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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1999
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ___________________.
Commission File Number: 0-24701
CATAPULT COMMUNICATIONS CORPORATION
(Exact name of Registrant as specified in its charter)
Nevada 77-0086010
(State of Incorporation) (IRS Employer Identification Number)
160 South Whisman Road, Mountain View, California 94041
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code:
(650) 960-1025/Web Site (www.catapult.com)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, $0.001
par value
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes _ No X
As of November 30, 1999, 12,729,570 shares of the Registrant's common
stock, $0.001 par value, were outstanding. The aggregate market value of the
voting stock held by non-affiliates of the Registrant (based upon the closing
price of the Registrant's common stock on November 30, 1999 of $19.4375 per
share) was approximately $99,160,756. Shares of common stock held by each
executive officer and director of the outstanding common stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive
proxy statement for the Annual Meeting of Stockholders scheduled to be held on
February 11, 2000.
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PART I....................................................................................................................1
ITEM 1. BUSINESS ...................................................................................................1
The Company.................................................................................................1
The DCT Product Line........................................................................................2
Customers...................................................................................................3
Sales and Marketing.........................................................................................4
International Sales.........................................................................................5
DCT Product Line Support....................................................................................5
Product Development.........................................................................................5
Manufacturing...............................................................................................6
Competition.................................................................................................6
Intellectual Property.......................................................................................7
Employees...................................................................................................8
Executive Officers of the Company...........................................................................8
ITEM 2. PROPERTIES ................................................................................................10
ITEM 3. LEGAL PROCEEDINGS .........................................................................................10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................................10
PART II..................................................................................................................10
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..................................10
ITEM 6. SELECTED FINANCIAL DATA....................................................................................12
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................14
Overview...................................................................................................14
Fiscal Years Ended September 30, 1998 and 1999.............................................................15
Fiscal Years Ended September 30, 1997 and 1998.............................................................16
Liquidity and Capital Resources............................................................................18
Year 2000 Readiness Disclosures............................................................................18
Factors That May Affect Future Results.....................................................................19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS.................................................27
Foreign Exchange Risk and Derivative Financial Instruments.................................................27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................................30
Range of Exercise Price....................................................................................44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.......................48
PART III.................................................................................................................48
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.........................................................48
ITEM 11. EXECUTIVE COMPENSATION.....................................................................................48
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............................................48
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................................................48
PART IV..................................................................................................................49
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K...........................................49
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FORWARD-LOOKING STATEMENTS
THIS REPORT ON FORM 10-K CONTAINS STATEMENTS THAT ARE NOT HISTORICAL
FACTS BUT ARE FORWARD-LOOKING STATEMENTS RELATING TO SUCH MATTERS AS ANTICIPATED
FINANCIAL PERFORMANCE, BUSINESS PROSPECTS, TECHNOLOGICAL DEVELOPMENTS, NEW
PRODUCTS AND SIMILAR MATTERS. 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 STOCKHOLDERS OF CATAPULT
SHOULD CAREFULLY REVIEW THE CAUTIONARY STATEMENTS SET FORTH IN THIS REPORT ON
FORM 10-K, 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 FROM TIME TO TIME BY OR ON BEHALF OF THE COMPANY.
PART I
ITEM 1. BUSINESS
The Company
Catapult Communications Corporation ("Catapult," the "Company" or the
"Registrant") designs, develops, manufactures, markets and supports an advanced
software-based test system offering an integrated suite of testing applications
for the global telecommunications industry. Catapult's DCT product line(1), a
family of digital communications test systems, is designed to enable equipment
manufacturers and network operators to deliver complex digital
telecommunications equipment and services more quickly and cost-effectively,
while helping to ensure interoperability and reliability. The Company's advanced
software and hardware assist customers in the design, integration, installation
and acceptance testing of a broad range of digital telecommunications equipment
and services. The Company markets its products through a direct sales force to
industry leaders such as Cable & Wireless Communications PLC, Fujitsu Limited,
LM Ericsson, Lucent Technologies, Inc. ("Lucent"), Marconi Communications Ltd.,
Motorola Inc. ("Motorola"), NEC Corporation ("NEC"), Nippon Telephone and
Telegraph ("NTT"), Northern Telecom Limited and Tellabs Inc.
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 Company's emphasis is
on complex, high-level and emerging protocols, including Third Generation
Cellular, IP Telephony (Voice over IP), General Packet Radio Service (GPRS),
Asynchronous Transfer Mode (ATM), Signaling System #7 (SS7), Intelligent Network
(IN), V5,
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1 The DCT product line consists of the DCT-S and DCT2000, introduced in
November of 1999. The DCT2000 introduces PCI-bus architecture to the DCT
product line. Emerging Third Generation Cellular technology will be
implemented on the DCT2000 platform.
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Integrated Services Digital Network (ISDN), Global Systems for Mobile
Communications (GSM), Interim Standard 41 (IS-41), Code Division Multiple Access
(CDMA), X.25 and Frame Relay(2). The Company's extensive technical know-how and
proprietary software development tools enable the Company to implement new
protocols and protocol variants rapidly in response to customer needs. With its
extensive library of software protocol modules, large selection of physical
interfaces and versatile platform, the DCT product line is easily configured to
support a wide variety of digital testing functions, thereby reducing a
customer's need for multiple test systems. In addition, the DCT system's
multi-protocol, multi-user capability allows multiple testing operations to be
performed simultaneously, helping the Company's customers to accelerate their
product development cycles.
The DCT Product Line
DCT systems consist of advanced software and hardware running on a
third-party UNIX-based workstation. In a system sale, customers typically
license one or more software modules and purchase hardware and ongoing software
support. Customers may upgrade their systems by purchasing additional software
protocol modules and hardware to meet future testing needs. Customers have the
option to purchase a third-party workstation from the Company or provide a
workstation to the Company for configuration. Prices for DCT systems vary widely
depending upon the overall system configuration, including the number and type
of software protocol modules and the number of physical interfaces required by
the customer. A DCT system sale typically ranges in price from approximately
$50,000 to $150,000.
Applications
The principal applications of the DCT product line are simulation, load
and stress testing, feature verification, conformance testing and monitoring.
Simulation. DCT systems simulate or act like one or more network
devices, emulating their actions and responses. By simulating various network
devices, such as digital switches, wireless base stations, network access nodes
and network databases, the Company's products assist engineers to
cost-effectively develop equipment that will be compatible with the networks
within which they will be deployed. This helps ensure that equipment will
interoperate reliably, thereby reducing costly failures after installation.
Load and Stress Testing. DCT systems allow customers to verify that a
device under test can successfully handle its designed traffic capacity and that
its performance will degrade gradually, rather than fail completely, when
stressed beyond its specifications. Distributed interface processing and a
high-performance UNIX-based platform enable the DCT systems to initiate and
maintain high traffic volumes.
Feature Verification. DCT systems perform feature verification by
simulating one or more network devices and testing a wide variety of possible
scenarios to verify that the device under test handles all features specified by
the protocol. The user is able to initiate multiple simultaneous calls across
one or many links, create correct call scenarios, send messages out of sequence
to verify error response mechanisms and use the DCT systems' traffic channel
facilities to verify a voice or data path.
Conformance Testing. DCT systems test for conformance by enabling
manufacturers and network operators to verify that devices meet specified
standards. Conformance test suites validate the implementation of new features
and the functionality of existing features against a standardized set of
predefined criteria. The Company provides pre-packaged V5 , ISDN and SS7
conformance test suites which assist in this testing.
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2 Please refer to Glossary on page 29.
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Monitoring. DCT systems monitor network links and store network
activity information for future analysis, typically without affecting network
traffic. By collecting and analyzing traffic, the DCT systems help ensure that
the link has been brought into service and that the devices connected by the
link are functioning properly. The DCT systems also provide notice of network
device failure. The DCT systems can be used to set "traps" and "triggers," count
error messages and filter packets by address or selected field criteria. The DCT
systems can simultaneously monitor multiple links, each of which may be using
different protocols.
DCT Product Line Software
The DCT product line software, based on a UNIX(TM) operating system,
consists of protocol encoders and decoders, protocol state machines, protocol
validation tests and conformance test suites. The DCT system includes
approximately 160 protocols and variants, enabling the DCT system to be
configured for many different test applications. The Company's customers can
choose to program the DCT system using Catapult's graphical user interface (GUI)
or by writing their own code using the Company's Digital Communication
Programming Language (DCPL), a fully featured optimized communications language.
In addition, the Company has introduced pre-programmed applications to perform
load generation and network entity simulation. These turnkey solutions were
introduced under the product name, CrossBow(TM) in May of 1999. Finally,
customers can also choose to integrate their own libraries of subroutines
written in industry standard programming languages such as C or C++.
DCT Product Line Hardware
The DCT product line employs modular hardware architecture that
supports a wide variety of physical interfaces which connect the DCT systems to
the device under test. The Company provides this flexibility through both the
DCT-S protocol-independent MPI co-processor cards and the DCT2000 PowerPCI
co-processor cards, which are inserted into the workstation or an expansion
chassis. The DCT system is hosted on a Sun Microsystems or compatible
workstation.
DCT-S Hardware. Using up to three expansion chassis, a single
workstation may also support up to 19 MPI cards or 76 signaling channels. The
Company offers MPI cards for a variety of physical interfaces, including
industry standards such as Primary Rate E-1, Primary Rate T-1, Serial port card,
ISDN Basic Rate (S/T), and Japanese CII.
DCT-2000 Hardware. Using up to four expansion chassis, a single
workstation may also support up to 52 PowerPCI cards or 208 signaling channels.
The Company will offer PowerPCI cards for a variety of physical interfaces,
including industry standards such as a Primary Rate E-1, T-1 card, ATM
Optical/UTP cards, ATM PDH DS3/E3 cards, Serial port card, ISDN Basic Rate card,
and Japanese CII.*
The Company also offers a number of auxiliary cards to increase the
versatility of the DCT-S system. For example, the VOX card adds voice channel
testing capability on up to 64 channels of E-1 and T-1 links. The Timeslot
Interchange (TSI) card supports individual dynamic or static channel selection
for up to 248 timeslots. The Subscriber Line Interface Card (SLIC) converts
two-wire analog subscriber line interfaces to four-wire handset interfaces. The
Company provides a converter for CMI, the Japanese physical interface.
Customers
The Company's customers in the United States and Canada are primarily
telecommunications equipment manufacturers, and outside North America, its
customer base also includes network operators.
Revenues from the Company's top four customers represented
approximately 60%, 73% and 87% of total
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revenues in fiscal 1997, 1998 and 1999, respectively. The Company's largest
customers have been Motorola, which accounted for approximately 28% and 15% of
total revenues in fiscal 1997 and 1998, respectively and NTT, which accounted
for approximately 58% of total revenues in fiscal 1999. The Company's four
largest customers in fiscal 1999 were NTT, Motorola, NEC and Lucent, which
accounted for approximately 58%, 14%, 12% and 3% of total revenues,
respectively. The Company's four largest customers in fiscal 1998 were NTT, NEC,
Motorola and Lucent, which accounted for approximately 24%, 21%, 15% and 12% of
total revenues, respectively. In fiscal 1997, sales to Motorola and NEC
accounted for approximately 28% and 17% of total revenues, respectively.
Separate engineering groups of the same customer at different locations
generally make independent decisions to purchase the Company's products. For
example, several divisions of one major customer have independently installed
DCT systems at multiple locations in the United States as well as in Ireland,
the United Kingdom, Israel, India and China.
The Company expects that it will continue to depend upon a relatively
limited number of customers for substantially all of its revenues in future
periods, although no customer is presently obligated either to purchase a
specific amount of products or to provide the Company with binding forecasts of
purchases for any period. The loss of a major customer or the reduction, delay
or cancellation of orders from one or more of the Company's significant
customers could materially adversely affect the Company's business, financial
condition and results of operations.
Subsequent to 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 that these reductions are due to
the intensely competitive marketplace in Japan and to significant reductions in
NTT's budget. 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 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.
Sales and Marketing
The Company markets its products and services through its direct sales
force, a majority of whom have technical degrees. As of September 30, 1997, 1998
and 1999, the Company's direct sales force consisted of 5, 10 and 15 employees,
respectively. The sales and marketing staff is located in North America, Japan,
Europe and Canada. The Company does not anticipate entering into independent
distributor arrangements for the foreseeable future and intends to sell
exclusively through direct sales personnel because of the high level of
technical expertise and support required by customers.* Pursuant to a special
agreement, one of the Company's customers has the right to re-market the
Company's test systems as part of an integrated product sale.
The Company's sales strategy is to focus on the functional groups
related to the customer's product development cycle, including research and
development, network integration and final test. Sales to a new customer have
often led to sales at other facilities of the customer, as often a customer
performs development at multiple sites in order to adapt its telecommunications
equipment to local requirements and standards. The Company intends to continue
to leverage its existing customer base not only for follow-on and upgrade sales
but also to gain access to new customers. For example, because users of similar
test systems can benefit from sharing test scripts and results, an initial sale
can facilitate a subsequent sale to other equipment manufacturers and network
operators.
The Company has implemented a number of marketing initiatives to
support the sales of its products and services. These efforts are intended to
inform customers of the capabilities and benefits of the Company's advanced
software-based test systems. Marketing programs include direct mail, on-site
customer seminars, limited participation in industry trade shows, technology
conferences and forums and dissemination of information concerning products
through the Company's website.
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Customers generally purchase on an as-needed basis, and none of the
Company's customers has entered into agreements that require minimum purchases.
The Company's products generally are shipped within 15 to 30 days after orders
are received. As a result, the Company generally does not have a significant
backlog of orders, and revenues in any quarter are substantially dependent on
orders booked and shipped in that quarter.
