FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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 July 29, 2002, there were 13,053,650 shares of the Registrant's
Common Stock, $0.001 par value, outstanding.
CATAPULT COMMUNICATIONS CORPORATION
FORM 10-Q
INDEX
Part I--Financial Information Page
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at June 30, 2002 and September 30, 2001 3
Condensed Consolidated Statements of Income for the three and nine months ended
June 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows for the nine months ended
June 30, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Part II--Other Information
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 19
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CATAPULT COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
JUNE 30, SEPTEMBER 30,
2002 2001
---- ----
ASSETS
Current Assets:
Cash and cash equivalents.............................. $ 28,669 $ 44,202
Short-term investments............................... 46,065 17,274
Accounts receivable, net............................... 5,341 7,234
Inventories............................................ 1,136 1,124
Deferred income taxes.................................. 628 628
Prepaid expenses and other current assets.............. 1,381 398
------------ -----------
Total current assets................................ 83,220 70,860
Property and equipment, net............................... 1,275 1,430
Other assets.............................................. 517 543
------------ -----------
Total assets........................................ $ 85,012 $ 72,833
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable....................................... $ 921 $ 1,107
Accrued liabilities.................................... 8,410 6,027
Deferred revenue....................................... 2,512 2,209
------------ -----------
Total current liabilities........................... 11,843 9,343
------------ -----------
Stockholders' Equity:
Common stock........................................... 13 13
Additional paid-in capital............................. 22,612 21,758
Deferred stock-based compensation...................... (120) -
Treasury stock (50,000 shares at cost)................. (300) (300)
Accumulated other comprehensive income................. 594 612
Retained earnings...................................... 50,370 41,407
------------ -----------
Total stockholders' equity.......................... 73,169 63,490
------------ -----------
Total liabilities and stockholders' equity.......... $ 85,012 $ 72,833
============ ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
CATAPULT COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Product............................ $ 6,623 $ 8,354 $ 26,722 $ 26,166
Services........................... 1,400 1,173 4,311 3,837
------- ------- -------- --------
Total revenues................... 8,023 9,527 31,033 30,003
------- ------- -------- --------
Cost of revenues:
Product............................ 532 1,080 1,949 2,863
Services........................... 233 155 771 446
------- ------- -------- --------
Total cost of revenues........... 765 1,235 2,720 3,309
------- ------- -------- --------
Gross profit.......................... 7,258 8,292 28,313 26,694
------- ------- -------- --------
Operating expenses:
Research and development........... 1,774 1,168 5,219 3,401
Sales and marketing................ 2,656 2,687 8,126 7,923
General and administrative......... 705 1,341 3,520 4,060
------- ------- -------- --------
Total operating expenses......... 5,135 5,196 16,865 15,384
------- ------- -------- --------
Operating income...................... 2,123 3,096 11,448 11,310
Interest income....................... 346 656 1,102 2,323
Other income (expense), net........... 134 (48) (100) (552)
------- ------- -------- --------
Income before income taxes............ 2,603 3,704 12,450 13,081
Provision for income taxes........... 729 1,249 3,487 4,530
------- ------- -------- --------
Net income........................... $ 1,874 $ 2,455 $ 8,963 $ 8,551
======= ======= ======== ========
Earnings per share:
Basic.............................. $ 0.14 $ 0.19 $ 0.69 $ 0.66
======= ======= ======== ========
Diluted............................ $ 0.14 $ 0.18 $ 0.67 $ 0.64
======= ======= ======== ========
Shares used in per share calculation:
Basic............................. 13,050 12,954 13,033 12,916
======= ======= ======== ========
Diluted............................ 13,381 13,528 13,375 13,378
======= ======= ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
CATAPULT COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
NINE MONTHS ENDED
JUNE 30,
2002 2001
---- ----
Cash flows from operating activities:
Net income................................................ $ 8,963 $ 8,551
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization....................... 557 521
Amortization of deferred stock-based compensation.... 24 54
Loss (gain) on disposal of property and equipment... 22 (9)
Gain on sale of short-term investments.............. (5) -
