Catapult Communications (CATT) 10-Q 2002 Q1 Quarterly report

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, 2001

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
(State or other jurisdiction of
incorporation or organization) 77-0086010
(I.R.S. Employer
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 January 31, 2002, there were 13,042,547 shares of the Registrant’s Common Stock, $0.001 par value, outstanding.

CATAPULT COMMUNICATIONS CORPORATIONFORM 10-Q

INDEX

Part I—Financial Information	Page
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at December 31, 2001 and September 30, 2001	3
Condensed Consolidated Statements of Income for the three months ended
December 31, 2001 and 2000	4
Condensed Consolidated Statements of Cash Flows for the three months ended
December 31, 2001 and 2000	5
Notes to Condensed Consolidated Financial Statements	6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations	8
Item 3. Quantitative and Qualitative Disclosures About Market Risk	14

Part II—Other Information

Item 1. Legal Proceedings	15
Item 2. Changes in Securities and Use of Proceeds	15
Item 3. Defaults Upon Senior Securities	15
Item 4. Submission of Matters to a Vote of Security Holders	15
Item 5. Other Information	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, 2001		September 30, 2001
ASSETS
Current Assets:
Cash and cash equivalents	$ 46,472		$ 44,202
Short-term investments	16,392		17,274
Accounts receivable, net	8,817		7,234
Inventories	1,032		1,124
Deferred income taxes	628		628
Prepaid expenses and other current assets	368		398
Total current assets	73,709		70,860
Property and equipment, net	1,418		1,430
Other assets	489		543
Total assets	$ 75,616		$ 72,833
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$      608		$   1,107
Accrued liabilities	5,829		6,027
Deferred revenue	1,927		2,209
Total current liabilities	8,364		9,343
Stockholders’ Equity:
Common stock	13		13
Additional paid-in capital	22,427		21,758
Deferred compensation	(138	)	—
Treasury stock (50,000 shares at cost)	(300	)	(300	)
Accumulated other comprehensive income	481		612
Retained earnings	44,769		41,407
Total stockholders’ equity	67,252		63,490
Total liabilities and stockholders’ equity	$ 75,616		$ 72,833

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CATAPULT COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)

	Three Months Ended December 31,
	2001		2000
Revenues:
Product sales	$   9,526		$   8,372
Services	1,357		1,363
Total revenues	10,883		9,735
Cost of revenues:
Product sales	614		679
Services	263		150
Total cost of revenues	877		829
Gross profit	10,006		8,906
Operating expenses
Research and development	1,638		979
Sales and marketing	2,774		2,525
General and administrative (including
stock-based compensation expense of $6
and $15)	1,179		1,237
Total operating expenses	5,591		4,741
Operating income	4,415		4,165
Interest income	433		775
Other expense	(178	)	(91	)
Income before income taxes	4,670		4,849
Provision for income taxes	1,308		1,697
Net income	$   3,362		$   3,152
Earnings per share:
Basic	$     0.26		$     0.24
Diluted	$     0.25		$     0.24
Shares used in per share calculation:
Basic	13,008		12,870
Diluted	13,353		13,178

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CATAPULT COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

	Three Months Ended December 31,
	2001		2000
Cash flows from operating activities:
Net income	$   3,362		$ 3,152
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization	189		150
Amortization of deferred stock compensation	6		18
Change in current assets and liabilities:
Accounts receivable	(1,583	)	1,874
Inventories	92		(115	)
Prepaid expenses and other current assets	30		43
Other assets	54		(350	)
Accounts payable	(499	)	(103	)
Accrued liabilities	(198	)	666
Deferred revenue	(282	)	76
Net cash provided by operating activities	1,171		5,411
Cash flows from investing activities:
Sales (Purchases) of investments, net	844		(8,756	)
Purchases of property and equipment	(177	)	(148	)
Net cash provided (used) by investing activities	667		(8,904	)
Cash flows from financing activities:
Proceeds from issuance of common stock	525		121
Net cash provided by financing activities	525		121
Effect of exchange rate changes on cash	(93	)	(82	)
Increase (decrease) in cash and cash equivalents	2,270		(3,454	)
Cash and cash equivalents, beginning of period	44,202		5,200
Cash and cash equivalents, end of period	$ 46,472		$ 1,746

