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 June 30, 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 June 30, 2000, there were 12,835,381 shares of the Registrant's
Common Stock, $0.001 par value, outstanding.
<PAGE>
<TABLE>
CATAPULT COMMUNICATIONS CORPORATION
FORM 10-Q
<CAPTION>
INDEX
Part I--Financial Information Page
<S> <C>
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at June 30, 2000 and September 30, 1999 3
Condensed Consolidated Income Statements for the three and nine months ended
June 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flow for the nine months ended
June 30, 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 12
Part II--Other Information
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
2
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
<TABLE>
CATAPULT COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
<CAPTION>
June 30, September 30,
2000 1999
---- ----
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents.............................. $ 4,197 $ 8,486
Short-term investments................................. 42,606 33,168
Accounts receivable, net............................... 6,036 5,852
Inventories, net....................................... 834 705
Deferred income taxes.................................. 890 890
Prepaid expenses....................................... 829 349
------- -------
Total current assets................................ 55,392 49,450
Property and equipment, net............................... 1,403 998
Other assets.............................................. 102 219
------- -------
Total assets........................................ $56,897 $50,667
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable....................................... $ 1,103 $ 444
Accrued liabilities.................................... 4,766 4,782
Deferred revenue....................................... 2,228 1,852
------- -------
Total current liabilities........................... 8,097 7,078
Stockholders' Equity:
Common stock 13 13
Additional paid-in capital............................. 20,231 20,040
Deferred compensation.................................. (78) (132)
Retained earnings...................................... 28,313 23,796
Accumulated other comprehensive income................. 621 172
Treasury stock (50,000 shares at cost)................. (300) (300)
------- -------
Total stockholders' equity.......................... 48,800 43,589
------- -------
Total liabilities and stockholders' equity.......... $56,897 $50,667
======= =======
<FN>
See Notes to condensed consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
CATAPULT COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED INCOME STATEMENTS
(in thousands, except share and per share data)
(unaudited)
<CAPTION>
For the three months ended For the nine months ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Product sales............................... $ 6,223 $ 5,806 $ 15,655 $ 19,396
Services.................................... 1,284 901 3,527 2,292
------- ------- -------- --------
Total revenues............................ 7,507 6,707 19,182 21,688
------- ------- -------- --------
Cost of revenues:
Product sales............................... $ 577 $ 509 $ 1,472 $ 1,908
Services.................................... 264 236 830 627
------- ------- -------- --------
Total cost of revenues.................... 841 745 2,302 2,535
------- ------- -------- --------
Gross profit................................... 6,666 5,962 16,880 19,153
Operating expenses:
Research and development.................... $ 828 $ 792 $ 2,137 $ 2,089
Sales and marketing......................... 2,305 1,446 6,708 3,940
General and administrative.................. 981 742 2,589 2,055
------- ------- -------- --------
Total operating expenses.................. 4,114 2,980 11,434 8,084
------- ------- -------- --------
Operating income............................... 2,552 2,982 5,446 11,069
Interest income................................ 615 501 1,901 903
Other income (expense)......................... 233 (47) 18 (159)
------- ------- -------- --------
Income before taxes............................ 3,400 3,436 7,365 11,813
Provision for taxes............................ 1,326 1,477 2,873 5,079
------- ------- -------- --------
Net income.................................... $ 2,074 $ 1,959 $ 4,492 $ 6,734
======= ======= ======== ========
Earnings per share:
Basic....................................... $ 0.16 $ 0.16 $ 0.35 $ 0.58
======= ======= ======== ========
Diluted..................................... $ 0.16 $ 0.15 $ 0.34 $ 0.56
======= ======= ======== ========
Weighted average shares:
Basic....................................... 12,832,000 12,632,000 12,785,000 11,595,000
========== ========== ========== ==========
Diluted..................................... 13,116,000 13,091,000 13,070,000 12,039,000
========== ========== ========== ==========
<FN>
See Notes to condensed consolidated financial statements.
