Attached files
file | filename |
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EX-10.1 - EX.10.7 - FORM OF STOCK OPTION AGREEMENT - ULTICOM INC | mm04-1910_10ke1001.htm |
EX-32.1 - EX.32.1 - CERT OF CEO PURSUANT TO SECTION 906 - ULTICOM INC | mm04-1910_10ke3201.htm |
EX-32.2 - EX.32.1 - CERT OF CFO PURSUANT TO SECTION 906 - ULTICOM INC | mm04-1910_10ke3202.htm |
EX-31.2 - EX.31.2 - CERT OF CFO PURSUANT TO SECTION 302 - ULTICOM INC | mm04-1910_10ke3102.htm |
EX-21.1 - EX.21 - LIST OF SUBSIDIARIES - ULTICOM INC | mm04-1910_10ke2101.htm |
EX-31.1 - EX.31.1 - CERT OF CEO PURSUANT TO SECTION 302 - ULTICOM INC | mm04-1910_10ke3101.htm |
EX-3.1 - EX.3.1 - AMENDED AND RESTATED CERT OF INCORPORATION - ULTICOM INC | mm04-1910_10ke0301.htm |
EX-23.1 - EX.23 - AUDITOR CONSENT - ULTICOM INC | mm04-1910_10ke2301.htm |
United
States
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-K
ANNUAL
REPORT
PURSUANT
TO SECTIONS 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
(Mark
One)
|
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For
the fiscal year ended January 31, 2010
OR
|
o |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from ______________ to ______________
Commission
file number: 0-30121
ULTICOM,
INC.
(Exact
name of registrant as specified in its charter)
New
Jersey
(State
of incorporation)
|
22-2050748
(I.R.S.
Employer Identification No.)
|
1020
Briggs Rd. Mt. Laurel, NJ
|
08054
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (856) 787-2700
Securities
registered pursuant to Section 12(b) of the Act:
Title of Each Class
|
Name of Each Exchange on Which
Registered
|
Common Stock, no par
value
|
NASDAQ
Global Market
|
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes o No
x
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. Yes x No
o
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 the registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Annual Report on
Form 10-K or any amendment to this Annual Report on Form 10-K. o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large Accelerated Filer o Accelerated
Filer o
Non-Accelerated Filer x Smaller
reporting company o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of Exchange Act). Yes o No
x
The
aggregate market value of the voting and nonvoting common equity held by
non-affiliates of the registrant, computed by reference to the price at which
the common equity was last sold as of the last business day of the registrant’s
most recently completed second fiscal quarter (July 31, 2009), was approximately
$25,061,987.
There
were 11,118,361 shares of common stock of the registrant, no par value,
outstanding as of April 12, 2010.
DOCUMENTS
INCORPORATED BY REFERENCE:
The
registrant has incorporated by reference in Part III of this report on Form 10-K
portions of the registrant’s definitive Proxy Statement for the 2010 Annual
Meeting of Shareholders to be held on June 3, 2010, which is expected to be
filed with the Securities and Exchange Commission not later than 120 days after
the end of the registrant’s last fiscal year.
ULTICOM,
INC.
FORM
10-K
FOR
THE FISCAL YEAR ENDED JANUARY 31, 2010
INDEX
Page
|
||
Forward
Looking Statements
|
1
|
|
PART
I
|
||
Item
1.
|
Business.
|
3 |
Item
1A.
|
Risk
Factors.
|
13 |
Item
1B.
|
Unresolved
Staff Comments.
|
24 |
Item
2.
|
Properties.
|
24 |
Item
3.
|
Legal
Proceedings.
|
24 |
Item
4.
|
Reserved.
|
24 |
PART
II
|
||
Item
5.
|
Market
For Registrant's Common Equity and Related Shareholder
Matters.
|
25 |
Item
6.
|
Selected
Consolidated Financial Data.
|
27 |
Item
7.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
|
28 |
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
41 |
Item
8.
|
Consolidated
Financial Statements and Supplementary Data.
|
42 |
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting
and Financial Disclosures.
|
42 |
Item
9A.
|
Controls
and Procedures.
|
42 |
Item
9B.
|
Other
Information.
|
46 |
PART
III
|
||
Item
10.
|
Directors,
Executive Officers and Corporate Governance.
|
47 |
Item
11.
|
Executive
Compensation.
|
47 |
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters.
|
47 |
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
48 |
Item
14.
|
Principal
Accountant Fees and Services.
|
48 |
PART
IV
|
||
Item
15.
|
Exhibits
and Financial Statement Schedules.
|
49 |
FORWARD-LOOKING
STATEMENTS
Certain
statements by Ulticom, Inc. (referred to herein as “Ulticom,” the “Company,”
“we,” “our” or “us”) appearing in Item 1 (Business), Item 1A (Risk
Factors), Item 3 (Legal Proceedings), Item 7 (Management’s Discussion and
Analysis of Financial Condition and Results of Operations) and elsewhere in this
Annual Report on Form 10-K (“2009 Form 10-K”) constitute “forward-looking
statements” for purposes of the Private Securities Litigation Reform Act of
1995. 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. In some cases,
forward-looking statements can be identified by the use of future or conditional
words such as “may,” “will,” “expects,” “plans,” “anticipates,” “estimates,”
“intends,” “seeks,” “projected,” “believes,” “potential” or “continue” or the
negative thereof or other comparable terminology.
There can
be no assurances that forward-looking statements will be achieved. By their very
nature, forward-looking statements involve known and unknown risks,
uncertainties, and other important factors that could cause our actual results
or performance to differ materially from those expressed or implied by such
forward-looking statements. Such risks and uncertainties may also give rise to
future claims and increase our exposure to contingent
liabilities. These risks and uncertainties arise from (among other
factors):
·
|
our
incurring substantial expenses for litigation and governmental enforcement
actions which may continue to increase our exposure to contingent
liabilities because of historical improper accounting practices which
required restatement adjustments to be made in our consolidated financial
statements as disclosed in the Annual Report on Form 10-K for the year
ended January 31, 2009 (the “2008 Form 10-K”) and resulted in our
inability to file required periodic reports with the SEC during the period
from December 2005 to September 30,
2009;
|
·
|
a
Final Judgment that was entered in connection with our settlement of a SEC
enforcement proceeding that permanently enjoins us from violating Section
17(a) of the Securities Act of 1933, Sections 13(a), 13(b)(2)(A) and (B)
and 14(a) of the Securities Exchange Act of 1934 and SEC Rules 13a-1,
13a-11, 13a-13 and 14a-9;
|
·
|
our
directors and officers liability insurance is unlikely to cover potential
expenses or liabilities relating to our historical improper option-related
accounting practices, and could result in significant indemnification
liabilities being uninsured, which could have a material adverse effect on
our business, financial position, results of operations or cash
flows;
|
·
|
changes
in our capital structure, including, but not limited to changes relating
to our payment of a special dividend in April
2009;
|
·
|
inaccuracies
in our historical periodic reports filed with the SEC prior to September
30, 2009, and, as indicated in our Current Report on Form 8-K dated April
16, 2006, such reports cannot be relied
upon;
|
·
|
our
majority shareholder, Comverse Technology, Inc., controls the outcome of
all matters submitted for shareholder action, including the composition of
our Board of Directors and the approval of significant corporate
transactions and the interests of our majority shareholder may not be
aligned with the interests of our other
shareholders;
|
1
·
|
our
dependence on sales of our Signalware products and the possibility of such
products becoming outdated because of new
technology;
|
·
|
our
ability to (i) identify and respond to emerging technological trends in
our target markets; (ii) develop and maintain competitive solutions that
meet customers’ changing needs; and (iii) enhance existing products by
adding features and functionality that differentiate our products from
those of our competitors;
|
·
|
our
investment in sales and marketing and research and development are a
significant percentage of our revenues, and the failure for a market to
emerge for these new products or customers to accept them could adversely
affect our business and the investments may be
lost;
|
·
|
our
dependence on a limited number of telecommunication industry customers for
a significant percentage of our revenues, which customers may experience
difficulties due to the current market environment and reductions in
capital spending by telecommunication service providers on projects that
incorporate our products;
|
·
|
aggressive
competition which may force us to reduce
prices;
|
·
|
our
holding a large proportion of our assets in investments in marketable debt
securities;
|
·
|
our
products being dependent upon their ability to operate on and support new
hardware and operating systems, signaling systems and protocols of other
companies and we are subject to risks associated with the integration of
our products with those of equipment manufacturers and application
developers and our ability to establish and maintain channel and marketing
relationships with leading equipment manufacturers and application
developers;
|
·
|
our
products having long sales cycles and our ability to forecast the timing
and amount of product sales is
limited;
|
·
|
our
reliance on a limited number of independent manufacturers to manufacture
boards for our products and on a limited number of suppliers for board
components;
|
·
|
our
becoming subject to, defending and resolving allegations or claims of
infringement of intellectual property rights; risks associated with others
infringing on our intellectual property rights and the inappropriate use
by others of our proprietary
technology;
|
·
|
the
impact changes in general economic conditions may have on our
business;
|
·
|
our
ability to maintain the listing of our common stock on a national
securities exchange;
|
·
|
our
dependence on customers outside of the United States for a significant
portion of our total revenues and our exposure to particular risks
associated with international transactions, 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; and
|
·
|
our
ability to recruit and retain qualified
personnel.
|
These
risks and uncertainties, as well as other factors, are discussed in greater
detail in Item 1A (Risk Factors) 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,
except where otherwise required by law.
2
PART
I
ITEM
1. BUSINESS.
THE
COMPANY
Ulticom,
Inc. (“Ulticom” and together with its subsidiaries, the “Company”) is a provider
of network signaling and information delivery solutions. The Company is engaged
in one operating segment: the design, development, manufacture, marketing, and
support of software and hardware for use in the communications industry. The
Company’s Signalware family of application-ready products is used by equipment
manufacturers, application developers, and communication service providers to
access signaling related information necessary to deploy revenue generating
infrastructure and enhanced services within fixed and mobile telecommunication
networks. Signalware products are also embedded in a range of packet
soft-switching products to interoperate or converge voice and data
networks. The Company’s Signalware family of network-ready products
is used by equipment manufacturers, system integrators and communication service
providers to bridge disparate signaling networks and transfer or route signaling
information between network elements.
The
Company was founded in December 1974 as DGM&S and was acquired by Comverse
Technology, Inc. in August 1995. The Company subsequently completed
an initial public offering of its common stock in April 2000. Its
common stock is currently traded on The NASDAQ Global Market under the symbol
“ULCM.” The Company is a New Jersey corporation and is a subsidiary of Comverse
Technology, Inc., which held approximately 66% of its outstanding common stock
as of April 12, 2010. 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 has four wholly owned foreign
subsidiaries: Ulticom Europe, SAS; Ulticom Asia Pacific, Pte. Ltd.; Ulticom
India Private, Ltd. and Ulticom Japan GK. The Company also has
branches in China and Korea.
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 website, its Annual Reports 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 amended (the “Exchange Act”), 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 ("SEC").
The Company’s fiscal year begins on February 1 and ends on January
31.
THE
COMPANY’S PRODUCTS
Background
Telecommunication
networks are based on the concept of establishing a circuit between the
originator and recipient of a call to carry the bearer (typically voice)
traffic. A circuit is dynamically set-up for each call by assembling
a series of segments between switches to create a
3
communications
path between the parties. At the conclusion of the call, the circuit
is torn-down and the segments are disassembled. Switches between the
telecommunication networks use signaling to communicate the instructions to
properly assemble and disassemble the circuit.
Historically,
signaling information was transmitted in-band on each segment of the circuit
using the same path that would ultimately be used by the voice traffic. In-band
signaling information was originally communicated by human operators manually
setting up the segments by verbally communicating instructions between nodes.
Subsequently, signaling evolved to automated multi-frequency signaling
information exchanges. However, the call set-up and tear-down was slow and was
an inefficient use of circuits. In addition, since the signaling information
shared the same path as the voice traffic, signaling was precluded while the
call was in progress relegating signaling primarily to circuit set-up and
tear-down duties.
Separate
Signaling Information Network
In order
to overcome the inefficiencies of in-band signaling, a separate dedicated
overlay signaling network was introduced. Based on a globally accepted set of
standards and protocols called Signaling System #7 (“SS7”), the overlay
signaling network provides circuit-related and non-circuit-related signaling
information exchanges. The circuit-related signaling information reduces call
set-up times and improves circuit utilization over the former in-band signaling
techniques, while the non-circuit related signaling information provides the
basis for transaction oriented services. The signaling infrastructure processes,
in real-time, the information needed to set up, connect, route, terminate, and
bill a circuit-switched call, while also providing a foundation to develop and
offer value-added services. SS7 provides the speed and reliability
required for processing complex call control information.
Signaling
in Mobile Networks
While SS7
was initially created to support the delivery of signaling information in fixed
networks, it also has become an essential element for connecting calls and
delivering services in mobile networks. In addition to providing the
signaling information exchange 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 provides the
mechanism to communicate the essential information that is 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.
Packet
Bearer Network
While
physical wires and switches have offered dependable, high quality voice
communication, newer packet-based technology (e.g., Internet Protocol, “IP”) is
inherently a more efficient and cost effective way to transport voice and other
bearer traffic. In addition, packet networks can simultaneously carry voice
(e.g., Voice over IP, “VoIP”) and data traffic. In packet 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 communications path. 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.
4
SS7
and Packet Bearer Networks
Packet
network carriage of voice and data traffic does not negate the need for the
exchange of information via SS7 signaling. Since 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 packet network providers worldwide
have implemented SS7 as an important component to connect to traditional
signaling networks allowing voice and data communications on traditional and
packet networks to exchange the essential information to enable
convergence.
Sigtran
Similar
to the movement of bearer traffic from traditional circuits to packet networks,
SS7 signaling has followed this path as well with a variation of SS7 over
IP. The variant of SS7 over IP has been standardized by the Internet
Engineering Task Force (“IETF”) Signaling Transport (“SIGTRAN”) working group.
SIGTRAN has standardized several different SS7 over IP components as well as the
SIGTRAN Signaling Gateway which defines the interworking required between
traditional SS7 and SS7 over IP signaling networks to enable seamless
information exchanges between traditional SS7 and IP-based SIGTRAN
networks.
