FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-24701
CATAPULT COMMUNICATIONS CORPORATION
(Exact name of Registrant as specified in its charter)
Nevada 77-0086010
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
160 South Whisman Road
Mountain View, California 94041
(650) 960-1025
(Address, including zip code, and telephone number, including
area code, of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No
As of March 31, 2000, there were 12,798,343 shares of the Registrant's
Common Stock, $0.001 par value, outstanding.
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CATAPULT COMMUNICATIONS CORPORATION
FORM 10-Q
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<CAPTION>
INDEX
<S> <C>
Part I--Financial Information Page
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at March 31, 2000 and September 30, 1999 3
Condensed Consolidated Income Statements for the three and six months ended
March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flow for the six months ended
March 31, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Part II--Other Information
Item 2. Changes in Securities and Use of Proceeds 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
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2
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Part I. Financial Information
Item 1. Financial Statements
CATAPULT COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(unaudited)
March 31 September 30
2000 1999
-------- -----------
ASSETS
Current Assets:
Cash and cash equivalents ...................... $ 5,771 $ 8,486
Short-term investments ......................... 39,672 33,168
Accounts receivable, net ....................... 4,936 5,852
Inventories, net ............................... 763 705
Deferred income taxes .......................... 890 890
Prepaid expenses ............................... 711 349
-------- --------
Total current assets ........................ 52,743 49,450
Property and equipment, net ....................... 1,100 998
Other assets ...................................... 205 219
-------- --------
Total assets ................................ $ 54,048 $ 50,667
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ............................... $ 767 $ 444
Accrued liabilities ............................ 4,386 4,782
Deferred revenue ............................... 2,455 1,852
-------- --------
Total current liabilities ................... 7,608 7,078
-------- --------
Stockholders' Equity:
Common stock ................................... 13 13
Additional paid-in capital ..................... 20,219 20,040
Deferred compensation .......................... (96) (132)
Retained earnings .............................. 26,239 23,796
Accumulated other comprehensive income ......... 365 172
Treasury stock (50,000 shares at cost) ......... (300) (300)
-------- --------
Total stockholders' equity .................. 46,440 43,589
-------- --------
Total liabilities and stockholders' equity .. $ 54,048 $ 50,667
======== ========
See Notes to condensed consolidated financial statements.
3
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<TABLE>
CATAPULT COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED INCOME STATEMENTS
(In thousands, except share and per share data)
(unaudited)
<CAPTION>
Three months ended Six months ended
March 31 March 31
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Product sales ............ $ 5,560 $ 9,066 $ 9,432 $ 13,590
Services ................. 1,131 686 2,243 1,391
------------ ------------ ------------ ------------
Total revenues ......... 6,691 9,752 11,675 14,981
------------ ------------ ------------ ------------
Cost of revenues:
Product sales ............ 435 788 895 1,399
Services ................. 254 202 566 391
------------ ------------ ------------ ------------
Total cost of revenues . 689 990 1,461 1,790
------------ ------------ ------------ ------------
Gross profit ................ 6,002 8,762 10,214 13,191
------------ ------------ ------------ ------------
Operating expenses:
Research and development . 694 744 1,309 1,297
Sales and marketing ...... 2,413 1,302 4,403 2,494
General and administrative 911 734 1,608 1,313
------------ ------------ ------------ ------------
Total operating expenses 4,018 2,780 7,320 5,104
------------ ------------ ------------ ------------
Operating income ............ 1,984 5,982 2,894 8,087
Interest income ............. 682 251 1,286 402
Other income (expense) ...... (28) 54 (215) (112)
------------ ------------ ------------ ------------
Income before taxes ......... 2,638 6,287 3,965 8,377
Provision for taxes ......... 1,037 2,703 1,547 (3,602)
------------ ------------ ------------ ------------
Net income .................. $ 1,601 $ 3,584 $ 2,418 $ 4,775
============ ============ ============ ============
Earnings per share:
Basic .................... $ 0.13 $ 0.31 $ 0.19 $ 0.43
============ ============ ============ ============
Diluted .................. $ 0.12 $ 0.30 $ 0.18 $ 0.41
============ ============ ============ ============
Weighted average shares:
Basic .................... 12,798,000 11,636,000 12,762,000 11,076,000
============ ============ ============ ============
Diluted .................. 13,113,000 12,073,000 13,077,000 11,513,000
============ ============ ============ ============
<FN>
See Notes to condensed consolidated financial statements.
