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, 2004
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 of Common Stock, no par value,
outstanding as of December 3, 2004 was 43,098,246
TABLE OF CONTENTS
-----------------
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Page
1. Condensed Consolidated Balance Sheets as of January 31, 2004 and
October 31, 2004 2
2. Condensed Consolidated Statements of Income for the Three and
Nine-Month Periods ended October 31, 2003 and 2004 3
3. Condensed Consolidated Statements of Cash Flows for the
Nine-Month Periods ended October 31, 2003 and 2004 4
4. Notes to Condensed Consolidated Financial Statements 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 20
ITEM 4. CONTROLS AND PROCEDURES. 20
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS. 21
SIGNATURES 22
ii
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. Forward-looking statements are
often identified by future or conditional words such as "will," "plans,"
"expects," "intends," "believes," "seeks," "estimates," or "anticipates" or by
variations of such words or by similar expressions.
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 makes no commitment to revise or update any forward-looking
statements in order to reflect events or circumstances after the date any such
statement is made. If the Company were in any particular instance to update or
correct a forward-looking statement, investors and others should not conclude
that the Company will make additional updates or corrections thereafter.
1
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,
2004* 2004
---------- ----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 128,713 $ 187,403
Short-term investments 95,817 54,526
Accounts receivable, net 6,417 8,821
Inventories 762 1,385
Prepaid expenses and other current assets 3,300 3,768
---------- ----------
Total current assets 235,009 255,903
Property and equipment, net 2,182 2,086
Investments 5,463 5,375
163 149
---------- ----------
Total assets $ 242,817 $ 263,513
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 5,914 $ 8,203
Deferred revenue 3,707 3,242
---------- ----------
Total current liabilities 9,621 11,445
Other liabilities 1,349 1,577
---------- ----------
Total liabilities 10,970 13,022
---------- ----------
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,
42,150,857 and 43,075,010 shares issued and outstanding -- --
Additional paid-in capital 208,576 216,240
Accumulated other comprehensive loss (598) (664)
Retained earnings 23,869 34,915
---------- ----------
Total shareholders' equity 231,847 250,491
---------- ----------
Total liabilities and shareholders' equity $ 242,817 $ 263,513
========== ==========
* The Condensed Consolidated Balance Sheet as of January 31, 2004 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.
2
ULTICOM, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED THREE MONTHS ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
2003 2004 2003 2004
---- ---- ---- ----
Sales $ 28,254 $ 46,310 $ 9,691 $ 17,034
Cost of sales 8,303 10,786 2,791 3,749
----------- ----------- ----------- -----------
Gross profit 19,951 35,524 6,900 13,285
Operating expenses:
Research and development 7,077 7,918 2,469 2,573
Selling, general and administrative 11,214 13,246 3,770 4,304
Workforce reduction and restructuring credit (233) - - -
----------- ----------- ----------- -----------
Income from operations 1,893 14,360 661 6,408
Interest and other income, net 2,739 2,130 557 996
----------- ----------- ----------- -----------
Income before income tax provision 4,632 16,490 1,218 7,404
Income tax provision 1,274 5,444 114 2,537
----------- ----------- ----------- -----------
Net income $ 3,358 $ 11,046 $ 1,104 $ 4,867
=========== =========== =========== ===========
Earnings per share:
Basic $ 0.08 $ 0.26 $ 0.03 $ 0.11
=========== =========== =========== ===========
Diluted $ 0.08 $ 0.25 $ 0.03 $ 0.11
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
3
ULTICOM, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
2003 2004
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,358 $ 11,046
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,436 1,149
Deferred income tax provision -- (706)
Changes in operating assets and liabilities:
Accounts receivable, net (364) (2,404)
Inventories 174 (623)
Prepaid expenses and other current assets (906) 3,054
Accounts payable and accrued expenses (692) 2,289
Deferred revenue (578) (465)
Other (215) (52)
---------- ----------
Net cash provided by operating activities 2,213 13,288
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (639) (1,053)
Maturities and sales (purchases) of investments, net (39,183) 41,379
---------- ----------
Net cash provided by (used in) investing activities (39,822) 40,326
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock in connection with
exercise of stock options and employee stock purchase plan 1,848 5,076
---------- ----------
Net cash provided by financing activities 1,848 5,076
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (35,761) 58,690
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 102,672 128,713
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 66,911 $ 187,403
========== ==========
The accompanying notes are an integral part of these financial statements.
4
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"), designs, develops, markets,
licenses, and supports service enabling signaling software for wireline,
wireless and Internet communications 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, 2004. 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, 2004 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 manner of presentation in the current year.
