UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-30121
ULTICOM, INC.
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-2050748
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1020 BRIGGS RD. MT. LAUREL, NJ 08054
(Address of principal executive offices) (Zip Code)
(856) 787-2700
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[X] Yes [ ] No
The number of shares outstanding of the registrant's common stock, no par value,
as of December 5, 2003 was 42,076,036.
Page 1 of 22 Total Pages
TABLE OF CONTENTS
-----------------
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements.
Page
----
1. Condensed Consolidated Balance Sheets as
of January 31, 2003 and October 31, 2003 3
2. Condensed Consolidated Statements of Operations for the Three
and Nine-Month Periods ended
October 31, 2002 and October 31, 2003 4
3. Condensed Consolidated Statements of Cash Flows
for the Nine-Month Periods ended
October 31, 2002 and October 31, 2003 5
4. Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 10
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk. 20
ITEM 4. Controls and Procedures. 20
PART II
OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K. 21
SIGNATURES 22
Page 2 of 22 Total Pages
PART I
Financial Information
ITEM 1. Financial Statements.
ULTICOM, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JANUARY 31, OCTOBER 31,
2003* 2003
----- ----
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 102,672 $ 66,911
Short-term investments 116,074 155,257
Accounts receivable, net 4,212 4,576
Inventories 695 521
Prepaid expenses and other current assets 4,395 4,100
---------- ----------
Total current assets 228,048 231,365
Property and equipment, net 3,333 2,536
Investments 5,550 5,550
Other assets 171 1,925
---------- ----------
Total assets $ 237,102 $ 241,376
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 8,510 $ 6,650
Deferred revenue 3,593 3,015
---------- ----------
Total current liabilities 12,103 9,665
Other liabilities 1,847 2,642
---------- ----------
Total liabilities 13,950 12,307
---------- ----------
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,
41,530,874 and 42,064,658 shares issued and outstanding -- --
Additional paid-in capital 204,388 207,404
Accumulated other comprehensive loss (525) (982)
Retained earnings 19,289 22,647
---------- ----------
Total shareholders' equity 223,152 229,069
---------- ----------
Total liabilities and shareholders' equity $ 237,102 $ 241,376
========== ==========
* The Condensed Consolidated Balance Sheet as of January 31, 2003 has been
summarized from the Company's audited Consolidated Balance Sheet as of that
date.
The accompanying notes are an integral part of these financial statements.
Page 3 of 22 Total Pages
ULTICOM, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED THREE MONTHS ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2002 2003 2002 2003
---- ---- ---- ----
Sales $ 20,964 $ 28,254 $ 7,764 $ 9,691
Cost of sales 8,583 8,303 2,817 2,791
---------- ---------- ---------- ----------
Gross profit 12,381 19,951 4,947 6,900
Operating expenses:
Research and development 8,055 7,077 2,263 2,469
Selling, general and administrative 10,200 11,214 3,221 3,770
Workforce reduction and restructuring
charges (credits) 2,290 (233) - -
---------- ---------- ---------- ----------
Income (loss) from operations (8,164) 1,893 (537) 661
Interest and other income, net 4,018 2,739 1,428 557
---------- ---------- ---------- ----------
Income (loss) before income tax provision (benefit) (4,146) 4,632 891 1,218
Income tax provision (benefit) (1,552) 1,274 312 114
---------- ---------- ---------- ----------
Net income (loss) $ (2,594) $ 3,358 $ 579 $ 1,104
========== ========== ========== ==========
Earnings (loss) per share:
Basic $ (0.06) $ 0.08 $ 0.01 $ 0.03
========== ========== ========== ==========
Diluted $ (0.06) $ 0.08 $ 0.01 $ 0.03
========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
Page 4 of 22 Total Pages
ULTICOM, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
2002 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,594) $ 3,358
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,034 1,436
Changes in operating assets and liabilities:
Accounts receivable, net 3,658 (364)
Inventories (181) 174
Prepaid expenses and other current assets 364 (906)
Accounts payable and accrued expenses (3,590) (692)
Deferred revenue (405) (578)
Other, net (401) (215)
--------- ---------
Net cash provided by (used in) operating activities (1,115) 2,213
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (400) (639)
Maturities and sales (purchases) of investments, net (53,195) (39,183)
--------- ---------
Net cash used in investing activities (53,595) (39,822)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock in connection with
exercise of stock options and employee stock purchase plan 1,398 1,848
--------- ---------
Net cash provided by financing activities 1,398 1,848
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (53,312) (35,761)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 140,260 102,672
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 86,948 $ 66,911
========= =========
The accompanying notes are an integral part of these financial statements.
