FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-24701
CATAPULT COMMUNICATIONS CORPORATION
(Exact name of Registrant as specified in its charter)
Nevada 77-0086010
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
160 South Whisman Road
Mountain View, California 94041
(650) 960-1025
(Address, including zip code, and telephone number, including
area code, of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No
As of December 31, 1999, there were 12,738,734 shares of the
Registrant's Common Stock, $0.001 par value, outstanding.
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CATAPULT COMMUNICATIONS CORPORATION
FORM 10-Q
<CAPTION>
INDEX
Part I--Financial Information Page
- ----------------------------- ----
<S> <C>
Item. 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at December 31, 1999 and
September 30, 1999 3
Condensed Consolidated Income Statements for the three months ended
December 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flow for the three months
ended December 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
Part II--Other Information
Item 2. Changes in Securities and Use of Proceeds 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
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Part I. Financial Information
Item 1. Financial Statements
CATAPULT COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(unaudited)
December 31, September 30,
1999 1999
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents .................. $ 3,114 $ 8,486
Short-term investments ..................... 40,442 33,168
Accounts receivable, net ................... 3,681 5,852
Inventories, net ........................... 770 705
Deferred income taxes ...................... 890 890
Prepaid expenses ........................... 370 349
-------- --------
Total current assets ..................... 49,267 49,450
Property and equipment, net .................. 1,108 998
Other assets ................................. 209 219
-------- --------
Total assets ............................. $ 50,584 $ 50,667
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ........................... $ 512 $ 444
Accrued liabilities ........................ 3,640 4,782
Deferred revenue ........................... 2,107 1,852
-------- --------
Total current liabilities ................ 6,259 7,078
-------- --------
Stockholders' Equity:
Common stock ............................... 13 13
Additional paid-in capital ................. 20,151 20,040
Deferred compensation ...................... (114) (132)
Retained earnings .......................... 24,101 23,796
Accumulated other comprehensive income ..... 474 172
Treasury stock (50,000 shares at cost) ..... (300) (300)
-------- --------
Total stockholders' equity ............... 44,325 43,589
-------- --------
Total liabilities and stockholders'
equity ................................ $ 50,584 $ 50,667
======== ========
See Notes to condensed consolidated financial statements.
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CATAPULT COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED INCOME STATEMENTS
(In thousands, except share and per share data)
(unaudited)
Three Months
Ended December 31,
---------------------------------
1999 1998
------------ ------------
Revenues:
Product sales ................. $ 3,872 $ 4,524
Services ...................... 1,112 705
------------ ------------
Total revenues .............. 4,984 5,229
------------ ------------
Cost of revenues:
Product sales ................. 460 611
Services ...................... 312 189
------------ ------------
Total cost of revenues ...... 772 800
------------ ------------
Gross profit .................... 4,212 4,429
------------ ------------
Operating expenses:
Research and development ...... 615 553
Sales and marketing ........... 1,990 1,192
General and administrative 697 579
------------ ------------
Total operating expenses .... 3,302 2,324
------------ ------------
Operating income ................ 910 2,105
Interest income ................. 604 151
Other income (expense) .......... (187) (166)
------------ ------------
Income before taxes ............. 1,327 2,090
Provision for taxes ............. 510 899
------------ ------------
Net income ...................... $ 817 $ 1,191
============ ============
Earnings per share:
Basic ......................... $ 0.06 $ 0.11
============ ============
Diluted ....................... $ 0.06 $ 0.11
============ ============
Weighted average shares:
Basic ......................... 12,727,000 10,517,000
============ ============
Diluted ....................... 13,103,000 10,953,000
============ ============
See Notes to condensed consolidated financial statements.
