commission a supplement to the Prospectus or an amended
prospectus so that the Prospectus as so supplemented or amended will not
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in the light of the
circumstances existing at the time such Prospectus is delivered to such
purchaser, not misleading. If, after the initial public offering of the
Stock by the Underwriters and during such period, the Underwriters shall
propose to vary
6.
<PAGE>
the terms of offering thereof by reason of changes in general market
conditions or otherwise, you will advise the Company in writing of the
proposed variation, and, if in the opinion either of counsel for the Company
or of counsel for the Underwriters such proposed variation requires that the
Prospectus be supplemented or amended, the Company will forthwith prepare and
file with the Commission a supplement to the Prospectus or an amended
prospectus setting forth such variation. The Company authorizes the
Underwriters and all dealers to whom any of the Stock may be sold by the
several Underwriters to use the Prospectus, as from time to time amended or
supplemented, in connection with the sale of the Stock in accordance with the
applicable provisions of the Securities Act and the applicable rules and
regulations thereunder for such period.
(e) Prior to the filing thereof with the Commission, the Company
will submit to you, for your information, a copy of any post-effective
amendment to the Registration Statement and any supplement to the Prospectus
or any amended prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by you, in
the qualification of the Stock for offer and sale under the securities or
blue sky laws of such jurisdictions as you may designate and, during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, in keeping such qualifications in good standing under
said securities or blue sky laws; PROVIDED, HOWEVER, that the Company shall
not be obligated to file any general consent to service of process or to
qualify as a foreign corporation in any jurisdiction in which it is not so
qualified. The Company will, from time to time, prepare and file such
statements, reports, and other documents as are or may be required to
continue such qualifications in effect for so long a period as you may
reasonably request for distribution of the Stock.
(g) During a period of five years commencing with the date hereof,
the Company will furnish to you, and to each Underwriter who may so request
in writing, copies of all periodic and special reports furnished to
stockholders of the Company and of all information, documents and reports
filed with the Commission.
(h) Not later than the 45th day following the end of the fiscal
quarter first occurring after the first anniversary of the Effective Date,
the Company will make generally available to its security holders an earnings
statement in accordance with Section 11(a) of the Securities Act and Rule 158
thereunder.
(i) The Company agrees to pay all costs and expenses incident to
the performance of their obligations under this Agreement, including all
costs and expenses incident to (i) the preparation, printing and filing with
the Commission and the National Association of Securities Dealers, Inc.
("NASD") of the Registration Statement, any Preliminary Prospectus and the
Prospectus (excluding fees of counsel for the Underwriters incurred in
connection with the preparation and printing thereof and the filing thereof
with the Commission), (ii) the furnishing to the Underwriters of copies of
any Preliminary Prospectus and of the several documents required by paragraph
(c) of this Section 6 to be so furnished, (iii) the printing of this
Agreement and related documents delivered to the Underwriters, (iv) the
preparation, printing and filing of all supplements and amendments to the
Prospectus referred to in paragraph (d) of this Section 6, (v) the furnishing
to you and the Underwriters of the reports and information referred to in
paragraph (g) of this Section 6 and (vi) the printing and issuance of stock
certificates, including the transfer agent's fees. The Selling
Securityholders will pay any transfer taxes incident to the transfer to the
Underwriters of the shares the Stock being sold by the Selling
Securityholders.
(j) The Company agrees to reimburse you, for the account of the
several Underwriters, for blue sky fees and related disbursements (including
counsel fees and disbursements and cost of printing memoranda for the
Underwriters) paid by or for the account of the Underwriters or their counsel
in qualifying the Stock under state securities or blue sky laws and in the
review of the offering by the NASD.
(k) The provisions of paragraphs (i) and (j) of this
Section are intended to relieve the Underwriters from the payment of the
expenses and costs which the Company and the Selling
7.
<PAGE>
Securityholders hereby agree to pay and shall not affect any agreement which
the Company and the Selling Securityholders may make, or may have made, for
the sharing of any such expenses and costs.
(l) The Company and each of the Selling Securityholders hereby
agrees that, without the prior written consent of Hambrecht & Quist LLC on
behalf of the Underwriters, the Company or such Selling Securityholder, as
the case may be, will not, for a period of 180 days following the
commencement of the public offering of the Stock by the Underwriters,
directly or indirectly, (i) sell, offer, contract to sell, make any short
sale, pledge, sell any option or contract to purchase, purchase any option or
contract to sell, grant any option, right or warrant to purchase or otherwise
transfer or dispose of any shares of Common Stock or any securities
convertible into or exchangeable or exercisable for or any rights to purchase
or acquire Common Stock or (ii) enter into any swap or other agreement that
transfers, in whole or in part, any of the economic consequences or ownership
of Common Stock, whether any such transaction described in clause (i) or (ii)
above is to be settled by delivery of Common Stock or such other securities,
in cash or otherwise. The foregoing sentence shall not apply to (A) the
Stock to be sold to the Underwriters pursuant to this Agreement, (B) shares
of Common Stock issued by the Company upon the exercise of options granted
under the stock option plans of the Company (the "Option Plans"), all as
described in footnote (1) to the table under the caption "Capitalization" in
the Preliminary Prospectus, and (C) options to purchase Common Stock granted
under the Option Plans.
(m) The Company agrees to use its best efforts to cause all
directors who are stockholders of the Company, officers, and stockholders to
agree that, without the prior written consent of Hambrecht & Quist LLC on
behalf of the Underwriters, such person or entity will not, for a period of
180 days following the commencement of the public offering of the Stock by
the Underwriters, directly or indirectly, (i) sell, offer, contract to sell,
make any short sale, pledge, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant
to purchase or otherwise transfer or dispose of any shares of Common Stock or
any securities convertible into or exchangeable or exercisable for or any
rights to purchase or acquire Common Stock or (ii) enter into any swap or
other agreement that transfers, in whole or in part, any of the economic
consequences or ownership of Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise (except, as to one
stockholder, as otherwise set forth in that certain letter agreement, dated
June 19, 1998, from a stockholder of the Company to you (the "Stockholder
Letter").