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CATAPULT COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1—THE COMPANY AND BASIS OF PRESENTATION

     Catapult Communications Corporation (the “Company”) designs, develops, manufactures, markets and supports an advanced software-based test system offering an integrated suite of testing applications for the global telecommunications industry. The Company’s advanced test systems assist its customers in the design, integration, installation and acceptance testing of a broad range of digital telecommunications equipment and services. The Company has been incorporated in Nevada since June 19, 1998. The Company has operations in the United States, Canada, the United Kingdom and Europe, Australia and Japan. The Company conducts its business within one industry segment.

     The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These condensed financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Report on Form 10-K for the year ended September 30, 2001, and filed with the Securities and Exchange Commission. The unaudited financial statements as of December 31, 2001, and for the three months ended December 31, 2001 and 2000, reflect, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial information set forth herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for any subsequent interim period or for an entire year. The September 30, 2001 balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

Revenue Recognition

     Sales of the Company’s product arrangements normally include hardware and software. Certain of the Company’s sales may also include installation. The Company also offers training and maintenance services. The Company recognizes revenue on system sales upon shipment or when installed, if installation services are purchased, provided collection is probable. Training and maintenance revenues are based on the Company’s established history of separate sales of training and maintenance. Training revenues are recognized at the time the training is complete. Maintenance revenues are recognized ratably over the term of the maintenance contract.

NOTE 2 —RECENTLY ISSUED ACCOUNTING STANDARDS

     In various areas, including revenue recognition, accounting standards and practices continue to evolve. The FASB’s Emerging Issues Task Force continues to address revenue related accounting issues. The management of the Company believes it is in compliance with all of the rules and related guidance, as they currently exist. However, any changes to generally accepted accounting principles in these areas could impact the Company’s accounting for its operations.

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NOTE 3—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 include the effect of dilutive potential common shares (options) issued during the period using the treasury stock method.

	Three Months Ended December 31,
	2001	2000
	(in thousands, except per share data)
Net income	$  3,362	$  3,152
Weighted average shares outstanding	13,008	12,870
Dilutive options	345	308
Weighted average shares assuming dilution	13,353	13,178
Earnings per share:
Basic	$    0.26	$    0.24
Diluted	$    0.25	$    0.24
Antidilutive common equivalent shares
excluded in calculating diluted earnings
per share	33	410

NOTE 4—COMPREHENSIVE INCOME

     The components of comprehensive income, net of tax, are as follows:

	Three Months Ended December 31,
	2001		2000
	(in thousands)
Net income	$ 3,362		$ 3,152
Currency translation adjustment	(93	)	(82	)
Unrealized gain (loss) on investments	(38	)	25
Comprehensive income	$ 3,231		$ 3,095

NOTE 5—INVENTORIES (in thousands)

	December 31, 2001	September 30, 2001
	(in thousands)
Raw Materials	$   953	$1,074
Work-in-process	22	6
Finished goods	57	44
	$1,032	$1,124

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NOTE 6 —SEGMENT REPORTING

     The Company is organized to operate and service a single industry segment: the design, development, manufacture, marketing and support of advanced software-based test systems globally.

     The Company’s principal geographical areas of operations, sales, income and assets by region for the current and previous three month periods ended December 31 were as follows (in thousands):

	North America		UK & Europe		Japan	Consolidated Total
Three Months Ended December 31, 2001
Sales to unaffiliated customers	$      926		$   5,013		$4,944	$10,883
Net income (loss)	(548	)	3,836		74	3,362
Identifiable Assets at December 31, 2001	$ 62,291		$ 12,506		$   819	$75,616
Three Months Ended December 31, 2000
Sales to unaffiliated customers	$   4,364		$   1,067		$4,304	$  9,735
Net income (loss)	3,008		(160	)	304	3,152
Identifiable Assets at September 30, 2001	$ 59,263		$ 11,085		$2,485	$72,833

     The result of operations by geographic region includes significant sales principally from the United States to the Company’s foreign locations at agreed upon transfer prices.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following discussion and analysis should be read in conjunction with “Selected Consolidated Financial Data”and the Company’s Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for 2001.

