================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended January 31, 2005
Commission File Number: 0-30121
ULTICOM, INC.
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-2050748
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1020 BRIGGS RD. MT. LAUREL, NJ 08054
(Address of principal executive offices) (Zip Code)
(856) 787-2700
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Not applicable Not applicable
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE PER SHARE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
================================================================================
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act).
[X] Yes [ ] No
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the closing price as of the last
business day of the registrant's most recently completed second fiscal quarter,
July 31, 2004, was approximately $139,000,000.
There were 43,152,464 shares of the registrant's common stock
outstanding on April 11, 2005.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on June 15, 2005, are incorporated by reference in Part
III.
_________________________
Signalware(R), Software Advancing Communications(R), and Ulticom(R) are
registered trademarks and Ulticom's logos are trademarks of the Company. All
other trademarks are the property of their respective owners.
- ii -
FORWARD-LOOKING STATEMENTS
Certain statements discussed in Item 1 (Business), Item 3 (Legal
Proceedings), Item 7 (Management's Discussion and Analysis of Financial
Condition and Results of Operations), and elsewhere in this Form 10-K constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties, and other important factors that could cause the
actual results, performance or achievements of results to differ materially from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Important risks, uncertainties, and other important
factors that could cause actual results to differ materially include, among
others: risks associated with rapid technological changes in the
telecommunications industry; risks associated with making significant
investments in the expansion of the business and with increased expenditures;
risks associated with holding a large proportion of the company's assets in cash
equivalents and short-term investments; risks associated with the company's
products being dependent upon their ability to operate on new hardware and
operating systems of other companies; risks associated with dependence on sales
of the company's Signalware products; risks associated with future networks not
utilizing signaling systems and protocols that the company's products are
designed to support; risks associated with the development and acceptance of new
products and product features; risks associated with the company's dependence on
a limited number of customers for a significant percentage of the company's
revenues; risks associated with the products having long sales cycles and the
limited ability to forecast the timing and amount of product sales; risks
associated with the integration of the company's products with those of
equipment manufacturers and application developers and the company's ability to
establish and maintain channel and marketing relationships with leading
equipment manufacturers and application developers; risks associated with the
company's reliance on a limited number of independent manufacturers to
manufacture boards for the company's products and on a limited number of
suppliers for board components; risks associated with becoming subjected to,
defending and resolving allegations or claims of infringement of intellectual
property rights; risks associated with others infringing on the company's
intellectual property rights and the inappropriate use by others of the
company's proprietary technology; risks associated with the company's ability to
retain existing personnel and recruit and retain qualified personnel; risks
associated with the increased difficulty in relying on equity incentive programs
to attract and retain talented employees and with any associated increased
employment costs; changes in the demand for the company's products; changes in
capital spending among the company's current and prospective customers; risks
associated with rapidly changing technology and the ability of the company to
introduce new products on a timely and cost-effective basis; aggressive
competition may force the company to reduce prices; risks associated with
changes in the competitive or regulatory environment in which the company
operates; and other risks described in filings with the Securities and Exchange
Commission.
These risks and uncertainties, as well as other factors, are discussed
in greater detail at the end of Item 7 (Management's Discussion and Analysis of
Financial Condition and Results of Operations) of this Form 10-K. 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.
1
PART I
ITEM 1. BUSINESS.
THE COMPANY
Ulticom, Inc. ("Ulticom" and together with its subsidiary, the
"Company") is a provider of service enabling signaling software for fixed,
mobile, and Internet communications. The Company's Signalware family of products
are used by equipment manufacturers, application developers and communication
service providers to deploy revenue generating infrastructure and enhanced
services within the mobility, messaging, payment, and location markets.
Signalware products are also embedded in a range of packet softswitching
products to interoperate or converge voice and data networks and facilitate
services such as voice over IP ("VoIP"), hosted IP telephony, and virtual
private networks.
The Company was founded in December 1974 and completed an initial
public offering of its common stock in April 2000. Its common stock is listed on
the NASDAQ National Market System under the symbol "ULCM". The Company is a
subsidiary of Comverse Technology, Inc. ("CTI"), which held approximately 69% of
its outstanding common stock as of January 31, 2005. The Company's principal
executive offices are located at 1020 Briggs Road, Mount Laurel, New Jersey
08054, and its telephone number is (856) 787-2700.
The Company's Internet address is www.ulticom.com. The information
contained on the Company's website is not included as a part of, or incorporated
by reference into, this Annual Report on Form 10-K. The Company makes available,
free of charge, on its Internet website, its annual report on Form 10-K, its
quarterly reports on Form 10-Q, its current reports on Form 8-K and amendments
to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 as soon as reasonably practicable after the
Company has electronically filed such material with, or furnished it to, the
United States Securities and Exchange Commission.
THE COMPANY'S PRODUCTS
BACKGROUND
Traditionally, voice networks were based on a technology called
"circuit switching." In circuit switched networks, a dedicated line or circuit
is established for each telephone call and maintained for the duration of the
call. At the conclusion of a circuit switched call, the dedicated line or
circuit is disconnected.
Separating the voice and signaling portions of a call improves network
utilization, reduces call setup times and provides transaction capabilities for
enhanced services. The signaling infrastructure processes, in real time, the
information needed to set up, connect, route, terminate and bill a call, while
also providing a foundation to develop and offer value-added services. The
signaling portion of a switching network that controls each call is based on a
globally accepted set of standards and protocols called signaling system #7
("SS7"). SS7 provides the speed and reliability required for processing complex
call control information.
2
While SS7 was initially created to support signaling in a fixed
network, it also has become an essential element for connecting calls and
delivering services in mobile networks. In addition to providing the signaling
link between fixed and mobile networks, SS7 efficiently allows mobile service
providers to register and authenticate subscribers as they move between mobile
cell areas. SS7 signaling also is used as the foundation for enhanced database
services such as prepaid calling and voice and text messaging. SS7 is designed
to be robust, flexible, and scalable, enabling service providers to offer new
services quickly and reliably.
While circuit switching has offered dependable, high quality voice
communication; a newer technology called "packet switching" is inherently more
efficient and cost effective than circuit switching. In packet switched
networks, the voice or data transmission is formatted into a series of shorter
digital messages called "packets". These packets of voice or data information
travel over a shared line or circuit. The cost advantage in the initial
deployment, combined with significant ongoing operational savings, has led both
incumbent and new service providers to build packet networks to handle voice and
data traffic.
Because SS7 is the globally accepted signaling standard protocol, it
has become the critical element needed to connect and interoperate packet
networks with the existing circuit network infrastructure. Fixed, mobile, and
Internet service providers worldwide have implemented SS7 as an important
component to converge voice and data communications through signaling gateways
that interwork SS7 signaling and packet switching protocols.
SIGNALWARE
Ulticom's Signalware product family provides the SS7 connectivity
required to offer value-added services. Signalware is embedded within fixed,
mobile and Internet service provider networks to interconnect and interoperate
voice, data, and video communication systems. In addition, Signalware plays a
key role in the convergence of disparate networks by providing a means to bridge
circuit and packet technology. Signalware offers many of the features that are
crucial to the connectivity of communication networks and the rapid delivery of
revenue generating services, including:
o open systems - running applications on multiple software and
hardware platforms;
o fault resiliency - insures the high availability requirements of
fixed and mobile communication services in circuit and packet
based networks with no single point of failure;
o high performance - processing calls and transactions at very high
rates;
o standards conformance - complying to industry-accepted standards
including IETF, ANSI, ITU, ETSI, TTC, NTT, and MII;
3
o scalability - increasing computing and link capacity to match
varying application requirements; and
o network interoperability - providing an open development
environment, which enables users to develop an application once
and deploy globally, maximizing their return on investment.
Signalware supports a range of applications across multiple networks.
In fixed networks, Signalware has been deployed as part of services such as
voice messaging, calling name, 800 number, and calling card services. Signalware
enables mobile infrastructure applications such as global roaming and
emergency-911, and enhanced services such as text messaging and prepaid calling.
The Company's products are being used to enable new mobile data services such as
ones that enable Global System for Mobile Communications ("GSM") subscribers to
roam into wireless local area networks ("WLAN") "Hot Spots" and seamlessly and
securely access network based services from their own trusted service provider.
Signalware also is used to enable VoIP in fixed, mobile, and cable service
provider networks.
Signalware works with multiple SS7 networks, supports a wide variety of
SS7 protocol elements, and enables analog or digital fixed and mobile
transmissions. It provides the functionality needed for call set-up/termination
and call routing/billing. Signalware products also include features that enable
the transition from SS7 signaling to emerging packet signaling standards as
defined by the Internet Engineering Task Force ("IETF"). These new standards
include Signaling Transport ("SIGTRAN"), which enables the transmission of SS7
signals over IP networks, and Session Initiation Protocol ("SIP"), which enables
interactive communications sessions in an IP network. New solutions include a
Signalware SIGTRAN Gateway for enabling circuit-packet network interoperability
and Signalware SIP for developing next generation services for all IP networks.
Signalware solutions run on a range of hardware platforms and operating
systems, including Sun Solaris, SuSE, MontaVista, and Red Hat Linux. These
solutions can be used in single or multiple computing configurations for fault
resiliency and reliability.
PRODUCTS
Signalware includes interface boards to provide the physical connection
to a signaling network. Signalware boards are configured to support a wide range
of hardware platforms and network links. The bundling of Signalware interface
boards and software allows the Company to control product performance, capacity,
and compliance with standards.
New customers begin development of applications and services by
purchasing the appropriate Signalware development kit. A typical development kit
includes a development software license, an interface board, cables, one-year
development support plan, training, and documentation. The annual development
support plan provides access to customer help-desk services, service packs, and
scheduled updates of the software. After the initial year, the maintenance plan
must be renewed for a fee in order to continue to receive support and software
updates.
4
When the application is ready for deployment in a communication service
provider's network, the customer typically purchases one or more interface
boards per server to stage the application for deployment. On a per installation
basis, the customer also purchases a deployment license and an annual software
deployment maintenance plan, which typically renews annually for the life of the
installation. The annual software deployment maintenance plan provides access to
technical support staff to troubleshoot and fix any software issues.
SERVICES
The Company believes that customer support, training, and professional
services are integral to building and maintaining strong customer relationships.
Customer support is offered as part of the maintenance agreements.
Customer Support. The Company provides comprehensive technical support
to help customers develop and deploy new services using Signalware. Customer
support representatives interface with customers' technical staff by answering
questions, resolving problems, and providing assistance. Services are available
24 hours a day, 7 days a week. Customer support is managed through corporate
headquarters in Mount Laurel, New Jersey with remote service locations to
provide extended geographic and time zone coverage.
Training Services. The Company offers customers a comprehensive
training program including courses covering topics such as Application
Development and Operations and Support. Courses are scheduled throughout the
year. Customized and/or on-site training programs also are provided for an
additional fee to meet the specific needs of customers. The Company also offers
computer-based training in an effort to provide added flexibility and
convenience to customers.
Professional Services. The Company offers fee-based consulting and
development services to create customer-specific enhancements to its products
and assist with deployment of its products in service provider networks. An
experienced engineering staff provides such services. This service assists
customers by accelerating their time-to-market, and also hastens the point in
the development cycle when the Company begins to receive recurring deployment
license and board revenues.
MARKETS, SALES AND MARKETING
The Company's sales organization operates from the United States,
Europe, and Asia. Account teams comprised of account managers and sales
engineers work closely with product management and development organizations to
provide customers with a consultative sales approach. The consultative approach
facilitates the sale of development kits to enable customers to immediately
begin building prototypes of their products.
The Company actively strives to enhance market awareness and acceptance
of the Company and its products. The Company identifies market opportunities in
cooperation with customers and develops and enhances products to seize those
opportunities in a timely fashion. Based on market considerations, the Company
may port software products to additional operating systems, develop new features
and functionality, and engage in new strategic alliances and partnerships.
5
The Company's market strategy includes enhancing brand awareness for
its products through its website, promotional literature, direct marketing to
current and prospective customers, advertising, continued participation in
industry relevant trade shows and conferences, and a public relations program
that includes public demonstrations of products and prototypes. Representatives
of the Company also are called upon to address industry symposia and
conferences, are quoted in industry publications, and may from time to time
author articles about developments in communications technology.
Products are sold primarily to network equipment manufacturers and
application developers, who include the Company's products within their products
and sell them as an integrated solution to service providers. Service providers
will install the solution in their communication networks and offer the service
enabled by such solution to their subscribers. Since the Company and its
customers have a mutual interest in developing solutions that are widely
accepted by subscribers and profitable to service providers, the Company works
closely with customers to support their development efforts and produce
solutions that are unique, reliable, scalable, and cost effective.
The Company engages in joint promotion, sales efforts, training,
testing, design, integration, and installation with Sun Microsystems, Inc. ("Sun
Microsystems") and other information systems providers who use Sun Microsystems'
components. The Company also engages in joint-marketing activities with
International Business Machines Corporation ("IBM") and Intel Corp.