</FN>
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4
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<TABLE>
CATAPULT COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Six months ended
March 31
2000 1999
-------- --------
<CAPTION>
Cash flows from operating activities:
<S> <C> <C>
Net income ....................................................... $ 2,418 $ 4,775
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Depreciation and amortization .................................... 222 156
Amortization of deferred stock compensation ...................... 36 100
Gain on sale of fixed assets .................................. -- 3
Change in current assets and liabilities:
Accounts receivable ........................................ 916 (4,077)
Inventories ................................................ (58) (16)
Prepaid expenses ........................................... (362) (253)
Other assets ............................................... 14 (27)
Accounts payable ........................................... 323 (129)
Accrued liabilities ........................................ (396) 2,207
Deferred revenue ........................................... 603 293
-------- --------
Net cash provided by operating activities ................ 3,716 3,032
-------- --------
Cash flows from investing activities:
Purchases of investments, net ................................. (6,504) (16,710)
Purchase of property and equipment ............................ (299) (190)
-------- --------
Net cash used by investing activities .................... (6,803) (16,900)
-------- --------
Cash flows from financing activities:
Stock issuances ............................................... 179 19,240
Purchase of treasury stock .................................... -- (300)
-------- --------
Net cash provided by financing activities ................ 179 18,940
-------- --------
Effect of exchange rates on cash and cash equivalents ............ 193 (33)
-------- --------
Increase (decrease) in cash and cash equivalents ................. (2,715) 5,039
Cash and cash equivalents, beginning of period ................... 8,486 15,229
-------- --------
Cash and cash equivalents, end of period ......................... $ 5,771 $ 20,268
======== ========
<FN>
See Notes to consolidated financial statements.
</FN>
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5
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CATAPULT COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1--THE COMPANY AND BASIS OF PRESENTATION:
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
has been incorporated in Nevada since June 19,1998. The Company has operations
in the United States, Canada, the United Kingdom, Europe and Japan. The Company
conducts its business within one industry segment.
These accompanying condensed consolidated financial statements and
related notes are unaudited. However, in the opinion of management, all
adjustments, (consisting only of normal recurring adjustments), which are
necessary for the fair presentation of the financial position and results of
operations for the interim periods presented have been included. The results of
operations for such periods are not necessarily indicative of results to be
expected for any future period or the fiscal year ending September 30, 2000.
These financial statements including the notes thereto should be read in
conjunction with the audited financial statements for the year ended September
30, 1999, which were included as part of the Company's Annual Report on Form
10-K for the year ended September 30, 1999.
NOTE 2 - RECENT ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards of derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. In July 1999, the Financial Accounting
Standards Board issued SFAS No. 137, "Accounting with Derivative Instruments and
Hedging Activities Deferral of the Effective Date of FASB Statement No. 133"
("SFAS 137"). SFAS 137 deferred the effective date until the first fiscal
quarter ending June 15, 2000. The Company will adopt SFAS 133 in 2001. The
Company continues assessing the effect of FAS 133 on the financial position and
results of operations of the Company.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No.
101 "Revenue Recognition in Financial Statements" which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. SAB 101 is effective for fiscal years beginning after
December 15, 1999. The Company has not yet determined the impact, if any, that
the adoption will have on the financial position and results of operations of
the Company.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation" an interpretation of APB Opinion No. 25 ("FIN 44"). FIN 44
establishes guidance for the accounting for stock option grants made after June
30, 2000. FIN 44 also establishes guidance for the repricing of stock options
and determining whether a grantee is an employee, for which guidance was
effective after December 15, 1998 and modifying a fixed option to add a reload
feature, for which guidance was effective after January 12, 2000. The adoption
of certain of the provisions of FIN 44 prior to March 31, 2000 did not have a
material effect on the financial statements. The Company does not expect that
the adoption of the remaining provisions will have a material effect on the
financial statements.