(n) If at any time during the 25-day period after the Registration
Statement becomes effective any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price for the Stock has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after
written notice from you advising the Company to the effect set forth above,
forthwith prepare, consult with you concerning the substance of, and
disseminate a press release or other public statement, reasonably
satisfactory to you, responding to or commenting on such rumor, publication
or event.
7. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company and each of the Principal Selling Securityholders
jointly and severally agree, and each Other Selling Securityholder severally
agrees, to indemnify and hold harmless each Underwriter and each person
(including each partner or officer thereof) who controls any Underwriter
within the meaning of Section 15 of the Securities Act from and against any
and all losses, claims, damages or liabilities, joint or several, to which
such indemnified parties or any of them may become subject under the
Securities Act, the Securities Exchange Act of 1934, as amended (herein
called the Exchange Act), or the common law or otherwise, and the Company and
the Selling Securityholders jointly and severally agree to reimburse each
such Underwriter and controlling person for any legal or other expenses
(including, except as otherwise hereinafter provided, reasonable fees and
disbursements of counsel) incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties,
in each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
8.
<PAGE>
statement) or any post-effective amendment thereto (including any Rule 462(b)
registration statement), or the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, or (ii) any untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus
or the Prospectus (as amended or as supplemented if the Company shall have
filed with the Commission any amendment thereof or supplement thereto) or the
omission or alleged omission to state therein a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading; PROVIDED, HOWEVER, that (1) the
indemnity agreements of the Company and the Selling Securityholders contained
in this paragraph (a) shall not apply to any such losses, claims, damages,
liabilities or expenses if such statement or omission was made in reliance
upon and in conformity with information furnished as herein stated or
otherwise furnished in writing to the Company by or on behalf of any
Underwriter for use in any Preliminary Prospectus or the Registration
Statement or the Prospectus or any such amendment thereof or supplement
thereto, and (2) the indemnity agreement contained in this paragraph (a) with
respect to any Preliminary Prospectus shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages,
liabilities or expenses purchased the Stock which is the subject thereof (or
to the benefit of any person controlling such Underwriter) if at or prior to
the written confirmation of the sale of such Stock a copy of the Prospectus
(or the Prospectus as amended or supplemented) was not sent or delivered to
such person and the untrue statement or omission of a material fact contained
in such Preliminary Prospectus was corrected in the Prospectus (or the
Prospectus as amended or supplemented) unless the failure is the result of
noncompliance by the Company with paragraph (c) of Section 6 hereof. Each
Other Selling Securityholder shall be liable under this paragraph only with
respect to (A) any untrue statement or omission or alleged untrue statement
or omission based on information pertaining to such Other Selling
Securityholder furnished by or on behalf of such Other Selling Securityholder
expressly for use in any Preliminary Prospectus or the Registration Statement
or the Prospectus or any such amendment thereof or supplement thereto or (B)
facts that would constitute a breach of any representation or warranty of
such Other Selling Securityholder set forth in Sections 2(b) or 2(c) hereof.
The indemnity agreements of the Company and the Selling Securityholders
contained in this paragraph (a) and the representations and warranties of the
Company and the Selling Securityholders contained in Section 2 hereof shall
remain operative and in full force and effect regardless of any investigation
made by or on behalf of any indemnified party and shall survive the delivery
of and payment for the Stock.
(b) Each Underwriter severally agrees to indemnify and hold
harmless the Company, each of its officers who signs the Registration
Statement on his own behalf or pursuant to a power of attorney, each of its
directors, each other Underwriter and each person (including each partner or
officer thereof) who controls the Company or any such other Underwriter
within the meaning of Section 15 of the Securities Act, and the Selling
Securityholders from and against any and all losses, claims, damages or
liabilities, joint or several, to which such indemnified parties or any of
them may become subject under the Securities Act, the Exchange Act, or the
common law or otherwise and to reimburse each of them for any legal or other
expenses (including, except as otherwise hereinafter provided, reasonable
fees and disbursements of counsel) incurred by the respective indemnified
parties in connection with defending against any such losses, claims, damages
or liabilities or in connection with any investigation or inquiry of, or
other proceeding which may be brought against, the respective indemnified
parties, in each case arising out of or based upon (i) any untrue statement
or alleged untrue statement of a material fact contained in the Registration
Statement (including the Prospectus as part thereof and any Rule 462(b)
registration statement) or any post-effective amendment thereto (including
any Rule 462(b) registration statement) or the omission or alleged omission
to state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading or (ii) any untrue statement or
alleged untrue statement of a material fact contained in the Prospectus (as
amended or as supplemented if the Company shall have filed with the
Commission any amendment thereof or supplement thereto) or the omission or
alleged omission to state therein a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading, if such statement or omission was made in reliance
upon and in conformity with information furnished as herein stated or
otherwise furnished in writing to the Company by or on behalf of such
indemnifying Underwriter for use in the Registration Statement or the
Prospectus or any such amendment thereof or supplement thereto. The
indemnity agreement of each Underwriter contained in this paragraph (b) shall
remain operative and in full force and effect regardless of any investigation
made by or on behalf of any indemnified party and shall survive the delivery
of and payment for the Stock.
9.