The Company's products are currently used by more than 55 customers and
are deployed by more than 300 service providers in more than 100 countries. The
Company markets its products and services primarily through a direct sales
organization and through distributors. The Company has entered into distribution
agreements with Beijing Teamsun Technology Co., Mantica Solutions, S.L., and
Macnica Networks Company that have resulted in deployments of the Company's
products in mobile and Internet services in China, Spain, and Japan,
respectively. Customers include network equipment manufacturers, such as Alcatel
and Siemens AG ("Siemens"); application developers, such as Comverse, Inc.
("Comverse") and Sonus Networks, Inc. ("Sonus"); and service providers, such as
MCI, Inc., Orange Personal Communications Services Limited, and Reliance
Infocomm Limited.
The Company currently derives a significant portion of its total sales
from customers outside of the United States. Financial information regarding the
Company's operations in these areas is presented in Note 12 to the Consolidated
Financial Statements included in Item 15 of this report on Form 10-K.
International transactions involve particular risks, including political
decisions affecting tariffs and trade conditions, rapid and unforeseen changes
in economic conditions in individual countries, turbulence in foreign currency
and credit markets, and increased costs resulting from lack of proximity to the
customer.
6
For fiscal year 2002, which ended January 31, 2003, Siemens, LM
Ericsson, and Comverse accounted for 23%, 19%, and 11%, respectively, of the
Company's sales. For fiscal year 2003, which ended January 31, 2004, Siemens,
Sonus, and Comverse accounted for 26%, 11%, and 11%, respectively, of the
Company's sales. For fiscal year 2004, which ended January 31, 2005, Siemens,
Alcatel, and Comverse accounted for 41%, 17%, and 10%, respectively, of the
Company's sales.
The Company actively participates in industry activities to define the
technology to facilitate the convergence of telecommunication networks with the
Internet. For example, as a member of the IETF, Ulticom has worked to develop
SIGTRAN to enable communication service providers to cost effectively and to
easily implement cost effective services that span existing circuit switched
networks and packet networks using IP. In addition, the Company participates in
the standards activities of the Third Generation Partnership Project ("3GPP"),
which works with various standards bodies to produce globally acceptable
technical specifications for the evolution to a packet-based 3G broadband mobile
infrastructure.
RESEARCH AND DEVELOPMENT
The Company continues to enhance the features and performance of
existing products and introduce new products. The Company believes that its
future success depends on a number of factors, which include the Company's
ability to:
o identify and respond to emerging technological trends in its
target markets;
o develop and maintain competitive solutions that meet customers'
changing needs; and
o enhance existing products by adding features and functionality
that differentiate the Company's products from those of its
competitors.
As a result, the Company has made and intends to continue to make
investments in research and development. Research and development resources are
allocated in response to market research and customer demands for additional
features and products. The development strategy involves rolling out initial
releases of products and adding features over time. The Company continuously
incorporates customer feedback into the product development process. While it is
expected that new products will continue to be developed internally, the Company
may, based on timing and cost considerations, acquire or license technologies,
products, or applications from third parties.
The Company's research and development expenses were approximately
$10.1 million, $9.5 million, and $10.6 million for the years ended January 31,
2003, 2004, and 2005, respectively. Research and development activities are
located in the United States and France. As of January 31, 2005, there were
approximately 100 employees engaged in research and development activities. The
Company believes that recruiting and retaining highly skilled engineering
personnel is essential to its success.
7
INTELLECTUAL PROPERTY RIGHTS
The Company has accumulated a significant amount of proprietary
know-how and expertise over the years in developing network signaling software
and SS7, SIGTRAN, and SIP protocol technologies for communication services. The
Company's continued success is dependent, in part, upon its ability to protect
proprietary rights to the technologies used in its products. If the Company is
not adequately protected, competitors could use the intellectual property that
it has developed to enhance competing products and services, which could harm
the Company's business. To safeguard its proprietary technology, the Company
relies on a combination of technical innovation, trade secret, copyright, patent
and trademark laws, restricted licensing arrangements and non-disclosure
agreements; each of which affords only limited protection. The Company conducts
periodic reviews of new areas of technology with patent counsel as part of its
patent program.
The Company licenses software from third parties that is incorporated
into certain versions of Signalware.
Due to the value of intellectual property rights, the Company generally
does not make its proprietary software source code available to customers.
Exceptions to this principle are only made in limited circumstances where
adequate control mechanisms are in place to protect the Company's intellectual
property rights.
The Company attempts to avoid infringing upon known third-party
proprietary rights 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.
The Company has granted Comverse, an affiliate, a perpetual,
royalty-free, non-exclusive license to use and operate software products for
incorporation into any of Comverse's products. This software is maintained by
Comverse at no cost to the Company.
In January 2000, an affiliate, Comverse Patent Holding, Inc. ("CPH")
and Lucent Technologies GRL Corp. ("Lucent") entered into a non-exclusive
cross-licensing arrangement covering current and certain future patents issued
to CPH and its affiliates, including the Company, and a portfolio of current and
certain future patents in the area of telecommunications technology issued to
Lucent and its affiliates. The Company is entitled to utilize the licensed
patent rights, and is obligated to provide licenses under any patents it may
hold, pursuant to a royalty-free license agreement with CPH.
COMPETITION
The global market for network signaling software is intensely
competitive. The Company expects competition to persist, intensify, and increase
in the future; especially with the convergence of voice and data networks.
8
The Company's primary competition comes from internal development
organizations within equipment manufactures and application developers who seek,
in a build-versus-buy decision, to develop substitutes for the Company's
products. The Company also competes with a number of United States and
international suppliers that vary in size, scope, and breadth of the products
and services offered.
Competitors include a number of companies ranging from SS7 software
solution providers, such as Flextronics Software Systems and TietoEnator
Corporation, to vendors of communication and network infrastructure equipment,
such as Continuous Computing Corporation and Hewlett-Packard Company. The
Company believes it competes principally on the basis of:
o product performance and functionality;
o product quality and reliability;
o customer service and support; and
o price.
The Company believes its success will depend, primarily, on its ability
to provide technologically advanced and cost effective signaling solutions
adhering to evolving network solution architectures such as 3GPP and IP
Multimedia Subsystem (IMS). Furthermore, it is likely that as competition
intensifies and pricing pressure continues within its customers markets, the
Company may have to reduce prices or offer product sales incentive programs.
MANUFACTURING
The Company's Signalware products typically have two components:
software and interface boards. Software is duplicated in house and provided to
customers via several medium, primarily CD-ROM. Each software shipment is
configured to provide the specific operating system version and features
requested by the customer. Each order is tracked by purchase order number and
documented according to internal quality standards.
During 2002, the Company was certified in compliance with TL 9000; a
set of common quality system requirements and measurements designed specifically
for the telecommunications industry for the design, development, production,
delivery, installation, and maintenance of products and services. TL 9000
encompasses International Standard Organization ("ISO") 9001:2000 and additional
requirements specific to the telecommunications industry. The Company is
currently in compliance and is periodically audited to ensure continued
compliance with TL 9000 standards.
Subcontractors, who are ISO certified, perform assembly of the
Company's printed circuit interface boards. Periodic audits of the Company's
subcontractors are performed to ensure adherence to quality standards.
Subcontractors are responsible for purchasing, inspecting, installing, and
assembling components of interface boards. Completed assemblies are burned-in,
inspected, tested, and packaged in the Company's facility according to TL 9000
and other industry standards. All inspection, test, repair, revision, and
shipping information is tracked by product type and serial number and maintained
in the Company's tracking database.
9
The Company works closely with interface board component suppliers to
monitor component changes and availability. However, there are no long-term
supply agreements with these suppliers to ensure uninterrupted supply of
components. Under certain circumstances, the Company may place blanket orders to
ensure availability of discontinued components. In the event of a reduction or
an interruption in the supply of components, a significant amount of time could
be required to qualify alternate suppliers and to receive an adequate supply of
replacement components.
The Company does not have any long-term agreements with any of its
manufacturers, some of whom are small, privately held companies. In the event
that these manufacturers experience financial, operational, or quality assurance
difficulties; the Company's business could be adversely affected unless and
until an alternate manufacturer could be found. There is no assurance that an
alternate manufacturer will be able to meet the Company's requirements or that
existing or alternate sources for interface boards will continue to be available
at favorable prices.
EMPLOYEES
As of January 31, 2005, the Company had approximately 235 employees.
The Company's employees are not covered by any collective bargaining agreement
and the Company considers its relationship with its employees to be good.
Employees of the Company's subsidiary are subject to French labor laws that
contain requirements regarding termination, severance payments, and other
obligations that are significantly greater than those in the United States.
ITEM 2. PROPERTIES.
The Company's headquarters and development facilities are located in
Mount Laurel, New Jersey where it leases approximately 54,000 square feet of
office space. The Company also leases approximately 5,000 square feet of office
space in Dallas, Texas, and sales offices in Chicago, Illinois, and Boston,
Massachusetts. The Company's subsidiary leases approximately 7,000 square feet
of office space in Sophia-Antipolis, France and a sales office in Singapore.
The Company believes that its facilities currently under lease are more
than adequate for current operations, and may endeavor to selectively reduce its
existing facilities commitments.
ITEM 3. LEGAL PROCEEDINGS.
None.
10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the security holders during the
fourth quarter of fiscal year 2004.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
The Company's common stock trades on the NASDAQ National Market System
under the symbol "ULCM". The following table sets forth the range of closing
prices of the Company's common stock as reported on NASDAQ for the period from
February 1, 2003 through January 31, 2005:
FISCAL YEAR FISCAL QUARTER LOW HIGH
- ----------- -------------- --- ----
2003 02/1/03 - 04/30/03 $ 5.50 $ 7.28
05/1/03 - 07/31/03 $ 7.08 $ 12.09
08/1/03 - 10/31/03 $ 9.75 $ 12.93
11/1/03 - 01/31/04 $ 8.68 $ 11.55
2004 02/1/04 - 04/30/04 $ 9.01 $ 10.93
05/1/04 - 07/31/04 $ 8.88 $ 11.70
08/1/04 - 10/31/04 $ 8.94 $ 17.19
11/1/04 - 01/31/05 $ 13.24 $ 19.12
There were 31 holders of record of the Company's common stock on March
22, 2005. Such record holders include a number who are nominees for an
undetermined number of beneficial owners. The Company believes that the number
of beneficial owners of the shares of common stock outstanding at such date was
approximately 3,400.
The Company does not currently expect to pay any cash dividends on its
equity securities in the near future, but rather intends to retain its earnings
to finance the development and growth of its business. Any future determination
as to the declaration and payment of dividends will be made by the Board of
Directors in its discretion, and will depend upon the Company's earnings,
financial condition, capital requirements, and other relevant factors.
12
ITEM 6. SELECTED FINANCIAL DATA.
The following tables present selected consolidated financial data for
the Company for each of the years in the five years ended January 31, 2005. Such
information has been derived from the Company's audited consolidated financial
statements and should be read in conjunction with the Company's consolidated
financial statements and the notes to the consolidated financial statements
included elsewhere in this report.
YEARS ENDED JANUARY 31,
--------------------------------------------------------------------
2001 2002 2003 2004 2005
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Sales $ 47,441 $ 58,156 $ 29,231 $ 38,378 $ 63,436
Cost of sales 15,489 19,536 11,233 11,158 14,627
---------- ---------- ---------- ---------- ----------
Gross profit 31,952 38,620 17,998 27,220 48,809
Research and development 10,325 14,236 10,098 9,461 10,636
Selling, general and administrative 13,271 15,861 13,972 15,168 17,607
Workforce reduction and restructuring charges (credits) - - 2,290 (233) -
---------- ---------- ---------- ---------- ----------
Income (loss) from operations 8,356 8,523 (8,362) 2,824 20,566
Interest and other income, net 6,282 8,761 5,536 3,493 3,275
---------- ---------- ---------- ---------- ----------
Income (loss) before income tax provision (benefit) 14,638 17,284 (2,826) 6,317 23,841
Income tax provision (benefit) 5,561 6,447 (1,091) 1,737 7,870
---------- ---------- ---------- ---------- ----------
Net income (loss) $ 9,077 $ 10,837 $ (1,735) $ 4,580 $ 15,971
========== ========== ========== ========== ==========
Earnings (loss) per share--diluted $ 0.22 $ 0.25 $ (0.04) $ 0.11 $ 0.36
Weighted average number of common and common
equivalent shares outstanding - diluted 40,715 43,246 41,399 43,261 44,009
JANUARY 31,
-------------------------------------------------------------------
2001 2002 2003 2004 2005
---- ---- ---- ---- ----
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital $ 195,369 $ 212,946 $ 215,945 $ 222,229 $ 246,150
Total assets 232,187 240,675 237,102 244,627 271,992
Shareholders' equity 207,049 224,024 223,152 231,847 255,564
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
INTRODUCTION
Ulticom designs, develops, markets, licenses, and supports service
enabling signaling software for fixed, mobile, 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 support 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.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those that are both most important to
the portrayal of a company's financial position and results of operations, and
require management's most difficult, subjective or complex judgments. Although
not all of the Company's accounting policies require management to make
difficult, subjective or complex judgments or estimates, the following policies
and estimates are those that the Company deems most critical.
