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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended January 31, 2003
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)
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Not applicable Not applicable
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE PER SHARE
(Title of Class)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act).
[X] Yes [ ] No
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the closing price as of the last
business day of the registrant's most recently completed second fiscal quarter,
July 31, 2002 was approximately $76,000,000.
There were 41,623,316 shares of the registrant's common stock
outstanding on April 25, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant hereby incorporates by reference in this report the
information required by Part III appearing in the registrant's proxy statement
or information statement distributed in connection with the 2003 Annual Meeting
of Shareholders of the registrant or in an amendment to this report on Form
10K/A.
-------------------------
Signalware(R) and Ulticom(R) are registered trademarks and Ulticom's
logos are trademarks of the Company. All other trademarks are the property of
their respective owners.
- ii -
PART I
ITEM 1. BUSINESS.
THE COMPANY
Ulticom, Inc. ("Ulticom" and together with its subsidiary, the
"Company") is a provider of service enabling signaling software for wireline,
wireless and Internet communications. The Company's Signalware family of
products interconnect the complex switching, database and messaging systems, and
manage vital number, routing and billing information that form the backbone of
today's telecommunications networks. The Company's products are used by
equipment manufacturers, application developers and communication service
providers to deploy revenue generating infrastructure, enhanced, and mandated
services such as mobility, messaging, payment and location-based services.
Signalware products also are embedded in a range of packet softswitching
products to interoperate or converge voice and data networks and facilitate
services such as Internet offload and voice over IP ("VoIP").
The Company was incorporated in New Jersey on December 18, 1974 as
"Dale, Gesek, McWilliams & Sheridan, Inc.," and was formerly known as "DGM&S
Telecom, Inc." In May 1999, the Company changed its name to "Ulticom, Inc." The
Company completed an initial public offering of its common stock in April 2000
and its common stock is listed on the NASDAQ National Market System under the
symbol "ULCM". The Company is a subsidiary of Comverse Technology, Inc. ("CTI"),
which holds approximately 72% of its outstanding common stock. The Company's
principal executive offices are located at 1020 Briggs Road, Mount Laurel, New
Jersey 08054, and its telephone number is (856) 787-2700.
The Company's Internet address is www.ulticom.com. The information
contained on the Company's website is not included as a part of, or incorporated
by reference into, this Annual Report on Form 10-K. The Company makes available,
free of charge, on its Internet website, its annual report on Form 10-K, its
quarterly reports on Form 10-Q, its current reports on Form 8-K and amendments
to such reports filed or furnished pursuant to Section 13(a) or 15 (d) of the
Securities Exchange Act of 1934 as soon as reasonably practicable after the
Company has electronically filed such material with, or furnished it to, the
United States Securities and Exchange Commission.
THE COMPANY'S PRODUCTS
BACKGROUND
Traditionally, voice networks were based on a technology called "circuit
switching." In circuit switched networks, a dedicated line or circuit is
established for each telephone call and maintained for the duration of the call.
At the conclusion of a circuit switched call, the dedicated line or circuit is
disconnected.
1
Separating the voice and signaling portions of a call improves network
utilization, reduces call setup times and provides transaction capabilities for
enhanced services. The signaling infrastructure processes in real time the
information needed to set up, connect, route, terminate and bill a call, while
also providing a foundation to develop and offer value-added services. The
signaling portion of a switching network that controls each call is based on a
globally accepted set of standards and protocols called signaling system #7
("SS7"). SS7 provides the speed and reliability required for processing complex
call control information.
While SS7 was initially created to support signaling in a wireline or
fixed network, it also has become an essential element for connecting calls and
delivering services in wireless networks. In addition to providing the signaling
link between wireline and wireless networks, SS7 efficiently allows wireless
service providers to register and authenticate subscribers as they move between
mobile cell areas. SS7 signaling also is used as the foundation for enhanced
database services such as prepaid calling and voice and text messaging. SS7 is
designed to be robust, flexible and scalable, enabling service providers to
offer new services quickly and reliably.
While circuit switching has offered dependable, high quality voice
communication, a newer technology called "packet switching" is inherently more
efficient and cost effective than circuit switching. In packet switched
networks, the voice or data transmission is formatted into a series of shorter
digital messages called "packets." These packets of voice or data information
travel over a shared line or circuit. The cost and performance superiority of
packet switching has led certain incumbent and new service providers to build
packet networks to handle voice and data traffic.
Because SS7 is the globally accepted signaling standard protocol, it has
become the critical element needed to connect and interoperate packet networks
with the existing circuit network infrastructure. Wireline, wireless and
Internet service providers worldwide have implemented SS7 as an important
component to converge voice and data communications through signaling gateways
that interwork SS7 signaling and packet switching protocols.
SIGNALWARE
Ulticom's Signalware provides the SS7 connectivity required to offer
value-added services. Signalware products work within wireline, wireless and
Internet networks to interconnect and interoperate voice and data communication
systems. In addition, Signalware plays a key role in the convergence of
disparate networks by providing a means to bridge circuit and packet technology.
Signalware offers many of the features that are crucial to the connectivity of
communication networks and the rapid delivery of revenue generating services,
including:
o open systems - running applications on multiple software and hardware
platforms;
o service reliability - building systems with no single point of
failure;
o high performance - processing calls at very high rates;
2
o standards conformance - complying to industry-accepted standards
including IETF, ANSI and ITU;
o scalability - increasing computing and link capacity to match varying
application requirements; and
o global interoperability - creating applications that can run on
various communications networks around the world.
Signalware supports a range of applications in wireline, wireless and
Internet networks. In circuit networks, Signalware has been deployed as part of
wireline services such as voice messaging, 800 number service and caller ID.
Signalware enables wireless services that include infrastructure applications
such as global roaming, as well as enhanced services such as voice and text
messaging and prepaid calling. Signalware enables deployment of high capacity
wireless data services made possible by the evolution from second generation
("2G") to third generation ("3G") infrastructures, including an intermediate
generation called "2.5G". Signalware is used to deploy mandated, location based
wireless services, such as emergency-911. Signalware also is used to enable
solutions that ease congestion on existing networks by routing Internet dial-up
traffic to packet infrastructure, and deliver VoIP services for local and long
distance carriers.
Signalware works with multiple SS7 networks, supports a wide variety of
SS7 protocol elements, and enables analog or digital wireline and wireless
transmissions. It provides the functionality needed for call set-up/termination
and call routing/billing. Signalware products also include features that enable
the transition from SS7 signaling to emerging packet signaling standards, such
as SIGTRAN. New features include a SIGTRAN Gateway for circuit-packet network
interoperability, and protocols to transport SS7 traffic over IP networks.
Signalware packages run on a range of hardware platforms and operating systems,
including Sun Solaris, IBM AIX and Red Hat Linux. These packages can be used in
single or multiple computing configurations for fault resiliency and
reliability.
Signalware includes interface boards to provide the physical
connection to a signaling network. Signalware boards are configured to support a
wide range of hardware platforms and network links. The bundling of Signalware
interface boards and software allows the Company to control product performance,
capacity and compliance with standards.
New customers begin development of applications and services by
purchasing the appropriate Signalware development kit and a development license.
A typical development kit includes software, an interface board, cables, first
year maintenance, training, and documentation. The annual development
maintenance plan provides access to customer support services, service packs,
and scheduled release upgrades of the software. After the initial year, the
maintenance plan must be renewed for a fee in order to continue to receive
support and upgrades.
When the application is ready for deployment in a communication service
provider's network, the customer purchases one or more interface boards per
server to stage the application for deployment. After the application is in
3
operation, the customer reports deployment licenses per installation, while
continuing the development site license and maintenance. In addition, a customer
typically will purchase an annual deployment maintenance and support plan for
each installation for the life of the application.
PRODUCT SERVICES
The Company believes that customer support, training and professional
services are integral to building and maintaining strong customer relationships.
Customer support is offered as part of the maintenance agreements.
Customer Support. The Company provides comprehensive technical
support to help customers develop and deploy new services using Signalware.
Customer support representatives at the help desk interface with customers'
technical staff, answering questions, resolving problems and providing
assistance. Services are available 24 hours a day, 7 days a week. Customer
support is managed through corporate headquarters in Mount Laurel, New Jersey
with remote service locations to provide extended geographic and time zone
coverage.
Training Services. The Company offers customers a comprehensive
training program including courses such as application development, and
operations and support. Courses are scheduled throughout the year. Customized
and/or on-site training programs also are provided for an additional fee to meet
the specific needs of customers.
Professional Services. The Company offers fee-based consulting and
development services to create customer-specific enhancements to its products
and assist with deployment of its products in service provider networks. An
experienced engineering staff provides such services. This service assists
customers by accelerating their time-to-market, and also hastens the point in
the development cycle when the Company begins to receive recurring deployment
license and board revenues.
MARKETS, SALES AND MARKETING
The Company's sales organization operates from the U.S., Europe and
Asia. Account teams comprised of account managers and sales engineers work
closely with product management and development organizations to provide
customers with a consultative sales approach. The consultative approach
facilitates the sale of development kits to enable customers to immediately
begin to build prototypes of their products.
The Company actively works to further enhance market awareness and
acceptance of the Company and its products. The Company identifies market
opportunities in cooperation with customers and develops and enhances products
to seize those opportunities in a timely fashion. Based on market
considerations, the Company may port software products to additional operating
systems, develop new features and functionality, and engage in new strategic
alliances and partnerships.
4
The Company's market strategy includes enhancing brand awareness for
its products through its web site, promotional literature, direct marketing to
current and prospective customers, advertising, continued participation in
industry relevant trade shows and conferences, and a public relations program
that includes public demonstrations of products and prototypes. Representatives
of the Company also are called upon to address industry symposia and
conferences, are quoted in industry publications and may from time to time
author articles about developments in communications technology.
