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 March 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 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 April 30, 2001, there were 12,940,296 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. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at March 31, 2001 and September 30, 2000 3
Condensed Consolidated Statements of Income for the three and six months ended
March 31, 2001 and 2000 4
Condensed Consolidated Statements of Cash Flows for the six months ended
March 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 16
PART II--OTHER INFORMATION
- ----------------------------
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 17
- ----------
2
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
CATAPULT COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
MARCH 31, SEPTEMBER 30,
2001 2000
---- ----
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents.............................. $ 19,238 $ 5,200
Short-term investments............................... 32,848 43,437
Accounts receivable, net............................... 9,156 5,630
Inventories............................................ 1,754 1,399
Deferred income taxes.................................. 1,263 1,263
Prepaid expenses....................................... 669 691
Other current assets................................... 98 -
-------- -------
Total current assets................................ 65,026 57,620
Property and equipment, net............................... 1,470 1,529
Other assets.............................................. 470 194
-------- -------
Total assets........................................ $ 66,966 $59,343
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable....................................... $ 933 $ 862
Accrued liabilities.................................... 5,684 5,735
Deferred revenue....................................... 3,124 1,859
-------- -------
Total current liabilities........................... 9,741 8,456
Stockholders' Equity:
Common stock........................................... 13 13
Additional paid-in capital............................. 20,696 20,270
Deferred compensation.................................. (24) (60)
Retained earnings...................................... 36,457 30,362
Accumulated other comprehensive income................. 383 602
Treasury stock (50,000 shares at cost)................. (300) (300)
-------- -------
Total stockholders' equity.......................... 57,225 50,887
-------- -------
Total liabilities and stockholders' equity.......... $ 66,966 $59,343
======== =======
See Notes to 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 SIX
MONTHS ENDED MONTHS ENDED
MARCH 31, MARCH 31,
2001 2000 2001 2000
---- ---- ---- ----
Revenues:
Product sales..................... $9,440 $5,560 $17,812 $9,432
Services.......................... 1,301 1,131 2,664 2,243
------ ------ ------- ------
Total revenues.................. 10,741 6,691 20,476 11,675
------ ------ ------- ------
Cost of revenues:
Product sales..................... 1,105 435 1,784 895
Services.......................... 140 254 290 566
------ ------ ------- ------
Total cost of revenues.......... 1,245 689 2,074 1,461
------ ------ ------- ------
Gross profit......................... 9,496 6,002 18,402 10,214
Operating expenses:
Research and development.......... 1,255 694 2,234 1,309
Sales and marketing............... 2,710 2,413 5,235 4,403
General and administrative........ 1,482 911 2,719 1,608
------ ------ ------- ------
Total operating expenses........ 5,447 4,018 10,188 7,320
------ ------ ------- ------
Operating income..................... 4,049 1,984 8,214 2,894
Interest income...................... 893 682 1,668 1,286
Other expense, net................... (414) (28) (505) (215)
------ ------ ------- ------
Income before income taxes........... 4,528 2,638 9,377 3,965
Provision for income taxes........... 1,585 1,037 3,282 1,547
------ ------ ------- ------
Net income........................... $ 2,943 $1,601 $6,095 $2,418
====== ====== ======= ======
Earnings per share:
Basic............................. $0.23 $0.13 $0.47 $0.19
====== ====== ======= ======
Diluted........................... $0.22 $0.12 $0.46 $0.18
====== ====== ======= ======
Shares used in per share calculation:
Basic............................. 12,919 12,798 12,894 12,762
====== ====== ======= ======
Diluted........................... 13,438 13,113 13,287 13,077
====== ====== ======= ======
See Notes to condensed consolidated financial statements.
4
CATAPULT COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
SIX MONTHS ENDED
MARCH 31,
2001 2000
----- ----
Cash flows from operating activities:
Net income...................................................... $ 6,095 $ 2,418
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Depreciation and amortization............................... 313 222
Amortization of deferred stock compensation................. 35 36
Gain on sale of property and equipment (9) -
Change in current assets and liabilities:
Accounts receivable....................................... (3,526) 916
Inventories............................................... (355) (58)
Prepaid expenses.......................................... 22 (362)
Other assets.............................................. (374) 14
Accounts payable.......................................... 71 323
Accrued liabilities....................................... (51) (396)
Deferred revenue.......................................... 1,265 603
-------- -------
Net cash provided by operating activities............... 3,486 3,716
-------- -------
Cash flows from investing activities:
Purchases of investments, net................................ 10,589 (6,504)
Purchase of property and equipment, net...................... (245) (299)
-------- -------
Net cash provided (used) by investing activities........ 10,321 (6,803)
-------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock....................... 426 179
-------- -------
Net cash provided by financing activities............... 426 179
Unrealized gain on investment................................... (30) -
Effect of exchange rate changes on cash......................... (188) 193
-------- -------
Increase (decrease) in cash and cash equivalents................ 14,038 (2,715)
Cash and cash equivalents, beginning of period.................. 5,200 8,486
-------- -------
Cash and cash equivalents, end of period........................ $19,238 $5,771
======== =======
See Notes to 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 and Japan. The Company
conducts its business within one industry segment.