Service
Platforms
The
platforms used to deploy telephony services have continued to evolve in tandem
with the evolution of the computer industry. Early service platforms were
purpose-built with proprietary hardware and operating systems. Second generation
service platforms leveraged open systems technology and standard operating
systems such as Solaris and Linux. These second generation platforms typically
scaled through multi-processor and clustering technologies. More recent advances
in service platforms leverage Information Technology (IT) and Web Services
architectures where “racking and stacking” of low cost computers is combined
with Application Delivery Controllers (ADC) to achieve scaling, redundancy and
disaggregation of signaling through intelligent load balancing and
signaling gateway functionality.
The
Company’s Products and Services
The
Company’s products provide network signaling and the delivery of signaling
information. Information access and routing are key enabling functions of the
Information Delivery capability. These functions enable communications services
ranging from network-based calling name identification to Application Store
over-the-top services such as real estate finders and social networking
applications which are made smarter and more personal through the delivery of
presence, location, identity and other network derived information.
Signalware
Application-Ready
The
Company’s Signalware Application-Ready (“Signalware AR”) product family provides
the SS7 connectivity and access to signaling information required to offer
value-added services. Signalware AR is embedded within fixed, mobile and
Internet service provider applications to interconnect and interoperate voice,
data and video communication systems. In addition,
5
Signalware
AR plays a key role in the convergence of disparate networks by providing a
means to bridge circuit and packet technology. Signalware AR offers many of the
features that are crucial to the connectivity of communication networks and the
rapid delivery of revenue generating services. These features
include:
·
|
open systems – running applications
on multiple software and hardware
platforms;
|
·
|
fault resiliency – ensuring the high
availability requirements of fixed and mobile communication services in
circuit- and packet-based networks with no single point of
failure;
|
·
|
high performance – processing calls and
transactions at very high rates;
|
·
|
standards conformance –
complying to industry-accepted standards including IETF, ANSI,
Telcordia, ITU, ETSI, TTC, NTT, and
MII;
|
·
|
scalability – increasing computing
and link capacity to match varying application requirements;
and
|
·
|
network
interoperability – providing an open
development environment, which enables users to develop an application
once and deploy globally, maximizing their return on
investment.
|
Signalware
AR supports a range of applications across multiple networks. In
fixed networks, Signalware AR has been deployed as part of services such as
voice messaging, calling name, 800 number, and calling card
services. Signalware AR enables mobile 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 support new mobile
data services that enable subscribers to roam into wireless local area networks
“Hot Spots” and seamlessly and securely access network-based services from their
own trusted service provider. Signalware AR also is used to enable
VoIP in fixed, mobile, and cable service provider networks.
Signalware
AR works with multiple SS7 networks and supports a wide variety of SS7 protocol
information elements. It provides the functionality and information
access needed for call set-up/termination and call
routing/billing. Signalware AR products also include features that
enable the transition from SS7 signaling to emerging packet signaling standards
including SIGTRAN.
Signalware
AR solutions run on a range of hardware platforms and operating systems, such as
Sun Solaris and various implementations of Linux. These solutions can be used in
single or multiple computing configurations for fault resiliency and
reliability.
Signalware
AR solutions include interface boards to provide the physical connection to a
signaling network. Signalware AR boards are configured to support a
wide range of hardware platforms and network links. The bundling of
Signalware AR interface boards and software allows the Company to control
product performance, capacity, and compliance with standards.
New
customers generally begin development of applications and services by purchasing
the appropriate Signalware AR 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.
6
When the
customer’s application is ready for deployment in a communication service
provider’s network, the customer typically purchases one or more interface
boards per server or, in the case of SIGTRAN, uses on-board Ethernet interfaces,
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. Board technical support is covered under a standard hardware
warranty that provides for repair or replacement of defective
boards.
In fiscal
years 2007, 2008 and 2009, revenues from Signalware AR products accounted for
approximately 79%, 78% and 69%, respectively, of the Company’s total
revenues.
Signalware
Network-Ready
The
Company’s Signalware Network-Ready (“Signalware NR”) product family provides
information routing functionality in the form of signaling gateways, edge Signal
Transfer Points, and advanced Signaling Application Delivery Controllers.
Signalware NR enables hybrid network solutions designed to support incremental
migration of existing time division multiplexing-based infrastructure and
services to more cost effective next-generation IP-based networks. Signalware NR
is built upon the Signalware AR platform.
Signalware
NR offers equipment providers a key element to route signaling information over
IP and traditional time division multiplexed communications paths. This allows
services to be efficiently deployed in a geographically distributed manner or in
IT-like server farm architectures while still leveraging the existing signaling
infrastructure. Signalware NR enables equipment providers to add value at the
network edge without disturbing the core signaling network allowing service
providers to cap investments on core signaling transfer points. This enables
functions that were formerly captive in the network core to be extended to the
network edge, allowing service providers to leverage their existing investment
while incrementally and efficiently expanding to meet demand for services such
as wireless prepaid calling, text messaging, free-phone, global roaming, and
VoIP. The Company believes that not only does Signalware NR ensure
interoperability and limit service disruption, it also delivers lower cost of
operation and initial investment.
Combining
the Company’s field-proven signaling technology and the benefits of open
computing systems, Signalware NR provides a bridge for systems and service
providers to maximize existing investments while capitalizing on emerging
opportunities for revenue generating services.
In each
of the fiscal years 2007, 2008 and 2009, revenues from Signalware NR products
accounted for less than 3% of the Company’s total annual revenues.
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 for both Signalware AR
and Signalware NR.
7
Customer Support. The Company
provides comprehensive technical support to help customers develop and deploy
new services and solutions using Signalware AR and Signalware NR. Customer
support representatives interface with customers’ technical staff by answering
questions, resolving problems, and providing assistance. Service
options are available up to 24 hours a day, 7 days a week. Customer support is
managed through corporate headquarters in Mount Laurel, New Jersey with remote
service locations providing 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 facilitates the point in the development cycle when the
Company begins to receive recurring deployment license and board
revenues.
In fiscal
years 2007, 2008 and 2009, revenues from customer support, training, and
professional services associated with Signalware products accounted for
approximately 18%, 21% and 28%, respectively, of the Company’s total annual
revenues.
MARKETS,
SALES AND MARKETING
Markets
Products
are sold primarily to network equipment manufacturers and application developers
that incorporate the Company’s products within their products and sell them as
an integrated solution to service providers. Service providers install the
solution in their communication networks and offer the service enabled by such
solution to their subscribers. Because 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’s products are currently used by more than 50 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, fixed and IP networks in China, Spain, and Japan, respectively.
Customers include: (i) network equipment manufacturers, such as Alcatel-Lucent
(formerly Alcatel) and Nokia Siemens Networks (formerly Siemens Networks AG);
(ii) application developers, such as Comverse Ltd. (a subsidiary of Comverse
Technology, Inc., an affiliate of the Company) and Sonus Networks, Inc.; and
(iii) service providers, such as Verizon, Inc. and Orange Personal
Communications Services Limited.
8
Sales
and Marketing
The
Company’s sales organization operates from the United States, Europe, and Asia.
Account teams comprised of account managers and solution 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 currently derives a significant portion of its total revenues from
customers outside of the United States. Financial information
regarding the Company’s operations in these geographic areas is presented in
Note 12 to the Consolidated Financial Statements included in Item 15 of this
2009 Form 10-K.
The table
below presents the Company’s customers that account for 10% or more of the
Company’s total revenues:
Fiscal
Years
|
|||||||||
2007
|
2008
|
2009
|
|||||||
Nokia Siemens
Networks
|
35
|
%
|
33
|
%
|
18
|
%
|
|||
Sonus Networks,
Inc.
|
16
|
13
|
17
|
||||||
Alcatel-Lucent
|
11
|
14
|
22
|
||||||
All other
|
38
|
40
|
43
|
||||||
Total
|
100
|
%
|
100
|
%
|
100
|
%
|
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.
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.
The
Company engages in joint promotion, sales efforts, training, testing, design,
integration, installation and support with Sun Microsystems, Inc. and other
information systems providers who use Sun Microsystems’
components. The Company also has engaged in joint marketing
activities with International Business Machines Corporation and Sun
Microsystems.
The
Company actively participates in industry activities that are focused on
defining the technology to facilitate the convergence of telecommunication
networks with the Internet. For example, as a member of the Internet Engineering
Taskforce, the Company has worked to develop SIGTRAN to enable communication
service providers 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
9
(“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 and solutions. The Company believes that its future
success depends on a number of
factors, which include the Company’s ability to:
● | identify and respond to emerging technological trends in its target markets; | |
● | develop and maintain competitive solutions that meet customers’ changing needs; and | |
|
●
|
enhance
existing products by adding features and functionality that differentiate
the Company’s products from those of its
competitors.
|
Research
and development resources are allocated in response to market research and
customer demands for additional features and products. The Company’s 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.
For
fiscal years 2007, 2008 and 2009, the Company’s research and development
expenses were approximately $16.4 million, $16.3 million and $13.3 million,
respectively. The Company conducts research and development activities in the
United States and France. As of January 31, 2010, there were approximately 82
employees engaged in research and development activities. The Company believes
that recruiting and retaining highly skilled engineering personnel is essential
to its success.
PATENTS
AND INTELLECTUAL PROPERTY RIGHTS
The
Company operates under a variety of registered trademarks such as Signalware®
Signalcare®, Ulticom® and Service Essential Solutions®.
The
Company has accumulated a significant amount of proprietary know-how and
expertise over the years in developing network signaling software technologies
and communication protocols. 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; laws pertaining to trade secrets, copyrights, patents, and
trademarks; restricted licensing arrangements and non-disclosure agreements;
each of which affords only limited protection.
The
Company licenses software from third parties that is incorporated into certain
versions of its Signalware products.
10
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 has granted Comverse Technology, Inc., an affiliate, a perpetual,
royalty-free, non-exclusive license to use, operate and distribute an older
version of the Signalware AR software product as incorporated into any of
Comverse Technology, Inc.’s products. This software is maintained by Comverse
Technology, Inc. at no cost to the Company.
COMPETITION
The
global market for network signaling solutions is intensely competitive. The
Company expects competition to increase in the future, especially with the
convergence of voice and data networks.
The
Company’s primary competition comes from internal development organizations
within equipment manufacturers 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 U.S. and
international suppliers that vary in size, scope, and breadth of the products
and services offered.
Competitors
for the Company’s Signalware AR products include a number of companies ranging
from SS7 software solution providers, such as Aricent and Tieto Corporation, to
vendors of communication and network infrastructure equipment, such as
Continuous Computing Corporation and Hewlett-Packard Company, and board vendors
such as Adax, Interphase, and Performance Technologies.
Competitors
for the Company’s Signalware NR products include a number of companies ranging
from SS7 network equipment providers, such as Hewlett-Packard Company,
Performance Technologies, and Tekelec, to next-generation network equipment
manufacturers, such as Cisco and Huawei.
The
Company believes it competes principally on the basis of:
· product
performance and functionality;
· product
quality and reliability;
· customer
service and support; and
· 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 architectures such as 3GPP and IP Multimedia Subsystem (IMS).
Furthermore, as competition and pricing pressure continues within its customers’
markets, the Company may have to further reduce prices or offer product sales
incentive programs.
11
MANUFACTURING
AND SOURCES OF SUPPLIES
The
Company’s Signalware AR products typically have two components: software and
interface boards. Software is duplicated internally and provided to customers
via several media, primarily CD-ROM and the internet. 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.
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’s Signalware NR products are typically prepackaged with the Company’s
software and interface boards into a standard Unix-based computing platform by
Company employees. Each order is tracked by purchase order number and documented
according to internal quality standards.
The
Company is 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 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.
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, 2010, the Company had approximately 143 employees in the U.S. The
Company’s U.S. employees are not covered by a collective bargaining agreement
and the Company considers its relationship with its employees to be
good. As of January 31, 2010 the
12
Company’s
international operations in Europe and Asia Pacific had 49 and 10 employees,
respectively, who are subject to local labor laws that contain requirements
regarding termination, severance payments, and other obligations that are
significantly more onerous for the Company than those in the United
States.
ENVIRONMENTAL
The
Company has historically incurred costs associated with complying with
environmental laws and regulations applicable to the components used in its
interface boards. These expenditures have not been material with
respect to the Company’s capital expenditures, earnings or competitive
position.
ITEM
1A. RISK
FACTORS.
The
risks described below, together with all of the other information included in
this 2009 Form 10-K, should be carefully considered in evaluating our business
and prospects. The risks and uncertainties described below could
adversely affect our results of operations or financial condition and cause our
actual results to differ materially from those expressed in forward-looking
statements made by us. Although we believe that we have identified
and discussed below the key risk factors affecting our business, there may be
additional risks and uncertainties that are not presently known or that are not
currently believed to be significant that may adversely affect our future
performance or financial condition. In addition, information regarding various
risks and uncertainties facing us are included under Items 1 and 7 of this 2009
Form 10-K. Solely for purposes of the risk factors in this Item 1A,
the terms "we," "our," and "us" refer to Ulticom, Inc. and its
subsidiaries.
Risks
Relating to Investing in Our Common Stock
We
have incurred substantial expenses for litigation and governmental enforcement
action and may continue to have increased exposure to contingent liabilities
because of historical improper accounting practices which required restatement
adjustments to be made in our consolidated financial statements as disclosed in
the 2008 Form 10-K and resulted in our inability to file required periodic
reports with the SEC during the period from December 2005 to September 30,
2009.
As
disclosed in our 2008 Form 10-K, we have made certain restatement adjustments in
our consolidated financial statements as of February 1, 2005 in connection with
(a) improper historical option grant practices and other unrelated historical
accounting practices; (b) our evaluation of our software revenue recognition
policies for complex contractual arrangements; and (c) our evaluation of our
accounting practices with respect to the recognition of depreciation
expense. Due to the pendency of the restatement adjustments, we were
unable to make required filings of Quarterly Reports on Form 10-Q and Annual
Reports on Form 10-K from December 2005 until September 30,
2009. These issues have exposed us to risks associated with
litigation, regulatory proceedings and government enforcement actions as well as
substantial expenses for legal, accounting, tax and other professional services
and have diverted management’s attention from our business.