Products are sold primarily to network equipment manufacturers and
application developers, who include the Company's products within their products
and sell them as an integrated solution to service providers. Service providers
will install the solution in their communication networks and offer the service
enabled by such solution to their subscribers. Since the Company and its
customers have a mutual interest in developing solutions that are widely
accepted by subscribers and profitable to service providers, the Company works
closely with customers to support their development efforts and produce
solutions that are unique, reliable, scalable and cost effective.
The Company engages in joint promotion, sales efforts, training,
testing, design, integration and installation with Sun Microsystems and other
information systems providers who use Sun Microsystems' components. The Company
also engages in joint-marketing activities with IBM.
The Company's products are currently used by over 55 customers and
are deployed by more than 260 service providers in more than 100 countries. The
Company markets its products and services primarily through a direct sales
organization and through distributors. The Company has entered into distribution
agreements with Beijing Futong Computerland Co., Ltd., Beijing Teamsun
Technology Co., and Macnica, Inc. that have resulted in deployments of the
Company's products in wireless and Internet services in China and Japan.
Customers include: network equipment manufacturers, such as Alcatel, Ericsson
and Siemens; application developers, such as Comverse, Inc. ("Comverse"),
LogicaCMG and Sonus; and service providers, such as MCI WorldCom and Telefonica.
The Company currently derives a significant portion of its total
sales from customers outside of the United States. Financial information
regarding the Company's operations in these areas is presented in Note 12 of the
Financial Statements included in Item 15 of this report on Form 10-K.
International transactions involve particular risks, including political
decisions affecting tariffs and trade conditions, rapid and unforeseen changes
in economic conditions in individual countries, turbulence in foreign currency
and credit markets, and increased costs resulting from lack of proximity to the
customer.
For fiscal year 2000, which ended January 31, 2001, Ericsson,
Comverse and its affiliates and Siemens accounted for 18%, 16% and 10%,
respectively, of the Company's revenues. For fiscal year 2001, which ended
January 31, 2002, Ericsson, Comverse, Sonus and Siemens accounted for 18%, 16%,
11% and 11%, respectively, of the Company's revenues. For fiscal year 2002,
which ended January 31, 2003, Siemens, Ericsson and Comverse accounted for 23%,
19% and 11%, respectively, of the Company's revenues.
5
The Company actively participates in industry activities to define
the technology to facilitate the convergence of telecommunication networks with
the Internet. As a member of the Internet Engineering Task Force, Ulticom has
worked to develop a set of signaling transport standards called SIGTRAN to
enable communication service providers to cost effectively and more easily
implement services that span existing circuit switched networks and packet
networks using IP. The Company also participates in the standards activities of
the Third Generation Partnership Project ("3GPP"), which works with various
standards bodies to produce globally acceptable technical specifications for the
evolution to a packet-based 3G wireless infrastructure.
RESEARCH AND DEVELOPMENT
The Company continues to enhance the features and performance of
existing products and introduce new products. The Company believes that its
future success depends on a number of factors, which includes the Company's
ability to:
o identify and respond to emerging technological trends in its target
markets;
o develop and maintain competitive solutions that meet customers'
changing needs; and
o enhance existing products by adding features and functionality that
differentiate the Company's products from those of its competitors.
As a result, the Company has made and intends to continue to make
investments in research and development. Research and development resources are
allocated in response to market research and customer demands for additional
features and products. The development strategy involves rolling out initial
releases of products and adding features over time. The Company continuously
incorporates feedback it receives from customers into the product development
process. While it is expected that new products will continue to be developed
internally, the Company may, based on timing and cost considerations, acquire or
license technologies, products or applications from third parties.
The Company's research and development expenses were approximately
$10.3 million, $14.2 million and $10.1 million for the years ended January 31,
2001, 2002 and 2003, respectively. Research and development activities are
located in the U.S. and France. As of January 31, 2003, there were 105 employees
engaged in research and development activities. The Company believes that
recruiting and retaining highly skilled engineering personnel is essential to
its success.
INTELLECTUAL PROPERTY RIGHTS
The Company has accumulated a significant amount of proprietary
know-how and expertise over the years in developing network signaling software
and SS7 protocol technology for communication services. Its continued success is
dependent, in part, upon its ability to protect proprietary rights to the
6
technologies used in its products. If the Company is not adequately protected,
competitors could use the intellectual property that it has developed to enhance
competing products and services, which could harm the Company's business. To
safeguard its proprietary technology, the Company relies on a combination of
technical innovation, trade secret, copyright, patent and trademark laws,
restricted licensing arrangements and non-disclosure agreements, each of which
affords only limited protection. The Company conducts periodic reviews of new
areas of technology with its patent attorneys as part of its patent program.
The Company licenses software from third parties that is incorporated
into some versions of Signalware.
Due to the value of intellectual property rights, the Company
generally does not make its proprietary software source code available to
customers. Exceptions to this principle were made in the past, in limited
circumstances, for large customers where adequate control mechanisms were in
place to protect the Company's intellectual property rights.
The Company has granted Comverse a perpetual, royalty-free,
non-exclusive license to use and operate software products for incorporation
into any of Comverse's products.
In January 2000, an affiliate, Comverse Patent Holding, Inc. ("CPH")
and Lucent Technologies GRL Corp. ("Lucent") entered into a non-exclusive
cross-licensing arrangement covering current and certain future patents issued
to CPH and its affiliates, including the Company, and a portfolio of current and
certain future patents in the area of telecommunications technology issued to
Lucent and its affiliates. The Company is entitled to utilize the licensed
patent rights, and is obligated to provide licenses under any patents it may
hold, pursuant to a royalty-free license agreement with CPH.
COMPETITION
The market for network signaling software is intensely competitive,
both in the U.S. and internationally. The Company expects competition to
persist, intensify and increase in the future, especially with the convergence
of voice and data networks.
The Company's primary competition comes from in-house development
organizations within its customers who seek, in a build-versus-buy decision, to
develop substitutes for the Company's products. The Company also competes with a
number of U.S. and international suppliers that vary in size and in the scope
and breadth of the products and services offered.
Competitors include a number of companies ranging from SS7 software
solution providers, such as Hughes Software Systems and SS8 Networks, to vendors
of communication and network infrastructure equipment, such as Continuous
Computing (formerly Trillium Digital Systems) and Hewlett-Packard Company. The
Company believes it competes principally on the basis of:
7
o product performance and functionality;
o product quality and reliability;
o customer service and support; and
o price.
The Company believes its success will depend primarily on its ability
to provide technologically advanced and cost effective signaling solutions.
Furthermore, it is likely that as competition intensifies, the Company may have
to reduce the prices of its products.
MANUFACTURING
The Company's Signalware products typically have two components:
software and interface boards. Software is duplicated in house and provided to
customers via several media, primarily CD-ROM. Each software shipment is
configured to provide the specific operating system version and features
requested by the customer. Each order is tracked by purchase order number and
documented according to internal quality standards.
During 2002, the Company was certified in compliance with TL 9000, a
set of common quality system requirements and measurements designed specifically
for the telecommunications industry for the design, development, production,
delivery, installation and maintenance of products and services. TL 9000
encompasses International Standard Organization ("ISO") 9001:2000 and best
practices.
Subcontractors, who are ISO certified, perform assembly of the
Company's printed circuit interface boards. Periodic audits of our
subcontractors are performed to ensure adherence to quality standards.
Subcontractors are responsible for purchasing, inspecting, installing and
assembling components of interface boards. Completed assemblies are burned-in,
inspected, tested and packaged in the Company's facility according to TL 9000
and other industry standards. All inspection, test, repair, revision and
shipping information is tracked by product type and serial number and maintained
in the Company's tracking database.
The Company works closely with interface board component suppliers to
monitor component changes and availability. However, there are no long-term
supply agreements with these suppliers to ensure uninterrupted supply of
components. Under certain circumstances, the Company may place blanket orders to
ensure availability of discontinued components. In the event of a reduction or
an interruption in the supply of components, a significant amount of time could
be required to qualify alternate suppliers and to receive an adequate supply of
replacement components.
The Company does not have any long-term agreements with any of its
manufacturers, some of whom are small, privately held companies. In the event
that these manufacturers experience financial, operational or quality assurance
difficulties, the Company's business could be adversely affected unless and
until an alternate manufacturer could be found. There is no assurance that an
8
alternate manufacturer will be able to meet the Company's requirements or that
existing or alternate sources for interface boards will continue to be available
at favorable prices.
EMPLOYEES
As of January 31, 2003, the Company had approximately 245 employees.
Our employees are not covered by any collective bargaining agreement and the
Company considers its relationship with its employees to be good. The Company's
French employees are subject to French labor laws that contain requirements
regarding termination, severance payments, and other obligations that are
significantly greater than those in the US.
ITEM 2. PROPERTIES.
The Company's headquarters and development facilities are located in
Mount Laurel, New Jersey where it leases approximately 54,000 square feet of
office space. The Company also leases approximately 13,000 square feet of office
space in Dallas, Texas, and sales offices in Chicago, Illinois, and Boston,
Massachusetts. The Company's subsidiary leases approximately 7,000 square feet
of office space in Sophia-Antipolis, France and a sales office in Singapore.
The Company believes that its facilities currently under lease are
more than adequate for current operations, and may endeavor to selectively
reduce its existing facilities commitments.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the security holders during
the fourth quarter of the last fiscal year.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The Company's common stock trades on the NASDAQ National Market System
under the symbol "ULCM". The following table sets forth the range of closing
prices of the Company's common stock as reported on NASDAQ for the period from
February 1, 2001 through January 31, 2003.
