UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-30121
ULTICOM, INC.
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-2050748
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1020 BRIGGS RD. MT. LAUREL, NJ 08054
(Address of principal executive offices) (Zip Code)
(856) 787-2700
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
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.
[ X ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of Common Stock, no par value,
outstanding as of December 06, 2002 was 41,523,318.
Page 1 of 23 Total Pages
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements.
Page
1. Condensed Consolidated Balance Sheets as
of January 31, 2002 and October 31, 2002 3
2. Condensed Consolidated Statements of Operations for the Three
and Nine-Month Periods ended October 31, 2001 and 2002 4
3. Condensed Consolidated Statements of Cash Flows for the
Nine-Month Periods ended October 31, 2001 and 2002 5
4. Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 10
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk. 19
ITEM 4. Controls and Procedures. 19
PART II
OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K. 20
SIGNATURES 21
CERTIFICATIONS 22
Page 2 of 23 Total Pages
PART I
Financial Information
ITEM 1. Financial Statements.
ULTICOM, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JANUARY 31, OCTOBER 31,
2002 * 2002
------ ----
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 140,260 $ 86,948
Short-term investments 76,827 130,022
Accounts receivable, net of allowance for doubtful accounts of
$849 and $667, respectively 8,422 4,764
Inventories 446 627
Prepaid expenses and other current assets 3,642 3,278
------- -------
Total current assets 229,597 225,639
Property and equipment, net 5,270 3,636
Investments 5,550 5,550
Other assets 258 244
------- -------
Total assets $ 240,675 $ 235,069
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 12,972 $ 9,382
Deferred revenue 3,679 3,274
------- -------
Total current liabilities 16,651 12,656
------- -------
LONG-TERM LIABILITIES -- 622
------- -------
SHAREHOLDERS' EQUITY:
Undesignated stock, no par value, 10,000,000 shares authorized, no
shares issued and outstanding -- --
Common stock, no par value, 200,000,000 authorized,
41,121,505 and 41,509,642 issued and outstanding -- --
Additional paid-in capital 202,557 203,955
Accumulated other comprehensive income (loss) 443 (594)
Retained earnings 21,024 18,430
------- -------
Total shareholders' equity 224,024 221,791
------- -------
Total liabilities and shareholders' equity $ 240,675 $ 235,069
========= =========
*The Condensed Consolidated Balance Sheet as of January 31, 2002 has been
summarized from the Company's audited Consolidated Balance Sheet as of that
date.
The accompanying notes are an integral part of these financial statements.
Page 3 of 23 Total Pages
ULTICOM, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED THREE MONTHS ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2001 2002 2001 2002
---- ---- ---- ----
Sales $ 47,972 $ 20,964 $ 13,013 $ 7,764
Cost of sales 15,998 8,583 4,989 2,817
--------- --------- ---------- ---------
Gross profit 31,974 12,381 8,024 4,947
Operating expenses:
Research and development 10,950 8,055 3,888 2,263
Selling, general and administrative 12,602 10,200 3,779 3,221
Workforce reduction and restructuring charges - 2,290 - -
--------- --------- ---------- ---------
Income (loss) from operations 8,422 (8,164) 357 (537)
Interest and other income, net 7,269 4,018 2,007 1,428
--------- ---------- --------- ---------
Income (loss) before income tax provision (benefit) 15,691 (4,146) 2,364 891
Income tax provision (benefit) 5,866 (1,552) 882 312
--------- ---------- ---------- ---------
Net income (loss) $ 9,825 $ (2,594) $ 1,482 $ 579
======== ========= ========= =========
Earnings (loss) per share:
Basic $ 0.24 $ (0.06) $ 0.04 $ 0.01
======== ========== ========= =========
Diluted $ 0.23 $ (0.06) $ 0.03 $ 0.01
======== ========== ========= =========
The accompanying notes are an integral part of these financial statements.
Page 4 of 23 Total Pages
ULTICOM, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
2001 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash from operations after adjustment for non-cash item $ 11,850 $ (560)
Changes in assets and liabilities:
Accounts receivable, net 2,626 3,658
Inventories 1,144 (181)
Prepaid expenses and other current assets (407) 364
Accounts payable and accrued expenses 3,111 (3,590)
Deferred revenue (7,298) (405)
Other, net 701 (401)
-------- --------
Net cash provided by (used in) operating activities 11,727 (1,115)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities and sales (purchases) of investments, net (36,698) (53,195)
Purchases of property and equipment (3,646) (400)
-------- --------
Net cash used in investing activities (40,344) (53,595)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock in connection with
exercise of stock options and employee stock purchase plan 2,677 1,398
-------- --------
Net cash provided by financing activities 2,677 1,398
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS
(25,940) (53,312)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
183,303 140,260
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $157,363 $ 86,948
======== ========
The accompanying notes are an integral part of these financial statements.
