##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended December 31, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Commission file number 0-24701
 CATAPULT COMMUNICATIONS CORPORATION
  Nevada
(State or other jurisdiction of 
Incorporation or organization)
    
    77-0086010
(I.R.S. Employer
Identification Number)
 160 South Whisman Road
Mountain View, California 94041
 (650) 960-1025
 þ o
  Large accelerated filer o
Accelerated filer o
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting company þ o þ




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##### 



CATAPULT COMMUNICATIONS CORPORATION
 FORM 10-Q
 INDEX
 PagePart IFinancial InformationItem 1. Financial StatementsUnaudited Condensed Consolidated Balance Sheets as of December 31, 2008 and September 30, 2008
    
    
    1Unaudited Condensed Consolidated Statements of Operations for the three months ended December 31,
2008 and 2007
    
    
    2Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended
December 31, 2008 and 2007
    
    
    3Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    15Item 4. Controls and Procedures
    
    
    15Part IIOther InformationItem 1A. Risk Factors
    
    
    15Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    16Item 6. Exhibits
    
    
    16Signature
    
    
    17EX-31.1EX-31.2EX-32
  ii




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##### Table of Contents



Part I. Financial Information
 
 Item 1. Financial Statements
 
 CATAPULT COMMUNICATIONS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 December 31,
    
    
    September 30,2008
    
    
    2008(In thousands, except shareand par value data)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    27,355
    
    
    $
    33,792Short-term investments
    
    
    9,055
    
    
    
    7,588Accounts receivable, net of allowances of $16 as of
December 31, 2008 and September 30, 2008
    
    
    7,866
    
    
    
    6,487Inventories
    
    
    2,775
    
    
    
    2,313Deferred tax assets
    
    
    44
    
    
    
    98Prepaid expenses
    
    
    2,173
    
    
    
    2,333Total current assets
    
    
    49,268
    
    
    
    52,611Property and equipment, net
    
    
    1,027
    
    
    
    1,011Goodwill
    
    
    49,394
    
    
    
    49,394Other intangibles, net
    
    
    52
    
    
    
    70Long-term investments (Note 14)
    
    
    4,641
    
    
    
    4,950Other assets
(Note 15, 16)
    
    
    8,017
    
    
    
    5,992Total assets
    
    $
    112,399
    
    
    $
    114,028LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    930
    
    
    $
    1,984Accrued liabilities
    
    
    4,193
    
    
    
    4,040Deferred revenue
    
    
    7,196
    
    
    
    6,446Total current liabilities
    
    
    12,319
    
    
    
    12,470Deferred revenue, long-term
    
    
    111
    
    
    
    173Deferred taxes, long-term
    
    
    3,711
    
    
    
    3,557Tax liabilities, long-term
    
    
    1,338
    
    
    
    1,338Other liabilities, long-term
    
    
    169
    
    
    
    162Total liabilities
    
    
    17,648
    
    
    
    17,700Stockholders Equity:Common stock, $0.001 par value, 40,000,000
shares authorized; 11,386,298 and 11,778,887
issued and outstanding as of December 31, 2008
and September 30, 2008, respectively
    
    
    11
    
    
    
    12Additional paid-in capital
    
    
    41,048
    
    
    
    42,449Accumulated other comprehensive income
    
    
    730
    
    
    
    951Retained earnings
    
    
    52,962
    
    
    
    52,916Total stockholders equity
    
    
    94,751
    
    
    
    96,328Total liabilities and stockholders equity
    
    $
    112,399
    
    
    $
    114,028
  1




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CATAPULT COMMUNICATIONS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three months endedDecember 31,2008
    
    
    2007(In thousands, exceptper share amounts)Revenues:Products
    
    $
    6,457
    
    
    $
    6,770Services
    
    
    3,355
    
    
    
    3,531Total revenues
    
    
    9,812
    
    
    
    10,301Cost of revenues:Products
    
    
    1,452
    
    
    
    1,248Services
    
    
    473
    
    
    
    798Amortization of purchased technology
    
    
    12
    
    
    