NOTE 3--BASIC AND DILUTED EARNINGS PER SHARE
<TABLE>
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:
<CAPTION>
Three months ended Six months ended
March 31 March 31
2000 1999 2000 1999
----------- ----------- ----------- -----------
(in thousands, except share and per share)
<S> <C> <C> <C> <C>
Net income .............................. $ 1,601 $ 3,584 $ 2,418 $ 4,775
=========== =========== =========== ===========
Weighted average shares outstanding ..... 12,798,000 11,636,000 12,762,000 11,076,000
Dilutive options ........................ 315,000 437,000 315,000 437,000
----------- ----------- ----------- -----------
Weighted average shares assuming dilution 13,113,000 12,073,000 13,077,000 11,513,000
=========== =========== =========== ===========
Earnings per share:
Basic ................................... $ 0.13 $ 0.31 $ 0.19 $ 0.43
=========== =========== =========== ===========
Diluted ................................. $ 0.12 $ 0.30 $ 0.18 $ 0.41
=========== =========== =========== ===========
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6
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NOTE 4--COMPREHENSIVE INCOME
The components of comprehensive income, net of tax, are as follows (in
thousands):
Three Months Ended Six Months Ended
March 31 March 31
2000 1999 2000 1999
------ ------ ------ ------
Net Income $1,601 $3,584 $2,418 $4,775
Currency translation adjustment 77 (33) 193 (34)
------ ------ ------ ------
Comprehensive income $1,678 $3,551 $2,611 $4,741
====== ====== ====== ======
NOTE 5--INVENTORIES (in Thousands)
March 31, September 30,
2000 1999
---- ----
Raw Materials ...................................... $673 $554
Work-in-process .................................... 40 79
Finished goods ..................................... 50 72
---- ----
$763 $705
==== ====
NOTE 6 - SEGMENT REPORTING
The Company is organized to operate and service a single industry
segment: the design, development, manufacture, marketing and support of advanced
software-based test systems globally.
The Company's principal geographical areas of operations, sales, income
and assets by region for each fiscal year end were as follows (in thousands):
North UK and Consolidated
America Europe Japan Total
------- ------ ----- -----
Six months ended March 31, 2000
Sales to unaffiliated customers $ 3,685 $ 1,741 $ 6,249 $11,675
Net income (loss) ............. 2,546 (432) 304 2,418
Total assets .................. 45,366 2,718 5,964 54,048
Six months ended March 31, 1999
Sales to unaffiliated customers $ 1,911 $ 1,159 $11,911 $14,981
Net income (loss) ............. 4,220 (185) 740 4,775
Total assets .................. 40,957 293 4,398 45,648
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.
7
<PAGE>
Item 2. 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 in the Annual Report on Form
10-K. The following discussion contains statements that are not historical facts
but are forward-looking statements. Such statements are generally identified by
the use of forward-looking words and phrases, such as "intended," "expects,"
"anticipates" and "is (or are) expected (or anticipated)." These forward-looking
statements include but are not limited to those identified in this report with
an asterisk (*) symbol. Actual results may differ materially from those
discussed in such forward-looking statements, and the Company's stockholders of
should carefully review the cautionary statements set forth in this report on
Form 10-Q, including those set forth under the caption "Factors That May Affect
Future Results."
The Company may from time to time make additional written and oral
forward-looking statements, including statements contained in the Company's
filings with the Securities and Exchange Commission and in its reports to
Stockholders. The Company does not undertake to update any forward-looking
statements that may be made in this Form 10-Q and from time to time by or on
behalf of the Company."
Overview
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 family of
digital communication test systems is designed to enable equipment manufacturers
and network operators to deliver complex digital telecommunications equipment
and services more quickly and cost-effectively. The DCT product line performs a
variety of test functions, including simulation, load and stress testing,
feature verification, conformance testing and monitoring. The company maintains
an extensive library of software modules that support approximately 160
protocols and variants. The DCT systems 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.