These accompanying condensed consolidated financial statements and related
notes are unaudited. However, in the opinion of management, all adjustments
(consisting only of normal recurring adjustments) that 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, 2001. These financial statements,
including the notes thereto, should be read in conjunction with the audited
financial statements for the year ended September 30, 2000, which were included
as part of the Company's Annual Report on Form 10-K for the year ended September
30, 2000.
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.
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. The following data is presented in
thousands except share and per share data:
6
Three months ended Six months ended
March 31, March 31,
2001 2000 2001 2000
---- ---- ---- ----
(in thousands, except per share data)
Net income $ 2,943 $ 1,601 $6,095 $2,418
======= ======= ====== ======
Weighted average shares outstanding................ 12,919 12,798 12,894 12,762
Dilutive options................................... 519 315 393 315
------ -------- ------ ------
Weighted average shares assuming dilution 13,438 13,113 13,287 13,077
====== ====== ====== ======
Earnings per share:
Basic ............................................. $0.23 $0.13 $0.47 $0.19
===== ===== ===== =====
Diluted............................................ $0.22 $0.12 $0.46 $0.18
===== ===== ===== =====
Anitdilutive common equivalent shares
excluded in calculating diluted earnings
per share.......................................... - 283 69 283
===== === == ===
NOTE 4--COMPREHENSIVE INCOME
The components of comprehensive income, net of tax, are as follows (in
thousands):
Three months ended Six months ended
March 31, March 31,
2001 2000 2001 2000
---- ---- ---- ----
Net income......................................... $2,943 $1,601 $6,095 $2,418
Currency translation adjustment.................... (105) 77 (188) 193
Unrealized gain on investment...................... (56) - (30) -
---- --- ---- ---
Comprehensive income............................... $2,782 $1,678 $5,877 $2,611
====== ====== ====== ======
NOTE 5--INVENTORIES (in thousands)
March 31, September 30,
2001 2000
---- ----
Raw Materials............................................... $1,487 $1,223
Work-in-process............................................. 125 93
Finished goods.............................................. 142 83
------ ------
$1,754 $1,399
====== ======
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):
7
NORTH CONSOLIDATED
AMERICA EUROPE JAPAN TOTAL
SIX MONTHS ENDED MARCH 31, 2001 ------- ------ ----- -----
- -------------------------------
Sales to unaffiliated customers............... $ 7,037 $2,663 $10,776 $ 20,476
Net income.................................... 4,376 1,079 640 6,095
Identifiable assets at March 31, 2001......... 57,311 3,872 5,783 66,966
SIX MONTHS ENDED MARCH 31, 2000
- -------------------------------
Sales to unaffiliated customers............... $3,685 $1,741 $6,249 $ 11,675
Net income.................................... 2,546 (432) 304 2,418
Identifiable assets at March 31, 2000......... 45,366 2,718 5,964 54,048
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 2000.
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.
8
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 For the six months
ended March 31, ended March 31,
2001 2000 2001 2000
---- ---- ---- ----
Revenues:
Product sales................................ 87.9% 83.0% 87.0% 80.8%
Services..................................... 12.1 17.0 13.0 19.2
---- ---- ---- ----
Total revenues 100.0 100.0 100.0 100.0
Cost of revenues:
Product sales................................ 10.3 6.5 8.7 7.7
Services..................................... 1.3 3.8 1.4 4.8
---- ---- ---- ----
Total cost of revenues..................... 11.6 10.3 10.1 12.5
---- ---- ---- ----
Gross profit.................................... 88.4 89.7 89.9 87.5
Operating expenses:
Research and development..................... 11.7 10.4 10.9 11.2
Sales and marketing.......................... 25.2 36.0 25.6 37.7
General and administrative................... 13.8 13.6 13.3 13.8
---- ---- ---- ----
Total operating expenses................... 50.7 60.0 49.8 62.7
---- ---- ---- ----
Operating income................................ 37.7 29.7 40.1 24.8
Interest income................................. 8.3 10.2 8.1 11.0
Other income (expense).......................... (3.9) (0.4) (2.5) (1.8)
------ ------ ------ ------
Income before taxes............................. 42.2 39.5 45.8 34.0
------ ------ ------ ------
Provision for taxes............................. 14.8 15.5 16.0 13.3
------ ------ ------ ------
Net income...................................... 27.4% 24.0% 29.8% 20.7%
====== ====== ====== ======
Gross margin on product sales................... 88.3% 92.2% 90.0% 90.5%
====== ====== ====== ======
Gross margin on services........................ 89.2% 77.5% 89.1% 74.8%
====== ====== ====== ======
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
REVENUES
Revenues increased by approximately 61% from $6.7 million for the three
months ended March 31, 2000 to $10.7 million for the three months ended March
31, 2001. Over the same period, product sales increased by approximately 70%
from $5.6 million to $9.4 million. Services revenue increased by approximately
15% from $1.1 million to $1.3 million. The increase in product sales was
primarily attributable to the results generated from the Company's increased
focus on test systems for third generation (3G) digital cellular and Voice over
IP (VoIP). The increase in services revenue was primarily due to sales of
software support contracts associated with new system sales as well as support
contract renewals and customer training.