FISCAL YEAR FISCAL QUARTER LOW HIGH
- ----------- -------------- --- ----
2002 02/1/02 - 04/30/02 $ 5.65 $ 8.55
05/1/02 - 07/31/02 $ 5.69 $ 6.98
08/1/02 - 10/31/02 $ 4.90 $ 6.85
11/1/02 - 01/31/03 $ 5.70 $ 7.79
2001 02/1/01 - 04/30/01 $ 15.06 $ 44.56
05/1/01 - 07/31/01 $ 16.28 $ 34.81
08/1/01 - 10/31/01 $ 7.52 $ 20.86
11/1/01 - 01/31/02 $ 8.44 $ 11.80
There were 35 holders of record of the Company's common stock on
April 25, 2003. Such record holders include a number who are nominees for an
undetermined number of beneficial owners. The Company believes that the number
of beneficial owners of the shares of common stock outstanding at such date was
approximately 3,200.
The Company does not expect to pay any cash dividends on its equity
securities in the near future, but rather intends to retain its earnings to
finance the development and growth of its business. Any future determination as
to the declaration and payment of dividends will be made by the Board of
Directors in its discretion, and will depend upon the Company's earnings,
financial condition, capital requirements and other relevant factors. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
10
ITEM 6. SELECTED FINANCIAL DATA.
The following tables present selected consolidated financial data for
the Company for each of the years in the five years ended January 31, 2003. Such
information has been derived from the Company's audited consolidated financial
statements and should be read in conjunction with the Company's consolidated
financial statements and the notes to the consolidated financial statements
included elsewhere in this report.
YEAR ENDED JANUARY 31,
----------------------------------------------------------------------------
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Sales $ 18,629 $ 25,831 $ 47,441 $ 58,156 $ 29,231
Cost of sales 6,131 8,883 15,489 19,536 11,233
--------- --------- --------- --------- ----------
Gross profit 12,498 16,948 31,952 38,620 17,998
Research and development 4,706 6,015 10,325 14,236 10,098
Selling, general and administrative 4,948 8,124 13,271 15,861 13,972
Workforce reduction and restructuring charge - - - - 2,290
--------- --------- --------- --------- ----------
Income (loss) from operations 2,844 2,809 8,356 8,523 (8,362)
Interest income (expense), net (350) (271) 6,282 8,761 5,536
--------- --------- --------- --------- ----------
Income (loss) before income taxes provision (benefit) 2,494 2,538 14,638 17,284 (2,826)
Income tax provision (benefit) 927 964 5,561 6,447 (1,091)
--------- --------- --------- --------- ----------
Net income (loss) $ 1,567 $ 1,574 $ 9,077 $ 10,837 $ (1,735)
========= ========= ========= ========= ==========
Earnings (loss) per share--diluted $ 0.05 $ 0.05 $ 0.22 $ 0.25 $ (0.04)
Weighted average number of common and common
equivalent shares outstanding - diluted 33,087 33,759 40,715 43,246 41,399
JANUARY 31,
----------------------------------------------------------------------------
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital (deficit) $ (2,236) $ 742 $ 195,369 $ 212,946 $ 215,945
Total assets 8,883 17,364 232,187 240,675 237,102
Long-term debt - 3,800 - - -
Shareholders' equity (deficit) (454) 1,120 207,049 224,024 223,152
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
INTRODUCTION
Ulticom designs, develops, markets, licenses and supports service
enabling signaling software for wireline, wireless and Internet communications.
These products are sold through a direct sales force to network equipment
manufacturers, application developers and service providers who include the
Company's products within their products. Signalware sales consist of software
licenses, interface boards, training and support revenues. In certain limited
circumstances, the Company sells Signalware development services under fixed-fee
arrangements with its customers. New customers begin development of applications
and services by purchasing the appropriate Signalware development kit, which
includes a development license, an interface board, and a one-year maintenance
plan. At deployment, the customer generally purchases one or more deployment
licenses, additional interface boards and a deployment maintenance and support
plan.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those that are both most important to
the portrayal of a company's financial position and results of operations, and
require management's most difficult, subjective or complex judgments. Although
not all of the Company's critical accounting policies require management to make
difficult, subjective or complex judgments or estimates, the following policies
and estimates are those that the Company deems most critical.
In accordance with Statement of Position 97-2, "Software Revenue
Recognition," and related Interpretations, product revenues are generally
recognized in the period in which the products are delivered and accepted by the
customer, the fee is fixed and determinable, and collection is considered
probable. When the Company has significant obligations subsequent to shipment,
revenues are not recognized until the obligations are fulfilled. Revenues from
arrangements that include significant acceptance terms are not recognized until
acceptance has occurred. The Company provides its customers with post-contract
support services, which generally consist of bug-fixing and telephone access to
the Company's technical personnel, but may also include the right to receive
product updates, upgrades and enhancements. Revenue from these services is
recognized ratably over the contract period. Post-contract support services
included in the initial licensing fee are allocated from the total contract
amount based on the relative fair value of vendor specific objective evidence
("VSOE"). For multi-element arrangements, VSOE of fair value is determined based
on the price charged when the same element is sold separately or, for elements
not yet being sold separately, the price established by management having the
relevant authority. If VSOE of fair value does not exist for one or more
delivered elements of a multi-element arrangement and VSOE of fair value exists
for all undelivered elements, then revenue is recognized using the "residual
method."
12
Deferred revenue consists primarily of amounts billed to customers
pursuant to terms specified in contracts but for which revenue has not been
recognized.
Cost of sales include material costs, salary and related benefits for
the operations and service departments, depreciation and amortization of
equipment used in the operations and service departments, amortization of
capitalized software development costs and an overhead allocation. Research and
development costs include salary and related benefits as well as travel,
depreciation and amortization of research and development equipment, an overhead
allocation, as well as other costs associated with research and development
activities. Selling, general and administrative costs include salary and related
benefits, travel, depreciation and amortization, marketing and promotional
materials, recruiting expenses, professional fees, corporate services provided
by CTI, facility costs, as well as other costs associated with sales, marketing,
finance and administrative departments.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
RELATED PARTY TRANSACTIONS
The Company sells products and provides services to other
subsidiaries of CTI. Sales to related parties were approximately $7.6 million,
$9.0 million and $3.4 million for the years ended January 31, 2001, 2002 and
2003, respectively.
As of January 31, 2002 and 2003, amounts due from subsidiaries of CTI
were approximately $1.8 million and $0.5 million, respectively.
The Company has a corporate services agreement with CTI. Under this
agreement, CTI provides the Company with the following services:
o maintaining in effect general liability and other insurance policies
providing coverage for the Company;
o maintaining in effect a policy of directors' and officers' insurance
covering the Company's directors and officers;
o administration of employee benefit plans;
o routine legal services; and
o consulting services with respect to the Company's public relations.
13
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. The Company was charged
$600,000 in each of the years ended January 31, 2001, 2002 and 2003 for services
provided by CTI. In addition, the Company has agreed to reimburse CTI for any
out-of-pocket expenses incurred, if any, 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. The
agreement was automatically extended until January 31, 2004.
In January 2000, the Company secured a bank loan in the amount of
$3.8 million in order to repay debt owed to CTI. A portion of the proceeds from
the Company's initial public offering was used to repay the bank loan in July
2000.
14
RESULTS OF OPERATIONS
INTRODUCTION
As explained in greater detail in "Certain Trends and Uncertainties",
the Company is operating within an industry experiencing a deep capital spending
contraction and, consequently, has experienced year over year revenue declines
resulting in an operating loss for the year ended January 31, 2003.
YEAR ENDED JANUARY 31, 2003 COMPARED TO YEAR ENDED JANUARY 31, 2002
Sales. Sales for the fiscal year 2002 ended January 31, 2003,
decreased by approximately $28.9 million to approximately $29.2 million, or
approximately 50%, compared to the fiscal year 2001 ended January 31, 2002. The
decrease is primarily attributable to a lower volume of sales and deployments of
our Signalware products. Sales to international customers represented
approximately 71% of sales in fiscal year 2002 and approximately 62% of sales in
fiscal year 2001.
Cost of Sales. Cost of sales decreased by approximately $8.3 million
to approximately $11.2 million, or approximately 43%, in fiscal year 2002
compared to fiscal year 2001. The decrease is primarily attributable to lower
expenses of approximately $4.8 million in personnel-related costs, $2.6 million
in material and production costs, and $1.2 million in depreciation and
amortization expense for fiscal year 2002 when compared to fiscal year 2001.
Gross margins (expressed as a percentage of sales) decreased from approximately
66% in fiscal year 2001 to approximately 62% in fiscal year 2002.
Research and Development Expenses. Research and development expenses
decreased in fiscal year 2002 by approximately $4.1 million to approximately
$10.1 million, or approximately 29% in fiscal year 2002 compared to fiscal year
2001. The decrease is primarily attributable to a decrease in personnel-related
costs of approximately $3.9 million.
Selling, General & Administrative Expenses. Selling, general and
administrative expenses decreased by approximately $1.9 million to approximately
$14.0 million, or approximately 12%, in fiscal year 2002 compared to fiscal year
2001, and as a percentage of sales increased to approximately 48% in fiscal year
2002 from approximately 27% in fiscal year 2001. The decrease is primarily
attributable to decreases of approximately $0.9 million in depreciation and
amortization expense, $0.9 million in bad debt reserve, $0.9 million in
professional services, $0.7 million in general office expenses, and $0.3 million
in travel and entertainment costs. In addition, expenses increased by
approximately $1.7 million due to increased personnel-related and overhead
costs, primarily in sales and marketing.
Workforce Reduction and Restructuring Charge. During fiscal year 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, the elimination of excess
facilities and related leasehold improvements, and the write-off of certain
property and equipment.
15
Interest Income. Interest income decreased by approximately $3.2
million to approximately $5.5 million or approximately 37% in fiscal year 2002
as compared to fiscal year 2001. The decrease is primarily attributable to lower
interest earned on the Company's cash investments, as a result of the decline in
interest rates during fiscal year 2002.
Income Tax Provision (Benefit). Benefit for income taxes was
approximately $1.1 million, due to losses sustained on a pre-tax income basis.