13
In
addition, the Company and certain of our officers and directors were named as
nominal defendants in three derivative actions relating to our historical
accounting practices for stock option grants issued beginning in fiscal year
2000. Although these suits have been dismissed, there is risk that
other actions could be filed against us and certain current or former officers
and directors based on allegations relating to our historical stock option grant
practices, the associated restatement adjustments or our failure to file
required periodic reports with the SEC. We have incurred and may
incur substantial additional defense costs with respect to potential future
claims, regardless of their outcome. Likewise, these claims might
continue to cause a diversion of our management’s time and
attention.
Because
we were not current in our Exchange Act reporting obligations and did not file
required periodic reports with the SEC prior to September 30, 2009, we were
unable to utilize a Form S-8 Registration Statement and accordingly, unable to
permit employees to exercise stock options during the period from April 17, 2006
through December 10, 2009. We have received correspondence from
counsel representing three former employees, one of whom is a former officer,
indicating that we may be sued by such parties in connection with their
inability to exercise stock options. It is possible that we may be sued by these
or other employees in connection with their stock options, employment
terminations and other matters. These lawsuits may be time consuming,
expensive, and may cause further distraction from the operation of the
business.
No
assurance can be given regarding the outcomes from any litigation, regulatory
proceedings or government enforcement actions. The resolution of any
such matters may be time consuming, expensive, and may distract management from
the conduct of our business. Furthermore, if we are subject to
adverse findings in litigation, regulatory proceedings or government enforcement
actions, we could be required to pay damages or penalties or have other remedies
imposed, which could have a material adverse effect on our business, financial
condition, results of operations or cash flows.
Our
directors and officers liability insurance is unlikely to provide coverage for
potential expenses or liability relating to our historical improper
option-related accounting practices and, accordingly, significant
indemnification liabilities are likely to be uninsured and could have a material
adverse effect on our business, financial position, results of operations or
cash flows.
We are
obligated, subject to certain limitations, to indemnify our current and former
directors, officers and employees against personal liability for their actions
in service to the Company, which would include regulatory or litigation matters
relating to our historical improper stock option granting
practices. Such obligations may arise under the terms of our amended
and restated certificate of incorporation, our amended and restated bylaws,
applicable agreements or New Jersey law. An obligation to indemnify
generally means that we are required to pay or reimburse damages and other
liabilities that may be incurred, as well as the individual’s legal expenses
that may be incurred in defending the matter. Our insurance coverage
for periods prior to June 29, 2007 is unlikely to provide coverage for expenses
resulting from our historical improper stock option granting practices and any
such coverage is shared with Comverse Technology, Inc. and related
parties. Factors that may affect any available coverage are
minimum retention requirements and exceptions for certain non
– qualifying expenses.
14
Additionally,
our current directors and officers liability insurance does not provide coverage
with respect to our historical stock option granting practices.
No
assurance can be given regarding the outcomes from any obligation to indemnify
our current and former directors, officers and employees in connection with any
regulatory or litigation matter. The resolution of these matters may
be time consuming, expensive, and may distract management from the conduct of
our business; the effect of which could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.
The
Company was a defendant in an SEC enforcement action and the Company and its
agents are permanently enjoined from violations of Section 17(a) of the
Securities Act of 1933, Sections 13(a), 13(b)(2)(A) and (B) and 14(a) of the
Exchange Act, and SEC Rules 13a-1, 13a-11, 13a-13 and 14a-9.
On June
18, 2009 the SEC announced that it had filed a civil injunctive action against
the Company, in the U.S. District Court for the Eastern District of New York
(the “Court”), for violations of:
1)
|
Section
17(a) of the Securities Act of 1933 which prohibits any knowing
misrepresentation in the offer or sale of any
security;
|
2)
|
Section
13(a) of the Exchange Act and SEC Rules 13a-1, 13a-11, and 13a-13 which
require filing of required reports and prohibit the use of any untrue
statements of material facts, omission of material facts or misleading
information;
|
3)
|
Sections
13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act which require (i) keeping
books and records in reasonable detail to accurately reflect transactions
and disposition of assets and (ii) devising and maintaining a system of
internal accounting controls that can ensure transactions are properly
recorded; and
|
4)
|
Section
14(a) of the Exchange Act and SEC Rule 14a-9, which prohibit any
solicitation by means of a proxy statement or other written or oral
communication that is false or misleading with respect to any material
fact or omits to state any material
fact.
|
Simultaneous
with the filing of the Complaint, without admitting or denying the allegations
therein, we consented to the issuance of a Final Judgment (the “Final
Judgment”). The Court imposed the Final Judgment on July 22, 2009,
ordering that the Company and its agents are permanently restrained and enjoined
from any violations, directly or indirectly of Section 17(a) of the Securities
Act of 1933, Sections 13(a), 13(b)(2)(A) and (B) and 14(a) of the Exchange Act
and SEC Rules 13a-1, 13a-11, 13a-13 and 14a-9. The Final Judgment
provided that the Company must become current in its reporting obligations under
Section 13(a) of the Exchange Act on or before November 9, 2009.
We
believe that we have complied with the Final Judgment. Future violations,
however, of the Final Judgment could require us to pay material fines or suffer
other penalties, each of which could have a material adverse effect on our
business, results of operations, financial condition and cash
flows.
15
Certain
of our periodic reports filed with the SEC are inaccurate and cannot be relied
upon.
We have
not amended and do not plan to amend our Annual Reports on Form 10-K and
Quarterly Reports on Form 10-Q that we have filed prior to September 30,
2009. Accordingly, the consolidated financial statements and related
financial information contained in such reports should not be relied upon as
described in our Current Report on Form 8-K dated April 16, 2006. For
the same reason, investors also should not rely on the unaudited financial
results reported in Current Reports on Form 8-K prior to September 30,
2009.
Our
past failure to file reports on Form 10-K and Form 10-Q in a timely manner will
result in our ineligibility to register securities on Form S-3.
As a
result of our failure to timely file our Quarterly Reports on Form 10-Q and our
Annual Reports on Form 10-K for the fiscal years ended January 31, 2006, 2007,
2008 and 2009, we will be ineligible to register our securities on Form S-3 for
sale by us or resale by others until we have timely filed all periodic reports
under the Exchange Act, as amended, for a period of twelve months and any
portion of a month from the due date of the last untimely report. We may
attempt to use Form S-1 to raise capital or complete acquisitions using our
securities, but doing so could increase transaction costs and adversely affect
our ability to raise capital or complete such acquisitions in a timely
manner.
We
are controlled by our majority shareholder, Comverse Technology, Inc. whose
interests may not be aligned with the interests of our other
shareholders.
Comverse
Technology, Inc. beneficially owns a majority of our outstanding shares of
common stock. Consequently, Comverse Technology, Inc. controls the
outcome of all matters submitted for shareholder action, including the
composition of our Board of Directors and the approval of significant corporate
transactions. Through its representation on our Board of Directors,
Comverse Technology, Inc. has a controlling influence on our strategic
direction, policies and management, including the ability to appoint and remove
officers. As a result, Comverse Technology, Inc. may cause us to take
actions that may not be aligned with the interests of other
shareholders. For example, Comverse Technology, Inc. may prevent,
delay or accelerate any transaction involving a change in control of us or in
which our shareholders might receive a premium over the prevailing market price
for their shares, or may determine to pursue a transaction not involving a
premium.
We
paid a special dividend which reduced our cash reserves available to fund future
growth or pay unanticipated contingent liabilities.
Prior to
April 20, 2009, we held approximately $280 million of cash. On April
2, 2009, our Board of Directors declared a special cash dividend (the “Special
Dividend”) of approximately $200 million, payable on April 20, 2009 to our
shareholders of record as of the close of business on April 13,
2009. After giving effect to the Special Dividend, our cash assets
were reduced by approximately $200 million. Our cash reserves may be
inadequate to fund unanticipated contingent liabilities or any significant
changes in or expansions to our business plan.
16
Risks
Related to the Communications Industry
Adverse
conditions in the communications industry have harmed and may continue to harm
our business, financial condition and results of operations.
Our
business is particularly dependent on, and we derive substantially all of our
revenue from, the communications industry, which has experienced a challenging
capital spending environment in recent years. Our sales to equipment
manufacturers and application developers who supply the communications industry
have been adversely affected by the ongoing slowdown of infrastructure purchases
by communication service providers and by declines in technology
expenditures. In addition to loss of revenue, weakness in the
communications industry may affect our 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.
Our
quarterly revenues and operating results can fluctuate substantially and can be
difficult to forecast due to the nature of our business.
Because a
significant proportion of our revenues are dependent upon deployment of our
products by our customers, we lack visibility to the ultimate timing of a
sale. A delay, cancellation or other factors resulting in the loss or
deferral of a sale may not be discernible until the end of a financial reporting
period. Accordingly, it has been and continues to be very difficult
for us to accurately forecast future revenues and operating results. If we fail
to adequately forecast revenues, we may have incurred planned expenditures that
are not warranted given revenue levels and accordingly could report a
loss.
Consolidation
in the communications industry could result in a further increase in our
dependence on a small number of customers as well as increased pricing pressures
on us.
To the
extent that our customer base consolidates as a result of mergers in the
communications industry, we may have an increased dependence on a few customers
who may be able to exert increased pressure on our prices and contractual terms
in general. Consolidation also may result in the loss of both our
existing and potential customers.
Changes
in the communications industry may lead to increased competition and harm our
business.
The
communications industry continues to undergo significant change as a result of
deregulation and privatization worldwide, reducing restrictions on competition
in the industry. We believe that existing competitors will continue
to present substantial competition, and that other companies, many with
considerably greater financial, marketing, and sales resources than us, may
enter the markets for our products. In addition, we 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.
Our
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 our 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
17
may
create pricing pressure and reduce our market share. In addition, some of our
customers may in the future decide to internally develop their own solutions
instead of purchasing them from us. Increased competition could force
us to lower our prices or take other actions to differentiate our
products.
Because
the market for our products is characterized by rapidly changing technology, our
future success depends on our ability to enhance our existing products and the
timely and cost-effective development, marketing, and adoption of new
products.
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 us. Our continued success will depend
on the ability to correctly anticipate technological trends, to react quickly
and effectively to such trends, enhance our existing product line, and to
introduce new products on a timely and cost-effective basis. The life
cycle of our product line is difficult to estimate. Discontinuing a
product line may result in the incurrence of 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.
Moreover,
most of our products are designed to support SS7 and SIGTRAN
protocols. If future networks do not utilize these protocols, because
they are using newer technology, and we are unable to adapt our products to work
with other appropriate signaling protocols, our products will become less
competitive or obsolete. A reduction in the demand for these products
could adversely affect our business and operating results.
Risks
Related to Our Business
We
have a limited product portfolio and our primary source of revenue is from our
Signalware AR products.
Over 90%
of our revenue is derived from our Signalware AR products and related
services. If demand for this product decreases or if we are unable to
replace this product and related service revenue with revenue from a product
that has similar acceptance with our customers, this would cause a material
adverse effect on our business. In recent fiscal periods, we have reduced
R&D expenditures in order to conserve capital given the uncertain economic
environment and decreased levels of revenue, which reduction may adversely
impact our competitive position in development of new products and
enhancements.
We
are endeavoring to migrate our largest selling product to new network
technologies and protocols; however, even if this development is successful, it
may not be as profitable.
Signalware
AR is based on a technology that relies on an infrastructure that may become
obsolete as it is replaced by new network technologies and
protocols. Even if we successfully migrate our Signalware products to
these new network technologies and protocols, the replacement products may not
be as profitable.
18
We
may incur significant costs related to undetected product defects, errors or
operational problems.
Our
products involve sophisticated technology that performs critical functions to
highly demanding standards. If our current or future products develop
operational problems, we may incur fees and penalties in connection with such
problems, which could have an adverse effect on us. We offer complex
products that may contain undetected defects or errors, particularly when first
introduced or as new versions are released. We may not discover such
defects, errors, or operational problems until after a product has been released
and used by the customer. Significant costs may be incurred to
correct undetected defects, errors or operational problems in our products and
these defects, errors, or operational problems could result in future lost
sales. Defects, errors, or operational problems in our products also may result
in product liability claims, which could cause adverse publicity and impair
their market acceptance.
We
depend on a limited number of manufacturers and suppliers, and any failure of
those parties to fulfill their obligations may disrupt our product
supply.
Because
we rely on a limited number of independent manufacturers to produce boards for
our products, if these manufacturers experience financial, operational or other
difficulties, we may experience disruptions to our product supply. We
may not be able to find alternate manufacturers that meet our requirements and
existing or alternative sources for boards may not continue to be available at
favorable prices. We also rely on a limited number of suppliers for
our board components and we do not have any long-term supply
agreements. Thus, if there is a shortage of supply for these
components, we may experience an interruption in our product supply, which could
have an adverse effect on short term operating results.
We
depend on a limited number of customers, and the loss of any of these customers
or a significant order from any of these customers could adversely affect our
business.
A limited
number of customers have contributed to a significant percentage of our
revenues; with 57% of our fiscal year 2009 revenues derived from only three
customers (Nokia Siemens Networks, Alcatel-Lucent, and Sonus Networks,
Inc.). We anticipate that our 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 or the loss of any of these customers could have an
adverse effect on our business and operating results.
Our
business could be adversely affected if we are unable to attract new
customers.
In order
to increase our revenues and reduce our dependence on a limited number of
customers, we will need to attract additional customers on an ongoing
basis. In addition, because our products have long sales cycles that
typically range from six to twelve months, our ability to forecast the timing
and amount for specific sales is limited. The loss or deferral of one
or more significant sales could have an adverse effect on our operating results
in any fiscal quarter, especially if there are significant sales and marketing
expenses associated with the deferred or lost sales. Our software
products are primarily sold to equipment manufacturers and application
developers who integrate our products with their products and sell them to
communications service providers. The success of new products depends
on our being able to successfully develop sales channels directly to service
providers. The success of our business and operating
19
results
is dependent upon our channel and marketing relationships with these
manufacturers, developers and service providers and the successful development
and deployment of their products. If we cannot successfully establish
channel and marketing relationships with leading equipment manufacturers,
application developers and communications service providers or maintain these
relationships on favorable terms, or our sales channels are affected by economic
weakness, our business and operating results may be adversely
affected.