9
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 81% from $689,000 for the three
months ended March 31, 2000 to $1.2 million for the three months ended March 31,
2001. Over the same period, the cost of product sales increased by approximately
154%. Gross margin for product sales decreased from 92.2% to 88.3% over this
same period as the Company's sales mix had a greater proportion of lower margin
third-party hardware. Cost of services decreased by approximately 45% from
$254,000 for the three months ended March 31, 2000 to $140,000 for the three
months ended March 31, 2001. Over the same period, gross margin on services
increased from 77.5% to 89.2%.
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 expensed as research and
development expenses as incurred. Research and development expenses increased by
approximately 81% from $694,000 for the three months ended March 31, 2000 to
$1.3 million for the three months ended March 31, 2001. As a percentage of total
revenues, research and development expenses increased from 10.4% to 11.7% over
the same period. The increase in absolute dollars was due primarily to an
increase in compensation expense in the engineering group. The Company expects
that research and development expenses will increase in absolute dollars for the
foreseeable future as the Company intends to continue to invest in product
development.*
SALES AND MARKETING
Sales and marketing expenses consist primarily of the costs of payroll,
benefits, commissions and bonuses, occupancy costs, travel and promotional
expenses, such as product brochures and trade show costs. Sales and marketing
expenses increased by approximately 12.3% from $2.4 million for the three months
ended March 31, 2000 to $2.7 million for the three months ended March 31, 2001.
As a percentage of total revenues, sales and marketing expenses decreased from
36.0% for the three months ended March 31, 2000 to 25.2% for the three months
ended March 31, 2001. The increase in absolute dollars 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 increased by approximately 63%
from $911,000 for the three months ended March 31, 2000 to $1.5 million for the
three months ended March 31, 2001 due primarily to an overall increase in
personnel which resulted in increased salary and bonus expenses in addition to
increased legal and accounting fees, and facility costs. As a percentage of
total revenues, general and administrative expenses increased from 13.6% to
13.8% over the same period.
INTEREST INCOME
Interest income consists primarily of interest earned on cash and cash
equivalents and short-term investments. Interest income increased from $682,000
for the three months ended March 31, 2000 to $893,000
10
for the three months ended March 31, 2001 due to an increase in the Company's
cash and cash equivalent balances and short-term investments primarily from
profitable operations and to higher prevailing interest rates.
OTHER EXPENSE, NET
Other expense represents primarily gains and losses from fluctuations in
exchange rates on transactions denominated in foreign currencies. Other expense
increased from $28,000 for the three months ended March 31, 2000 to $414,000 for
the three months ended March 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, and to a loss on a sale of marketable
securities.
PROVISION FOR INCOME TAXES
Provision for income tax consists of federal, state and international
income taxes. The Company's effective tax rate was 39.0% for the three months
ended March 31, 2000 and 35.0% for the three months ended March 31, 2001. These
tax rates primarily reflect the anticipated percentages of revenues derived by
the Company from international operations. The Company expects that its future
tax rate may vary depending in part on the relative income contribution by its
domestic and foreign operations.*
SIX MONTHS ENDED MARCH 31, 2001 AND 2000
REVENUES
Revenues increased by approximately 75% from $11.7 million for the six
months ended March 31, 2000 to $20.5 million for the six months ended March 31,
2001. Over the same period, product sales increased by approximately 89% from
$9.4 million to $17.8 million. Services revenue increased by approximately 19%
from $2.2 million to $2.7 million. The increase in product sales was primarily
attributable to the results generated from the Company's increased focus on test
systems for third generation (3G) digital cellular and Voice over IP (VoIP). The
increase in services revenue was primarily due to sales of software support
contracts associated with new system sales as well as support contract renewals
and customer training.