In accordance with Statement of Position 97-2, "Software Revenue
Recognition," and related Interpretations; product revenues, which include
software license and hardware revenue, are generally recognized in the period in
which persuasive evidence of an arrangement exists, the products are delivered
and accepted by the customer, the fee is fixed and determinable, and collection
is considered probable. When the Company has significant obligations subsequent
to shipment, revenues are not recognized until the obligations are fulfilled.
Revenues from arrangements that include significant acceptance terms are not
recognized until acceptance has occurred. The Company provides its customers
with post-contract support services, which generally consist of bug-fixing and
telephone access to the Company's technical personnel, but may also include the
right to receive product updates, upgrades, and enhancements. Revenue from these
services is recognized ratably over the contract period. Post-contract support
services included in the initial licensing fee are allocated from the total
contract amount based on the relative fair value of vendor specific objective
evidence ("VSOE"). For multi-element arrangements, VSOE of fair value is
determined based on the price charged when the same element is sold separately
or, for elements not yet being sold separately, the price established by
management having the relevant authority. If VSOE of fair value does not exist
for one or more delivered elements of a multi-element arrangement and VSOE of
fair value exists for all undelivered elements, then revenue is recognized using
the "residual method."
14
Deferred revenue consists primarily of amounts billed to customers
pursuant to terms specified in contracts but for which revenue has not been
recognized.
Revenues from providing customer training are recognized when training
is provided and historically have not been material.
Revenues from fee-based consulting and development services are
recognized when services are provided in accordance with customer's
specification and historically have not been material.
Cost of sales includes salary and related benefits, material costs,
depreciation and amortization, an overhead allocation, as well as other costs
associated with cost of sales activities. Research and development costs include
salary and related benefits as well as travel, depreciation and amortization of
research and development equipment, an overhead allocation, as well as other
costs associated with research and development activities. Selling, general and
administrative costs include salary and related benefits, travel, depreciation
and amortization, marketing and promotional materials, recruiting expenses,
professional fees, corporate services provided by CTI, facility costs, as well
as other costs associated with sales, marketing, finance, and administrative
departments.
Expenses incurred in connection with research and development
activities and selling, general and administrative expenses are charged to
operations as incurred.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
RELATED PARTY TRANSACTIONS
The Company sells products and provides services to other subsidiaries
of CTI. Sales to related parties were approximately $3,352,000, $4,234,000, and
$6,419,000 for the years ended January 31, 2003, 2004, and 2005, respectively.
As of January 31, 2004 and 2005, amounts due from subsidiaries of CTI
were approximately $240,000 and $1,432,000, respectively, and are included in
accounts receivable on the Consolidated Balance Sheets.
The Company has a corporate services agreement with CTI. Under this
agreement, CTI provides the Company with the following services:
15
o maintaining in effect general liability and other insurance
policies providing coverage for the Company;
o maintaining in effect a policy of directors' and officers'
insurance covering the Company's directors and officers;
o administration of employee benefit plans;
o routine legal services; and
o consulting services with respect to the Company's corporate
communications.
The Company has agreed to pay to CTI a quarterly fee of $150,000,
payable in arrears at the end of each fiscal quarter, in consideration for all
services provided by CTI during such fiscal quarter. The Company was charged
$600,000 in each of the years ended January 31, 2003, 2004, and 2005 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, 2006 and
extends for additional twelve-month periods unless terminated by either party.
16
RESULTS OF OPERATIONS
YEAR ENDED JANUARY 31, 2005 ("FISCAL YEAR 2004") COMPARED TO YEAR ENDED JANUARY
31, 2004 ("FISCAL YEAR 2003")
Sales. Sales for fiscal year 2004 increased by approximately $25.1
million, or approximately 65%, to approximately $63.4 million when compared with
fiscal year 2003. The increase was attributable to an increase in product
revenues of approximately $25.3 million, due primarily to a higher volume of
sales and deployments of our Signalware products when compared with fiscal year
2003. The increase in sales was partially offset by a decrease in service
revenues of approximately $0.2 million. Sales to international customers
represented approximately 79% of sales in fiscal year 2004 and approximately 72%
of sales in fiscal year 2003.
Cost of Sales. Cost of sales increased by approximately $3.5 million,
or approximately 31%, to approximately $14.6 million in fiscal year 2004 when
compared with fiscal year 2003. The dollar increase is primarily attributable to
increased expenses of approximately $2.7 million in material and production
costs and approximately $0.9 million in personnel-related and overhead costs,
offset by approximately $0.1 million decrease in depreciation and amortization
costs for fiscal year 2004 when compared with fiscal year 2003. Gross margins
(expressed as a percentage of sales) increased to approximately 77% in fiscal
year 2004 from approximately 71% in fiscal year 2003.
Research and Development Expenses. Research and development expenses
increased in fiscal year 2004 by approximately $1.2 million, or approximately
12%, to approximately $10.6 million in fiscal year 2004 when compared with
fiscal year 2003, and as a percentage of sales, decreased to approximately 17%
in fiscal year 2004 from approximately 25% in fiscal year 2003. The dollar
increase is primarily attributable to management's investment in research and
development activities to enhance the features and performance of existing
products and introduce new products, resulting in approximately $1.4 million
increase in personnel-related and overhead costs. The dollar increase in
research and development expenses was partially offset by a decrease of
approximately $0.2 million in depreciation and amortization costs for fiscal
year 2004 when compared with fiscal year 2003.
Selling, General & Administrative Expenses. Selling, general and
administrative expenses increased by approximately $2.4 million, or
approximately 16%, to approximately $17.6 million in fiscal year 2004 when
compared with fiscal year 2003, and as a percentage of sales decreased to
approximately 28% in fiscal year 2004 from approximately 40% in fiscal year
2003. The dollar increase is primarily attributable to management's continued
investment in sales and marketing activities, resulting in approximately $1.7
million increase in personnel-related costs, $0.8 million in professional
services and $0.3 million in travel and entertainment costs. The dollar increase
in selling, general and administrative expenses was partially offset by a
decrease of approximately $0.3 million in depreciation and amortization costs
and $0.1 million in other costs, for fiscal year 2004 when compared with fiscal
year 2003.
17
Workforce Reduction and Restructuring Charges (Credits). In June 2003,
the Company entered into an agreement with the landlord of a facility covered
under the Company's 2002 restructuring plan. The agreement terminated 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.
Interest and Other Income, net. Interest income decreased by
approximately $0.2 million, or approximately 6%, to approximately $3.3 million
in fiscal year 2004 when compared with fiscal year 2003. The decrease is a
result of lower interest income earned on the Company's cash investments of
approximately $0.6 million, primarily as a result of a shift towards investing
in lower yielding, tax efficient investments, which is partially offset by lower
realized losses from investments of approximately $0.4 million when compared
with fiscal year 2003.
Income Tax Provision (Benefit). Provision for income taxes increased by
approximately $6.1 million to approximately $7.9 million for fiscal year 2004
when compared with fiscal year 2003. The Company's overall effective tax rate
was approximately 33% for fiscal year 2004 and approximately 28% for fiscal year
2003.
Net Income (Loss). Net income increased by approximately $11.4 million
to approximately $16.0 million for fiscal year 2004 when compared with fiscal
year 2003. Net income as a percentage of sales was approximately 25% in fiscal
year 2004 and approximately 12% in fiscal year 2003. The changes are primarily
attributable to the factors described above.
YEAR ENDED JANUARY 31, 2004 COMPARED TO YEAR ENDED JANUARY 31, 2003 ("FISCAL
YEAR 2002")
Sales. Sales for fiscal year 2003 increased by approximately $9.1
million, or approximately 31%, to approximately $38.4 million when compared with
fiscal year 2002. The increase was attributable to an increase in product
revenues of approximately $8.5 million and an increase in service revenues of
approximately $0.7 million, due primarily to a higher volume of sales and
deployments of our Signalware products and services when compared with fiscal
year 2002. Sales to international customers represented approximately 72% of
sales in fiscal year 2003 and approximately 71% of sales in fiscal year 2002.
Cost of Sales. Cost of sales decreased by approximately $0.1 million,
or approximately 1%, to approximately $11.2 million in fiscal year 2003 when
compared with fiscal year 2002. The dollar decrease is primarily attributable to
lower expenses of approximately $0.3 million in depreciation and amortization
costs and approximately $0.1 million in material and production costs, offset by
approximately $0.3 million increase in personnel-related and overhead costs for
fiscal year 2003 when compared with fiscal year 2002. Gross margins (expressed
as a percentage of sales) increased from approximately 71% in fiscal year 2003
to approximately 62% in fiscal year 2002.
18
Research and Development Expenses. Research and development expenses
decreased in fiscal year 2003 by approximately $0.6 million, or approximately
6%, to approximately $9.5 million in fiscal year 2003 when compared with fiscal
year 2002, and as a percentage of sales, decreased to approximately 25% in
fiscal year 2003 from approximately 35% in fiscal year 2002. The dollar decrease
is primarily attributable to management's efforts to better align the Company's
cost structure with the business environment, which contributed to decreases of
approximately $0.3 million in personnel-related costs and $0.3 million in
depreciation and amortization expense.
Selling, General & Administrative Expenses. Selling, general and
administrative expenses increased by approximately $1.2 million, or
approximately 9%, to approximately $15.2 million in fiscal year 2003 when
compared with fiscal year 2002, and as a percentage of sales decreased to
approximately 40% in fiscal year 2003 from approximately 48% in fiscal year
2002. The dollar increase is primarily attributable to management's continued
investment in sales and marketing activities, resulting in approximately $0.6
million increase in personnel-related costs, $0.5 million in professional
services and $0.1 million in travel and entertainment costs.
Workforce Reduction and Restructuring Charges (Credits). During fiscal
year 2002, the Company took steps to better align its cost structure with the
business environment. These steps included a workforce reduction and
restructuring plan announced in April 2002. The plan included terminations of 47
employees in the United States and 18 employees in France, in the engineering
and administrative departments of the Company. As a result, the Company recorded
a charge of approximately $2.3 million to operations in fiscal year 2002, which
included severance and other related costs of approximately $1.6 million, the
elimination of excess facilities of approximately $0.6 million, and the
write-off of certain property and equipment of approximately $0.1 million.
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 vacated
as a result of the restructuring.
The write-off of property and equipment consisted primarily of
leasehold improvements and furnishings determined to be impaired at a facility
vacated in the United States.
In June 2003, the Company entered into an agreement with the landlord
of the facility covered under the restructuring plan 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.
Interest and Other Income, net. Interest income decreased by
approximately $2.0 million, or approximately 37%, to approximately $3.5 million
in fiscal year 2003 as when compared with fiscal year 2002. The decrease is a
result of lower interest income earned on the Company's cash investments of
approximately $1.3 million, primarily as a result of the decline in interest
rates when compared with the corresponding 2002 periods and an increase in
losses from investments of approximately $0.7 million.
Income Tax Provision (Benefit). Provision for income taxes was
approximately $1.7 million for fiscal year 2003. For fiscal year 2002, the
Company had a benefit for income taxes of approximately $1.0 million due to
losses sustained on a pre-tax basis. The Company's overall effective tax rate
was approximately 28% for fiscal year 2003 and approximately (39)% for fiscal
year 2002.
19
Net Income (Loss). Net income for fiscal year 2003 was approximately
$4.6 million when compared with net loss of approximately $1.7 million in fiscal
year 2002. Net income (loss) as a percentage of sales was approximately 12% in
fiscal year 2003 and approximately (6)% in fiscal year 2002. The changes are
primarily attributable to the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital at January 31, 2005 and 2004 of
approximately $246.2 million and $222.2 million, respectively. At January 31,
2005 and 2004, the Company had cash and cash equivalents and short-term
investments of approximately $246.7 million and $224.4 million, respectively.
Operations for fiscal years 2004, 2003, and 2002, after adjusting for
non-cash items, provided cash of approximately $17.4 million, $5.5 million, and
$2.3 million, respectively. During such years, other changes in operating assets
and liabilities provided (used) cash of approximately $0.9 million, $(1.2)
million, and $(1.5) million, respectively. This resulted in net cash provided by
operating activities of approximately $18.3 million, $4.3 million, and $0.8
million during the fiscal years 2004, 2003, and 2002, respectively.
Investing activities for fiscal years 2004, 2003, and 2002 used cash of
approximately $10.6 million, $10.6 million, and $35.5 million, respectively.
These amounts include (i) purchases of property and equipment of approximately
$1.4 million, $0.8 million, and $0.6 million, respectively; and (ii) net
maturities and sales (purchases) of investments, of approximately $(9.1)
million, $(9.9) million, and $(34.9) million, respectively.
Financing activities for fiscal years 2004, 2003, and 2002 provided
cash of approximately $5.3 million, $2.1 million, and $1.4 million,
respectively, relating to the 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.
20
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.
OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS
The Company does not participate in transactions that generate
relationships with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special purpose entities
("SPEs"), which would have been established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited
purposes. As of January 31, 2005, the Company was not involved in any
unconsolidated SPE transactions.