Page 5 of 22 Total Pages
ULTICOM, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
BASIS OF PRESENTATION - The accompanying financial information should
be read in conjunction with the financial statements, including the notes
thereto, for the year ended January 31, 2003. The condensed consolidated
financial information included herein is unaudited; however, such information
reflects all adjustments (consisting solely of normal recurring adjustments),
which are, in the opinion of management, necessary for a fair statement of
results for the interim periods. The results of operations for the three-month
and nine-month periods ended October 31, 2003 are not necessarily indicative of
the results to be expected for the full year.
RECLASSIFICATIONS - Certain prior period amounts have been
reclassified to conform to the presentation in the current periods.
STOCK-BASED COMPENSATION. The Company accounts for stock options
under the recognition and measurement principles of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. Accordingly, no stock-based employee compensation cost is
reflected in net income (loss) for any periods, as all options granted have an
exercise price at least equal to the market value of the underlying common stock
on the date of grant.
The Company estimated the fair value of employee stock options
utilizing the Black-Scholes option valuation model, using appropriate
assumptions, as required under accounting principles generally accepted in the
United States of America. The Black-Scholes model was developed for use in
estimating the fair value of traded options and does not consider the non-traded
nature of employee stock options, vesting and trading restrictions, lack of
transferability or the ability of employees to forfeit the options prior to
expiry. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of the Company's employee stock options.
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:
Page 6 of 22 Total Pages
NINE MONTHS ENDED THREE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
2002 2003 2002 2003
---- ---- ---- ----
Net income (loss), as reported $ (2,594) $ 3,358 $ 579 $ 1,104
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (2,832) (3,581) (1,065) (1,343)
--------- --------- --------- ---------
Pro forma net income (loss) $ (5,426) $ (223) $ (486) $ (239)
========= ========= ========= =========
Earnings (loss) per share:
Basic - as reported $ (0.06) $ 0.08 $ 0.01 $ 0.03
Basic - pro forma $ (0.13) $ (0.01) $ (0.01) $ (0.01)
Diluted - as reported $ (0.06) $ 0.08 $ 0.01 $ 0.03
Diluted - pro forma $ (0.13) $ (0.01) $ (0.01) $ (0.01)
COMPREHENSIVE INCOME (LOSS) - For the nine-month periods ended
October 31, 2002 and 2003, total comprehensive income (loss) was approximately
$(3.6) million and $2.9 million, respectively, and for the three-month periods
ended October 31, 2002 and 2003 was approximately $0.1 million and $2.0 million,
respectively. The elements of comprehensive income (loss) include net income
(loss), unrealized gains/losses on available for sale securities, and foreign
currency translation adjustments.
EARNINGS (LOSS) PER SHARE - For the nine-month and three-month
periods ended October 31, 2002 and 2003, the computation of basic earnings
(loss) per share is based on the weighted average number of outstanding common
shares. Diluted earnings per share further assumes the issuance of common shares
for all dilutive potential common shares outstanding (consisting entirely of
stock options). The diluted loss per share computation for the nine-month period
ended October 31, 2002 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 net loss during this period.
The shares used in the computations are as follows:
NINE MONTHS ENDED THREE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
2002 2003 2002 2003
---- ---- ---- ----
(In thousands)
Basic 41,357 41,782 41,463 41,995
Diluted 41,357 43,165 42,444 43,593
Page 7 of 22 Total Pages
RELATED PARTY TRANSACTIONS - The Company sells products and provides
services to other subsidiaries of CTI. For the nine-month periods ended October
31, 2002 and 2003, sales to related parties were approximately $2.5 million and
$3.2 million, respectively, and for the three-month periods ended October 31,
2002 and 2003 was approximately $0.8 million and $1.4 million, respectively.