Investment
in sales and marketing and research and development are a significant percentage
of our revenues, and the failure for a market to emerge for these new products
or customers to accept them could adversely affect our business and the
investments may be lost.
Our
investments in the areas of sales and marketing, and research and development
are a significant percentage of our revenues. Our research and
development activities include ongoing investment in the development of
additional features and functionality for our 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. Our business may be adversely affected by our 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 us, or we are not successful in marketing such
products, our growth could be adversely affected and our investment in those
products may be lost.
Failure
to attract and retain qualified personnel, including key management, could have
an adverse effect on us.
Our
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.Our ability to
attract and retain employees also may be affected by, among other reasons,
speculation regarding a potential change of control or cost control actions,
which in the past and may again in the future, include reductions in our
workforce and the associated reorganization of operations. If the costs of
attracting and retaining qualified personnel increase significantly, our
financial results could be adversely affected.
If
we experience disruptions or systems failures, our ability to conduct our
business would be materially harmed.
We are a
highly automated business and a disruption or failure of our 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 our critical business systems
could severely affect our ability to conduct normal business operations and, as
a result, the financial condition and operating results could be adversely
affected.
In
addition, “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. Our information technology infrastructure is regularly
subject to various attacks and intrusion efforts
20
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 we may
be subject to lawsuits and other liability. Even if we are not held
liable, a security breach could harm our reputation. Even the
perception of security risks, whether or not valid, could inhibit market
acceptance of our products and could harm our business, financial condition, and
operating results. While we diligently maintain our information
technology infrastructure and continuously implement protections against such
viruses, electronic break-ins, disruptions, or intrusions, if the defensive
measures fail or should similar defensive measures by our customers fail, our
business could be adversely affected.
Our
international operations involve special challenges that we may not be able to
meet, which could adversely affect our financial results.
We
currently derive a majority of our total revenues 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
our operating results. Unforeseen changes in the regulatory
environment, including, but not limited to changes in product requirements also
may have an impact on our revenues, operations and/or costs in any given part of
the world. New manufacturing requirements for our products could also
require us to redesign or find alternatives to such products, resulting in
delays and possibly lost sales.
Changes
to licensing regulations abroad could adversely affect business, financial
condition, results of operations and cash flows.
All of
our products are of U.S. origin and are classified under the U.S. export
regulations such that currently no licenses are required to export to the
countries with which we currently conduct business. In the future, we
may be required to obtain export licenses and other authorizations from
applicable governmental authorities for certain countries within which we
conduct business and to comply with applicable export control laws
generally. The failure to receive any required license or
authorization would hinder our ability to sell our products and could adversely
affect our business, results of operations, financial condition or cash
flows. Export laws and regulations are revised from time to time and
can be extremely complex in their application. If we are found not to
have complied with applicable export control laws, we may be penalized by, among
other things, having our ability to receive export licenses curtailed or
eliminated. Our failure to comply with applicable export laws would
hinder our ability to sell our products and could adversely affect our business,
financial condition, and results of operations, and could subject us to civil
and criminal penalties.
Our
international operations subject us to currency exchange risk.
International
sales are predominately denominated in U.S. dollars, and we have not been
exposed to material fluctuations in foreign currency exchange rates related to
sales. We have certain expenses, however, denominated in foreign
currency which expose us to higher expenses due to
21
fluctuations
in foreign currency exchange rates. From time to time, we may choose
to limit our exposure by utilizing hedging strategies. There can be
no assurance that any such hedging strategies that we may undertake would be
successful in avoiding exchange rate losses.
We
may be unable to protect our intellectual property, which could adversely affect
our business, financial condition, results of operations and cash flows, and any
infringement or misappropriation of intellectual property rights could result in
costly litigation.
While we
generally require employees, independent contractors and consultants to execute
non-competition and confidentiality agreements, our intellectual property or
proprietary rights could be infringed or misappropriated, which could result in
expensive and protracted litigation. We rely on a combination of
copyright, trade secret and trademark law to protect our
technology. Despite our efforts to protect our intellectual property
and proprietary rights, unauthorized parties may attempt to copy or otherwise
obtain and use our products or technology. Effectively policing the unauthorized
use of our products is time-consuming and costly, and the steps taken by us may
not prevent misappropriation of our 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. In addition, the cost of
any lawsuit to protect our rights may be expensive and time
consuming.
Others
may bring infringement claims against us, which could adversely affect our
business, financial condition, results of operations and cash
flows.
If others
claim that our products infringe their intellectual property rights, we may be
forced to seek expensive licenses, reengineer our products, engage in expensive
and time-consuming litigation or stop marketing our products. We
attempt to avoid infringing known proprietary rights of third parties in our
product development efforts. We do not, however, regularly conduct
comprehensive patent searches to determine whether the technology used in our
products infringes patents held by third parties. There are many
issued patents, as well as patent applications, in the fields in which we are
engaged. Because patent applications in the United States are not
publicly disclosed until published or issued, applications may have been filed
which relate to our software and products. If we were to discover
that our products violated or potentially violated third-party proprietary
rights, we 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
such licenses may not be available. Even if such licenses were
available, they may not be offered to us on commercially reasonable
terms.
Substantial
litigation regarding intellectual property rights exists in the communications
industry, and we expect that our products may be increasingly subject to
third-party infringement claims as the number of competitors in our industry
segments grows and the functionality of software products in different industry
segments overlaps. In addition, we have agreed to indemnify customers
in certain situations should it be determined that our products infringe on the
proprietary rights of third parties. Any third-party infringement
claims could be time consuming to defend, result in costly litigation, divert
management’s attention and resources, cause product and service delays, or
require us to enter into royalty or licensing agreements. Any royalty
or licensing arrangements may not be available on terms acceptable to us, if at
all. A successful claim of infringement against us and our failure or
inability to license the infringed or similar
22
technology
could have an adverse effect on our business, financial condition, and results
of operations.
Our
investment activities and changes in interest rates could adversely affect our
financial position and results of operations.
We hold a
large proportion of our assets in marketable debt securities. Such
investments subject us to the risks inherent in the capital markets generally.
Given the relatively high proportion of our liquid assets relative to our
overall size, the results of our operations are materially affected by the
results of our capital management and investment activities and the risks
associated with those activities. In addition, changes in interest
rates may in the future have an adverse effect on our results of
operations.
We
could be required to register as an investment company and become subject to
substantial regulation that would interfere with our ability to conduct our
business.
The
Investment Company Act of 1940 requires the registration of companies which are
engaged primarily in the business of investing, reinvesting or trading in
securities, or which are engaged in the business of investing, reinvesting,
owning, holding or trading in securities and which own or propose to acquire
investment securities with a value of more than 40% of its assets on an
unconsolidated basis (other than U.S. government securities and cash). We are
not engaged primarily in the business of investing, reinvesting or trading in
securities, and we intend to invest our cash and cash equivalents in U.S.
government securities and money market funds to the extent necessary to take
advantage of the 40% safe harbor. To manage our cash holdings, we invest in
short-term instruments consistent with prudent cash management and the
preservation of capital and not primarily for the purpose of maximizing
investment returns. U.S. government securities and money market funds generally
yield lower rates of income than other short-term instruments in which we have
invested to date. Accordingly, investing substantially all of our cash and cash
equivalents in U.S. government securities and money market funds could result in
lower levels of interest income and net income.
If we
were deemed an investment company and were unable to rely upon a safe harbor or
exemption under the Investment Company Act, we would, among other things, be
prohibited from engaging in certain businesses or issuing certain securities.
Certain of our contracts might be voidable, and we could be subject to civil and
criminal penalties for noncompliance.
Our
Board of Directors may issue additional shares of stock without shareholder
approval that could result in issuance of stock with rights superior to the
rights of shareholders of our common stock or make it more difficult to acquire
control of us.
Our Board
of Directors has the authority to cause us to issue, without vote or action of
our shareholders, up to 2,500,000 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 our common stock. We are also authorized to issue, without
shareholder approval, common stock. The issuance of either preferred
or common stock could have the effect of making it more difficult for a person
to
23
acquire,
or could discourage a person from seeking to acquire control of
us. If this occurs, investors could lose the opportunity to receive a
premium on the sale of their shares in a change of control
transaction.
Our results of
operations could vary as a result of the methods, estimates, and judgments that
we use in applying our accounting policies.
The
methods, estimates, and judgments that we use in applying our accounting
policies have a significant impact on our results of operations (see “Critical
Accounting Policies and Estimates” in Part II, Item 7 of this 2009 Form 10-K).
Such methods, estimates, and judgments are, by their nature, subject to
substantial risks, uncertainties, and assumptions, and factors may arise over
time that lead us to change our methods, estimates, and judgments. Changes in
those methods, estimates, and judgments could significantly affect our results
of operations.
ITEM
1B. UNRESOLVED STAFF
COMMENTS.
None.
ITEM
2. PROPERTIES.
The
Company’s headquarters and development facilities consist of approximately
35,000 square feet of leased office space located in Mount Laurel, New Jersey.
The Company’s subsidiaries lease approximately 14,000 square feet of office
space in Sophia-Antipolis, France; 4,000 square feet of office space in
Singapore; and sales offices in Massachusetts, China, Korea and
Japan.
The
Company believes that its facilities currently under lease are adequate for
current operations.
ITEM
3. LEGAL
PROCEEDINGS.
From time
to time, the Company is subject to claims in legal proceedings arising in the
normal course of its business. The Company does not believe that it
is currently party to any pending legal actions that could reasonably be
expected to have a material adverse effect on its business, financial condition,
results of operations or cash flows.
ITEM
4.
RESERVED.
24
PART
II
ITEM
5.
|
MARKET
FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
|
MARKET
FOR COMMON STOCK
Beginning
on February 1, 2007 and ending on November 24, 2009, the Company’s common stock
was quoted on the over-the-counter (OTC) securities market under the symbol
“ULCM.PK” with pricing and financial information provided by Pink OTC Markets,
Inc. Effective November 25, 2009, the Company’s common stock relisted
and began trading on The NASDAQ Global Market under the symbol
“ULCM.” The table presented below sets forth the high and low bid
quotations as reported by Pink OTC Markets, Inc. from February 1, 2008 through
November 24, 2009 and high and low intra-day sales prices of the Company’s
common stock as reported on The NASDAQ Global Market for the period from
November 25, 2009 through January 31, 2010. The Company’s Board of
Directors authorized a one-for-four reverse stock split of all outstanding
shares of common stock, which became effective November 18, 2009. All amounts
prior to November 18, 2009 have been retroactively adjusted for the effects of
the reverse stock split.
FISCAL
YEAR
|
FISCAL
QUARTER
|
LOW
|
HIGH
|
|||||||
2008
|
02/1/08 - 04/30/08
|
$ | 24.80 | $ | 29.20 | |||||
05/1/08 - 07/31/08
|
$ | 26.16 | $ | 34.40 | ||||||
08/1/08 - 10/31/08
|
$ | 19.40 | $ | 32.00 | ||||||
11/1/08 - 01/31/09
|
$ | 14.00 | $ | 26.00 | ||||||
2009
|
02/1/09 - 04/30/09*
|
$ | 6.00 | $ | 27.60 | |||||
05/1/09 - 07/31/09
|
$ | 7.00 | $ | 9.40 | ||||||
08/1/09 - 10/31/09
|
$ | 7.20 | $ | 12.76 | ||||||
11/1/09 - 01/31/10
|
$ | 9.08 | $ | 10.39 |
*On April
20, 2009, the Company paid a $4.58 per share special dividend (equivalent to
$18.32 per share retroactively adjusted for the effects of the one-for-four
reverse stock split). None of the high and low prices for periods prior to this
date have been adjusted to account for the effects of the special
dividend.
HOLDERS
OF RECORD
There
were approximately 37 holders of record of the Company’s common stock on April
12, 2010. Such record holders include those who are nominees for an
undetermined number of beneficial owners.
PERFORMANCE
GRAPH
The
following performance graph compares the cumulative five-year total return to
shareholders from an investment in the Company’s common stock with the
cumulative five-year total returns of the NASDAQ Computer index and the NASDAQ
Composite index, assuming a hypothetical investment of $100 in the Company’s
common stock and in each index on January 31, 2005 and
25
the
reinvestment of any dividends. The performance shown is not necessarily
indicative of future performance. The Company’s Board of Directors authorized a
one-for-four reverse stock split of all outstanding shares of common stock,
which became effective November 18, 2009. On April 20, 2009, the Company paid a
$4.58 per share special dividend (equivalent to $18.32 per share retroactively
adjusted for the effects of the reverse stock split). Prices used in the
performance graph for periods prior to November 18, 2009 have been adjusted to
account for the effects of the reverse stock split.
Cumulative
Total Return
Jan.
31, 2005
|
Jan.
31, 2006
|
Jan.
31, 2007
|
Jan.
31, 2008
|
Jan.
31, 2009
|
Jan.
31, 2010
|
|||||||||||||||||||
Ulticom,
Inc.
|
$ | 100.00 | $ | 73.33 | $ | 61.96 | $ | 51.81 | $ | 41.87 | $ | 50.58 | ||||||||||||
Nasdaq
Computer Index
|
$ | 100.00 | $ | 111.43 | $ | 116.10 | $ | 117.31 | $ | 70.70 | $ | 115.47 | ||||||||||||
Nasdaq
Composite Index
|
$ | 100.00 | $ | 111.80 | $ | 119.47 | $ | 115.88 | $ | 71.59 | $ | 104.12 |
DIVIDENDS
On April
20, 2009, the Company paid a special cash dividend to its shareholders of record
as of the close of business on April 13, 2009, totaling approximately $200
million. The Company has no current plans to pay any additional
dividends on its equity securities. 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.
26
ITEM
6. SELECTED CONSOLIDATED
FINANCIAL DATA.
The
following selected consolidated financial data should be read in conjunction
with the consolidated financial statements and related notes appearing in Item
15 in this 2009 Form 10-K.