Page 5 0f 23 Total Pages
ULTICOM, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The accompanying financial information should
be read in conjunction with the financial statements, including the notes
thereto, for the annual period ended January 31, 2002. The financial information
included herein is unaudited; however, such information reflects all adjustments
(consisting solely of normal recurring adjustments), which are, in the opinion
of management, necessary for a fair statement of results for the interim
periods. The results of operations for the three and nine-month periods ended
October 31, 2002 are not necessarily indicative of the results to be expected
for the full year.
COMPANY BUSINESS AND BACKGROUND - Ulticom, Inc., a New Jersey
corporation, is a majority-owned subsidiary of Comverse Technology, Inc.
("CTI"), and is engaged in the design, development, manufacture, marketing and
support of software and hardware for use in the communications industry.
PRINCIPLES OF CONSOLIDATION - The condensed consolidated financial
statements include the accounts of Ulticom, Inc. and its wholly-owned subsidiary
(together the "Company"). All material intercompany balances and transactions
have been eliminated.
INVENTORIES - Inventories are stated at the lower of cost or market.
Cost is determined by the first in, first out (FIFO) method. Inventories at
January 31 and October 31, 2002 consist entirely of finished goods.
COMPREHENSIVE INCOME (LOSS) - For the three-month periods ended
October 31, 2001 and 2002, total comprehensive income (loss) was approximately
$1.7 million and $0.1 million, respectively, and for the nine-month periods was
approximately $10.1 million and ($3.6) million, respectively. The elements of
comprehensive income (loss) include net income (loss), unrealized gains/losses
on available for sale securities and foreign currency translation adjustments.
WORKFORCE REDUCTION AND RESTRUCTURING CHARGES - During the nine-month
period ended October 31, 2002, the Company took steps to better align its cost
structure with the current business environment, to improve efficiency of its
operations and to better position the Company to realize emerging opportunities.
These steps included a workforce reduction and restructuring plan announced in
April 2002. The plan included terminations of 47 employees in the United States
and 18 employees in France, in the engineering and administrative departments of
the Company. As a result of this plan, the Company recorded a charge of
approximately $2.3 million to operations for severance and other related costs
and the elimination of excess facilities and related leasehold improvements
during the nine-month period ended October 31, 2002.
Page 6 of 23 Total Pages
As of October 31, 2002, the Company had an accrual of approximately
$1.2 million related to the workforce reduction and restructuring plan. An
analysis of the workforce reduction and restructuring plan accrual is as
follows:
NON-RECURRING CASH NONCASH ACCRUAL BALANCE AT
EXPENSES PAYMENTS CHARGE OCTOBER 31, 2002
-------- -------- ------ ----------------
(In thousands)
Severance and related $ 1,593 $ 846 $ - $ 747
Property and equipment 130 - 130 -
Facilities and related 567 78 - 489
------- ------- ------- -------
Outstanding at end of period $ 2,290 $ 924 $ 130 $ 1,236
======= ======= ======= =======
Severance and related costs consist primarily of severance payments
to terminated employees, fringe related costs associated with severance
payments, other termination costs and legal and consulting costs. The balance of
the severance and related costs are expected to be paid by January 31, 2003.
Property and equipment consists primarily of leasehold improvements
and furnishings determined to be impaired at a facility to be vacated in the
United States. The charge has been classified as a reduction of property and
equipment for financial statement purposes.
Facilities and related costs consist primarily of contractually
obligated lease liabilities and operating expenses related to facilities to be
vacated as a result of the restructuring plan. The balance of the facilities and
related costs is expected to be paid at various dates through May 2005, of which
approximately $296,000 is classified as a long-term liability as of October 31,
2002.
EARNINGS (LOSS) PER SHARE - For the three and nine-month periods
ended October 31, 2001 and 2002, the computation of basic earnings (loss) per
share is based on the weighted average number of outstanding common shares.
Diluted earnings per share further assumes the issuance of common shares for all
dilutive potential common shares outstanding (consisting entirely of stock
options). The diluted earnings (loss) per share calculation for the nine-month
period ended October 31, 2002 excludes incremental shares of 1,158,054 related
to employee stock options. These shares are excluded due to their anti-dilutive
effect as a result of the Company's loss during the nine-month period. The
shares used in the computations are as follows:
NINE MONTHS ENDED THREE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
2001 2002 2001 2002
(In thousands)
Basic 40,865 41,357 41,088 41,463
Diluted 43,359 41,357 42,958 42,444
Page 7 of 23 Total Pages
RELATED PARTY TRANSACTIONS - The Company sells products and provides
services to other subsidiaries of CTI. For the three-month periods ended October
31, 2001 and 2002, sales to related parties were approximately $2.5 million and
$0.8 million, respectively, and for the nine- month periods ended October 31,
2001 and 2002 were approximately $6.8 million and $2.5 million, respectively.