The Company has a corporate services agreement with CTI. Under this
agreement, CTI provides the Company various administrative and consulting
services. The Company has agreed to pay to CTI a quarterly fee of $150,000,
payable in arrears at the end of each fiscal quarter, in consideration for all
services provided by CTI during such fiscal quarter. The Company was charged
$450,000 and $150,0000, respectively, in each of the nine-month and three-month
periods ended October 31, 2002 and 2003. In addition, the Company has agreed to
reimburse CTI for any 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 period unless
terminated by either party. The agreement was automatically extended until
January 31, 2004.
As of October 31, 2003, amounts due from subsidiaries of CTI was
approximately $0.6 million and amounts due to CTI was approximately $0.2
million.
WORKFORCE REDUCTION AND RESTRUCTURING ACCRUAL - During the year ended
January 31, 2003, the Company took steps to better align its cost structure with
the current business environment including workforce reduction and
restructuring.
In June 2003, the Company entered into an agreement with the landlord
of the facility covered under the restructuring that terminates the current
lease obligations in exchange for a lump sum payment by the Company and the
execution of a lease for another smaller facility owned by the landlord,
resulting in the reversal of approximately $0.2 million of this previously taken
charge. As such, the workforce reduction and restructuring accrual was utilized
by July 31, 2003. A roll-forward of the workforce reduction and restructuring
accrual from January 31, 2003 is as follows:
ACCRUAL BALANCE AT CASH NON-CASH ACCRUAL BALANCE AT
JANUARY 31, 2003 PAYMENTS CREDITS OCTOBER 31, 2003
---------------- -------- ------- ----------------
(In thousands)
Severance and related $ 34 $ 15 $ (19) $ -
Facilities and related 417 203 (214) -
------- ------- ------- -------
Outstanding at end of period $ 451 $ 218 $ (233) $ -
======= ======= ======= =======
Severance and related costs consisted primarily of severance payments
to terminated employees, fringe related costs associated with severance
payments, other termination costs and legal and consulting costs.
Facilities and related costs consisted primarily of contractually
obligated lease liabilities and operating expenses related to facilities to be
vacated as a result of the restructuring.
Page 8 of 22 Total Pages
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS - In August 2001, the
Financial Accounting Standards Board ("FASB") issued SFAS No. 143 "Accounting
for Asset Retirement Obligations". SFAS No. 143 establishes accounting standards
for recognition and measurement of a liability for an asset retirement
obligation and the associated asset retirement cost. SFAS No. 143 applies to
legal obligations associated with the retirement of a tangible long-lived asset
that result from the acquisition, construction, development and/or normal
operation of a long-lived asset. This Statement is effective for fiscal years
beginning after June 15, 2002. The adoption of SFAS No. 143 did not have a
material effect on the Company's condensed consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". SFAS No. 145, among other things, rescinds SFAS No. 4, which
required all gains and losses from the extinguishments 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. The adoption of SFAS No. 145 did not have a
material effect on the Company's condensed consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 149 is generally effective for derivative instruments, including derivative
instruments embedded in certain contracts, entered into or modified after June
30, 2003 and for hedging relationships designated after June 30, 2003. The
adoption of SFAS No. 149 did not have a material effect on the Company's
condensed consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how to classify and measure certain financial
instruments with characteristics of both liabilities and equity. The statement
is effective for financial instruments entered into or modified after May 31,
2003. The adoption of SFAS No. 150 did not have a material effect on the
Company's condensed consolidated financial statements.
Page 9 of 22 Total Pages
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
RESULTS OF OPERATIONS
NINE-MONTH AND THREE-MONTH PERIODS ENDED OCTOBER 31, 2003
COMPARED WITH NINE-MONTH AND THREE-MONTH PERIODS ENDED OCTOBER 31, 2002
Sales. Sales for the nine-month and three-month periods ended October
31, 2003 increased by approximately $7.3 million (35%) and $1.9 million (25%),
to approximately $28.3 million and $9.7 million, respectively, when compared
with the nine-month and three-month periods ended October 31, 2002. The increase
is primarily attributable to a higher volume of sales and deployments of the
Company's Signalware products. Sales to international customers represented
approximately 71% and 73%, respectively, of the Company's sales for the
nine-month and three-month periods ended October 31, 2003, and approximately 72%
and 71%, respectively, of the Company's sales in the nine-month and three-month
periods ended October 31, 2002.