A customer's decision to purchase the Company's products typically
involves a significant technical evaluation, internal procedural delays
associated with large capital expenditure approvals and testing and acceptance
of new systems that affect key operations. For these and other reasons, the
sales cycle associated with the Company's products is typically lengthy and
subject to a number of significant risks over which the Company has little or no
control. Historically, the period between initial customer contact and purchase
of the Company's products has typically ranged from two to nine months, with
sales to new customers (including new divisions within existing customers) at
the longer end of this range. Because of the lengthy sales cycle and the
relatively small number and large size of customers' orders, if revenues
forecast from a specific customer for a particular quarter are not realized in
that quarter, the Company's operating results for that quarter could be
materially adversely affected.
International Sales
International sales constituted approximately 53%, 72% and 78% of the
Company's total revenues in fiscal 1997, 1998 and 1999, respectively. The
Company expects that international sales will continue to account for a
significant portion of its revenues in future periods.* The Company sells its
products worldwide through its direct sales force. In addition, the Company has
offices and sales staff located in Japan, the United Kingdom, Germany, Sweden,
France and Canada and plans to open new offices internationally from time to
time.*
Subsequent to September 30, 1999, the Company received information that
sales to NTT, a major customer in Japan and our largest customer in fiscal 1999,
would likely be significantly reduced beginning in fiscal 2000. The Company
believes that these reductions are due to the intensely competitive marketplace
in Japan and to significant reductions in NTT's budget. The Company believes
that sales in Japan will not 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 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.
DCT Product Line Support
Due to the complexity of its customers' testing needs, the Company
offers its customers support and training from highly skilled technical
personnel. As of September 30, 1997, 1998 and 1999, the Company had 10, 16 and
26, applications engineers worldwide who provide full-time technical support to
the Company's customers, including technical assistance and development support,
respectively. The Company provides ongoing training, generally at the customer's
site, and technical assistance from all of its offices. Support is generally
offered during normal business hours applicable to each office. The Company also
offers product warranties for various lengths of time, depending on the product
and country of purchase or operation.
The Company provides periodic software releases that contain new
features, new protocol variants and other improvements. Each new software
release is carefully designed not only to enhance performance and flexibility,
but also to maximize compatibility with the Company's earlier software releases,
enabling the DCT system to continue to be used as customer needs and
applications evolve. As part of its ongoing software support, the Company may
also develop protocol variants at the request of its customers.*
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Product Development
The Company's development efforts are directed at improving the
capability, performance and ease of use of the DCT system. The Company intends
to continue to devote a large portion of its engineering resources to the
enhancement of its suite of software protocol modules in order to meet current
and projected customer requirements. The Company also intends to continue to
develop and enhance its proprietary internal tools and techniques for supporting
new protocols in the DCT systems.
The Company is continually seeking to make the DCT systems easier to
use in order to expand its market to include a broad range of users. In order to
run test scenarios, particularly on advanced test systems, users may need to
create customized test scripts, a process that may require significant technical
expertise. The Company continues to extend the CrossBow(TM) product line of
pre-programmed applications, such as load generators and network entity
simulators, across emerging network areas. Catapult believes that these
additional product offerings will permit expansion of its market to include
companies with limited programming resources.* The Company plans to expand and
refine its GUI and pre-programmed applications to continue to improve the ease
of use of the DCT system.* In addition, the Company is continuing to implement a
number of test suites specified by telecommunications standards bodies, such as
ITU-T (International), ETSI (European) and EIA-TIA (North American) and the
Third Generation Partnership Program (3GPP). The Company believes that these new
solutions will provide the opportunity to capture more revenues and sell to
companies with fewer programming resources.*
Most of the Company's hardware development program is directed towards
designing protocol co-processors and associated physical interfaces. The Company
has initiated these projects to increase the performance and capabilities of the
DCT system and expand the range of devices to which the DCT system can be
directly connected for testing purposes.
Research and product development expenses were approximately $1.4
million, $2.0 million and $2.8 million in fiscal 1997, 1998 and 1999,
respectively. The Company's policy is to evaluate software development projects
for technological feasibility to determine if they meet capitalization
requirements. To date, all software development costs have been expensed as
research and development expenses as incurred. As of September 30, 1997, 1998
and 1999, 10, 15 and 24, of the Company's engineers, respectively, were engaged
in or provided support to research and development.
Manufacturing
The Company's manufacturing operations consist of the procurement and
inspection of components, final assembly, quality control tests and packaging.
Workstations that host the Company's products are either purchased by customers
directly or purchased by the Company on behalf of its customers. Printed circuit
boards, chassis and most of the other major components used in the Company's
products are sub-assembled to the Company's specifications by independent
contractors. The sub-assembled components are then delivered to the Company's
facilities for final assembly, quality control and testing against product
specifications and product configuration, including installation of the
Company's software and proprietary hardware. The Company believes that its use
of independent contractors for sub-assembly combined with in-house final
assembly improves production planning, increases efficiency, reduces costs and
improves quality.
The Company has a computerized manufacturing inventory control system
that is integrated with its financial bookkeeping system. This manufacturing
control system monitors purchasing, inventory control and production.
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Competition
The market for telecommunications test systems is characterized by
intense competition. The Company believes that the principal competitive factors
affecting its market include availability of a broad range of protocols and
protocol variants, system performance, length of operating history and industry
experience, product reliability, ease of use, quality of service and support,
status as an independent vendor and price/performance. In addition, the Company
believes that potential customers consider other factors, such as the number of
protocols required and whether the test system vendor sells competing
telecommunications products. The Company believes that it competes favorably
with respect to these factors.
The Company believes its principal competitors are Able Communications
Inc. ("Able"), Agilent Technologies Inc. ("Agilent"), IFR Systems Inc. ("IFR"),
INET, Inc. ("INET"), Schlumberger, Ltd. ("Schlumberger"), Tekelec, Tektronix
Inc. ("Tektronix") and Wavetek Corporation ("Wavetek"). Many of the Company's
existing and potential competitors are large domestic and international
companies that have substantially greater financial, manufacturing,
technological, marketing, sales, distribution and other resources, larger
installed customer bases, greater name recognition and longer-standing customer
relationships than the Company. Accordingly, such competitors or potential
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements or to devote greater resources to the
development, promotion and sales of their products than the Company. The Company
believes that the market for high-end testing systems is fragmented
geographically. For example, Tekelec, INET, Tektronix and Schlumberger are the
Company's primary competitors in North America, while its primary competitors in
Europe are Tektronix, Wavetek, Schlumberger and IFR. The Company's primary
competitors in Japan are Able and Tekelec. The Company also faces competition
from several relatively small companies.
The Company also competes with the internal test system groups of its
customers and potential customers. Many of the Company's existing and potential
customers have the technical capability and financial resources to produce their
own test systems and perform test services internally. These systems and
services would be competitive with the test systems offered by the Company.
The Company expects competition to increase in the future from existing
competitors and from other companies that may enter this market with solutions
that may be less costly or provide higher performance or offer more features
than the Company's solutions. Current and potential competitors have established
or may establish cooperative relationships among themselves or with third
parties to develop new test solutions for internal use or for sale to third
parties in the Company's markets. Accordingly, it is possible that new
competitors may emerge and acquire significant market share. Increased
competition may result in price reductions, reduced gross margins and loss of
market share, any of which would have a material adverse effect on the Company's
business, financial condition and results of operations.
Intellectual Property
The Company relies on a combination of trademark, copyright and trade
secret laws, as well as nondisclosure agreements and other contractual
restrictions, to establish and protect its proprietary rights. The Company
generally enters into nondisclosure and invention assignment agreements with its
employees and consultants, and into nondisclosure agreements with its customers
and suppliers. To date, the Company has not sought patent protection for its
proprietary technology. The Company believes that, historically, because of the
rapid pace of technological change in the telecommunications test system market,
patent protection has been a less significant factor than the knowledge, ability
and experience of the Company's employees, the nature and frequency of product
enhancement and the quality of the Company's support services. However, there
can be no assurance that patent protection will not become a more significant
factor in the Company's industry in the future. Likewise, there can be no
assurance that the measures the Company undertakes will be adequate to protect
its proprietary technology. To date, the Company has not federally registered
any of its trademarks or copyrights. The Company's practice is to affix
copyright notices
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on software, hardware and product literature in order to assert copyright
protection for these works. There can be no assurance that the lack of federal
registration of the Company's trademarks and copyrights would not have a
material adverse effect on the Company's intellectual property rights in the
future. Additionally, the Company may be subject to further risks as it enters
into transactions in countries where intellectual property laws are unavailable,
do not provide adequate protection or are difficult to enforce.
Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to duplicate aspects of the Company's products
or to obtain and use information that the Company regards as proprietary. There
can be no assurance that the steps taken by the Company to protect its
proprietary technology will be adequate to prevent misappropriation of such
technology or that they will preclude competitors from independently developing
products with functionality or features similar to the Company's products. The
failure of the Company to protect its proprietary technology would have a
material adverse effect on the Company's business, financial condition and
results of operations.
While, to date, the Company has not been subject to claims of
infringement or misappropriation of intellectual property of third parties,
there can be no assurance that third parties will not assert infringement claims
against the Company, that any such assertion of infringement will not result in
litigation or that the Company would prevail in such litigation. Furthermore,
any such claims, with or without merit, could result in substantial cost to the
Company and diversion of its personnel, require the Company to develop new
technology, or require the Company to enter into royalty or licensing
arrangements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company or at all. Because the Company does
not rely on patents to protect its technology, the Company will not be able to
offer a license for patented technology in connection with any settlement of
patent infringement lawsuits. In the event of a successful claim of infringement
or misappropriation against the Company and failure or inability of the Company
to develop non-infringing technology or license the infringed, misappropriated
or similar technology at a reasonable cost, the Company's business, financial
condition and results of operations would be materially adversely affected. In
addition, the Company indemnifies its customers against claimed infringement of
patents, trademarks, copyrights and other proprietary rights of third parties.
Any requirement for the Company to indemnify a customer could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Employees
As of September 30, 1999, the Company employed 93 full-time employees,
including 24 in research and development, 26 in application engineering customer
support, 25 in sales, five in marketing, eight in administration and five in
manufacturing. Of these employees, 63 were employed in North America of which 46
are at the Mountain View, California headquarters, 15 in the United Kingdom and
Europe and 15 in Japan. The Company is not subject to any collective bargaining
agreement and has not experienced any work stoppages. The Company believes that
its relations with its employees are good.
Executive Officers of the Company
The following table sets forth certain information, as of September 30,
1999, with respect to the executive officers of the Company:
Name Age Positions
- ---- --- ---------
Richard A. Karp............ 55 President, Chief Executive Officer,
Chairman of the Board and
Acting Chief Financial Officer
8
<PAGE>
Barry R. Hoglund........... 51 Vice President of Sales
Glenn Stewart.............. 49 Vice President of Engineering
Guy R. Simpson............. 41 Vice President of Application Development
Barbara J. Fairhurst....... 51 Vice President of Operations
Terry Eastham.............. 52 Vice President of Marketing
Kathy T. Omaye-Sosnow...... 43 Director of Human Resources
Dr. Richard A. Karp founded the Company in 1985 and has served as
President, Chief Executive Officer and Chairman of the Board of the Company
since inception. Prior to founding Catapult in 1985, Dr. Karp was Vice President
of Software Development for Tri-Data, Inc., a supplier of protocol conversion
equipment, from 1982 to 1985. Previously, he was a founder and Vice President of
Software of Sequoia Systems, a fault-tolerant computer systems manufacturer. Dr.
Karp has also served as an independent software consultant, and he spent five
years as a systems programmer and project leader at Burroughs Corporation. Dr.
Karp holds a Ph.D. in computer science from Stanford University, a M.S. in
mathematics from the University of Wisconsin and a B.S. in science from the
California Institute of Technology.
Mr. Barry R. Hoglund joined the Company in 1993 as Vice President of
Sales. From 1992 to 1993, he was Vice President of North American Sales and
Service at Spectra-Physics Lasers. Prior to that, he was employed for 17 years
by Watkins-Johnson Company, where his last position was Vice President of Sales
and Marketing. Mr. Hoglund received a M.S. in Physics from the University of
Illinois and a B.S. in Physics from the University of Minnesota.
Mr. Glenn Stewart joined the Company in 1992 as Vice President of
Engineering. Prior to joining the Company, he was Director of Engineering at
Tektronix/LP Com. Previously, he spent nine years at Bell Northern Research as a
manager of development of telecommunications products and services. Mr. Stewart
holds a M.Sc. and a B.Sc. in Computer Science from the University of Toronto.
Mr. Guy R. Simpson has served as Deputy Chairman of Catapult
Communications Ltd. ("CCL"), the Company's UK subsidiary, since October 1996 and
was elected Vice President of Applications Development of the Company in May
1998. Mr. Simpson joined the Company in 1989 and has held a number of technical
and management positions with the Company and CCL since that time. From October
1996 to April 1998, Mr. Simpson was the Director of Field Test Systems for the
Company. From July 1994 to September 1996, Mr. Simpson was Managing Director of
CCL. From July 1992 to June 1994, he was Secretary of CCL. Prior to joining the
Company, Mr. Simpson was employed for eight years by AT&T Bell Laboratories,
where he held a variety of engineering and management positions in the area of
advanced digital switching systems. Mr. Simpson holds a B.Sc. degree in Computer
Science from Hatfield Polytechnic at the University of Hertfordshire, United
Kingdom.
Mr. Barbara J. Fairhurst joined the Company in June 1995 as Director of
Operations. From 1994 to 1995, Ms. Fairhurst was Principal at BJF Consulting, a
consulting firm, where she developed business plans and implemented operating
systems. From 1990 to 1993, Ms. Fairhurst was Corporate Vice President at
Intersource Technologies, Inc., where she was responsible for operations and
manufacturing. Prior to that time, Ms. Fairhurst spent 10 years as President and
Chief Operating Officer of Sequential Circuits, a manufacturer of electronic
music equipment. Ms. Fairhurst holds a M.B.A. from the Santa Clara University
and a B.A. from San Jose State University.