    12Total cost of revenues
    
    
    1,937
    
    
    
    2,058Gross profit
    
    
    7,875
    
    
    
    8,243Operating expenses:Research and development
    
    
    1,638
    
    
    
    3,553Sales and marketing
    
    
    3,971
    
    
    
    4,345General and administrative
    
    
    2,259
    
    
    
    2,172Total operating expenses
    
    
    7,868
    
    
    
    10,070Operating income (loss)
    
    
    7
    
    
    
    (1,827
    )Interest income
    
    
    232
    
    
    
    744Other income, net
    
    
    175
    
    
    
    130Income (loss) before income taxes
    
    
    414
    
    
    
    (953
    )Provision for income taxes
    
    
    357
    
    
    
    218Net income (loss)
    
    $
    57
    
    
    $
    (1,171
    )Net income (loss) per share  basic
    
    $
    0.00
    
    
    $
    (0.09
    )Net income (loss) per share  diluted
    
    $
    0.00
    
    
    $
    (0.09
    )Shares used in per share calculation:Basic
    
    
    11,568
    
    
    
    13,373Diluted
    
    
    11,568
    
    
    
    13,373
  2




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CATAPULT COMMUNICATIONS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three months endedDecember 31,2008
    
    
    2007(In thousands)Cash flows from operating activities:Net income (loss) as reported
    
    $
    57
    
    
    $
    (1,171
    )Adjustments to reconcile net income (loss) to net cash used in
operating activities:Depreciation and amortization of property and equipment
    
    
    133
    
    
    
    267Amortization of purchased technology
    
    
    12
    
    
    
    12Amortization of other acquisition related intangibles
    
    
    6
    
    
    
    6Gain on disposal of fixed assets
    
    
    (6
    )
    
    
    Provision for recovery of doubtful accounts
    
    
    
    
    
    
    (45
    )Deferred income taxes
    
    
    192
    
    
    
    (19
    )Stock based compensation expense
    
    
    553
    
    
    
    825Change in assets and liabilities:Accounts receivable
    
    
    (1,363
    )
    
    
    (1,189
    )Inventories
    
    
    (462
    )
    
    
    286Prepaid expenses and other current assets
    
    
    145
    
    
    
    21Other assets
    
    
    40
    
    
    
    2Accounts payable
    
    
    (1,073
    )
    
    
    15Accrued liabilities
    
    
    199
    
    
    
    (28
    )Deferred revenue
    
    
    684
    
    
    
    (519
    )Net cash used in operating activities
    
    
    (883
    )
    
    
    (1,537
    )Cash flows from investing activities:Sale and maturities of short-term investments
    
    
    4,069
    
    
    
    20,374Purchase of short-term investments
    
    
    (5,479
    )
    
    
    (13,016
    )Capitalized software development costs
    
    
    (2,021
    )
    
    
    Purchase of property and equipment
    
    
    (143
    )
    
    
    (243
    )Proceeds from sale of property and equipment
    
    
    6
    
    
    
    Net cash provided by (used in) investing activities
    
    
    (3,568
    )
    
    
    7,115Cash flows from financing activity:Repurchase of common stock
    
    
    (2,002
    )
    
    
    (1,280
    )Net cash used in financing activity
    
    
    (2,002
    )
    
    
    (1,280
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    16
    
    
    
    (11
    )Net increase (decrease) in cash and cash equivalents
    
    
    (6,437
    )
    
    
    4,287Cash and cash equivalents, beginning of period
    
    
    33,792
    
    
    
    23,351Cash and cash equivalents, end of period
    
    $
    27,355
    
    
    $
    27,638Supplemental disclosure of cash flow information:Unrealized gain (loss) on investments
    
    $
    (252
    )
    
    $
    3Cash paid for income taxes
    
    
    84
    
    
    
    186
  3




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CATAPULT COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Note 1  The Company and Basis of Presentation
   Fair Value Measurements The Fair Value Option for Financial Assets and Financial Liabilities-Including an
amendment of FASB Statement No. 115.
 Note 2  Recent Accounting Pronouncements
 Fair Value
Measurements
 Effective
Date of FASB Statement No. 157
 Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active
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The Fair Value Option for Financial Assets and Financial
Liabilitiesincluding an amendment of FASB Statement No. 115,
  Note 3  Stock-Based Compensation
  Three months ended
    