STOCK-BASED EMPLOYEE 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 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.
5
The following table illustrates the effect on net income and earnings
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:
NINE MONTHS ENDED THREE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
2003 2004 2003 2004
---- ---- ---- ----
Net income, as reported $ 3,358 $ 11,046 $ 1,104 $ 4,867
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (3,581) (3,423) (1,343) (1,130)
---------- ---------- ---------- ----------
Pro forma net income $ (223) $ 7,623 $ (239) $ 3,737
========== ========== ========== ==========
Earnings per share:
Basic - as reported $ 0.08 $ 0.26 $ 0.03 $ 0.11
Basic - pro forma $ (0.01) $ 0.18 $ (0.01) $ 0.09
Diluted - as reported $ 0.08 $ 0.25 $ 0.03 $ 0.11
Diluted - pro forma $ (0.01) $ 0.17 $ (0.01) $ 0.08
COMPREHENSIVE INCOME - For the nine-month periods ended October 31,
2003 and 2004, total comprehensive income was approximately $2.9 million and
$11.0 million, respectively, and for the three-month periods ended October 31,
2003 and 2004 was approximately $2.0 million and $5.2 million, respectively. The
elements of comprehensive income include net income, unrealized gains/losses on
available for sale securities, and foreign currency translation adjustments.
6
EARNINGS PER SHARE - For the nine-month and three-month periods ended
October 31, 2003 and 2004, the computation of basic earnings 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
shares used in the computations are as follows:
NINE MONTHS ENDED THREE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
2003 2004 2003 2004
(In thousands)
Basic 41,782 42,435 41,995 42,713
Diluted 43,165 43,740 43,593 44,114
RELATED PARTY TRANSACTIONS - The Company sells products and provides
services to other subsidiaries of CTI. For the nine-month periods ended October
31, 2003 and 2004, sales to related parties were approximately $3.2 million and
$4.5 million, respectively, and for the three-month periods ended October 31,
2003 and 2004 were approximately $1.4 million and $1.7 million, respectively.
As of October 31, 2004, amounts due from subsidiaries of CTI was
approximately $0.2 million.
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 $150,000, respectively, in each of the nine-month and three-month
periods ended October 31, 2003 and 2004 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 agreement is currently
in effect until January 31, 2005 and extends for additional twelve-month periods
unless terminated by either party.
7
ITEM 2. 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 software license, an interface board, cables, training, a
one-year development maintenance plan, and documentation. At deployment, the
customer generally purchases one or more deployment licenses, additional
interface boards and an annual deployment maintenance and support plan, which is
typically renewed annually for the life of the installation.
As explained in greater detail in "Certain Trends and Uncertainties", the
Company is operating within the telecommunication industry that has been
experiencing a challenging capital spending environment, although there is some
evidence of recent improvement. Overall, the Company has achieved year over year
and sequential growth in revenue and operating income during the nine-month and
three-month periods ended October 31, 2004.
CRITICAL ACCOUNTING POLICIES
There have been no material changes to the critical accounting policies and
estimates as disclosed in the Annual Report on Form 10-K for the year ended
January 31, 2004.
RESULTS OF OPERATIONS
Summary of Results
Consolidated results of operations in dollars and as a percentage of sales for
each of the nine-months and three-month periods ended October 31, 2003 and 2004
were as follows:
8
Nine Months ended
(in thousands, except percentages)
(Unaudited)
October 31, % of October 31, % of %
2003 sales 2004 sales Variance variance
Sales $ 28,254 100% $ 46,310 100% $ 18,056 64%
Cost of sales 8,303 29% 10,786 23% 2,483 30%
--------- ----- --------- ----- --------- -----
Gross profit 19,951 71% 35,524 77% 15,573 78%
Operating expenses:
Research and development 7,077 25% 7,918 17% 841 12%
Selling, general and administrative 11,214 40% 13,246 29% 2,032 18%
Workforce reduction and restructuring
credit (233) (1)% - - 233 (100)%
--------- ----- --------- ----- --------- -----
Income from operations 1,893 7% 14,360 31% 12,467 659%
Interest and other income, net 2,739 10% 2,130 5% (609) (22)%
--------- ----- --------- ----- --------- -----