The Company's overall effective tax rate was approximately 39% for fiscal year
2002 and 37% for fiscal year 2001.
Net Income (Loss). Net loss for fiscal year 2002 was approximately
$1.7 million compared to net income of approximately $10.8 million in fiscal
year 2001, while net income (loss) as a percentage of sales was approximately
(6%) in fiscal year 2002 and approximately 19% in fiscal year 2001. The changes
are primarily attributable to the factors described above.
YEAR ENDED JANUARY 31, 2002 COMPARED TO YEAR ENDED JANUARY 31, 2001
Sales. Sales for the fiscal year 2001 ended January 31, 2002,
increased by approximately $10.7 million to approximately $58.2 million, or
approximately 23%, compared to the fiscal year 2000 ended January 31, 2001. The
increase is attributable to a higher volume of sales and deployments of
Signalware products worldwide, especially to customers who provide wireless
communication services or who sell products enabling the convergence of voice
and data networks. Sales to international customers represented approximately
62% of sales in both fiscal year 2001 and fiscal year 2000.
Cost of Sales. Cost of sales increased by approximately $4.0 million
to approximately $19.5 million, or approximately 26%, in fiscal year 2001
compared to fiscal year 2000. The increase is primarily attributable to an
increase of approximately $4.8 million in personnel-related costs due to the
hiring of additional personnel, and an increase in depreciation and amortization
expense of approximately $0.8 million for fiscal year 2001 compared to fiscal
year 2000. This was partially offset by a decrease in material and production
costs of approximately $1.8 million due to volume discounts and cost containment
measures. Gross margins (expressed as a percentage of sales) decreased from
approximately 67% in fiscal year 2000 to approximately 66% in fiscal year 2001.
Research and Development Expenses. Research and development expenses
increased in fiscal year 2001 by approximately $3.9 million to approximately
$14.2 million, or approximately 38%, in fiscal year 2001 compared to fiscal year
2000 due to the overall growth of research and development operations and the
increase in new research and development projects. The increase is primarily
attributable to an increase in personnel-related costs of approximately $4.7
million due to the hiring of additional personnel and increased compensation and
benefits for existing personnel. This was partially offset by decreased material
costs related to research and development activities of approximately $0.7
million.
Selling, General & Administrative Expenses. Selling, general and
administrative expenses increased by approximately $2.6 million to approximately
$15.9 million, or approximately 20%, in fiscal year 2001 compared to fiscal year
16
2000, and as a percentage of sales decreased to approximately 27% in fiscal year
2001 from approximately 28% in fiscal year 2000. The increase in the dollar
amount of these expenses is primarily attributable to an increase in
personnel-related costs of approximately $1.8 million due to the hiring of
additional personnel and increased compensation and benefits for existing
personnel. In addition, administrative expenses increased by approximately $0.8
million due to the overall growth and expansion of operations.
Interest Income. Interest income, net increased by approximately $2.5
million to approximately $8.8 million or approximately 39% in fiscal year 2001
as compared to fiscal year 2000. The principal reason for this increase was
additional interest income earned from the investment of proceeds from the
Company's public offerings in the fiscal year 2000 period, which was outstanding
for a full year in fiscal year 2001 as compared to fiscal year 2000.
Income Tax Provision. Provision for income taxes increased by
approximately $0.9 million to approximately $6.4 million, or approximately 16%,
due to the increased pre-tax income. The Company's overall effective tax rate
was approximately 37% for fiscal year 2001 as compared to approximately 38% for
fiscal year 2000.
Net Income. Net income increased by approximately $1.8 million to
approximately $10.8 million or approximately 19%, in fiscal year 2001 compared
to fiscal year 2000, while net income as a percentage of sales was approximately
19% in both fiscal years 2000 and 2001. The changes resulted primarily from the
factors described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital at January 31, 2003 and 2002 of
approximately $215.9 million and $212.9 million, respectively. At January 31,
2003 and 2002, the Company had cash and cash equivalents and short-term
investments of approximately $218.7 million and $217.1 million, respectively.
Operations for fiscal year 2002, fiscal year 2001 and fiscal year
2000, after adjusting for non-cash items, provided cash of approximately $2.3
million, $14.6 million and $11.4 million, respectively. During such years, other
changes in operating assets and liabilities provided (used) cash of
approximately ($1.5) million, ($5.2) million and $9.6 million. This resulted in
net cash provided by operating activities of approximately $0.8 million, $9.4
million, $21.0 million during the fiscal years 2002, 2001 and 2000,
respectively.
Investing activities for fiscal years 2002, 2001 and 2000 used cash
of approximately $39.8 million, $55.1 million and $35.4 million, respectively.
These amounts include (i) purchases of property and equipment of approximately
$0.6 million, $3.8 million and $4.3 million, respectively; and (ii) net
maturities and sales (purchases) of investments, of approximately ($39.2)
million, ($51.3) million and ($31.1) million, respectively.
17
Financing activities for fiscal years 2002, 2001 and 2000 provided
cash of approximately $1.4 million, $2.7 million, and $191.4 million,
respectively. These amounts include (i) approximately $195.2 million of net
proceeds from the issuance of common stock in connection with the Company's
public offerings in fiscal year 2000; (ii) proceeds from the issuance of common
stock in connection with the exercise of stock options and employee stock
purchase plan in the amount of approximately $1.4 million, $2.7 million and $0.5
million in fiscal years 2002, 2001 and 2000, respectively, (iii) repayments to
related parties of approximately $0.6 million in fiscal year 2000, and (iv) the
repayment of bank debt of approximately $3.8 million in fiscal year 2000.
The Company leases office space under non-cancelable operating
leases. As of January 31, 2003, the minimum annual rent obligations of the
Company were approximately $1.0 million, $1.0 million, $0.9 million, $0.2
million and $0.1 million, respectively, for fiscal years 2003, 2004, 2005, 2006,
and 2007 and thereafter, for a total obligation of $3.2 million.
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
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 continues to face 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.
18
The Company's business is dependent on the strength of the
telecommunications industry. The telecommunications industry, including the
Company, has 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 networks 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.
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 recovery,
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 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
19
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,
which could have a material adverse effect on the Company.
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 new product offerings may not
properly integrate into existing platforms and the failure of new product
offerings to be accepted by the market could have a material adverse effect on
our business, results of operations, and financial condition.
The Company's current products are designed to support SS7. 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
20
products could adversely affect 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 protocols that
facilitate the convergence of voice and data networks. However, the Company also
has ceased, curtailed or delayed certain longer-term initiatives 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.
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.
Geopolitical, economic and military conditions could directly affect
the Company's operations. The recent outbreak of Severe Acute Respiratory
Syndrome ("SARS") has curtailed travel to and from certain countries (primarily
in the Asia-Pacific region). Continued or additional restrictions on travel to
and from these and other regions on account of SARS could have a material
adverse effect on the Company's business, results of operations, and financial
condition. The continued threat of terrorism and heightened security and
military action in response to this threat, or any future acts of terrorism, may
cause further disruptions to the Company's business. To the extent that such
disruptions result in delays or cancellations of customer orders, or the
manufacture or shipment of the Company's products, business, operating results
and financial condition could be materially and adversely affected.
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
21
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
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,
22
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. 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.
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
23
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.
CTI beneficially owns a majority of the Company's outstanding shares
of common stock. Consequently, CTI effectively controls the outcome of all
matters submitted for stockholder action, including the composition of the
Company's board of directors and the approval of significant corporate
transactions. Through its representation on the Company's board of directors,
CTI has a controlling influence on the Company's management, direction and
policies, including the ability to appoint and remove officers. As a result, CTI
may cause the Company to take actions that may not be aligned with the Company's
interests or those of its other stockholders. For example, CTI may prevent or
delay any transaction involving a change in control of the Company or in which
the Company's stockholders might receive a premium over the prevailing market
price for their shares.
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.
EFFECT OF NEW 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"). SFAS No. 142 addresses financial
accounting and reporting for acquired goodwill and other intangible assets.
24
Under SFAS No. 142, goodwill and some intangible assets will no longer be
amortized, but rather reviewed for impairment on a periodic basis. The Company
was required to apply the provisions of SFAS No. 142 at the beginning of the
Company's fiscal year. The adoption of SFAS No. 142 did not have a material
effect on the Company's consolidated financial statements.
In August 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"). 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 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"). 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, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." SFAS No. 144 was effective at the beginning of the Company's
fiscal year. The adoption of SFAS No. 144 did not have a material effect on the
Company's 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"). 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
consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities" ("SFAS No. 146"). 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
25
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. The adoption of
SFAS No. 146 did not have a material effect on the Company's consolidated
financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment of FASB
Statement No. 123" ("SFAS No. 148"). SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation and does not permit the use of the
original SFAS No. 123 prospective method of transition in fiscal years beginning
after December 15, 2003. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results,
regardless of whether, when, or how an entity adopts the preferable, fair value
based method of accounting. SFAS No. 148 improves the prominence and clarity of
the pro forma disclosures required by SFAS No. 123 by prescribing a specific
tabular format and by requiring disclosure in the "Summary of Significant
Accounting Policies" or its equivalent and improves the timeliness of those
disclosures by requiring their inclusion in financial reports for interim
periods. The Company will continue to account for stock-based compensation to
employees under APB Opinion No. 25 and related Interpretations. The Company
adopted the disclosure requirements of the standard for its January 31, 2003
reporting period. The adoption of the remaining provisions of SFAS No. 148 is
not expected to have a material effect on the Company's consolidated financial
statements.
In November 2002, the FASB issued interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees and Indebtedness of Others." The interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
The interpretation also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and measurement
provisions of the interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure
requirements in this interpretation are effective for financial statements of
interim or annual periods ending after December 15, 2002. The Company has made
no material guarantees subject to the liability recognition and disclosure
provisions of the interpretation.