YEARS
ENDED JANUARY 31,
|
||||||||||||||||||||
(In
thousands, except per share data)
|
||||||||||||||||||||
2006
|
2007
|
2008
|
2009
|
2010
|
||||||||||||||||
Consolidated
Statement of Operations Data:
|
||||||||||||||||||||
Revenues
|
$ | 60,632 | $ | 63,593 | $ | 59,010 | $ | 53,047 | $ | 45,838 | ||||||||||
Cost
of revenues
|
15,791 | 16,085 | 16,316 | 14,500 | 11,991 | |||||||||||||||
Gross
profit
|
44,841 | 47,508 | 42,694 | 38,547 | 33,847 | |||||||||||||||
Research
and development expenses
|
12,353 | 15,155 | 16,363 | 16,288 | 13,289 | |||||||||||||||
Selling,
general and administrative expenses
|
17,122 | 28,340 | 35,523 | 34,145 | 27,633 | |||||||||||||||
Income
(loss) from operations
|
15,366 | 4,013 | (9,192 | ) | (11,886 | ) | (7,075 | ) | ||||||||||||
Interest
and other income, net
|
8,103 | 12,660 | 12,364 | 7,098 | 1,953 | |||||||||||||||
Income
(loss) before income tax expense (benefit)
|
23,469 | 16,673 | 3,172 | (4,788 | ) | (5,122 | ) | |||||||||||||
Income
tax expense (benefit)
|
2,992 | 4,120 | (715 | ) | (1,652 | ) | (627 | ) | ||||||||||||
Net
income (loss)
|
$ | 20,477 | $ | 12,553 | $ | 3,887 | $ | (3,136 | ) | $ | (4,495 | ) | ||||||||
Earnings
(loss) per share—diluted (1)
|
$ | 1.86 | $ | 1.14 | $ | 0.35 | $ | (0.29 | ) | $ | (0.41 | ) | ||||||||
Weighted
average common and common equivalent shares outstanding – diluted
(1)
|
11,016 | 11,054 | 11,051 | 10,875 | 10,896 |
AS
OF JANUARY 31,
|
|||||||||||||||||
2006 | 2007 | 2008 | 2009 | 2010 | |||||||||||||
Consolidated
Balance Sheet Data:
|
|||||||||||||||||
Total
assets
|
$ | 295,774 | $ | 310,754 | $ | 318,401 | $ | 314,951 | $ | 107,057 |
(1) The
Company’s Board of Directors authorized a one-for-four reverse stock split of
all outstanding shares of common stock, which became effective November 18,
2009. The common share and per common share data previously reported
as of and for the years ended January 31, 2006, 2007, 2008 and 2009 have been
retroactively adjusted to account for the effect of the reverse stock
split.
27
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
The
following management’s discussion and analysis should be read in conjunction
with the consolidated financial statements and related notes included in Item 15
in this 2009 Form 10-K. The discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results
could differ materially from the results contemplated in these forward-looking
statements as a result of factors including, but not limited to, those described
under “Item 1A – Risk Factors.”
OVERVIEW
OF COMPANY’S OPERATIONS
The
Company designs, develops, markets, licenses and supports network signaling
solutions. Its products are sold primarily through direct sales to network
equipment manufacturers, application developers, and service providers who
include the Company’s products within their systems or services. Product
revenues consist primarily of sales of software licenses and interface boards.
Service revenues consist primarily of software maintenance fees related to
previously deployed licenses of the Company’s products and fees for support
services. Service revenues are expected to show less volatility than product
revenues. The key drivers of the Company’s financial results are:
·
|
product
price and volume;
|
·
|
cost
to support new and existing customer deployments of its
products;
|
·
|
investments
in product enhancements and expansion into new markets;
and,
|
·
|
interest
income earned on its cash equivalents and short-term
investments.
|
Revenues
for fiscal year 2009 declined 14%, as compared to fiscal year 2008. This decline
in revenues began in the second half of fiscal year 2008, primarily as a result
of the slowdown of infrastructure spending by communication service providers
and declines in technology expenditures. In response to these circumstances,
during the fourth fiscal quarter of 2008, the Company took measures to reduce
selling, general and administrative expenses, consisting primarily of making
reductions in the number of sales and marketing personnel. As a result of
implementing these measures, personnel and other labor-related costs charged to
selling, general and administrative expenses for fiscal year 2009 were
approximately $1.3 million lower than the comparable amount for fiscal year
2008. In September 2009, the Company took additional actions to lower its costs
to operate more effectively at these lower sales levels, principally consisting
of reductions in the numbers of personnel in substantially all areas of its
operations. On an annualized basis, operating expenses are expected to decrease
by approximately $2.2 million as a result of the actions taken in September
2009.
For
fiscal years 2008 and 2009, the Company’s financial results were also negatively
impacted by the substantial expenses related to investigation, restatement and
corporate development activities, as well as employee retention and workforce
reduction payments. The activities associated with investigating improper
accounting practices were completed in early 2008, while restatement related
activities continued into and were completed during fiscal year
2009.
The
Company continues to focus on the key elements of its strategy to expand its
role as a premium provider of signaling solutions to the telecommunications
industry. These elements
28
include
the Company leveraging its strengths to maintain and expand its market share in
the wireless broadband services and communication infrastructure markets.
Specifically, the Company is currently focusing on further developing the
following strengths of its business:
·
|
comprehensive
product portfolio – signaling component and system
solutions;
|
·
|
high-value
customer base – established and emerging equipment manufacturers and
service providers; and
|
·
|
increasing
operational efficiency – continuous process innovation and talent
management.
|
On April
20, 2009, the Company paid a special cash dividend to its shareholders of record
as of the close of business on April 13, 2009, totaling approximately $200
million. The Company currently has no plans to pay any additional dividends on
its equity securities and believes it has sufficient capital for meeting
operational needs, paying liabilities and funding strategic initiatives. The
payment of the special dividend reduced the Company’s invested cash by
approximately $200 million, and, as a result, interest income has been
significantly lower in fiscal quarters subsequent to the first fiscal quarter of
2009.
On
November 17, 2009, the Company announced that its Board of Directors authorized
a one-for-four reverse stock split of all outstanding shares of common stock and
decreases in the authorized common shares from 200,000,000 to 50,000,000 and
authorized undesignated shares from 10,000,000 to 2,500,000. These changes
became effective on November 18, 2009.
The
Company’s common stock was relisted on The NASDAQ Global Market on November 25,
2009.
RESULTS
OF OPERATIONS
Year
Ended January 31, 2010 (“fiscal year 2009”) Compared to Year Ended January 31,
2009 (“fiscal year 2008”)
Revenues.
(dollar amounts in
thousands)
|
Fiscal
year
|
Fiscal
year
|
||||||||||
2008
|
2009
|
Change
|
||||||||||
Product
revenues
|
$
|
41,939
|
$
|
32,850
|
$
|
(9,089
|
)
|
|||||
Service
revenues
|
11,108
|
12,988
|
1,880
|
|||||||||
Total
revenues
|
$
|
53,047
|
$
|
45,838
|
$
|
(7,209
|
)
|
The
decrease in the Company’s product revenues was due primarily to decreases in the
sales of boards and licenses totaling approximately $8.2 million. Most of this
decrease was attributable to one of the Company’s largest customers, which has
experienced a significant decline in sales of products in which the Company’s
boards are embedded. Additionally, product revenues declined as a result of
lower sales to affiliates of Comverse Technology, Inc. of approximately $1.2
million. The Company believes that the demand for its products has been
negatively impacted by declines in capital spending by companies operating in
the communications industry in recent years. The decline in
industry-wide capital spending began to make its most significant adverse impact
on the Company’s revenues beginning in the third quarter of fiscal year 2008.
Service
29
revenues
increased as the installed base of software licenses continued to grow,
consequently generating higher levels of fees for software maintenance and
support. The Company expects product revenues to decline slightly in 2010 and
does not expect service revenues to vary significantly from the fiscal year 2009
amount.
Cost of
Revenues.
(dollar amounts in
thousands)
|
Fiscal
year
|
Fiscal
year
|
||||||||||
2008
|
2009
|
Change
|
||||||||||
Product
costs
|
$
|
8,780
|
$
|
7,032
|
$
|
(1,748
|
)
|
|||||
Service
costs
|
5,720
|
4,959
|
(761
|
)
|
||||||||
Total
cost of revenues
|
$
|
14,500
|
$
|
11,991
|
$
|
(2,509
|
)
|
|||||
Gross
margin (as a percentage of revenues)
|
73%
|
74%
|
Lower
materials and production costs from the lower volume of board and license sales
resulted in an approximate $0.8 million decrease in cost of product revenues.
Personnel and other labor-related expenses included in total cost of revenues
were lower by approximately $1.4 million, primarily as a result of the Company
employing fewer production personnel during fiscal year 2009, as compared to
fiscal year 2008. During the fiscal years from 2005 to 2009, the Company’s
annual gross margin ranged from 72% to 75%. The Company does not expect gross
margin for fiscal year 2010 to vary significantly from this range.
Research and Development
Expenses.
(dollar amounts in
thousands)
|
Fiscal
year
|
Fiscal
year
|
||||||||||
2008
|
2009
|
Change
|
||||||||||
Research
and development expenses
|
$
|
16,288
|
$
|
13,289
|
$
|
(2,999
|
)
|
|||||
As
a percentage of revenues
|
31%
|
29%
|
Personnel
and other labor-related costs charged to research and development expenses were
lower by approximately $2.2 million, primarily as a result of the Company’s
employing fewer research and development personnel during fiscal year 2009, as
compared to fiscal year 2008. Additionally, share-based payment expense included
in research and development expenses was lower by approximately $0.3
million. The Company does not expect total research and development
expenses for fiscal year 2010 to vary significantly from the fiscal year 2009
amount.
Selling,
General and Administrative Expenses.
(dollar amounts in
thousands)
|
Fiscal
year
|
Fiscal
year
|
||||||||||
2008
|
2009
|
Change
|
||||||||||
Selling,
general and administrative expenses
|
$
|
34,145
|
$
|
27,633
|
$
|
(6,512
|
)
|
|||||
As
a percentage of revenues
|
64%
|
60%
|
30
Included
in selling, general and administrative expenses were various costs associated
with investigation and restatement activities, corporate development, payments
made in February 2008 to compensate holders of expired stock options, workforce
reductions and employee retention, as summarized in the following
table:
(dollar amounts in
thousands)
|
Fiscal
year
|
Fiscal
year
|
||||||||||
2008
|
2009
|
Change
|
||||||||||
Investigation
and restatement related expenses
|
$
|
4,088
|
$
|
4,645
|
$
|
557
|
||||||
Corporate
development related expenses
|
1,722
|
464
|
(1,258
|
)
|
||||||||
Payments
for expired options
|
1,860
|
-
|
(1,860
|
)
|
||||||||
Retention
and reduction in force expenses
|
1,296
|
1,543
|
247
|
|||||||||
Total
|
$
|
8,966
|
$
|
6,652
|
$
|
(2,314
|
)
|
The
activities associated with investigating improper accounting practices were
completed in early 2008, while restatement related activities continued into and
were completed during fiscal year 2009 upon completion and filing of the
Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2009
and Quarterly Reports on Form 10-Q for the fiscal quarters ended October 31,
2008, April 30, 2009, July 31, 2009 and October 31, 2009. The Company’s
corporate development related activities consisted primarily of exploring
various strategic options and the evaluation of the special dividend that was
paid in April 2009. During the fourth quarter of fiscal year 2008 and in
September 2009, the Company made reductions in sales, marketing and
administrative staff. As a result, workforce reduction costs were incurred
during fiscal years 2008 and 2009.
Excluding
the expenses described above, selling, general and administrative expenses
decreased by approximately $4.2 million during fiscal year 2009, as compared to
fiscal year 2008. Personnel and other labor-related expenses were lower by
approximately $2.2 million, primarily as a result of reductions in the Company’s
sales, marketing and administrative staff and related travel expenses.
Additionally, expenses for professional fees and share-based payments decreased
by approximately $0.7 million and $0.6 million, respectively. As a
result of the completion of all restatement related activities and the workforce
reductions in fiscal year 2009, the Company expects selling, general and
administrative expenses to decrease significantly in fiscal year
2010.
Interest and Other Income, net.
Interest and other income, net decreased $5.1 million to
approximately $2.0 million for fiscal year 2009, as compared to fiscal year
2008, primarily due to lower interest income of approximately $4.7 million. The
payment of the special dividend on April 20, 2009 lowered the Company’s total
cash equivalents and short-term investments by approximately $200 million,
resulting in lower interest income of approximately $3.4 million. The remaining
decrease in interest income was primarily due to the significant declines in
interest rates earned on cash equivalents and short-term investments occurring
throughout fiscal year 2008 and the first quarter of fiscal year
2009.
Income Tax
Benefit. For fiscal years 2008 and 2009, the Company recorded
income tax benefits of approximately $1.7 million and $0.6 million,
respectively. The Company’s overall effective tax rate was approximately 35% and
12% for fiscal years 2008 and 2009, respectively. The decrease in the
Company’s effective rate was primarily attributable to the establishment of
a
31
valuation
allowance against the recorded amounts of deferred income tax assets associated
with foreign tax credits.
Year
Ended January 31, 2009 (“fiscal year 2008”) Compared to Year Ended January 31,
2008 (“fiscal year 2007”)
Revenues.
(dollar amounts in
thousands)
|
Fiscal
year
|
Fiscal
year
|
||||||||||
2007
|
2008
|
Change
|
||||||||||
Product
revenues
|
$
|
48,348
|
$
|
41,939
|
$
|
(6,409
|
)
|
|||||
Service
revenues
|
10,662
|
11,108
|
446
|
|||||||||
Total
revenues
|
$
|
59,010
|
$
|
53,047
|
$
|
(5,963
|
)
|
The
decrease in the Company’s product revenues was due primarily to the effects of
declines in sales volume and average selling prices of boards of approximately
$5.4 million and $0.9 million, respectively.
Cost of
Revenues.