As of October 31, 2001 and 2002, amounts due from subsidiaries of CTI
were approximately $0.9 million and $0.7 million, respectively.
The Company has a services agreement with CTI. Under this agreement,
CTI provides the Company with various administrative and consulting services.
The Company has agreed to pay to CTI a quarterly fee of $150,000, payable in
arrears at the end of each fiscal quarter, in consideration for all services
provided by CTI during such fiscal quarter. In addition, the Company has agreed
to reimburse CTI for any out-of-pocket expenses incurred by CTI in providing the
services. The term of the agreement extends to January 31, 2003 and is
automatically extended for additional twelve-month periods unless terminated by
either party.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill
and Other Intangible Assets". SFAS No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets. Under SFAS No. 142,
goodwill and some intangible assets will no longer be amortized, but rather
reviewed for impairment on a periodic basis. The provisions of this Statement
are required to be applied starting with fiscal years beginning after December
15, 2001. This Statement is required to be applied at the beginning of the
Company's fiscal year and is to be applied to all goodwill and other intangible
assets recognized in its financial statements at that date. Impairment losses
for goodwill and certain intangible assets that arise due to the initial
application of this Statement are to be reported as resulting from a change in
accounting principle. Goodwill and intangible assets acquired after June 30,
2001 will be subject immediately to the provisions of this Statement. The
adoption of SFAS No. 142 did not have a material effect on the Company's
condensed consolidated financial statements.
In August 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations". SFAS No. 143 establishes accounting standards for
recognition and measurement of a liability for an asset retirement obligation
and the associated asset retirement cost. SFAS No. 143 applies to legal
obligations associated with the retirement of a tangible long-lived asset that
result from the acquisition, construction, development and/or normal operation
of a long-lived asset. This Statement is effective for fiscal years beginning
after June 15, 2002; however, early adoption is encouraged. The adoption of SFAS
No. 143 is not expected to have a material effect on the Company's condensed
consolidated financial statements.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and certain
provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results
of Operations - Reporting the Effects of Disposal of a Segment of a Business,
Page 8 of 23 Total Pages
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
SFAS No. 144 is effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years. Early application is encouraged. The adoption of SFAS No. 144 did not
have a material effect on the Company's condensed consolidated financial
statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145, among other things, rescinds SFAS No. 4, which
required all gains and losses from the extinguishment of debt to be classified
as an extraordinary item and amends SFAS No. 13 to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-leaseback transactions. The
rescission of SFAS No. 4 is effective for fiscal years beginning after May 15,
2002. The remainder of the statement is generally effective for transactions
occurring after May 15, 2002 with earlier application encouraged. The adoption
of SFAS No. 145 is not expected to have a material effect on the Company's
condensed consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities." This statement addresses the recognition, measurement and
reporting of costs that are associated with exit and disposal activities. This
statement includes the restructuring activities that are currently accounted for
pursuant to the guidance set forth in Emerging Issues Task Force ("EITF") Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to exit an Activity (including Certain Costs Incurred in a
Restructuring)," costs related to terminating a contract that is not a capital
lease and one-time benefit arrangements received by employees who are
involuntarily terminated - nullifying the guidance under EITF Issue No. 94-3.
Under SFAS No. 146, the cost associated with an exit or disposal activity is
recognized in the periods in which it is incurred rather than at the date the
company committed to the exit plan. This statement is effective for exit or
disposal activities initiated after December 31, 2002 with earlier application
encouraged. The Company is currently evaluating the impact that SFAS No. 146
will have on its condensed consolidated financial statements.
Page 9 of 23 Total Pages
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
RESULTS OF OPERATIONS
Sales. Sales for the nine-month and three-month periods ended October
31, 2002 decreased by approximately $27.0 million (56%) and $5.2 million (40%),
respectively, compared to the corresponding periods in 2001. The decrease is
attributable primarily to a lower volume of sales and deployments of our
Signalware products. Sales to international customers represented approximately
72% and 71%, respectively, of our sales for the nine and three-month periods
ended October 31, 2002 compared to approximately 61% and 73%, respectively, of
our sales in the corresponding 2001 periods.
Cost of Sales. Cost of sales for the nine-month and three-month
periods ended October 31, 2002 decreased by approximately $7.4 million (46%) and
$2.2 million (44%), respectively, compared to the corresponding periods in 2001.