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
26
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 would make additional updates or corrections thereafter with respect to
that or any other forward-looking statement.
27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risk from changes in interest rates.
Various financial instruments held by the Company are sensitive to changes in
interest rates. Interest rate changes would result in gains or losses in the
market value of the Company's investments in debt securities due to differences
between the market interest rates and rates at the date of purchase of these
financial instruments. Given the Company's recent operating losses, a 100 basis
point increase or decrease from current interest rates could have a material
effect on the Company's financial position, results of operations or cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial information required by Item 8 is in the "Financial
Statements" included in Item 14 of this report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
28
PART III
The information required by Part III (Items 10, 11, 12 and 13) is omitted
pursuant to instruction G (3).
ITEM 14. 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, as amended, 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 the 90-day period prior to the date of this report, the
Company 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.
29
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
Page(s)
(a) Documents filed as part of this report.
(1) Financial Statements.
Index to Consolidated Financial Statements F-1
Independent Auditors' Report F-2
Consolidated Balance Sheets as of January 31, 2002
and 2003 F-3
Consolidated Statements of Operations for the years
ended January 31, 2001, 2002 and 2003 F-4
Consolidated Statements of Shareholders' Equity for
the years ended January 31, 2001, 2002 and 2003 F-5
Consolidated Statements of Cash Flows for the
years ended January 31, 2001, 2002 and 2003 F-6
Notes to Consolidated Financial Statements F-7
(2) Financial Statement Schedules.
None
(3) Exhibits.
The Index of Exhibits commences on the
following page.
(b) Reports on Form 8-K
During the fourth quarter of 2002, the Company filed one
report on Form 8-K:
Report on Form 8-K dated December 13, 2002.
30
Item 9. Regulation FD Disclosure:
Certifications of the Principal Executive Officer and the
Principal Financial Officer, pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
INDEX TO EXHIBITS
NO. DESCRIPTION
- --- -----------
3 Articles of Incorporation and By-Laws:
3.1* Amended and Restated Certificate of Incorporation of Ulticom, Inc.
(Incorporated by reference from the Registrant's Registration
Statement on Form S-1 under the Securities Act of 1933, Registration
No. 333-94873)
3.2* Amended and Restated Bylaws of Ulticom, Inc. (Incorporated by
reference from the Registrant's Registration Statement on Form S-1
under the Securities Act of 1933, Registration No. 333-94873)
4 Instruments defining the rights of security holders including
indentures:
4.1* Specimen Common Stock certificate. (Incorporated by reference from
the Registrant's Registration Statement on Form S-1 under the
Securities Act of 1933, Registration No. 333-94873)
4.2* See Exhibit 3.1 for provisions defining the rights of holders of
common stock of the Registrant.
10 Material Contracts:
10.1* Services Agreement, dated as of February 1, 1998, between Comverse
Technology, Inc. and Ulticom, Inc. (Incorporated by reference from
the Registrant's Registration Statement on Form S-1 under the
Securities Act of 1933, Registration No. 333-94873)
10.2* Federal Income Tax Sharing Agreement, dated as of December 21, 1999,
between Comverse Technology, Inc. and Ulticom, Inc. (Incorporated by
reference from the Registrant's Registration Statement on Form S-1
under the Securities Act of 1933, Registration No. 333-94873)
10.3* Patent License Agreement, dated January 12, 2000, between Comverse
Patent Holding Company, Inc. and Ulticom, Inc. (Incorporated by
31
reference from the Registrant's Registration Statement on Form S-1
under the Securities Act of 1933, Registration No. 333-94873)
10.4* License Agreement, dated as of February 1, 2000, between Comverse
Technology, Inc. and Ulticom, Inc. (Incorporated by reference from
the Registrant's Registration Statement on Form S-1 under the
Securities Act of 1933, Registration No. 333-94873)
10.5* Registration Rights Agreement, dated as of January 1, 2000, between
Comverse Technology, Inc. and Ulticom, Inc. (Incorporated by
reference from the Registrant's Registration Statement on Form S-1
under the Securities Act of 1933, Registration No. 333-94873)
10.6* Business Opportunities Agreement, dated as of January 1, 1999,
between Comverse Technology, Inc. and Ulticom, Inc. (Incorporated by
reference from the Registrant's Registration Statement on Form S-1
under the Securities Act of 1933, Registration No. 333-94873)
10.7* Form of Indemnification Agreement. (Incorporated by reference from
the Registrant's Registration Statement on Form S-1 under the
Securities Act of 1933, Registration No. 333-94873)
10.8* 1998 Stock Incentive Compensation Plan (Incorporated by reference
from the Registrant's Registration Statement on Form S-1 under the
Securities Act of 1933, Registration No. 333-94873)
10.9* Employment Agreement, dated as of February 1, 2000 between Shawn
Osborne and Ulticom, Inc. (Incorporated by reference from the
Registrant's Registration Statement on Form S-1 under the Securities
Act of 1933, Registration No. 333-94873)
10.10* 2000 Employee Stock Purchase Plan (Incorporated by reference from the
Registrant's Registration Statement on Form S-8 under the Securities
Act of 1933, Registration No. 333-56522)
21.1** Subsidiaries of Ulticom, Inc.
23.1** Consent of Deloitte and Touche LLP, Independent Auditors
24.1** Powers of Attorney (see signature page to this report)
- --------------------------------------
* Incorporated by reference
** Filed with this report on Form 10-K
32
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) 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.
By: /s/ Shawn K. Osborne
------------------------------------------
Name: Shawn K. Osborne
Date: April 28, 2003
Title: President and Chief Executive Officer
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Shawn Osborne and Mark Kissman
and each of them, jointly and severally, his attorneys-in-fact, each with full
power of substitution, for him in any and all capacities, to sign any and all
amendments to this Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each said attorneys-in-fact
or his substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Kobi Alexander Chairman of the Board of Directors April 30, 2003
- ---------------------------- and Director
Kobi Alexander
/s/ Shawn K. Osborne President and Chief Executive Officer April 28, 2003
- ---------------------------- and Director
Shawn K. Osborne (Principal Executive Officer)
/s/ Mark A. Kissman Chief Financial Officer April 28, 2003
- ---------------------------- (Principal Financial Officer)
Mark A. Kissman
/s/ David Kreinberg Director April 28, 2003
- ----------------------------
David Kreinberg
/s/ William F. Sorin Director April 28, 2003
- ----------------------------
William F. Sorin
/s/ Paul D. Baker Director April 30, 2003
- ----------------------------
Paul D. Baker
33
/s/ Yaacov Koren Director April 30, 2003
- ----------------------------
Yaacov Koren
/s/ Ron Hiram Director April 30, 2003
- ----------------------------
Ron Hiram
/s/ Rex A. Mc Williams Director April 29, 2003
- ----------------------------
Rex A. McWilliams
/s/ Zvi Bar-on Director April 30, 2003
- ----------------------------
Zvi Bar-on
34
CERTIFICATIONS
--------------
I, Shawn K. Osborne, President and Chief Executive Officer of Ulticom, Inc.,
certify that:
1. I have reviewed this annual report on Form 10-K of Ulticom, Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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
functions):
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
annual report whether 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: April 30, 2003 /s/ Shawn K. Osborne
---------------------------------------------
Name: Shawn K. Osborne
Title: President and Chief Executive Officer
35
I, Mark A. Kissman, Chief Financial Officer of Ulticom, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Ulticom, Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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
functions):
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
annual report whether 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: April 30, 2003 /s/ Mark A. Kissman
-------------------------------
Name: Mark A. Kissman
Title: Chief Financial Officer
36
ULTICOM, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report...............................................F-2
Consolidated Balance Sheets as of January 31, 2002 and 2003................F-3
Consolidated Statements of Operations for the years ended
January 31, 2001, 2002 and 2003...................................F-4
Consolidated Statements of Shareholders' Equity for the
years ended January 31, 2001, 2002 and 2003.......................F-5
Consolidated Statements of Cash Flows for the years ended
January 31, 2001, 2002 and 2003...................................F-6
Notes to Consolidated Financial Statements.................................F-7
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Ulticom, Inc.
Mt. Laurel, New Jersey
We have audited the accompanying consolidated balance sheets of Ulticom, Inc.