The following table summarizes the impact that the Company's January
31, 2005 aggregate contractual obligations are expected to have on liquidity and
cash flows in future periods:
Payments Due by Period
-------------------------------------------------------------------------------------
Less than More than
Total 1 Year 1-3 Years 3-5 Years 5 Years
----- ------ --------- --------- -------
(In thousands)
Operating lease obligations $ 1,211 $ 995 $ 214 $ 2 $ -
Purchase obligations (1) 3,648 3,648 - - -
-------------------------------------------------------------------------------------
Total $ 4,859 $ 4,643 $ 214 $ 2 $ -
============= ============= =========== ========== ==========
(1) Purchase obligations include agreements to purchase goods or services that
are enforceable and legally binding on the Company and that specify all
significant terms, including: fixed or minimum quantities to be purchased;
fixed, minimum or variable price provisions; and the approximate timing of the
transaction. Purchase obligations exclude agreements that are cancelable without
penalty. The Company does not have material commitments for capital expenditures
as of January 31, 2005.
CERTAIN TRENDS AND UNCERTAINTIES
The Company derives substantially all of its revenue from the
communications industry, which has experienced a challenging capital spending
environment. Although the capital spending environment has improved recently and
the Company's revenues have increased in recent quarters, business conditions
currently are weaker than in prior quarters 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 will be adversely affected. Because a significant proportion of the
21
Company's sales occur in the late stages of a quarter, a delay, cancellation or
other factor resulting in the postponement or cancellation of a sale may cause
the Company to miss its financial projections, which may not be discernible
until the end of a financial reporting period. The Company issued guidance that
its sales and net income for the first fiscal quarter of 2005 is projected to be
lower than the prior quarter's sales and net income. Future results may differ
materially from recent results and past reported results should not be
considered as an indication of future performance. 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
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. In the past, 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 have been
adversely affected by the past slowdown of infrastructure purchases by
communication service providers and by declines in technology expenditures.
While there has recently been an increase in such purchases, the return of
diminished purchases 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 may, in the future, 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.
A limited number of customers have contributed a significant percentage
of the Company's revenues; with 68% of the Company's fiscal year 2004 sales
derived from only three customers. 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.
Recently, there have been announcements of several mergers in the
telecommunications industry. To the extent that the Company's customer base
consolidates, the Company may have an increased dependence on a few customers
who may be able to exert increased pressure on the Company's prices and
contractual terms in general. Consolidation also may result in the loss of both
existing and potential customers of the Company.
While the Company's plan of operations is predicated, in part, on a
recovery in expenditures by equipment manufacturers, application developers and
communication service providers, the Company could experience deterioration in
its operating results, and may determine to modify its plan for future
operations in the absence of such recovery, which may include, among other
things, reductions in its workforce.
22
The Company intends to continue to make significant investment in its
business, and to examine opportunities for growth. 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 financial
results 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 intends to continue to examine opportunities for growth
through merger and acquisitions. If the Company does make acquisitions, it may
not be able to discover all potential risks and liabilities of the newly
acquired business through the due diligence process, will inherit the acquired
companies' past financial statements and may enter an industry in which it has
limited or no experience. Also, the Company may not be able to successfully
incorporate the personnel, operations and customers of these companies into the
Company's business. In addition, the Company may fail to achieve the anticipated
synergies from the combined businesses, including marketing, product
integration, distribution, product development and other synergies. The
integration process may further strain the Company's existing financial and
managerial controls and reporting systems and procedures. This may result in the
diversion of management and financial resources from the Company's core business
objectives. In addition, an acquisition or merger may require the Company to
utilize cash reserves, incur debt or issue equity securities, which may result
in a dilution of existing shareholders, and the Company may be negatively
impacted by the assumption of liabilities of the merged or acquired company. Due
to rapidly changing market conditions, the Company may find the value of its
acquired technologies and related intangible assets, such as goodwill as
recorded in the Company's financial statements, to be impaired, resulting in
charges to operations. The Company may also fail to retain the acquired or
merged company's key employees and customers. The 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.
Currently, the Company accounts for employee stock options in
accordance with Accounting Principles Board ("APB") Opinion No. 25 and related
Interpretations, which provide that any compensation expense relative to
employee stock options be measured based on intrinsic value of the stock
options. As a result, when options are priced at or above fair market value of
the underlying stock on the date of the grant, as currently is the Company's
practice, the Company incurs no compensation expense. In December 2004, the
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standard ("SFAS") No. 123 (Revised 2004), "Share-Based Payment",
("SFAS No. 123(R)") which revises SFAS No. 123 and supersedes APB Opinion No.
25. SFAS No. 123(R) requires all share-based payments to employees, including
grants of employee stock options, to be valued at fair value on the date of
grant, and to be expensed over the applicable vesting period. Pro forma
disclosure of the income statement effects of share-based payments is no longer
an alternative. SFAS No. 123(R) is effective for reporting periods beginning
after June 15, 2005, which for the Company is August 1, 2005 (the "Effective
Date"). Beginning on the Effective Date, the Company must (i) expense all
23
options granted after the Effective Date over the applicable vesting period, and
(ii) expense the non-vested portions of existing option grants going forward
over their remaining vesting period. Compensation expense for the non-vested
portions of existing option grants as of the Effective Date will be recorded
based on the fair value of the awards previously calculated in developing the
pro forma disclosures in accordance with the provisions of SFAS No. 123. Under
SFAS No. 123(R), the Company is required to adopt a fair value-based method for
measuring the compensation expense related to employee stock and stock options
awards; this will lead to substantial additional compensation expense. Any such
expense, although it will not affect the Company's cash flows, will have a
material negative impact on the Company's reported 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 continued 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, the Company may incur fees and
penalties in connection with such 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. Defects
or errors in the Company's products also 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. The
Company's products are dependent upon their ability to operate on new and
24
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's competitors may be able to develop more quickly or adapt
faster to new or emerging technologies and changes in customer requirements, or
devote greater resources to the development, promotion and sale of their
products. Some of the Company's competitors have longer operating histories,
larger customer bases, longer standing relationships with customers, greater
name recognition and significantly greater financial, technical, marketing,
customer service, public relations, distribution and other resources. New
competitors continue to emerge which may reduce the Company's market share. In
addition, some of the Company's customers, may in the future, decide to
internally develop their own solutions instead of purchasing them from the
Company. Increased competition could force the Company to lower its prices or
take other actions to differentiate its products.
The Company's recent growth has strained its managerial and operational
resources. The Company's continued growth may further strain its resources,
which could hurt its business and results of operations. There can be no
assurance that the Company's managers will be able to manage growth effectively.
To manage future growth, the Company's management must continue to improve the
Company's operational and financial systems, procedures and controls and expand,
train, retain and manage its employee base. If the Company's systems, procedures
and controls are inadequate to support its operations, the Company's expansion
could slow or come to a halt, and it could lose its opportunity to gain
significant market share. Any inability to manage growth effectively could
materially harm the Company's business, results of operations and financial
condition.
The Company's business is subject to evolving corporate governance and
public disclosure regulations that have increased both costs and the risk of
noncompliance, which could have an adverse effect on the Company's stock price.
Because the Company's common stock is publicly traded on the Nasdaq stock
market, the Company is subject to rules and regulations promulgated by a number
of governmental and self-regulated organizations, including the SEC, Nasdaq and
the Public Company Accounting Oversight Board, which monitors the accounting
practices of public companies. Many of these regulations have only recently been
enacted, and continue to evolve, making compliance more difficult and uncertain.
In addition, the Company's efforts to comply with these new regulations have
resulted in, and are likely to continue to result in, increased general and
administrative expenses and a diversion of management time and attention from
revenue-generating activities to compliance activities. In particular, Section
404 of Sarbanes-Oxley Act of 2002 and related regulations require the Company to
25
include a management assessment of its internal controls over financial
reporting and auditor attestation of that assessment in its annual report for
the Company's fiscal year ending January 31, 2005. While the Company is now able
to assert, in the management certifications filed with this Annual Report on
Form 10-K, that the Company's internal control over financial reporting is
effective as of January 31, 2005 and that no material weaknesses have been
identified, the Company must continue to monitor and assess the internal control
over financial reporting. The Company cannot provide any assurances that
material weaknesses will not be discovered in the future. If the Company's
management identifies one or more material weaknesses in the internal control
over financial reporting that remain unremediated, the Company will be unable to
assert such internal control over financial reporting is effective. If the
Company is unable to assert that the internal control over financial reporting
is effective for any given reporting period (or if the Company's auditors are
unable to attest that the management's report is fairly stated or are unable to
express an opinion on the effectiveness of the internal controls), the Company
could lose investor confidence in the accuracy and completeness of the Company's
financial reports, which would have an adverse effect on the Company's stock
price. The effort regarding Section 404 has required, and continues to require,
the commitment of significant financial and managerial resources.
Changes in existing accounting or taxation rules or practices, new
accounting pronouncements or taxation rules or new interpretations of existing
accounting principles could have a significant adverse effect on the Company's
results of operations and may affect the Company's reported financial 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.
Geopolitical, economic and military conditions could directly affect
the Company's operations. The outbreak of diseases, such as severe acute
respiratory syndrome ("SARS") have curtailed and may in the future curtail
travel to and from certain countries. Restrictions on travel to and from these
and other 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
26
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 United States military
involvement in overseas operations including, for example, the war in Iraq and
other armed conflicts throughout the world, could have a material adverse effect
on the Company's business, results of operations, and financial condition.
The Company is a highly automated business and a disruption or failure
of its systems in the event of a catastrophic event, such as a major earthquake,
tsunami or other natural disaster, cyber-attack or terrorist attack could cause
delays in completing sales and providing services. A catastrophic event that
results in the destruction or disruption of any of the Company's critical
business systems could severely affect its ability to conduct normal business
operations and, as a result, the financial condition and operating results could
be adversely affected. "Hackers" and others have, in the past, created a number
of computer viruses or otherwise initiated "denial of service" attacks on
computer networks and systems. The Company's information technology
infrastructure is regularly subject to various attacks and intrusion efforts of
differing seriousness and sophistication. If such "hackers" are 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. Even the perception of
security risks, whether or not valid, could inhibit market acceptance of the
Company's products and could harm the Company's business, financial condition
and operating results. While the Company diligently maintains its information
technology infrastructure and continuously implements protections against such
viruses, electronic break-ins, disruptions or intrusions, if the defensive
measures fail or should similar defensive measures by the Company's customers
fail, the Company's business could be materially and adversely affected.
The Company currently derives a majority of its total sales from
customers outside of the United States. International transactions involve
particular risks, including political decisions affecting tariffs and trade
conditions, rapid and unforeseen changes in economic conditions in individual
countries, difficulty in enforcing intellectual property rights, turbulence in
foreign currency and credit markets, and increased costs resulting from lack of
proximity to the customer. In addition, legal uncertainties regarding liability,
compliance with local laws and regulations, local taxes, labor laws, employee
benefits, currency restrictions, difficulty in accounts receivable collection,
longer collection periods and other requirements may have a negative impact on
the Company's operating results. Unforeseen changes in the regulatory
environment, including, but not limited to changes in product requirements also
may have an impact on the Company's revenues, operations and/or costs in any
given part of the world. New manufacturing requirements for the Company's
products could require the Company to redesign or find alternatives to such
products, resulting in delays and possibly lost sales.
All of the Company's products are of US origin and are classified under
the US export regulations such that currently no licenses are required to export
to the countries with which the Company currently conducts business. In the
future, the Company may be required to obtain export licenses and other
authorizations from applicable governmental authorities for certain countries
within which it conducts business. The failure to receive any required license
or authorization would hinder the Company's ability to sell its products and
could adversely affect the Company's business, results of operations, financial
condition, and could subject the Company to civil and criminal penalties.
27
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.
The Company's success is dependent on recruiting and retaining key
management and highly skilled technical, managerial, sales, and marketing
personnel. The market for highly skilled personnel remains very competitive. The
Company's ability to attract and retain employees also may be affected by cost
control actions, which in the past and may again in the future, include
reductions in the Company's workforce and the associated reorganization of
operations.
28
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 published or 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 offering 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.
While the Company occasionally files patent applications, it cannot be
assured that patents will be issued on the basis of such applications or that,
if such patents are issued, they will be sufficiently broad to protect its
technology. In addition, the Company cannot be assured that any patents issued
to it will not be challenged, invalidated or circumvented.
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
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.
29
The Company holds a large proportion of its net assets in 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, although interest rates have risen recently, low interest rates have
in the past and may in the future 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 shareholder 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 shareholders. For example, CTI may prevent or delay any
transaction involving a change in control of the Company or in which the
Company's shareholders might receive a premium over the prevailing market price
for their shares.
