CATT Catapult Communications (MM)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

(Exact name of Registrant as specified in its charter)

Nevada (State or other jurisdiction of Incorporation or organization)		77-0086010 (I.R.S. Employer Identification Number)

160 South Whisman Road
Mountain View, California 94041
(Address of principal executive offices) (Zip Code)

(650) 960-1025
(Registrant’s telephone number, including
area code)

     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  þ  No  o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o  No  þ

     As of December 31, 2008, there were 11,386,298 shares of the Registrant’s Common Stock, $0.001 par value, outstanding.

 

 

CATAPULT COMMUNICATIONS CORPORATION

FORM 10-Q

INDEX

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

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 share
		and par value data)
ASSETS
Current Assets:
Cash and cash equivalents		$	27,355			$	33,792
Short-term investments			9,055				7,588
Accounts receivable, net of allowances of $16 as of December 31, 2008 and September 30, 2008			7,866				6,487
Inventories			2,775				2,313
Deferred tax assets			44				98
Prepaid expenses			2,173				2,333
Total current assets			49,268				52,611
Property and equipment, net			1,027				1,011
Goodwill			49,394				49,394
Other intangibles, net			52				70
Long-term investments (Note 14)			4,641				4,950
Other assets (Note 15, 16)			8,017				5,992
Total assets		$	112,399			$	114,028
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	930			$	1,984
Accrued liabilities			4,193				4,040
Deferred revenue			7,196				6,446
Total current liabilities			12,319				12,470
Deferred revenue, long-term			111				173
Deferred taxes, long-term			3,711				3,557
Tax liabilities, long-term			1,338				1,338
Other liabilities, long-term			169				162
Total liabilities			17,648				17,700
Stockholders’ 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				12
Additional paid-in capital			41,048				42,449
Accumulated other comprehensive income			730				951
Retained earnings			52,962				52,916
Total stockholders’ equity			94,751				96,328
Total liabilities and stockholders’ equity		$	112,399			$	114,028

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

CATAPULT COMMUNICATIONS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

		Three months ended
		December 31,
		2008				2007
		(In thousands, except
		per share amounts)
Revenues:
Products		$	6,457			$	6,770
Services			3,355				3,531
Total revenues			9,812				10,301
Cost of revenues:
Products			1,452				1,248
Services			473				798
Amortization of purchased technology			12				12
Total cost of revenues			1,937				2,058
Gross profit			7,875				8,243
Operating expenses:
Research and development			1,638				3,553
Sales and marketing			3,971				4,345
General and administrative			2,259				2,172
Total operating expenses			7,868				10,070
Operating income (loss)			7				(1,827	)
Interest income			232				744
Other income, net			175				130
Income (loss) before income taxes			414				(953	)
Provision for income taxes			357				218
Net 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				13,373
Diluted			11,568				13,373

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

CATAPULT COMMUNICATIONS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		Three months ended
		December 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				267
Amortization of purchased technology			12				12
Amortization of other acquisition related intangibles			6				6
Gain on disposal of fixed assets			(6	)			—
Provision for recovery of doubtful accounts			—				(45	)
Deferred income taxes			192				(19	)
Stock based compensation expense			553				825
Change in assets and liabilities:
Accounts receivable			(1,363	)			(1,189	)
Inventories			(462	)			286
Prepaid expenses and other current assets			145				21
Other assets			40				2
Accounts payable			(1,073	)			15
Accrued 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				20,374
Purchase 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	)			7,115
Cash 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	)			4,287
Cash and cash equivalents, beginning of period			33,792				23,351
Cash and cash equivalents, end of period		$	27,355			$	27,638
Supplemental disclosure of cash flow information:
Unrealized gain (loss) on investments		$	(252	)		$	3
Cash paid for income taxes			84				186

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

Note 1 — The Company and Basis of Presentation

     Catapult Communications Corporation and its subsidiaries (“we” or “the Company”) design, develop, manufacture, market and support advanced software-based test systems offering integrated suites of testing applications for the global telecommunications industry. Our advanced test systems assist our customers in the design, integration, installation and acceptance testing of a broad range of digital telecommunications equipment and services. The Company was incorporated in California in October 1985, was reincorporated in Nevada in 1998, and has operations in the United States, Canada, the United Kingdom, Europe, Japan, China, India, and the Philippines. Management has determined that we conduct our business within one reportable segment: the design, development, manufacture, marketing and support of advanced software-based test systems globally.