and subsidiary (the "Company") as of January 31, 2002 and 2003, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended January 31, 2003. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of January 31, 2002
and 2003, and the results of their operations and their cash flows for each of
the three years in the period ended January 31, 2003, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Jericho, New York
March 11, 2003
F-2
ULTICOM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JANUARY 31, JANUARY 31,
2002 2003
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 140,260 $ 102,672
Short-term investments 76,827 116,074
Accounts receivable, net 8,422 4,212
Inventories, net 446 695
Prepaid expenses and other current assets 2,546 3,194
Deferred tax asset 1,096 1,201
---------- ----------
Total current assets 229,597 228,048
Property and equipment, net 5,270 3,333
Investments 5,550 5,550
Deferred tax asset 55 -
Other assets 203 171
---------- ----------
Total assets $ 240,675 $ 237,102
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 12,972 $ 8,510
Deferred revenue 3,679 3,593
---------- ----------
Total current liabilities 16,651 12,103
LONG-TERM LIABILITIES:
Deferred tax liability - 1,597
Other liabilities - 250
---------- ----------
Total liabilities 16,651 13,950
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 13)
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 shares authorized,
41,121,505 and 41,530,874 shares issued and outstanding - -
Additional paid-in capital 202,557 204,388
Accumulated other comprehensive income (loss) 443 (525)
Retained earnings 21,024 19,289
---------- ----------
Total shareholders' equity 224,024 223,152
---------- ----------
Total liabilities and shareholders' equity $ 240,675 $ 237,102
========== ==========
See notes to consolidated financial statements
F-3
ULTICOM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED JANUARY 31,
-------------------------------------------------------------
2001 2002 2003
---- ---- ----
Sales $47,441 $58,156 $29,231
Cost of sales 15,489 19,536 11,233
-------- -------- --------
Gross profit 31,952 38,620 17,998
Operating expenses:
Research and development 10,325 14,236 10,098
Selling, general and administrative 13,271 15,861 13,972
Workforce reduction and restructuring charge - - 2,290
-------- -------- --------
Income (loss) from operations 8,356 8,523 (8,362)
Interest income, net 6,282 8,761 5,536
-------- -------- --------
Income (loss) before income tax provision (benefit) 14,638 17,284 (2,826)
Income tax provision (benefit) 5,561 6,447 (1,091)
-------- -------- --------
Net income (loss) $ 9,077 $10,837 $ (1,735)
======== ======== ========
Earnings (loss) per share:
Basic $ 0.24 $ 0.26 $ (0.04)
======== ======== ========
Diluted $ 0.22 $ 0.25 $ (0.04)
======== ======== ========
See notes to consolidated financial statements
F-4
ULTICOM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 2001, 2002 AND 2003
(IN THOUSANDS)
Accumulated Other
Comprehensive Income (Loss)
Common Stock ---------------------------
-------------------- Additional Unrealized Cumulative Total
Number of Par Paid-in Retained Gains Translation Shareholders'
Shares Value Capital Earnings (Losses) Adjustment Equity
------ ----- ------- -------- -------- ---------- ------
BALANCE, FEBRUARY 1, 2000 32,727 $ - $ 10 $ 1,110 $ - $ - $ 1,120
Net income & total comprehensive income 9,077 9,077
Exercise of stock options 53 - 546 546
Proceeds from sale of stock 7,731 - 195,231 195,231
Tax benefit of dispositions of stock options 1,075 1,075
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 31, 2001 40,511 - 196,862 10,187 - - 207,049
Comprehensive income:
Net income 10,837
Unrealized gain on available-for-sale
securities, net 287
Translation adjustment, net 156
Total comprehensive income 11,280
Common stock issued for employee
stock purchase plan 60 - 769 769
Exercise of stock options 551 - 1,927 1,927
Tax benefit of dispositions of stock options 2,999 2,999
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 31, 2002 41,122 - 202,557 21,024 287 156 224,024
Comprehensive loss:
Net loss (1,735)
Unrealized loss on available-for-sale
securities, net (721)
Translation adjustment, net (247)
Total comprehensive loss (2,703)
Common stock issued for employee
stock purchase plan 107 - 633 633
Exercise of stock options 302 - 815 815
Tax benefit of dispositions of stock options 383 383
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 31, 2003 41,531 $ - $204,388 $19,289 $(434) $ (91) $223,152
======= ======== ========= ======== ====== ====== =========
See notes to consolidated financial statements
F-5
ULTICOM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED JANUARY 31,
----------------------
2001 2002 2003
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 9,077 $ 10,837 $ (1,735)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 2,448 4,612 2,502
Deferred income tax provision (benefits) (119) (864) 1,547
Changes in assets and liabilities:
Accounts receivable, net (4,597) 61 4,210
Inventories, net 187 1,179 (249)
Prepaid expenses and other current assets (27) (1,826) (265)
Accounts payable and accrued expenses 10,873 1,948 (4,462)
Deferred revenue 3,210 (6,969) (86)
Other (35) 402 (686)
---------- --------- ---------
Net cash provided by operating activities 21,017 9,380 776
---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (4,296) (3,819) (565)
Maturities and sales (purchases) of investments, net (31,077) (51,300) (39,247)
---------- --------- ---------
Net cash used in investing activities (35,373) (55,119) (39,812)
---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock in connection with
exercise of stock options and employee stock purchase plan 546 2,696 1,448
Proceeds from sale of common stock in connection with public
offerings 195,231 - -
Note payable, bank (3,800) - -
Repayments to related parties (617) - -
---------- --------- ---------
Net cash provided by financing activities 191,360 2,696 1,448
---------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 177,004 ( 43,043) (37,588)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 6,299 183,303 140,260
---------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 183,303 $ 140,260 $ 102,672
========== ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 114 $ - $ -
========== ========= =========
Cash paid during the year for income taxes $ 2,954 $ 7,464 $ 813
========== ========= =========
See notes to consolidated financial statements
F-6
ULTICOM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2001, 2002 AND 2003
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPANY BUSINESS AND BACKGROUND - Ulticom, Inc. (together with its
subsidiary, the "Company"), a New Jersey corporation and a majority-owned
subsidiary of Comverse Technology, Inc. ("CTI"), is engaged in the design,
development, manufacture, marketing and support of software and hardware for use
in the communications industry.
RECAPITALIZATION - In March 2000, the Company amended its certificate
of incorporation in connection with its initial public offering to increase its
authorized capital stock to 210,000,000 shares with no par value, of which
200,000,000 have been designated as common stock and 10,000,000 shares have been
authorized without designation and are available for issuance with such
designations and relative rights, preferences and limitations as may be
specified from time to time by the Board of Directors.
On March 13, 2000, the Board of Directors declared a stock dividend
on the Company's outstanding common stock at the rate of 2.2727 shares of common
stock for each outstanding share of common stock. All references to per share
amounts and the number of shares in these financial statements have been
adjusted to reflect the increase in authorized capital stock and the stock
dividends referred to above.
PUBLIC OFFERINGS - On April 5, 2000, the Company issued 4,250,000
shares of common stock to the public at a price of $13.00 per share. The
underwriters exercised their option to purchase 637,500 additional shares to
cover over-allotments. The net proceeds of the offering were approximately
$58,062,000. On October 17, 2000, the Company issued an additional 2,843,375
shares of common stock in an offering to the public at a price of $50.00 per
share. The net proceeds of this offering were approximately $137,169,000.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Ulticom, Inc. and its wholly-owned subsidiary. All
material intercompany balances and transactions have been eliminated.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments purchased with original maturities of three months or less to be
cash equivalents.
SHORT-TERM INVESTMENTS - The Company classifies all of its short-term
investments as available-for-sale, accounted for at fair value, with resulting
unrealized gains or losses reported as a separate component of shareholders'
equity.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The estimated fair value
amounts have been determined by the Company, using available market information
and appropriate valuation methodologies. However, considerable judgment is
necessarily required in interpreting market data to develop the estimates of
F-7
fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
CONCENTRATION OF CREDIT RISK - Financial instruments, which
potentially expose the Company to a concentration of credit risk, consist
primarily of cash investments and accounts receivable. The Company places its
cash investments with high credit-quality financial institutions and currently
invests primarily in money market funds placed with major banks and financial
institutions, corporate commercial paper, corporate and municipal short-term
notes, corporate medium-term notes, asset backed securities, and U.S. government
and U.S. government corporation and agency obligations and/or mutual funds
investing in the like. The Company believes no significant concentration of
credit risk exists with respect to these cash investments. The Company sells its
products to customers who are dispersed across many geographic regions and who
are principally in the communications industry. The Company had three customers
that represented approximately 58% of gross accounts receivable as of January
31, 2003. The Company had three customers that represented approximately 52% of
gross accounts receivable as of January 31, 2002. As of January 31, 2002 and
2003, the Company's allowance for doubtful accounts was approximately $849,000
and $636,000, respectively. The carrying amount of these financial instruments
is a reasonable estimate of their fair value.
INVENTORIES - Inventories are stated at the lower of cost or market
and consist entirely of finished goods, net of reserve for obsolescence. Cost is
determined by the first in, first out (FIFO) method.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost
less accumulated depreciation and amortization. The Company depreciates its
transportation equipment and furniture and equipment using straight-line
depreciation over periods ranging from three to seven years. Leasehold
improvements are amortized over the lesser of the term of the respective lease
or the estimated useful lives of the improvements (7 years). The cost of
maintenance and repairs are charged to operations as incurred. Significant
renewals and betterments are capitalized.
During the year ended January 31, 2002, the Company changed its
accounting estimates relating to depreciation of certain equipment. The
estimated service lives for these assets were reduced from 5 years to 3 years.
As a result of this change, net income was reduced by approximately $0.8
million, or $0.02 per diluted share.
INCOME TAXES - The Company accounts for income taxes under the asset
and liability method. Under this method, deferred tax assets and liabilities are
determined based on differences between the financial reporting and the tax
bases of assets and liabilities, and are measured using the enacted tax rates
and laws that are expected to be in effect when the differences are expected to
reverse. For federal income tax purposes in the year ended January 31, 2001, the
Company's results were included in the CTI consolidated tax return for the
period that CTI retained beneficial ownership of at least 80% of the total
voting power and value of the outstanding common stock of the Company. Income
taxes were determined as if the Company was a separate taxpayer. Upon completion
F-8
of the Company's public offering on October 17, 2000, CTI's ownership was
reduced below 80% of the total voting power and value of the outstanding Company
common stock. The Company files its tax returns on a stand-alone basis for the
period from October 17, 2000 through January 31, 2001 and for fiscal years
thereafter.
REVENUE AND EXPENSE RECOGNITION - In accordance with Statement of
Position 97-2, "Software Revenue Recognition," and related Interpretations,
product revenues are generally recognized in the period in which the products
are delivered and accepted by the customer, the fee is fixed and determinable,
and collection is considered probable. When the Company has significant
obligations subsequent to shipment, revenues are not recognized until the
obligations are fulfilled. Revenues from arrangements that include significant
acceptance terms are not recognized until acceptance has occurred. The Company
provides its customers with post-contract support services, which generally
consist of bug-fixing and telephone access to the Company's technical personnel,
but may also include the right to receive product updates, upgrades and
enhancements. Revenue from these services is recognized ratably over the
contract period. Post-contract support services included in the initial
licensing fee are allocated from the total contract amount based on the relative
fair value of vendor specific objective evidence ("VSOE"). For multi-element
arrangements, VSOE of fair value is determined based on the price charged when
the same element is sold separately or, for elements not yet being sold
separately, the price established by management having the relevant authority.