Change in assets and liabilities:
Accounts receivable................................... 1,893 1,109
Inventories........................................... (12) (42)
Prepaid expenses and other current assets............. (983) (28)
Other assets.......................................... 26 (393)
Accounts payable...................................... (186) (169)
Accrued liabilities................................... 2,383 (15)
Deferred revenue...................................... 303 162
--------- ---------
Net cash provided by operating activities........... 12,985 9,741
--------- ---------
Cash flows from investing activities:
Sales (purchases) of investments, net.................... (28,835) 24,690
Proceeds from sale of property and equipment............. - 37
Purchases of property and equipment...................... (424) (504)
--------- ---------
Net cash provided by (used in) investing activities. (29,259) 24,223
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock................... 710 787
--------- ---------
Net cash provided by financing activities........... 710 787
--------- ---------
Effect of exchange rate changes on cash..................... 31 (51)
--------- ---------
Increase (decrease) in cash and cash equivalents............ (15,533) 34,700
Cash and cash equivalents, beginning of period.............. 44,202 5,200
--------- ---------
Cash and cash equivalents, end of period.................... $ 28,669 $ 39,900
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
CATAPULT COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--THE COMPANY AND BASIS OF PRESENTATION
Catapult Communications Corporation (the "Company") designs, develops,
manufactures, markets and supports an advanced software-based test system
offering an integrated suite of testing applications for the global
telecommunications industry. The Company's advanced test systems assist its
customers in the design, integration, installation and acceptance testing of a
broad range of digital telecommunications equipment and services. The Company
has been incorporated in Nevada since June 19, 1998. The Company has operations
in the United States, Canada, the United Kingdom, Europe, 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 consolidated financial statements should
be read in conjunction with the audited consolidated financial statements and
notes thereto included in the Company's Annual 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 June 30, 2002, and for the three and
nine months ended June 30, 2002 and 2001, 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 consolidated balance sheet was derived from the audited
consolidated financial statements, but does not include all disclosures required
by accounting principles generally accepted in the United States of America.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The Company has identified the policies below as critical to its business
operations and the understanding of its results of operations. The impact and
any associated risks related to these policies on its business operations is
discussed throughout Management's Discussion and Analysis of Financial Condition
and Results of Operations where such policies affect the Company's reported and
expected financial results. For a detailed discussion on the application of
these and other accounting policies, see Note 1 in the Notes to the Consolidated
Financial Statements in the Company's Annual Report on Form 10-K.
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 reasonably assured. Training and
maintenance revenues are based on the Company's established history of separate
sales of training and maintenance. Revenues allocated to training are recognized
at the time the training is complete. Revenues allocated to maintenance are
recognized ratably over the term of the maintenance contract.
FOREIGN CURRENCY TRANSLATIONS
Certain of the Company's foreign subsidiaries use their respective local
currencies as their functional currencies because the majority of their
revenues, expenses, assets and liabilities are denominated in those
6
local currencies. In consolidation, assets and liabilities are translated at
period-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. Only gains and losses resulting from foreign currency
transactions are included in the consolidated statement of income.
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
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.
USE OF ESTIMATES; ALLOWANCE FOR DOUBTFUL ACCOUNTS
The preparation of financial statements requires the Company to make
estimates and assumptions that affect the reported amount of assets and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. The Company specifically analyzes accounts receivable, historical bad
debt experience, customer concentration, customer credit-worthiness, current
economic trends and changes in customer payment terms when evaluating the
adequacy of the allowance for doubtful accounts. The Company's accounts
receivable balance as of June 30, 2002 was $5.3 million, net of allowance for
doubtful accounts of $0.1 million.