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.
For the three months ended For the six months
March 31, ended March 31,
2000 1999 2000 1999
----- ----- ----- -----
Revenues:
Product sales ............ 93.0% 93.0% 80.8% 90.7%
Services ................. 17.0 7.0 19.2 9.3
----- ----- ----- -----
Total revenues ......... 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of revenues:
Product sales ............ 6.5 8.1 7.7 9.3
Services ................. 3.8 2.1 4.8 2.6
----- ----- ----- -----
Total cost of revenues . 10.3 10.2 12.5 11.9
----- ----- ----- -----
Gross profit ................ 89.7 89.8 87.5 88.1
----- ----- ----- -----
8
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Operating expenses:
Research and development . 10.4 7.6 11.2 8.7
Sales and marketing ...... 36.0 13.4 37.7 16.6
General and administrative 13.6 7.5 13.8 8.8
----- ----- ----- -----
Total operating expenses 60.0 28.5 62.7 34.1
----- ----- ----- -----
Operating income ............ 29.7 61.3 24.8 54.0
Interest income ............. 10.2 2.6 11.0 2.7
Other income (expense) ...... (0.4) 0.6 (1.8) (0.8)
----- ----- ----- -----
Income before taxes ......... 39.5 64.5 34.0 55.9
----- ----- ----- -----
Provision for taxes ......... 15.5 27.7 13.3 24.0
----- ----- ----- -----
Net income .................. 24.0% 36.8% 20.7% 31.9%
===== ===== ===== =====
Gross margin on product sales 92.2% 91.3% 90.5% 89.7%
===== ===== ===== =====
Gross margin on services .... 77.5% 70.6% 74.8% 71.9%
===== ===== ===== =====
Three Months Ended March 31, 2000 and 1999
Revenues. Revenues decreased by approximately 32% from $9.8 million for
the three months ended March 31, 1999 to $6.7 million for the three months ended
March 31, 2000. Over the same period, product sales decreased by approximately
39% from $9.1 million to $5.6 million. Services revenue increased by
approximately 60% from $686,000 to $1.1 million. The decrease in product sales
was primarily attributable to a one time $3.5 million sale to an existing
customer in Japan in 1999. The increase in services revenue was primarily due to
sales of software support contracts associated with new system sales as well as
support contract renewals and customer training. 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.
Subsequent to the fiscal year ended September 30, 1999, the Company
received information that sales to NTT, a major customer in Japan, would likely
be significantly reduced beginning in fiscal 2000. The Company believes it is
likely that sales to NTT will no longer represent as large a percentage of total
revenue, and this will likely have a negative effect on the Company's long term
growth expectations.* Accordingly, results for quarter and fiscal 2000 will
likely be significantly reduced and different in terms of total revenue,
earnings per share, geographic sales mix and customer concentration from fiscal
1999.
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 revenue decreased 30% from $990,000 for the three months
ended March 31, 1999 to $689,000 for the three months ended March 31 2000. Over
the same period, product sales decreased by approximately 39% while the cost of
product sales decreased by 45%. Product gross margin for product sales increased
from 91.3% to 92.2% over this same period as the Company's sales mix had a
greater proportion of higher margin products. Cost of services increased by
approximately 26% from $202,000 for the three months ended March 31, 1999 to
$254,000 for the three months ended March 31, 2000 due primarily to personnel
and increased compensation costs. Over the same period, service gross margin on
services increased from 70.6% to 77.5% due to increased service revenues from
service contract renewals in North America.
9
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Research and development. Research and development expenses consist
primarily of the costs of payroll and benefits for engineers, materials,
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 decreased slightly by approximately 7% from $744,000 for
the three months ended March 31, 1999 to $694,000 for the three months ended
March 31, 2000. As a percentage of total revenues, research and development
expenses slightly increased from 7.6% to 10.4% over the same period. The
decrease in absolute dollars was due primarily to timing and to a lesser extent
a decrease in variable compensation expense in the engineering group. 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, occupancy costs, travel
and promotional expenses, such as product brochures and trade show costs. Sales
and marketing expenses increased 84.6% from $1.3 million for the three months
ended March 31, 1999 to $2.4 million for the three months ended March 31, 2000.