Mr. Terry Eastham joined the Company in 1999 as the company's first
Vice President of Marketing. Prior to
9
<PAGE>
joining the Company, he served as Chief Operating Officer for Sherwood Networks,
a manufacturer of network computers and display terminals. Previously, he spent
six years at Wyse Technology as Vice President of Product Marketing and 17 years
at Hewlett-Packard Co. where he held a variety of marketing and sales
development positions. Mr. Eastham holds both a M.B.A. degree and a M.S. in
Physics degree from Washington University and a B.S. degree in Physics from
Oklahoma State University.
Ms. Kathy T. Omaye-Sosnow joined the Company in 1997. Ms. Omaye-Sosnow
has served as the Company's Director of Human Resources since June of 1999.
Prior to that, Ms. Omaye-Sosnow served as the Company's Manager of Human
Resources. Prior to joining the Company, she held a variety of human resources
positions, most recently as Manager of Corporate Employment at McKesson HBOC
Corporation, a pharmaceutical distributor and health management corporation.
Prior to that, she was employed with Delta Dental Plan of California, a dental
insurance firm in California, where she held various human resources positions.
Ms. Omaye-Sosnow holds a B.S. degree in Human Resources from California State
University, Sacramento.
ITEM 2. PROPERTIES
The Company's executive offices, product development and primary
support and production operations are located in Mountain View, California,
where the Company occupies approximately 17,750 square feet pursuant to a lease
that expires early in 2002. The annual rent for the property is approximately
$168,000. The Company believes that this facility will be adequate for its
planned purposes.*
In addition, the Company leases professional services office space in
the following locations with the following approximate square footage: 2,000
square feet in Schaumburg, Illinois; 1,500 square feet in Dallas, Texas; 1,300
square feet in Ottawa, Canada; 1,950 square feet in Chippenham, England; and
2,000 square feet in Tokyo, Japan.
ITEM 3. LEGAL PROCEEDINGS
The Company is not subject to any pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is quoted on the Nasdaq National Market
System ("Nasdaq") under the symbol "CATT." The following table sets forth the
range of high and low closing sales prices for each period indicated beginning
on February 11, 1999 when the Company's common stock began trading on Nasdaq:
1999
----
High Low
---- ---
Second quarter $15.15 $ 9.94
Third quarter $30.69 $12.75
Fourth quarter $27.19 $13.75
10
<PAGE>
The Company had approximately 54 stockholders of record as of September
30, 1999. The Company has not declared or paid any cash dividends on its common
stock and presently intends to retain its future earnings, if any, to fund the
development and growth of its business and, therefore does not anticipate paying
cash dividends in the foreseeable future.*
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data is qualified by reference to and
should be read in conjunction with the "Management Discussion and Analysis of
Financial Condition and Results of Operations" section and Consolidated
Financial Statements and Notes thereto included elsewhere in this Report on Form
10-K.
<TABLE>
Consolidated Statements of Income Data:
<CAPTION>
Fiscal Year Ended September 30,
-----------------------------------------------------------------------------
1995 1996 1997 1998 1999
------------ ------------ ------------ ------------- ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues:
Product Sales........................... $5,857 $7,690 $11,519 $15,833 $25,505
Services................................ 1,012 1,562 1,833 2,373 3,450
------------ ------------ ------------ ------------- ------------
Total revenues...................... 6,869 9,252 13,352 18,206 28,955
------------ ------------ ------------ ------------- ------------
Cost of revenues:
Product sales........................... 804 1,103 1,576 1,852 2,701
Services................................ 132 246 344 564 945
------------ ------------ ------------ ------------- ------------
Total cost of revenues.............. 936 1,349 1,920 2,416 3,646
------------ ------------ ------------ ------------- ------------
Gross profit............................ 5,933 7,903 11,432 15,790 25,309
------------ ------------ ------------ ------------- ------------
Operating expenses:
Research and development................ 697 908 1,419 2,001 2,777
Sales and marketing..................... 1,300 1,881 2,550 3,242 5,623
General and administrative.............. 889 1,384 2,063 2,188 2,485
Offering costs.......................... -- -- -- 769 --
------------ ------------ ------------ ------------- ------------
Total operating expenses............ 2,886 4,173 6,032 8,200 10,885
------------ ------------ ------------ ------------- ------------
Operating income............................. 3,047 3,730 5,400 7,590 14,424
Interest income......................... 224 269 380 594 1,294
Other income (expense).................. 126 (209) (6) (263) (107)
------------ ------------ ------------ ------------- ------------
Income before taxes..................... 3,397 3,790 5,774 7,921 15,611
Provision for taxes..................... 1,225 1,502 2,436 3,396 6,706
------------ ------------ ------------ ------------- ------------
Net income.......................... $2,172 $2,288 $ 3,338 $ 4,525 $ 8,905
============ ============ ============ ============= ============
Earnings per share:
Basic................................... $0.23 $0.24 $0.35 $0.44 $0.75
============ ============ ============ ============= ============
Diluted................................. $0.22 $0.22 $0.31 $0.41 $0.73
============ ============ ============ ============= ============
Shares used in per share calculation:
Basic................................... 9,581 9,621 9,630 10,369 11,874
============ ============ ============ ============= ============
Diluted................................. 10,058 10,301 10,605 10,940 12,217
============ ============ ============ ============= ============
</TABLE>
12
<PAGE>
<TABLE>
Consolidated Balance Sheet Data:
<CAPTION>
Fiscal Year Ended September 30,
-----------------------------------------------------------------------------
1995 1996 1997 1998 1999
------------ ------------ ------------ ------------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and short-term
investments................................ $5,438 $7,171 $10,672 $15,229 $41,654
Working capital............................ 4,260 6,496 9,698 14,006 42,372
Total assets............................... 6,760 9,542 14,035 19,495 50,667
Redeemable common stock.................... -- -- -- 5,000 --
Total stockholders' equity................. $4,557 $6,832 $10,170 $10,150 $43,589
</TABLE>
<TABLE>
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.
<CAPTION>
Percentage of Total Revenues Fiscal Year
Ended September 30,
-------------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Revenues:
Product Sales.......................................................... 86.3% 87.0% 88.0%
Services............................................................... 13.7 13.0 12.0
----------- ------------ ------------
Total revenues..................................................... 100.0 100.0 100.0
----------- ------------ ------------
Cost of revenues:
Product sales.......................................................... 11.8 10.2 9.3
Services............................................................... 2.6 3.1 3.3
----------- ------------ ------------
Total cost of revenues............................................. 14.4 13.3 12.6
----------- ------------ ------------
Gross profit........................................................... 85.6 86.7 87.4
----------- ------------ ------------
Operating expenses:
Research and development............................................... 10.6 11.0 9.6
Sales and marketing.................................................... 19.1 17.8 19.4
General and administrative............................................. 15.5 12.0 8.6
Offering costs......................................................... -- 4.2 --
----------- ------------ ------------
Total operating expenses........................................... 45.2 45.0 37.6
----------- ------------ ------------
Operating income............................................................ 40.4 41.7 49.8
Interest income........................................................ 2.8 3.3 4.5
Other income (expense)................................................. -- (1.5) (0.4)
----------- ------------ ------------
Income before taxes.................................................... 43.2 43.5 53.9
Provision for taxes.................................................... 18.2 18.6 23.2
----------- ------------ ------------
Net income......................................................... 25.0% 24.9% 30.8%
=========== ============ ============
Gross margin on product sales............................................... 86.3% 88.3% 89.4%
=========== ============ ============
Gross margin on services.................................................... 81.2% 76.2% 73.0%
=========== ============ ============
</TABLE>
13
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The Company's revenues are derived from product sales, which include
both licenses of the DCT system software and sales of hardware, and from
services, which includes customer support under software support contracts, as
well as installation and training. Prices for the DCT system vary widely
depending upon overall system configuration, including the number and type of
software protocol modules and the number of physical interfaces required by the
customer. A DCT system sale typically ranges in price from approximately $50,000
to $150,000. In addition to the initial system purchase, customers also may
upgrade their systems by purchasing additional software protocol modules and
hardware. Customers have the option to purchase a third-party workstation from
the Company or provide a workstation to the Company for configuration. Product
sales are recognized upon shipment provided that no significant vendor
obligations remain and collection is considered probable.
The Company offers product warranties for various lengths of time,
depending on the product and country of purchase or operation. Customers may
elect to purchase an annual software support contract, which includes both
ongoing technical support and any new software releases made available during
the term of the support contract. These software releases include protocol
variants for protocols already purchased by the customer. Revenues from software
support contracts are recognized ratably over the contract period, which is
generally one year. New customers typically purchase onsite installation and
training, which are charged on a fixed-price basis and recognized as the
services are performed.
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.
14
<PAGE>
Fiscal Years Ended September 30, 1998 and 1999
Revenues
Revenues increased by approximately 59% from $18.2 million in fiscal
1998 to $29.0 million in fiscal 1999. Over the same period, product sales
increased by approximately 61% from $15.8 million in fiscal 1998 to $25.5
million in fiscal 1999. Services revenue increased by approximately 46% from
$2.4 million in fiscal 1998 to $3.5 million in fiscal 1999. The increase in
product sales was primarily attributable to increased system sales to
international customers, including a large sale in the second quarter to NTT
DoCoMo of Japan, and domestic customers as well as increased sales of the
Company's MPI cards. The increase in service 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 September 30, 1999, the Company received information that
sales to NTT, the Company's largest customer in fiscal 1999 and a major customer
in Japan, would likely be significantly reduced beginning in fiscal 2000. The
Company believes that these reductions are due to the intensely competitive
marketplace in Japan and to significant reductions in NTT's budget. 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 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 increased by approximately 42% from $1.9 million
for fiscal 1998 to $2.7 million in fiscal 1999. Gross margin on product sales
increased from 88.3% for fiscal 1998 to 89.4% in fiscal 1999. This increase was
due primarily to a significantly higher proportion of higher margin sales in
Japan and increased sales of higher margin proprietary products, such as MPI
cards, in fiscal 1999. Cost of services increased by approximately 68% from
$564,000 for fiscal 1998 to $945,000 for fiscal 1999 due primarily to increased
cost of engineering personnel additions. Gross margin on services decreased from
76.2% for fiscal 1998 to 73.0% for fiscal 1999 as the Company added application
and other engineers to service the increased sales to customers. 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 service revenue due to
market factors affecting pricing as well as the timing of system sales and
support contract renewals.
Research and Development
Research and development expenses increased by approximately 39% from
$2.0 million for fiscal 1998 to $2.8 million in 1999. As a percentage of total
revenues, research and development expenses decreased slightly from 11.0% to
9.6% over the same period. The increase in expenses was due primarily to
increased spending on projects and increases in the cost to recruit and retain
software and application engineering personnel. The decrease in expenses as a
percentage of sales was due primarily to revenue growth at a higher rate than
R&D expense growth.
15
<PAGE>
Sales and Marketing
Sales and marketing expenses increased by approximately 73% from $3.2
million for fiscal 1998 to $5.6 million in fiscal 1999. As a percentage of total
revenues, sales and marketing expenses increased from 17.8% for fiscal 1998 to
19.4% in fiscal 1999. The increases were due primarily to higher compensation
and occupancy cost resulting from the hiring of additional sales staff in the
UK, Europe, Canada and the US, expansion of Japanese sales office, opening a
sales office in Texas and hiring a Vice President of Marketing along with
additional marketing personnel.
General and Administrative
General and administrative expenses increased by approximately 14% from
$2.2 million for fiscal 1998 to $2.5 million in fiscal 1999. As a percentage of
total revenues, general and administrative expenses decreased from 12.0% to 8.6%
over the same period. This increase was due primarily to increased bonuses,
executive compensation cost and cost associated with being a public company.
Investment Income
Investment income increased from $594,000 for fiscal 1998 to $1,294,000
in fiscal 1999 due to the investment of cash balances and the proceeds from the
initial public offering.
Other Income (expense)
Other expense decreased from $263,000 for fiscal 1998 to $107,000 in
fiscal 1999 due primarily to lower exchange losses and hedging cost related to
transactions denominated in foreign currencies.
Income taxes
The Company's effective tax rate was 42.9% in fiscal 1998 and fiscal
1999. The effective tax rate primarily reflects the higher percentage of
revenues derived by the Company from international operations in fiscal 1999,
particularly its operations in Japan, which has an overall higher corporate tax
rate than the US.
Fiscal Years Ended September 30, 1997 and 1998
Revenues
Revenues increased by approximately 36% from $13.4 million in fiscal
1997 to $18.2 million in fiscal 1998. Over the same period, product sales
increased by approximately 37% from $11.5 million in fiscal 1997 to $15.8
million in fiscal 1998. Services revenue increased by approximately 29% from
$1.8 million in fiscal 1997 to $2.4 million in fiscal 1998. The increase in
product sales was primarily attributable to increased system sales to
international customers as well as increased sales of the Company's MPI cards.
The increase in service revenue was primarily due to sales of software support
contracts associated with new system sales as well as contract renewals.
Services revenue varied depending in part on the relative contributions of each
sales region. The Company has historically received lower services revenue in
Japan in proportion to its product sales, principally due to market factors
affecting the pricing of such services.
Cost of Revenues
Cost of product sales increased by approximately 18% from $1.6 million
for fiscal 1997 to $1.9 million in fiscal 1998. Gross margin on product sales
increased from 86.3% for fiscal 1997 to 88.3% in fiscal 1998. This increase was
due primarily to a significantly higher proportion of higher margin
international sales and to increased
16
<PAGE>
sales of higher margin proprietary products, such as MPI cards, in fiscal 1998.
Cost of services increased by approximately 64% from $344,000 for fiscal 1997 to
$564,000 for fiscal 1998 due to personnel additions. Gross margin on services
decreased from 81.2% for fiscal 1997 to 76.2% for fiscal 1998 as the Company
added support personnel in anticipation of increased sales. Gross margin on
services varied depending in part on the amount of sales to Japan, where the
Company historically generated lower margins on service revenue due to market
factors affecting pricing.
Research and Development
Research and development expenses increased by approximately 41% from
$1.4 million for fiscal 1997 to $2.0 million in 1998. As a percentage of total
revenues, research and development expenses increased slightly from 10.6% to
11.0% over the same period. These increases were due primarily to an increase in
engineering personnel.