Cost of Sales. Cost of sales for the nine-month period ended October
31, 2003 decreased by approximately $0.3 million (3%) when compared with the
nine-month period ended October 31, 2002. Cost of sales for the three-month
period ended October 31, 2003 was approximately flat when compared with the
three-month period ended October 31, 2002. For the nine-month period ended
October 31, 2003, the decrease is primarily attributable to a decrease in
depreciation costs. Gross margins (expressed as a percentage of sales) for the
nine-month and three-month periods ended October 31, 2003 increased to
approximately 71% from approximately 59% and 64%, respectively, for the
nine-month and three-month periods ended October 31, 2002.
Research and Development. Research and development expenses decreased
by approximately $1.0 million (12%) for the nine-month period ended October 31,
2003, when compared with the nine-month period ended October 31, 2002, and
increased by $0.2 million (9%) for the three-month period ended October 31, 2003
when compared with the three-month period ended October 31, 2002. For the
nine-month period ended October 31, 2003, the decrease is primarily attributable
to lower personnel-related costs of approximately $0.7 million, depreciation
costs of approximately $0.2 million and various other costs of approximately
$0.1 million when compared with the nine-month period ended October 31, 2002.
For the three-month period ended October 31, 2003, the increase is primarily
attributable to higher material costs related to hardware development activities
of approximately $0.2 million when compared with the three-month period ended
October 31, 2002.
Selling, General and Administrative. Selling, general and
administrative expenses for the nine-month and three-month periods ended October
31, 2003 increased by approximately $1.0 million (10%) and $0.5 million (17%),
to approximately $11.2 million and $3.8 million, respectively, when compared
with the nine-month and three-month periods ended October 31, 2002. For the
nine-month period ended October 31, 2003, the increase is primarily attributable
to a $0.6 million increase in professional fees, and a $0.5 million increase in
personnel-related costs, partially offset by a net decrease in various other
costs of approximately $0.1 million when compared with the nine-month period
ended October 31, 2002. For the three-month period ended October 31, 2003, the
increase is primarily attributable to a $0.6 million increase in professional
fees, partially offset by a net decrease in various other costs of approximately
$0.1 million when compared with the three-month period ended October 31, 2002.
As a percentage of sales for the nine-month and three-month periods ended
October 31, 2003, selling, general and administrative expenses decreased to
approximately 40% and 39%, respectively, from approximately 49% and 41%,
respectively, for the nine-month and three-month periods ended October 31, 2002.
Page 10 of 22 Total Pages
Workforce Reduction and Restructuring Charges (Credits). During the
three-month period ended July 31, 2002, the Company implemented a workforce
reduction and restructuring plan. As a result, the Company recorded a charge of
approximately $2.3 million to operations for severance, facilities, and other
related costs. During the three-month period ended July 31, 2003, the company
renegotiated the lease covered under the restructuring, resulting in a credit of
approximately $0.2 million due to the reversal of this previously taken charge.
The effect, after tax, of these charges and credits was to increase the net loss
by approximately $1.4 million in the nine-month period ended October 31, 2002
and to increase the net income by approximately $0.2 million in the nine-month
period ended October 31, 2003.
Interest and Other Income, net. Interest and other income, net
decreased by approximately $1.3 million and $0.9 million, respectively, to
approximately $2.7 million and $0.6 million, respectively, for the nine-month
and three-month periods ended October 31, 2003 when compared with the nine-month
and three-month periods ended October 31, 2002. These decreases are the result
of (i) lower interest income earned on the Company's cash investments, primarily
as a result of the decline in interest rates when compared with the
corresponding 2002 periods and (ii) net losses recognized on short-term
investments. For the nine-month and three-month periods ended October 31, 2003,
the Company recognized losses of approximately $1.0 million and $0.7 million,
respectively, on a short-term investment, partially offset by gains of $0.3
million and $0.1 million, respectively, on the Company's foreign currency cash
investments.
Income Tax Provision (Benefit). Provision for income taxes was
approximately $1.3 million and $0.1 million, respectively, for the nine-month
and three-month periods ended October 31, 2003. For the nine-month period ended
October 31, 2002, the Company had a benefit for income taxes of approximately
$1.6 million due to losses sustained on a pre-tax basis. For the three-month
period ended October 31, 2002, the Company had a provision for income taxes of
approximately $0.3 million. The overall effective tax rate was approximately 28%
and 9%, respectively, for the nine-month and three-month periods ended October
31, 2003 and approximately (37)% and 35%, respectively, for the nine-month and
three-month periods ended October 31, 2002.