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CATAPULT COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<CAPTION>
Three Months
Ended December 31,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income ....................................................... $ 817 $ 1,191
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Depreciation and amortization .................................. 98 77
Amortization of deferred stock compensation .................... 18 50
Change in current assets and liabilities:
Accounts receivable .......................................... 2,171 (1,413)
Inventories .................................................. (65) 39
Prepaid expenses ............................................. (21) (284)
Other assets ................................................. 10 (3)
Accounts payable ............................................. 68 (290)
Accrued liabilities .......................................... (1,142) (273)
Deferred revenue ............................................. 255 (231)
-------- --------
Net cash provided (used) by operating activities ........... 2,209 (1,137)
Cash flows from investing activities:
Purchase of investments, net ................................... (7,182) --
Purchase of property and equipment ............................. (208) (49)
-------- --------
Net cash used by investing activities ........................ (7,390) (49)
-------- --------
Cash flows from financing activities:
Stock issuances ................................................ 111 17
Purchase of treasury stock ..................................... -- (300)
-------- --------
Net cash provided (used) by financing activities ............. 111 (283)
-------- --------
Effect of exchange rate changes .................................. (302) (1)
-------- --------
Decrease in cash and cash equivalents ............................ (5,372) (1,470)
Cash and cash equivalents, beginning of period ................... 8,486 15,229
-------- --------
Cash and cash equivalents, end of period ......................... $ 3,114 $ 13,759
======== ========
<FN>
See Notes to condensed consolidated financial statements.
</FN>
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CATAPULT COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1--THE COMPANY AND BASIS OF PRESENTATION:
Catapult Communications Corporation, (the "Company) designs, develops,
manufactures, markets and supports an advanced software-based test system
offering an integrated suite of testing applications for the global
telecommunications industry. The Company's advanced test systems assist its
customers in the design, integration, installation and acceptance testing of a
broad range of digital telecommunications equipment and services. The Company
was incorporated in California in October 1985 and has operations in the United
States, Canada, the United Kingdom, Europe and Japan. The Company is organized
to operate and service a single industry segment: the design, development,
manufacture, marketing and support of advanced software-based test systems
globally.
The accompanying condensed consolidated financial statements and
related notes are unaudited. However, in the opinion of management, all
adjustments, (consisting only of normal recurring adjustments), which are
necessary for the fair presentation of the financial position and results of
operations for the interim periods presented have been included. The results of
operations for such periods are not necessarily indicative of results to be
expected for any future period or the fiscal year ending September 30, 2000.
These financial statements, including the notes thereto, should be read in
conjunction with the audited financial statements for the year ended September
30, 1999, which were included as part of the Company's Annual Report on Form
10-K for the year ended September 30, 1999 and Registration Statement on Form
S-1 on file with the Securities and Exchange Commission.
NOTE 2 - RECENT ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Statement No. 133 ("FAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." The Company is required to adopt FAS 133 in
fiscal 2001. 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 continues assessing the effect of FAS 133 on the
operations and financial position of the Company.
NOTE 3--BASIC AND DILUTED EARNINGS PER SHARE
Basic earnings per share is computed using the weighted average number
of common shares outstanding during the period. Diluted earnings per share
includes the effect of dilutive potential common shares (options) issued during
the period (using the treasury stock method). The following data is presented in
thousands except per share data:
Three months ended
December 31,
1999 1998
----------- ------------
(in thousands, except share
and per share data)
Net income .............................. $ 817 $ 1,191
=========== ===========
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Weighted average shares outstanding ..... 12,727,000 10,517,000
Dilutive options ........................ 376,000 436,000
----------- ------------
Weighted average shares assuming dilution 13,103,000 10,953,000
=========== ===========
Earnings per share:
Basic ................................... $ 0.06 $ 0.11
=========== ===========
Diluted ................................. $ 0.06 $ 0.11
=========== ===========
NOTE 4--COMPREHENSIVE INCOME
The components of comprehensive income, net of tax, are as follows (in
thousands):
Three Months Ended
December 31,
1999 1998
---- ----
Net income ................................ $ 817 $1,191
Foreign currency translation adjustment ... 302 (1)
------ ------
Comprehensive income ...................... $1,119 $1,190
====== ======
NOTE 5--INVENTORIES (in thousands)
December 31, September 30,
1999 1999
---- ----
Raw Materials ..... $655 $554
Work-in-process ... 63 79
Finished goods .... 52 72
---- ----
$770 $705
==== ====
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction
with "Selected Consolidated Financial Data" and the Company's Consolidated
Financial Statements and Notes thereto included in the Annual Report on Form
10-K and Registration Statement on Form S-1. The following discussion contains
statements that are not historical facts but are forward-looking statements.