(dollar amounts in
thousands)
|
Fiscal
year
|
Fiscal
year
|
||||||||||
2007
|
2008
|
Change
|
||||||||||
Product
costs
|
$
|
10,458
|
$
|
8,780
|
$
|
(1,678
|
)
|
|||||
Service
costs
|
5,858
|
5,720
|
(138
|
)
|
||||||||
Total
cost of revenues
|
$
|
16,316
|
$
|
14,500
|
$
|
(1,816
|
)
|
|||||
Gross
margin (as a percentage of revenues)
|
72%
|
73%
|
Included
in cost of revenues in fiscal year 2007 were losses resulting from write-downs
in the values of inventories for excess and obsolete boards and board
components, totaling approximately $0.7 million. Additionally, a
reduction in workforce in fiscal year 2008 and lower materials and production
costs from a lower volume of sales orders resulted in lower cost of revenues in
fiscal year 2008, as compared to fiscal year 2007.
Research and Development
Expenses.
(dollar amounts in
thousands)
|
Fiscal
year
|
Fiscal
year
|
||||||||||
2007
|
2008
|
Change
|
||||||||||
Research
and development expenses
|
$
|
16,363
|
$
|
16,288
|
$
|
(75
|
)
|
|||||
As
a percentage of revenues
|
28%
|
31%
|
As a
percentage of revenues, research and development expenses increased by 3%, due
primarily to the continued development of new product features and
enhancements.
32
Selling,
General and Administrative Expenses.
(dollar amounts in
thousands)
|
Fiscal
year
|
Fiscal
year
|
||||||||||
2007
|
2008
|
Change
|
||||||||||
Selling,
general and administrative expenses
|
$
|
35,523
|
$
|
34,145
|
$
|
(1,378
|
)
|
|||||
As
a percentage of revenues
|
60%
|
64%
|
Included
in selling, general and administrative expenses in fiscal years 2007 and 2008
were various costs associated with investigative and restatement activities,
corporate development, payments made in February 2008 to compensate holders of
expired options, workforce reductions and employee retention, as summarized in
the following table:
(dollar amounts in
thousands)
|
Fiscal
year
|
Fiscal
year
|
||||||||||
2007
|
2008
|
Change
|
||||||||||
Investigation
and restatement related expenses
|
$
|
5,222
|
$
|
4,088
|
$
|
(1,134
|
)
|
|||||
Corporate
development related expenses
|
990
|
1,722
|
732
|
|||||||||
Payments
for expired options
|
-
|
1,860
|
1,860
|
|||||||||
Retention
and reduction in force expenses
|
217
|
1,296
|
1,079
|
|||||||||
Total
|
$
|
6,429
|
$
|
8,966
|
$
|
2,537
|
The
completion of the activities associated with investigating improper accounting
practices in early 2008 resulted in lower selling, general and administrative
expenses. During 2008, the Company’s corporate development related
activities consisted primarily of exploring various strategic options and the
evaluation of the special dividend that was paid in April
2009. Additionally, the Company made cash payments to compensate
holders of expired options in February 2008 and incurred significant costs
associated with employee retention payments and workforce reductions in fiscal
year 2008.
Excluding
the expenses described above, selling, general and administrative expenses
decreased by approximately $3.9 million in fiscal year 2008, as compared to
fiscal year 2007. Personnel and other labor-related expenses were
lower in fiscal year 2008 by approximately $3.1 million, as a result of
reductions in the Company’s sales, marketing and administrative staff and
related travel expenses. Payments of fees made under the corporate services
agreement with Comverse Technology, Inc., which was terminated effective
February 1, 2008, were approximately $0.4 million in the year ended January 31,
2008. Additionally, share-based payment expenses were lower by approximately
$0.3 million in fiscal year 2008.
Interest and Other Income, net.
Interest and other income, net decreased $5.3 million to approximately
$7.1 million in fiscal year 2008, as compared to fiscal year 2007. Interest
income decreased approximately $4.1 million, primarily due to the effects of
significantly lower interest rates earned on cash equivalents and short-term
investments.
Income
Tax Benefit. For the fiscal years 2007 and 2008, the Company
recorded income tax benefits of approximately $0.7 million and $1.7 million,
respectively. The Company’s overall effective tax rate was approximately 35% for
fiscal year 2008, as compared to a benefit of approximately (23)% for fiscal
year 2007. The change in the effective tax rate was primarily
attributable to the effect of the loss from operations exceeding the tax exempt
income earned on the Company’s investments in fiscal year
2008.
33
LIQUIDITY
AND CAPITAL RESOURCES
At
January 31, 2009 and 2010, the Company’s cash and cash equivalents and
short-term investments totaled approximately $282.0 million and $78.3 million,
respectively. On April 20, 2009, the Company paid a special cash
dividend to its shareholders of record as of the close of business on April 13,
2009, totaling approximately $200 million. The Company has no current plans to
pay additional cash dividends on its equity securities. 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.
The
Company believes that its cash, cash equivalent and short-term investment
balances will be sufficient to meet anticipated cash needs for working capital,
capital expenditures, research and development and other activities for the
foreseeable future. However, if current sources are not sufficient to
meet the Company’s needs, it may seek additional debt or equity
financing.
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 may have
a dilutive impact on the Company’s shareholders, and any acquired business may
not contribute positive operating results commensurate with the associated
investment.
Analysis
of Cash Flows
Operations
for fiscal years 2007, 2008 and 2009 provided or (used) cash of approximately
$4.1 million, $(1.4) million and $(4.2) million, respectively. The
decrease in cash flows from operating activities for fiscal year 2009 was
primarily attributable to the decrease in interest income earned on the
Company’s short-term investments and cash equivalents of approximately $4.7
million and payments to settle certain income tax audits totaling approximately
$0.9 million, partially offset by decreases in cash used for expenses associated
with corporate development activities and payments to compensate employees for
expired options. The decline in cash flows from operating activities
for fiscal year 2008 was primarily attributable to lower revenues from product
sales and the increased use of cash for expenses associated with corporate
development activities, workforce reduction, employee retention and payments to
compensate employees for certain expired options. The Company’s
completion of restatement related activities during fiscal year 2009, coupled
with realizing cost savings from workforce reductions that resulted in lower
selling, general and administrative expenses in fiscal year 2009, is expected to
result in significant reductions in the use of cash during fiscal year
2010.
During
the three fiscal years 2007 through 2009, the Company’s cash provided by or used
in investing activities generally reflected the Company’s shifts between cash
equivalents and short-term investments. For fiscal year 2010, the
Company anticipates that the amount of capital expenditures will not vary
significantly from total expenditures made in fiscal year 2009.
For the
year ended January 31, 2010, the Company’s financing activities primarily
consisted of the payment of the special dividend in April 2009 and proceeds from
exercises of stock options. From April 17, 2006 through December 10, 2009,
holders of options to purchase common stock
34
under the
Company’s equity incentive plans were prohibited from exercising their vested
options until the time that the Company became current in its reporting
obligations under applicable securities laws and had an effective registration
statement on Form S-8 on file with the SEC, both of which occurred on December
10, 2009.
OFF-BALANCE
SHEET ARRANGEMENTS
As of
January 31, 2010, the Company was not involved in any off-balance sheet
arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation
S-K.
CONTRACTUAL
OBLIGATIONS
The
following table summarizes the Company’s aggregate contractual obligations as of
January 31, 2010:
(in thousands) |
Payments
Due by Fiscal Year Ending January 31,
|
|||||||||||||||||||||
Total
|
2011
|
2012
|
2013
|
2014
|
2015
|
Thereafter
|
||||||||||||||||
Operating
lease obligations
|
$ | 2,502 | $ | 1,193 | $ | 658 | $ | 351 | $ | 300 | $ | - | $ | - | ||||||||
Purchase
obligations (1)
|
1,753 | 1,545 | 179 | 29 | - | - | - | |||||||||||||||
Unrecognized
tax benefits (2)
|
- | - | - | - | - | - | - | |||||||||||||||
Other
long-term liabilities
|
35 | - | 35 | - | - | - | - | |||||||||||||||
Total
|
$ | 4,290 | $ | 2,738 | $ | 872 | $ | 380 | $ | 300 | $ | - | $ | - |
(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, 2010.
(2)
Obligations for unrecognized income tax benefits, totaling approximately $1.6
million, are excluded from this table, because the timing of eventual payment
cannot be reliably estimated.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (“GAAP”) 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 consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. The Company evaluates these estimates and
judgments on an ongoing basis, and the estimates are based on experience,
current and expected future conditions, third-party evaluations and various
other assumptions that the Company believes are reasonable under the
circumstances. The results of estimates form the basis for making judgments
about the carrying amounts of assets and liabilities, as well as identifying and
assessing the accounting treatment with respect to commitments and
contingencies. Actual results could differ from those estimates.
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 to
make difficult, subjective, or complex judgments.
35
The
Company’s accounting policies that require a significant amount of estimation or
judgment in their application include:
·
|
revenue
recognition;
|
·
|
allowance
for doubtful accounts receivable;
|
·
|
reserve
for obsolete or excess inventory;
|
·
|
accounting
for share-based payment transactions;
and
|
·
|
accounting
for income taxes.
|
Revenue
Recognition
Product
revenues, which include software license and hardware revenue, are generally
recognized in the period in which persuasive evidence of a sale or service
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
unspecified product updates, upgrades, and enhancements, when and if available.
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 multiple element software
arrangements, the fair value of any undelivered element is determined using
VSOE. The Company allocates revenue based on VSOE to the undelivered elements
and the residual revenue to the delivered elements. Where VSOE of the
undelivered element cannot be determined, the Company defers revenue for the
delivered elements until the undelivered elements are delivered.
Sales of
development kits are deferred and recognized as revenue over the estimated
period of future customer software deployments and related maintenance, which
the Company considers to be the economic life of the development kit. Additional
development license fees are deferred and recognized as revenue over the
remaining estimated economic life of the development kit. The estimation of the
economic life of the development kit requires significant management judgment
and is based on the customer’s historical project experience. Any change in the
estimated economic life of the development kit would affect the amount of
revenue recognized in future periods. For example, if during the
fiscal year 2010, the Company determined that an increase in the economic life
of the development kit of two years was warranted, the amount of revenue
expected to be recognized in fiscal year 2010 based on the deferred development
kit revenue as of January 31, 2010 would decrease by approximately $0.1
million.
Allowance
for Doubtful Accounts Receivable
The
collectability of the Company’s accounts receivable requires a considerable
amount of judgment when assessing the realization of these receivables,
including reviewing the current creditworthiness, current and historical
collection history, and the related aging of past due balances of each customer.
The Company evaluates specific accounts when it becomes aware of information
indicating that a customer may not be able to meet its financial obligations due
to
36
deterioration
of its financial condition, lower credit ratings, bankruptcy, or other factors
affecting the ability to render payment. Reserve requirements are based on the
facts available and are re-evaluated and adjusted each accounting period as
additional information is received.
Reserve
for Obsolete or Excess Inventory
Inventory
reserves for excess and obsolete inventory are determined primarily by future
demand forecasts and charges are recorded to cost of revenues. Demand forecasts
are assessed on at least a quarterly basis. Charges are recorded to reduce
inventory to its estimated net realizable value and there is no increase in its
carrying value due to subsequent changes in demand forecasts.
Accounting
for Share-based Payments
For all
share-based payment transactions in which the Company acquires services from
employees or directors by issuing shares of the Company’s common stock, options
to purchase shares or other equity instruments, the Company recognizes the cost
of awarded equity instruments that are ultimately expected to vest based on each
instrument’s grant-date fair value over the period during which the employee or
director is required to provide service in exchange for the award. For purposes
of calculating each stock option’s fair value, the Company uses the
Black-Scholes option pricing model, which involves the determination of
assumptions that become inputs into the model. The primary inputs are expected
volatility, expected term of the option, risk-free interest rate and dividend
yield. Expected volatility is based on the historical performance of the
Company’s common stock. Prior to the option award made in January 2010, the
Company had not made an option award since December 2005 and all holders of
options were prohibited from exercising their vested options from April 17, 2006
through December 10, 2009. Accordingly, sufficient recent data
regarding exercise behavior did not exist in a form that could reasonably
predict the term, or life, of an option. Therefore, for the options
granted during January 2010, the Company estimated the expected term using the
“simplified method.” The risk-free interest rate is the implied yield
available as of the grant date on U.S. Treasury zero-coupon issues with a
remaining term equal to the option’s expected term. Prior to the Company’s
special cash dividend paid on April 20, 2009, the Company had not paid dividends
and had not declared any intentions of doing so. Accordingly, the dividend yield
is assumed to be zero.
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 expiration. Because the
Company’s employee stock options have characteristics significantly different
from those of traded options, and because changes in subjective input
assumptions can materially affect the fair value estimate, the Black-Scholes
model may not necessarily provide a reliable single measure of the fair value of
the options granted under the Company’s equity incentive plans.
The total
cost to recognize as share-based payment expense over the requisite service
period is based on the number of awards that are ultimately expected to
vest. Accordingly, the Company develops expectations with respect to
forfeitures of awards, based on historical experience regarding employee
turnover or, in the case of awards that vest upon the satisfaction of
predetermined performance conditions, on the probable outcome of the performance
conditions.
37
Upon
vesting of awards, the Company’s share-based payment expense is adjusted to
reflect the effects of actual forfeitures.
Accounting
for Income Taxes
The
Company accounts for income taxes using an asset and liability approach, which
requires estimates of taxes payable or refunds for the current period and
estimates of deferred tax assets and liabilities for the future tax consequences
attributable to differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the corresponding amounts used
for income tax purposes. Current and deferred tax assets and
liabilities are based on provisions of the enacted tax laws and are measured
using the enacted tax rates and laws that are expected to be in effect when the
future tax events are expected to reverse. The effects of future changes in tax
laws or rates are not anticipated.
Significant
judgment is required in evaluating the Company's tax positions and measuring any
related future benefit that may result from such positions. In its determination
of income tax expense, the Company does not recognize any benefit from tax
positions it considers to be uncertain. Only benefits that may result
from tax positions that are more likely than not of being sustained on audit,
based on the technical merits of the position, are
recognized. Further, the effect on the Company’s income tax provision
of these tax positions is measured at the largest amount of benefit that is
greater than 50% likely of being realized upon the ultimate
settlement. Differences between the amount of benefits taken or
expected to be taken in the Company’s income tax returns and the amount of
benefits recognized based on the evaluation and measurement of the related tax
positions represent unrecognized income tax benefits, the total of which is
reflected as a liability in the consolidated balance sheet. The total
amount of unrecognized tax benefits that, if recognized, would affect the
Company’s effective income tax rate was approximately $0.4 million as of January
31, 2010.