ACCOUNTING FOR INCOME TAXES
As part of the process of preparing consolidated financial statements, the
Company is required to estimate income taxes in each of the jurisdictions in
which it operates. This process involves estimating the Company's actual current
tax exposure together with assessing temporary differences resulting from
differing treatment of items, such as deferred revenue, for tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which
are included within its consolidated balance sheet. The Company must then assess
the likelihood that its deferred tax assets will be recovered from future
taxable income and to the extent it believes that recovery is not likely, it
must establish a valuation allowance. To the extent it establishes a valuation
allowance or increases this allowance in a period, it must include an expense
within the tax provision in the statement of operations.
7
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 NINE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
---- ---- ---- ----
(in thousands, except per share data)
Net income $ 1,874 $ 2,455 $8,963 $8,551
======= ======= ====== ======
Weighted average shares outstanding................ 13,050 12,954 13,033 12,916
Dilutive options................................... 331 574 342 462
------ ------ ------ ------
Weighted average shares assuming dilution 13,381 13,528 13,375 13,378
====== ====== ====== ======
Earnings per share:
Basic $ 0.14 $ 0.19 $ 0.69 $ 0.66
====== ====== ====== ======
Diluted............................................ $ 0.14 $ 0.18 $ 0.67 $ 0.64
====== ====== ====== ======
Anti-dilutive common equivalent shares
excluded in calculating diluted earnings
per share.......................................... 57 - 42 33
====== ====== ====== ======
NOTE 4--COMPREHENSIVE INCOME
The components of comprehensive income, net of tax, are as follows (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
---- ---- ---- ----
Net income......................................... $1,874 $2,455 $8,963 $8,551
Currency translation adjustment.................... 123 137 31 (51)
Unrealized gains (losses) on investment............ 119 24 (49) (7)
------ ------ ------ ------
Comprehensive income............................... $2,116 $2,616 $8,945 $8,493
====== ====== ====== ======
NOTE 5--INVENTORIES (in thousands)
JUNE 30, SEPTEMBER 30,
2002 2001
---- ----
Raw Materials............................................. $ 875 $1,074
Work-in-process........................................... 173 6
Finished goods............................................ 88 44
------ ------
$1,136 $1,124
====== ======
8
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, revenues, income
and assets by region for the nine month periods ended June 30, 2002 and 2001
were as follows (in thousands):
NORTH UK & CONSOLIDATED
AMERICA EUROPE JAPAN TOTAL
------- ------ ----- -----
NINE MONTHS ENDED JUNE 30, 2002
Revenues from unaffiliated customers............. $ 4,257 $13,851 $12,925 $31,033
Net income (loss)................................ (941) 9,620 284 8,963
Identifiable Assets at June 30, 2002............. $65,013 $19,109 $ 890 $85,012
NINE MONTHS ENDED JUNE 30, 2001
Revenues from unaffiliated customers............. $ 9,794 $6,648 $13,561 $30,003
Net income ...................................... 5,024 2,573 954 8,551
Identifiable assets at June 30, 2001............. $61,194 $5,805 $1,656 $68,655
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.
NOTE 7 - ACQUISITION
The Company entered into a definitive Asset Purchase Agreement (the
"Agreement") on July 15, 2002 to acquire the Network Diagnostics Business
("NDB") of Tekelec (the "Acquisition"). Under the terms of the Agreement, the
Company will pay Tekelec $42.5 million in cash and issue one or more 2.0%
convertible notes in the aggregate amount of $17.5 million due in 2004. Subject
to satisfaction of customary closing conditions, the Acquisition is expected to
close within 30-60 days.*
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.
9
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.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship of certain items from the Company's condensed consolidated
statements of income to total revenues.