Forward-looking Statements

     The following discussion contains statements that are not historical facts but are forward-looking statements. Such statements are generally identified by the use of forward-looking words and phrases, such as “intended,”“expects,”“anticipates”and “is (or are) expected (or anticipated).”These forward-looking statements include but are not limited to those identified in this report with an asterisk (*) symbol. Actual results may differ materially from those discussed in such forward-looking statements, and the Company’s stockholders should carefully review the cautionary statements set forth in this report on Form 10-Q, including those set forth under the caption “Factors That May Affect Future Results.”

     The Company may from time to time make additional written and oral forward-looking statements, including statements contained in the Company’s filings with the Securities and Exchange Commission and in its reports to Stockholders. The Company does not undertake to update any forward-looking statements that may be made in this Form 10-Q and from time to time 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 a large number of protocols and variants. The DCT system consists of advanced software and hardware running on a third-party UNIX-based workstation. In addition, the Company offers customer support under software support contracts, as well as installation and training services.

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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.

	Three Months Ended December 31,
	2001		2000
Revenues:
Product sales	87.5	%	86.0	%
Services	12.5		14.0
Total revenues	100.0		100.0
Cost of revenues:
Product sales	5.7		7.0
Services	2.4		1.5
Total cost of revenues	8.1		8.5
Gross margin	91.9		91.5
Operating expenses:
Research and development	15.0		10.1
Sales and marketing	25.5		25.9
General and administrative	10.8		12.7
Total operating expenses	51.3		48.7
Operating income	40.6		42.8
Interest income	4.0		7.9
Other expense	(1.7	)	(0.9	)
Income before taxes	42.9		49.8
Provision for taxes	12.0		17.4
Net income	30.9	%	32.4	%
Gross margin on product sales	93.6	%	91.9	%
Gross margin on services	80.6	%	89.0	%

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Comparison of the Three Month Periods Ended December 31, 2001 and 2000

   Revenues

     Revenues increased by approximately 12% from $9.7 million for the three months ended December 31, 2000 to $10.9 million for the three months ended December 31, 2001. Over the same period, product sales increased by approximately 14% from $8.4 million to $9.5 million. Services revenue remained at approximately $1.4 million. The increase in product sales was primarily attributable to the results generated from the Company’s increased focus on test systems for the third generation (3G) digital cellular market.

   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, installation and training personnel. Cost of sales increased approximately 6% from $829,000 for the three months ended December 31, 2000 to $877,000 for the three months ended December 31, 2001. Over the same period, the cost of product sales decreased by approximately 10%. Gross margin for product sales increased from 92% to 94% over this same period due to a more favorable product mix. Cost of services increased by approximately 75% from $150,000 for the three months ended December 31, 2000 to $263,000 for the three months ended December 31, 2001 due to an increase in customer service personnel. Over the same period, gross margin on services decreased from 89% to 81%.

   Research and Development

     Research and development expenses consist primarily of the costs of payroll and benefits for engineers, materials, equipment and consulting services. To date, all software development costs have been charged to research and development expenses as incurred. Research and development expenses increased by approximately 67% from $979,000 for the three months ended December 31, 2000 to $1.6 million for the three months ended December 31, 2001. As a percentage of total revenues, research and development expenses increased from 10% to 15% over the same period. The increase in absolute dollars was due primarily to an increase in personnel in the engineering group. The Company expects that research and development expenses will increase in absolute dollars for the foreseeable future as the Company intends to continue to invest in product development.*