<PAGE>
(c) Each party indemnified under the provision of paragraphs (a)
and (b) of this Section 7 agrees that, upon the service of a summons or other
initial legal process upon it in any action or suit instituted against it or
upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against, it in respect of which
indemnity may be sought on account of any indemnity agreement contained in
such paragraphs, it will promptly give written notice (herein called the
Notice) of such service or notification to the party or parties from whom
indemnification may be sought hereunder. No indemnification provided for in
such paragraphs shall be available to any party who shall fail so to give the
Notice if the party to whom such Notice was not given was unaware of the
action, suit, investigation, inquiry or proceeding to which the Notice would
have related and was prejudiced by the failure to give the Notice, but the
omission so to notify such indemnifying party or parties of any such service
or notification shall not relieve such indemnifying party or parties from any
liability which it or they may have to the indemnified party for contribution
or otherwise than on account of such indemnity agreement. Any indemnifying
party shall be entitled at its own expense to participate in the defense of
any action, suit or proceeding against, or investigation or inquiry of, an
indemnified party. Any indemnifying party shall be entitled, if it so elects
within a reasonable time after receipt of the Notice by giving written notice
(herein called the Notice of Defense) to the indemnified party, to assume
(alone or in conjunction with any other indemnifying party or parties) the
entire defense of such action, suit, investigation, inquiry or proceeding, in
which event such defense shall be conducted, at the expense of the
indemnifying party or parties, by counsel chosen by such indemnifying party
or parties and reasonably satisfactory to the indemnified party or parties;
PROVIDED, HOWEVER, that (i) if the indemnified party or parties reasonably
determine that there may be a conflict between the positions of the
indemnifying party or parties and of the indemnified party or parties in
conducting the defense of such action, suit, investigation, inquiry or
proceeding or that there may be legal defenses available to such indemnified
party or parties different from or in addition to those available to the
indemnifying party or parties, then counsel for the indemnified party or
parties shall be entitled to conduct the defense to the extent reasonably
determined by such counsel to be necessary to protect the interests of the
indemnified party or parties and (ii) in any event, the indemnified party or
parties shall be entitled to have counsel chosen by such indemnified party or
parties participate in, but not conduct, the defense. If, within a
reasonable time after receipt of the Notice, an indemnifying party gives a
Notice of Defense and the counsel chosen by the indemnifying party or parties
is reasonably satisfactory to the indemnified party or parties, the
indemnifying party or parties will not be liable under paragraphs (a) through
(c) of this Section 7 for any legal or other expenses subsequently incurred
by the indemnified party or parties in connection with the defense of the
action, suit, investigation, inquiry or proceeding, except that (A) the
indemnifying party or parties shall bear the legal and other expenses
incurred in connection with the conduct of the defense as referred to in
clause (i) of the proviso to the preceding sentence and (B) the indemnifying
party or parties shall bear such other expenses as it or they have authorized
to be incurred by the indemnified party or parties. If, within a reasonable
time after receipt of the Notice, no Notice of Defense has been given, the
indemnifying party or parties shall be responsible for any legal or other
expenses incurred by the indemnified party or parties in connection with the
defense of the action, suit, investigation, inquiry or proceeding.
(d) If the indemnification provided for in this Section 7 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) of this Section 7, then each indemnifying party, in lieu
of indemnifying such indemnified party, shall contribute to the amount paid
or payable by such indemnified party as a result of the losses, claims,
damages or liabilities referred to in paragraph (a) or (b) of this Section 7
(i) in such proportion as is appropriate to reflect the relative benefits
received by each indemnifying party from the offering of the Stock or (ii) if
the allocation provided by clause (i) above is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of each
indemnifying party in connection with the statements or omissions that
resulted in such losses, claims, damages or liabilities, or actions in
respect thereof, as well as any other relevant equitable considerations. The
relative benefits received by the Company and the Selling Securityholders on
the one hand and the Underwriters on the other shall be deemed to be in the
same respective proportions as the total net proceeds from the offering of
the Stock received by the Company and the Selling Securityholders and the
total underwriting discount received by the Underwriters, as set forth in the
table on the cover page of the Prospectus, bear to the aggregate public
offering price of the Stock. Relative fault shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by each indemnifying party and
10.
<PAGE>
the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission.
The parties agree that it would not be just and equitable if
contributions pursuant to this paragraph (d) were to be determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into
account the equitable considerations referred to in the first sentence of
this paragraph (d). The amount paid by an indemnified party as a result of
the losses, claims, damages or liabilities, or actions in respect thereof,
referred to in the first sentence of this paragraph (d) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigation, preparing to defend or defending
against any action or claim which is the subject of this paragraph (d).
Notwithstanding the provisions of this paragraph (d), no Underwriter shall be
required to contribute any amount in excess of the underwriting discount
applicable to the Stock purchased by such Underwriter. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations
in this paragraph (d) to contribute are several in proportion to their
respective underwriting obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted
against it in respect of which contribution may be sought, it will promptly
give written notice of such service to the party or parties from whom
contribution may be sought, but the omission so to notify such party or
parties of any such service shall not relieve the party from whom
contribution may be sought from any obligation it may have hereunder or
otherwise (except as specifically provided in paragraph (c) of this Section
7).
(e) Neither the Company nor the Selling Securityholders will,
without the prior written consent of each Underwriter, settle or compromise
or consent to the entry of any judgment in any pending or threatened claim,
action, suit or proceeding in respect of which indemnification may be sought
hereunder (whether or not such Underwriter or any person who controls such
Underwriter within the meaning of Section 15 of the Securities Act or Section
20 of the Exchange Act is a party to such claim, action, suit or proceeding)
unless such settlement, compromise or consent includes an unconditional
release of such Underwriter and each such controlling person from all
liability arising out of such claim, action, suit or proceeding.
(f) The terms "jointly and severally" and "severally" in the first
sentence of paragraph (a) of this Section 7 mean that the respective
obligations of the Company and each of the Principal Selling Securityholders
are joint and several with the obligations of each other and each Other
Selling Securityholder, but that the obligation of each of the Other Selling
Securityholders is several and not joint with the obligations of the Company
and other Selling Securityholders. The liability of each Selling
Securityholder under this Agreement, including the indemnity, contribution
and reimbursement provisions contained in Section 7 and Section 11 hereof,
shall be limited to an amount equal to the gross proceeds from the sale of
the Stock sold by such Selling Securityholder to the Underwriters, less the
amount of the underwriting discount applicable to such Stock. The Company
and the Selling Stockholders may agree, as among themselves and without
limiting the rights of the Underwriters under this Agreement, as to the
respective amounts of such liability for which each shall be responsible.