The decrease is primarily attributable to lower expenses of approximately $3.7
million in material and production costs, $2.9 million in personnel-related
costs and $0.9 million in depreciation costs for the nine-month period ended
October 31, 2002. The decrease in cost of sales in the three-month period ended
October 31, 2002 is primarily attributable to lower costs of approximately $0.9
million in materials and production costs and $1.1 million in personnel-related
costs. Gross margins for the nine-month period ended October 31, 2002 decreased
to approximately 59% from approximately 67% as compared to the corresponding
period in 2001. For the three-month period ending October 31, 2002, gross
margins increased to approximately 64% from approximately 62% in the
corresponding 2001 period.
Research and Development Expenses. Research and development expenses
for the nine-month and three-month periods ended October 31, 2002 decreased by
approximately $2.9 million (26%) and $1.6 million (42%), respectively, as
compared to the corresponding periods in 2001. The decrease was primarily
attributable to a decrease in personnel-related costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the nine-month and three-month periods ended October
31, 2002 decreased by approximately $2.4 million (19%) and $0.6 million (15%),
respectively, compared to the corresponding periods in 2001. The decrease is
primarily attributable to decreases of approximately $0.3 million in travel and
entertainment costs, $0.4 million in marketing costs, $0.7 million in general
office expenses, and $0.8 million in professional services for the nine-month
period ended October 31, 2002. The decrease for the three-month period ended
October 31, 2002 is primarily attributable to a decrease of approximately $0.5
million in professional services.
Workforce Reduction and Restructuring Charges. During the nine-months
ended October 31, 2002, the Company implemented a workforce reduction and
restructuring plan. As a result, the Company recorded a charge of approximately
$2.3 million to operations for severance and other related costs and the
elimination of excess facilities and related leasehold improvements during the
nine-month period ended October 31, 2002.
Page 10 of 23 Total Pages
Interest and Other Income, net. Interest and other income, net for
the nine-month and three-month period ended October 31, 2002 decreased by
approximately $3.3 million and $0.6 million, respectively, as compared to the
corresponding periods in 2001. The decrease is attributable primarily to lower
interest earned on the Company's cash investments, as a result of the decline in
interest rates when compared to the corresponding nine and three-month periods
ended October 31, 2001.
Income Tax Provision (Benefit). Benefit for income taxes was
approximately $1.6 million for the nine-month period ended October 31, 2002 due
to losses sustained on a pre-tax income basis. For the three-month period ended
October 31, 2002, the Company had a provision for income taxes of approximately
$0.3 million. For the corresponding periods in 2001, the Company had a provision
for income taxes of approximately $5.9 million and $0.9 million, respectively.
The overall effective tax rate was approximately 37.4% for the nine-month
periods ended October 31, 2002 and 2001 and approximately 35.0% and 37.3% for
the three-month periods ended October 31, 2002 and 2001, respectively.
Net Income (Loss). Net loss for the nine-month period ended October
31, 2002 was approximately $2.6 million compared to approximately $9.8 million
of net income in the corresponding period in 2001. Net income for the
three-month period ending October 31, 2002 was approximately $0.6 million
compared to approximately $1.5 million in the corresponding period in 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital at October 31, 2002 of approximately
$213.0 million. At October 31, 2002, the Company had cash and cash equivalents
and short-term investments of approximately $217.0 million.
Operations for the nine-month periods ended October 31, 2002 and
2001, after adjustment for non-cash item, provided (used) cash of approximately
($0.6) million and $11.9 million, respectively. Other changes in operating
assets and liabilities used cash of approximately $0.6 million and $0.1 million
for the nine-month periods ended October 31, 2002 and 2001, respectively.
Investing activities for the nine-month periods ended October 31,
2002 and 2001 used cash of approximately $53.6 million and $40.3 million,
respectively. These amounts include purchases of property and equipment in the
nine-month periods ended October 31, 2002 and 2001 of approximately $0.4 million
and $3.6 million, respectively, and net maturities and sales (purchases) of
investments of ($53.2) million and ($36.7) million, respectively, in the
nine-month periods ended October 31, 2002 and 2001.
Financing activities for the nine-month periods ended October 31,
2002 and 2001 provided cash of approximately $1.4 million and $2.7 million,
respectively, related to proceeds from the issuance of common stock in
connection with the exercise of stock options and employee stock purchase plan.
Although there are no present understandings, commitments or
agreements with respect to acquisitions of other businesses, products or
technologies, the Company may in the future consider such transactions, which
may require additional debt or equity financing. The issuance of debt or equity
Page 11 of 23 Total Pages
securities could be expected to have a dilutive impact on the Company's
shareholders, and there can be no assurance as to whether or when any acquired
business would contribute positive operating results commensurate with the
associated investment.
The Company may pursue acquisitions of businesses, products or
technologies in the future to expand its business and the products it offers.
Any material acquisition could result in a decrease in working capital depending
upon the amount, timing and nature of the consideration paid.