     The accompanying condensed consolidated balance sheet as of September 30, 2008, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements as of December 31, 2008 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and include the accounts of Catapult Communications Corporation and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated. 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 (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. These unaudited 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, 2008 and filed with the SEC on December 3, 2008. The unaudited condensed consolidated financial statements as of December 31, 2008, and for the three months ended December 31, 2008 and 2007, reflect, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to state 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, 2008 balance sheet was derived from audited financial statements at that date, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

     There have been no significant changes in the Company’s significant accounting policies during the three months ended December 31, 2008 as compared to what was previously disclosed in the Company’s Form 10-K for the fiscal year ended September 30, 2008 as filed with the SEC on December 3, 2008, except that we adopted the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 157 (“SFAS 157”), Fair Value Measurements and SFAS No. 159 (“SFAS 159”), The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115.

Note 2 — Recent Accounting Pronouncements

     During the first quarter of fiscal 2009, the Company adopted SFAS 157, Fair Value Measurements , which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements, but rather eliminates inconsistencies in guidance found in various other accounting pronouncements. The adoption of SFAS 157 did not have a material impact on the Company’s results of operations or the fair values of its financial assets and liabilities.

     In February 2008, the FASB issued FASB Staff Position (“FSP”) 157-2 (“FSP 157-2”), Effective Date of FASB Statement No. 157 . FSP 157-2 delays the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). FSP 157-2 partially defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope of this FSP. The Company is still evaluating the impact of the items deferred by FSP 157-2.

     In October 2008, the FASB issued FSP 157-3 (“FSP 157-3”), Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active . FSP 157-3 clarifies the application of SFAS 157 when the market for that financial asset is not active and defines additional key criteria in determining the fair value of a financial asset. The adoption of this FSP did not have a material impact on the Company’s results of operations or the fair values of its financial assets and liabilities.

     The Company also adopted SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115, during the first quarter of fiscal 2009, but we did not elect the fair value measurement option for any eligible financial instruments as of December 31, 2008. SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities under an instrument-by-instrument election. Subsequent measurements for the financial assets and liabilities an entity elects to fair value will be recognized in earnings. SFAS 159 also establishes additional disclosure requirements. The adoption of SFAS 159 did not have any impact on the Company’s results of operations or the fair values of its financial assets and liabilities. We could elect this option for new or substantially modified assets and liabilities in the future.

     Refer to the section entitled “Fair Value Measurements” in Note 5 for additional information on the adoption of SFAS 157.

Note 3 — Stock-Based Compensation

     The following table summarizes the effect on our unaudited condensed consolidated statements of operations of recording stock-based compensation expense recognized under SFAS 123(R) for the three months ended December 31, 2008 and 2007.

		Three months ended				Three months ended
		December 31,				December 31,
		2008				2007
		(In thousands)
Stock-Based Compensation Expense:
Cost of sales — products		$	45			$	50
Cost of sales — services			5				68
Research and development expense			61				201
Selling and marketing expense			161				168
General and administrative expense			281				338
Total stock-based compensation expense			553				825
Tax effect on stock-based compensation expenses			(5	)			(4	)
Net effect on net income		$	548			$	821

     Additionally, stock-based compensation expense is capitalized in accordance with SFAS 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed , as discussed in “Note 15 — Capitalized Software Development Costs.” The following table summarizes stock-based compensation expense included in our unaudited condensed consolidated balance sheets as a component of other assets (in thousands):

Balance at October 1, 2008		$	46
Stock-based compensation expense capitalized during the period			37
Amortization of capitalized stock-based compensation			—
Balance at December 31, 2008		$	83

     The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

		Employee Stock Option Plan
		Three months ended
		December 31,
		2008				2007
Dividend yield			0.0	%			0.0	%
Expected life of option		4.5 years				4.3 years
Risk-free interest rate			2.15	%			3.61	%
Expected volatility			57.6	%			55.0	%

     As of December 31, 2008, approximately $2.3 million of unrecognized compensation costs related to stock options are expected to be recognized over a weighted-average period of approximately 1.4 years.