The Company issues stock options as a key component of its overall
compensation. There is growing pressure on public companies from shareholders
generally and various organizations to reduce the rate at which companies,
including the Company, issue stock options to employees, which may make it more
difficult to obtain shareholder approval of equity compensation plans when
required. In addition, FASB has adopted changes to generally accepted accounting
principles ("GAAP") that will require the Company to adopt a different method of
determining the compensation expense for its employee stock options and employee
stock purchase plan beginning in the third quarter of fiscal 2005. As a result,
the Company has terminated its employee stock purchase plan. In addition, the
Company believes expensing stock options will increase shareholder pressure to
limit future option grants and could make it more difficult for the Company to
grant stock options to employees in the future. As a result, the Company may
lose top employees to non-public, start-up companies or may generally find it
more difficult to attract, retain and motivate employees, either of which could
materially and adversely affect the Company's business, results of operations
and financial condition.
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
30
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.
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.
31
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No.123(R), which revises SFAS
No. 123 and supersedes APB No. 25. SFAS No. 123(R) requires all share-based
payments to employees, including grants of employee stock options, to be valued
at fair value on the date of grant, and to be expensed over the applicable
vesting period. Pro forma disclosure of the income statement effects of
share-based payments is no longer an alternative. SFAS No. 123(R) is effective
for reporting periods beginning after June 15, 2005, which for the Company is
August 1, 2005 (the "Effective Date"). Beginning on the Effective Date, the
Company must (i) expense all options granted after the Effective Date over the
applicable vesting period, and (ii) expense the non-vested portions of existing
option grants going forward over their remaining vesting period. Compensation
expense for the non-vested portions of existing option grants as of the
Effective Date will be recorded based on the fair value of the awards previously
calculated in developing the pro forma disclosures in accordance with the
provisions of SFAS No. 123. Under SFAS No. 123(R), the Company is required to
adopt a fair value-based method for measuring the compensation expense related
to employee stock and stock options awards; this will lead to substantial
additional compensation expense. Any such expense, although it will not affect
the Company's cash flows, will have a material negative impact on the Company's
reported results of operations.
In March 2004, the Emerging Issues Task Force ("EITF") of the FASB
reached a consensus on EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments", which provides
additional guidance for assessing impairment losses on investments.
Additionally, EITF 03-1 includes new disclosure requirements for investments
that are deemed to be temporarily impaired. In September 2004, the FASB delayed
the accounting provisions of EITF 03-1; however the disclosure requirements
remain effective for annual periods ending after June 15, 2004. The Company will
evaluate the impact of EITF 03-1 once final guidance is issued, however the
adoption of EITF 03-1 in its current form is not expected to have a material
effect on the Company's consolidated financial statements.
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.
32
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risk from changes in interest rates.
Various financial instruments held by the Company are sensitive to changes in
interest rates. Interest rate changes could result in an increase or decrease in
interest income as well as in gains or losses in the market value of the
Company's debt security investments due to differences between the market
interest rates and rates at the date of purchase of these investments.
The Company places its cash investments with high credit-quality
financial institutions and currently invests primarily in money market funds
placed with major banks and financial institutions, Auction Rate Securities,
corporate and municipal short and medium-term notes, asset-backed securities,
and United States government and United States government corporation and agency
obligations and/or mutual funds investing in the like. The Company has
investment guidelines relative to diversification and maturities designed to
maintain safety and liquidity. As of January 31, 2005, the Company had cash and
cash equivalents totaling approximately $19,372,000 and had short-term
investments totaling approximately $227,300,000. If, during the year ended
January 31, 2006, average short-term interest rates increase or decrease by 50
basis points relative to average rates realized during the year ended January
31, 2005, the Company's projected interest income from cash and cash equivalents
and short-term investments would increase or decrease by approximately
$1,233,000, assuming a similar level of investments in the year ended January
31, 2006.
Due to the short-term nature of the Company's cash and cash
equivalents, the carrying values approximates market value and are not generally
subject to price risk due to fluctuations in interest rates. The Company's
short-term investments are subject to price risk due to fluctuations in interest
rates. Neither a 10% increase nor decrease in prices would have a material
effect on the Company's consolidated financial statements. All short-term
33
investments are considered to be available-for-sale, accounted for at fair
value, with resulting unrealized gains or losses reported as a separate
component of shareholders' equity. If these available-for-sale securities
experience declines in fair value that are considered other-than-temporary, an
additional loss would be reflected in net income (loss) in the period when the
subsequent impairment becomes apparent. See Note 2 of the financial statements
for more information regarding short-term investments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial information required by Item 8 is in the "Financial
Statements" included in Item 15 of this report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. 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 January 31, 2005. 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 January 31, 2005.
(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 January
31, 2005, that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
See the Management Report on Internal Control Over Financial Reporting,
which appears on page F-2 of this report. The Company's management, including
the Chief Executive Officer and Chief Financial Officer, does not expect the
Company's disclosure controls and procedures or its internal controls, to
prevent all error and fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, with the Company have been detected.
34
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item is incorporated by referenced to the
information in the Company's Notice of Annual Meeting of Shareholders and Proxy
Statement relating to the Annual Meeting of Shareholders to be held on June 15,
2005 (the "Proxy Statement") under the captions "Codes of Business Conduct and
Ethics", "Background of Nominees and Executive Officers", "Audit Committee",
and "Section 16(a) Beneficial Ownership Reporting Compliance".
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is incorporated by reference to
"Executive Compensation" and "Compensation of Directors" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED SHAREHOLDER MATTERS
Information required by this Item is incorporated by reference to
"Security Ownership of Management and Principal Shareholders" and "Equity
Compensation Plan Information" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item is incorporated by reference to
"Certain Relationships and Related Transactions" in the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required by this Item is incorporated by reference to
"Independent Registered Public Accounting Firm Fees" and "Policy for Audit,
Audit Related and Non-Audit Services" in the Proxy Statement.
35
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Page
(a) Documents filed as part of this report.
--------------------------------------
(1) Financial Statements.
--------------------
Index to Consolidated Financial Statements F-1
Management Report on Internal Control Over Financial Reporting F-2
Report of Independent Registered Public Accounting Firm on Internal
Control over Financial Reporting F-3
Report of Independent Registered Public Accounting Firm on the
Consolidated Financial Statements F-5
Consolidated Balance Sheets as of January 31, 2004 and 2005 F-6
Consolidated Statements of Operations for the years ended January F-7
31, 2003, 2004 and 2005
Consolidated Statements of Shareholders' Equity for the years
ended January 31, 2003, 2004 and 2005 F-8
Consolidated Statements of Cash Flows for the years ended January
31, 2003, 2004 and 2005 F-9
Notes to Consolidated Financial Statements F-10
(2) Financial Statement Schedules.
-----------------------------
None
36
(3) Exhibits.
--------
The Index of Exhibits commences on the following page. Exhibits
numbered 10.1 through 10.6 and 10.8 through 10.12 comprise material
compensatory plans and arrangements of the registrant.
(b) Index of Exhibits
Exhibits
No. Description
3 Articles of Incorporation and By-Laws:
3.1* Amended and Restated Certificate of Incorporation of
Ulticom, Inc. (Incorporated by reference from the
Registrant's Registration Statement on Form S-1 under the
Securities Act of 1933, Registration No. 333-94873)
3.2* Amended and Restated Bylaws of Ulticom, Inc. (Incorporated
by reference from the Registrant's Registration Statement on
Form S-1 under the Securities Act of 1933, Registration No.
333-94873)
4 Instruments defining the rights of security holders including indentures:
4.1* Specimen Common Stock certificate. (Incorporated by
reference from the Registrant's Registration Statement on
Form S-1 under the Securities Act of 1933, Registration No.
333-94873)
4.2* See Exhibit 3.1 for provisions defining the rights of
holders of common stock of the Registrant.
10 Material Contracts:
10.1* Services Agreement, dated as of February 1, 1998, between
Comverse Technology, Inc. and Ulticom, Inc. (Incorporated by
reference from the Registrant's Registration Statement on
Form S-1 under the Securities Act of 1933, Registration No.
333-94873)
10.2* Federal Income Tax Sharing Agreement, dated as of December
21, 1999, between Comverse Technology, Inc. and Ulticom,
Inc. (Incorporated by reference from the Registrant's
Registration Statement on Form S-1 under the Securities Act
of 1933, Registration No. 333-94873)
10.3* Patent License Agreement, dated January 12, 2000, between
Comverse Patent Holding Company, Inc. and Ulticom, Inc.
(Incorporated by reference from the Registrant's
Registration Statement on Form S-1 under the Securities Act
of 1933, Registration No. 333-94873)
37
10.4* License Agreement, dated as of February 1, 2000, between
Comverse Technology, Inc. and Ulticom, Inc. (Incorporated by
reference from the Registrant's Registration Statement on
Form S-1 under the Securities Act of 1933, Registration No.
333-94873)
10.5* Registration Rights Agreement, dated as of January 1, 2000,
between Comverse Technology, Inc. and Ulticom, Inc.
(Incorporated by reference from the Registrant's
Registration Statement on Form S-1 under the Securities Act
of 1933, Registration No. 333-94873)
10.6* Business Opportunities Agreement, dated as of January 1,
1999, between Comverse Technology, Inc. and Ulticom, Inc.
(Incorporated by reference from the Registrant's
Registration Statement on Form S-1 under the Securities Act
of 1933, Registration No. 333-94873)
10.7* Form of Indemnification Agreement. (Incorporated by
reference from the Registrant's Registration Statement on
Form S-1 under the Securities Act of 1933, Registration No.
333-94873)
10.8* 1998 Stock Incentive Compensation Plan (Incorporated by
reference from the Registrant's Registration Statement on
Form S-1 under the Securities Act of 1933, Registration No.
333-94873)
10.9* Employment Agreement, dated as of February 1, 2000 between
Shawn Osborne and Ulticom, Inc. (Incorporated by reference
from the Registrant's Registration Statement on Form S-1
under the Securities Act of 1933, Registration No.
333-94873)
10.10* 2000 Employee Stock Purchase Plan (Incorporated by reference
from the Registrant's Registration Statement on Form S-8
under the Securities Act of 1933, Registration No.
333-56522)
10.11* Form of Agreement evidencing a grant of Stock Options under
the Ulticom, Inc.'s Stock Incentive Compensation Plan.
(Incorporated by reference to the Registrant's Current
Report on Form 8-K under the Securities Exchange Act of 1934
filed on December 10, 2004.)
10.12* Form of Agreement evidencing a grant of Stock Options under
the Ulticom, Inc.'s Stock Incentive Compensation Plan to its
directors. (Incorporated by reference to the Registrant's
Current Report on Form 8-K under the Securities Exchange Act
of 1934 filed on February 11, 2005.)
21.1** Subsidiaries of Ulticom, Inc.
38
23.1** Consent of Deloitte and Touche LLP, Independent Registered
Public Accounting Firm
24.1** Powers of Attorney (see signature page to this report)
31.1** Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2** Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32*** Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
- ---------------------------
* Incorporated by reference
** Filed with this report on Form 10-K
*** Furnished herewith pursuant to Item 601(b)(32) of SEC Regulation S-K and
are not deemed "filed" with the Securities and Exchange Commission and are
not incorporated by reference in any filing of the Company under the
Securities Act of 1933 or the Securities Exchange Act of 1934.
39
SIGNATURES
Pursuant to the requirements of the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
Ulticom, Inc.
(Registrant)
Dated: April 15, 2005 By: /s/ Shawn K. Osborne
Shawn K. Osborne
President and Chief Executive Officer
Dated: April 15, 2005 By: /s/ Mark A. Kissman
Mark A. Kissman
Vice President of Finance and
Chief Financial Officer
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Shawn K. Osborne and Mark A.
Kissman and each of them, jointly and severally, his attorneys-in-fact, each
with full power of substitution, for him in any and all capacities, to sign any
and all amendments to this Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each said
attorneys-in-fact or his substitutes, may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ Kobi Alexander Chairman of the Board of Directors April 13, 2005
- ----------------------- and Director
Kobi Alexander
/s/ Shawn K. Osborne President and Chief Executive Officer April 13, 2005
- ----------------------- and Director
Shawn K. Osborne (Principal Executive Officer)
/s/ Mark A. Kissman Chief Financial Officer April 13, 2005
- ----------------------- (Principal Financial Officer)
Mark A. Kissman
/s/ Paul D. Baker Director April 12, 2005
- -----------------------
Paul D. Baker
/s/ Michael J. Chill Director April 12, 2005
- -----------------------
Michael J. Chill
40
Signature Title Date
- --------- ----- ----
/s/ Ron Hiram Director April 12, 2005
- -----------------------
Ron Hiram
/s/ Yaacov Koren Director April 12, 2005
- -----------------------
Yaacov Koren
/s/ David Kreinberg Director April 13, 2005
- -----------------------
David Kreinberg
/s/ Rex A. McWilliams Director April 11, 2005
- -----------------------
Rex A. McWilliams
/s/ Paul L. Robinson Director April 13, 2005
- -----------------------
Paul L. Robinson
41
ULTICOM, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Management Report on Internal Control Over Financial Reporting..............F-2
Report of Independent Registered Public Accounting Firm
on Internal Control Over Financial Reporting.......................F-3
Report of Independent Registered Public Accounting Firm
on the Consolidated Financial Statements..........................F-5
Consolidated Balance Sheets as of January 31, 2004 and 2005 ................F-6
Consolidated Statements of Operations for the
years ended January 31, 2003, 2004 and 2005.........................F-7
Consolidated Statements of Shareholders' Equity for the
years ended January 31, 2003, 2004 and 2005.........................F-8
Consolidated Statements of Cash Flows for the
years ended January 31, 2003, 2004 and 2005 ........................F-9
Notes to Consolidated Financial Statements..................................F-10
F-1
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting as defined in
Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934. Those
rules define internal control over financial reporting as a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles and includes those policies and
procedures that:
o Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the
assets of the Company;
o Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and
o Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
The Company's management assessed the effectiveness of the Company's
internal control over financial reporting as of January 31, 2005. In making this
assessment, the Company's management used the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission.