The Company believes that its existing cash balances will be
sufficient to meet anticipated cash needs for working capital, capital
expenditures and other activities for the foreseeable future. Thereafter, if
current sources are not sufficient to meet the Company's needs, it may seek
additional debt or equity financing.
CERTAIN TRENDS AND UNCERTAINTIES
The Company derives substantially all of its revenue from the
telecommunications industry, which is facing an unprecedented recession. This
has resulted in a significant reduction of capital expenditures made by
equipment manufacturers, application developers and communication service
providers. The Company's operating results and financial condition have been,
and will continue to be, adversely affected by the severe decline in technology
purchases and capital expenditures by these entities. Consequently, the
Company's operating results have deteriorated significantly in recent periods
and the Company's operating results may continue to deteriorate in future
periods if such conditions remain in effect. For these reasons and the risk
factors outlined below, it has been and continues to be very difficult for the
Company to accurately forecast future revenues and operating results.
The Company's business is dependent on the strength of the
telecommunications industry. The telecommunications industry, in general, and
the Company, in particular, have been negatively affected by, among other
factors, the high costs and large debt positions incurred by communication
service providers to expand capacity and enable the provision of future services
(and the corresponding risks associated with the development, marketing and
adoption of these services as discussed below), including the cost of
acquisitions of licenses to provide future broadband services and reductions in
actual and projected revenues and deterioration in actual and projected
operating results. Accordingly, these entities have significantly reduced their
actual and planned expenditures to expand their equipment and delayed and
reduced the deployment of services. A number of communication service providers
have indicated the existence of conditions of excess capacity in certain markets
and have delayed the planned introduction of new services. The Company's sales
to equipment manufacturers and application developers who supply the
telecommunications industry are adversely affected by the slowdown of
infrastructure purchases by communication service providers and by declines in
technology expenditures. The continuation and/or exacerbation of these trends
will have an adverse effect on the Company's future results. In addition to loss
of revenue, weakness in the telecommunications industry has affected and will
continue to affect the Company's business by increasing the risks of credit or
business failures of suppliers, customers or distributors, by delays and
defaults in customer or distributor payments, and by price reductions instituted
by competitors to retain or acquire market share.
Page 12 of 23 Total Pages
The Company's current plan of operations is predicated in part on a
recovery in capital expenditures by equipment manufacturers, application
developers and communication service providers. In the absence of such
improvement, the Company would experience further deterioration in its operating
results, and may determine to modify its plan for future operations accordingly,
which may include, among other things, additional reductions in its workforce.
The Company intends to continue to make significant investment in its
business, and to examine opportunities for growth through acquisitions of
businesses, products or technologies and other strategic investments. These
activities may involve significant expenditures and obligations that cannot
readily be curtailed or reduced if anticipated growth in demand for the
associated products does not materialize or is delayed. The impact of these
decisions on future profitability cannot be predicted with assurance, and the
Company's commitment to growth may increase its vulnerability to downturns in
its markets, technology changes and shifts in competitive conditions. The
Company also may not be able to identify future suitable merger or acquisition
candidates, and even if the Company does identify suitable candidates, it may
not be able to make these transactions on commercially acceptable terms, or at
all. If the Company does make acquisitions, it may not be able to successfully
incorporate the personnel, operations and customers of these companies into the
Company's business. In addition, the Company may fail to achieve the anticipated
synergies from the combined businesses, including marketing, product
integration, distribution, product development and other synergies. The
integration process may further strain the Company's existing financial and
managerial controls and reporting systems and procedures. This may result in the
diversion of management and financial resources from the Company's core business
objectives. In addition, an acquisition or merger may require the Company to
utilize cash reserves, incur debt or issue equity securities, which may result
in a dilution of existing shareholders, and the Company may be negatively
impacted by the assumption of liabilities of the merged or acquired company. Due
to rapidly changing market conditions, the Company may find the value of its
acquired technologies and related intangible assets, such as goodwill as
recorded in the Company's financial statements, to be impaired, resulting in
charges to operations. The Company may also fail to retain the acquired or
merged company's key employees and customers.
The telecommunications industry is subject to rapid technological
change. The introduction of new technologies in the telecommunications market,
including the delay in the adoption of such new technologies, and new
alternatives for the delivery of services are having, and can be expected to
continue to have, a profound effect on competitive conditions in the market and
the success of market participants, including the Company. The Company's success
will depend on the ability to correctly anticipate technological trends, to
react quickly and effectively to such trends and to enhance its existing product
line and to introduce new products on a timely and cost-effective basis. As a
result, the life cycle of the Company's product line is difficult to estimate.
In addition, changing industry and market conditions may dictate strategic
decisions to restructure some business units and discontinue others.