8. TERMINATION. This Agreement may be terminated by you at any time
prior to the Closing Date by giving written notice to the Company and the
Selling Securityholders if after the date of this Agreement trading in the
Common Stock shall have been suspended, or if there shall have occurred (i)
the engagement in hostilities or an escalation of major hostilities by the
United States or the declaration of war or a national emergency by the United
States on or after the date hereof, (ii) any outbreak of hostilities or other
national or international calamity or crisis or change in economic or
political conditions if the effect of such outbreak, calamity, crisis or
change in economic or political conditions in the financial markets of the
United States would, in the Underwriters' reasonable judgment, make the
offering or delivery of the Stock impracticable, (iii) suspension of trading
in securities generally or a material adverse decline in value of securities
generally on the New York Stock Exchange, the American Stock Exchange, or The
Nasdaq Stock Market, or limitations on prices (other than limitations on
hours or numbers of days of trading) for securities on either such exchange
or system,
11.
<PAGE>
(iv) the enactment, publication, decree or other promulgation of any federal
or state statute, regulation, rule or order of, or commencement of any
proceeding or investigation by, any court, legislative body, agency or other
governmental authority which in the Underwriters' reasonable opinion
materially and adversely affects or will materially or adversely affect the
business or operations of the Company, (v) declaration of a banking
moratorium by either federal or New York State authorities or (vi) the taking
of any action by any federal, state or local government or agency in respect
of its monetary or fiscal affairs which in the Underwriters' reasonable
opinion has a material adverse effect on the securities markets in the United
States. If this Agreement shall be terminated pursuant to this Section 8,
there shall be no liability of the Company or the Selling Securityholders to
the Underwriters and no liability of the Underwriters to the Company or the
Selling Securityholders; PROVIDED, HOWEVER, that in the event of any such
termination the Company and the Selling Securityholders agree to indemnify
and hold harmless the Underwriters from all costs or expenses incident to the
performance of the obligations of the Company and the Selling Securityholders
under this Agreement, including all costs and expenses referred to in
paragraphs (i) and (j) of Section 6 hereof.
9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Stock shall be subject to
the performance by the Company and by the Selling Securityholders of all
their respective obligations to be performed hereunder at or prior to the
Closing Date or any later date on which Option Stock is to be purchased, as
the case may be, and to the following further conditions:
(a) The Registration Statement shall have become effective; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the Stock
hereunder and the validity and form of the certificates representing the
Stock, all corporate proceedings and other legal matters incident to the
foregoing, and the form of the Registration Statement and of the Prospectus
(except as to the financial statements contained therein), shall have been
approved at or prior to the Closing Date by Cooley Godward LLP, counsel for
the Underwriters.
(c) You shall have received from Wilson Sonsini Goodrich & Rosati,
counsel for the Company and the Selling Securityholders, an opinion,
addressed to the Underwriters and dated the Closing Date, covering the
matters set forth in Annex A hereto, and if Option Stock is purchased at any
date after the Closing Date, additional opinions from each such counsel,
addressed to the Underwriters and dated such later date, confirming that the
statements expressed as of the Closing Date in such opinions remain valid as
of such later date.
(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true
and correct and neither the Registration Statement nor the Prospectus omitted
to state any material fact required to be stated therein or necessary in
order to make the statements therein, respectively, not misleading, (ii)
since the Effective Date, no event has occurred which should have been set
forth in a supplement or amendment to the Prospectus which has not been set
forth in such a supplement or amendment, (iii) since the respective dates as
of which information is given in the Registration Statement in the form in
which it originally became effective and the Prospectus contained therein,
there has not been any material adverse change or any development involving a
prospective material adverse change in or affecting the business, properties,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole, whether or not arising from transactions in
the ordinary course of business, and, since such dates, except in the
ordinary course of business, neither the Company nor any of its subsidiaries
has entered into any material transaction not referred to in the Registration
Statement in the form in which it originally became effective and the
Prospectus contained therein, (iv) neither the Company nor any of its
subsidiaries has any material contingent obligations which are not disclosed
in the Registration Statement and the Prospectus, (v) there are not any
pending or known threatened legal proceedings to which the Company or any of
its subsidiaries is a party or of which property of the Company or any of its
subsidiaries is or may be subject which are material and which are not
disclosed in the Registration Statement and the Prospectus, (vi) there are
not any franchises, contracts, leases or other documents which are required
to be filed as exhibits to the Registration Statement which have not been
filed as required, (vii) the
12.
<PAGE>
representations and warranties of the Company herein are true and correct in
all material respects as of the Closing Date or any later date on which
Option Stock is to be purchased, as the case may be, and (viii) there has not
been any material change in the market for securities in general or in
political, financial or economic conditions from those reasonably foreseeable
as to render it impracticable in your reasonable judgment to make a public
offering of the Stock, or a material adverse change in market levels for
securities in general (or those of companies in particular) or financial or
economic conditions which render it inadvisable to proceed.
(e) You shall have received on the Closing Date and on any later
date on which Option Stock is purchased a certificate, dated the Closing Date
or such later date, as the case may be, and signed by the President and the
Chief Financial Officer of the Company, stating that the respective signers
of said certificate have carefully examined the Registration Statement in the
form in which it originally became effective and the Prospectus contained
therein and any supplements or amendments thereto, and that the statements
included in clauses (i) through (vii) of paragraph (d) of this Section 9 are
true and correct.