Such statements are generally identified by the use of forward-looking words and
phrases, such as "intended," "expects," "anticipates" and "is (or are) expected
(or anticipated)." These forward-looking statements include but are not limited
to those identified in this report with an asterisk (*) symbol. Actual results
may differ materially from those discussed in such forward-looking statements,
and the Company's stockholders should carefully review the cautionary statements
set forth in this report on Form 10-Q, including those set forth under the
caption "Factors That May Affect Future Results."
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 its reports to
Stockholders. The Company does not undertake to update any forward-looking
statements that may be made in this Form 10-Q and from time to time by or on
behalf of the Company.
Overview
The Company designs, develops, manufactures, markets and supports an
advanced software-based test system offering an integrated suite of testing
applications for the global telecommunications industry. The Company's family of
digital communication test systems, is designed to enable equipment
manufacturers and network operators to deliver complex digital
telecommunications equipment and services more quickly and cost-effectively. The
DCT product line performs a variety of test functions, including simulation,
load and stress testing, feature verification, conformance testing and
monitoring. The company maintains an extensive library of software modules that
support approximately 160 protocols and variants. The DCT systems consists of
advanced software and hardware running on a third-party UNIX-based workstation.
In addition, the Company offers customer support under software support
contracts, as well as installation and training.
Results of Operations
The following table sets forth, for the periods indicated, the
percentage relationship of certain items from the Company's consolidated
statements of income to total revenues.
For the three months
ended December 31,
1999 1998
----- -----
Revenues:
Product sales ........................ 77.7% 86.5%
Services ............................. 22.3 13.5
----- -----
Total revenues ..................... 100.0 100.0
----- -----
Cost of revenues:
Product sales ........................ 9.2 11.7
Services ............................ 6.3 3.6
----- -----
Total cost of revenues ............. 15.5 15.3
----- -----
Gross profit ........................... 84.5 84.7
Operating expenses:
Research and development ............. 12.3 10.6
Sales and marketing .................. 39.9 22.8
General and administrative ........... 14.0 11.0
----- -----
Total operating expenses ........... 66.2 44.4
----- -----
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Operating income ....................... 18.3 40.3
Interest income ........................ 12.1 2.9
Other income (expense) ................. (3.8) (3.2)
----- -----
Income before taxes .................... 26.6 40.0
Provision for taxes .................... 10.2 17.2
----- -----
Net income ............................. 16.4% 22.8%
===== =====
Gross margin on product sales .......... 88.1% 86.5%
===== =====
Gross margin on services ............... 71.9% 73.2%
===== =====
Three Months Ended December 31, 1998 and 1999
Revenues. Revenues decreased by approximately 5% from $5.2 million for
the three months ended December 31, 1998 to $5.0 million for the three months
ended December 31, 1999. Over the same period, product sales decreased by
approximately 14.4% from $4.5 million to $4.0 million, and services revenue
increased by approximately 56% from $705,000 to $1.1 million. The decrease in
product sales was primarily attributable to decreased system sales to customers
in Japan, specifically NTT DoCoMo. The increase in services revenue was
primarily due to sales of software support contracts associated with new system
sales as well as contract renewals and to a lesser extent customer training.
Services revenue will vary depending in part on the relative contribution of
each sales region. In Japan, the Company has historically received lower
services revenue in proportion to its product sales, principally due to market
factors affecting the pricing of such services.
Subsequent to the fiscal year ended September 30, 1999, the Company
received information that sales to NTT, a major customer in Japan, would likely
be significantly reduced beginning in fiscal 2000. The Company believes it is
likely that sales to NTT will no longer represent as large a percentage of total
revenue, and this will likely have a negative effect on the Company's long term
growth expectations*. Accordingly, future quarterly results and fiscal 2000 will
likely be significantly reduced and different in terms of total revenue,
earnings per share, geographic sales mix and customer concentration from fiscal
1999.
Cost of revenues. Cost of product sales consists of the costs of board
assembly by independent contractors, purchased components, payroll and benefits
for personnel in product testing, purchasing, shipping and inventory management,
as well as supplies, media and freight. Cost of services consists primarily of
the costs of payroll and benefits for customer support personnel, installation
and training. Cost of revenues decreased 3.5% from $800,000 for the three months
ended December 31, 1998 to $772,000 for the three months ended December 31 1999.