Based on our assessment and those criteria, the Company's management
believes that, as of January 31, 2005, the Company's internal control over
financial reporting is effective.
The Company's independent registered public accounting firm, Deloitte &
Touche LLP, has issued an attestation report on management's assessment of the
Company's internal control over financial reporting, which appears on pages F-3
and F-4.
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
To the Board of Directors and Shareholders of
Ulticom, Inc.
Mount Laurel, New Jersey
We have audited management's assessment, included in the accompanying Management
Report on Internal Control Over Financial Reporting, that Ulticom, Inc. and
subsidiary (the "Company") maintained effective internal control over financial
reporting as of January 31, 2005, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by,
or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
F-3
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of January 31, 2005, is fairly
stated, in all material respects, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of January 31, 2005, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended January 31, 2005 of the Company and our
report dated April 1, 2005 expressed an unqualified opinion on those financial
statements.
/s/ Deloitte & Touche LLP
Jericho, New York
April 1, 2005
F-4
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON THE CONSOLIDATED
FINANCIAL STATEMENTS
To the Board of Directors and Shareholders of
Ulticom, Inc.
Mount Laurel, New Jersey
We have audited the accompanying consolidated balance sheets of Ulticom, Inc.
and subsidiary (the "Company") as of January 31, 2005 and 2004, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended January 31, 2005. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Ulticom, Inc. and subsidiary as of
January 31, 2005 and 2004, and the results of their operations and their cash
flows for each of the three years in the period ended January 31, 2005, in
conformity with accounting principles generally accepted in the United States of
America.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of January 31, 2005, based on the
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated April 1, 2005 expressed an unqualified opinion on management's assessment
of the effectiveness of the Company's internal control over financial reporting
and an unqualified opinion on the effectiveness of the Company's internal
control over financial reporting.
/s/ Deloitte & Touche LLP
Jericho, New York
April 1, 2005
F-5
ULTICOM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JANUARY 31, JANUARY 31,
2004 2005
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,316 $ 19,372
Short-term investments 218,066 227,300
Accounts receivable, net 6,417 11,062
Inventories 762 1,286
Prepaid expenses and other current assets 3,448 3,558
---------- ----------
Total current assets 235,009 262,578
Property and equipment, net 2,182 2,274
Investments 5,463 5,375
Other assets 1,973 1,765
---------- ----------
Total assets $ 244,627 $ 271,992
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 9,073 $ 11,966
Deferred revenue 3,707 4,462
---------- ----------
Total current liabilities 12,780 16,428
COMMITMENTS AND CONTINGENCIES (Note 13)
SHAREHOLDERS' EQUITY:
Undesignated stock, no par value, 10,000,000 shares authorized,
no shares issued and outstanding - -
Common stock, no par value, 200,000,000 shares authorized,
42,150,857 and 43,101,804 shares issued and outstanding - -
Additional paid-in capital 208,576 216,490
Retained earnings 23,869 39,840
Accumulated other comprehensive loss (598) (766)
---------- ----------
Total shareholders' equity 231,847 255,564
---------- ----------
Total liabilities and shareholders' equity $ 244,627 $ 271,992
========== ==========
See notes to consolidated financial statements
F-6
ULTICOM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED JANUARY 31,
-----------------------
2003 2004 2005
--------- --------- ---------
Sales:
Product revenues:
Sales to third parties $ 19,325 $ 26,905 $ 50,022
Sales to related parties 3,342 4,231 6,417
--------- --------- ---------
Total product revenues 22,667 31,136 56,439
--------- --------- ---------
Service revenues:
Sales to third parties 6,554 7,239 6,995
Sales to related parties 10 3 2
--------- --------- ---------
Total service revenues 6,564 7,242 6,997
--------- --------- ---------
Total sales 29,231 38,378 63,436
--------- --------- ---------
Cost of sales:
Product costs 5,930 5,892 8,766
Service costs 5,303 5,266 5,861
--------- --------- ---------
Total cost of sales 11,233 11,158 14,627
--------- --------- ---------
Gross profit 17,998 27,220 48,809
Operating expenses:
Research and development 10,098 9,461 10,636
Selling, general and administrative 13,972 15,168 17,607
Workforce reduction and restructuring charges (credits) 2,290 (233) -
--------- --------- ---------
Income (loss) from operations (8,362) 2,824 20,566
Interest and other income, net 5,536 3,493 3,275
--------- --------- ---------
Income (loss) before income tax provision (benefit) (2,826) 6,317 23,841
Income tax provision (benefit) (1,091) 1,737 7,870
--------- --------- ---------
Net income (loss) $ (1,735) $ 4,580 $ 15,971
========= ========= =========
Earnings (loss) per share:
Basic $ (0.04) $ 0.11 $ 0.37
========= ========= =========
Diluted $ (0.04) $ 0.11 $ 0.36
========= ========= =========
See notes to consolidated financial statements
F-7
ULTICOM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 2003, 2004 AND 2005
(IN THOUSANDS)
Accumulated Other
Comprehensive Income (Loss)
Common Stock ---------------------------
------------- Additional Unrealized Cumulative Total
Number of Par Paid-in Retained Gains Translation Shareholders'
Shares Value Capital Earnings (Losses) Adjustment Equity
------ ----- ------- -------- -------- ---------- ------
BALANCE, FEBRUARY 1, 2002 41,122 $ - $ 202,557 $ 21,024 $ 287 $ 156 $ 224,024
Comprehensive loss:
Net loss (1,735) (1,735)
Unrealized loss on available-for-sale
securities, net (721) (721)
Translation adjustment (247) (247)
----------
Total comprehensive loss (2,703)
Common stock issued for employee
stock purchase plan 107 633 633
Exercise of stock options 302 815 815
Tax benefit of dispositions of stock options 383 383
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 31, 2003 41,531 - 204,388 19,289 (434) (91) 223,152
Comprehensive income:
Net income 4,580 4,580
Unrealized gain on available-for-sale
securities, net 124 124
Translation adjustment (197) (197)
----------
Total comprehensive income 4,507
Common stock issued for employee
stock purchase plan 112 548 548
Exercise of stock options 508 1,537 1,537
Tax benefit of dispositions of stock options 2,103 2,103
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 31, 2004 42,151 - 208,576 23,869 (310) (288) 231,847
Comprehensive income:
Net income 15,971 15,971
Unrealized loss on available-for-sale
securities, net (494) (494)
Translation adjustment 326 326
----------
Total comprehensive income 15,803
Common stock issued for employee
stock purchase plan 70 590 590
Exercise of stock options 881 4,702 4,702
Tax benefit of dispositions of stock options 2,622 2,622
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 31, 2005 43,102 $ - $ 216,490 $ 39,840 $ (804) $ 38 $ 255,564
========== ========== ========== ========== ========== ========== ==========
See notes to consolidated financial statements
F-8
ULTICOM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED JANUARY 31,
-----------------------
2003 2004 2005
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,735) $ 4,580 $ 15,971
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 2,502 1,933 1,322
Deferred income tax provision (benefit) 1,547 (1,020) 148
Changes in operating assets and liabilities:
Accounts receivable, net 4,210 (2,205) (4,645)
Inventories (249) (67) (524)
Prepaid expenses and other current assets (202) 2,521 2,571
Accounts payable and accrued expenses (4,462) 563 2,893
Deferred revenue (86) 114 755
Other, net (686) (2,125) (167)
--------- --------- ---------
Net cash provided by operating activities 839 4,294 18,324
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (565) (782) (1,414)
Maturities and sales (purchases) of investments, net (34,934) (9,854) (9,146)
--------- --------- ---------
Net cash used in investing activities (35,499) (10,636) (10,560)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock in connection with
exercise of stock options and employee stock purchase plan 1,448 2,085 5,292
--------- --------- ---------
Net cash provided by financing activities 1,448 2,085 5,292
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (33,212) (4,257) 13,056
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 43,785 10,573 6,316
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 10,573 $ 6,316 $ 19,372
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ - $ - $ -
========= ========= =========
Cash paid during the year for income taxes $ 813 $ 1,247 $ 3,980
========= ========= =========
See notes to consolidated financial statements
F-9
ULTICOM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2003, 2004 AND 2005
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPANY BUSINESS AND BACKGROUND - Ulticom, Inc. (together with its
subsidiary, the "Company"), a New Jersey corporation and a majority-owned
subsidiary of Comverse Technology, Inc. ("CTI"), designs, develops, markets,
licenses, and supports service enabling signaling software for fixed, mobile,
and Internet communications software and hardware for use in the communications
industry.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Ulticom, Inc. and its wholly-owned subsidiary. All
material intercompany balances and transactions have been eliminated.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments purchased with original maturities of three months or less to be
cash equivalents.
SHORT-TERM INVESTMENTS - The Company classifies all of its short-term
investments as available-for-sale, accounted for at fair value, with resulting
unrealized gains or losses reported as a separate component of shareholders'
equity.
In connection with the preparation of this report, the Company
concluded that it was appropriate to classify investments in Auction Rate
Securities ("ARS") as short-term investments. ARS generally have long-term
stated maturities; however, these investments have characteristics similar to
short-term investments because at pre-determined intervals, generally every 7 to
90 days, there is a new auction process at which these securities are reset to
current interest rates. Previously, such investments had been classified as cash
and cash equivalents due to their liquidity and pricing reset feature.
Accordingly, the Company has revised the classification to report these
securities as short-term investments in the Consolidated Balance Sheets. As of
January 31, 2005, the Company held approximately $162,970,000 of investments in
ARS that are classified as short-term investments. The Company reclassified
approximately $122,249,000, $92,051,000, and $96,364,000 of investments in ARS
as of January 31, 2004, 2003, and 2002, respectively, that were previously
included in cash and cash equivalents to short-term investments. The Company
also reclassified accrued interest related to investments in ARS of
approximately $148,000, $48,000, and $111,000 as of January 31, 2004, 2003, and
2002, respectively, from cash and cash equivalents to prepaid expenses and other
current assets.
The Company has also revised the presentation of the Consolidated
Statements of Cash Flows for the years ended January 31, 2004 and 2003 to
reflect the purchases and sales of ARS as investing activities rather than as a
component of cash and cash equivalents, which is consistent with the
presentation for the year ended January 31, 2005. In the previously reported
Consolidated Statements of Cash Flows for the years ended January 31, 2004 and
2003, net cash (used in) provided by investing activities related to these
short-term investments of approximately $(30,198,000) and $4,313,000,
F-10
respectively, were included in cash and cash equivalents and net cash (used in)
provided by operating activities related to prepaid expenses and other current
assets of approximately $(100,000) and $63,000, respectively, were also included
in cash and cash equivalents. This change in classification did not materially
affect previously reported cash flows from operations, and did not change
previously reported cash flows from financing activities in the Consolidated
Statements of Cash Flows or previously reported Consolidated Statements of
Operations for any period.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The estimated fair value amounts
have been determined by the Company, using available market information and
appropriate valuation methodologies. However, considerable judgment is
necessarily required in interpreting market data to develop the estimates of
fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
CONCENTRATION OF CREDIT RISK - Financial instruments which potentially
expose the Company to concentration of credit risk, consist primarily of cash
investments and accounts receivable. The Company places its cash investments
with high credit-quality financial institutions and currently invests primarily
in money market funds placed with major banks and financial institutions, ARS,
corporate and municipal short and medium-term notes, asset-backed securities,
and United States government and United States government corporation and agency
obligations and/or mutual funds investing in the like. The Company believes no
significant concentration of credit risk exists with respect to these cash
investments. The Company sells its products to customers who are dispersed
across many geographic regions and who are principally in the communications
industry. The Company had three customers that represented approximately 60% of
gross accounts receivable as of January 31, 2005. The Company had three
customers that represented approximately 56% of gross accounts receivable as of
January 31, 2004. The net carrying amounts of these financial instruments are a
reasonable estimate of their fair value.
A roll forward of the allowance for doubtful accounts is a follows:
YEARS ENDED JANUARY 31,
-----------------------
2003 2004 2005
----- ----- -----
(IN THOUSANDS)
Balance, beginning of year $ 849 $ 636 $ 516
Charges to costs and expenses - - -
Deductions 213 120 116
----- ----- -----
Balance, end of year $ 636 $ 516 $ 400
===== ===== =====
INVENTORIES - Inventories are stated at the lower of cost or market and
consist entirely of finished goods, net of reserve for obsolescence. Cost is
determined by the first-in, first-out method.