COST OF REVENUES
Cost of sales increased approximately 42% from $1.5 million for the six
months ended March 31, 2000 to $2.1 for the six months ended March 31, 2001.
Over the same period, the cost of product sales increased by approximately 99%.
Gross margin from product sales decreased from 90.5% to 90.0% over the same
period as the Company's sales mix had a greater proportion of lower margin
third-party products. Cost of services decreased by approximately 49% from
$566,000 for the six months ended March 31, 2000 to $290,000 for the six months
ended March 31, 2001. Over the same period, gross margin on services increased
from 74.8% to 89.1%.
RESEARCH AND DEVELOPMENT
Research and development expenses increased by approximately 71% from $1.3
million for the six months ended March 31, 2000 to $2.2 million for the six
months ended March 31, 2001. As a percentage of total revenues, research and
development expenses decreased from 11.2% to 10.9% over the same period. The
increase in absolute dollars was due primarily to an increase in compensation
expense in the engineering group. The Company expects that research and
development expenses will increase in absolute dollars for the foreseeable
future as the Company intends to continue to invest in product development.*
11
SALES AND MARKETING
Sales and marketing expenses increased by approximately 19% from $4.4
million for the six months ended March 31, 2000 to $5.2 million for the six
months ended March 31, 2001. As a percentage of total revenues, sales and
marketing expenses decreased from 37.7% for the six months ended March 31, 2000
to 25.6% for the six months ended March 31, 2001. The increase in absolute
dollars 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 increased by approximately 69%
from $1.6 million for the six months ended March 31, 2000 to $2.7 million for
the six months ended March 31, 2001 due primarily to an overall increase in
personnel which resulted in increased salary and bonus expenses in addition to
increased legal and accounting fees, and facility costs. As a percentage of
total revenues, general and administrative expenses decreased from 13.8% to
13.3% over the same period.
INTEREST INCOME
Interest income consists primarily of interest earned on cash and cash
equivalents and short-term investments. Interest income increased from $1.3
million for the six months ended March 31, 2000 to $1.7 million for the six
months ended March 31, 2001 due to an increase in the Company's cash and cash
equivalent balances and short-term investments primarily from profitable
operations and to higher prevailing interest rates.
OTHER EXPENSE, NET
Other expense primarily represents gains and losses from fluctuations in
exchange rates on transactions denominated in foreign currencies. Other expense
increased from $215,000 for the six months ended March 31, 2000 to $505,000 for
the six months ended March 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, and to a loss on a sale of marketable
securities.
PROVISION FOR INCOME TAXES
Provision for income tax consists of federal, state and international
income taxes. The Company's effective tax rate was 39.0% for the six months
ended March 31, 2000 and 35.0% for the six months ended March 31, 2001. These
tax rates primarily reflect the anticipated percentages of revenues derived by
the Company from international operations. 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 accounts receivable and capital equipment acquisitions, 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.
12
The Company's operating activities provided cash of $3.8 million and $3.7
million in the six month periods ended March 31, 2000 and 2001, respectively.
The cash provided by the Company's operations for the six months ended March 31,
2001 was primarily attributable to net income and increased deferred revenue,
partially offset by an increase in accounts receivable that reflected primarily
timing of invoicing. Of the $9.2 million in accounts receivable outstanding as
at March 31, 2001, $5.2 million had been collected by April 18, 2001. 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 $10.3 million in the six months ended March 31, 2001 and used cash of
$6.8 million in the six months ended March 31, 2000. Cash flows from financing
activities in the six months ended March 31, 2000 and 2001 were attributable to
exercises of employee stock options and the purchase of shares under the
employee stock purchase plan in both periods.
As of March 31, 2001, the Company had working capital of $55.3 million,
cash and cash equivalents of $19.2 million and short-term investments of $32.8
million. As of March 31, 2001, the Company had no bank indebtedness and no
long-term commitments other than operating lease obligations. The Company
expects that capital expenditures will increase in fiscal 2001 over the prior
year due to increased personnel and office expansion.*
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 has experienced, and anticipates that it will continue to
experience, significant fluctuations in quarterly revenues and operating
results. The Company's revenues and operating results are relatively difficult
to forecast for a number of reasons, including (i) the variable size and timing
of individual purchases by customers, (ii) seasonal factors that may affect
capital spending by customers, such as the varying fiscal year ends of customers
and the reduction in business during the summer months, particularly in Europe,
(iii) the relatively long sales cycles for the Company's products, (iv) the
timing of hiring sales and technical personnel, (v) changes in timing and amount
of sales incentive compensation, (vi) competitive conditions in the Company's
markets, (vii) exchange rate 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
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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.