Sales and Marketing
Sales and marketing expenses increased by approximately 27% from $2.6
million for fiscal 1997 to $3.2 million in fiscal 1998 as the Company hired
additional personnel. As a percentage of total revenues, sales and marketing
expenses decreased from 19.1% for fiscal 1997 to 17.8% in fiscal 1998.
General and Administrative
General and administrative expenses increased slightly from $2.1
million for fiscal 1997 to $2.2 million in fiscal 1998. As a percentage of total
revenues, general and administrative expenses decreased from 15.5% to 12.0% over
the same period. This percentage decrease was due primarily to a decrease of
approximately $500,000 in executive bonuses, offset in part by personnel
additions, settlement of a claim and $176,000 of deferred compensation expense
related to employee stock option grants.
Offering Costs
In fiscal 1998, the Company expensed $769,000 of costs related to its
delayed initial public offering. There were no such costs in the comparable
period of fiscal 1997.
Investment Income
Interest income increased from $380,000 for fiscal 1997 to $594,000 in
fiscal 1998 due to an increase in the Company's cash and cash equivalent
balances and short-term investments.
Other Income (expense)
Other expense was $6,000 for fiscal 1997 and was $263,000 in fiscal
1998, due to exchange losses related to transactions denominated in foreign
currencies.
Income Taxes
The Company's effective tax rate was 42.2% in fiscal 1997 and 42.9% in
fiscal 1998. The increase in the tax rate primarily reflects the higher
percentage of revenues derived by the Company from international operations in
fiscal 1998, particularly its operations in Japan, which has a relatively high
tax rate.
17
<PAGE>
Liquidity and Capital Resources
Historically, the Company has financed its operations, including
increases in accounts receivable and capital equipment acquisitions, primarily
through cash generated from operations.
On February 11, 1999, the Company consummated an initial public
offering of 3,352,500 shares of its common stock at a price to the public of
$10.00 per share, of which 2,100,000 shares were issued and sold by the Company
and 1,252,500 shares were sold by certain stockholders of the Company. The
proceeds, net of underwriter fees and other expenses, to the Company from the
offering were approximately $19.2 million.
The Company's operating activities provided cash of $3.4 million, $4.8
million and $7.6 million in fiscal 1997, 1998 and 1999, respectively,
principally from net income in those periods. The use of cash in the Company's
operations for fiscal 1997, 1998 and 1999 was primarily attributable to a
significant increase in accounts receivable due to increased sales and increases
in accrued liabilities and deferred revenue offset in part by decreases in
accounts payable. Investing activities, consisting primarily of purchases and
sale of short-term investments and additions to property and equipment, provided
cash of $167,000 in fiscal 1997 and used cash of $562,000 and $33,552,000 in
fiscal 1998 and 1999, respectively. Financing activities were immaterial in
fiscal 1997. Financing activities provided cash of $212,000 in fiscal 1998 from
the exercise of stock options and $18,987,000 in fiscal 1999, primarily as a
result of proceeds from the Company's initial public offering and the proceeds
from the exercise of stock options offset in part by a repurchase of stock from
an executive officer in fiscal 1999.
As of September 30, 1999, the Company had working capital of $42.3
million and cash and cash equivalents of $8.5 million and temporary investments
of $33.2 million. As of September 30, 1999, 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 $500,000 in fiscal
2000.
The Company believes that cash and cash equivalents and temporary
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.
Year 2000 Readiness Disclosures
Many currently installed computer systems and software products are
coded to accept only two-digit entries in the date code field. These date code
fields will need to accept four-digit entries to distinguish 21st century dates
from 20th century dates. As a result, computer systems and/or software used by
many companies may need to be upgraded to comply with such "Year 2000"
requirements. The Company's internal information systems, including its
financial accounting, product development and operations systems, utilize
software and hardware provided by third parties. In most cases, the Company
employs widely available software applications and other products from leading
third-party vendors and has been advised by such vendors that such products and
upgrades are Year 2000 compliant. However, the failure of such third-party
products to operate properly with regard to the Year 2000 or thereafter could
require the Company to incur unanticipated expenses to remedy any problems or
otherwise disrupt the Company's business.
Non-information technology systems that utilize embedded technology,
such as microcontrollers, have been upgraded or replaced to become Year 2000
compliant. The Company does not believe that it uses any non-information
technology systems the failure of which would be material to the Company's
business, financial condition and results of operations, although there can be
no assurance in this regard.*
18
<PAGE>
The Company generally represents to its customers that it has achieved
Year 2000 compliance for its products and believes this to be the case.* The
Company's products do not contain hardware components or software which involve
the rollover of dates. The Company's products may be integrated by the Company
or its customers with, or otherwise interact with, non-compliant hardware and
software produced by other companies, which may expose the Company to claims
from its customers. The foregoing may result in the loss of or delay in market
acceptance of the Company's products and services or increased service and
warranty costs to the Company, both of which would have a material adverse
effect on the Company's business, financial condition and results of operations.
Given the large number of such third-party hardware and software products and
the Company's limited resources, the Company does not intend to review such
products for Year 2000 compliance.
The Company surveyed its key vendors regarding their readiness and
exposure with respect to the Year 2000 problem. The Company has not been
notified to date by these vendors that they are not Year 2000 compliant. The
Company believes that it will have adequate inventory on hand of all key
components and will therefore have adequate time to find a replacement vendor in
the event supplies from one of its key vendors are disrupted due to Year 2000
issues.* However, there can be no assurance that its plans will be adequate and
that it will not experience unanticipated disruption in the supply of components
which could delay or result in the loss of revenue.
The Company's customers are large companies with complex operations and
as such the Company cannot adequately assess the impact which Year 2000 issues
might have on their operations. In addition, since the Company's sales are
highly concentrated, with its top four customers accounting for 87% of its
business in fiscal year 1999, operational disruptions caused by the Year 2000
could have an adverse effect on the timing and size of the Company's sales
during the Year 2000 and a material impact on its business, financial condition
and results of operations.
To date, the Company has not incurred material costs associated with
its efforts to become Year 2000 compliant. 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.*
The Company does not intend to develop any specific contingency plans
to address the effects of any Year 2000 problems. The Company believes that it
has adequate liquidity to sustain a temporary disruption in its business as a
result of such problems.* However, since it cannot forecast with any certainty
the impact, extent and duration of any Year 2000 problems on the Company, its
customers or its suppliers, there can be no assurance that the Company's
resources will be adequate to withstand any prolonged disruption.
Factors That May Affect Future Results
The risk factors set forth below and elsewhere in this Report on Form
10-K are important factors that may affect future results and that could cause
actual results to differ materially from those projected in forward-looking
statements that may be made by the Company from time to time.
Fluctuations in Quarterly Operating Results; Lengthy Sales Cycle
The Company has experienced, and anticipates that it will continue to
experience, significant fluctuations in quarterly revenues and operating
results. The Company's revenues and operating results are relatively difficult
to forecast for a number of reasons, including (i) the variable size and timing
of individual purchases by customers, (ii) seasonal factors that may affect
capital spending by customers, such as the varying fiscal year ends of customers
and the reduction in business during the summer months, particularly in Europe,
(iii) the relatively long sales cycles for the Company's products, (iv) the
timing of hiring sales and technical personnel, (v) changes in timing and amount
of sales incentive compensation, (vi) competitive conditions in the Company's
markets, (vii) exchange rate
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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. See "Dependence on Limited Number of Customers" below. The Company's
products generally are shipped within 15 to 30 days after orders are received
and revenues are recognized upon shipment of the products, provided no
significant vendor obligations remain and collection of the related receivable
is deemed probable. As a result, the Company generally does not have a
significant backlog of orders, and revenues in any quarter are substantially
dependent on orders booked and shipped in that quarter.
Subsequent to September 30, 1999, the Company received information that
sales to NTT, the Company's largest customer in Japan in fiscal 1999, would
likely be significantly reduced beginning in fiscal 2000. The Company believes
that these reductions are due to the intensely competitive marketplace in Japan
and to significant reductions in NTT's budget. 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 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.
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 fiscal year ended September 30, 1999, the Company's top
four customers represented approximately 87% of total revenues. The Company
expects that it will
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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.
Stock Market Fluctuations
In recent years, the stock market in general and the market for
technology stocks in particular, including the Company's common stock, have
experienced extreme price fluctuations. The market price of the Company's common
stock may be significantly affected by various factors such as quarterly
variations in the Company's operating results, changes in revenue growth rates
for the Company as a whole or for specific geographic areas or products, changes
in earning estimates by market analysts, the announcements of new products or
product enhancements by the Company or its competitors, speculation in the press
or analyst community and general market conditions or market conditions specific
to particular industries. There can be no assurance that the market price of the
Company's common stock will not experience significant fluctuations in the
future.
Competitive Market for Technical and Sales Personnel
The Company's success depends in part on its ability to attract, hire,
train, retain and motivate qualified technical and sales personnel with
appropriate levels of managerial and technical capabilities. The Company
believes that a significant level of expertise is required to develop and market
the Company's products and services effectively. The Company has in the past
experienced, and expects to continue to experience, difficulty in recruiting
qualified technical and sales personnel. The Company believes that the pool of
potential applicants with the requisite expertise is very limited. Recruiting
qualified personnel is an intensely competitive and time-consuming process. The
Company competes for such personnel with a number of other companies, many of
which have substantially greater resources than the Company. Such competition
has also resulted in demands for increased compensation from qualified
applicants, and the Company may not be able to compete effectively for such
personnel with companies that provide more attractive compensation arrangements.
There can be no assurance that the Company will be successful in attracting and
retaining the technical and sales personnel it requires to conduct and expand
its operations successfully on a timely basis. The failure to attract, hire,
train, retain and motivate qualified technical and sales personnel in the future
would have a material adverse effect on the Company's business, financial
condition and results of operations.
Risk Associated with International Operations
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 three fiscal years, 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 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.
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Most of the Company's international sales, including its sales in
Japan, are denominated in local currencies. Although the Company currently
engages in hedging transactions with respect to certain receivables resulting
from certain inter-company sales, there can be no assurance that the Company
will continue to do so or that its hedging activities will be successful.
Fluctuations in foreign currency exchange rates may contribute to fluctuations
in the Company's operating results. For example, changes in foreign currency
exchange rates could adversely affect the revenues, net income, earnings per
share and cash flow of the Company's operations in affected markets. Similarly,
such fluctuations may cause the Company to raise prices, which could affect
demand for the Company's products and services. In addition, if exchange or
price controls or other restrictions are imposed in countries in which the
Company does business, the Company's business, financial condition and results
of operations would be materially adversely affected.
Management of Growth
The Company's growth has placed, and is expected to continue to place,
significant demands on its management, administrative and operational resources.
To manage expansion effectively, the Company needs to continue to develop and
improve its operational and financial systems, sales and marketing capabilities
and expand, train, retain, manage and motivate its employee base. Some of the
Company's senior management have not previously managed a business of the
Company's size, and these individuals have limited experience managing a public
company. There can be no assurance that the Company's systems, procedures or
controls will be adequate to support the Company's operations or that the
Company's management will be able to successfully exploit future market
opportunities or successfully manage the Company's relationships with customers
and other third parties. There can be no assurance that the Company will
continue to grow or, if it does, that the Company will effectively manage such
growth. Any failure to manage growth would have a material adverse effect on the
Company's business, financial condition and results of operations.
Dependence on Customer Outsourcing of Test Systems
The Company's success will depend on continued growth in the market for
telecommunications test systems and services and the continued commercial
acceptance of the Company's products as a solution to address the testing
requirements of telecommunications equipment manufacturers and network
operators. While most of the Company's existing and potential customers have the
technical capability and financial resources to produce their own test systems
and perform test services internally, to date, many have chosen to outsource a
substantial proportion of their test system and service requirements. There can
be no assurance that the Company's customers will continue, or that new
customers will choose, to outsource any of their test systems and service
requirements or that the Company's products and services will be widely adopted.
If the market for telecommunications test systems and services, or the demand
for outsourcing, declines or fails to grow, or if the Company's products and
services are not widely adopted as a telecommunications test solution, the
Company's business, financial condition and results of operations would be
materially adversely affected.
Competitive Market
The market for the Company's products is highly competitive. Many of
the Company's competitors are better known and have substantially greater
financial, technological, production and marketing resources than the Company.
While the Company believes that the price/performance characteristics of its
products are competitive, price competition in the markets for the Company's
products is intense. Any material reduction in the price of the Company's
products without corresponding decreases in manufacturing costs and increases in
unit volume would negatively affect gross margins, which could in turn have a
material adverse effect on the Company's business, financial condition and
results of operations. Increased competition for the Company's products that
result in lower
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product sales could also adversely impact the Company's upgrades sales. The
Company's ability to maintain its competitive position will depend upon, among
other factors, its success in anticipating industry trends, investing in product
research and development, developing new products with improved
price/performance characteristics and effectively managing the introduction of
new products into targeted markets.
Dependence on Rapidly Evolving Telecommunications Industry
The Company's future success is dependent upon the continued growth of
the telecommunications industry. The global telecommunications industry is
evolving rapidly, and it is difficult to predict its potential growth rate or
future trends in technology development. There can be no assurance that the
deregulation, privatization and economic globalization of the worldwide
telecommunications market that has resulted in increased competition and
escalating demand for new technologies and services will continue in a manner
favorable to the Company or its business strategies. In addition, there can be
no assurance that the growth in demand for Internet services and the resulting
need for high speed or enhanced telecommunications equipment will continue at
its current rate or at all.
While the Company's operations are not directly regulated, the
Company's existing and potential customers are subject to a variety of United
States and foreign governmental regulations. Such regulations may adversely
affect the telecommunications industry, limit the number of potential customers
for the Company's products and services or otherwise have a material adverse
effect on the Company's business, financial condition and results of operations.