    
    Three months endedDecember 31,
    
    
    December 31,2008
    
    
    2007(In thousands)Stock-Based Compensation Expense:Cost of sales  products
    
    $
    45
    
    
    $
    50Cost of sales  services
    
    
    5
    
    
    
    68Research and development expense
    
    
    61
    
    
    
    201Selling and marketing expense
    
    
    161
    
    
    
    168General and administrative expense
    
    
    281
    
    
    
    338Total stock-based compensation expense
    
    
    553
    
    
    
    825Tax effect on stock-based compensation expenses
    
    
    (5
    )
    
    
    (4
    )Net effect on net income
    
    $
    548
    
    
    $
    821
 Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed
 Balance at October 1, 2008
    
    $
    46Stock-based compensation expense capitalized during the period
    
    
    37Amortization of capitalized stock-based compensation
    
    
    Balance at December 31, 2008
    
    $
    83
  Employee Stock Option PlanThree months endedDecember 31,2008
    
    
    2007Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Expected life of option
    
    4.5 years
    
    4.3 yearsRisk-free interest rate
    
    
    2.15
    %
    
    
    3.61
    %Expected volatility
    
    
    57.6
    %
    
    
    55.0
    %
 5




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Note 4  Basic and Diluted Net Income (Loss) per Share
 Earnings per Share
 Three months endedDecember 31,2008(1)
    
    
    2007(In thousands, exceptper share amounts)Net income (loss), as reported for basic and diluted earnings per share
    
    $
    57
    
    
    $
    (1,171
    )Weighted average shares outstanding
    
    
    11,568
    
    
    
    13,373Dilutive options
    
    
    
    
    
    
    Weighted average shares assuming dilution
    
    
    11,568
    
    
    
    13,373Net income (loss) per share:Basic
    
    $
    0.00
    
    
    $
    (0.09
    )Diluted
    
    $
    0.00
    
    
    $
    (0.09
    )
 
 (1)
    
    In the three months ended December 31, 2008, the average
market value was less than the average exercise price resulting in no diluted options outstanding.
  Three months endedDecember 31,2008
    
    
    2007(In thousands)Common stock options
    
    
    2,762
    
    
    
    2,852
 Note 5  Fair Value
Measurements
 Fair Value
Measurements
     6




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Quoted Prices
    
    
    Significantin Active
    
    
    Other
    
    
    SignificantMarkets for
    
    
    Observable
    
    
    UnobservableDecember 31,
    
    
    Identical Assets
    
    
    Inputs
    
    
    Inputs2008
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Assets:Cash and cash equivalents
    
    $
    27,355
    
    
    $
    27,355
    
    
    $
    
    
    
    $
    Short-term investments
    
    $
    9,055
    
    
    
    
    
    
    
    9,055
    
    
    
    Long-term investments
    
    $
    4,641
    
    
    
    
    
    
    
    
    
    
    
    4,641Non-marketable equity investment
    
    $
    1,814
    
    
    
    
    
    
    
    
    
    
    $
    1,814$
    42,865
    
    
    $
    27,355
    
    
    $
    9,055
    
    
    $
    6,455
  Three MonthsEndedDecember 31,2008Balance, beginning of period
    
    $
    6,764Total realized gains (losses) included in interest and other income, net
    
    
    Total unrealized losses included in other comprehensive loss
    
    
    (309
    )Purchases (sales), net
    
    
    Transfers into Level 3
    
    
    Balance, end of period
    
    $
    6,455
   Note 6  Inventories
  December 31,
    
    
    September 30,2008
    
    
    2008(In thousands)Inventories:Raw materials
    
    $
    2,002
    
    
    $
    1,548Work-in-process
    
    
    86
    
    
    
    243Finished goods
    
    
    687
    
    
    