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Product........................... 82.6% 87.7% 86.1% 87.2%
Services.......................... 17.4 12.3 13.9 12.8
------ ------ ------ ------
Total revenues 100.0 100.0 100.0 100.0
Cost of revenues:
Product........................... 6.6 11.4 6.3 9.5
Services.......................... 2.9 1.6 2.5 1.5
------ ------ ------ ------
Total cost of revenues.......... 9.5 13.0 8.8 11.0
------ ------ ------ ------
Gross profit......................... 90.5 87.0 91.2 89.0
Operating expenses:
Research and development.......... 22.1 12.2 16.8 11.4
Sales and marketing............... 33.1 28.2 26.2 26.4
General and administrative........ 8.8 14.1 11.3 13.5
------ ------ ------ ------
Total operating expenses........ 64.0 54.5 54.3 51.3
------ ------ ------ ------
Operating income..................... 26.5 32.5 36.9 37.7
Interest income...................... 4.3 6.9 3.5 7.7
Other income (expense), net.......... 1.6 (0.5) (0.3) (1.8)
------ ------ ------ ------
Income before income taxes........... 32.4 38.9 40.1 43.6
------ ------ ------ ------
Provision for income taxes........... 9.1 13.1 11.2 15.1
------ ------ ------ ------
Net income........................... 23.3% 25.8% 28.9% 28.5%
====== ====== ====== ======
Gross margin on product sales........ 92.0% 87.0% 92.7% 89.1%
====== ====== ====== ======
Gross margin on services.............. 83.4% 86.8% 82.1% 88.4%
====== ====== ====== ======
10
COMPARISON OF THE THREE MONTH PERIODS ENDED JUNE 30, 2002 AND 2001
REVENUES
Revenues decreased by approximately 16% from $9.5 million for the three
months ended June 30, 2001 to $8.0 million for the three months ended June 30,
2002. Over the same period, product revenues decreased by approximately 21% from
$8.4 million to $6.6 million. Services revenues increased by approximately 19%
from $1.2 million to $1.4 million. The decrease in product revenues was
attributable to the continued slowdown in the North American telecommunications
industry and to an unexpected capital expenditure freeze at NEC in Japan. The
increase in services revenues was due to increased sales of software support
contracts associated with new system sales as well as support contract renewals
and customer training.
COST OF REVENUES
Cost of product revenues 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 service revenues consists of the
costs of payroll and benefits for customer support, installation and training
personnel. Cost of revenues decreased approximately 38% from $1.2 million for
the three months ended June 30, 2001 to $765,000 for the three months ended June
30, 2002. Over the same period, the cost of product revenues decreased by
approximately 51% and product gross margin increased from 87% to 92% as the
Company's sales mix had a greater proportion of higher margin products. Cost of
service revenues increased by approximately 50% from $155,000 for the three
months ended June 30, 2001 to $233,000 for the three months ended June 30, 2002
and services gross margin decreased from 87% to 83% due to an increase in
customer service personnel.
RESEARCH AND DEVELOPMENT
Research and development expenses consist 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 52% from $1.2 million for the three months ended June 30, 2001 to
$1.8 million for the three months ended June 30, 2002. As a percentage of total
revenues, research and development expenses increased from 12% to 22% over the
same period. The increase in absolute dollars was due to an increase in
personnel of approximately 60% from June 30, 2001 to June 30, 2002 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 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 remained
consistent at $2.7 million for the three months ended June 30, 2001 and 2002. As
a percentage of total revenues, sales and marketing expenses were 28% and 33%
for the three months ended June 30, 2001 and 2002, respectively. 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.*
11
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 decreased by approximately 47%
from $1.3 million for the three months ended June 30, 2001 to $705,000 for the
three months ended June 30, 2002 due to a reversal of a provision for legal
settlement and to a reduction in accrued performance bonuses. As a percentage of
total revenues, general and administrative expenses decreased from 14% to 9%
over the same period.
INTEREST INCOME
Interest income consists of interest earned on cash and cash equivalents
and short-term investments. Interest income decreased from $656,000 for the
three months ended June 30, 2001 to $346,000 for the three months ended June 30,
2002. Although the Company had higher invested balances during the three months
ended June 30, 2002 compared to the three months ended June 30, 2001, the
decrease in prevailing interest rates significantly reduced earnings on the
Company's investments.
OTHER INCOME (EXPENSE), NET
Other income (expense), net represents primarily gains and losses from
fluctuations in exchange rates on transactions denominated in foreign
currencies. Other income (expense), net changed from an expense of $48,000 for
the three months ended June 30, 2001 to income of $134,000 for the three months
ended June 30, 2002.