Gross margin on product sales increased from 86.5% to 88.1% over this same
period as the Company's sales mix had a greater proportion of higher margin
products. Cost of services increased by approximately 65.1% from $189,000 for
the three months ended December 31, 1998 to $312,000 for the three months ended
December 31, 1999 due primarily to personnel additions. Over the same period,
gross margin on services decreased slightly from 73.2% to 71.9% gross margin on
services will vary depending in part on the amount of sales in Japan, where the
Company has historically generated lower margins on services revenue due to
market factors affecting pricing.
Research and development. Research and development expenses consist
primarily of the costs of payroll and benefits for engineers, equipment and
consulting services. The Company's policy is to evaluate software development
projects for technological feasibility to determine if they meet capitalization
requirements. To date, all software development costs have been expensed as
research and development expenses as incurred. Research and development expenses
increased by approximately 11.2% from $553,000 for the three months ended
December 31, 1998 to $615,000 for the three months ended December 31, 1999. As a
percentage of
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total revenues, research and development expenses increased from 10.6% to 12.3%
over the same period. The increase in absolute dollars was due primarily to an
increase in engineering personnel. The Company expects that research and
development expenses will increase in absolute dollars for the foreseeable
future as the Company intends to continue to invest in product development*.
Sales and marketing. Sales and marketing expenses consist primarily of
the costs of payroll, benefits, commissions and bonuses, occupancy costs and
travel and promotional expenses, such as brochures and trade shows. Sales and
marketing expenses increased 66.9% from $1.2 million for the three months ended
December 31, 1998 to $2.0 million for the three months ended December 31, 1999.
As a percentage of total revenues, sales and marketing expenses increased from
22.8% for the three months ended December 31, 1998 to 39.9% for the three months
ended December 31, 1999. The increase in absolute dollars was due primarily to
an overall increase in marketing personnel and the expansion of the Company's
sales and support offices. The Company expects that sales and marketing expenses
will increase in absolute dollars for the foreseeable future as the Company
intends to invest in its sales and marketing capabilities*.
General and administrative. General and administrative expenses include
costs associated with the Company's general management, public company reporting
requirements, human resources and finance functions. General and administrative
expenses increased 20.4% from $579,000 for the three months ended December 31,
1998 to $697,000 for the three months ended December 31, 1999 due primarily to
an overall increase in personnel, temporary staffing costs, recruiting costs and
public company costs. As a percentage of total revenues, general and
administrative expenses increased from 11.0% to 14.0% over the same period.
In the three months ended December 31, 1999, the Company recorded
amortization of deferred compensation expense of approximately $18,000 related
to the issuance of options to purchase the Company's Common Stock at exercise
prices subsequently deemed to be below fair market value. At December 31, 1999,
approximately $114,000 of deferred compensation expense remained to be
amortized.
Interest income. Interest income consists primarily of interest earned
on cash and cash equivalents and short-term investment balances. Interest income
increased from $151,000 for the three months ended December 31, 1998 to $604,000
for the three months ended December 31, 1999 due to an increase in the Company's
cash and cash equivalent balances and short-term investments from the proceeds
of the February 1999 public offerings and operations.
Other income (expense), net. Other income (expense) represents gains
and losses from fluctuations in exchange rates on transactions denominated in
foreign currencies and other miscellaneous expenses. Other expense was $166,000
for the three months ended December 31, 1998 and $187,000 for the three months
ended December 31, 1999 due principally to foreign exchange gains and losses,
premiums paid for forward contracts and options entered into to hedge
transactions denominated in currencies other than the US dollar.
Provision for income taxes. Provision for income taxes consists of
federal, state and international income taxes. The Company's effective tax rate
was 43.0% for the three months ended December 31, 1998 and 39.0% for the three
months ended December 31, 1999. These tax rates primarily reflect the
anticipated percentages of revenues derived by the Company from international
operations and a decrease in the tax rate in Japan. The Company expects that its
future tax rate may vary depending in part on the relative income contribution
by its domestic and foreign operations*.