Discontinuing a business unit or product line may result in the Company
recording accrued liabilities for special charges, such as costs associated with
a reduction in workforce. These strategic decisions could result in changes to
determinations regarding a product's useful life and the recoverability of the
carrying basis of certain assets.
The Company's products involve sophisticated technology that performs
critical functions to highly demanding standards. There can be no assurance that
the Company's current or future products will not develop operational problems,
Page 13 of 23 Total Pages
which could have a material adverse effect on the Company. The Company relies on
a limited number of suppliers and manufacturers for specific components and may
not be able to obtain substitute suppliers and manufacturers on terms that are
as favorable if supplies are interrupted.
The telecommunications industry continues to undergo significant
change as a result of deregulation and privatization worldwide, reducing
restrictions on competition in the industry. Unforeseen changes in the
regulatory environment also may have an impact on the Company's revenues and/or
costs in any given part of the world. The Company believes that existing
competitors will continue to present substantial competition, and that other
companies, many with considerably greater financial, marketing and sales
resources than the Company, may enter the markets for the Company's products.
Moreover, as the Company enters into new markets as a result of its own research
and development efforts or acquisitions, it is likely to encounter new
competitors.
The Company's products are dependent upon their ability to operate on
new and existing hardware and operating systems of other companies. Any
modifications to the Company's software needed to adapt to these hardware and
operating systems may prove to be costly, time-consuming and may not be
successful. Undetected defects could result in lost sales, adverse publicity and
other claims against the Company.
The Company's current products are designed to support signaling
system #7. If future networks do not utilize this signaling system and the
Company is unable to adapt its products to work with other appropriate signaling
protocols, its products will become less competitive or obsolete. A reduction in
the demand for these products could affect adversely the Company's business and
operating results.
The Company has made and continues to make significant investments in
the areas of sales and marketing, and research and development. The Company's
research and development activities include ongoing significant investment in
the development of additional features and functionality for its products,
including products based on emerging open standards for Internet protocol that
facilitate the convergence of voice and data signaling. However, the Company
also has ceased, curtailed or delayed certain longer-term initiatives, such as
its Nexworx product, pending a recovery in its business. The success of these
initiatives will be dependent upon, among other things, the emergence of a
market for these types of products and their acceptance by existing and new
customers. Despite delays in the adoption of new features and functionality as a
result of the telecommunications recession and the other factors described
herein, the Company believes that expenditures on these initiatives are
necessary to enhance its products in order to remain competitive, provide future
growth opportunities and to maintain the Company's presence in the market. The
Company's product initiatives reflect the Company's continuing analysis of the
future demand for new products and services, and the Company from time to time
is required to reprioritize or otherwise modify its product plans based on such
analysis. The Company's business may be adversely affected by its failure to
correctly anticipate the emergence of a market demand for certain products or
services, or delays or changes in the evolution of market opportunities. If a
sufficient market does not emerge for new or enhanced products developed by the
Company, or the Company is not successful in marketing such products, the
Company's continued growth could be adversely affected and its investment in
those products may be lost.
Page 14 of 23 Total Pages
Historically, a limited number of customers have contributed a
significant percentage of the Company's revenues. The Company anticipates that
its operating results in any given period will continue to depend significantly
upon revenues from a small number of customers. The loss of any of these
customers could have a material adverse effect on the Company's business.
The Company currently derives a majority of its total sales from
customers outside of the United States. International transactions involve
particular risks, including political decisions affecting tariffs and trade
conditions, rapid and unforeseen changes in economic conditions in individual
countries, difficulty in enforcing intellectual property rights, turbulence in
foreign currency and credit markets, and increased costs resulting from lack of
proximity to the customer. Recent world events may have an adverse effect on the
Company's international transactions, including political and economic
instability in certain countries in which the Company currently transacts
business and may transact business in the future.
To date, international sales have been denominated in U.S. dollars.
Accordingly, the Company has not been exposed to fluctuations in foreign
currency exchange rates related to sales. However, the Company expects that in
future periods, a portion of international sales may be denominated in
currencies other than the U.S. dollar, which could expose it to losses and gains
on foreign currency transactions. The Company does have certain expenses
denominated in foreign currency. The Company may choose to limit its exposure by
utilizing hedging strategies. There can be no assurance that any such hedging
strategies that it undertakes would be successful in avoiding exchange rate
losses.
In order to increase the Company's revenues, it will need to attract
additional customers on an ongoing basis. In addition, since the Company's
products have long sales cycles that typically range from six to twelve months,
its ability to forecast the timing and amount for specific sales is limited. The
loss or deferral of one or more significant sales could have a material adverse
effect on the Company's operating results in any fiscal quarter, especially if
there are significant sales and marketing expenses associated with the deferred
or lost sales. The Company's software products are primarily sold to equipment
manufacturers and application developers, who integrate its products with their
products and sell them to communications service providers. The success of the
Company's business and operating results is dependent upon its channel and
marketing relationships with these manufacturers and developers and the
successful development and deployment of their products. If the Company cannot
successfully establish channel and marketing relationships with leading
equipment manufacturers and application developers or maintain these
relationships on favorable terms, or the Company's sales channels are affected
by economic weakness, its business and operating results may suffer.