(f) You shall have received from PricewaterhouseCoopers LLP, a
letter or letters, addressed to the Underwriters and dated the Closing Date
and any later date on which Option Stock is purchased, confirming that they
are independent public accountants with respect to the Company within the
meaning of the Securities Act and the applicable published rules and
regulations thereunder and based upon the procedures described in their
letter delivered to you concurrently with the execution of this Agreement
(herein called the Original Letter), but carried out to a date not more than
three business days prior to the Closing Date or such later date on which
Option Stock is purchased (i) confirming, to the extent true, that the
statements and conclusions set forth in the Original Letter are accurate as
of the Closing Date or such later date, as the case may be, and (ii) setting
forth any revisions and additions to the statements and conclusions set forth
in the Original Letter which are necessary to reflect any changes in the
facts described in the Original Letter since the date of the Original Letter
or to reflect the availability of more recent financial statements, data or
information. The letters shall not disclose any change, or any development
involving a prospective change, in or affecting the business or properties of
the Company or any of its subsidiaries which, in your sole judgment, makes it
impractical or inadvisable to proceed with the public offering of the Stock
or the purchase of the Option Stock as contemplated by the Prospectus.
(g) You shall have received from PricewaterhouseCoopers LLP a letter
stating that their review of the Company's system of internal accounting
controls, to the extent they deemed necessary in establishing the scope of
their examination of the Company's financial statements as at June 30, 1998,
did not disclose any weakness in internal controls that they considered to be
material weaknesses.
(h) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several
jurisdictions, or other evidence satisfactory to you, of the qualification
referred to in paragraph (f) of Section 6 hereof.
(i) Prior to the Closing Date, the Stock shall have been duly
authorized for listing by the Nasdaq National Market upon official notice of
issuance.
(j) On or prior to the Closing Date, you shall have received from
all directors that are securityholders of the Company, officers, and
securityholders agreements, in form reasonably satisfactory to Hambrecht &
Quist LLC, stating that without the prior written consent of Hambrecht &
Quist LLC on behalf of the Underwriters, such person or entity will not, for
a period of 180 days following the commencement of the public offering of the
Stock by the Underwriters, directly or indirectly, (i) sell, offer, contract
to sell, make any short sale, pledge, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of any shares of Common
Stock or any securities convertible into or exchangeable or exercisable for
or any rights to purchase or acquire Common Stock or (ii) enter into any swap
or other agreement that transfers, in whole or in part, any of the economic
consequences or ownership of Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise (except, as to one
stockholder, as otherwise set forth in the Stockholder Letter).
13.
<PAGE>
All the agreements, opinions, certificates and letters mentioned above
or elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Cooley Godward LLP, counsel for the Underwriters,
shall be satisfied that they comply in form and scope.
In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company and to the Selling Securityholders. Any such termination shall be
without liability of the Company or the Selling Securityholders to the
Underwriters and without liability of the Underwriters to the Company or the
Selling Securityholders; PROVIDED, HOWEVER, that (i) in the event of such
termination, the Company and the Selling Securityholders agree to indemnify
and hold harmless the Underwriters from all costs or expenses incident to the
performance of the obligations of the Company and the Selling Securityholders
under this Agreement, including all costs and expenses referred to in
paragraphs (i) and (j) of Section 6 hereof, and (ii) if this Agreement is
terminated by you because of any refusal, inability or failure on the part of
the Company or the Selling Securityholders to perform any agreement herein,
to fulfill any of the conditions herein, or to comply with any provision
hereof other than by reason of a default by any of the Underwriters, the
Company will reimburse the Underwriters severally upon demand for all
out-of-pocket expenses (including reasonable fees and disbursements of
counsel) that shall have been incurred by them in connection with the
transactions contemplated hereby.
10. CONDITIONS OF THE OBLIGATION OF THE COMPANY AND THE SELLING
SECURITYHOLDERS. The obligation of the Company and the Selling
Securityholders to deliver the Stock shall be subject to the conditions that
(a) the Registration Statement shall have become effective and (b) no stop
order suspending the effectiveness thereof shall be in effect and no
proceedings therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 10 shall not
be fulfilled, this Agreement may be terminated by the Company and the Selling
Securityholders by giving notice to you. Any such termination shall be
without liability of the Company and the Selling Securityholders to the
Underwriters and without liability of the Underwriters to the Company or the
Selling Securityholders; PROVIDED, HOWEVER, that in the event of any such
termination the Company and the Selling Securityholders jointly and severally
agree to indemnify and hold harmless the Underwriters from all costs or
expenses incident to the performance of the obligations of the Company and
the Selling Securityholders under this Agreement, including all costs and
expenses referred to in paragraphs (i) and (j) of Section 6 hereof.
11. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to their other
obligations under Section 7 of this Agreement, the Company and the Selling
Securityholders hereby jointly and severally agree to reimburse on a
quarterly basis the Underwriters for all reasonable legal and other expenses
incurred in connection with investigating or defending any claim, action,
investigation, inquiry or other proceeding arising out of or based upon any
statement or omission, or any alleged statement or omission, described in
paragraph (a) of Section 7 of this Agreement, notwithstanding the absence of
a judicial determination as to the propriety and enforceability of the
obligations under this Section 11 and the possibility that such payments
might later be held to be improper; PROVIDED, HOWEVER, that (i) to the extent
any such payment is ultimately held to be improper, the persons receiving
such payments shall promptly refund them and (ii) such persons shall provide
to the Company, upon request, reasonable assurances of their ability to
effect any refund, when and if due.
12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall
inure to the benefit of the Company, the Selling Securityholders and the
several Underwriters and, with respect to the provisions of Section 7 hereof,
the several parties (in addition to the Company, the Selling Securityholders
and the several Underwriters) indemnified under the provisions of said
Section 7, and their respective personal representatives, successors and
assigns. Nothing in this Agreement is intended or shall be construed to give
to any other person, firm or corporation any legal or equitable remedy or
claim under or in respect of this Agreement or any provision herein
contained. The term "successors and assigns" as herein used shall not
include any purchaser, as such purchaser, of any of the Stock from any of the
several Underwriters.
13. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters,
shall be mailed, telegraphed or delivered to
14.
<PAGE>
Hambrecht & Quist LLC, One Bush Street, San Francisco, California 94104; and
if to the Company, shall be mailed, telegraphed or delivered to it at its
office at 160 South Whisman Road, Mountain View, California 94041, Attention:
Dr. Richard A. Karp; and if to the Selling Securityholders, shall be mailed,
telegraphed or delivered to the Selling Securityholders in care of Dr.