Recently enacted legislation deregulating the telecommunications industry,
including the Telecommunications Act of 1996 (the "Telecommunications Act"), has
caused significant changes in the telecommunications industry, including the
entrance of new competitors and possible industry consolidation, which could in
turn affect demand for the Company's telecommunications test solutions or
otherwise have a material adverse effect on the Company's business, financial
condition and results of operations. Currently, the Federal Communications
Commission ("FCC") and state authorities are implementing the provisions of the
Telecommunications Act, and several of the decisions by the FCC and state
authorities are being challenged in court. Therefore, the Company cannot at this
time predict the extent to which such legislation and related litigation will
affect the Company's current and potential customers or ultimately affect the
Company's business, financial condition and results of operations.
The Company's future success is dependent upon the increased
utilization of its test solutions by network operators and telecommunications
equipment manufacturers. Industry-wide network equipment and infrastructure
development driving the demand for the Company's products and services may be
delayed or prevented by a variety of factors, including cost, regulatory
obstacles or the lack of or reduction in consumer demand for advanced
telecommunications products and services. There can be no assurance that
telecommunications equipment manufacturers and network operators will develop
new technology or enhance current technology or, if developed, that such new
technology or enhancements will create demand for the Company's products or
services.
Dependence on Key Personnel
The Company's future growth and success depends to a significant extent
upon the continuing services of its executive officers and other key employees.
During fiscal 1999, the Chief Financial Officer and Corporate Controller
resigned from the Company to pursue other interests. Efforts were begun
immediately to locate and hire replacements. The Company has retained an interim
Controller to manage the accounting and reporting functions while continuing the
search for full-time replacements.
The Company does not have long-term employment agreements or
non-competition agreements with any of its employees. Competition for qualified
management and other high-level telecommunications industry personnel is
intense, and there can be no assurance that the Company will be successful in
attracting and retaining such personnel. The loss of services of any key
employees would have a material adverse effect on the Company's business,
financial
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condition and results of operations. The Company maintains, and is the
beneficiary of, a key person life insurance policy in the amount of $2 million
with respect to Dr. Richard A. Karp, the Company's President, Chief Executive
Officer and Chairman of the Board.
Rapid Technological Change; Uncertainty of Acceptance of the Company's
Products and Services
The market for telecommunications test systems and services is subject
to rapid technological change, evolving industry standards, rapid changes in
customer requirements and frequent product and service introductions and
enhancements. The Company's future success will depend in part on its ability to
anticipate and respond to these changes by enhancing its existing products and
services and by developing and introducing, on a timely and cost-effective
basis, new products, features and services that address the needs of its
customer base. There can be no assurance that the Company will be successful in
identifying, developing and marketing new products, product enhancements and
related services that respond to technological change or evolving industry
standards or that adequately meet new market demands. In addition, because of
the rapid technological change characteristic of the telecommunications
industry, the Company may be required to support legacy systems used by its
customers, which may place additional demands on the Company's personnel and
other resources and may require the Company to maintain an inventory of
otherwise obsolete components.
The Company's test systems currently operate only on the UNIX operating
system. The Company's current and prospective customers may require other
operating systems to be used in their telecommunications test systems, such as
Windows 95, Windows 98 or Windows NT or may require the integration of other
industry standards. There can be no assurance that the Company would be able to
successfully adapt its products to such operating systems on a timely or
cost-effective basis, if at all. The failure of the Company to respond to
rapidly changing technologies and to develop and introduce new products and
services in a timely manner would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's success will depend in part on whether a large number of
telecommunications equipment manufacturers and network operators purchase the
Company's products and services. Because the telecommunications market is
rapidly evolving, it is difficult to predict the future success of products and
services in this market. The customers in this market use products from a number
of competing suppliers for various testing purposes, and there has not been
broad adoption of the products of one company. There can be no assurance that
the Company's current or future products or services will achieve widespread
acceptance among network operators, telecommunications equipment manufacturers
or other potential customers or that solutions developed by competitors will not
render the Company's products obsolete or uncompetitive. In the event the
telecommunications industry does not broadly adopt the Company's products or
services or does so less rapidly than expected by the Company, or in the event
the Company's products are rendered obsolete or uncompetitive by more advanced
solutions, the Company's business, financial condition and results of operations
would be materially adversely affected.
Dependence on Sole and Single Source Suppliers
The Company purchases many key components, including certain
microprocessors, workstations, bus interface and other chips, connectors and
other hardware, from the sole supplier of a particular component. For other
components, even though multiple vendors may exist, the Company may purchase
components from only a single source. The Company does not have any long-term
supply agreements with these vendors to ensure uninterrupted supply of these
components. In the event of a reduction or interruption in the supply of a key
component, a significant amount of time could be required to qualify alternative
suppliers and receive an adequate flow of replacement components.
Reconfiguration of the Company's products to adapt to new components may also be
required and could entail substantial time and expense. In addition, the process
of manufacturing certain of these components is extremely complex, and the
Company's reliance on the suppliers of these components exposes the
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Company to potential production difficulties and quality variations, which could
negatively affect cost and timely delivery of the Company's products. The
Company has from time to time in the past experienced supply problems as a
result of the financial or operational difficulties of its suppliers, shortages
and discontinuations resulting from component obsolescence. Although the
Company, to date, has not experienced material delays in product deliveries to
its customers resulting from such supply problems, there can be no assurance
that supply problems will not recur or, if such problems do recur, that
satisfactory solutions would be found. Any prolonged inability to obtain
adequate amounts of fully functional components or any other circumstances that
would require the Company to seek alternative sources of supply could have a
material adverse effect on the Company's relationship with its customers as well
as on its business, financial condition and results of operations.
Dependence on Third-Party Manufacturers
The Company relies on a limited number of independent manufacturers,
some of which are small, privately held companies, to provide certain assembly
services to the Company's specifications. The Company does not have any
long-term supply agreements with any third-party manufacturer. In the event of a
reduction or interruption in assembly services to the Company, the Company's
business, financial condition and results of operations would be materially
adversely affected until the Company was able to establish sufficient assembly
services supply from alternative sources. There can be no assurance that
alternative manufacturing sources will be able to meet the Company's future
requirements or that existing or alternative sources will continue to be
available to the Company at favorable prices.
Risk of Product Defects
Products as complex as those offered by the Company may contain
undetected errors or "bugs," particularly when first introduced or when new
versions are released. There can be no assurance that errors will not be found
in future releases of the Company's software or that any such errors will not
generate adverse publicity, impair the market acceptance of these products,
create customer concerns or adversely affect operating results due to product
returns, the costs of generating corrective releases or otherwise.
Product Liability
The Company's license agreements with its customers typically contain
provisions designed to limit the Company's exposure to potential product
liability claims. However, it is possible that the limitation of liability
provisions contained in the Company's license agreements may not be effective
under the laws of certain jurisdictions, particularly since the Company sells a
majority of its products internationally. Although the Company has not
experienced any product liability claims to date, the sale and support of
products by the Company may entail the risk of such claims, and there can be no
assurance that the Company will not be subject to such claims in the future. A
successful product liability claim brought against the Company could have a
material adverse effect upon the Company's business, financial condition and
results of operations. The Company does not maintain product liability
insurance. There can be no assurance that the failure to maintain product
liability insurance, in the event of the successful assertion against the
Company of one or a series of large uninsured claims, would not have a material
adverse effect on the Company's business, financial condition and results of
operations.
Product Concentration
To date, substantially all of the Company's revenues have been
attributable to sales of the DCT family of products and related services. The
Company currently expects the DCT family of products and related services to
account for substantially all of its revenues for the foreseeable future.* As a
result, factors adversely affecting the pricing of or demand for DCT products,
such as competition or technological change, could have a material adverse
25
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effect on the Company's business, financial condition and results of operations.
The Company's future financial performance will depend, in significant part, on
the successful development, introduction and customer acceptance of new and
enhanced versions of the DCT family of products. There can be no assurance that
the Company will continue to be successful in developing and marketing the DCT
family of products and related services.
Control By Principal Stockholder
As of November 30, 1999, Dr. Richard A. Karp beneficially owned
6,966,875 shares or approximately 55% of the Company's common stock outstanding
on such date, which includes 2,786,875 shares beneficially owned as of such date
by Ms. Nancy H. Karp. Dr. Karp has voting control through a voting trust, but
not dispositive power, with respect to the shares beneficially owned by Ms.
Karp. As a result, Dr. Karp has the ability to control matters requiring
approval by the stockholders of the Company, including the election of
directors. Such a concentration of ownership may have the effect of delaying or
preventing a change in control of the Company.
Limited Protection of Proprietary Rights; Enforcement of Rights
The Company's success and its ability to compete effectively are
dependent in part upon its proprietary technology. The Company relies on a
combination of trademark, copyright and trade secret laws, as well as
nondisclosure agreements and other contractual restrictions, to establish and
protect its proprietary rights. To date, the Company has not sought patent
protection for its proprietary technology. There can be no assurance that patent
protection will not become a more significant factor in the Company's industry
in the future. Likewise, there can be no assurance that the measures the Company
undertakes will be adequate to protect its proprietary technology. To date, the
Company has not federally registered any of its trademarks or copyrights. The
Company's practice is to affix copyright notices on software, hardware and
product literature in order to assert copyright protection for these works.
There can be no assurance that the lack of federal registration of the Company's
trademarks and copyrights would not have a material adverse effect on the
Company's intellectual property rights in the future. Additionally, the Company
may be subject to further risks as it enters into transactions in countries
where intellectual property laws are unavailable, do not provide adequate
protection or are difficult to enforce. Despite the Company's efforts to protect
its proprietary rights, unauthorized parties may attempt to duplicate aspects of
the Company's products or to obtain and use information that the Company regards
as proprietary. There can be no assurance that the steps taken by the Company to
protect its proprietary technology will be adequate to prevent misappropriation
of such technology or that they will preclude competitors from independently
developing products with functionality or features similar to the Company's
products. The failure of the Company to protect its proprietary technology would
have a material adverse effect on the Company's business, financial condition
and results of operations.
Risks of Third-Party Claims of Infringement
The telecommunications industry is characterized by a relatively high
level of litigation based on allegations of infringement of proprietary rights.
While to date, the Company has not been subject to claims of infringement or
misappropriation of intellectual property by third parties, there can be no
assurance that third parties will not assert infringement claims against the
Company, that any such assertion of infringement will not result in litigation
or that the Company would prevail in such litigation. Furthermore, any such
claims, with or without merit, could result in substantial cost to the Company
and diversion of its personnel, require the Company to develop new technology or
require the Company to enter into royalty or licensing arrangements. Such
royalty or licensing agreements, if required, may not be available on terms
acceptable to the Company or at all. Because the Company does not rely on
patents to protect its technology, the Company will not be able to offer a
license for patented technology in connection with any settlement of patent
infringement lawsuits. In the event of a successful claim of infringement or
misappropriation against the Company and failure or inability of the Company to
develop non-infringing technology or license the infringed, misappropriated or
similar technology at a reasonable cost, the Company's business, financial
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condition and results of operations would be materially adversely affected. In
addition, the Company indemnifies its customers against claimed infringement of
patents, trademarks, copyrights and other proprietary rights of third parties.
Any requirement for the Company to indemnify a customer could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Risks Relating to Potential Acquisitions
As part of its business strategy, the Company may make acquisitions of,
or significant investments in, companies, products or technologies that it
believes are complementary, although no such acquisitions or investments are
currently pending. Any such future transactions would be accompanied by the
risks commonly encountered in making acquisitions of companies, products and
technologies. Such risks include, among others, the difficulties associated with
assimilating the personnel and operations of acquired companies, the potential
disruption of the Company's ongoing business, the distraction of management and
other resources, the integration of personnel and technology of an acquired
Company, difficulties in evaluating the technology of a potential target,
inability to motivate and retain new personnel, the maintenance of uniform
standards, controls, procedures and policies and the impairment of relationships
with employees and clients as a result of the integration of new management
personnel. The Company has no experience in assimilating acquired companies or
product lines into its operations. There can be no assurance that the Company
will be successful in overcoming these risks or any other problems encountered
in connection with any such acquisitions. Furthermore, future acquisitions by
the Company could result in the issuance of dilutive equity securities, the
incurrence of debt or contingent liabilities or amortization expenses related to
goodwill and other intangible assets, any of which could have a material adverse
effect on the Company's business, financial condition and results of operation
or on the market price of the Company's common stock.
Product Development Risks
The Company's future success will depend in part on its ability to
anticipate and respond to changing industry standards and customer requirements
by enhancing its existing products and services and by developing and
introducing, on a timely and cost-effective basis, new products, features and
services that address the needs of its customer base. There can be no assurance
that the Company will be successful in identifying, developing and marketing new
products, product enhancements and related services that respond to
technological change or evolving industry standards or that adequately meet new
market demands.
Anti-Takeover Effect of Nevada Law and Charter and Bylaw Provisions;
Availability of Preferred Stock for Issuance
Nevada law and the Company's Articles of Incorporation and Bylaws
contain provisions that could discourage a proxy contest or make more difficult
the acquisition of a substantial block of the Company's common stock. In
addition, the Board of Directors is authorized to issue, without stockholder
approval, up to 5,000,000 shares of preferred stock with voting, conversion and
other rights and preferences that may be superior to those of the common stock
and that could adversely affect the voting power or other rights of the holders
of common stock. The issuance of preferred stock or rights to purchase preferred
stock could be used to discourage an unsolicited acquisition proposal.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Foreign Exchange Risk and Derivative Financial Instruments
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
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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 inter-company 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 offset foreign exchange
transaction gains or losses from revaluation of foreign currency denominated
inter-company 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 September 30, 1999, the Company had forward exchange contracts
maturing in fiscal 2000 to sell approximately $7 million in Japanese Yen and
$1.9 million in Pounds Sterling designed to hedge against future movements in
foreign exchange rates. At September 30, 1998, the Company had forward exchange
contracts maturing in fiscal 1999 to sell approximately $560,000 in Japanese
Yen. In addition, at September 30, 1999, the Company had a foreign currency call
option contract for $2 million in Japanese Yen maturing on June 30, 2000. This
option, redeemable at maturity, was in the money at September 30, 1999. The fair
market value of the contracts at September 30, 1999 was not material.