Note 4 — Basic and Diluted Net Income (Loss) per Share

     We have presented net income (loss) per share for all periods in accordance with SFAS No. 128 (“SFAS 128”), Earnings per Share . SFAS 128 requires the presentation of basic and diluted earnings per share. Basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per share includes the effect of dilutive potential common shares, but in periods where net losses are recorded, diluted net loss per share does not include the conversion of common stock equivalents such as common stock options because to do so would decrease the net loss per share and would be anti-dilutive. The following is a reconciliation of the denominator used in calculating basic and diluted net income (loss) per share:

		Three months ended
		December 31,
		2008 (1)				2007
		(In thousands, except
		per share amounts)
Net income (loss), as reported for basic and diluted earnings per share		$	57			$	(1,171	)
Weighted average shares outstanding			11,568				13,373
Dilutive options			—				—
Weighted average shares assuming dilution			11,568				13,373
Net 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.

     Diluted net income (loss) per share does not include the effect of the following anti-dilutive potential common shares:

		Three months ended
		December 31,
		2008				2007
		(In thousands)
Common stock options			2,762				2,852

Note 5 — Fair Value Measurements

     During the first quarter of fiscal 2009, the Company adopted SFAS 157, Fair Value Measurements , which defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considered the principal or most advantageous market in which the Company would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability.

     SFAS 157 established a three-tiered fair value hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable to prioritize inputs used to measure fair value. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is available and significant to the fair value measurement. Those tiers are defined as follows:

Level 1 — inputs are quoted prices in active markets for identical assets or liabilities.

Level 2 — inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly.

Level 3 — inputs are unobservable and shall be used to the extent that observable inputs are not available in the overall fair value measurement.

     The following table represents a summary of financial assets and liabilities that were measured at fair value and the classification by level of input within the fair value hierarchy (in thousands):

						Quoted Prices				Significant
						in Active				Other				Significant
						Markets for				Observable				Unobservable
		December 31,				Identical Assets				Inputs				Inputs
		2008				(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				—				—				4,641
Non-marketable equity investment		$	1,814				—				—			$	1,814
		$	42,865			$	27,355			$	9,055			$	6,455

     The following table is a reconciliation of Level 3 inputs measured at fair value using significant unobservable inputs (in thousands):

		Three Months
		Ended
		December 31,
		2008
Balance, beginning of period		$	6,764
Total 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

     Our investments in auction rate securities (“ARS”) were classified as Level 3 as quoted prices were not available. We used a discounted cash flow (“DCF”) model to derive an estimate of fair value at December 31, 2008. The assumptions used in the DCF model for the estimated total expected future cash flows included estimates on the amount and timing of future interests and principal payments, projections of the interest rate, probability of full repayment of principal considering the credit quality and guarantees, the market required rate of return by investors owning ARS and the company’s tax position.

     Our non-marketable equity investment is measured at fair value on a nonrecurring basis and recognized at fair value when deemed to be other than temporarily impaired. We did not record an impairment charge on this investment during the three months ended December 31, 2008. Refer to Note 16, Non-marketable Equity Investment.

Note 6 — Inventories

     The components of inventories are as follows:

		December 31,				September 30,
		2008				2008
		(In thousands)
Inventories:
Raw materials		$	2,002			$	1,548
Work-in-process			86				243
Finished goods			687				522
		$	2,775			$	2,313

Note 7 — Goodwill and Intangible Assets

     We performed our most recent goodwill impairment test as of December 31, 2008 and determined that there was no impairment. As such, there was no write-down of the goodwill balance. Between October 1, 2008 and December 31, 2008, there have been no changes to the Company’s goodwill balance of $49.4 million.

     In the three months ended December 31, 2008, there were no events or changes in circumstances to indicate impairment of intangible assets or changes to intangible assets.