Because the Company relies on a limited number of independent
manufacturers to produce boards for its products, if these manufacturers
experience financial, operational or other difficulties, the Company may
experience disruptions to its product supply. The Company may not be able to
find alternate manufacturers that meet its requirements and existing or
alternative sources for boards may not continue to be available at favorable
prices. The Company also relies on a limited number of suppliers for its board
components and it does not have any long term supply agreements. Thus, if there
is a shortage of supply for these components, the Company may experience an
interruption in its product supply.
The Company's success is dependent on recruiting and retaining key
management and highly skilled technical, managerial, sales, and marketing
Page 15 of 23 Total Pages
personnel. The competition for highly skilled personnel remains very competitive
despite the current economic conditions. The Company's ability to attract and
retain employees also may be affected by recent cost control actions, including
reductions in the Company's workforce and the associated reorganization of
operations.
The occurrence or perception of security breaches within the Company
could harm the Company's business, financial condition and operating results.
While the Company implements sophisticated security measures, third parties may
attempt to breach the Company's security through computer viruses, electronic
break-ins and other disruptions. If successful, confidential information,
including passwords, financial information, or other personal information may be
improperly obtained and the Company may be subject to lawsuits and other
liability. Even if the Company is not held liable, a security breach could harm
the Company's reputation, and even the perception of security risks, whether or
not valid, could inhibit market acceptance of the Company's products.
While the Company generally requires employees, independent
contractors and consultants to execute non-competition and confidentiality
agreements, the Company's intellectual property or proprietary rights could be
infringed or misappropriated, which could result in expensive and protracted
litigation. The Company relies on a combination of patent, copyright, trade
secret and trademark law to protect its technology. Despite the Company's
efforts to protect its intellectual property and proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use its
products or technology. Effectively policing the unauthorized use of the
Company's products is time-consuming and costly, and there can be no assurance
that the steps taken by the Company will prevent misappropriation of its
technology, particularly in foreign countries where in many instances the local
laws or legal systems do not offer the same level of protection as in the United
States.
If others claim that the Company's products infringe their
intellectual property rights, the Company may be forced to seek expensive
licenses, reengineer its products, engage in expensive and time-consuming
litigation or stop marketing its products. The Company attempts to avoid
infringing known proprietary rights of third parties in its product development
efforts. The Company does not regularly conduct comprehensive patent searches to
determine whether the technology used in its products infringes patents held by
third parties, however. There are many issued patents as well as patent
applications in the fields in which the Company is engaged. Because patent
applications in the United States are not publicly disclosed until the patent is
issued, applications may have been filed which relate to the Company's software
and products. If the Company were to discover that its products violated or
potentially violated third-party proprietary rights, it might not be able to
obtain licenses to continue offering those products without substantial
reengineering. Any reengineering effort may not be successful, nor can the
Company be certain that any licenses would be available on commercially
reasonable terms.
Substantial litigation regarding intellectual property rights exists
in the telecommunications industry, and the Company expects that its products
may be increasingly subject to third-party infringement claims as the number of
competitors in its industry segments grows and the functionality of software
products in different industry segments overlaps. In addition, the Company has
agreed to indemnify customers in certain situations should it be determined that
its products infringe on the proprietary rights of third parties. Any
third-party infringement claims could be time consuming to defend, result in
costly litigation, divert management's attention and resources, cause product
and service delays or require us to enter into royalty or licensing agreements.
Page 16 of 23 Total Pages
Any royalty or licensing arrangements, if required, may not be available on
terms acceptable to the Company, if at all. A successful claim of infringement
against the Company and its failure or inability to license the infringed or
similar technology could have a material adverse effect on its business,
financial condition and results of operations.
The Company holds a large proportion of its net assets in cash
equivalents and short-term investments. Such investments subject the Company to
the risks inherent in the capital markets generally, and to the performance of
other businesses over which it has no direct control. Given the relatively high
proportion of the Company's liquid assets relative to its overall size, the
results of its operations are materially affected by the results of the
Company's capital management and investment activities and the risks associated
with those activities. In addition, reduction in prevailing interest rates due
to economic conditions or government policies has had and may continue to have
an adverse impact on the Company's results of operations.