As a percentage of total revenues, sales and marketing expenses increased from
13.4% for the three months ended March 31, 1999 to 36.0% for the three months
ended March 31, 2000. The increase in absolute dollars was due primarily to an
increase in marketing personnel and the expansion of the Company's sales and
support offices. 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 and risk management, meeting public
company reporting requirements, employee recruitment and retention, investor
relations and finance functions. General and administrative expenses increased
24.1% from $734,000 for the three months ended March 31, 1999 to $911,000 for
the three months ended March 31, 2000 due primarily to an overall increase in
temporary staffing costs, recruiting costs and public company costs. As a
percentage of total revenues, general and administrative expenses increased from
7.5% to 13.6% over the same period.
Interest income. Interest income consists primarily of interest earned
on cash and cash equivalents and short-term investments. Interest income
increased from $251,000 for the three months ended March 31, 1999 to $682,000
for the three months ended March 31, 2000 due to investing the increase in the
Company's cash and cash equivalent balances and short-term investments primarily
from the proceeds of the February 1999 public offering and cash flows from
profitable operations.
Other income (expense), net. Other income (expense) primarily
represents realized gains and losses from fluctuations in exchange rates on
transactions denominated in foreign currencies. Other income was $54,000 for the
three months ended March 31, 1999. Other expense was $28,000 for the three
months ended March 31, 2000 due to the change in foreign exchange gains and
losses realized and premiums paid for forward contracts entered into to hedge
transactions denominated in currencies other than the US dollar.
Provision for income taxes. Provision for income tax consists of
federal, state and international income taxes. The Company's effective tax rate
was 43.0% for the three months ended March 31, 1999 and 39.0% for the three
months ended March 31, 2000. These tax rates primarily reflect the anticipated
percentages of revenues derived by the Company from international operations and
a decrease in the top tax rate in Japan. The Company expects that its future tax
rate may vary depending in part on the relative income contribution by its
domestic and foreign operations.*
10
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Six Months Ended March 31, 2000 and 1999
Revenues. Revenues decreased by approximately 22% from $15 million in six months
ended March 31, 1999 to $11.7 million in the six months ended March 31, 2000.
Over the same period, product sales decreased by approximately 31% from $13.6
million to $9.4 million. Services revenue increased by approximately 57% from
$1.4 million in the six months ended March 31, 1999 to $2.2 million in the six
months ended March 31, 2000. The decreased product sales was primarily
attributable to the large one-time sale to a customer in Japan in the second
quarter of 1999. 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
contributions 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 decreased approximately 36% from $1.4
million in the six months ended March 31, 1999 to $0.9 million in the six months
ended March 31, 2000. Over the same period, product sales decreased by
approximately 31% during the period.. As a result, over the same period, gross
margin for product sales increased from 89.7% to 90.5% as the Company's hardware
sales in the first six months of 2000 had a higher proportion of high margin
products. Cost of services increased by approximately 45% from $391,000 in the
six months ended March 31, 1999 to $566,000 in the six months ended March 31,
2000. Over the same period, gross margin on services increased from 71.9% to
74.8%, as support contract renewals increased.
Research and Development. Research and development expenses were flat at $1.3
million in the six months ended March 31, 1999 compared to $1.3 million in the
six months ended March 31, 2000. As a percentage of total revenues, research and
development expenses increased from 8.7% to 11.2% over the same period. The
increase in absolute dollars was due primarily to an increase in engineering
compensation cost.
Sales and Marketing. Sales and marketing expenses increased by approximately 76%
from $2.5 million in the six months ended March 31, 1999 to $4.4 million in the
six months ended March 31, 2000. As a percentage of total revenues, sales and
marketing expenses increased from 16.6% to 37.7% over the same period. The
increases were due primarily to an overall increase in personnel and the
expansion of the Company's sales and support offices. 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 increased by
approximately 23% from $1.3 million in the six months ended March 31, 1999 to
$1.6 million in the six months ended March 31, 2000. As a percentage of total
revenues, general and administrative expenses increased from 8.8% to 13.8% over
the same period. The increase in absolute dollars is due primarily to an overall
increase in personnel and the costs associated with being a public company.