A customer's decision to purchase the Company's products typically involves
a significant technical evaluation, internal procedural delays associated with
large capital expenditure approvals and testing and acceptance of new systems
that affect key operations. For these and other reasons, the sales cycle
associated with the Company's products is typically lengthy and subject to a
number of significant risks over which the Company has little or no control.
Historically, the period between initial customer contact and purchase of the
Company's products has typically ranged from two to nine months, with sales to
new customers (including new divisions within existing customers) at the longer
end of this range. Because of the lengthy sales cycle and the relatively small
number and large size of customers' orders, if revenues forecast from a specific
customer for a particular quarter are not realized in that quarter, the
Company's operating results for that quarter could be materially adversely
affected.
The Company's expectations for future revenues are predicated, to a large
extent, on the recruitment and hiring of a significant number of employees,
particularly experienced sales and technical personnel. Failure to hire, or
delays in hiring, sufficient sales and technical personnel could have a material
adverse effect on the Company's results of operations for any period.
Due to the relatively fixed nature of most of the Company's costs,
including personnel and facilities costs, and because operating expenses are
based on anticipated revenue, a decline in revenue from even a limited number of
transactions, failure to achieve expected revenue in any fiscal quarter or
unanticipated variations in the timing of recognition of specific revenues can
cause significant variations in operating results from quarter to quarter and
may in some future quarter result in losses or have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company believes, therefore, that period-to-period comparisons of its operating
results should not be relied upon as an indication of future performance.
For all of the foregoing factors, as well as other unanticipated factors,
it is possible that in some future quarter the Company's results of operations
could fail to meet the expectations of public market analysts or investors. In
such event, or in the event that adverse conditions prevail or are perceived to
prevail generally or with respect to the Company's business, the price of the
Company's common stock will likely be materially adversely affected.
DEPENDENCE ON LIMITED NUMBER OF CUSTOMERS
The Company's customer base is highly concentrated, and a relatively small
number of companies have accounted for substantially all of the Company's
revenues to date. In the six months ended March 31, 2001, the Company's top four
customers represented approximately 60% 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 66% during
the six months ended March 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 offices located in Japan, Canada, the United
Kingdom, Germany, France and Finland
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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 six months ended
March 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. 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.
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 95, Windows NT or Windows 98 or may require the integration of other
industry standards. There can be no assurance that the Company would be able to
successfully adapt its products to such operating systems on a timely or
cost-effective basis, if at all. The failure of the Company to respond to
rapidly changing technologies and to develop and introduce new products and
services in a timely manner would have a material adverse effect on the
Company's business, financial condition and results of operations.
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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.
CALIFORNIA ENERGY CRISIS
California is in the midst of an energy crisis that could disrupt the
Company's operations and increase its expenses. Suppliers of electric power have
on some occasions implemented, and may in the future continue to implement,
rolling blackouts throughout California. The Company currently does not have
backup generators or alternate sources of power in the event of a blackout, and
its current insurance does not provide coverage for any damages it or its
customers may suffer as a result of any interruption in its power supply. If
blackouts interrupt the Company's power supply, it would be temporarily unable
to continue operations at its facilities in California. Any such interruption in
the Company's ability to continue operations at its facilities could damage the
Company's reputation, harm its ability to retain existing customers and to
obtain new customers, and could result in lost revenue, any of which could
substantially harm its business and results of operations.
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
currency exchange rates on sales denominated in foreign currencies. The Company
utilizes foreign currency forward exchange contracts and options to minimize
exposure against future movements in foreign exchange rates that affect certain
foreign currency denominated receivables. The Company attempts to match the
forward contracts with the underlying receivables 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,
these financial instruments minimize the 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 receivable balances which otherwise
would be charged to other income (expense). There can be no assurance that these
current or future activities will be successful.
At March 31, 2001 the Company had forward exchange contracts maturing in
fiscal 2001 to sell approximately $1.0 million in Pounds Sterling and options
maturing in fiscal 2001 to sell $5.0 million in Yen. The fair market value of
the contracts and options at March 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.*
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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 2000.
PART II. OTHER INFORMATION
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the quarter for which
this report on Form 10-Q is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CATAPULT COMMUNICATIONS CORPORATION
Date: May 8, 2001 BY: /s/ Chris Stephenson
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Chris Stephenson
Vice President and Chief Financial Officer
(Principal Financial Officer)