The
portion of any deferred tax asset for which it is more likely than not that a
tax benefit will not be realized is offset by recording a valuation
allowance. Future realization of the tax benefit of an existing
deductible temporary difference or carryforward ultimately depends on the
existence of sufficient taxable income of the appropriate character (for
example, ordinary income or capital gain) within the carryforward period
available under the tax law. The Company’s policy is to consider the following
sources of taxable income, which may be available under the tax law to realize a
tax benefit for deductible temporary differences and carryforwards:
·
|
future
reversals of existing taxable temporary
differences;
|
·
|
future
taxable income exclusive of reversing temporary differences and
carryforwards;
|
·
|
taxable
income in prior carryback year(s) if carryback is permitted under the
tax law; and
|
·
|
tax
planning strategies that would, if necessary, be implemented
to:
|
(1) accelerate
taxable amounts to utilize expiring carryforwards;
(2) change
the character of taxable or deductible amounts from ordinary income or loss to
capital gain or loss; and
(3) switch
from tax-exempt to taxable investments.
Evidence
available about each of those possible sources of taxable income will vary
between tax jurisdictions and, possibly, from year to year. To the extent
evidence about one or more sources of taxable income is sufficient to support a
conclusion that a valuation allowance is not
38
necessary,
the Company’s policy is that other sources need not be considered. Consideration
of each source is required, however, to determine the amount of the valuation
allowance that may be required to be recognized for deferred tax
assets.
For any
specific jurisdiction where a history of three years of cumulative losses has
occurred or where there has been a substantial change in the business, the
Company does not rely on projections of future taxable income as described
above. Instead, the Company determines its need for a valuation allowance on
deferred tax assets, if any, by determining an average steady-state normalized
taxable income amount over the last three years. The Company will also consider
the following positive evidence in the above scenarios, if present:
·
|
existing
contracts or firm sales backlog that will produce more than enough taxable
income to realize the deferred tax asset based on existing sales prices
and cost structures; and
|
·
|
an
excess of appreciated asset value over the tax basis of the entity’s net
assets in an amount sufficient to realize the deferred tax
asset.
|
RECENTLY
ADOPTED ACCOUNTING GUIDANCE
Effective
February 1, 2009, the Company adopted authoritative guidance issued by the
Financial Accounting Standards Board (“FASB”) regarding fair value measurements
that relates specifically to nonfinancial assets and nonfinancial liabilities.
This guidance defined fair value based upon an exit price model, established a
framework for measuring fair value and established a fair value hierarchy
disclosure framework that prioritizes and ranks the level of market price
observability used in measuring assets and liabilities at fair value. The
application of this guidance to the Company’s nonfinancial assets and
nonfinancial liabilities as of February 1, 2009 did not have a material effect
on the Company’s financial position, results of operations or cash
flows.
In the
second quarter of fiscal year 2009, the Company adopted authoritative guidance
issued by the FASB that:
·
|
established
a new model for measuring other-than-temporary impairments for debt
securities, including establishing criteria for when to recognize a
write-down through earnings versus other comprehensive income;
|
·
|
clarified
the objective and method of fair value measurement even when there has
been a significant decrease in market activity for the asset being
measured; and
|
·
|
expanded
the fair value disclosures required for all financial instruments to
interim disclosures.
|
The
adoption of this guidance did not have a material impact on the Company
consolidated financial statements and related disclosures.
Effective
February 1, 2009, the Company adopted authoritative guidance issued by the FASB
that revised the accounting and disclosure requirements for business
combinations. As the Company did not complete an acquisition during the year
ended January 31, 2010, the adoption of this revised standard has had no impact
on the Company’s consolidated financial statements.
39
Effective
February 1, 2009, the Company retrospectively adopted authoritative guidance
issued by the FASB that, for purposes of applying the two-class method in
calculating earnings per share, includes as participating securities all
outstanding unvested share-based payment awards that contain rights to
non-forfeitable dividends, as such awards are considered to participate in the
undistributed earnings with the common shareholders. The effect of applying this
guidance did not have a material effect on the Company’s basic and diluted
earnings (loss) per share for all periods presented in the consolidated
statements of operations.
In the
second fiscal quarter of 2009, the Company adopted authoritative guidance issued
by the FASB regarding subsequent events that established general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued. This guidance was subsequently
amended in February 2010 to no longer require disclosure of the date through
which an entity has evaluated subsequent events. The Company’s
adoption of this guidance did not have a material impact on the Company’s
consolidated financial statements and notes thereto.
RECENT
ACCOUNTING GUIDANCE NOT YET ADOPTED
In
October 2009, the FASB issued an accounting standards update that provides
authoritative guidance regarding revenue arrangements with multiple
deliverables. The guidance in this update:
·
|
provides
principles and application guidance on whether a revenue arrangement
contains multiple deliverables, how the arrangement should be separated,
and how the arrangement consideration should be
allocated;
|
·
|
requires
an entity to allocate revenue in a multiple-deliverable arrangement using
estimated selling prices of the deliverables if a vendor does not have
vendor-specific objective evidence or third-party evidence of selling
price;
|
·
|
eliminates
the use of the residual method and, instead, requires an entity to
allocate revenue using the relative selling price method;
and
|
·
|
expands
disclosure requirements with respect to multiple-deliverable revenue
arrangements.
|
Also, in
October 2009, the FASB issued an accounting standards update that applies to
multiple-deliverable revenue arrangements that contain both software and
hardware elements. This update removes tangible products from the scope of the
existing software revenue guidance and provides guidance on determining whether
software deliverables in an arrangement that includes a tangible product are
within the scope of the software revenue guidance. The guidance in both
accounting standards updates should be applied on a prospective basis for
applicable multiple-deliverable revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010. Alternatively, an
entity can elect to adopt the provisions of the guidance on a retrospective
basis. The Company is assessing the potential impact that the application of
this guidance may have on its consolidated financial statements and
disclosures.
40
ITEM
7A.
|
QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
|
The
Company is exposed to financial market risks, primarily from changes in interest
rates that may impact the fair values of the Company’s short-term investments in
marketable debt securities. Derivative financial instruments are not
used to manage these risks.
As
discussed in Note 3 to the Consolidated Financial Statements, short-term
investments as of January 31, 2010 consisted of marketable debt securities,
principally U.S. government agency obligations, which the Company deems
available-for-sale. The Company’s investment policy provides
guidelines relative to diversification and maturities designed to maintain
reasonable levels of safety and liquidity. At any given time, the
Company’s mix of investments held as cash and cash equivalents versus short-term
investments is dependent upon the Company’s view of each prospective
investment’s price risk relative to the attainment of potentially higher yields
or returns on its invested cash. A 10% increase or decrease in the
fair values of the Company’s short-term investments held at January 31, 2010
would have a material effect on the Company's consolidated financial
position.
As of the
end of each reporting period, the Company adjusts the carrying amount of each
short-term investment to its fair value. For each of the Company’s
marketable debt securities held as of January 31, 2010, the Company’s
measurements of fair value were based on non-binding market consensus prices
that can be corroborated with observable market data. As of each
reporting date, the Company monitors the liquidity of each investment it holds
by analyzing current trading activity, to the extent such activity exists and is
verifiable. The Company obtains alternate fair value estimates for
each of its investments from independent pricing services as a means of
verifying the prices used to measure fair value.
As of
January 31, 2010, cash and cash equivalents and short-term investments totaled
approximately $78.3 million. If, during the fiscal year ending
January 31, 2011, average short-term interest rates increase or decrease by 50
basis points relative to average rates realized during the year ended January
31, 2010, the Company’s projected interest income from cash and cash equivalents
and short-term investments would increase or decrease by approximately $0.4
million, assuming a similar level of investments as held as of January 31,
2010.
The
Company’s cash equivalents primarily consist of investments in money market
funds placed with high credit-quality financial institutions. Due to the short-term
nature of the Company’s cash and cash equivalents, the carrying amounts are not
generally subject to price risk due to fluctuations in interest
rates.
41
ITEM
8.
|
CONSOLIDATED FINANCIAL
STATEMENTS AND SUPPLEMENTARY
DATA.
|
Financial
statements required pursuant to this Item are presented beginning on page F-1 of
this report.
ITEM
9.
|
CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES.
|
None.
ITEM 9A. | CONTROLS AND PROCEDURES. |
EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
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”), are controls
and other procedures designed to ensure that information required to be
disclosed in reports filed or submitted under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified by the
rules and forms promulgated by the SEC. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that such information is accumulated and communicated to management,
including the chief executive officer and the chief financial officer, as
appropriate, to allow timely decisions regarding required
disclosure.
In
connection with the preparation of this Annual Report on Form 10-K, the Company
completed an evaluation, as of January 31, 2010, under the supervision of and
with participation from the Company’s management, including the Chief Executive
and Chief Financial Officers, as to the effectiveness of the Company’s
disclosure controls and procedures. Based upon the evaluation, the
Company’s Chief Executive Officer and Chief Financial Officer have concluded
that as of January 31, 2010 the Company’s disclosure controls and procedures are
effective.
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management
is responsible for establishing and maintaining adequate “internal control over
financial reporting” for the Company, as that term is defined in
Rule 13a-15(f) and Rule 15d-15(f) under the Exchange
Act. The Company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of consolidated financial statements for
external reporting purposes in accordance with GAAP. Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect every misstatement. Any evaluation of effectiveness is
subject to the risk that the controls may subsequently become inadequate because
of changes in conditions or that the degree of compliance with policies or
procedures may decrease over time.
The
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
42
assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with GAAP, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of management and
the Board of Directors of the Company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized use, acquisition, or
disposition of the Company’s assets that could have a material effect on the
financial statements.
Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of January 31, 2010. Management completed its assessment
using the criteria set forth in “Internal Control—Integrated Framework” by the
Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”). A “material weakness” is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the Company’s annual or
interim financial statements will not be prevented or detected on a timely
basis. Based on this assessment, management concluded that the
Company’s internal control over financial reporting was effective as of January
31, 2010.
The
Company’s independent registered public accounting firm has issued an
attestation report on the Company’s internal control over financial reporting,
which report appears herein.
43
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders of
Ulticom,
Inc.
Mount
Laurel, New Jersey
We have
audited the internal control over financial reporting of Ulticom, Inc. and
subsidiaries (the “Company”) as of January 31, 2010, 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, included in the accompanying Management’s Report on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on
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, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on that risk, and performing such other procedures as
we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
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.
44
In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of January 31, 2010, 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, 2010, of the Company and our report dated April
19, 2010, expressed an unqualified opinion on those financial
statements.
/s/
DELOITTE & TOUCHE LLP
Parsippany,
New Jersey
April 19,
2010
45
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
The
Company implemented significant remedial measures prior to September 30, 2009,
the filing date of its fiscal year 2008 Annual Report on Form 10-K (the “2008
Form 10-K”) to address the material weaknesses in its internal control over
financial reporting that were described in the 2008 Form 10-K. As
noted in the 2008 Form 10-K and the Company’s Quarterly Report on Form 10-Q for
the period ended October 31, 2009, while the Company’s management believed that
it had addressed the material weaknesses identified in its Fiscal Year 2008 Form
10-K through the implementation of remedial procedures as of the date of the
filing of the 2008 Form 10-K, the material weaknesses cannot be considered
remediated until the controls have been operational for a period of time that is
adequate to permit testing. Therefore, while there were no changes in the
Company’s internal control over financial reporting during the quarter ended
January 31, 2010 that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial reporting, the
Company continued monitoring the operation of these remedial measures during the
quarter ended January 31, 2010. As of January 31, 2010, the Company
determined that the material weaknesses had been remediated because the controls
had been operational for such a period of time that was adequate to permit
testing and, upon the completion of management’s assessment, were deemed
effective as of January 31, 2010.
ITEM
9B. OTHER
INFORMATION.
Not
applicable.
46
PART
III
ITEM
10.
|
DIRECTORS, EXECUTIVE
OFFICERS AND CORPORATE
GOVERNANCE.
|
The
names, ages, periods of service as a director, principal occupations, business
experience and other directorships of nominees for director of the Company are
set forth in the Proxy Statement in the section entitled “Election of
Directors,” which information is incorporated herein by reference.
The
names, ages, positions held with the Company, periods of service as executive
officer, and business experience for executive officers of the Company, who are
not also directors, are set forth in the Proxy Statement in the section entitled
“Executive Officers,” which information is incorporated herein by
reference.
Information
regarding the identity of the Audit Committee as a separately designated
standing committee of the Board and information regarding the status of one or
more members of the Audit Committee being an “audit committee financial expert”
are set forth in the Proxy Statement in the section entitled “Meetings and
Committees of the Board – Committees of the Board,” which information is
incorporated herein by reference
Information
regarding compliance with Section 16(a) of the Exchange Act is set forth in the
Proxy Statement in the section entitled “Section 16(a) Beneficial Ownership
Reporting Compliance,” which information is incorporated herein by
reference.
Information
regarding the Company’s Code of Business Conduct and Ethics applicable to the
Company’s directors, officers and employees is set forth in the section of the
Proxy Statement entitled “Corporate Governance – Code of Business Conduct and
Ethics,” which information is incorporated herein by reference.
ITEM 11. | EXECUTIVE COMPENSATION. |
Information
concerning compensation of each of the named executive officers, including the
Chief Executive Officer and the Chief Financial Officer, of the Company during
fiscal years 2007, 2008 and 2009, and compensation of directors, is set forth in
the Proxy Statement in the sections entitled, respectively, “Compensation of
Executive Officers,” and “Compensation of Directors,” which information is
incorporated herein by reference.
ITEM
12.
|
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
|
Information
concerning ownership of the Company’s voting securities by certain beneficial
owners, individual nominees for director, each of the named executive officers,
including the Chief Executive Officer and the Chief Financial Officer, of the
Company and the executive officers as a group, is set forth in the Proxy
Statement in the section entitled “Ownership of Ulticom’s Common Stock,” which
information is incorporated herein by reference.