Net Income (Loss). Net income for the nine-month and three-month
periods ended October 31, 2003 was approximately $3.4 million and $1.1 million,
respectively, when compared with a net loss of approximately $2.6 million and a
net income of approximately $0.6 million, respectively, in the nine-month and
three-month periods ended October 31, 2002. As a percentage of sales for the
nine-month and three-month periods ended October 31, 2003, net income (loss)
increased to approximately 12% and 11%, respectively, from approximately (12)%
and 7%, respectively, in the nine-month and three-month periods ended October
31, 2002. The changes are primarily attributable to the factors described above.
Page 11 of 22 Total Pages
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital at October 31, 2003 and January 31,
2003 of approximately $221.7 million and $215.9 million, respectively. At
October 31, 2003 and January 31, 2003, the Company had cash and cash equivalents
and short-term investments of approximately $222.2 million and $218.7 million,
respectively.
Net income (loss) for the nine-month periods ended October 31, 2003
and 2002, after adjustment for depreciation and amortization, provided (used)
cash of approximately $4.8 million and $(0.6) million, respectively. During such
periods, other changes in operating assets and liabilities used cash of
approximately $(2.6) million and $(0.6) million, respectively. This resulted in
net cash provided by (used) in operating activities of approximately $2.2
million and $(1.1) million, respectively.
Investing activities for the nine-month periods ended October 31,
2003 and 2002 used cash of approximately $(39.8) million and $(53.6) million,
respectively. These amounts include (i) purchases of property and equipment of
approximately $0.6 million and $0.4 million, respectively; and (ii) net
maturities and sales (purchases) of investments of approximately $(39.2) million
and $(53.2) million, respectively.
Financing activities for the nine-month periods ended October 31,
2003 and 2002 provided cash of approximately $1.8 million and $1.4 million,
respectively, related to proceeds from the issuance of common stock in
connection with the exercise of stock options and the Company's employee stock
purchase plan.
Although there are no present understandings, commitments or
agreements with respect to acquisitions of other businesses, products or
technologies, the Company may in the future consider such transactions, which
may require additional debt or equity financing. The issuance of debt or equity
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.
Page 12 of 22 Total Pages
CERTAIN TRENDS AND UNCERTAINTIES
The Company derives substantially all of its revenue from the
telecommunications industry, which is experiencing a challenging capital
spending environment. The Company's operating results and financial condition
have been, and will continue to be, adversely affected by declines in technology
purchases and capital expenditures by these entities. While revenues have
increased in recent quarters, the Company's operating results have deteriorated
significantly from historical highs and the Company's operating results may
deteriorate in future periods if such conditions exist. For these reasons and
the risk factors outlined below, it has been and continues to be very difficult
for the Company to accurately forecast future revenues and operating results.
The Company's business is dependent on the strength of the
telecommunications industry. The telecommunications industry, 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 provisioning 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 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
Page 13 of 22 Total Pages
incorporate the personnel, operations and customers of these companies into the
Company's business. In addition, the Company may fail to achieve the anticipated
synergies from the combined businesses, including marketing, product
integration, distribution, product development and other synergies. The
integration process may further strain the Company's existing financial and
managerial controls and reporting systems and procedures. This may result in the
diversion of management and financial resources from the Company's core business
objectives. In addition, an acquisition or merger may require the Company to
utilize cash reserves, incur debt or issue equity securities, which may result
in a dilution of existing shareholders, and the Company may be negatively
impacted by the assumption of liabilities of the merged or acquired company. Due
to rapidly changing market conditions, the Company may find the value of its
acquired technologies and related intangible assets, such as goodwill as
recorded in the Company's financial statements, to be impaired, resulting in
charges to operations. The Company may also fail to retain the acquired or
merged company's key employees and customers.
The telecommunications industry is subject to rapid technological
change. The introduction of new technologies in the telecommunications market,
including the delay in the adoption of such new technologies, and new
alternatives for the delivery of services are having, and can be expected to
continue to have, a profound effect on competitive conditions in the market and
the success of market participants, including the Company. The Company's success
will depend on the ability to correctly anticipate technological trends, to
react quickly and effectively to such trends and to enhance its existing product
line and to introduce new products on a timely and cost-effective basis. As a
result, the life cycle of the Company's product line is difficult to estimate.