    522$
    2,775
    
    
    $
    2,313
 Note 7  Goodwill and Intangible Assets
   Note 8  Income Taxes
  7




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Accounting for Uncertainty in Income Taxes,
an interpretation of FASB Statement No. 109
   Note 9  Stockholders Equity
 Comprehensive income (loss)
  Three months endedDecember 31,2008
    
    
    2007(in thousands)Net income (loss) as reported
    
    $
    57
    
    
    $
    (1,171
    )Currency translation adjustment
    
    
    31
    
    
    
    (18
    )Unrealized loss on investments
    
    
    (252
    )
    
    
    (3
    )Comprehensive loss
    
    $
    (164
    )
    
    $
    (1,192
    )
 Stock Option Plans
  Repurchase of Common Stock
  Note 10  Geographical Information
  8




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Europe, Middle
    
    
    
    
    
    Asia
    
    ConsolidatedAmericas
    
    East & Africa
    
    Japan
    
    Pacific
    
    Total(In thousands)Three months ended December 31, 2008Revenues from unaffiliated customers
    
    $
    2,148
    
    
    $
    2,135
    
    
    $
    3,195
    
    
    $
    2,334
    
    
    $
    9,812Three months ended December 31, 2007Revenues from unaffiliated customers
    
    $
    2,997
    
    
    $
    3,356
    
    
    $
    2,402
    
    
    $
    1,546
    
    
    $
    10,301As of December 31, 2008Goodwill
    
    $
    22,896
    
    
    $
    26,498
    
    
    $
    
    
    
    $
    
    
    
    $
    49,394Long-lived assets
    
    
    578
    
    
    
    130
    
    
    
    187
    
    
    
    132
    
    
    
    1,027As of September 30, 2008Goodwill
    
    $
    22,896
    
    
    $
    26,498
    
    
    $
    
    
    
    $
    
    
    
    $
    49,394Long-lived assets
    
    
    601
    
    
    
    97
    
    
    
    178
    
    
    
    135
    
    
    
    1,011
   Note 11  Customer Information
  Percentage of Accounts
    
    Percentage of RevenuesReceivable as of
    
    For the three months endedDecember 31,
    
    September 30,
    
    December 31,
    
    December 31,2008
    
    2008
    
    2008
    
    2007Customer A
    
    
    16
    %
    
    
    
    
    
    
    17
    %
    
    
    11
    %Customer B
    
    
    30
    %
    
    
    21
    %
    
    
    15
    %
    
    
    17
    %Customer C
    
    
    
    
    
    
    11
    %
    
    
    11
    %
    
    
    Customer D
    
    
    
    
    
    
    10
    %
    
    
    
    
    
    
    Customer E
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12
    %Customer F
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10
    %
 Note 12  Contingencies
 Accounting for Contingencies
 Note 13  Restructuring Costs
  9




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Note 14  Long-term Investments
    Note 15  Capitalized Software Development Costs
  Note 16  Non-marketable Equity Investment
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Forward-looking Statements
   
    
    the variable size and timing of individual purchases by our customers, including
delays in customer purchasing decisions or orders due to customer consolidation;
    
    the absence of long-term customer purchase contracts;
    
    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;
    
    the relatively long sales cycles for our products;
    
    competitive conditions in our markets;
    
    exchange rate fluctuations;
 10




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
    
    the timing of the introduction and market acceptance of new products or product
enhancements by us and by our customers, competitors and suppliers;
    
    costs associated with developing and introducing new products;
    
    product life cycles;
    
    changes in the level of operating expenses relative to revenues;
    
    product defects and other quality problems;
    
    customer order deferrals in anticipation of new products;
    
    supply interruptions;
    
    changes in global or regional economic conditions or in the telecommunications industry;
    
    asset impairment, valuation allowance and restructuring charges;
    
    changes in our tax rate;
    
    changes in the mix of products sold;
    
    changes in the regulatory environment; and
    
    adverse results from litigation.
   Overview
 Our Business and Products
  Conditions and Trends in Our Industry
   Summary of Our Financial Performance in the First Quarter of Fiscal 2009
  11