Liquidity and Capital Resources
Historically, the Company has financed its operations, including
increases in account receivable and capital equipment acquisitions, primarily
through cash generated from operations, cash raised through its
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initial public offering of common stock and the exercise of employee stock
options.
The Company's operating activities used cash of $1.1 million and
provided $2.3 million in the period ending December 31, 1998 and 1999,
respectively. The cash used in the Company's operations for the three months
ended December 31 1998 was primarily attributable to a significant increase in
account receivables and a reduction in liabilities. The cash provided in the
Company's operations for the three months ended December 31 1999 was primarily
attributable to profitable operations and a significant increase in collection
of account receivable offset by an decrease in accrued expenses. Investing
activities, consisting primarily of purchases of short-term investments and
additions to property and equipment, using cash of $49,000 and $7.5 million in
the three months ending December 31, 1998 and 1999, respectively. Financing
activities in the three months ending December 31, 1998 and 1999 were
attributable to the exercise of employee stock options and the repurchase of
stock from an officer of the Company in 1998.
As of December 31, 1999, the Company had working capital of $43.0
million, cash and cash equivalents of $3.1 million and short-term investments of
$40.4 million. As of December 31, 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 $1 million in fiscal
2000*.
The Company believes that cash and cash equivalents, 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.
Factors That May Affect Future Operating Results
Fluctuations in Quarterly Operating Results; Lengthy Sales Cycle
The Company has experienced, and anticipates that it will continue to
experience, significant fluctuations in quarterly revenues and operating
results. The Company's revenues and operating results are relatively difficult
to forecast for a number of reasons, including (i) the variable size and timing
of individual purchases by customers, (ii) seasonal factors that may affect
capital spending by customers, such as the varying fiscal year ends of customers
and the reduction in business during the summer months, particularly 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 the timing and
amount of sales incentive compensation, (vi) competitive conditions in the
Company's markets, (vii) exchange rate fluctuations, (viii) changes in the mix
of products sold, (ix) the timing of the introduction and market acceptance of
new products or product enhancements by the Company, its customers, competitors
or suppliers, (x) costs associated with developing and introducing new products,
(xi) product life cycles, (xii) changes in the level of operating expenses
relative to revenues, (xiii) software defects and other product quality
problems, (xiv) customer order deferrals in anticipation of new products, (xv)
delays in purchasing decisions or customer orders due to customer consolidation,
(xvi) supply interruptions, (xvii) changes in the regulatory environment and
(xviii) changes in global or regional economic conditions or in the
telecommunications industry.
The Company's revenues in any period generally have been, and are
likely to continue to be, derived from relatively small numbers of sales and
service transactions with relatively high average revenues per order. Therefore,
the loss of any orders or delays in closing such transactions could have a more
significant impact on the Company's quarterly revenues and results of operations
than on those of companies with relatively high volumes of sales or low revenues
per order. The Company's products are generally shipped within 15 to 30 days
after orders are received and revenues are recognized upon shipment of the
products, provided no significant vendor obligations remain and collection of
the related receivable is deemed probable. As a result, the Company generally
does not have a significant backlog of orders, and revenues in any quarter are
substantially dependent on orders booked and shipped in that quarter.
A customer's decision to purchase the Company's products typically
involves a significant technical evaluation, internal procedural delays
associated with large capital expenditure approvals and testing and
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acceptance of new systems that affect key operations. For these and other
reasons, the sales cycle associated with the Company's products is typically
lengthy and subject to a number of significant risks over which the Company has
little or no control. Historically, the period between initial customer contact
and purchase of the Company's products has typically ranged from two to nine
months, with sales to new customers (including new divisions within existing
customers) at the longer end of this range. Because of the lengthy sales cycle
and the relatively small number and large size of customers' orders, if revenues
forecast from a specific customer for a particular quarter are not realized in
that quarter, the Company's operating results for that quarter could be
materially adversely affected.
The Company's expectations for future revenues are predicated, to a
large extent, on the recruitment and hiring of a significant number of
employees, particularly experienced sales and technical personnel. Failure to
hire, or delays in hiring, sufficient sales and technical personnel could have a
material adverse effect on the Company's results of operations for any period.