Income before income tax provision 4,632 16% 16,490 36% 11,858 256%
Income tax provision 1,274 5% 5,444 12% 4,170 327%
--------- ----- --------- ----- --------- -----
Net income $ 3,358 12% $ 11,046 24% $ 7,688 229%
========= ===== ========= ===== ========= =====
Effective tax rate 28% 33%
** TABLE CONTINUED **
Three Months ended
(in thousands, except percentages)
(Unaudited)
October 31, % of October 31, % of %
2003 sales 2004 sales Variance variance
Sales $ 9,691 100% $ 17,034 100% $ 7,343 76%
Cost of sales 2,791 29% 3,749 22% 958 34%
--------- ----- --------- ----- --------- -----
Gross profit 6,900 71% 13,285 78% 6,385 93%
Operating expenses:
Research and development 2,469 25% 2,573 15% 104 4%
Selling, general and administrative 3,770 39% 4,304 25% 534 14%
Workforce reduction and restructuring
credit - - - - - -
--------- ----- --------- ----- --------- -----
Income from operations 661 7% 6,408 38% 5,747 869%
Interest and other income, net 557 6% 996 6% 439 79%
Income before income tax provision 1,218 13% 7,404 43% 6,186 508%
Income tax provision 114 1% 2,537 15% 2,423 2125%
--------- ----- --------- ----- --------- -----
Net income $ 1,104 11% $ 4,867 29% $ 3,763 341%
========= ===== ========= ===== ========= =====
Effective tax rate 9% 34%
** TABLE COMPLETE **
9
NINE-MONTH AND THREE-MONTH PERIODS ENDED OCTOBER 31, 2004 COMPARED WITH
NINE-MONTH AND THREE-MONTH PERIODS ENDED OCTOBER 31, 2003
Sales. Sales for the nine-month and three-month periods ended October
31, 2004 increased by approximately $18.1 million, or approximately 64%, and
approximately $7.3 million, or approximately 76%, to approximately $46.3 million
and approximately $17.0 million, respectively, when compared with the nine-month
and three-month periods ended October 31, 2003. The increase was due primarily
to a higher volume of deployments by our customers of our Signalware products.
Sales to international customers represented approximately 77% and 75%
respectively, of sales for the nine-month and three-month periods ended October
31, 2004 and approximately 71% and 73%, respectively, of sales in the nine-month
and three-month periods ended October 31, 2003.
Cost of Sales. Cost of sales for the nine-month period ended October
31, 2004 increased to approximately $10.8 million, an increase of approximately
$2.5 million, or approximately 30%, when compared with the nine-month period
ended October 31, 2003. This increase is primarily attributable to increased
material and production costs of approximately $1.8 million and
personnel-related and other costs of approximately $0.7 million, when compared
with the corresponding 2003 period. Gross margins (expressed as a percentage of
sales) increased to approximately 77% for the nine-month period ended October
31, 2004 from approximately 71% in the corresponding 2003 period. Cost of sales
for the three-month period ended October 31, 2004 increased to approximately
$3.7 million, an increase of approximately $1.0 million, or approximately 34%,
when compared with the three-month period ended October 31, 2003. This increase
is primarily attributable to increased material and production costs of
approximately $0.8 million and personnel-related and other costs of
approximately $0.2 million, when compared with the three-month period ended
October 31, 2003. Gross margins increased to approximately 78% for the
three-month period ended October 31, 2004 from approximately 71% in the
corresponding 2003 period.
Research and Development. Research and development expenses for the
nine-month period ended October 31, 2004 increased to approximately $7.9
million, an increase of approximately $0.8 million, or approximately 12%, and as
a percentage of sales, decreased to approximately 17% from approximately 25%,
when compared with the corresponding 2003 period. The dollar increase is
primarily attributable to higher personnel-related costs of approximately $1.0
million, which is partially offset by lower depreciation expense of
approximately $0.1 and approximately $0.1 million in various other costs, when
compared with the corresponding 2003 period. Research and development expenses
for the three-month period ended October 31, 2004 increased to approximately
$2.6 million, an increase of approximately $0.1 million, or approximately 4%,
and as a percentage of sales, decreased to approximately 15% from approximately
25% for the corresponding 2003 period. The dollar increase is primarily
attributable to higher personnel-related costs of approximately $0.3 million,
which is partially offset by various other costs of approximately $0.2 million,
when compared with the corresponding 2003 period.