   Sales and Marketing

     Sales and marketing expenses consist primarily of the costs of payroll, benefits, commissions and bonuses, occupancy costs, travel and promotional expenses, such as product brochures and trade show costs. Sales and marketing expenses increased by approximately 10% from $2.5 million for the three months ended December 31, 2000 to $2.8 million for the three months ended December 31, 2001. As a percentage of total revenues, sales and marketing expenses was at 26% for the three months ended December 31, 2000 and 2001. The increase of $249,000 was due primarily to an increase in sales and marketing personnel resulting in increased salary, commissions, and bonuses, increased travel expenses, and the expansion of the Company’s sales and support offices. The Company expects that sales and marketing expenses will increase in absolute dollars for the foreseeable future as the Company intends to continue to invest in its sales and marketing capabilities.*

   General and Administrative

     General and administrative expenses include costs associated with the Company’s general and risk management, meeting public company reporting requirements, employee recruitment and retention, investor relations and finance functions. General and administrative expenses were $1.2 million for the three months ended December 31, 2000 and 2001. As a percentage of total revenues, general and administrative expenses decreased from 13% to 11% over the same period.

10

   Interest Income

     Interest income consists primarily of interest earned on cash and cash equivalents and short-term investments. Interest income decreased from $775,000 for the three months ended December 31, 2000 to $433,000 for the three months ended December 31, 2001. Although the Company had higher invested balances during the three months ended December 31, 2001 compared to the three months ended December 31, 2000, the decrease in prevailing interest rates significantly reduced earnings on the Company’s investments.

   Other Income (Expense), net

     Other income (expense) primarily represents gains and losses from fluctuations in exchange rates on transactions denominated in foreign currencies. Other expense increased from $91,000 for the three months ended December 31, 2000 to $178,000 for the three months ended December 31, 2001 due to foreign exchange losses, including losses realized on forward contracts entered into which were denominated in currencies other than the US dollar.

   Provision for income taxes

     Provision for income tax consists of federal, state and international income taxes. The Company’s effective tax rate was 35.0% for the three months ended December 31, 2000 and 28.0% for the three months ended December 31, 2001. The decrease in the consolidated tax rate reflects changes in the levels of pretax profits in the countries in which the Company and its subsidiaries are registered together with changes in the tax rates in those countries. 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 requirements, including increases in accounts receivable and acquisitions of capital equipment, primarily through cash generated from operations, cash proceeds from its initial public offering of common stock, investment earnings and the sale of the Company’s stock through the exercise of employee stock options and the Employee Stock Purchase Plan.

     The Company’s operating activities provided cash of $1.2 million and $5.4 million in the three month periods ended December 31, 2001 and 2000, respectively. The cash provided by the Company’s operations for the three months ended December 31, 2001 was primarily attributable to net income and partially offset by an increase in accounts receivable that reflected primarily timing of invoicing. Investing activities, consisting primarily of purchases and sales of short-term investments and to a lesser extent additions to property and equipment, provided cash of $667,000 in the three months ended December 31, 2001 and used cash of $8.9 million in the three months ended December 31, 2000. Cash flows from financing activities for the three months ended December 31, 2001 and 2000 were attributable to exercises of employee stock options and the purchase of shares under the employee stock purchase plan in both periods.

     As of December 31, 2001, the Company had working capital of $65.3 million, cash and cash equivalents of $46.5 million and short-term investments of $16.4 million. As of December 31, 2001, the Company had no bank indebtedness and no long-term commitments other than operating lease obligations. The Company expects that capital expenditures during fiscal 2002 will remain at the fiscal 2001 levels with expenditures primarily in support of the Company’s research and development activities.*

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     The Company believes that cash and cash equivalents, short-term investments and funds generated from operations will provide the Company with sufficient funds to finance its operations for at least the next 12 months.* The Company may require additional funds to support its working capital requirements or for other purposes. There can be no assurance that additional financing will be available or that, if available, such financing will be obtainable on terms favorable to the Company or its stockholders.