Note 8 — Income Taxes

     Our provision for income taxes consists of federal, state and foreign income taxes. We recorded a tax provision of $357,000 in the three months ended December 31, 2008, compared with $218,000 in the three months ended December 31,

2007. Having taken a full valuation allowance against our U.S. deferred tax assets at the end of fiscal 2006, we no longer record a tax benefit for U.S. pre-tax losses. As a result, our tax provision consists primarily of tax on foreign income, including the change in our allowance for uncertain tax positions, plus the increase in deferred tax liability resulting from the amortization for tax purposes of a portion of our goodwill.

     On October 1, 2007, we adopted FIN 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 . The cumulative effect of adopting FIN 48 was a $17,000 decrease to retained earnings as of October 1, 2007. As of September 30, 2008, the total amount of gross unrecognized tax benefits was $4,000,000, of which $1,024,000 would affect the effective tax rate if recognized.

     In accordance with our accounting policy, we recognize accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. This policy did not change as a result of the adoption of FIN 48. In the three months ended December 31, 2008 and 2007, accrued interest and penalties related to uncertain tax positions of approximately $37,000 and $25,000, respectively, have been expensed.

     We file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state, or foreign examinations by tax authorities for years prior to 2000. At this time, we cannot estimate the possible change in unrecognized tax benefits.

Note 9 — Stockholders’ Equity

Comprehensive income (loss)

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

		Three months ended
		December 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

     In June 1998, the Board of Directors adopted the 1998 Stock Plan (the “1998 Plan”), which initially provided for the issuance of options to purchase 1,800,000 shares. The Company’s stockholders have subsequently approved increases of a total of 3,000,000 shares to the 1998 Plan. The Board of Directors has the authority to determine optionees, the number of shares, the term of each option and the exercise price. Options under the 1998 Plan generally become exercisable at a rate of 1/8th of the total options granted six months after the option grant date and then at a rate of 1/48th per month thereafter. Options will expire, if not exercised, upon the earlier of 10 years from the date of grant or 30 days after termination as an employee of the Company.

Repurchase of Common Stock

     In December 1999, our Board of Directors authorized a stock repurchase program of up to 2,000,000 shares of its common stock. In January 2007, November 2007, April 2008 and October 2008, our Board of Directors authorized increases of 1,000,000 shares, 208,974 shares, 420,820 shares and 1,241,583 shares, respectively, to the program. Depending on market conditions and other factors, repurchases can be made from time to time in the open market and in negotiated transactions, including block transactions, and this program may be discontinued at any time. In fiscal 2008, we repurchased and canceled 1,690,162 shares at a cost of approximately $12.2 million. In the three month period ended December 31, 2008, we repurchased and canceled 392,589 shares at a cost of approximately $2.0 million. The shares repurchased were restored to the status of authorized but unissued. As of December 31, 2008, approximately 1,107,000 shares remained available for repurchase under the authorization.

Note 10 — Geographical Information

     We are organized to operate in and service a single reportable segment: the design, development, manufacture, marketing and support of advanced software-based telecommunications test systems.

     Revenues and long-lived assets by geographic region are as follows:

						Europe, Middle								Asia				Consolidated
		Americas				East & Africa				Japan				Pacific				Total
						(In thousands)
Three months ended December 31, 2008
Revenues from unaffiliated customers		$	2,148			$	2,135			$	3,195			$	2,334			$	9,812
Three months ended December 31, 2007
Revenues from unaffiliated customers		$	2,997			$	3,356			$	2,402			$	1,546			$	10,301
As of December 31, 2008
Goodwill		$	22,896			$	26,498			$	—			$	—			$	49,394
Long-lived assets			578				130				187				132				1,027
As of September 30, 2008
Goodwill		$	22,896			$	26,498			$	—			$	—			$	49,394
Long-lived assets			601				97				178				135				1,011

     Revenues above reflect the location of the end customer and exclude all inter-company sales.

     Revenues in the United States represented 21%, and 26% of our total revenues in the three months ended December 31, 2008 and 2007, respectively. Revenues from China represented 16% and 10% of our total revenues in the three months ended December 31, 2008 and 2007, respectively. Revenues from France represented 10% of our total revenues in the three months ended December 31, 2007. Operations in Ireland accounted for 39% and 34% of the consolidated identifiable assets at December 31, 2008 and 2007, respectively.