F-11
PROPERTY AND EQUIPMENT, NET - Property and equipment are recorded at
cost less accumulated depreciation and amortization. The Company depreciates its
furniture and equipment using straight-line depreciation over periods ranging
from three to seven years. Leasehold improvements are amortized over the lesser
of the term of the respective lease or the estimated useful lives of the
improvements (7 years). The cost of maintenance and repairs are charged to
operations as incurred. Significant renewals and improvements are capitalized.
INVESTMENTS - The Company's long-term investments consist of common
stock and warrants to purchase common stock of a company and are stated at cost,
adjusted for declines in fair value that are considered other-than-temporary.
INCOME TAXES - The Company accounts for income taxes using the asset
and liability method. Under this method, deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax bases of
assets and liabilities, and are measured using the enacted tax rates and laws
that are expected to be in effect when the differences are expected to reverse.
REVENUE AND EXPENSE RECOGNITION - In accordance with Statement of
Position 97-2, "Software Revenue Recognition," and related Interpretations;
product revenues, which include software license and hardware revenue, are
generally recognized in the period in which persuasive evidence of an
arrangement exists, the products are delivered and accepted by the customer, the
fee is fixed and determinable, and collection is considered probable. When the
Company has significant obligations subsequent to shipment, revenues are not
recognized until the obligations are fulfilled. Revenues from arrangements that
include significant acceptance terms are not recognized until acceptance has
occurred. The Company provides its customers with post-contract support
services, which generally consist of bug-fixing and telephone access to the
Company's technical personnel, but may also include the right to receive product
updates, upgrades, and enhancements. Revenue from these services is recognized
ratably over the contract period. Post-contract support services included in the
initial licensing fee are allocated from the total contract amount based on the
relative fair value of vendor specific objective evidence ("VSOE"). For
multi-element arrangements, VSOE of fair value is determined based on the price
charged when the same element is sold separately or, for elements not yet being
sold separately, the price established by management having the relevant
authority. If VSOE of fair value does not exist for one or more delivered
elements of a multi-element arrangement and VSOE of fair value exists for all
undelivered elements, then revenue is recognized using the "residual method."
Deferred revenue consists primarily of amounts billed to customers
pursuant to terms specified in contracts but for which revenue has not been
recognized.
Included in product revenues are license revenues amounting to
approximately $6,873,000, $11,517,000, and $18,187,000 for the years ended
January 31, 2003, 2004, and 2005, respectively. The related costs of sales
associated with these license revenues include various personnel, duplication,
and shipping costs, which were not material in each of the periods presented.
F-12
Revenues from providing customer training are recognized when training
is provided and historically have not been material.
Revenues from fee-based consulting and development services are
recognized when services are provided in accordance with customer's
specification and historically have not been material.
Cost of sales includes salary and related benefits, material costs,
depreciation and amortization, an overhead allocation, as well as other costs
associated with cost of sales activities. Research and development costs include
salary and related benefits as well as travel, depreciation and amortization of
research and development equipment, an overhead allocation, as well as other
costs associated with research and development activities. Selling, general and
administrative costs include salary and related benefits, travel, depreciation
and amortization, marketing and promotional materials, recruiting expenses,
professional fees, corporate services provided by CTI, facility costs, as well
as other costs associated with sales, marketing, finance, and administrative
departments.
Expenses incurred in connection with research and development
activities and selling, general and administrative expenses are charged to
operations as incurred.
FUNCTIONAL CURRENCY AND FOREIGN CURRENCY TRANSACTION GAINS AND LOSSES-
The Company's sales and materials purchased for manufacturing are denominated in
or linked to the United States dollar. Certain operating costs of foreign
operations, principally salaries and related benefits, are denominated in local
currencies and any transaction gains or losses are recorded in the Company's
Consolidated Statements of Operations. The Company records any necessary foreign
currency translation adjustment, reflected in a separate component of
shareholders' equity, at the end of each reporting period. As of January 31,
2004 and 2005, the Company had no outstanding foreign exchange forward
contracts.
LONG-LIVED ASSETS - The Company reviews for the impairment of
long-lived assets whenever events change, or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. An impairment loss
would be recognized when estimated future undiscounted cash flows expected to
result from the use of an asset and its proceeds from its eventual disposition
are less than its carrying amount. Impairment is measured at fair value. In
conjunction with the Company's restructuring plan during the year ended January
31, 2003, the Company identified impairment losses of approximately $130,000
that are included in "Workforce reduction and restructuring charges (credits)"
in the Company's Consolidated Statements of Operations.
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 (loss) for any period, 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. Refer to Recent Accounting
Pronouncements later in this Note for a description of pending changes to this
accounting treatment.
F-13
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:
YEARS ENDED JANUARY 31,
-----------------------
2003 2004 2005
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss), as reported $ (1,735) $ 4,580 $ 15,971
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (3,319) (4,695) (4,506)
--------- -------- ---------
Pro forma net income (loss) $ (5,054) $ (115) $ 11,465
========= ======== =========
Earnings (loss) per share:
Basic - as reported $ (0.04) $ 0.11 $ 0.37
Basic - pro forma $ (0.12) $ 0.00 $ 0.27
Diluted - as reported $ (0.04) $ 0.11 $ 0.36
Diluted - pro forma $ (0.12) $ 0.00 $ 0.26
The fair value of these options was estimated using the Black-Scholes
option pricing model with the following weighted-average assumptions:
YEARS ENDED JANUARY 31,
-----------------------
2003 2004 2005
---- ---- ----
Risk-free interest rate 4.0% 2.5% 3.6%
Dividend yield - - -
Volatility 59% 60% 41%
Expected option life 5 years 5 years 5 years
The weighted-average fair value of options granted for the years ended
January 31, 2003, 2004, and 2005 is estimated at $3.64, $5.09, and $4.63 per
share, respectively.
F-14
PERVASIVENESS OF ESTIMATES - The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS - In December 2004, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 123 (revised 2004),
"Share-Based Payment", ("SFAS No.123(R)") which revises SFAS No. 123 and
supersedes APB No. 25. SFAS No. 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be valued at fair
value on the date of grant, and to be expensed over the applicable vesting
period. Pro forma disclosure of the income statement effects of share-based
payments is no longer an alternative. SFAS No. 123(R) is effective for reporting
periods beginning after June 15, 2005, which for the Company is August 1, 2005
(the "Effective Date"). Beginning on the Effective Date, the Company must (i)
expense all options granted after the Effective Date over the applicable vesting
period, and (ii) expense the non-vested portions of existing option grants going
forward over their remaining vesting period. Compensation expense for the
non-vested portions of existing option grants as of the Effective Date will be
recorded based on the fair value of the awards previously calculated in
developing the pro forma disclosures in accordance with the provisions of SFAS
No. 123. Under SFAS No. 123(R), the Company is required to adopt a fair
value-based method for measuring the compensation expense related to employee
stock and stock options awards; this will lead to substantial additional
compensation expense. Any such expense, although it will not affect the
Company's cash flows, will have a material negative impact on the Company's
reported results of operations.
In March 2004, the Emerging Issues Task Force ("EITF") of the FASB
reached a consensus on EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments", which provides
additional guidance for assessing impairment losses on investments.
Additionally, EITF 03-1 includes new disclosure requirements for investments
that are deemed to be temporarily impaired. In September 2004, the FASB delayed
the accounting provisions of EITF 03-1; however the disclosure requirements
remain effective for annual periods ending after June 15, 2004. The Company will
evaluate the impact of EITF 03-1 once final guidance is issued, however the
adoption of EITF 03-1 in its current form is not expected to have a material
effect on the Company's consolidated financial statements.
RECLASSIFICATIONS - Certain prior year amounts have been reclassified
to conform to the manner of presentation in the current year. Refer to the
description under Short-Term Investments found earlier in this Note 1 regarding
revisions to the presentation of certain investments in the consolidated
financial statements.
F-15
2. SHORT-TERM INVESTMENTS
As previously noted under Short-Term Investments in Note 1, the Company
concluded that it was appropriate to classify investments in ARS as short-term
investments. ARS generally have long-term stated maturities; however, these
investments have characteristics similar to short-term investments because at
pre-determined intervals, generally every 7 to 90 days, there is a new auction
process at which these securities are reset to current interest rates.
Previously, such investments had been classified as cash and cash equivalents
due to their liquidity and pricing reset feature. Accordingly, the Company has
revised the classification to report these securities as short-term investments
in the Consolidated Balance Sheets.
The Company classifies all of its short-term investments as
available-for-sale securities. The following is a summary of available-for-sale
securities as of January 31, 2005:
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ------------ ------------ -----------
(IN THOUSANDS)
United States Government
agency bonds $ 55,000 $ - $ 759 $ 54,241
United States Municipal
agency bonds 10,126 - 37 10,089
Auction Rate Securities 162,978 - 8 162,970
------------ ------------ ------------ -----------
Total debt securities $ 228,104 $ - $ 804 $ 227,300
============ ============ ============ ===========
The following is a summary of available-for-sale securities as of
January 31, 2004:
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ------------ ------------ -----------
(IN THOUSANDS)
United States Government
agency bonds $ 64,999 $ - $ 310 $ 64,689
Auction Rate Securities 122,249 - - 122,249
------------ ------------ ------------ -----------
Total debt securities 187,248 - 310 186,938
------------ ------------ ------------ -----------
Mutual funds (1) 31,128 - - 31,128
------------ ------------ ------------ -----------
Total equity securities 31,128 - - 31,128
------------ ------------ ------------ -----------
$ 218,376 $ - $ 310 $ 218,066
============ ============ ============ ===========
(1) Investing in United States Government and United States Government
corporation and agency obligations, corporate debt securities, commercial
paper and/or asset-backed securities.
F-16
Unrealized losses on investments at January 31, 2005 by investment
category and length of time the investment has been in a continuous unrealized
loss position are as follows:
LESS THAN 12 MONTHS 12 MONTHS OR GREATER TOTAL
------------------- -------------------- -----
GROSS GROSS GROSS
ESTIMATED UNREALIZED ESTIMATED UNREALIZED ESTIMATED UNREALIZED
FAIR VALUE LOSSES FAIR VALUE LOSSES FAIR VALUE LOSSES
---------- ------ ---------- ------ ---------- ------
(IN THOUSANDS)
United States Government
agency bonds $ 9,956 $ 44 $ 44,285 $ 715 $ 54,241 $ 759
United States Municipal
agency bonds 10,089 37 - - 10,089 37
Auction Rate Securities 8,375 8 - - 8,375 8
--------- --------- --------- --------- --------- ---------
Total debt securities $ 28,420 $ 89 $ 44,285 $ 715 $ 72,705 $ 804
========= ========= ========= ========= ========= ==========
The Company held no investments that had been in a continuous unrealized
loss position for 12 months or greater as of January 31, 2004. The Company
evaluates investments with unrealized losses to determine if the losses are
other-than-temporary. All gross unrealized losses are due to changes in interest
rates and the Company has determined that such diminution in value is temporary.
In making this determination, the Company considered its ability to hold the
investment to maturity, the financial condition and near-term prospects of the
issuers, the magnitude of the losses compared to the investments' cost and the
length of time the investments have been in an unrealized loss position.
As of January 31, 2005, all securities with maturities beyond three
years are ARS. The cost and estimated fair value of debt securities at January
31, 2005, by contractual maturity, are as follows:
ESTIMATED
FAIR
COST VALUE
---- -----
(IN THOUSANDS)
Due in one year or less $ 25,126 $ 24,915
Due after one year through three years 40,000 39,415
Due after ten years through twenty years 22,925 22,925
Due after twenty years 140,053 140,045
----------- -----------
$ 228,104 $ 227,300
=========== ===========
For the years ended January 31, 2003, 2004, and 2005, the Company had
gross realized gains of approximately $0, $346,000, and $0, respectively, and
gross realized losses of approximately $190,000, $1,227,000, and $470,000,
respectively. For the years ended January 31, 2003, 2004, and 2005, the Company
had proceeds from sales of available-for-sale securities of approximately
$71,950,000, $75,472,000, and $41,151,000, respectively.
F-17
3. PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
JANUARY 31,
-----------
2004 2005
---- ----
(IN THOUSANDS)
Furniture and equipment $ 7,105 $ 5,473
Leasehold improvements 499 519
-------- --------
7,604 5,992
Less accumulated depreciation and amortization 5,422 3,718
-------- --------
$ 2,182 $ 2,274
======== ========
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
JANUARY 31,
-----------
2004 2005
---- ----
(IN THOUSANDS)
Accounts payable $ 652 $ 653
Accrued compensation and benefits 2,773 3,713
Accrued taxes 3,087 4,065
Other accrued expenses 2,561 3,535
-------- --------
$ 9,073 $ 11,966
======== ========
5. RELATED PARTY TRANSACTIONS
The Company sells products and provides services to other subsidiaries
of CTI. Sales to related parties were approximately $3,352,000, $4,234,000, and
$6,419,000 for the years ended January 31, 2003, 2004, and 2005, respectively.
As of January 31, 2004 and 2005, amounts due from subsidiaries of CTI
were approximately $240,000 and $1,432,000, respectively, and are included in
accounts receivable on the Consolidated Balance Sheets.