If VSOE of fair value does not exist for one or more delivered elements of a
multi-element arrangement and VSOE of fair value exists for all undelivered
elements, then revenue is recognized using the "residual method."
Deferred revenue consists primarily of amounts billed to customers
pursuant to terms specified in contracts but for which revenue has not been
recognized.
Included in sales are license revenues amounting to approximately
$11,642,000, $16,287,000 and $6,873,000 for the years ended January 31, 2001,
2002 and 2003, respectively. The related costs of revenues associated with these
license revenues were not material in each of the periods presented.
Expenses incurred in connection with research and development
activities, other than certain software development costs that are capitalized,
and selling, general and administrative expenses are charged to operations as
incurred.
SOFTWARE DEVELOPMENT COSTS - Software development costs are
capitalized upon the establishment of technological feasibility and are
amortized over the estimated useful life of the software, which has been four
years or less. Amortization begins in the period when the product is available
for general release to customers. Amortization expenses amounted to
approximately $323,000, $335,000 and $0 for the years ended January 31, 2001,
2002 and 2003, respectively.
FUNCTIONAL CURRENCY AND FOREIGN CURRENCY TRANSACTION GAINS AND
LOSSES- The Company's sales and materials purchased for manufacturing are
denominated in or linked to the dollar. Certain operating costs, principally
salaries, of foreign operations are denominated in local currencies and any
transaction gains or losses are recorded in the Company's consolidated
statements of operations. The Company records any necessary foreign currency
F-9
translation adjustment, reflected in shareholders' equity, at the end of each
reporting period. As of January 31, 2002 and 2003, the Company had no
outstanding foreign exchange contracts.
LONG-LIVED ASSETS - The Company reviews for the impairment of
long-lived assets whenever events change, or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. An impairment loss
would be recognized when estimated future undiscounted cash flows expected to
result from the use of an asset and its proceeds from its eventual disposition
are less than its carrying amount. Impairment is measured at fair value. In
conjunction with its restructuring plan during the year ended January 31, 2003,
the Company identified impairment losses that are included in "Workforce
Reduction and Restructuring Charge" in the Company's consolidated statements of
operations.
STOCK-BASED EMPLOYEE COMPENSATION - The Company applies the
intrinsic-value based method prescribed by Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and related Interpretations
in accounting for its stock-based employee compensation. Accordingly,
stock-based employee compensation cost is recognized only when employee stock
options are granted with exercise prices below the fair market value at the date
of grant. Any resulting stock-based employee compensation cost is recognized
ratably over the associated service period, which is generally the option
vesting period. Accordingly, no stock-based employee compensation cost is
reflected in the Company's consolidated statements of operations for any
periods, as all options granted under the plan had an exercise price equal to
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income (loss) and earnings (loss)
per share if the Company had applied the fair value recognition provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation", to stock-based employee compensation for all periods:
YEAR ENDED JANUARY 31,
----------------------
2001 2002 2003
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss), as reported $ 9,077 $ 10,837 $ (1,735)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (2,107) (4,039) (3,319)
-------- -------- --------
Pro forma net income (loss) $ 6,970 $ 6,798 $ (5,054)
======== ======== ========
Earnings (loss) per share:
Basic - as reported $ 0.24 $ 0.26 $ (0.04)
Basic - pro forma $ 0.19 $ 0.17 $ (0.12)
Diluted - as reported $ 0.22 $ 0.25 $ (0.04)
Diluted - pro forma $ 0.17 $ 0.16 $ (0.12)
F-10
The fair value of these options was estimated using the Black-Scholes
option pricing model with the following weighted-average assumptions:
YEAR ENDED JANUARY 31,
----------------------
2001 2002 2003
---- ---- ----
Risk-free interest rate 5.6% 4.7% 4.0%
Dividend yield - - -
Volatility 90% 95% 59%
Expected option life 5 years 5 years 5 years
The weighted-average fair value of options granted for the years ended
January 31, 2001, 2002 and 2003 is estimated at $12.29, $12.09 and $3.64 per
share, respectively.
PERVASIVENESS OF ESTIMATES - The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS - In June 2001, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"). 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 Company was required to apply
the provisions of SFAS No. 142 at the beginning of the Company's fiscal year.
The adoption of SFAS No. 142 did not have a material effect on the Company's
consolidated financial statements.
In August 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"). 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 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"). 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, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." SFAS No. 144 was effective at the beginning of the Company's
F-11
fiscal year. The adoption of SFAS No. 144 did not have a material effect on the
Company's 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"). 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
consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities" ("SFAS No. 146"). 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. The adoption of
SFAS No. 146 did not have a material effect on the Company's consolidated
financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment of FASB
Statement No. 123" ("SFAS No. 148"). SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation and does not permit the use of the
original SFAS No. 123 prospective method of transition in fiscal years beginning
after December 15, 2003. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results,
regardless of whether, when, or how an entity adopts the preferable, fair value
based method of accounting. SFAS No. 148 improves the prominence and clarity of
the pro forma disclosures required by SFAS No. 123 by prescribing a specific
tabular format and by requiring disclosure in the "Summary of Significant
Accounting Policies" or its equivalent and improves the timeliness of those
disclosures by requiring their inclusion in financial reports for interim
periods. The Company will continue to account for stock-based compensation to
employees under APB Opinion No. 25 and related Interpretations. The Company
adopted the disclosure requirements of the standard for its January 31, 2003
F-12
reporting period. The adoption of the remaining provisions of SFAS No. 148 is
not expected to have a material effect on the Company's consolidated financial
statements.
In November 2002, the FASB issued interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees and Indebtedness of Others." The interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
The interpretation also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and measurement
provisions of the interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure
requirements in this interpretation are effective for financial statements of
interim or annual periods ending after December 15, 2002. The Company has made
no material guarantees subject to the liability recognition and disclosure
provisions of the interpretation.
RECLASSIFICATIONS - Certain prior year amounts have been reclassified
to conform to the manner of presentation in the current year.
F-13
2. SHORT-TERM INVESTMENTS
The Company classifies all of its short-term investments as
available-for-sale securities. The following is a summary of available-for-sale
securities as of January 31, 2003:
GROSS GROSS ESTIMATED
ESTIMATED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------------------------------------------------------------------------
(IN THOUSANDS)
U.S. Government
agency bonds $ 60,138 $ 7 $ - $ 60,145
----------- ---------- --------- ---------
Total debt securities 60,138 7 - 60,145
----------- ---------- --------- ---------
Mutual funds (1) 56,370 - 441 55,929
----------- ---------- --------- ---------
Total equity securities 56,370 - 441 55,929
----------- ---------- --------- ---------
$ 116,508 $ 7 $ 441 $ 116,074
=========== ========== ========= =========
(1) Investing in all or some of U.S. Government and U.S. Government
corporation and agency obligations, corporate debt securities and
commercial paper and asset-backed securities.
The following is a summary of available-for-sale securities as of January 31,
2002:
GROSS GROSS ESTIMATED
ESTIMATED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------------------------------------------------------------------------------
(IN THOUSANDS)
U.S. Government
agency bonds $ 72,640 $ 287 $ - $ 72,927
Municipal bonds 3,900 - - 3,900
------------ -------- ----------- ----------
Total debt securities $ 76,540 $ 287 $ - $ 76,827
============ ======== =========== ==========
As of January 31, 2002 and 2003, all short-term investments have a
contractual maturity of one year or less. The Company had gross realized gains
(losses) of approximately $0, $0 and ($190,000) for the years ended January 31,
2001, 2002 and 2003, respectively.
F-14
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
JANUARY 31,
2002 2003
---- ----
(IN THOUSANDS)
Furniture and equipment $ 11,462 $ 11,922
Transportation equipment 17 17
Leasehold improvements 515 469
--------- --------
11,994 12,408
Less: accumulated depreciation and amortization 6,724 9,075
--------- --------
$ 5,270 $ 3,333
========= ========
4. WORKFORCE REDUCTION AND RESTRUCTURING CHARGE - During the year ended January
31, 2003, the Company took steps to better align its cost structure with the
current business environment. 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. In connection with these actions,
the Company has charged approximately $2,290,000 to operations in the year ended
January 31, 2003. Such charges relate to the following:
WORKFORCE
REDUCTION AND
RESTRUCTURING CASH NON-CASH ACCRUAL BALANCE AT
CHARGE PAYMENTS CHARGE JANUARY 31, 2003
------ -------- ------ ----------------
(IN THOUSANDS)
Severance and related $ 1,593 $ 1,559 $ - $ 34
Property and equipment 130 - 130 -
Facilities and related 567 150 - 417
------- ------- ------ ------
Outstanding at end of period $ 2,290 $ 1,709 $ 130 $ 451
======= ======= ====== ======
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 April 30, 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
F-15
related costs is expected to be paid at various dates through May 2005, of which
approximately $250,000 is classified as a long-term liability as of January 31,
2003.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
JANUARY 31,
2002 2003
---- ----
(IN THOUSANDS)
Accounts payable $ 1,901 $ 994
Accrued compensation and benefits 4,437 4,020
Other accrued expenses 6,634 3,496
-------- -------
$ 12,972 $ 8,510
======== =======
6. RELATED PARTY TRANSACTIONS
The Company sells products and provides services to other
subsidiaries of CTI. Sales to related parties were approximately $7,600,000,
$9,026,000 and $3,353,000 for the years ended January 31, 2001, 2002 and 2003,
respectively.
As of January 31, 2002 and 2003 amounts due from subsidiaries of CTI
were approximately $1,768,000 and $519,000, respectively.
The Company has a corporate services agreement with CTI. Under this
agreement, CTI provides the Company with the following services:
o maintaining in effect general liability and other
insurance policies providing coverage for the Company;
o maintaining in effect a policy of directors' and officers'
insurance covering the Company's directors and officers;
o administration of employee benefit plans;
o routine legal services; and
o consulting services with respect to the Company's public
relations.