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Critical Accounting Policies and Estimates
  Fair Value Measurement
 Fair Value Measurements The Fair Value Option
for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115
    12




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Results of Operations
  For the three monthsended December 31,2008
    
    
    2007Revenues:Products
    
    
    65.8
    %
    
    
    65.7
    %Services
    
    
    34.2
    
    
    
    34.3Total revenues
    
    
    100.0
    
    
    
    100.0Cost of revenues:Products
    
    
    14.8
    
    
    
    12.1Services
    
    
    4.9
    
    
    
    7.7Amortization of purchased technology
    
    
    0.1
    
    
    
    0.1Total cost of revenues
    
    
    19.8
    
    
    
    19.9Gross profit
    
    
    80.2
    
    
    
    80.1Operating expenses:Research and development
    
    
    16.7
    
    
    
    34.5Sales and marketing
    
    
    40.5
    
    
    
    42.2General and administrative
    
    
    23.0
    
    
    
    21.1Total operating expenses
    
    
    80.2
    
    
    
    97.8Operating income (loss)
    
    
    0.0
    
    
    
    (17.7
    )Interest income
    
    
    2.4
    
    
    
    7.2Other income, net
    
    
    1.8
    
    
    
    1.2Income (loss) before income taxes
    
    
    4.2
    
    
    
    (9.3
    )Provision for income taxes
    
    
    3.6
    
    
    
    2.1Net income (loss)
    
    
    0.6
    %
    
    
    (11.4
    )%Gross profit margin on products
    
    
    77.5
    %
    
    
    81.6
    %Gross profit margin on services
    
    
    85.9
    %
    
    
    77.4
    %
  Comparison of the Three-Month Periods Ended December 31, 2008 and 2007
 Revenues
   
    
    revenues in the Americas decreased by 28% to $2.2 million;
    
    revenues in Europe, the Middle East and Africa decreased by 36% to $2.1 million;
    
    revenues in Japan increased by 33% to $3.2 million; and
    
    revenues in Asia Pacific outside Japan increased by 51% to $2.3 million.
  13




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Cost of Revenues
     Research and Development
  Sales and Marketing
  General and Administrative
  Interest income
  Provision for income taxes
  Impact of Inflation
  Liquidity and Capital Resources
  14




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Recent Accounting Pronouncements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
 Evaluation of disclosure controls and procedures.
  Changes in internal control over financial reporting.
  
 Part II. Other Information
 
 Item 1A. Risk Factors
  15




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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Repurchases of Common StockTotal Number of
    
    
    Maximum NumberTotal
    
    
    
    
    
    
    Shares Purchased
    
    
    of Shares that MayNumber
    
    
    Average
    
    
    as Part of Publicly
    
    
    Yet Be Purchasedof Shares
    
    
    Price Paid
    
    
    Announced
    
    
    Under the PlansPurchased
    
    
    Per Share (1)
    
    
    Plans or Programs
    
    
    Or ProgramsOctober 1, 2008  October 31, 2008.
    
    
    22,263
    
    
    $
    3.43
    
    
    
    22,263
    
    
    
    1,477,737November 1, 2008  November 30, 2008
    
    
    349,399
    
    
    
    5.14
    
    
    
    349,399
    
    
    
    1,128,338December 1, 2008  December 31, 2008
    
    
    20,927
    
    
    
    6.16
    
    
    
    20,927
    
    
    
    1,107,411Total for the Quarter
    
    
    392,589
    
    
    $
    5.10
    
    
    
    392,589
    
    
    
    1,107,411
 
 (1)
    
    Average price paid per share includes brokerage commission.  
 Item 6. Exhibits
 31.1
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32
    
    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.
 16




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##### Table of Contents



SIGNATURE
  CATAPULT COMMUNICATIONS CORPORATIONDate:  February 11, 2009
    By:
    /s/ Christopher A. StephensonChristopher A. StephensonVice President and Chief Financial Officer
(Principal Financial Officer) 17




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Exhibit Index
 Number
    
    Description31.1
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32
    
    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.