Note 11 — Customer Information

     We currently sell our products to a small number of customers. Customers representing 10% or more of our accounts receivable balances as of December 31, 2008 or September 30, 2008, or 10% or more of our revenues for the three months ended December 31, 2008 or 2007, were as follows:

		Percentage of Accounts								Percentage of Revenues
		Receivable as of								For the three months ended
		December 31,				September 30,				December 31,				December 31,
		2008				2008				2008				2007
Customer 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

     From time to time, we may be involved in lawsuits, claims, investigations and proceedings, consisting of intellectual property, commercial, employment and other matters, which arise in the ordinary course of business. In accordance with SFAS 5, Accounting for Contingencies , we record a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. If an unfavorable ruling were to occur in any specific period, there exists the possibility of a material adverse impact on the results of operations of that period.

Note 13 — Restructuring Costs

     A restructuring charge of $2,197,000 was recorded in the second quarter of fiscal 2008, of which $1,574,000 was paid in fiscal year 2008 and a further $217,000 was paid in the first quarter of fiscal 2009. These costs related primarily to one-time employee termination benefits consisting of severance and related benefits for the workforce reduction through layoffs and early retirement of 25 employees worldwide and to the closure of our research and development facility in Australia. The global workforce reduction represented 11% of our workforce prior to the restructuring.

Note 14 — Long-term Investments

     In our investment portfolio, we held auction rate securities (“ARS”) that are securities with long-term maturities for which the interest rates are reset through a dutch auction each month. These auctions historically have provided a liquid market for these securities. The ARS held in our portfolio represent interests in student loan, closed-end mutual fund preferred and municipal issues, all highly rated by one or more of the major credit rating agencies at the time of purchase.

     On February 11, 2008, when the market for ARS began to experience widespread auction failures, we held a total of $12 million in these securities in two of our three externally managed short-term investment portfolios. Since then, as a result of auction sales due to some degree of recovery in the auction market together with refinancing of some issues, our total position in these securities was reduced to $5.0 million as of September 30, 2008. These sales and redemptions all occurred at par without a loss.

     Based on the current lack of liquidity related to these investments, we anticipate that liquidation of these remaining securities will be protracted and accordingly we have continued to classify them as long-term investments at December 31, 2008. In light of the absence of sales and redemptions in the three months ended December 31, 2008 and the further deterioration of credit markets during that period, we recorded a temporary unrealized holding loss of $309,000 in the three months ended December 31, 2008 as discussed in Note 5, Fair Value Measurements.

Note 15 — Capitalized Software Development Costs

     Unamortized software development costs were $5.5 million at December 31, 2008 and are included in other assets. There were $3.5 million in unamortized software development costs at September 30, 2008.

Note 16 — Non-marketable Equity Investment

     We have an interest of approximately 2.6% in Nethawk Oyj, a private Finnish company, that has been recorded on our balance sheet as a long-term asset at a fair value of $1.8 million as of December 31, 2008 and September 30, 2008 as determined by management and as discussed in Note 5, Fair Value Measurements.

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 our Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the year ended September 30, 2008, as filed with the Securities and Exchange Commission on December 3, 2008.

Forward-looking Statements

     This report on Form 10-Q contains statements that are not historical facts but are forward-looking statements relating to such matters as anticipated financial performance and involve known and unknown risks, uncertainties and other factors that may cause our business or our industry’s actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by any forward-looking statements. Such statements include, in particular, statements about our plans, strategies, prospects, changes and trends in our business and the markets in which we operate as described in this report on Form 10-Q. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “forecast,” “predict,” “propose,” “potential” or “continue” or the negative of those terms or other comparable terminology. These statements are only predictions.

     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 for a number of reasons, including:

	•		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;

	•		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.

     You should carefully review the cautionary statements set forth under the caption “Risk Factors” in Item 1A of Part II of this report and those set forth in our Annual Report on Form 10-K for the year ended September 30, 2008, filed on December 3, 2008.