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. The Company was charged
$600,000 in each of the years ended January 31, 2001, 2002 and 2003 for services
provided by CTI. In addition, the Company has agreed to reimburse CTI for any
F-16
out-of-pocket expenses, if any, 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. The
agreement was automatically extended until January 31, 2004.
In January 2000, the Company secured a bank loan in the amount of
$3.8 million in order to repay debt owed to CTI. A portion of the proceeds from
the Company's initial public offering was used to repay the bank loan in July
2000.
F-17
7. STOCK OPTIONS
EMPLOYEE STOCK OPTIONS - At January 31, 2003, 4,131,679 shares of
common stock were reserved for issuance upon exercise of options then
outstanding and 1,460,427 shares of common stock were available for future grant
under the Company's stock option plan. Options under the plan may be granted to
key employees, directors, and other persons rendering services to the Company.
Options which are designated as "incentive stock options" under the option plan
may be granted with an exercise price not less than the fair market value of the
underlying shares at the date of grant and are subject to certain quantity and
other limitations specified in Section 422 of the Internal Revenue Code. Options
which are not intended to qualify as incentive stock options may be granted at
any price and without restriction as to amount. The options and the underlying
shares are subject to adjustment in accordance with the terms of the plan in the
event of stock dividends, recapitalizations and similar transactions.
The changes in the number of options were as follows:
YEAR ENDED JANUARY 31,
----------------------
2001 2002 2003
---- ---- ----
Outstanding at beginning of period 3,272,700 3,802,471 3,917,363
Granted during the period 843,723 913,591 1,261,500
Exercised during the period (53,090) (550,987) (302,454)
Canceled, terminated and expired (260,862) (247,712) (744,730)
---------- ---------- ----------
Outstanding at end of period 3,802,471 3,917,363 4,131,679
========== ========== ==========
Substantially all of the options outstanding as of January 31, 2003
vest in four equal annual increments from the date of grant, or for the options
issued before the Company completed the initial public offering of its common
stock, in four equal annual increments on the anniversary of Company's initial
public offering, up to a maximum of ten years for all options granted.
Weighted average option exercise price information was as follows:
YEAR ENDED JANUARY 31,
----------------------
2001 2002 2003
---- ---- ----
Outstanding at beginning of period $ 2.57 $ 5.49 $ 8.06
Granted during the period 16.84 16.76 6.53
Exercised during the period 10.28 3.52 2.68
Canceled, terminated and expired 4.62 10.78 10.81
Outstanding at end of period 5.49 8.06 7.49
F-18
Significant option groups outstanding at January 31, 2003 and
related weighted average price and life information were as follows:
WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------------- ----------- ---------------- -------------- ----------- --------------
$ 1.99 - $ 1.99 1,140,682 5.01 $ 1.99 405,971 $ 1.99
$ 2.75 - $ 3.97 616,360 6.08 3.21 200,750 3.18
$ 6.49 - $ 7.64 1,246,500 9.48 6.53 - -
$ 9.38 - $19.56 996,887 8.00 15.20 314,166 14.57
$22.56 - $27.47 116,250 7.68 25.59 44,500 25.82
$29.25 - $29.25 15,000 8.10 29.25 15,000 29.25
--------- ------- -------- ---------- ------
4,131,679 7.32 $ 7.49 980,387 $ 7.76
========= ======= ======== ========== ======
8. EMPLOYEE STOCK PURCHASE PLAN
Upon completion of the Company's initial public offering, the Company
adopted the 2000 Employee Stock Purchase Plan. Under the terms of this plan, all
employees who have completed at least three months of employment are entitled,
through payroll deductions of amounts up to 10% of their base salary, to
purchase shares of the Company's common stock at 85% of the lesser of the market
price at the offering commencement date or the offering termination date. The
first plan offering period began in September 2000. The number of shares
available under the plan is 600,000, of which approximately 167,000 had been
issued as of January 31, 2003.
9. EARNINGS (LOSS) PER SHARE ("EPS")
Basic earnings (loss) per share is determined by using the weighted
average number of shares of common stock outstanding during each period. Diluted
earnings (loss) per share further assumes the issuance of common shares for all
dilutive potential shares outstanding. The calculation for earnings (loss) per
share for the years ended January 31, 2001, 2002 and 2003 was as follows:
JANUARY 31, 2001 JANUARY 31, 2002 JANUARY 31, 2003
---------------- ---------------- ----------------
PER SHARE PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT LOSS SHARES AMOUNT
------ ------ ------ ------ ------ ------ ---- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
BASIC EPS
Net income (loss) $ 9,077 37,602 $0.24 $ 10,837 40,929 $0.26 $ (1,735) 41,399 $(0.04)
===== ===== =======
Effect of dilutive
securities - options - 3,113 - 2,317 - -
------- ------ -------- ------ --------- ------
DILUTED EPS $ 9,077 40,715 $0.22 $ 10,837 43,246 $0.25 $ (1,735) 41,399 $(0.04)
======= ====== ===== ======== ====== ===== ========= ====== =======
F-19
The diluted earnings (loss) per share computation for the year ended
January 31, 2003 excludes incremental shares of approximately 1,158,000 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 period.
10. INTEREST INCOME, NET
Interest income, net consists of the following:
YEAR ENDED JANUARY 31,
----------------------
2001 2002 2003
---- ---- ----
(IN THOUSANDS)
Interest and dividend income $ 6,396 $ 8,761 $ 5,536
Interest expense (114) - -
------- ------- -------
$ 6,282 $ 8,761 $ 5,536
======= ======= =======
11. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
YEAR ENDED JANUARY 31,
----------------------
2001 2002 2003
---- ---- ----
Current provision (benefit): (IN THOUSANDS)
Federal $ 4,916 $ 6,729 $ (2,370)
Foreign - 7 150
State 764 575 (418)
-------- --------- ---------
Total current 5,680 7,311 (2,638)
-------- --------- ---------
Deferred provision (benefit):
Federal (37) (736) 1,315
State (82) (128) 232
-------- --------- ---------
Total deferred (119) (864) 1,547
-------- --------- ---------
$ 5,561 $ 6,447 $ (1,091)
======== ========= =========
The reconciliation of the U.S. Federal statutory tax rate to the
Company's effective rate is as follows:
YEAR ENDED JANUARY 31,
----------------------
2001 2002 2003
---- ---- ----
U.S. Federal statutory rate 34% 35% 35%
State taxes, net 3% 3% 3%
Other 1% (1%) 1%
----- ----- -----
Company's effective tax rate 38% 37% 39%
===== ===== =====
F-20
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effects of
significant items comprising the Company's deferred tax asset and liability at
January 31, 2002 and 2003 are as follows:
JANUARY 31,
-----------
2002 2003
---- ----
(IN THOUSANDS)
Deferred tax asset:
Accrued liabilities and other $ 835 $ 956
Allowance for doubtful accounts 316 245
------- -------
Total deferred tax asset $ 1,151 $ 1,201
======= =======
Deferred tax liability:
Depreciation and other $ - $ 1,597
------- -------
Total deferred tax liability $ - $ 1,597
======= =======
12. BUSINESS SEGMENT INFORMATION
The Company is engaged in one business segment: the design,
development, manufacture, marketing and support of software and hardware for use
in the communications industry.
Sales by country, as a percentage of total sales, is as follows:
YEAR ENDED JANUARY 31,
----------------------
2001 2002 2003
---- ---- ----
United States 38% 38% 29%
Germany 10% 9% 21%
Sweden 15% 12% 16%
Israel 16% 16% 12%
Other 21% 25% 22%
----- ----- -----
Total 100% 100% 100%
===== ===== =====
For the year ended January 31, 2001, three customers accounted for
approximately 18%, 16% and 10%, of the Company's sales. For the year ended
January 31, 2002, four customers accounted for approximately 18%, 16%, 11% and
11% of the Company's sales. For the year ended January 31, 2003, three customers
accounted for approximately 23%, 19% and 11% of the Company's sales.
The Company had long-lived assets of approximately $8,041,000 in the
United States and $1,013,000 in France at January 31, 2003. The Company had
long-lived assets of approximately $9,772,000 in the United States and
$1,306,000 in France at January 31, 2002.
F-21
13. COMMITMENTS AND CONTINGENCIES
LEASES - The Company leases office space under non-cancelable
operating leases. Rent expense for all leased premises approximated $847,000,
$1,169,000 and $1,145,000 for the years ended January 31, 2001, 2002 and 2003,
respectively.
As of January 31, 2003, the minimum annual rent obligations of the
Company were approximately as follows:
YEAR ENDING JANUARY 31, AMOUNT
----------------------- --------------
(IN THOUSANDS)
2004 $ 968
2005 988
2006 907
2007 219
2008 and thereafter 94
-------
$3,176
=======
F-22
14. QUARTERLY INFORMATION (UNAUDITED)
The following table shows selected results of operations of each of the fiscal
quarters during the years ended January 31, 2002 and 2003:
FISCAL QUARTER ENDED
--------------------------------------------------------------------------------------------------------
APR. 30, JULY 31, OCT. 31, JAN. 31, APR. 30, JULY 31, OCT. 31, JAN. 31,
2001 2001 2001 2002 2002 2002 2002 2003
---- ---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Sales $ 17,033 $ 17,926 $ 13,013 $ 10,184 $7,097 $6,103 $7,764 $8,267
Gross profit 11,617 12,333 8,024 6,646 3,869 3,565 4,947 5,617
Net income (loss) 4,144 4,199 1,482 1,012 (1,079) (2,094) 579 859
Diluted earnings
(loss) per share $ 0.10 $ 0.10 $ 0.03 $ 0.02 $(0.03) $ (0.05) $ 0.01 $ 0.02
====== ====== ====== ====== ======= ======== ====== ======
F-23