PROVISION FOR INCOME TAXES
Provision for income tax consists of federal, state and international
income taxes. The Company's effective tax rate was 35% for the three months
ended June 30, 2001 and 28% for the three months ended June 30, 2002. 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. *
COMPARISON OF THE NINE MONTH PERIODS ENDED JUNE 30, 2002 AND 2001
REVENUES
Revenues increased by approximately 3% from $30.0 million for the nine
months ended June 30, 2001 to $31.0 million for the nine months ended June 30,
2002. Over the same period, product revenues increased by approximately 2% from
$26.2 million to $26.7 million. Services revenues increased by approximately 12%
from $3.8 million to $4.3 million. The increase in product revenues was
attributable to the results generated from the Company's increased focus on test
systems for third generation (3G) digital cellular and Voice over IP (VoIP). The
increase in services revenues was due to increased sales of software support
contracts associated with new system sales as well as support contract renewals
and customer training.
COST OF REVENUES
Cost of revenues decreased approximately 18% from $3.3 million for the nine
months ended June 30, 2001 to $2.7 million for the nine months ended June 30,
2002. Over the same period, the cost of product revenues decreased by
approximately 34% and product gross margin increased from 89% to 93% as the
Company's sales mix had a greater proportion of higher margin company products.
Cost of service revenues increased by
12
approximately 73% from $446,000 for the nine months ended June 30, 2001 to
$771,000 for the nine months ended June 30, 2002 and services gross margin
decreased from 88% to 82% due to an increase in customer service personnel.
RESEARCH AND DEVELOPMENT
Research and development expenses increased by approximately 53% from $3.4
million for the nine months ended June 30, 2001 to $5.2 million for the nine
months ended June 30, 2002. As a percentage of total revenues, research and
development expenses increased from 11% to 17% over the same period. The
increase in absolute dollars was due to an increase in headcount 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 increased by approximately 3% from $7.9
million for the nine months ended June 30, 2001 to $8.1 million for the nine
months ended June 30, 2002. As a percentage of total revenues, sales and
marketing expenses remained at 26% for the nine months ended June 30, 2001 and
the nine months ended June 30, 2002. The increase in absolute dollars was due 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 decreased by approximately 13% from
$4.1 million for the nine months ended June 30, 2001 to $3.5 million for the
nine months ended June 30, 2002 due to a reduction in bonus expense, temporary
employment services and legal expense. As a percentage of total revenues,
general and administrative expenses decreased from 14% to 11% over the same
period.
INTEREST INCOME
Interest income decreased from $2.3 million for the nine months ended June
30, 2001 to $1.1 million for the nine months ended June 30, 2002. Although the
Company had higher invested balances during the nine months ended June 30, 2002
compared to the nine months ended June 30, 2001, the decrease in prevailing
interest rates significantly reduced earnings on the Company's investments.
OTHER INCOME (EXPENSE), NET
Other income (expense), net decreased from expense of $552,000 for the
nine months ended June 30, 2001 to expense of $100,000 for the nine months ended
June 30, 2002 due to reduced foreign exchange losses.
PROVISION FOR INCOME TAXES
Provision for income tax consists of federal, state and international
income taxes. The Company's effective tax rate was 35% for the nine months ended
June 30, 2001 and 28% for the nine months ended June 30, 2002. 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. *
13
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its operations, including increases
in accounts receivable and capital equipment acquisitions, 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 $9.7 million and $13.0
million in the nine month periods ended June 30, 2001 and 2002, respectively.
The cash provided by the Company's operations for the nine months ended June 30,
2002 was attributable to net income, collections on accounts receivable,
increase in accrued liabilities and partially offset by an increase in prepaid
expenses. Investing activities, consisting of purchases and sales of short-term
investments and to a lesser extent additions to property and equipment, provided
cash of $24.2 million in the nine months ended June 30, 2001 and used cash of
$29.3 million in the nine months ended June 30, 2002. Cash flows from financing
activities of $0.8 million and $0.7 million in the nine months ended June 30,
2001 and 2002, respectively were attributable to exercises of employee stock
options and the purchase of shares under the employee stock purchase plan in
both periods.