Factors That May Affect Future Results

   Fluctuations in Quarterly Operating Results; Lengthy Sales Cycle

     The Company’s revenues and operating results are relatively difficult to forecast for a number of reasons, including (i) the variable size and timing of individual purchases by customers, (ii) seasonal factors that may affect capital spending by customers, such as the varying fiscal year ends of customers and the reduction in business during the summer months, particularly in Europe, (iii) the relatively long sales cycles for the Company’s products, (iv) the timing of hiring sales and technical personnel, (v) changes in timing and amount of sales incentive compensation, (vi) competitive conditions in the Company’s markets, (vii) exchange rate fluctuations, (viii) changes in the mix of products sold, (ix) the timing of the introduction and market acceptance of new products or product enhancements by the Company, its customers, competitors or suppliers, (x) costs associated with developing and introducing new products, (xi) product life cycles, (xii) changes in the level of operating expenses relative to revenues, (xiii) software defects and other product quality problems, (xiv) customer order deferrals in anticipation of new products, (xv) 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 installation 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, shipped and installed in that quarter.

     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.

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     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, 2001, the Company’s top four customers represented approximately 69% of total revenues. The Company expects that it will continue to depend upon a relatively limited number of customers for substantially all of its revenues in future periods, although no customer is presently obligated either to purchase a specific amount of products or to provide the Company with binding forecasts of purchases for any period. The loss of a major customer or the reduction, delay or cancellation of orders from one or more of the Company’s significant customers could materially adversely affect the Company’s business, financial condition and results of operations.

   Risks Associated with International Sales and Operations

     Company revenues from international customers were approximately 91% during the three months ended December 31, 2001. 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 international offices located in Japan, Canada, the United Kingdom, Germany, France, Finland, and Australia and plans to add offices, staff and resources worldwide from time to time. International sales and operations are subject to inherent risks, including difficulties in staffing and managing foreign operations, longer customer payment cycles, greater difficulty in accounts receivable collection, changes in regulatory requirements or in economic or trade policy, costs related to localizing products for foreign countries, potentially weaker protection for intellectual property in certain foreign countries, the burden of complying with a wide variety of foreign laws and practices, tariffs and other trade barriers, and potentially adverse tax consequences, including restrictions on repatriation of earnings. During the last two fiscal years and during the three months ended December 31, 2001 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. An inability to obtain necessary regulatory approvals in foreign markets on a timely basis could also have a material adverse effect on the Company’s business, financial condition and results of operations.

     Most of the Company’s international sales, including its sales in Japan, are denominated in local currencies. 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.

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   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 2000 or Windows XP 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

   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 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.

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     At December 31, 2001 the Company had forward exchange contracts maturing in fiscal 2002 to sell approximately $0.7 million in Japanese Yen and options maturing in fiscal 2002 to sell $2.2 million in Japanese Yen. The fair market value of the contracts and options at December 31, 2001 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 changes in market rates or prices and believes that any such losses would not be material.*

     Additional factors that could affect future operating results or the price of the Common Stock are set forth under the caption “Factors That May Affect Future Results”in the Company’s Annual Report on Form 10-K for 2001.

Part II. Other Information

Item 1. Legal Proceedings

     The Company is not currently aware of any legal proceedings or claims that the Company believes are likely to have a material adverse effect on the Company’s financial position, results of operation or cash flows. From time to time we have been and expect to continue to be, subject to legal proceedings and claims by third parties in the ordinary course of business, including claims of alleged infringement of third party trademarks and other intellectual property rights against our licensees or us. Third party claims, like these, even if not meritorious, could result in the expenditure of significant financial and managerial resources and could materially affect our business, financial condition, results of operations and cash flows.

Item 2. Changes in Securities and Use of Proceeds

Inapplicable

Item 3. Defaults Upon Senior Securities

Inapplicable

Item 4. Submission of Matters to a Vote of Security Holders

Inapplicable

Item 5. Other Information

Inapplicable

Item 6. Exhibits and Reports on Form 8-K.

(a) Exhibits.

Inapplicable

(b) Reports on Form 8-K.

No reports on Form 8-K were filed during the quarter for which this report on Form 10-Q is filed.

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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.

February 13, 2002 CATAPULT COMMUNICATIONS CORPORATION


By: /s/ Chris Stephenson
——————————————
Chris Stephenson
Vice President and Chief Financial Officer
(Principal Financial Officer)

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