Richard A. Karp at Catapult Communications Corporation, 160 South Whisman
Road, Mountain View, California 94041. All notices given by telegraph shall
be promptly confirmed by letter.
14. MISCELLANEOUS. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties
and covenants in this Agreement shall remain in full force and effect
regardless of (a) any termination of this Agreement, (b) any investigation
made by or on behalf of any Underwriter or controlling person thereof, or by
or on behalf of the Company or the Selling Securityholders or their
respective directors or officers, and (c) delivery and payment for the Stock
under this Agreement; PROVIDED, HOWEVER, that if this Agreement is terminated
prior to the Closing Date, the provisions of paragraphs (l), (m) and (n) of
Section 6 hereof shall be of no further force or effect.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of California.
[The remainder of this page is intentionally left blank.]
15.
<PAGE>
Please sign and return to the Company and to the Selling Securityholders
in care of the Company the enclosed duplicates of this letter, whereupon this
letter will become a binding agreement among the Company, the Selling
Securityholders and the several Underwriters in accordance with its terms.
Very truly yours,
CATAPULT COMMUNICATIONS CORPORATION
By________________________________________
Dr. Richard A. Karp
President and Chief Executive Officer
SELLING SECURITYHOLDERS:
DR. RICHARD A. KARP
__________________________________________
Dr. Richard A. Karp
By________________________________________
[Attorney-in-Fact]
NANCY H. KARP
__________________________________________
Nancy H. Karp
By________________________________________
[Attorney-in-Fact]
The foregoing Agreement is
hereby confirmed
And accepted as of the date
first above written.
HAMBRECHT & QUIST LLC
CIBC OPPENHEIMER CORP.
C.E. UNTERBERG, TOWBIN
By Hambrecht & Quist LLC
KATHERINE F. DOLLARD
By _______________________________
Managing Director
__________________________________________
Acting on behalf of the several Katherine F. Dollard
Underwriters, Including themselves,
named in Schedule I hereto.
By________________________________________
[Attorney-in-Fact]
16.
<PAGE>
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF SHARES TO
UNDERWRITERS BE PURCHASED
<S> <C>
Hambrecht & Quist LLC...................................
CIBC Oppenheimer Corp. .................................
C.E. Unterberg, Towbin .................................
---------
Total .................................................. 3,352,500
---------
---------
</TABLE>
<PAGE>
SCHEDULE II
SELLING SECURITYHOLDERS
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME OF SELLING SECURITYHOLDERS TO BE SOLD
<S> <C>
Dr. Richard A. Karp .......................................
Nancy H. Karp ............................................. *
Katherine F. Dollard ......................................
---------
Total ..................................................... 1,252,500
---------
---------
</TABLE>
- -----------------------
* Nancy H. Karp is granting to the Underwriters an option to purchase up to
502,875 additional shares of Common Stock.
<PAGE>
ANNEX A
MATTERS TO BE COVERED IN THE OPINION OF WILSON SONSINI GOODRICH & ROSATI, P.C.
COUNSEL FOR THE COMPANY
AND THE SELLING SECURITYHOLDERS
(i) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under
the laws of the jurisdiction of its incorporation, is duly qualified as a
foreign corporation and in good standing in each state of the United States
of America in which its ownership or leasing of property requires such
qualification (except where the failure to be so qualified would not have a
material adverse effect on the business, properties, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole),
and has full corporate power and authority to own or lease its properties and
conduct its business as described in the Registration Statement; all the
issued and outstanding capital stock of each of the subsidiaries of the
Company has been duly authorized and validly issued and is fully paid and
nonassessable, and is owned by the Company free and clear of all liens,
encumbrances and security interests, and to the best of such counsel's
knowledge, no options, warrants or other rights to purchase, agreements or
other obligations to issue or other rights to convert any obligations into
shares of capital stock or ownership interests in such subsidiaries are
outstanding;
(ii) the authorized capital stock of the Company consists of
_______________ shares of _______________ Stock, of which there are
outstanding _______________ shares, and _______________ shares of Common
Stock, $_______________ par value, of which there are outstanding
_______________shares (including the Underwritten Stock plus the number of
shares of Option Stock issued on the date hereof); proper corporate
proceedings have been taken validly to authorize such authorized capital
stock; all of the outstanding shares of such capital stock (including the
Underwritten Stock and the shares of Option Stock issued, if any) have been
duly and validly issued and are fully paid and nonassessable; any Option
Stock purchased after the Closing Date, when issued and delivered to and paid
for by the Underwriters as provided in the Underwriting Agreement, will have
been duly and validly issued and be fully paid and nonassessable; and no
preemptive rights of, or rights of refusal in favor of, stockholders exist
with respect to the Stock, or the issue and sale thereof, pursuant to the
Articles of Incorporation or Bylaws of the Company and, to the knowledge of
such counsel, there are no contractual preemptive rights that have not been
waived, rights of first refusal or rights of co-sale which exist with respect
to the Stock being sold by the Selling Securityholders or the issue and sale
of the Stock;
(iii) the Registration Statement has become effective under the
Securities Act and, to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement or suspending or
preventing the use of the Prospectus is in effect and no proceedings for that
purpose have been instituted or are pending or contemplated by the Commission;
(iv) the Registration Statement and the Prospectus (except as to
the financial statements and schedules and other financial data contained
therein, as to which such counsel need express no opinion) comply as to form
in all material respects with the requirements of the Securities Act and with
the rules and regulations of the Commission thereunder;
(v) (A) the information required to be set forth in the Registration
Statement in answer to Items 9, 10 (insofar as it relates to such counsel),
and 11(c) and (n) of Form S-1 is to the best of such counsel's knowledge
accurately and adequately set forth therein in all material respects or no
response is required with respect to such Items, (B) the description of the
Company's stock issuance and option plans and the stock issued and options
granted and which may be issued and granted thereunder set forth in the
Prospectus accurately and fairly presents the information required to be
shown with respect to said plans, stock and options to the extent required by
the Securities Act and the rules and regulations of the Commission
thereunder, and (C) the information set forth in the Prospectus under the
headings "Description of Capital Stock" and "Management - Limitation of
Liability and Indemnification Matters" accurately and fairly describe the
subject matter thereof to the extent required by the Securities Act and the
rules and regulations of the Commission thereunder;
1.