Interest Income. Interest income increased from $402,000 in the six months ended
March 31, 1999 to $1.3 million in the six months ended March 31, 2000 due to
investing of the increase in the Company's cash and cash equivalent balances and
short-term investments.
Other Income (expense). Other expense was $112,000 in the six months ended March
31, 1999 and was $215,000 in the six months ended March 31, 2000. The increase
was due to exchange losses related to transactions
11
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denominated in foreign currencies.
Provision for income taxes. The Company's effective tax rate was 43.0% in the
six months ended March 31, 1999 and was 39.0% in the six months ended March 31,
2000. These tax rates primarily reflect the anticipated percentages of revenues
derived by the Company from international operations and a decrease in the top
tax rate in Japan.
Liquidity and Capital Resources
Historically, the Company has financed its operations, including
increases in account receivable and capital equipment acquisitions, primarily
through cash generated from operations, cash proceeds from its initial public
offering of common stock, profitable operations, investment earnings and the
exercise of employee stock options.
The Company's operating activities provided cash of $3.0 million and
provided $3.7 million in the six month period ending March 31, 1999 and 2000,
respectively. The cash provided in the Company's operations for the six months
ended March 31 1999 was primarily attributable to its net income and increased
accrued expenses offset by a significant increase in account receivables,
specifically in Japan from a large one-time sale and a reduction in accounts
payable. The cash provided in the Company's operations for the six months ended
March 31, 2000 was primarily attributable to its net income and decreases in
account receivable offset by a decrease in accrued expenses and prepaid
expenses. Investing activities, consisted primarily of purchases of short-term
investments and to a lesser extent additions to property and equipment, using
cash of $16.9 million and $6.8 million in the six months ending March 31, 1999
and 2000, respectively. Financing activities in the six months ending March 31,
1999 and 2000 were attributable to proceeds from the initial public offering,
and the exercise of employee stock options.
As of March 31, 2000, the Company had working capital of $45.1 million,
cash and cash equivalents of $5.8 million and short-term investments of $39.7
million. As of March 31, 2000, 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 $1.0 million in
fiscal 2000.*
The Company believes that cash and cash equivalents, short-term
investments and funds generated from operations will provide the Company with
sufficient funds to finance its operations for at least the next 12 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.
Factors That May Affect Future Operating Results
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
Internationally, (iii) the relatively long sales cycles for the Company's
products, (iv) the timing of hiring sales and technical personnel, (v) changes
in the 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
12
<PAGE>
in anticipation of new products, (xv) delays in purchasing decisions or customer
orders due to customer consolidation, (xvi) supply interruptions, (xvii) changes
in the regulatory environment and (xviii) 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 are generally 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 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.
Dependence on Limited Number of Customers
The Company's customer base is highly concentrated, and a relatively
small number of companies have accounted for substantially all of the Company's
revenues to date. In the six months ended March 31, 2000, the Company's top four
customers represented approximately 69.5% of total revenues. The Company expects
that it will continue to depend upon a relatively limited number of customers
for substantially all of
13
<PAGE>
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.
Risks Associated with International Sales and Operations; Foreign Exchange Risk
Company revenues from international customers were approximately 70%
during the six months ended March 31, 2000. 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 Japan, Canada, the
United Kingdom, Germany, France and Sweden and plans to add offices, staff and
resources worldwide from time to time. 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 and during the six months ended March 31, 2000 a
significant portion of the Company's sales has been to customers in Japan. If
economic conditions in Japan deteriorate to a significant extent, the Company's
business, financial condition and results of operations could be materially
adversely affected. In addition, although the Company cannot predict the
potential consequences to the Company's business of the adoption of the Euro as
a common currency in Europe, the transition to the Euro presents a number of
risks, including increased competition from European firms as a result of
increased pricing transparency. 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.