Selling, General and Administrative. Selling, general and
administrative expenses for the nine-month period ended October 31, 2004
increased to approximately $13.2 million, an increase of approximately $2.0
million, or approximately 18%, and as a percentage of sales decreased to
approximately 29% from approximately 40%, when compared with the corresponding
2003 period. The dollar increase is primarily attributable to increases of
approximately $1.6 million in personnel-related costs, approximately $0.2
10
million in travel and entertainment expenses and approximately $0.2 million in
various other costs, when compared with the corresponding 2003 period. Selling,
general and administrative expenses for the three-month period ended October 31,
2004 increased to approximately $4.3 million, an increase of approximately $0.5
million, or approximately 14%, and as a percentage of sales decreased to
approximately 25% from approximately 39%, when compared with the corresponding
2003 period. The dollar increase is primarily attributable to increases of
approximately $0.6 million in personnel-related costs and approximately $0.1
million in various other costs, which is partially offset by lower professional
fees of approximately $0.2 million, when compared with the corresponding 2003
period.
Interest and Other Income, net. Interest and other income, net for
the nine-month period ended October 31, 2004 decreased to approximately $2.1
million, a decrease of approximately $0.6 million, or approximately 22%, when
compared with the corresponding 2003 period. The dollar decrease is a result of
lower interest income earned on the Company's cash investments of approximately
$0.7 million, primarily as a result of a shift towards investing in lower
yielding, tax efficient investments and realized losses on foreign currency
holdings of approximately $0.4 million, which is partially offset by lower
realized losses from investments of approximately of $0.5 million. Interest and
other income, net for the three-month period ended October 31, 2004 increased to
approximately $1.0 million, an increase of approximately $0.4 million, or
approximately 79%, when compared with the corresponding 2003 period. The dollar
increase is a result of lower realized losses on investments of approximately
$0.7 million, which is partially offset by lower interest income earned on
investments and realized gains on foreign currency holdings of approximately
$0.2 million and $0.1 million, respectively, when compared with the
corresponding 2003 period.
Income Tax Provision. Provision for income taxes for the nine-month
period ended October 31, 2004 increased to approximately $5.4 million, an
increase of approximately $4.2 million, when compared with the nine-month period
ended October 31, 2003. Provision for income taxes for the three-month period
ended October 31, 2004 increased to approximately $2.5 million, an increase of
approximately $2.4 million, when compared with the three-month period ended
October 31, 2003. The Company's overall effective tax rate was approximately 33%
and 34%, respectively, in the nine-month and three-month periods ended October
31, 2004 and approximately 28% and 9% for the nine-month and three-month periods
ending October 31, 2003.
Net Income. Net income for the nine-month period ending October 31,
2004 increased to approximately $11.0 million, an increase of approximately $7.7
million, or approximately 229%, when compared with the corresponding 2003
period. Net income for the three-month period ending October 31, 2004 increased
to approximately $4.9 million, an increase of approximately $3.8 million, or
approximately 341%, when compared with corresponding 2003 period. As a
percentage of sales, net income was approximately 24% and 29%, respectively, in
the nine-month and three-month periods ended October 31, 2004 and was
approximately 12% and 11%, respectively, in the nine-month and three-month
periods ended October 31, 2003. The changes are primarily attributable to the
factors described above.
11
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital at October 31, 2004 and January 31,
2004 of approximately $244.5 million and $225.4 million, respectively. At
October 31, 2004 and January 31, 2004, the Company had cash and cash equivalents
and short-term investments of approximately $241.9 million and $224.5 million,
respectively.
Operations for the nine-month periods ending October 31, 2004 and
2003, after adjustment for non-cash items, provided cash of approximately $11.5
million and $4.8 million, respectively. During such periods, other changes in
operating assets and liabilities provided (used) cash of approximately $1.8
million and $(2.6) million, respectively.
Investing activities for the nine-month periods ended October 31,
2004 and 2003 provided (used) cash of approximately $40.3 million and $(39.8)
million, respectively. These amounts include (i) purchases of property and
equipment of approximately $(1.1) million and $(0.6) million, respectively; and
(ii) net maturities and sales (purchases) of investments, of approximately $41.4
million and $(39.2) million, respectively.
Financing activities for the nine-month periods ended October 31,
2004 and 2003 provided cash of approximately $5.1 million and $1.8 million,
respectively, related to proceeds from the issuance of common stock in
connection with the exercise of stock options and employee stock purchase plan.
Although there are no present understandings, commitments or
agreements with respect to acquisitions of other businesses, products or
technologies, the Company may in the future consider such transactions, which
may require additional debt or equity financing. The issuance of debt or equity
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 or services
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
communications industry, which is experiencing a challenging capital spending
environment. Although the capital spending environment has improved and the
Company's revenues have increased in recent quarters, the Company experienced
significant revenue declines from historical peak revenue levels, and if capital
spending and technology purchasing by the Company's customers does not continue
to improve or if they decline, revenue may stagnate or decrease, and the
Company's operating results may be adversely affected. 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.