<PAGE>
(vi) such counsel do not know of any franchises, contracts, leases,
documents or legal proceedings, pending or threatened, which in the opinion
of such counsel are of a character required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement, which are not described and filed as required;
(vii) the Underwriting Agreement has been duly authorized, executed
and delivered by the Company;
(viii) based insofar as factual matters are concerned solely upon
certificates of the Selling Securityholders, the accuracy of which we have no
reason to question, (A) the Underwriting Agreement has been duly executed and
delivered by or on behalf of each of the Selling Securityholders; (B) the
Custody Agreement between the Selling Securityholders and ChaseMellon
Shareholder Services, LLC, as Custodian, and the Power of Attorney referred
to in such Custody Agreement have been duly executed and delivered by such
Selling Securityholder; (C) the Custody Agreement entered into by, and the
Power of Attorney given by, such Selling Securityholder is valid and binding
on such Selling Securityholder; and (D) each Selling Securityholder has full
legal right and authority to enter into the Underwriting Agreement and to
sell, transfer and deliver in the manner provided in the Underwriting
Agreement the shares of Stock sold by such Selling Securityholder hereunder;
(ix) the issue and sale by the Company of the shares of Stock sold
by the Company as contemplated by the Underwriting Agreement will not
conflict with, or result in a breach of, the Articles of Incorporation or
Bylaws of the Company or any of its subsidiaries or any agreement or
instrument to which the Company or any of its subsidiaries is a party and
which has been identified to such counsel by the Company as material or any
applicable law or regulation, or so far as is known to such counsel, any
order, writ, injunction or decree, of any jurisdiction, court or governmental
instrumentality;
(x) no holders of securities of the Company have rights to the
registration of shares of Common Stock, or other securities, because of the
filing of the Registration Statement by the Company;
(xi) good and marketable title to the shares of Stock sold by the
Selling Securityholders under the Underwriting Agreement, free and clear of
all liens, encumbrances, equities, security interests and claims, has been
transferred to the Underwriters who have severally purchased such shares of
Stock under the Underwriting Agreement, assuming for the purpose of this
opinion that the Underwriters purchased the same for value in good faith
without notice of any adverse claims;
(xii) no consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the
transactions contemplated in the Underwriting Agreement, except such as have
been obtained under the Securities Act and such as may be required under
state securities or blue sky laws in connection with the purchase and
distribution of the Stock by the Underwriters;
(xiii) the Stock will have been duly authorized for listing by the
Nasdaq National Market upon official notice of issuance;
(xiv) the forms of certificates evidencing the Common Stock and
filed as exhibits to the Registration Statement comply with Nevada law;
(xv) the Voting Trust Agreement, dated as of June 8, 1998, by and
among the Principal Selling Securityholders, the Company and Wilson Sonsini
Goodrich & Rosati (the "Voting Trust Agreement") has been duly authorized by
the Company and Wilson Sonsini Goodrich & Rosati, and has been duly executed
and delivered by, and is a valid and binding agreement of, the parties
thereto, enforceable in accordance with its terms, except insofar as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or affecting
creditors' rights generally or by general equitable principles and
limitations on availability of equitable remedies;
2.
<PAGE>
(xvi) no consent, approval, authorization or order of any court or
governmental instrumentality or body is required for the transfer of Shares
(as defined in the Voting Trust Agreement) to the voting trust created under
the Voting Trust Agreement (the "Voting Trust") and for the exercise by
Trustee of its powers under the Voting Trust, and the transfer of Shares (as
defined in the Voting Trust Agreement) to the Voting Trust and the exercise
by Trustee of its power under the Voting Trust do not and will not conflict
with, or result in a breach of, any applicable law or regulation, or so far
as is known to such counsel, any order, writ, injunction or decree, of any
jurisdiction, court or governmental instrumentality or body applicable to any
of the parties to the Voting Trust Agreement; and
(xvii) the Severance Agreement and Mutual Release of All Claims,
dated as of June 8, 1998, by and between Nancy H. Karp and the Company has
been duly authorized by the Company, and has been duly executed and delivered
by, and is a valid and binding agreement of, the parties thereto, enforceable
in accordance with its terms, except insofar as enforceability may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium or similar
laws relating to or affecting creditors' rights generally or by general
equitable principles and limitations on availability of equitable remedies.
-----------------------------
Counsel rendering the foregoing opinion may rely (i) as to questions of
law not involving the laws of the United States or of the State of California
or the corporate laws of the State of Nevada, upon opinions of local counsel
satisfactory in form and scope to counsel for the Underwriters and (ii) as to
opinions delivered with respect to Nancy H. Karp, upon opinions of counsel
satisfactory in form and scope to counsel for the Underwriters. Copies of
any opinions so relied upon shall be delivered to the Representatives and to
counsel for the Underwriters and the foregoing opinion shall also state that
counsel knows of no reason the Underwriters are not entitled to rely upon the
opinions of such local counsel.
In addition to the matters set forth above, counsel rendering the
foregoing opinion shall also include a statement to the effect that nothing
has come to the attention of such counsel that leads them to believe that the
Registration Statement (except as to the financial statements and schedules
and other financial data contained therein or statistical data derived
therefrom, as to which such counsel need not express any opinion or belief)
at the Effective Date contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary
to make the statements therein not misleading, that the Prospectus (except as
to the financial statements and schedules and other financial data contained
therein or statistical data derived therefrom, as to which such counsel need
not express any opinion or belief) as of its date or at the Closing Date (or
any later date on which Option Stock is purchased), contained or contains any
untrue statement of a material fact or omitted or omits to state a material
fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
3.