The Company has a corporate services agreement with CTI. Under this
agreement, CTI provides the Company with the following services:
o maintaining in effect general liability and other insurance
policies providing coverage for the Company;
o maintaining in effect a policy of directors' and officers'
insurance covering the Company's directors and officers;
o administration of employee benefit plans;
F-18
o routine legal services; and
o consulting services with respect to the Company's corporate
communications.
The Company has agreed to pay to CTI a quarterly fee of $150,000,
payable in arrears at the end of each fiscal quarter, in consideration for all
services provided by CTI during such fiscal quarter. The Company was charged
$600,000 in each of the years ended January 31, 2003, 2004, and 2005 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, 2006 and
extends for additional twelve-month periods unless terminated by either party.
F-19
6. STOCK OPTIONS
EMPLOYEE STOCK COMPENSATION - At January 31, 2005, 3,806,818 shares of
common stock were reserved for issuance upon exercise of options then
outstanding and 394,944 shares of common stock were available for future grant
under the Company's stock option plan. Options under the plan may be granted to
key employees, directors, and other persons rendering services to the Company.
Options, which are designated as "incentive stock options" under the option
plan, may be granted with an exercise price not less than the fair market value
of the underlying shares at the date of grant and are subject to certain
quantity and other limitations specified in Section 422 of the Internal Revenue
Code. Options, which are not intended to qualify as incentive stock options, may
be granted at any price and without restriction as to amount. The options and
the underlying shares are subject to adjustment in accordance with the terms of
the plan in the event of stock dividends, recapitalizations, and similar
transactions.
The changes in the number of options were as follows:
YEARS ENDED JANUARY 31,
-----------------------
2003 2004 2005
---- ---- ----
Outstanding at beginning of period 3,917,363 4,131,679 4,189,018
Granted during the period 1,261,500 611,500 690,555
Exercised during the period (302,454) (508,218) (881,127)
Canceled, terminated, and expired (744,730) (45,943) (191,628)
----------- ----------- -----------
Outstanding at end of period 4,131,679 4,189,018 3,806,818
=========== =========== ===========
Substantially all of the options outstanding as of January 31, 2005
vest in four equal annual increments from the date of grant, or for the options
issued before the Company completed the initial public offering of its common
stock, in four equal annual increments on the anniversary of Company's initial
public offering, up to a maximum term of ten years for all options granted. At
January 31, 2005, options to purchase an aggregate of 1,920,848 shares were
vested and currently exercisable and options to purchase an additional 1,885,970
shares vest at various dates extending through the year ending January 31, 2009.
Weighted average option exercise price information was as follows:
YEARS ENDED JANUARY 31,
-----------------------
2003 2004 2005
---- ---- ----
Outstanding at beginning of period $ 8.06 $ 7.49 $ 8.33
Granted during the period 6.53 9.65 11.17
Exercised during the period 2.68 3.02 5.34
Canceled, terminated and expired 10.81 9.47 11.12
Outstanding at end of period 7.49 8.33 9.39
Exercisable at end of period 7.76 8.34 8.85
F-20
Significant option groups outstanding at January 31, 2005 and related
weighted average price and life information were as follows:
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE WEIGHTED
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE EXERCISE PRICE
-------------- ----------- ---- ----- ----------- --------------
$ 1.99 - $ 1.99 610,898 3.01 $ 1.99 610,884 $ 1.99
$ 2.75 - $ 3.97 230,238 4.05 3.15 230,213 3.15
$ 6.49 - $ 7.64 865,703 7.50 6.52 263,703 6.54
$ 9.38 - $ 19.56 1,982,979 7.77 12.68 699,048 14.74
$ 22.56 - $ 27.47 102,000 5.67 25.47 102,000 25.47
$ 29.25 - $ 29.25 15,000 6.10 29.25 15,000 29.25
----------- ----------- ----------- ----------- -----------
3,806,818 6.66 $ 9.39 1,920,848 $ 8.85
=========== =========== =========== =========== ===========
7. EMPLOYEE STOCK PURCHASE PLAN
Upon completion of the Company's initial public offering, the Company
adopted the 2000 Employee Stock Purchase Plan ("ESPP"). Under the terms of this
plan, all employees who have completed at least three months of employment are
entitled, through payroll deductions of amounts up to 10% of their base salary,
to purchase shares of the Company's common stock at 85% of the lesser of the
market price at the offering commencement date or the offering termination date.
The number of shares available under the plan is 600,000, of which approximately
348,000 had been issued through January 31, 2005.
Effective March 1, 2005, the ESPP has been terminated. February 28,
2005 was the final period for participation in the ESPP. The total number of
shares issued under the plan through February 28, 2005, was 391,572.
8. WORKFORCE REDUCTION AND RESTRUCTURING CHARGES (CREDITS)
During the year ended January 31, 2003, the Company took steps to better
align its cost structure with the business environment. These steps included a
workforce reduction and restructuring plan announced in April 2002. The plan
included terminations of 47 employees in the United States and 18 employees in
France, in the engineering and administrative departments of the Company. In
connection with these actions, the Company charged approximately $2,290,000 to
operations in the year ended January 31, 2003.
In June 2003, the Company entered into an agreement with the landlord
of the facility covered under the restructuring plan 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 $214,000 of this previously taken
charge. The workforce reduction and restructuring accrual was fully utilized by
January 31, 2004. An analysis of the total charges of approximately $2,290,000
F-21
incurred during the year ended January 31, 2003 as well as a rollforward of the
workforce reduction and restructuring accrual for that period is as follows:
WORKFORCE
REDUCTION AND
RESTRUCTURING CASH NON-CASH ACCRUAL BALANCE AT
CHARGE PAYMENTS CHARGE JANUARY 31, 2003
------ -------- ------ ----------------
(IN THOUSANDS)
Severance and related $ 1,593 $ 1,559 $ - $ 34
Property and equipment 130 - 130 -
Facilities and related 567 150 417
---------- ---------- --------- ----------
-
Total $ 2,290 $ 1,709 $ 130 $ 451
========== ========== ========= ==========
A roll-forward of the workforce reduction and restructuring accrual
from January 31, 2003 to January 31, 2004 is as follows:
ACCRUAL BALANCE AT CASH NON-CASH ACCRUAL BALANCE AT
JANUARY 31, 2003 PAYMENTS CREDITS JANUARY 31, 2004
---------------- -------- ------- ----------------
(IN THOUSANDS)
Severance and related $ 34 $ 15 $ (19) $ -
Facilities and related 417 203 (214) -
---------- ---------- --------- ----------
Total $ 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 vacated
as a result of the restructuring.
The write-off of property and equipment consisted primarily of
leasehold improvements and furnishings determined to be impaired at a facility
vacated in the United States.
F-22
9. EARNINGS (LOSS) PER SHARE ("EPS")
Basic earnings (loss) per share is determined by using the weighted
average number of shares of common stock outstanding during each period. Diluted
earnings per share further assumes the issuance of common shares for all
dilutive potential shares outstanding. The calculation of earnings (loss) per
share for the years ended January 31, 2003, 2004, and 2005 was as follows:
JANUARY 31, 2003 JANUARY 31, 2004 JANUARY 31, 2005
---------------- ---------------- ----------------
PER SHARE NET PER SHARE NET PER SHARE
NET LOSS SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
-------- ------ ------ ------ ------ ------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
BASIC EPS
Net income (loss) $ (1,735) 41,399 $ (0.04) $ 4,580 41,860 $ 0.11 $ 15,971 42,602 $ 0.37
======== ======= =======
Effect of dilutive
securities - options - - - 1,401 - 1,407
---------- -------- -------- -------- --------- --------
DILUTED EPS $ (1,735) 41,399 $ (0.04) $ 4,580 43,261 $ 0.11 $ 15,971 44,009 $ 0.36
========== ======== ======== ======== ======== ======= ========= ======== ========
The diluted loss per share computation for the year ended January 31,
2003 excludes incremental shares of approximately 1,158,000 related to employee
stock options. These shares are excluded due to their anti-dilutive effect as a
result of the Company's loss during the period.
10. INTEREST AND OTHER INCOME, NET
Interest and other income, net consists of the following:
YEARS ENDED JANUARY 31,
-----------------------
2003 2004 2005
---- ---- ----
(IN THOUSANDS)
Interest and dividend income $ 5,726 $ 4,374 $ 3,790
Losses on investments, net (190) (881) (470)
Other - - (45)
-------- -------- --------
$ 5,536 $ 3,493 $ 3,275
======== ======== ========
F-23
11. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
YEARS ENDED JANUARY 31,
-----------------------
2003 2004 2005
---- ---- ----
(IN THOUSANDS)
Current provision (benefit):
Federal $ (2,370) $ 2,027 $ 6,420
State (418) 626 941
Foreign 150 104 361
--------- -------- --------
Total current (2,638) 2,757 7,722
--------- -------- --------
Deferred provision (benefit):
Federal 1,315 (768) 48
State 232 (252) 100
--------- -------- --------
Total deferred 1,547 (1,020) 148
--------- -------- --------
$ (1,091) $ 1,737 $ 7,870
========= ======== ========
The reconciliation of the United States federal statutory income tax
expense (benefit) rate to the Company's effective rate is as follows:
YEARS ENDED JANUARY 31,
-----------------------
2003 2004 2005
---- ---- ----
U. S. federal statutory expense (benefit) rate (35)% 34% 35%
State taxes, net of federal income tax effect 7 4 3
Foreign income taxed at different rate (1) (3) 0
Research and development credits (6) (5) (3)
Tax exempt income (7) (4) (3)
Other 3 2 1
------ ------ ------
Company's effective tax rate (39)% 28% 33%
====== ====== ======
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The tax effects
of significant items comprising the Company's deferred tax asset and liability
at January 31, 2004 and 2005 are as follows:
JANUARY 31,
-----------
2004 2005
---- ----
(IN THOUSANDS)
Deferred tax asset:
Federal tax credits $ 798 $ 1,118
Accrued liabilities and other 1,216 1,103
Depreciation and amortization 515 65
-------- --------
Total deferred tax asset $ 2,529 $ 2,286
======== ========
Deferred tax liability:
Deferred state taxes $ 95 $ -
-------- --------
Total deferred tax liability $ 95 $ -
======== ========
F-24
Income tax has not been provided on unrepatriated earnings of our
foreign subsidiary as currently it is the intention of the Company to reinvest
such foreign earnings in its operations.
12. BUSINESS SEGMENT INFORMATION
The Company is engaged in one business segment: the design,
development, manufacture, marketing, and support of software and hardware for
use in the communications industry.
Sales by country, as a percentage of total sales, is as follows:
YEARS ENDED JANUARY 31,
-----------------------
2003 2004 2005
---- ---- ----
United States 29% 28% 21%
Germany 21 25 40
Sweden 16 3 2
Israel 12 11 10
Other 22 33 27
----- ----- -----
Total 100% 100% 100%
===== ===== =====
For the year ended January 31, 2003, three customers accounted for
approximately 23%, 19%, and 11% of the Company's sales. For the year ended
January 31, 2004, three customers accounted for approximately 26%, 11%, and 11%
of the Company's sales. For the year ended January 31, 2005, three customers
accounted for approximately 41%, 17%, and 10% of the Company's sales.
The Company had long-lived assets of approximately $8,531,000 in the
United States and $883,000 in France at January 31, 2005. The Company had
long-lived assets of approximately $8,678,000 in the United States and $940,000
in France at January 31, 2004.
F-25
13. COMMITMENTS AND CONTINGENCIES
LEASES - The Company leases office space and certain other equipment
under non-cancelable operating leases. Rent expense for all leased premises
approximated $1,145,000, $1,054,000, and $1,020,000 for the years ended January
31, 2003, 2004, and 2005, respectively.
As of January 31, 2005, the minimum annual rent obligations of the
Company were approximately as follows:
YEARS ENDING JANUARY 31, AMOUNT
------------------------ ------
(IN THOUSANDS)
2006 $ 995
2007 199
2008 10
2009 5
2010 2
-------
$ 1,211
=======
F-26
14. QUARTERLY INFORMATION (UNAUDITED)
The following table shows selected results of operations of each of the fiscal
quarters during the years ended January 31, 2004 and 2005:
FISCAL QUARTERS ENDED
-------------------------------------------------------------------------------------------------
APR. 30, JULY 31, OCT. 31, JAN. 31, APR. 30, JULY 31, OCT. 31, JAN. 31,
2003 2003 2003 2004 2004 2004 2004 2005
---- ---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Sales $ 9,129 $ 9,434 $ 9,691 $ 10,124 $ 13,189 $ 16,087 $ 17,034 $ 17,126
Gross profit 6,362 6,689 6,900 7,269 9,693 12,546 13,285 13,285
Net income 981 1,273 1,104 1,222 2,185 3,994 4,867 4,925
Diluted earnings per share $ 0.02 $ 0.03 $ 0.03 $ 0.03 $ 0.05 $ 0.09 $ 0.11 $ 0.11
======== ======== ======== ========= ========= ========= ========= =========
F-27