The Company has evaluated the potential near-term losses in future
earnings, fair values and cash flows from reasonably possible near-term currency
fluctuations and believes that any such losses would not be material.*
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<TABLE>
GLOSSARY
<CAPTION>
<S> <C>
Asynchronous Transfer A cell-based network technology protocol that supports simultaneous transmission of data, voice and
Mode (ATM) video typically at T-1 or higher speeds.
Code Division Multiple A digital wireless technology that uses a modulation technique in which many channels are
Access (CDMA) independently coded for transmission over a single wideband channel.
E-1 A digital transmission link used by European carriers to transmit thirty-two 64 Kbps digital channels
for voice or data.
Frame Relay An access standard which employs a form of packet switching to facilitate high-speed data
communications.
Global System for Mobile A digital wireless technology that is widely deployed in Europe and, increasingly, in other parts of
Communications (GSM) the world.
Graphical User
Interface (GUI) A graphics-based computer interface that usually incorporates icons, pull-down menus and a mouse.
Intelligent Network (IN) A network that allows functionality to be distributed flexibly to a variety of nodes on and off the
network and allows that architecture to be modified to control network services.
Integrated Services An international telecommunications standard for transmitting voice, data and video over digital lines
Digital Network (ISDN) at transmission speeds of up to 142 Kbps.
IS-41 (Interim Standard 41) A signaling protocol used in the North American cellular applications.
Personal Communication
Service (PCS) A digital cellular communication service offered by some North American operators.
Personal Digital
Cellular (PDC) A digital cellular communication service used in Japan.
Protocol A specific set of rules, procedures or conventions governing the format, means and timing of
transmissions between two devices.
System Signalling 7 (SS7) A message-based protocol for exchanging signaling and control information between telephony network
entities.
T-1 A point-to-point dedicated line with transmission speeds of up to 1.544 Mbps widely used for private
networks and high-speed links to the Internet.
V5 A European standard protocol for the interface between the access network and the carrier switch
principally for basic telephony.
Variant A specific implementation of a protocol, typically unique to a country or region.
X.25 A switched communications protocol that defines how data streams are to be assembled into packets,
controlled, routed and protected as they cross a network.
</TABLE>
29
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
CATAPULT COMMUNICATIONS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<CAPTION>
Page
Financial Statements: ----
<S> <C>
Report of Independent Accountants............................................................................... 31
Consolidated Balance Sheets at September 30, 1998 and 1999 32
Consolidated Statements of Income for each of the three years in the period ended September 30, 1999............ 33
Consolidated Statements of Stockholders' Equity for each of the three years in the period ended September 30,
1999.......................................................................................................... 34
Consolidated Statements of Cash Flows for each of the three years in the period ended September 30, 1999........ 35
Notes to Consolidated Financial Statements...................................................................... 36
All schedules are omitted because they are not applicable or the required information is shown in the
consolidated financial statements or notes thereto.
Supplementary Financial Data:
Quarterly Financial Data (unaudited) for the two years ended September 30, 1998 and 1999 ....................... 47
</TABLE>
30
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of
Catapult Communications Corporation
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Catapult Communications Corporation and its subsidiaries at
September 30, 1998 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended September 30, 1999, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/S/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
November 2, 1999
31
<PAGE>
<TABLE>
CATAPULT COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<CAPTION>
September 30,
-----------------------
1998 1999
-------- ----------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents ........................................................................... $ 15,229 $ 8,486
Short-term investments .............................................................................. -- 33,168
Accounts receivable, net of allowances of $75 and $86 ............................................... 2,007 5,852
Inventories, net .................................................................................... 612 705
Deferred income taxes ............................................................................... 406 890
Prepaid expenses .................................................................................... 95 349
-------- --------
Total current assets .......................................................................... 18,349 49,450
Property and equipment, net ............................................................................ 778 998
Other assets ........................................................................................... 368 219
-------- --------
Total assets .................................................................................. $ 19,495 $ 50,667
======== ========
LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable .................................................................................... $ 782 $ 444
Accrued liabilities ................................................................................. 2,341 4,782
Deferred revenue .................................................................................... 1,222 1,852
-------- --------
Total current liabilities ..................................................................... 4,345 7,078
-------- --------
Redeemable common stock (Note 5) ....................................................................... 5,000 --
-------- --------
Commitments (Note 7)
Stockholders' Equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized none
issued and outstanding ........................................................................... -- --
Common stock, $0.001 par value, 40,000,000 shares authorized; 9,992,317
and 12,689,394 issued and outstanding actual ..................................................... 10 13
Additional paid-in capital .......................................................................... -- 20,040
Deferred compensation ............................................................................... (609) (132)
Retained earnings ................................................................................... 10,756 23,796
Accumulated other comprehensive income (loss) ....................................................... (7) 172
Treasury stock, 50,000 shares at cost ............................................................... -- (300)
-------- --------
Total stockholders' equity .................................................................... 10,150 43,589
-------- --------
Total liabilities, redeemable common stock and stockholders' equity ........................... $ 19,495 $ 50,667
======== ========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
32
<PAGE>
<TABLE>
CATAPULT COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share data)
<CAPTION>
Year Ended September 30,
------------------------------------------------------------
1997 1998 1999
------------ ------------ -------------
<S> <C> <C> <C>
Revenues:
Product sales ......................................... $ 11,519 $ 15,833 $ 25,505
Services .............................................. 1,833 2,373 3,450
------------ ------------ ------------
Total revenues .................................... 13,352 18,206 28,955
------------ ------------ ------------
Cost of revenues:
Product sales ......................................... 1,576 1,852 2,701
Services .............................................. 344 564 945
------------ ------------ ------------
Total cost of revenues ............................ 1,920 2,416 3,646
------------ ------------ ------------
Gross profit ............................................... 11,432 15,790 25,309
------------ ------------ ------------
Operating expenses:
Research and development .............................. 1,419 2,001 2,777
Sales and marketing ................................... 2,550 3,242 5,623
General and administrative ............................ 2,063 2,188 2,485
Offering costs ........................................ -- 769 --
------------ ------------ ------------
Total operating expenses .......................... 6,032 8,200 10,885
------------ ------------ ------------
Operating income ........................................... 5,400 7,590 14,424
Interest income ............................................ 380 594 1,294
Other expense, net ......................................... (6) (263) (107)
------------ ------------ ------------
Income before income taxes ................................. 5,774 7,921 15,611
Provision for income taxes ................................. 2,436 3,396 6,706
------------ ------------ ------------
Net income ................................................. $ 3,338 $ 4,525 $ 8,905
============ ============ ============
Earnings per share:
Basic ................................................. $ 0.35 $ 0.44 $ 0.75
============ ============ ============
Diluted ............................................... $ 0.31 $ 0.41 $ 0.73
============ ============ ============
Shares used in per share calculation:
Basic ................................................. 9,630,000 10,369,000 11,874,000
============ ============ ============
Diluted ............................................... 10,605,000 10,940,000 12,217,000
============ ============ ============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
33
<PAGE>
<TABLE>
CATAPULT COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
<CAPTION>
Additional
Common Stock Paid-in Deferred Retained
Shares Amount Capital Compensation Earnings
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1996 ................. 9,629,281 $ 10 $ 48 $ -- $ 6,828
Issuance of common stock ...................... 162 -- -- -- --
Deferred stock compensation ................... -- -- 216 (216) --
Amortization of deferred stock
compensation ............................. -- -- -- 20 --
Currency translation adjustment ............... -- -- -- -- --
Net income .................................... -- -- -- -- 3,338
--------------------------------------------------------------------------
Balance at September 30, 1997 ................. 9,629,443 10 264 (196) 10,166
Issuance of common stock ...................... 862,874 1 211 -- --
Deferred stock compensation ................... -- -- 589 (589) --
Amortization of deferred stock
compensation ............................. -- -- -- 176 --
Redeemable common stock ....................... (500,000) (1) (1,064) -- (3,935)
Currency translation adjustment ............... -- -- -- -- --
Net income .................................... -- -- -- -- 4,525
--------------------------------------------------------------------------
Balance at September 30, 1998 ................. 9,992,317 10 -- (609) 10,756
Issuance of stock from public
offering ................................. 2,100,000 3 19,154 -- --
Redeemable common stock ....................... 500,000 -- 1,065 -- 3,935
Issuance of common stock from
exercise of stock options ................ 147,077 -- 130 -- --
Purchase of treasury stock .................... (50,000) -- -- -- --
Amortization and adjustments to
stock compensation ....................... -- -- (309) 477 --
Currency translation adjustment ............... -- -- -- -- --
Tax benefit from exercise of stock
options .................................. -- -- -- -- 200
Net income .................................... -- -- -- -- 8,905
--------------------------------------------------------------------------
Balance at September 30, 1999 ................. 12,689,394 $ 13 $ 20,040 $ (132) $ 23,796
========== ========= ========= ========= ==========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Total
Income Treasury Stockholders' Comprehensive
(Loss) Stock Equity Income
-------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at September 30, 1996 ................. $ (54) $ -- $ 6,832 --
Issuance of common stock ...................... -- -- -- --
Deferred stock compensation ................... -- -- -- --
Amortization of deferred stock
compensation ............................. -- -- 20 --
Currency translation adjustment ............... (20) -- (20) $ (20)
Net income .................................... -- -- 3,338 3,338
-------------------------------------------------------
Balance at September 30, 1997 ................. (74) -- 10,170 $ 3,318
=========
Issuance of common stock ...................... -- -- 212 --
Deferred stock compensation ................... -- -- -- --
Amortization of deferred stock
compensation ............................. -- -- 176 --
Redeemable common stock ....................... -- -- (5,000) --
Currency translation adjustment ............... 67 -- 67 $ 67
Net income .................................... -- -- 4,525 4,525
-------------------------------------------------------
Balance at September 30, 1998 ................. (7) -- 10,150 $ 4,592
=========
Issuance of stock from public
offering ................................. -- -- 19,157 --
Redeemable common stock ....................... -- -- 5,000 --
Issuance of common stock from
exercise of stock options ................ -- -- 130 --
Purchase of treasury stock .................... -- (300) (300) --
Amortization and adjustments to
stock compensation ....................... -- -- 168 --
Currency translation adjustment ............... 179 -- 179 $ 179
Tax benefit from exercise of stock
options .................................. -- -- 200 --
Net income .................................... -- -- 8,905 8,905
-------------------------------------------------------
Balance at September 30, 1999 ................. $ 172 $ (300) $ 43,589 $ 9,084
========== ========= ========= =========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
34
<PAGE>
<TABLE>
CATAPULT COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<CAPTION>
Year ended September 30,
--------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .......................................................... $ 3,338 $ 4,525 $ 8,905
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ..................................... 121 226 393
Amortization of deferred stock compensation ....................... 20 176 169
Deferred income taxes ............................................. (51) 122 (512)
Gain on sale of property and equipment ............................ (7) -- (4)
Change in assets and liabilities:
Accounts receivable ............................................. (397) (1,115) (3,845)
Inventories ..................................................... 171 (191) (93)
Prepaid expenses ................................................ (959) 897 (254)
Other assets .................................................... (26) (308) 149
Accounts payable ................................................ (34) 632 (338)
Accrued liabilities ............................................. 989 (381) 2,443
Deferred revenue ................................................ 189 257 630
-------- -------- --------
Net cash provided by operating activities ..................... 3,354 4,840 7,643
-------- -------- --------
Cash flows from investing activities:
Sale and maturities of short-term investments ..................... 402 -- 17,844
Purchase of short-term investments ................................ -- -- (50,886)
Purchase of property and equipment ................................ (242) (562) (514)
Proceeds from sale of property and equipment ...................... 7 -- 4
-------- -------- --------
Net cash provided (used) by investing activities .............. 167 (562) (33,552)
-------- -------- --------
Cash flows from financing activities:
Proceeds from public offering, net ................................ -- -- 19,157
Proceeds from exercise of stock options ........................... -- 212 130
Purchase of treasury stock ........................................ -- -- (300)
-------- -------- --------
Net cash provided by financing activities ..................... -- 212 18,987
Effect of exchange rate changes ........................................ (20) 67 179
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ................... 3,501 4,557 (6,743)
Cash and cash equivalents, beginning of year ........................... 7,171 10,672 15,229
-------- -------- --------
Cash and cash equivalents, end of year ................................. $ 10,672 $ 15,229 $ 8,486
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes .................................................... $ 3,291 $ 2,400 $ 4,033
======== ======== ========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
35
<PAGE>
CATAPULT COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
The Company designs, develops, manufactures, markets and supports an
advanced software-based test system offering an integrated suite of testing
applications for the global telecommunications industry. The Company's advanced
test systems assist its customers in the design, integration, installation and
acceptance testing of a broad range of digital telecommunications equipment and
services. The Company was incorporated in California in October 1985 and has
operations in the United States, Canada, the United Kingdom, Europe and Japan.
The Company conducts its business within one industry segment.
Reincorporation in Nevada and Recapitalization
On June 19, 1998, the Company reincorporated in Nevada. In connection
with the reincorporation, the Company authorized 45,000,000 shares of capital
stock, consisting of 40,000,000 shares of common stock, $0.001 par value, and
5,000,000 shares of undesignated preferred stock, $0.001 par value. In addition,
stockholders of the California corporation received three shares of common stock
of the Nevada corporation for every two shares of common stock of the California
corporation. All share and per share amounts have been restated to give
retroactive effect to the changes in authorized shares and par values, and the
three-for-two stock exchange.
Basis of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, CCL, Catapult Communications K.K.,
and ISDN Technologies, Ltd. All significant inter-company accounts and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company maintains its cash in bank deposit accounts at high credit,
quality financial institutions in the United States, Japan, United Kingdom and
Canada.
Cash equivalents are investments in the portfolios with an original
maturity of 90 days or less. This type of investment consists principally of
U.S. treasury securities, commercial paper and money market funds with a fair
value that approximates cost.