12
The Company's business is dependent on the strength of the
communications industry. The communications industry, including the Company, has
been negatively affected by, among other factors, the high costs and large debt
positions incurred by some 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 communications 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 may have an adverse effect on the Company's future
results. In addition to loss of revenue, weakness in the communications 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 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, 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
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.
13
The Company accounts for employee stock options in accordance with
Accounting Principles Board Opinion No. 25 and related Interpretations, which
provide that any compensation expense relative to employee stock options be
measured based on the intrinsic value of the stock options. As a result, when
options are priced at or above the fair market value of the underlying stock on
the date of grant, as is the Company's practice, the Company incurs no
compensation expense. However, the Financial Accounting Standards Board has
proposed in its exposure draft entitled "Share-Based Payment, an amendment of
FASB Statements No 123 and 95" new accounting requirements that, if adopted,
would cause the Company to record compensation expense for all employee stock
option grants. Any such expense, although it would not affect the Company's cash
flows, could have a material impact on the Company's results of operations.
The communications industry is subject to rapid technological change.
The introduction of new technologies in the communications 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. If the Company's current or
future products develop operational problems, this 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 communications industry continues to undergo significant change
as a result of deregulation and privatization worldwide, reducing restrictions
on competition in the industry. 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, the
Company may lose sales to companies operating in regions such as India and China
as a result of pricing competition because of their lower operating costs.
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. 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.
14
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. 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. 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 deferral or loss of one or
more significant orders from 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 diseases, such as severe acute
respiratory syndrome ("SARS") have and may in the future curtail travel to and
from certain countries. Restrictions on travel to and from these regions on
account of additional incidents of diseases, such as 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. The United States 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.
15
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 United States
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 United States 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.
16
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 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 utilizes 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, however, 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
continue to offer these products without obtaining licenses for those products
or without substantial reengineering of the products. Any reengineering effort
may not be successful and the Company cannot be certain as to whether such
licenses would be available. Even if such licenses were available, the Company
cannot be certain that any licenses would be offered to the Company on
commercially reasonable terms.
Substantial litigation regarding intellectual property rights exists
in the communications 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
17
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.
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 past decline in the price of the Company's
shares, and the overall decline in equity prices between 2000 and 2003
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 Company's operating results have fluctuated in the past and may
do so in the future. 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, which at times is unrelated to the operating
performance of a company. 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 communications 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.
18
The Company has not declared or paid any cash dividends on its common
stock and currently does not expect to pay cash dividends in the near future.
Consequently, any economic return to a shareholder may be derived, if at all,
from appreciation in the price of the Company's stock, and not as a result of
dividend payments.
In addition, the Company's board of directors has the authority to
cause the Company to issue, without vote or action of the Company's shareholders
up to 10,000,000 shares of undesignated stock, and has the ability to divide
such undesignated shares into one or more classes of common or preferred stock
and to further divide any classes of preferred stock into series. Any such
series of preferred stock could contain dividend rights, conversion rights,
voting rights, terms of redemption, redemption prices, liquidation preferences
or other rights superior to the rights of holders of its common stock. The
Company's board of directors has no present intention of issuing any such
preferred series, but reserves the right to do so in the future. The Company is
also authorized to issue, without shareholder approval, common stock under
certain circumstances. The issuance of either preferred or common stock could
have the effect of making it more difficult for a person to acquire, or could
discourage a person from seeking to acquire, control of the Company. If this
occurs, investors could lose the opportunity to receive a premium on the sale of
their shares in a change of control transaction.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
REFER TO ITEM 7A IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR A
DISCUSSION ABOUT THE COMPANY'S EXPOSURE TO MARKET RISKS.
ITEM 4. CONTROLS AND PROCEDURES.
(a) The Company's management evaluated, with the participation of the Company's
principal executive and principal financial officers, the effectiveness 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, as amended (the "Exchange
Act")), as of October 31, 2004. Based on their evaluation, the Company's
principal executive and principal financial officers concluded that the
Company's disclosure controls and procedures were effective as of October 31,
2004.
(b) There has been no change in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
that occurred during the Company's fiscal quarter ended October 31, 2004, that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
20
PART II
ITEM 6. EXHIBITS.
(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
32.1 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
21
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 10, 2004 /s/ Shawn K. Osborne
----------------------------------
Shawn K. Osborne
President and
Chief Executive Officer
Dated: December 10, 2004 /s/ Mark A. Kissman
----------------------------------
Mark A. Kissman
Vice President of Finance and
Chief Financial Officer
22