</FN>
</TABLE>
4
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<TABLE>
CATAPULT COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<CAPTION>
Nine months ended
June 30,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................ $ 4,492 $ 6,734
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Depreciation and amortization.................................. 225 221
Amortization of deferred stock compensation.................... 54 150
Change in current assets and liabilities:
Accounts receivable......................................... (184) (524)
Inventories................................................. (129) (68)
Prepaid expenses............................................ (480) (220)
Other assets................................................ 117 (74)
Accounts payable............................................ 659 (291)
Accrued liabilities......................................... (16) 1,163
Deferred revenue............................................ 376 862
------- -------
Net cash provided by operating activities................. 5,114 7,953
Cash flows from investing activities:
Purchases of investments, net.................................. (9,438) (27,716)
Purchase of property and equipment............................. (605) (344)
------- -------
Net cash used by investing activities..................... (10,043) (28,060)
Cash flows from financing activities:
Stock issuances................................................ 191 19,264
Purchase of treasury stock..................................... - (300)
------- -------
Net cash provided by financing activities................. 191 18,964
Effect of comprehensive income changes............................ 449 (73)
------- -------
Increase (decrease) in cash and cash equivalents.................. (4,289) (1,216)
Cash and cash equivalents, beginning of period.................... 8,486 15,229
------- -------
Cash and cash equivalents, end of period.......................... $ 4,197 $14,013
======= =======
<FN>
See Notes to condensed consolidated financial statements.
</FN>
</TABLE>
5
<PAGE>
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 ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities".
SFAS No. 133 established new standards of accounting and reporting for
derivative instruments and hedging activities. SFAS No. 133 requires that all
derivatives be recognized at fair value in the statement of financial position,
and that the corresponding gains or losses be reported either in the statement
of operations or as a component of comprehensive income (loss), depending on the
type of hedging relationship that exists. In July 1999, the FASB issued SFAS No.
137 "Accounting for Derivative Instruments and Hedging Activities -- Deferral of
the Effective Date of FASB Statement No. 133". SFAS No. 137 deferred the
effective date of SFAS No. 133 until fiscal years beginning after June 15, 2000.
The Company does believe that the adoption of SFAS 133 will have a material
impact on its reported operations, or its financial condition.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements", which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with SEC. SAB 101 outlines
the basic criteria that must be met to recognize revenue and provides guidance
for disclosures related to revenue recognition policies. Management believes
that the Company has complied with the guidance of SAB 101.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44") "Accounting for Certain Transactions Involving
Stock Compensation, an Interpretation of APB Opinion No. 25". FIN 44 clarifies
the application of Opinion No. 25 for (a) the definition of employee for
purposes of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequences of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination.
6
<PAGE>
FIN 44 is effective July 1, 2000, but certain conclusions cover specific events
that occur after either December 15, 1998, or January 12, 2000. The adoption of
certain provisions of FIN 44 prior to March 31, 2000 did not have a material
impact on the financial statements. Management does not expect that the adoption
of the remaining provisions will have a material effect on the financial
position or results of operations of the Company.
In various areas, including revenue recognition and other
Internet-related issues, accounting standards and practices continue to evolve.
The SEC is preparing to issue interpretative guidance relating to SAB 101, and
the FASB's Emerging Issues Task Force continues to address revenue and other
Internet-related accounting issues. The management of the Company believes it is
in compliance with all of the rules and related guidance as they currently
exist. However, any changes to generally accepted accounting principles in these
areas could impact the Company's accounting for operations.