36
<PAGE>
Short-Term Investments
Short-term investments are investments with original maturity between
91 days and one year. The Company's short-term investments are placed in
portfolios managed by two professional money management firms. At September 30,
1999, the portfolios consisted primarily of commercial paper, investment quality
corporate bonds, collateralized mortgage obligations, U.S. government agency
securities and money market funds.
At September 30, 1999, the Company's short-term investments are
classified as available for sale and are carried at their estimated fair value
in the accompanying consolidated balance sheet with unrealized gains and losses
included in stockholder's equity. Such amounts were not material at September
30, 1999. Realized gains and losses are included in other income or expenses.
Revenue Recognition
Product sales are recognized upon shipment provided that no significant
vendor obligations remain and collection is considered probable.
Services revenue consists primarily of post-contract customer support,
training, consulting and installation services. Post-contract customer support
revenues are recognized ratably over the support period, which is generally one
year. Revenues from training, consulting services and installation are
recognized as the services are performed.
Foreign Currency Translations
The functional currencies of the Company's foreign subsidiaries are the
respective local currencies. In consolidation, assets and liabilities are
translated at year-end currency exchange rates and revenue and expense items are
translated at average currency exchange rates prevailing during the period.
Gains and losses from foreign currency translation are accumulated as a separate
component of stockholders' equity. Gains and losses resulting from foreign
currency transactions are included in the consolidated statement of income.
Derivative Financial Instruments
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 could affect certain foreign currency
denominated inter-company 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 offset foreign exchange
transaction gains or losses for revaluation of foreign currency denominated
inter-company receivable balances which otherwise would be charged to other
income (expense).
At September 30, 1999, the Company had forward exchange contracts
maturing in fiscal 2000 to sell approximately $7 million in Japanese Yen and
$1.9 million in Pounds Sterling designed to hedge against future movements in
foreign exchange rates. At September 30, 1998, the Company had forward exchange
contracts maturing in fiscal 1999 to sell approximately $560,000 in Japanese
Yen. In addition, at September 30, 1999, the Company had a foreign currency call
option contract for $2 million in Japanese Yen maturing on June 30, 2000. This
option, redeemable at maturity, was in the money at September 30, 1999. The fair
market value of the contracts at September 30, 1999 was not material. The cost
associated with foreign exchange contracts has been included in other
37
<PAGE>
income (expense) and was not material to the Company's operations.
Fair Value
The carrying value of the Company's financial instruments including
cash and cash equivalents, short-term investments, accounts receivable, accounts
payable and accrued liabilities approximate their fair values due to their
relatively short maturity.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents, short-term
investments and accounts receivable. Substantially all of the company's cash,
cash equivalents and short-term investments are managed or held by three
financial institutions. The Company's accounts receivable are derived from
revenue earned from customers located in Japan, North America, the United
Kingdom and Europe. The Company performs ongoing credit evaluations of its
customers' financial condition and, generally, requires no collateral from its
customers. The Company maintains an allowance for doubtful accounts based upon
the expected collection of its outstanding receivable balance.
The following table summarizes the revenues from customers in excess of
10% of total revenues:
Year ended September 30,
------------------------
1997 1998 1999
---- ---- ----
Customer A................................. -- 24% 58%
Customer B................................. 28% 15% 15%
Customer C................................. 17% 21% 12%
Customer D................................. -- 12% 3%
At September 30, 1998, four customers accounted for 39%, 13%, 13% and
10% of total accounts receivable, respectively. At September 30, 1999, four
customers account for 26%, 19%, 19% and 11% of total accounts receivable,
respectively.
Inventories
Inventories are stated at the lower of cost or market, using the
first-in first-out ("FIFO") method.
Capitalized Software Development Costs
Software development costs not qualifying for capitalization are
included in research and development and are expensed as incurred. After
technological feasibility is established, material software development costs
are capitalized. The capitalized cost is then amortized on a straight-line basis
over the greater of the estimated product life or on the ratio of current
revenues to total projected product revenues. The Company defines technological
feasibility as the establishment of a working model, which typically occurs upon
completion of the first beta version. To date, the period between achieving
technological feasibility and the general availability of such software has been
short and software development costs qualifying for capitalization have been
insignificant. Accordingly, the Company has not capitalized any software
development costs.
38
<PAGE>
Property and Equipment
Property and equipment, including leasehold improvements' are stated at
cost. Depreciation is computed using the straight-line method over estimated
useful lives, generally four years, or the lease term of the respective assets.
Warranty
The Company provides a limited warranty for its products. A provision
for the estimated warranty cost is recorded at the time revenue is recognized
based on the Company's historical experience.
Income Taxes
The Company accounts for income taxes under the liability method, which
requires recognition of deferred tax assets and liabilities for the future tax
consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts.
Stock-based Compensation
The Company accounts for stock-based employee compensation arrangements
in accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB 25") and complies with the
disclosure provisions of SFAS No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation." Under APB 25, compensation cost is recognized over the vesting
period based on the difference, if any, on the date of grant between the fair
value of the Company's stock and the amount an employee must pay to acquire the
stock.
<TABLE>
Earnings per Share
The Company has presented earnings per share for all periods in
accordance with SFAS No. 128 ("SFAS 128"), "Earnings per Share." SFAS 128
requires the presentation of basic and diluted earnings per share. Basic
earnings per share are computed using the weighted average number of common
shares outstanding during the period. Diluted earnings per share includes the
effect of dilutive potential common share equivalents (options) issued (using
the treasury stock method).
<CAPTION>
Year ended September 30,
---------------------------------------------------------
1997 1998 1999
----------- ----------- -----------
(in thousands, except share and per share data)
<S> <C> <C> <C>
Net income .................................................... $ 3,338 $ 4,525 $ 8,905
=========== =========== ===========
Weighted average shares outstanding ........................... 9,630,000 10,369,000 11,874,000
Dilutive options .............................................. 975,000 571,000 343,000
----------- ----------- -----------
Weighted average shares assuming dilution ..................... 10,605,000 10,940,000 12,217,000
----------- ----------- -----------
Earnings per share:
Basic ......................................................... $ 0.35 $ 0.44 $ 0.75
Diluted ....................................................... $ 0.31 $ 0.41 $ 0.73
</TABLE>
39
<PAGE>
Comprehensive Income
As of October 1, 1998, the Company adopted SFAS No. 130 ("SFAS 130"),
"Reporting Comprehensive Income." SFAS 130 requires separate reporting of
comprehensive income which is "the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources."
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Statement ("FAS") No. 133 ("FAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." The Company is required to adopt
FAS 133 in fiscal 2000. FAS 133 established methods of accounting for derivative
financial instruments and hedging activities related to those instruments as
well as other hedging activities. The Company has not yet determined the effect
FAS 133 will have on the operations and financial position of the Company.
<TABLE>
NOTE 2 - BALANCE SHEET COMPONENTS
<CAPTION>
Year ended September 30,
--------------------------------
1998 1999
------- --------
(in thousands)
<S> <C> <C>
Inventories:
Raw materials .................................................................... $ 391 $ 554
Work-in-process .................................................................. 39 79
Finished goods ................................................................... 182 72
------- -------
$ 612 $ 705
======= =======
Property and equipment:
Equipment ........................................................................ $ 1,348 $ 1,789
Leasehold improvements ........................................................... 329 456
------- -------
1,677 2,245
Less accumulated depreciation and amortization ................................... (899) (1,247)
------- -------
$ 778 $ 998
======= =======
Accrued liabilities:
Payroll and related expenses ..................................................... $ 961 $ 1,402
Income taxes ..................................................................... 668 2,388
Other ............................................................................ 712 992
------- -------
$ 2,341 $ 4,782
======= =======
</TABLE>
NOTE 3 - RELATED PARTY TRANSACTIONS
In fiscal 1997, 1998 and 1999, the Company's principal stockholder
earned compensation for his duties as President and Chief Executive Officer of
approximately $1,410,000, $611,000 and $332,000, respectively.
On June 10, 1998 the Company settled a claim by an officer, director
and stockholder of the Company. The settlement required the Company to enter
into a three-year consulting agreement with the officer, director and
stockholder at the rate of $1,500 per day, with a minimum obligation of $4,500
per month. In fiscal 1998 and 1999, the Company paid the officer, director and
stockholder approximately $13,500 and $55,500, respectively.
40
<PAGE>
NOTE 4 - INCOME TAXES
Consolidated income before income taxes includes non-U.S. income of
approximately $1,260,000, $1,723,000 and $227,000 in fiscal 1997, 1998 and 1999,
respectively.
<TABLE>
The provision for income taxes consists of the following:
<CAPTION>
Year ended September 30,
-----------------------------------------------------------
1997 1998 1999
------- ------ -------
(in thousands)
<S> <C> <C> <C>
Current:
U.S. federal ....................................... $ 1,591 $ 1,853 $ 6,024
State .............................................. 311 490 793
Foreign ............................................ 585 931 401
------- ------- -------
2,487 3,274 7,218
------- ------- -------
Deferred:
U.S. federal ....................................... (21) 230 (282)
State .............................................. -- -- (80)
Foreign ............................................ (30) (108) (150)
------- ------- -------
(51) 122 (512)
------- ------- -------
$ 2,436 $ 3,396 $ 6,706
======= ======= =======
</TABLE>
<TABLE>
A reconciliation of the U.S. federal income tax rate to the Company's effective
tax rate is as follows:
<CAPTION>
Year ended September 30,
--------------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Tax at federal rate .................................................... 34% 34% 35%
State taxes, net of federal benefit .................................... 5 5 5
Excess foreign tax rate ................................................ 2 3 1
Other .................................................................. 1 1 2
-- -- --
42% 43% 43%
== == ==
</TABLE>
41
<PAGE>
<TABLE>
Deferred tax assets and liabilities consist of the following:
<CAPTION>
September 30,
------------------------------------
1998 1999
------- --------
(in thousands)
<S> <C> <C>
Deferred Tax Assets:
Accruals and reserves ................................................. $ 209 $ 852
Net operating losses .................................................. -- 186
Other ................................................................. 197 64
------- -------
Total ............................................................. 406 1,102
Valuation allowance ................................................... -- (186)
------- -------
406 916
Deferred Tax Liabilities:
Excess tax depreciation ............................................... (2) --
------- -------
Net deferred tax assets ........................................... $ 404 $ 916
======= =======
</TABLE>
In fiscal 1999, the Company recorded a valuation allowance against its
foreign net operating loss carryforward.
NOTE 5 - STOCKHOLDERS' EQUITY
Redeemable Securities
In connection with the settlement on June 10, 1998 of claims by an
officer and director for compensation for past services rendered to the Company,
the Company agreed that, if it did not complete its planned initial public
offering by December 31, 1998, it would repurchase common stock held by this
individual at a rate of up to 50,000 shares per annum, in quarterly installments
of up to 12,500 shares, beginning on March 31, 1999, until the earliest of
certain events, including the cumulative receipt of $5 million by the individual
from sales of the individual's stock, an initial public offering of stock by the
Company, an acquisition of the Company or 12 years from March 31, 1999. The
repurchase price was the fair market value of the shares as determined by the
Board of Directors.
As a result of this agreement, 500,000 shares of common stock with a
fair market value of $5 million, based on the assumed fair market value at the
date of the agreement of $10 per share, are reflected as redeemable securities
beginning as of the date of this settlement. As a result of the Company's
initial public offering, such shares are no longer redeemable and have been
reclassified as stockholders' equity.
Initial Public Offering
On February 11, 1999, the Company consummated an initial public
offering of 3,352,500 shares of its common stock at a price to the public of
$10.00 per share, of which 2,100,000 shares were issued and sold by the Company
and 1,252,500 shares were sold by certain stockholders of the Company. The
proceeds, net of fees and other expenses, to the Company from the offering were
approximately $19.2 million. During the quarter ended September 30, 1998, the
Company expensed $769,000 of costs related to its delayed public offering.
Stock Option Plans
At September 30, 1997, 1,800,000 shares and 154,500 shares of common
stock had been reserved for issuance to employees under the 1989 Incentive Stock
Option Plan (the "1989 Plan") and the UK Executive Share Option
42
<PAGE>
Scheme (the "UK Scheme"), respectively. In June 1998, the Board of Directors
adopted the 1998 Stock Plan (the "1998 Plan") which provided for the issuance of
an additional 1,800,000 stock options. The Board of Directors has the authority
to determine optionees, the number of shares, the term of each option and the
exercise price. Options under the 1989 and 1998 Plans generally become
exercisable at a rate of 1/8th of the option shares six months after the option
grant date and then at a rate of 1/48th per month thereafter. Options under the
UK Scheme become exercisable at the rate of 1/36th of the option shares per
month following twelve months after the option grant date. Options will expire,
if not exercised, upon the earlier of 10 years from the date of grant or 30 days
after termination as an employee of the Company.
In the years ended September 30, 1997 and 1998, the Company recorded
deferred compensation expense of approximately $216,000 and $589,000,
respectively, related to the issuance of stock options at prices subsequently
determined to be below fair market value. These expenses are being amortized
over a period of four years from the date of option issuance. Amortization of
deferred compensation expense related to these options of approximately $20,000,
$176,000 and $169,000 was included in general and administrative expenses in the
years ended September 30, 1997, 1998 and 1999, respectively.
<TABLE>
Information with respect to stock option activity from September 30, 1996 through September 30, 1999 is set forth
below:
<CAPTION>
Number of Weighted Average
Shares Exercise Price
--------- ----------------
<S> <C> <C>
Balance, September 30, 1996 ............................................. 1,156,500 $ 0.27
Options granted ....................................................... 296,475 0.99
Options exercised ..................................................... (162) 0.46
Options canceled ...................................................... (94,713) 0.85
---------
Balance, September 30, 1997 ............................................. 1,358,100 0.39
Options granted ....................................................... 206,100 2.01
Options exercised ..................................................... (862,874) 0.25
Options canceled ...................................................... (876) 1.12
---------
Balance, September 30, 1998 ............................................. 700,450 1.04
Options granted ....................................................... 273,014 16.14
Options exercised ..................................................... (147,077) 0.88
Options canceled ...................................................... (117,435) 2.31
---------
Balance, September 30, 1999 ............................................ 708,952 6.68
=========
</TABLE>
As of September 30, 1999, 1,961,905 options remained available for
grant.