Due to the relatively fixed nature of most of the Company's costs,
including personnel and facilities costs, and because operating expenses are
based on anticipated revenue, a decline in revenue from even a limited number of
transactions, failure to achieve expected revenue in any fiscal quarter or
unanticipated variations in the timing of recognition of specific revenues can
cause significant variations in operating results from quarter to quarter and
may in some future quarter result in losses or have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company believes, therefore, that period-to-period comparisons of its operating
results should not be relied upon as an indication of future performance.
For all of the foregoing factors, as well as other unanticipated
factors, it is possible that in some future quarter the Company's results of
operations could fail to meet the expectations of public market analysts or
investors. In such event, or in the event that adverse conditions prevail or are
perceived to prevail generally or with respect to the Company's business, the
price of the Company's Common Stock will likely be materially adversely
affected.
Dependence on Limited Number of Customers
The Company's customer base is highly concentrated, and a relatively
small number of companies have accounted for substantially all of the Company's
revenues to date. In the three months ended December 31, 1999, the Company's top
four customers represented approximately 51.7% of total revenue. 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.
Risks Associated with International Sales and Operations; Foreign Exchange Risk
Company revenues from international customers were approximately 64%
during the three months ended December 31, 1999. The Company expects that
international sales will continue to account for a significant portion of its
revenues in future periods. The Company sells its products worldwide through its
direct sales force. The Company has offices located in Japan, Canada, the United
Kingdom, Germany, France and Sweden and plans to add offices, staff and
resources worldwide from time to time. International sales and operations are
subject to inherent risks, including difficulties in staffing and managing
foreign operations, longer customer payment cycles, greater difficulty in
accounts receivable collection, changes in regulatory requirements or in
economic or trade policy, costs related to localizing products for foreign
countries,
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potentially weaker protection for intellectual property in certain foreign
countries, the burden of complying with a wide variety of foreign laws and
practices, tariffs and other trade barriers, and potentially adverse tax
consequences, including restrictions on repatriation of earnings. During the
last two fiscal years and during the three months ended December 31, 1999 a
significant portion of the Company's sales has been to customers in Japan. If
economic conditions in Japan deteriorate to a significant extent, the Company's
business, financial condition and results of operations could be materially
adversely affected. In addition, although the Company cannot predict the
potential consequences to the Company's business of the adoption of the Euro as
a common currency in Europe, the transition to the Euro presents a number of
risks, including increased competition from European firms as a result of
increased pricing transparency. An inability to obtain necessary regulatory
approvals in foreign markets on a timely basis could also have a material
adverse effect on the Company's business, financial condition and results of
operations.
Subsequent to the fiscal year ended September 30, 1999, the Company
received information that sales to NTT, a major customer in Japan, would likely
be significantly reduced beginning in fiscal 2000. The Company believes it is
likely that sales to NTT will no longer represent as large a percentage of total
revenue, and this will likely have a negative effect on the Company's long term
growth expectations. Accordingly, results for the quarter and fiscal 2000 will
likely be significantly reduced and different in terms of total revenue,
earnings per share, geographic sales mix and customer concentration from fiscal
1999.
Rapid Technological Change; Uncertainty of Acceptance of the Company's Products
and Services
The market for telecommunications test systems and services is subject
to rapid technological change, evolving industry standards, rapid changes in
customer requirements and frequent product and service introductions and
enhancements. The Company's future success will depend in part on its ability to
anticipate and respond to these changes by enhancing its existing products and
services and by developing and introducing, on a timely and cost-effective
basis, new products, features and services that address the needs of its
customer base. There can be no assurance that the Company will be successful in
identifying, developing and marketing new products, product enhancements and
related services that respond to technological change or evolving industry
standards or that adequately meet new market demands
The Company's test systems currently operate only on the UNIX operating
system. The Company's current and prospective customers may require other
operating systems to be used in their telecommunications test systems, such as
Windows 95, Windows NT or Windows 98 or may require the integration of other
industry standards. There can be no assurance that the Company would be able to
successfully adapt its products to such operating systems on a timely or
cost-effective basis, if at all. The failure of the Company to respond to
rapidly changing technologies and to develop and introduce new products and
services in a timely manner would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's success will depend in part on whether a large number of
telecommunications equipment manufacturers and network operators purchase the
Company's products and services. Because the telecommunications market is
rapidly evolving, it is difficult to predict the future success of products and
services in this market. The customers in this market use products from a number
of competing suppliers for various testing purposes, and there has not been
broad adoption of the products of one company. There can be no assurance that
the Company's current or future products or services will achieve widespread
acceptance among network operators, telecommunications equipment manufacturers
or other potential customers or that solutions developed by competitors will not
render the Company's products obsolete or uncompetitive.