NOTE 3--BASIC AND DILUTED EARNINGS PER SHARE
<TABLE>
Basic earnings per share are computed using the weighted average number
of common shares outstanding during the period. Diluted earnings per share
include 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 share and per share data:
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
(in thousands, except share and per share data)
<S> <C> <C> <C> <C>
Net income $2,074 $1,959 $4,492 $6,734
====== ====== ====== ======
Weighted average shares outstanding................ 12,832,000 12,632,000 12,785,000 11,595,000
Dilutive options................................... 284,000 459,000 285,000 444,000
---------- ---------- ---------- ----------
Weighted average shares assuming dilution 13,116,000 13,091,000 13,070,000 12,039,000
========== ========== ========== ==========
Earnings per share:
Basic.............................................. $ 0.16 $ 0.16 $ 0.35 $ 0.58
========== ========== ========== ==========
Diluted............................................ $ 0.16 $ 0.15 $ 0.34 $ 0.56
========== ========== ========== ==========
</TABLE>
NOTE 4--COMPREHENSIVE INCOME
<TABLE>
The components of comprehensive income, net of tax, are as follows (in
thousands):
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net income......................................... 2,074 1,959 4,492 6,734
Currency translation adjustment.................... 256 (40) 449 (73)
----- ----- ----- -----
Comprehensive income 2,330 1,919 4,941 6,661
===== ===== ===== =====
</TABLE>
7
<PAGE>
NOTE 5--INVENTORIES (in thousands)
June 30, September 30,
2000 1999
---- ----
Raw Materials...................................... $715 $554
Work-in-process.................................... 46 79
Finished goods..................................... 73 72
---- ----
$834 $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.
<TABLE>
The Company's principal geographical areas of operations, sales, income
and assets by region for each fiscal year end were as follows (in thousands):
<CAPTION>
North UK and Consolidated
America Europe Japan Total
------- ------ ----- -----
<S> <C> <C> <C> <C>
Nine months ended June 30, 2000
Sales to unaffiliated customers................ $ 6,447 $ 3,338 $ 9,397 $19,182
Net income..................................... 3,982 (304) 814 4,492
Total assets................................... 47,982 3,744 5,171 56,897
Nine months ended June 30, 1999
Sales to unaffiliated customers................ $3,892 $2,224 $15,572 $21,688
Net income..................................... 5,930 (143) 947 6,734
Total assets................................... 40,225 2,087 4,693 47,005
</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.
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 and Registration Statement on Form S-1.
Forward-looking Statements
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 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."
8
<PAGE>
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 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.
Results of Operations
<TABLE>
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.
<CAPTION>
For the three months ended For the nine months ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Product sales................................ 82.9% 86.6% 81.6% 89.4%
Services..................................... 17.1 13.4 18.4 10.6
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
Cost of revenues:
Product sales................................ 7.7 7.6 7.7 8.8
Services..................................... 3.5 3.5 4.3 28.9
----- ----- ----- -----
Total cost of revenues..................... 11.2 11.1 12.0 11.7
----- ----- ----- -----
Gross profit.................................... 88.8 88.9 88.0 88.3
Operating expenses:
Research and development..................... 11.0 11.8 11.1 9.6
Sales and marketing.......................... 30.7 21.5 35.0 18.2
General and administrative................... 13.1 11.1 13.5 9.5
----- ----- ----- -----
Total operating expenses................... 54.8 44.4 59.6 37.3
----- ----- ----- -----
Operating income................................ 34.0 44.5 28.4 51.0
Interest income................................. 8.2 7.5 9.9 4.2
Other income (expense).......................... 3.1 (0.8) 0.0 (0.7)
----- ----- ----- -----
Income before taxes............................. 45.3 51.2 38.3 54.5
----- ----- ----- -----
Provision for taxes............................. 17.7 22.0 14.9 23.4
----- ----- ----- -----
Net income...................................... 27.6% 29.2% 23.4% 31.0%
===== ===== ===== =====
Gross margin on product sales................... 90.7% 91.2% 90.6% 90.2%
===== ===== ===== =====
Gross margin on services........................ 79.4% 73.8% 76.5% 72.6%
===== ===== ===== =====
</TABLE>
9
<PAGE>
Three Months Ended June 30, 2000 and 1999
Revenues. Revenues increased by approximately 12% from $6.7 million for
the three months ended June 30, 1999 to $7.5 million for the three months ended
June 30, 2000. Over the same period, product sales increased by approximately 7%
from $5.8 million to $6.2 million. Services revenue increased by approximately
43% from $901,000 to $1.3 million. The increase in product sales was primarily
attributable to the results generated from the Company's increased focus on test
systems for third generation (3G) digital cellular and voice over IP (VoIP). 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.