The Company benefited from the rise in the public trading price of
its shares in various ways, including its ability to use equity incentive
arrangements as a means of attracting and retaining the highly qualified
employees necessary for its business and its ability to raise capital on
relatively attractive conditions. The decline in the price of the Company's
shares, and the overall decline in equity prices generally, and in the shares of
technology companies in particular, can be expected to make it more difficult
for the Company to rely on equity incentive arrangements as a means to recruit
and retain talented employees. The trading price of the Company's shares has
been affected by the factors disclosed herein as well as prevailing economic and
financial trends and conditions in the public securities markets. Share prices
of companies in technology-related industries, such as the Company, tend to
exhibit a high degree of volatility. The announcement of financial results that
fall short of the results anticipated by the public markets could have an
immediate and significant negative effect on the trading price of the Company's
shares in any given period. Such shortfalls may result from events that are
beyond the Company's immediate control, can be unpredictable and, since a
significant proportion of the Company's sales during each fiscal quarter tend to
occur in the latter stages of the quarter, may not be discernible until the end
of a financial reporting period. These factors may contribute to the volatility
of the trading value of its shares regardless of the Company's long-term
prospects. The trading price of the Company's shares may also be affected by
developments, including reported financial results and fluctuations in trading
prices of the shares of other publicly-held companies in the telecommunications
industry in general, and the Company's business segment in particular, which may
not have any direct relationship with the Company's business or prospects.
Page 17 of 23 Total Pages
FORWARD-LOOKING STATEMENTS
From time to time, the Company makes forward-looking statements.
Forward-looking statements include financial projections, statements of plans
and objectives for future operations, statements of future economic performance,
and statements of assumptions relating thereto.
The Company may include forward-looking statements in its periodic
reports to the Securities and Exchange Commission on Forms 10-K, 10-Q, and 8-K,
in its annual report to shareholders, in its proxy statements, in its press
releases, in other written materials, and in statements made by employees to
analysts, investors, representatives of the media, and others.
By their very nature, forward-looking statements are subject to
uncertainties, both general and specific, and risks exist that predictions,
forecasts, projections and other forward-looking statements will not be
achieved. Actual results may differ materially due to a variety of factors
including, without limitation, those discussed under "Certain Trends and
Uncertainties" and elsewhere in this report. Investors and others should
carefully consider these factors and other uncertainties and events, whether or
not the statements are described as forward-looking.
Forward-looking statements made by the Company are intended to apply
only at the time they are made, unless explicitly stated to the contrary.
Moreover, whether or not stated in connection with a forward-looking statement,
the Company undertakes no obligation to correct or update a forward-looking
statement should the Company later become aware that it is not likely to be
achieved. If the Company were in any particular instance to update or correct a
forward-looking statement, investors and others should not conclude that the
Company will make additional updates or corrections thereafter with respect to
that or any other forward-looking statement.
Page 18 of 23 Total Pages
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.
Refer to Item 7A in the Company's Annual Report on Form 10-K for a
discussion about the Company's exposure to market risks.
ITEM 4. Controls and Procedures.
(a) The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the Company's
filings under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the periods specified in the rules and forms of
the Securities and Exchange Commission. Such information is accumulated and
communicated to the Company's management, including its principal executive
officer and principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure. The Company's management, including the
principal executive officer and the principal financial officer, recognizes that
any set of controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving the desired control
objectives.
Within 90 days prior to the filing date of this quarterly report on
Form 10-Q, the Company has carried out an evaluation, under the supervision and
with the participation of the Company's management, including the Company's
principal executive officer and the Company's principal financial officer, of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures. Based on such evaluation, the Company's principal
executive officer and principal financial officer concluded that the Company's
disclosure controls and procedures are effective.
(b) There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date of their evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Page 19 of 23 Total Pages
PART II
Other Information
-----------------
ITEM 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibit Index.
--------------
None
(b) Reports on Form 8-K.
--------------------
Certification of the Chief Executive Officer and the Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, filed on September 12, 2002.
Page 20 of 23 Total Pages
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.
ULTICOM, INC.
Dated: December 13, 2002 /s/ Shawn Osborne
----------------------------------------
Shawn Osborne
President and Chief Executive Officer
Dated: December 13, 2002 /s/ Mark A. Kissman
----------------------------------------
Mark A. Kissman
Vice President of Finance and
Chief Financial Officer
Page 21 of 23 Total Pages
CERTIFICATIONS
--------------
I, Shawn Osborne, the Chief Executive Officer of Ulticom, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ulticom,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: December 13, 2002 /s/ Shawn Osborne
---------------------------------
Name: Shawn Osborne
Title: Chief Executive Officer
Page 22 of 23 Total Pages
I, Mark Kissman, the Chief Financial Officer of Ulticom, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ulticom,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: December 13, 2002 /s/ Mark Kissman
----------------------------------
Name: Mark Kissman
Title: Chief Financial Officer
Page 23 of 23 Total Pages