Foreign Exchange Risk
The Company's foreign subsidiaries operate and sell the Company's
products in various global markets. As a result, the Company is exposed to
changes in interest rates and foreign currency exchange rates
13
<PAGE>
on foreign currency denominated sales made to foreign subsidiaries. The Company
utilizes foreign currency forward exchange contracts and options to hedge
against future movements in foreign exchange rates that affect certain foreign
currency denominated intercompany receivables. The Company attempts to match the
forward contracts with the underlying receivables being hedged in terms of
currency, amount and maturity. The Company does not use derivative financial
instruments for speculative or trading purposes. Because the impact of movements
in currency exchange rates on forward contracts offsets the related impact on
the exposures hedged, these financial instruments do not subject the Company to
speculative risk that would otherwise result from changes in currency exchange
rates. Realized gains and losses on forward exchange contracts may offset
foreign exchange transaction gains or losses from revaluation of foreign
currency denominated intercompany receivable balances which otherwise would be
charged to other income (expense). To date, the Company has not fully hedged all
risk associated with its sales denominated in foreign currencies, and there can
be no assurance that the Company's hedging activities, if any, will be
successful.
At December 31, 1999 the Company had forward exchange contracts
maturing in fiscal 2000 to sell approximately $2.9 million in Japanese Yen and
$1.9 million in Pounds Sterling. The fair market value of the contracts at
December 31, 1999 was immaterial. In addition, at December 31, 1999, the Company
had a foreign currency option to sell approximately $2 million Japanese Yen
maturing in fiscal 2000. This option had an immaterial fair market value at
December 31, 1999. As of December 31, the cost of the contracts and option have
been included in other income (expense).
The Company has evaluated the potential near-term losses in future
earnings, fair values and cash flows from reasonably possible near-term changes
in market rates or prices and believes that any such losses would not be
material.
Year 2000 Compliance
14
<PAGE>
To date, the Company has not incurred material costs associated with
Year 2000 compliance nor any disruption with vendors or operations. Furthermore,
based on its assessment to date, the Company believes that any future costs
associated with its Year 2000 compliance efforts will not be material*.
Additional factors that could affect future operating results or the
price of the Common Stock are set forth under the caption "Risk Factors" in the
prospectus dated February 11, 1999 contained in the Registration Statement and
in Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The Company does not use derivative financial instruments in its
investment portfolio. The Company's short-term investments are generally
comprised of investments with original maturities of less than one year. The
investments consist of commercial paper, investment quality corporate bonds,
Collateralized Mortgage Obligations, U.S. government securities and money market
funds. These securities are subject to interest rate risk, and could decline in
value if interest rates increase. Due to the short duration and conservative
nature of the Company's investment portfolio, the Company does not expect any
material loss with respect to its investment portfolio*.
Foreign Currency Exchange Rate Risk
Certain of the Company's sales and marketing expenses are incurred in
Foreign currencies. As a result the Company's international results of
operations are subject to foreign exchange rate fluctuations. The Company
utilizes currency forward exchange contracts and options to hedge against
foreign currency rate fluctuations.
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds
(c) The following information relates to securities sold by the Company
during the quarter ended December 31, 1999: NONE.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27 Financial Data Schedule
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the
quarter for which this
15
<PAGE>
report on Form 10-Q is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CATAPULT COMMUNICATIONS CORPORATION
Date: February 14, 2000 By: /s/ Richard A. Karp
------------------------------------
Richard A. Karp
President and Chief Executive Officer
(Principal Executive Officer)
Acting Chief Financial Officer
(Principal Financial Officer)
16
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