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 sales increased approximately 13% from $745,000 for the
three months ended June 30, 1999 to $841,000 for the three months ended June 30,
2000. Over the same period, the cost of product sales increased by approximately
13%. Gross margin for product sales increased from 91.2% to 90.7% over this same
period as the Company's sales mix had a greater proportion of higher margin
products. Cost of services increased by approximately 12% from $236,000 for the
three months ended June 30, 1999 to $264,000 for the three months ended June 30,
2000 due primarily to increased compensation costs. Over the same period,
service gross margin on services increased from 73.8% to 79.4%. 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, and timing of service contract renewals.
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 increased by approximately 5% from $792,000 for the three
months ended June 30, 1999 to $828,000 for the three months ended June 30, 2000.
As a percentage of total revenues, research and development expenses decreased
from 11.8% to 11.0% over the same period. The increase in absolute dollars was
due to an increase in 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 59.4% from $1.4 million for the three months
ended June 30, 1999 to $2.3 million for the three months ended June 30, 2000. As
a percentage of total revenues, sales and marketing expenses increased from
21.5% for the three months ended June 30, 1999 to 30.7% for the three months
ended June 30, 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 continue to invest in its sales and marketing capabilities.*
--------------------------------------------------
* See "Forward-looking Statements" on Page 8
10
<PAGE>
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
32.2% from $742,000 for the three months ended June 30, 1999 to $981,000 for the
three months ended June 30, 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
11.1% to 13.1% 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 $501,000 for the three months ended June 30, 1999 to $615,000 for
the three months ended June 30, 2000 due to an increase in the Company's cash
and cash equivalent balances and short-term investments primarily from
profitable operations and to higher prevailing interest rates
Other income (expense), net. Other income (expense) primarily
represents gains and losses from fluctuations in exchange rates on transactions
denominated in foreign currencies. Other expense was $47,000 for the three
months ended June 30, 1999. Other income was $233,000 for the three months ended
June 30, 2000 due to foreign exchange gains, including gains realized on 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 June 30, 1999 and 39.0% for the three
months ended June 30, 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.*
Nine Months Ended June 30, 2000 and 1999
Revenues. Revenues decreased by approximately 11.6% from $21.7 million
in nine months ended June 30, 1999 to $19.2 million in the nine months ended
June 30, 2000. Over the same period, product sales decreased by approximately
19% from $19.4 million to $15.7million. Services revenue increased by
approximately 54% from $2.3 million in the nine months ended June 30, 1999 to
$3.5 million in the nine months ended June 30, 2000. 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
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.
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 as in the past, and this will likely have a negative effect on the
Company's long term growth expectations.* Accordingly, results for 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 decreased approximately 23%
from $1.9 million in the nine months ended June 30, 1999 to $1.5 million in the
nine months ended June 30, 2000. Over the same period,
--------------------------------------------------
* See "Forward-looking Statements" on Page 8
11
<PAGE>
product sales decreased by approximately 19%. As a result, over the same period,
gross margin for product sales increased from 90.2% to 90.6% as the Company's
hardware sales in the first nine months of 2000 had a higher proportion of high
margin products. Cost of services increased by approximately 32% from $627,000
in the nine months ended June 30, 1999 to $830,000 in the nine months ended June
30, 2000. Over the same period, gross margin on services increased from 72.6% to
76.5%, as support contract renewals increased. 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 were
essentially flat at $2.1 million for the nine months ended June 30, 1999 and the
nine months ended June 30, 2000. As a percentage of total revenues, research and
development expenses increased from 9.6% to 11.1% over the same period.