43
<PAGE>
<TABLE>
As of September 30, 1999, the options outstanding and exercisable are
presented below:
<CAPTION>
Options Outstanding Options Exercisable
at September 30, 1999 at September 30, 1999
--------------------------------------------------- ---------------------------------
Weighted
Average
Remaining Weighted Weighted
Number Contractual Average Number Average
Range of Exercise Price Outstanding Life Exercise Price Outstanding Exercise Price
- ---------------------------------- ------------------ ---------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
$0.00 - $2.07........................ 423,064 6.2 $0.69 331,070 $0.60
$2.08 - $4.14........................ 10,087 8.5 2.40 1,178 2.40
$4.15 - $6.22........................ 37,625 9.0 6.00 8,099 6.00
$10.34 - $12.41...................... 15,212 9.4 11.38 2,220 11.38
$14.48 - $16.55...................... 5,494 9.6 15.80 -- --
$16.56 - $18.62...................... 177,470 9.8 17.49 -- --
$18.63 - $20.69...................... 40,000 9.7 20.69 -- --
------------------ -----------------
708,952 6.68 342,567 0.80
------------------ -----------------
</TABLE>
Fair Value Disclosures
The Company calculated the fair value of each option grant on the date
of grant using the Black-Scholes model with the following assumptions: dividend
yield at 0%; weighted average expected option life of five years; risk free
interest rate of 5.5% and expected volatility of 50% for options granted during
the fiscal year ended September 30, 1999 for options granted after the Company's
initial public offering. Prior to the Company's initial public offering, the
Company used the minimum value method in determining the fair value of its
options. For years ended September 30, 1997 and 1998, the following range of
assumptions were used: dividend yield at 0%; weighted average expected option
life of five years; risk free interest rate of 6.2% and 5.6%, respectively, and
expected volatility of zero. The weighted average fair value of options granted
during 1999 was $12.87 per share.
44
<PAGE>
<TABLE>
The weighted average fair values of options granted during 1997, 1998
and 1999 were as follows:
<CAPTION>
Year Ended September 30, 1997 Weighted Average Weighted Average
----------------------------- Exercise Price Fair Value
-------------- ----------
<S> <C> <C>
Exercise price equal to market value....................................... $0.83 $0.22
Exercise price less than market value...................................... 1.27 2.37
Year Ended September 30, 1998 Weighted Average Weighted Average
----------------------------- Exercise Price Fair Value
-------------- ----------
Exercise price equal to market value....................................... $7.51 $1.50
Exercise price less than market value...................................... 1.39 3.46
Year Ended September 30, 1999 Weighted Average Weighted Average
----------------------------- Exercise Price Fair Value
-------------- ----------
Exercise price equal to market value....................................... $16.14 $12.87
</TABLE>
Had compensation cost been determined based on the fair value at the
grant dates for the awards under these plans using the Black-Scholes model
prescribed by SFAS No. 123, the Company's net income would not have been
materially different in fiscal 1997 and 1998. The Company's pro forma net income
and pro forma basic and diluted earnings per share for fiscal 1999 would have
been $8,670,000, $0.73 per share and $0.70 per share, respectively.
Employee Stock Purchase Plan
In June 1998, the Company adopted the 1998 Employee Stock Purchase Plan
(the "Purchase Plan"). A total of 750,000 shares of common stock have been
reserved for issuance under the Purchase Plan. The Purchase Plan permits
eligible employees to purchase common stock through payroll deductions of up to
7% of an employee's total compensation. The price of the common stock will
generally be 85% of the lower of the fair market value at the beginning of the
offering period or the end of the relevant purchase period. The maximum number
of shares a participant may purchase during a single offering period is 200
shares.
NOTE 6 - PROFIT-SHARING PLAN
The Company maintains a qualified profit-sharing plan for eligible
employees. Contributions to the profit-sharing plan are discretionary and are
determined by the Board of Directors. There were no contributions to the plan
for the years ended September 30, 1997, 1998 and 1999.
NOTE 7 - COMMITMENTS
The Company leases its facility in Mountain View, California under a
non-cancelable operating lease agreement expiring in 2002. The lease agreement
provides for minimum annual rent of $168,000. Under this agreement, the Company
pays certain shared operating expenses of the facility. The agreement provides
for rent increases at scheduled intervals. The Company leases other facilities
in Illinois, Texas, Canada, Japan and the United Kingdom under leases with the
longest term expiring in 2009.
Rent expense for all facilities for the years ended September 30, 1997,
1998 and 1999 was approximately $197,000, $287,000 and $426,000, respectively.
45
<PAGE>
Future minimum annual rental payments under non-cancelable operating
leases as of September 30, 1999 are as follows (in thousands):
2000................................................................ $ 555
2001................................................................ 484
2002................................................................ 260
2003................................................................ 187
2004................................................................ 137
Thereafter.......................................................... 470
------
$2,093
======
NOTE 8 - SEGMENT REPORTING
In June 1997, the FASB issued SFAS No. 131 ("SFAS 131"), "Disclosures
About Segments of an Enterprise and Related Information." The statement requires
the Company to report certain financial information about operating segments. It
also requires that the Company report certain information about its services,
the geographic areas in which it operates and its major customers. The method
specified in SFAS 131 for determining what information to report is referred to
as the "management approach." The management approach is based on the way that
management organizes the segments within the enterprise for making operating
decisions and assessing performance.
The 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 sales, income and assets by region for each fiscal year
end were as follows (in thousands):
<CAPTION>
United UK & Consolidated
States Europe Japan Total
------ ------ ----- -----
1997
- ----
<S> <C> <C> <C> <C>
Sales to unaffiliated customers...................... $ 6,261 $2,716 $ 4,375 $13,352
Net income........................................... 2,642 405 291 3,338
Total assets......................................... 9,714 2,669 1,652 14,035
1998
- ----
Sales to unaffiliated customers...................... $ 5,020 $3,649 $ 9,537 $18,206
Net income........................................... 3,626 400 499 4,525
Total assets......................................... 14,905 1,447 3,143 19,495
1999
- ----
Sales to unaffiliated customers...................... $ 6,383 $3,024 $19,548 $28,955
Net income........................................... 8,929 (287) 263 8,905
Total assets......................................... 42,423 2,185 6,059 50,667
</TABLE>
The result of operations by geographic region includes significant
sales principally from the United States to the Company's foreign locations at
agreed upon transfer prices. Transfers to other geographic regions from the
United States for the years ended September 30, 1997, 1998 and 1999 were $4.1
million, $9.6 million and $15.6 million, respectively.
46
<PAGE>
Supplementary Financial Data
<TABLE>
Quarterly Financial Data (unaudited)
<CAPTION>
Quarter Ended
-------------
(in thousands, except per share data)
Consolidated Statements of Income Data: Dec. 31, Mar. 31, June 30, Sept. 30,
1997 1998 1998 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues ....................................... $3,446 $5,013 $4,621 $5,126
Gross profit ................................... 3,026 4,505 3,902 4,357
Operating income ............................... 1,492 2,760 1,972 1,366
Net income ..................................... $ 860 $1,632 $1,125 $ 908
Earnings per share:
Basic ........................................ $ 0.08 $ 0.16 $ 0.11 $ 0.09
Diluted ...................................... $ 0.08 $ 0.15 $ 0.10 $ 0.08
Dec. 31, Mar. 31, June 30, Sept. 30,
1998 1999 1999 1999
---- ---- ---- ----
Revenues ....................................... $5,229 $9,752 $6,707 $7,267
Gross profit ................................... 4,429 8,762 5,962 6,156
Operating income ............................... 2,105 5,982 2,982 3,355
Net income ..................................... $1,191 $3,584 $1,959 $2,171
Earnings per share:
Basic ........................................ $ 0.11 $ 0.31 $ 0.16 $ 0.17
Diluted ...................................... $ 0.11 $ 0.30 $ 0.15 $ 0.17
</TABLE>
47
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this Annual
Report on Form 10-K because the Registrant will file a definitive proxy
statement within one hundred twenty (120) days after the end of its fiscal year
pursuant to Regulation 14A (the "Proxy Statement") for its Annual Meeting of
Stockholders currently scheduled for February 11, 2000, and the information
included in the Proxy Statement is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors of the Company is incorporated by
reference to the information under the heading "Election of Directors" in the
Registrant's Proxy Statement.
Information regarding the executive officers of the Company is
incorporated by reference to the section of Part I of this Annual Report on Form
10-K entitled "Item 1 -- Business -- Executive Officers of the Company."
Information regarding compliance with Section 16 of the Securities
Exchange Act of 1934, as amended, is incorporated by reference to the
information under the heading "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Registrant's Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding the compensation of executive officers and
directors of the Company is incorporated by reference from the information under
the headings "Executive Compensation" and "Certain Transactions" in the
Registrant's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the information under the heading
"Security Ownership of Principal Stockholders and Management" in the
Registrant's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the information under the caption "Certain
Transactions" in the Registrant's Proxy Statement.
48
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form
10-K:
1. FINANCIAL STATEMENTS
Consolidated Financial Statements: See Index to Consolidated Financial
Statements at Item 8 on page 30 of this report.
2. FINANCIAL STATEMENT SCHEDULES
Financial Statement Schedule: See Index to Consolidated Financial
Statements at Item 8 on page 30 of this report.
3. EXHIBITS
The following exhibits are incorporated herein by reference or are
filed with this reports as indicated below (numbered in accordance with Item 601
of Regulation S-K):
Exhibit
Number Description
- ------ -----------
2.1(1) Agreement and Plan of Merger dated June 10, 1998 between Catapult
Communications Corporation, a California corporation, and Registrant.
3.1(1) Articles of Incorporation of Registrant.
3.2(1) Bylaws of Registrant.
4.1(1) Specimen Common Stock Certificate of Registrant.
9.1(1) Voting Trust Agreement dated June 8, 1998 between Nancy Hood Karp,
Richard A. Karp, the Registrant and a depositary.
10.1(1) Form of Indemnification Agreement entered into by Registrant with each
of its directors and executive officers.
10.2(1) Form of Restricted Stock Purchase Agreement.
10.3(1) 1989 Stock Option Plan and related agreements.
10.4(1) UK Executive Share Option Scheme and related agreements.
10.5(1) 1998 Stock Plan and related agreements.
10.6(1) 1998 Employee Stock Purchase Plan and related agreements.
10.7(1) Fiscal 1999 Officer and Key Employee Profit Sharing Plan.
10.8(1) Lease for office space located at 160 Whisman Road, Mountain View, CA.
10.9(1) Form of Software Support Agreement.
10.10(1) Severance Agreement and Mutual Release of All Claims dated June 8, 1998
between Nancy Hood Karp and Registrant.
10.11(1) Consulting and Non-Competition Agreement dated June 9, 1998 between
Nancy Hood Karp and Registrant.
11.1 Calculation of Earnings per Common Share (contained in Note 1 of the
Notes to Financial Statements).
- ----------
(1) Incorporated by reference to exhibits filed in response to Item 16(a),
"Exhibits," of the Registrant's Registration Statement on Form S-1, as
amended (File No. 333-56627), which was declared effective on February 10,
1999.
49
<PAGE>
21.1(1) Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants (see
page 52)
24.1 Power of Attorney (see page 51)
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
No report on Report Form 8-K was filed during the last quarter of the
fiscal year ended September 30, 1999.
50
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused the report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CATAPULT COMMUNICATIONS CORPORATION
Date: December 30, 1999 By: /s/ RICHARD A. KARP
----------------------------------------
Richard A. Karp
President, Chief Executive Officer &
Chairman of the Board
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Richard A. Karp, his attorney-in-fact,
with the power of Substitution, for him in any and all capacities, to sign any
amendments to this Report on Form 10-K, and to file the same, with Exhibits
thereto and other documents in connection therewith with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorney-in-fact, or substitute or substitutes may do, or cause to be done, by
virtue hereof.
<TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following person on behalf of the
Registrant and in the capacities and on the dates indicated:
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ RICHARD A. KARP President, Chief Executive Officer, Chairman December 30, 1999
------------------------------------------ of the Board and Acting Chief Financial
(Richard A. Karp) Officer
(Principal Executive Officer, Principal
Financial and Principal Accounting Officer)
/s/ CHARLES L. WAGGONER Director December 23, 1999
------------------------------------------
(Charles L. Waggoner)
/s/ JOHN M. SCANDALIOS Director December 23, 1999
------------------------------------------
(John M. Scandalios)
/s/ NANCY H. KARP Director December 23, 1999
------------------------------------------
(Nancy H. Karp)
</TABLE>
51
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-75367) of Catapult Communications Corporation of
our report dated November 2, 1999 relating to the financial statements which
appears in this Form 10-K.
/S/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
December 30, 1999
52
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from Consolidated
Balance Sheet and Income Statement and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-1-1998
<PERIOD-END> SEP-30-1999
<CASH> 8,486,000
<SECURITIES> 33,168,000
<RECEIVABLES> 5,938,000
<ALLOWANCES> 86,000
<INVENTORY> 705,000
<CURRENT-ASSETS> 49,450,000
<PP&E> 2,245,000
<DEPRECIATION> 1,247,000
<TOTAL-ASSETS> 50,667,000
<CURRENT-LIABILITIES> 7,078,000
<BONDS> 0
0
0
<COMMON> 13,000
<OTHER-SE> 43,589,000
<TOTAL-LIABILITY-AND-EQUITY> 50,667,000
<SALES> 25,505,000
<TOTAL-REVENUES> 28,955,000
<CGS> 3,646,000
<TOTAL-COSTS> 10,885,000
<OTHER-EXPENSES> 107,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 15,611,000
<INCOME-TAX> 6,706,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,905,000
<EPS-BASIC> 0.75
<EPS-DILUTED> 0.73
</TABLE>