     We may from time to time make additional written and oral forward-looking statements, including statements contained in our filings with the Securities and Exchange Commission and in our reports to stockholders. We do not undertake to update any forward-looking statements that may be made in this Form 10-Q or from time to time by us or on our behalf.

Overview

Our Business and Products

     Catapult Communications Corporation (“we”, “Catapult,” the “Company” or the “Registrant”) designs, develops, manufactures, markets and supports advanced software-based test systems for the global telecommunications industry. Our Linux software-based DCT2000® (“DCT”) and MGTS® digital communications test systems operating on a common hardware platform range are designed to enable equipment manufacturers and network operators to deliver complex digital telecommunications equipment and services more quickly and cost-effectively, while helping to ensure interoperability and reliability. Our advanced software and hardware perform a range of test functions, including design and feature verification, conformance testing, interoperability testing and load and stress testing. Our emphasis is on testing complex, high-level and emerging protocols including, most recently, Long-Term Evolution (LTE), WiMAX and IP Multimedia Subsystem (IMS).

Conditions and Trends in Our Industry

     In our fiscal year ended September 30, 2008, we experienced lower revenues due to the effects of consolidation among major customers outside Japan, such as Alcatel-Lucent (which also acquired the 3G wireless business from Nortel) and Nokia Siemens Networks, and to continued competition from our customers’ own test equipment offerings in the Japanese market. These factors resulted in reduced purchasing of our products and services by our customers throughout the world.

     In the three months ended December 31, 2008, we saw improvement in revenues in both Japan and Asia Pacific outside Japan, but we continued to experience reduced demand in North America and Europe due to the effects of consolidation among major customers. Our customer order input for the quarter exceeded revenues due primarily to orders for LTE test systems, the majority of which will be delivered in future quarters.

Summary of Our Financial Performance in the First Quarter of Fiscal 2009

     Our revenues in the three months ended December 31, 2008 decreased by 5% to $9.8 million from $10.3 million in the same period in the prior year for the reasons outlined in the preceding section, “Conditions and Trends in our Industry”. Our gross profit margin remained substantially unchanged at 80% while our operating expenses decreased by 22%, due primarily to capitalized research and development expenses and decreases in staffing levels, non-cash stock option expenses, contractor expenses and exchange rates. We recorded operating income of $7,000 in comparison with an operating loss of $1.8 million in the same period in the previous year.

     During the three months ended December 31, 2008, our cash, cash equivalents and short-term investments decreased by $5.0 million, due to $0.9 million in negative cash flow from operations, $2.0 million in share repurchases, $2.0 million in additional capitalization of software development costs and $0.1 million in capital expenditures.

Critical Accounting Policies and Estimates

     There have been no material changes to our critical accounting policies and estimates as disclosed in our Annual Report on Form 10-K for the year ended September 30, 2008 as filed with the SEC on December 3, 2008, except that we are adding the following critical accounting policy.

Fair Value Measurement

     We measure fair value in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 157 (“SFAS 157”), Fair Value Measurements and SFAS No. 159 (“SFAS 159”), The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115 .

     A significant portion of our cash equivalents, short-term investments and long-term investments consists of financial instruments that are measured at fair value in our unaudited condensed consolidated financial statements. The measurement of fair value requires significant management judgments and assumptions. These judgments and assumptions, as well as changes in market conditions, may have a material effect on our unaudited condensed consolidated balance sheets and statements of operations.

     At December 31, 2008, the fair values for our cash equivalents and short-term investments were based on independent price quotations obtained from third party sources such as pricing services, dealer quotes or direct market observations. The fair values for our auction rate securities classified as long-term investments were measured using an internally-developed discounted cash flow model.

     We periodically evaluate our fair value measurement methodology and may change it to accommodate market developments or to compensate for changes in data availability and reliability.

Results of Operations

     The following table sets forth, for the periods indicated, the percentage relationships of certain items from our unaudited condensed consolidated statements of operations to total revenues except for gross profit margin on products and services.