In addition, changing industry and market conditions may dictate strategic
decisions to restructure some business units and discontinue others.
Discontinuing a business unit or product line may result in the Company
recording accrued liabilities for special charges, such as costs associated with
a reduction in workforce. These strategic decisions could result in changes to
determinations regarding a product's useful life and the recoverability of the
carrying basis of certain assets.
The Company's products involve sophisticated technology that perform
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 Company offers
complex products that may contain undetected defects or errors, particularly
when first introduced or as new versions are released. The Company may not
discover such defects or errors until after a product has been released and used
by the customer. Significant costs may be incurred to correct undetected defects
or errors in the Company's products and these defects or errors could result in
future lost sales. In addition, defects or errors in the Company's products may
result in product liability claims, which could cause adverse publicity and
impair their market acceptance.
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. In
addition, competition with companies in regions, such as India and China, have
significantly lower costs than the Company and may result in lost sales.
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.
Page 14 of 22 Total Pages
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
the Company's business, results of operations, and financial condition.
The Company's current products are designed to support signaling
system #7 ("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 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 challenging
capital spending environment 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 and
operating results.
Geopolitical, economic and military conditions could directly affect
the Company's operations. The outbreak of severe acute respiratory syndrome
("SARS") earlier this year 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 additional incidents 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,
the Company's business, operating results and financial condition could be
materially and adversely affected. More recently, the U.S. military involvement
in overseas operations including, for example, the war with Iraq, could have a
material adverse effect on the Company's business, results of operations, and
financial condition.
Page 15 of 22 Total Pages
The Company currently derives a majority of its total sales from
customers outside of the United States. International transactions involve
particular risks, including political decisions affecting tariffs and trade
conditions, rapid and unforeseen changes in economic conditions in individual
countries, difficulty in enforcing intellectual property rights, turbulence in
foreign currency and credit markets, and increased costs resulting from lack of
proximity to the customer. Recent world events may have an adverse effect on the
Company's international transactions, including political and economic
instability in certain countries in which the Company currently transacts
business and may transact business in the future.
International sales are predominately denominated in U.S. dollars and
the Company has not been exposed to material fluctuations in foreign currency
exchange rates related to sales. However, the Company expects that in future
periods, a greater 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. From time to time, the Company may choose to
limit its exposure by utilizing hedging strategies. There can be no assurance
that any such hedging strategies that the Company undertakes would be successful
in avoiding exchange rate losses.
In order to increase the Company's revenues, the Company 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, the Company's 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, the Company's business and
operating results may be adversely affected.
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.
Page 16 of 22 Total Pages
The Company's success is dependent on recruiting and retaining key
management and highly skilled technical, managerial, sales, and marketing
personnel. The Company's ability to attract and retain employees also may be
affected by recent cost control actions, including reductions in the Company's
workforce and the associated reorganization of operations.
The occurrence or perception of security breaches within the Company
could harm the Company's business, financial condition and operating results.
While the Company implements sophisticated security measures, third parties may
attempt to breach the Company's security through computer viruses, electronic
break-ins and other disruptions. If successful, confidential information,
including passwords, financial information, or other personal information may be
improperly obtained and the Company may be subject to lawsuits and other
liability. Even if the Company is not held liable, a security breach could harm
the Company's reputation, and even the perception of security risks, whether or
not valid, could inhibit market acceptance of the Company's products.
While the Company generally requires employees, independent
contractors and consultants to execute non-competition and confidentiality
agreements, the Company's intellectual property or proprietary rights could be
infringed or misappropriated, which could result in expensive and protracted
litigation. The Company relies on a combination of patent, copyright, trade
secret and trademark law to protect its technology. Despite the Company's
efforts to protect its intellectual property and proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use its
products or technology. Effectively policing the unauthorized use of the
Company's products is time-consuming and costly, and there can be no assurance
that the steps taken by the Company will prevent misappropriation of its
technology, particularly in foreign countries where in many instances the local
laws or legal systems do not offer the same level of protection as in the United
States.