Sales and Marketing. Sales and marketing expenses increased by
approximately 70% from $3.9 million in the nine months ended June 30, 1999 to
$6.7 million in the nine months ended June 30, 2000. As a percentage of total
revenues, sales and marketing expenses increased from 18.2% to 35.0% 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 continue to invest
in its sales and marketing capabilities.*
General and administrative. General and administrative expenses
increased by approximately 26% from $2.1 million in the nine months ended June
30, 1999 to $2.6 million in the nine months ended June 30, 2000. As a percentage
of total revenues, general and administrative expenses increased from 9.5% to
13.5% over the same period. The increase in absolute dollars is due primarily to
an overall increase in personnel, recruiting expenses and the costs associated
with being a public company.
Interest Income. Interest income increased from $903,000 in the nine
months ended June 30, 1999 to $1.9 million in the nine months ended June 30,
2000 due to an increase in the Company's cash and cash equivalents and
short-term investment balances resulting from the February 1999 public offering
and from profitable operations.
Other Income (expense). Other expense was $159,000 in the nine months
ended June 30, 1999 and other income was $18,000 in the nine months ended June
30, 2000, due to exchange gains related to transactions denominated in foreign
currencies.
Provision for income taxes. The Company's effective tax rate was
approximately 43.0% in the nine months ended June 30, 1999 and was 39.0% in the
nine months ended June 30, 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 $8.0 million and
$5.1 million in the period ending June 30, 1999 and 2000, respectively. The cash
provided by the Company's operations for the nine months ended June 30 1999 was
primarily attributable to high profitability and increased accrued expenses
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* See "Forward-looking Statements" on Page 8
12
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offset by a significant increase in account receivable, specifically in Japan
from a large one-time sale and a reduction in liabilities. The cash provided by
the Company's operations for the nine months ended June 30, 2000 was primarily
attributable to profitable operations, and to increased levels of accounts
payable and deferred income offset by higher prepaid expenses. Investing
activities, consisting primarily of purchases of short-term investments and to a
lesser extent additions to property and equipment, used cash of $28.1 million
and $10.0 million in the nine months ending June 30, 1999 and 2000,
respectively. Financing activities in the nine months ending June 30, 1999 and
2000 were attributable to the proceeds of the public offering in the former
period and to exercises of employee stock options in both periods.
As of June 30, 2000, the Company had working capital of $47.3 million,
cash and cash equivalents of $4.2 million and short-term investments of $42.6
million. As of June 30, 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 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,
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* See "Forward-looking Statements" on Page 8
13
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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 nine months ended June 30, 2000, the Company's top four
customers represented approximately 75% of total revenues. 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.
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* See "Forward-looking Statements" on Page 8
14
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Risks Associated with International Sales and Operations; Foreign Exchange Risk
Company revenues from international customers were approximately 66%
during the nine months ended June 30, 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 nine months ended June 30, 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 as in the past, and this will likely have a negative effect on the
Company's long term growth expectations.* Accordingly, results for 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
toanticipate 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 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.
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* See "Forward-looking Statements" on Page 8
15
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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 June 30, 2000 the Company had forward exchange contracts maturing in
fiscal 2000 to sell approximately $1.2 million in Pounds Sterling. The fair
market value of the contracts at June 30, 2000 was immaterial As of June 30,
2000 the cost of the contracts 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.*
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.
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,
collateralized mortgage obligations U.S. government securities and money market
funds. These securities
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* See "Forward-looking Statements" on Page 8
16
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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 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27 Financial Data Schedule
(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.
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: August 11, 2000 By: /s/ Richard A. Karp
------------------------
Richard A. Karp
President and Chief Executive Officer
(Principal Executive Officer)
Acting Chief Financial Officer
(Principal Financial Officer)