		For the three months
		ended December 31,
		2008				2007
Revenues:
Products			65.8	%			65.7	%
Services			34.2				34.3
Total revenues			100.0				100.0
Cost of revenues:
Products			14.8				12.1
Services			4.9				7.7
Amortization of purchased technology			0.1				0.1
Total cost of revenues			19.8				19.9
Gross profit			80.2				80.1
Operating expenses:
Research and development			16.7				34.5
Sales and marketing			40.5				42.2
General and administrative			23.0				21.1
Total operating expenses			80.2				97.8
Operating income (loss)			0.0				(17.7	)
Interest income			2.4				7.2
Other income, net			1.8				1.2
Income (loss) before income taxes			4.2				(9.3	)
Provision for income taxes			3.6				2.1
Net income (loss)			0.6	%			(11.4	)%
Gross profit margin on products			77.5	%			81.6	%
Gross profit margin on services			85.9	%			77.4	%

     Gross profit margin on products and services excludes amortization of purchased technology.

Comparison of the Three-Month Periods Ended December 31, 2008 and 2007

      Revenues

     Our revenues for the three months ended December 31, 2008 in comparison to the same period in the prior year decreased by 5% to $9.8 million. Over the same period, product revenues decreased by 5% to $6.5 million. The decrease in product revenues was attributable to decreased sales of our DCT and MGTS test systems. Services revenues decreased approximately 5% to $3.4 million, due primarily to a decrease in the number of test systems under maintenance.

     Our revenues by sales territory, based on origin of order taken, varied as follows in the three months ended December 31, 2008 in comparison with the three months ended December 31, 2007:

	•		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.

     Information on revenues from major customers is provided in Note 11 to the Unaudited Condensed Consolidated Financial Statements.

      Cost of Revenues

     Cost of product revenues increased by 16% to $1.5 million for the three months ended December 31, 2008 in comparison with the same period in the prior year and gross margin on product revenues decreased by four percentage points to 78%. These variances reflect increased hardware component and third party product costs as a percentage of revenue. We expect our gross margin on product revenues in future quarterly periods to fluctuate based on product mix and revenue levels.*

     Cost of services revenues decreased by approximately 41% to $0.5 million in the three months ended December 31, 2008 in comparison with the same period in the prior year, due primarily to a 22% decrease in the number of employees engaged in customer support. Gross margin on services revenues increased by nine percentage points to 86% as services costs decreased to a greater extent than the associated revenues. We expect our gross margin on services revenues in future quarterly periods to fluctuate based on changes in both revenue and cost levels.*

     Amortization of purchased technology remained unchanged at $12,000 in the three months ended December 31, 2008 compared with the same period the previous year.

     Gross margins did not vary significantly by geographic region.

      Research and Development

     Research and development expenses decreased by approximately 54% to $1.6 million for the three months ended December 31, 2008 in comparison with the same period in the prior year, primarily due the capitalization of $2.0 million in software production expenses. As a percentage of total revenues, research and development expenses decreased to 17% from 34% over the same period.

      Sales and Marketing

     Sales and marketing expenses decreased by 9% to $4.0 million for the three months ended December 31, 2008 in comparison with the same period in the prior year as a 10% reduction in the number of sales and marketing employees more than offset an increase of $0.2 million in variable compensation. As a percentage of total revenues, sales and marketing expenses decreased to 40% from 42% over the same period.

      General and Administrative

     General and administrative expenses increased approximately 4% to $2.3 million for the three months ended December 31, 2008 in comparison with the same period in the prior year, primarily due to an increase in variable compensation. As a percentage of total revenues, general and administrative expenses increased to 23% from 21% over the same period.

      Interest income

     Interest income decreased by 69% to $0.2 million in the three months ended December 31, 2008 in comparison with the same period in the prior year due to decreases in both short-term interest rates and in the total value of funds invested.

      Provision for income taxes

     Our provision for income taxes consists of federal, state and foreign income taxes. Having recorded a full valuation allowance on our deferred tax assets in the U.S. in fiscal 2006, we no longer accrue a benefit on U.S. pre-tax losses. Our tax provision increased by 64% to $0.4 million in the three months ended December 31, 2008 in comparison with the same period in the prior year due to pre-tax income recorded in the current period in comparison with a pre-tax loss in the same period in the prior year.