If others claim that the Company's products infringe their
intellectual property rights, the Company may be forced to seek expensive
licenses, reengineer its products, engage in expensive and time-consuming
litigation or stop marketing its products. The Company attempts to avoid
infringing known proprietary rights of third parties in its product development
efforts. The Company does not regularly conduct comprehensive patent searches to
determine whether the technology used in its products infringes patents held by
third parties. 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 the Company 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.
Page 17 of 22 Total Pages
The Company holds a large proportion of its net assets in cash
equivalents and short-term investments. Such investments subject the Company to
the risks inherent in the capital markets generally, and to the performance of
other businesses over which it has no direct control. Given the relatively high
proportion of the Company's liquid assets relative to its overall size, the
results of its operations are materially affected by the results of the
Company's capital management and investment activities and the risks associated
with those activities. In addition, reduction in prevailing interest rates due
to economic conditions or government policies has had and may continue to have
an adverse impact on the Company's results of operations.
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.
Page 18 of 22 Total Pages
FORWARD-LOOKING STATEMENTS
From time to time, the Company makes forward-looking statements.
Forward-looking statements include financial projections, statements of plans
and objectives for future operations, statements of future economic performance,
and statements of assumptions relating thereto.
The Company may include forward-looking statements in its periodic
reports to the Securities and Exchange Commission on Forms 10-K, 10-Q, and 8-K,
in its annual report to shareholders, in its proxy statements, in its press
releases, in other written materials, and in statements made by employees to
analysts, investors, representatives of the media, and others.
By their very nature, forward-looking statements are subject to
uncertainties, both general and specific, and risks exist that predictions,
forecasts, projections and other forward-looking statements will not be
achieved. Actual results may differ materially due to a variety of factors
including, without limitation, those discussed under "Certain Trends and
Uncertainties" and elsewhere in this report. Investors and others should
carefully consider these factors and other uncertainties and events, whether or
not the statements are described as forward-looking.
Forward-looking statements made by the Company are intended to apply
only at the time they are made, unless explicitly stated to the contrary.
Moreover, whether or not stated in connection with a forward-looking statement,
the Company undertakes no obligation to correct or update a forward-looking
statement should the Company later become aware that it is not likely to be
achieved. If the Company were in any particular instance to update or correct a
forward-looking statement, investors and others should not conclude that the
Company would make additional updates or corrections thereafter with respect to
that or any other forward-looking statement.
Page 19 of 22 Total Pages
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.
Refer to Item 7A in the Company's Annual Report on Form 10-K for a
discussion about the Company's exposure to market risks.
ITEM 4. Controls and Procedures.
As of the end of the period covered by this report, the Company
conducted an evaluation, under the supervision and with the participation of the
principal executive officer and principal financial officer, of the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934 (the "Exchange Act")). Based on this
evaluation, the principal executive officer and principal financial officer
concluded that the Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed by the Company in reports that
it files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in Securities and Exchange
Commission rules and forms. There was no change in the Company's internal
control over financial reporting during the Company's most recently completed
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
Page 20 of 22 Total Pages
PART II
Other Information
ITEM 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibit Index.
-------------
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) of the Exchange Act, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002*
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) of the Exchange Act, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002*
32 Certifications of Chief Executive Officer and Chief
Financial Officer pursuant to Rule 13a-14(b) of the Exchange
Act and 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002*
*These exhibits are being "furnished" with this periodic report and are not
deemed "filed" with the Securities and Exchange Commission and are not
incorporated by reference in any filing of Ulticom, Inc. under the Securities
Act of 1933 or the Securities Exchange Act of 1934, whether made before or after
the date hereof and irrespective of any general incorporation by reference
language in any such filings.
(b) Reports on Form 8-K.
-------------------
During the third quarter of 2003, the Company furnished a report on
Form 8-K dated September 8, 2003, regarding the announcement of the Company's
financial results for the fiscal quarter ended July 31, 2003.
Page 21 of 22 Total Pages
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ULTICOM, INC.
Dated: December 12, 2003 /s/ Shawn K. Osborne
-------------------------------------
Shawn K. Osborne
President and Chief Executive Officer
Dated: December 12, 2003 /s/ Mark A. Kissman
-------------------------------------
Mark A. Kissman
Vice President of Finance and Chief
Financial Officer
Page 22 of 22 Total Pages