As of June 30, 2002, the Company had working capital of $71.4 million,
cash and cash equivalents of $28.7 million and short-term investments of $46.1
million. As of June 30, 2002, the Company had no bank indebtedness and no
long-term commitments other than operating lease obligations. Minimum annual
rental payments under non-cancelable operating leases total $932,000 in the
current fiscal year ending September 30, 2002 and decline thereafter. The
Company expects that, except for the acquisition described in the following
paragraph, capital expenditures in fiscal 2002 will remain consistent with the
$625,000 level in the prior year.*
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 entered into a definitive Asset Purchase Agreement (the
"Agreement") on July 15, 2002 to acquire the Network Diagnostics Business
("NDB") of Tekelec (the "Acquisition"). Under the terms of the Agreement, the
Company will pay Tekelec $42.5 million in cash and issue one or more 2.0%
convertible notes in the aggregate amount of $17.5 million due in 2004. Subject
to satisfaction of customary closing conditions, the Acquisition is expected to
close within 30-60 days.* Though the closing of the Acquisition will reduce the
Company's capital resources, the Company believes that it will continue to have
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
14
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.
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.
RISKS ASSOCIATED WITH THE THE ACQUISITION
The Company faces a variety of risks relating to the Acquisition including
but not limited to the difficulties associated with successfully integrating the
business of the Company and NDB including the failure (i) to achieve anticipated
operational synergies and cost savings, (ii) to expand existing customer
relationships, (iii) to recruit and integrate current NDB employees and (iv) to
improve engineering efficiency. Other risks associated with the Acquisition
include the uncertainty of the future growth, spending levels and the economic
environment of the network diagnostics industry, the possibility that the
Acquisition will not close and the amount of costs related to the Acquisition.
If the Company is unable to close the Acquisition and integrate the NDB
division, its business, financial condition and results of operations would be
materially adversly 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 June 30, 2002, the Company's top
four customers represented approximately 65% 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.
15
RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS
Company revenues from international customers were approximately 85%
during the three months ended June 30, 2002. 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 nine months ended June
30, 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.
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.
16
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.
RISK OF 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 the Company has been and expects 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 the Company or its licensees. Third party
claims, like these, even if not meritorious, could result in the expenditure of
significant financial and managerial resources and could materially affect the
Company's business, financial condition, results of operations and cash flows.
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
17
contracts generally 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 June 30, 2002 the Company had forward exchange contracts maturing in
fiscal 2002 to sell approximately $0.8 million in Japanese Yen and options
maturing in fiscal 2002 to sell $2.3 million in Japanese Yen.
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 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
EXHIBIT
NUMBER Description
------
2.2.1 Asset Purchase Agreement dated July 15, 2002 between
the Company and Tekelec, a California corporation.
2.2.2 Transitional Services Agreement dated July 15, 2002
between the Company and Tekelec, a California
corporation.
2.2.3 License Agreement dated July 15, 2002 between the
Company and Tekelec, a California corporation.
2.2.4 International Rights License Agreement dated July 15,
2002 between the Company and Tekelec, a California
corporation.
2.2.5 Registration Agreement dated July 15, 2002 between the
Company and Tekelec, a California corporation.
2.2.6 Subordinated Guaranty dated July 15, 2002 between the
Company and Tekelec, a California corporation.
99.1 Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) REPORTS ON FORM 8-K.
1. On July 16, 2002, the Company filed a Current Report on
Form 8-K to report, under Item 5, the Company's agreement
to acquire the Network Diagnostics Business of Tekelec.
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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.
CATAPULT COMMUNICATIONS CORPORATION
Date: August 14, 2002 BY: /s/ Chris Stephenson
------------------------
Chris Stephenson
Vice President and Chief Financial Officer
(Principal Financial Officer)
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