      Impact of Inflation

     We believe that inflation has not had a material impact on our results of operations.

Liquidity and Capital Resources

     Operating activities used $0.9 million in cash in the three months ended December 31, 2008 in comparison with $1.5 million in the same period in the prior year. In the three months ended December 31, 2008, the net income component contributed $0.1 million, while a net loss used $1.2 million in the same period in the prior year. Over the same period, the contribution from adjustments for non-cash charges decreased to $0.9 million from $1.0 million. These non-cash charges include charges for depreciation, amortization, deferred income taxes and stock-based compensation expense. Finally, our cash flows from operations are affected by changes in current assets and liabilities. Changes in non-cash assets and liabilities used $1.8 million in cash in the three months ended December 31, 2008 in comparison with $1.4 million in the same period in the prior year.

     Investing activities have consisted of three components: purchases of property and equipment; purchases and sales of short-term investments; and capitalized software development costs. Purchases of property and equipment decreased by $0.1 million to $0.1 million in the three months ended December 31, 2008 in comparison with the same period in the prior year. We expect that capital expenditures for our full fiscal 2009 year will total approximately $0.6 million.* We invest cash that is surplus to our operating requirements in professionally managed investment portfolios. These portfolios consist of both cash equivalents and short-term investments, and the mix between these elements may vary from period to period due to changes in the investment approaches of the portfolio managers. Net purchases and sales of short-term investments used net cash of $1.4 million in the three months ended December 31, 2008 and provided $7.4 million in the same period in the prior year. Capitalized software development costs used cash of $2.0 million in the three months ended December 31, 2008. No software development costs were capitalized in the same period in the prior year.

     Financing activities representing primarily the repurchase of common shares used cash of $2.0 million in the three months ended December 31, 2008 in comparison with $1.3 million in the same period in the prior year.

     As of December 31, 2008, we had working capital of $36.9 million and cash, cash equivalents and short-term investments of $36.4 million.

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

Recent Accounting Pronouncements

     See Note 2 of our Notes to Unaudited Condensed Consolidated Financial Statements included with this Quarterly Report on Form 10-Q for information on recent accounting pronouncements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     Disclosure not required as a result of our Company’s status as a smaller reporting company.

Item 4. Controls and Procedures

      Evaluation of disclosure controls and procedures.

     We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) designed to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of December 31, 2008.

      Changes in internal control over financial reporting.

     There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1A. Risk Factors

     Disclosure not required as a result of our Company’s status as a smaller reporting company.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     The following table sets forth information regarding repurchases of our common stock during the quarter ended December 31, 2008:

		Repurchases of Common Stock
										Total Number of				Maximum Number
		Total								Shares Purchased				of Shares that May
		Number				Average				as Part of Publicly				Yet Be Purchased
		of Shares				Price Paid				Announced				Under the Plans
		Purchased				Per Share (1)				Plans or Programs				Or Programs
October 1, 2008 — October 31, 2008.			22,263			$	3.43				22,263				1,477,737
November 1, 2008 — November 30, 2008			349,399				5.14				349,399				1,128,338
December 1, 2008 — December 31, 2008			20,927				6.16				20,927				1,107,411
Total for the Quarter			392,589			$	5.10				392,589				1,107,411

     All shares were repurchased pursuant to the Company’s share repurchase program authorized in December 1999 to repurchase up to 2,000,000 shares of our common stock. In January 2007, November 2007, April 2008 and October 2008, our Board of Directors authorized increases of 1,000,000 shares, 208,974 shares, 420,820 shares and 1,241,583 shares, respectively, to the program. Depending on market conditions and other factors, repurchases can be made from time to time in the open market and in negotiated transactions, including block transactions, and this program may be discontinued at any time. During the first quarter of fiscal 2009, the Company repurchased and canceled 392,589 shares at a cost of approximately $2.0 million. As of December 31, 2008, approximately 1,107,000 shares remained available for repurchase under the authorization.

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.

SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, we have duly caused this report to be signed on our behalf by the undersigned thereunto duly authorized.

Exhibit Index

Number		Description
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.

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