<PAGE>
EXHIBIT 5.1
-----------
[Wilson Sonsini Goodrich & Rosati Letterhead]
July 20, 1998
Catapult Communications Corporation
160 South Whisman Road
Mountain View, California 94041
RE: REGISTRATION STATEMENT ON FORM S-1
----------------------------------
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 filed by you
with the Securities and Exchange Commission on June 11, 1998 (Registration
No. 333-56627), as amended (the "Registration Statement"), in connection with
the registration under the Securities Act of 1933, as amended, of up to
3,855,375 shares of your Common Stock, par value $.001 per share (the
"Shares"). The Shares include an over-allotment option granted to the
underwriters of the offering to purchase 502,875 shares. We understand that
the Shares are to be sold to the underwriters of the offering for resale to
the public as described in the Registration Statement. As your legal
counsel, we have examined the proceedings taken, and are familiar with the
proceedings proposed to be taken, by you in connection with the sale and
issuance of the Shares.
It is our opinion that, upon completion of the proceedings being taken
or contemplated by us, as your counsel, to be taken prior to the issuance of
the Shares, including the proceedings being taken in order to permit such
transaction to be carried out in accordance with applicable state securities
laws, the Shares, when issued and sold in the manner described in the
Registration Statement and in accordance with the resolutions adopted by the
Board of Directors of the Company, will be legally and validly issued, fully
paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in
the Registration Statement, including the Prospectus constituting a part
thereof, and any amendments thereto.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ WILSON SONSINI GOODRICH & ROSATI
<PAGE>
Exhibit 10.7
Confidential Treatment
Requested
FY '98 Officer and Key Employee Profit Sharing Plan
As approved by the board of directors on November 21, 1997
Note: These policies are intended as a guideline to management.
Management at its sole discretion may modify these policies in situations
which it believes are exceptional. There is no implication that this profit
sharing plan will be continued in this or any form in any subsequent year.
Unless otherwise stated, date references in this plan are to the fiscal year
beginning October 1, 1997, and ending September 30, 1998.
PURPOSE
We think that our stock, in the long run, is the best hope for
significant capital appreciation. However, in a company of our size, officer
and key employee compensation is tied strongly to the growth of the company,
and management is often unable as a result to connect salary actions to
individual performance at the officer/key employee level as aggressively as it
would like. As a result, this plan has been adopted to redress the balance
by providing additional compensation if the company has a good year.
HOW THE PLAN WORKS
To receive payment under this plan, an employee must be qualified, by
meeting all of the following requirements:
1. Except for vacation, sick leave, and other authorized leaves of
absence, the employee must be on staff continually from October 1 or date of
hire (whichever is later).
2. The employee must not have beneficial ownership of 10% or more of
the stock of the corporation (or hold options that, if exercised, would give
that employee such ownership) during any part of the fiscal year.
3. While on staff, the employee must be a full-time employee or officer
of the corporation or one of its majority owned subsidiaries, and be
specifically included under this plan by action of the board of directors.
November 21, 1997
<PAGE>
- 2 -
GENERAL CONDITIONS
All bonuses under this plan will be based on company wide consolidated
income and gross revenue, after removing the effect of any intra-company
transfers between parent and subsidiaries, or between subsidiaries.
Payments under this plan shall be in addition to any payments under the
company-wide bonus plan.
There will be no bonus payments unless the company achieves a gross
revenue of at least [*] (the lower accrual limit). Bonus accrual will cease
once the company's sales reach a total of at least [*] (the upper accrual
limit).
Between the upper and lower accrual limits, the bonus will be accrued
linearly. For example, if the company's sales are halfway between the lower
and upper accrual limits, 50% of the total possible bonus will be paid.
General conditions for bonuses to be paid:
If the targets above are met, bonuses will be paid provided that
aftertax profits remain at least [*] of gross revenues. Otherwise, the
amount payable as bonus will be reduced (possibly to 0) on a basis
proportional to each individual's bonus, until after tax profit is [*].
Payments called for under this plan shall be made before any payments under
the company-wide bonus plan.
No bonus will be paid to an employee who is otherwise qualified, unless
the employee is still on staff at the time that the bonus is scheduled to be
paid (except for vacation, sick leave, and other authorized leaves of
absence).
Foreign currency conversions in all directions shall be done using a
factor that closely approximates the actual exchange rate at the time the
bonus pool and its division is determined (some time between the end of the
fiscal year and the distribution date).
Bonuses shall be distributed at a time convenient to the company, but no
later than January 31 of the calendar year following the end of the fiscal
year.
All bonus payments to officers and key employees will follow the rules
in this policy, but will be further specified on an individual basis.
November 21, 1997
* This information has been omitted and filed separately with the Commission
pursuant to a request for confidential treatment.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS ON PAGES F-3 AND F-4 IN THE COMPANY'S FORM S-1
REGISTRATION STATEMENT FOR THE YEAR ENDED SEPTEMBER 30, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 13,254
<SECURITIES> 0
<RECEIVABLES> 2,828
<ALLOWANCES> 59
<INVENTORY> 485
<CURRENT-ASSETS> 17,486
<PP&E> 1,535
<DEPRECIATION> 790
<TOTAL-ASSETS> 18,597
<CURRENT-LIABILITIES> 4,553
<BONDS> 0
5,000
0
<COMMON> 10
<OTHER-SE> 9,014
<TOTAL-LIABILITY-AND-EQUITY> 18,597
<SALES> 11,385
<TOTAL-REVENUES> 13,080
<CGS> 1,258
<TOTAL-COSTS> 1,747
<OTHER-EXPENSES> 5,109
<LOSS-PROVISION> 59
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,338
<INCOME-TAX> 2,721
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,617
<EPS-PRIMARY> .35
<EPS-DILUTED> .33
</TABLE>