Subsequent to the fiscal year ended September 30, 1999, the Company
received information that sales to NTT, a major customer in Japan, would likely
be significantly reduced beginning in fiscal 2000. The Company believes it is
likely that sales to NTT will no longer represent as large a percentage of total
revenue, and this will likely have a negative effect on the Company's long term
growth expectations. Accordingly, results for the quarter and fiscal 2000 will
likely be significantly reduced and different in terms of total revenue,
earnings per share, geographic sales mix and customer concentration from fiscal
1999.
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
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
14
<PAGE>
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.
Foreign Exchange Risk
The Company's foreign subsidiaries operate and sell the Company's
products in various global markets. As a result, the Company is exposed to
changes in interest rates and foreign currency exchange rates on foreign
currency denominated sales made to foreign subsidiaries. The Company utilizes
foreign currency forward exchange contracts and options to hedge against future
movements in foreign exchange rates that affect certain foreign currency
denominated intercompany receivables. The Company attempts to match the forward
contracts with the underlying receivables being hedged in terms of currency,
amount and maturity. The Company does not use derivative financial instruments
for speculative or trading purposes. Because the impact of movements in currency
exchange rates on forward contracts offsets the related impact on the exposures
hedged, these financial instruments do not subject the Company to speculative
risk that would otherwise result from changes in currency exchange rates.
Realized gains and losses on forward exchange contracts may offset foreign
exchange transaction gains or losses from revaluation of foreign currency
denominated intercompany receivable balances which otherwise would be charged to
other income (expense). To date, the Company has not fully hedged all risk
associated with its sales denominated in foreign currencies, and there can be no
assurance that the Company's hedging activities, if any, will be successful.
At March 31, 2000 the Company had forward exchange contracts maturing
in fiscal 2000 to sell approximately $1.9 million in Japanese Yen and $1.9
million in Pounds Sterling. The fair market value of the contracts at March 31,
2000 was immaterial. In addition, at March 31, 2000, the Company had a foreign
currency option to sell approximately $2.0 million Japanese Yen maturing in
fiscal 2000. This option had an immaterial fair market value at March 31, 2000.
As of March 31, 2000 the cost of the contracts and option have been included in
other income (expense).
The Company has evaluated the potential near-term losses in future
earnings, fair values and cash flows from reasonably possible near-term changes
in market rates or prices and believes that any such losses would not be
material.*
Year 2000 Compliance
To date, the Company has not incurred material costs associated with
Year 2000 compliance nor any disruption with vendors or operations. Furthermore,
based on its assessment to date, the Company believes that any future costs
associated with its Year 2000 compliance efforts will not be material.*
Additional factors that could affect future operating results or the
price of the Common Stock are set forth under the caption "Risk Factors" in the
prospectus dated February 11, 1999 contained in the Registration Statement and
in Form 10-K.
15
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The Company does not use derivative financial instruments in its
investment portfolio. The Company's short-term investments are generally
comprised of investments with original maturities of less than one year. The
investments consist of investment quality commercial paper and corporate bonds,
collaterized mortgage obligations U.S. government securities and money market
funds. These securities are subject to interest rate risk, and could decline in
value if interest rates increase. Due to the short duration of the investment
portfolio and conservative nature of the Company's investment policy, the
Company does not expect any material loss with respect to its investment
portfolio.*
Foreign Currency Exchange Rate Risk
Certain of the Company's sales and marketing expenses are incurred in
foreign currencies. As a result the Company's international results of
operations are subject to foreign exchange rate fluctuations. The Company
utilizes currency forward exchange contracts and options to hedge against
foreign currency rate fluctuations.
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds
(c) The following information relates to securities sold by the
Company during the quarter ended March 31, 2000: NONE.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27 Financial Data Schedule (Mark Please Insert)
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for which
this report on Form 10-Q is filed.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CATAPULT COMMUNICATIONS CORPORATION
Date: May 9, 2000, By: /s/ Richard A. Karp
-------------------------------------
Richard A. Karp
President and Chief Executive Officer
(Principal Executive Officer)
Acting Chief Financial Officer
(Principal Financial Officer)
17
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