47
ITEM
13.
|
CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
|
Information
regarding the independence of each nominee for director of the Company is set
forth in the Proxy Statement in the sections entitled “Corporate Governance –
Director Independence,” and “Meetings and Committees of the Board – Committees
of the Board,” which information is incorporated herein by
reference.
Information
regarding transactions with related persons is set forth in the Proxy Statement
in the section entitled “Related Party Transactions,” which information is
incorporated herein by reference.
ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
Information
concerning principal accountant fees and services, and the pre-approval policy
for services by the independent registered public accounting firm, is set forth
in the Proxy Statement in the sections entitled, respectively, “Fees Paid to the
Independent Registered Public Accounting Firm” and “Pre-Approval Policy for
Services by Independent Registered Public Accounting Firm,” which information is
incorporated herein by reference.
48
PART
IV
ITEM
15.
|
EXHIBITS AND FINANCIAL
STATEMENT SCHEDULES.
|
(a)
Documents filed as part of this report:
(1)
|
Financial
Statements. The consolidated financial statements filed
as part of this report are listed on the Index to Consolidated Financial
Statements on page F-1.
|
(2)
|
Financial Statement
Schedules. All financial statement schedules have been
omitted here because they are not applicable, not required, or the
information is shown in the consolidated financial statements or notes
thereto.
|
(3)
|
Exhibits. See
(b) below.
|
(b)
Exhibits:
Exhibit No.
|
Description
|
|
3.1**
|
Amended
and Restated Certificate of Incorporation of Ulticom, Inc., as last
amended effective November 11, 2009.
|
|
3.2*
|
Amended
and Restated Bylaws of Ulticom, Inc. (incorporated by reference to Exhibit
3.1 to the Company’s Current Report on Form 8-K under the Securities
Exchange Act of 1934 filed on October 30, 2009).
|
|
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.
|
|
10.1*
|
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).
|
|
10.2*
|
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).
|
|
10.3*
|
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).
|
|
10.4*
|
Business
Opportunities Agreement, dated as of January 1, 1999, between Comverse
Technology, Inc. and Ulticom, Inc. (incorporated by
reference
|
49
from
the Registrant’s Registration Statement on Form S-1 under the Securities
Act of 1933, Registration No. 333-94873).
|
||
10.5*
|
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).
|
|
10.6*
|
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).
|
|
10.7**
|
Form
of Agreement evidencing a grant of stock options under the Ulticom, Inc.
2005 Stock Incentive Compensation Plan.
|
|
10.8*
|
Form
of Agreement evidencing a grant of stock options under Ulticom, Inc.’s
1998 Stock Incentive Compensation Plan to Ulticom, Inc.’s 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).
|
|
10.9*
|
Ulticom,
Inc. 2005 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 June 20, 2005).
|
|
10.10*
|
Form
of Restricted Stock Award Agreement (incorporated by reference to the
Registrant’s Current Report on Form 8-K under the Securities Exchange Act
of 1934 filed on January 5, 2006).
|
|
10.11*
|
Form
of Deferred Stock Award Agreement, evidencing a grant of deferred stock
units under Ulticom, Inc.’s 2005 Stock Incentive Compensation Plan to
Ulticom’s directors (incorporated by reference to Exhibit 10.13 to Form
10-K report of Company filed September 30, 2009).
|
|
10.12*
|
Employment
Agreement, amended and restated as of December 19, 2008, between Ulticom,
Inc. and Shawn K. Osborne (incorporated by reference to Exhibit 10.14 to
Form 10-K report of Company filed September 30, 2009).
|
|
10.13*
|
Form
of Change of Control Termination Protection Agreement, amended and
restated as of December 19, 2008 (incorporated by reference to Exhibit
10.15 to Form 10-K report of Company filed September 30,
2009).
|
|
10.14*
|
Side
Letter, dated as of August 27, 2007, between Ulticom, Inc. and Comverse
Technology, Inc. (incorporated by reference to the Registrant’s Current
Report on Form 8-K under the Securities Exchange Act of 1934 filed on
September 5, 2007).
|
|
10.15*
|
Ulticom,
Inc. U.S. Employee Retention Bonus Plan, effective February 15, 2008
(incorporated by reference to Exhibit 10.17 to Form 10-K report of Company
filed September 30, 2009).
|
|
10.16*
|
Ulticom,
Inc. Enhanced Severance Plan, effective February 15, 2008 (incorporated by
reference to Exhibit 10.18 to Form 10-K report of Company filed September
30, 2009).
|
|
10.17*
|
Ulticom,
Inc. Severance Plan, effective February 15, 2008 (incorporated by
reference to Exhibit 10.19 to Form 10-K report of Company filed September
30, 2009).
|
50
10.18*
|
Summary
of Ulticom Annual Cash Incentive Bonus Program for Senior Executives
(incorporated by reference to Exhibit 10.20 to Form 10-K report of Company
filed September 30, 2009).
|
|
21**
|
List
of Subsidiaries of Ulticom, Inc.
|
|
23**
|
Consent
of Independent Registered Public Accounting Firm.
|
|
31.1**
|
Certification
of Shawn K. Osborne, Chief Executive Officer, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
|
|
31.2**
|
Certification
of Mark A. Kissman, Chief Financial Officer, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
|
|
32.1***
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
32.2***
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
_____________________
* Incorporated
by reference.
** Filed
herewith.
*** Furnished
herewith.
(c)
Financial Statement Schedules.
|
None.
|
51
ULTICOM,
INC. AND SUBSIDIARIES
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
Page
|
||
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Consolidated
Balance Sheets as of January 31, 2009 and 2010
|
F-3
|
|
Consolidated
Statements of Operations for the years ended January
31, 2008, 2009 and 2010
|
F-4
|
|
|
|
|
Consolidated
Statements of Shareholders’ Equity for the years
ended January 31, 2008, 2009 and 2010
|
F-5
|
|
|
|
|
Consolidated
Statements of Cash Flows for the years
ended January 31, 2008, 2009 and 2010
|
F-6
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
F-7
|
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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
subsidiaries (the "Company") as of January 31, 2010 and 2009, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended January 31, 2010. 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 subsidiaries as of January
31, 2010 and 2009, and the results of their operations and their cash flows for
each of the three years in the period ended January 31, 2010, 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 Company's internal control over financial
reporting as of January 31, 2010, 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 19, 2010 expressed an unqualified
opinion on the Company's internal control over financial reporting.
/s/
DELOITTE & TOUCHE LLP
Parsippany,
New Jersey
April 19,
2010
F-2
ULTICOM,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share data)
|
||||||||
|
January
31,
|
January
31,
|
||||||
2009
|
2010
|
|||||||
ASSETS
|
||||||||
Current
Assets:
|
||||||||
Cash
and cash equivalents
|
$ | 206,771 | $ | 13,190 | ||||
Short-term
investments
|
75,224 | 65,087 | ||||||
Accounts
receivable, net, including $137 and $296 due from related parties at
January 31, 2009 and 2010, respectively
|
11,532 | 10,657 | ||||||
Inventories
|
1,101 | 1,019 | ||||||
Prepaid
expenses and other current assets
|
8,059 | 7,444 | ||||||
Total
current assets
|
302,687 | 97,397 | ||||||
Property
and equipment, net
|
2,841 | 1,872 | ||||||
Other
assets
|
1,866 | 1,411 | ||||||
Deferred
income taxes
|
7,557 | 6,377 | ||||||
Total
assets
|
$ | 314,951 | $ | 107,057 | ||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
Current
Liabilities:
|
||||||||
Accounts
payable and accrued expenses
|
$ | 8,570 | $ | 6,598 | ||||
Deferred
revenue
|
2,619 | 2,945 | ||||||
Total
current liabilities
|
11,189 | 9,543 | ||||||
Long-term
Liabilities:
|
||||||||
Deferred
revenue
|
4,654 | 3,682 | ||||||
Unrecognized
income tax benefits
|
2,273 | 1,640 | ||||||
Other
long-term liabilities
|
369 | 35 | ||||||
Total liabilities
|
18,485 | 14,900 | ||||||
Commitments
and Contingencies
|
||||||||
Shareholders’
Equity:
|
||||||||
Undesignated
stock, no par value, 2,500,000 shares authorized; no shares issued and
outstanding
|
- | - | ||||||
Common
stock, no par value, 50,000,000 shares authorized; 10,897,526 and
11,044,685 shares issued and
outstanding
|
- | - | ||||||
Additional
paid-in capital
|
230,373 | 96,691 | ||||||
Retained
earnings (accumulated deficit)
|
66,775 | (3,582 | ) | |||||
Accumulated
other comprehensive loss
|
(682 | ) | (952 | ) | ||||
Total
shareholders’ equity
|
296,466 | 92,157 | ||||||
Total
liabilities and shareholders’ equity
|
$ | 314,951 | $ | 107,057 |
The
accompanying notes are an integral part of the consolidated financial
statements.
F-3
ULTICOM,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except per share data)
|
||||||||||||
|
Years
Ended January 31,
|
|||||||||||
2008
|
2009
|
2010
|
||||||||||
Product
revenues from:
|
||||||||||||
Third
parties
|
$ | 43,081 | $ | 37,904 | $ | 30,060 | ||||||
Related
parties
|
5,267 | 4,035 | 2,790 | |||||||||
Total product revenues
|
48,348 | 41,939 | 32,850 | |||||||||
Service
revenues from:
|
||||||||||||
Third
parties
|
10,495 | 10,908 | 12,817 | |||||||||
Related
parties
|
167 | 200 | 171 | |||||||||
Total service revenues
|
10,662 | 11,108 | 12,988 | |||||||||
Total
revenues
|
59,010 | 53,047 | 45,838 | |||||||||
Cost
of revenues:
|
||||||||||||
Product
costs
|
10,458 | 8,780 | 7,032 | |||||||||
Service
costs
|
5,858 | 5,720 | 4,959 | |||||||||
Total
cost of revenues
|
16,316 | 14,500 | 11,991 | |||||||||
Gross
profit
|
42,694 | 38,547 | 33,847 | |||||||||
Operating
expenses:
|
||||||||||||
Research
and development
|
16,363 | 16,288 | 13,289 | |||||||||
Selling,
general and administrative
|
35,523 | 34,145 | 27,633 | |||||||||
Loss
from operations
|
(9,192 | ) | (11,886 | ) | (7,075 | ) | ||||||
Interest
and other income, net
|
12,364 | 7,098 | 1,953 | |||||||||
Income
(loss) before income tax benefit
|
3,172 | (4,788 | ) | (5,122 | ) | |||||||
Income
tax benefit
|
(715 | ) | (1,652 | ) | (627 | ) | ||||||
Net
income (loss)
|
$ | 3,887 | $ | (3,136 | ) | $ | (4,495 | ) | ||||
Earnings
(loss) per share:
|
||||||||||||
Basic
|
$ | 0.36 | $ | (0.29 | ) | $ | (0.41 | ) | ||||
Diluted
|
$ | 0.35 | $ | (0.29 | ) | $ | (0.41 | ) | ||||
Weighted
average common shares outstanding:
|
||||||||||||
Basic
|
10,871 | 10,875 | 10,896 | |||||||||
Diluted
|
11,051 | 10,875 | 10,896 | |||||||||
The
accompanying notes are an integral part of the consolidated financial
statements.
F-4
ULTICOM,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
YEARS
ENDED JANUARY 31, 2008, 2009 and 2010
(In
thousands)
|
Common
Stock
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
||||||||||||||||||||||||||
Number
of
Shares
|
Amount
|
Additional
Paid-in
Capital
|
Retained
Earnings
(Accumulated
Deficit)
|
Unrealized
Gains
(Losses)
|
Cumulative
Translation
Adjustment
|
Total
Shareholders'
Equity
|
|||||||||||||||||||||
Balance,
February 1, 2007
|
10,871 | $ | - | $ | 226,606 | $ | 66,024 | $ | 753 | $ | (125 | ) | $ | 293,258 | |||||||||||||
Comprehensive
income (loss):
|
|||||||||||||||||||||||||||
Net
income
|
3,887 | 3,887 | |||||||||||||||||||||||||
Unrealized
losses on investments, net of reclassification adjustments and
income taxes
|
(627 | ) | (627 | ) | |||||||||||||||||||||||
Translation
adjustment
|
152 | 152 | |||||||||||||||||||||||||
Total
comprehensive income
|
3,412 | ||||||||||||||||||||||||||
Issuances
of restricted stock
|
27 | - | |||||||||||||||||||||||||
Share-based
payment expense
|
2,190 | 2,190 | |||||||||||||||||||||||||
Balance,
January 31, 2008
|
10,898 | - | 228,796 | 69,911 | 126 | 27 | 298,860 | ||||||||||||||||||||
Comprehensive
income (loss):
|
|||||||||||||||||||||||||||
Net
loss
|
(3,136 | ) | (3,136 | ) | |||||||||||||||||||||||
Unrealized
gains on investments, net of reclassification adjustments and
income taxes
|
161 | 161 | |||||||||||||||||||||||||
Translation
adjustment
|
(996 | ) | (996 | ) | |||||||||||||||||||||||
Total
comprehensive loss
|
(3,971 | ) | |||||||||||||||||||||||||
Taxes
on vesting of deferred stock units
|
(8 | ) | (8 | ) | |||||||||||||||||||||||
Share-based
payment expense
|
1,585 | 1,585 | |||||||||||||||||||||||||
Balance,
January 31, 2009
|
10,898 | - | 230,373 | 66,775 | 287 | (969 | ) | 296,466 | |||||||||||||||||||
Comprehensive
income (loss):
|
|||||||||||||||||||||||||||
Net
loss
|
(4,495 | ) | (4,495 | ) | |||||||||||||||||||||||
Unrealized
losses on investments, net of reclassification adjustments and
income taxes
|
(207 | ) | (207 | ) | |||||||||||||||||||||||
Translation
adjustment
|
(63 | ) | (63 | ) | |||||||||||||||||||||||
Total
comprehensive loss
|
(4,765 | ) | |||||||||||||||||||||||||
Declaration
of special dividend
|
(133,931 | ) | (65,862 | ) | (199,793 | ) | |||||||||||||||||||||
Issuances
of restricted stock
|
90 | - | - | ||||||||||||||||||||||||
Issuances
of stock upon exercise of stock options
|
53 | 409 | 409 | ||||||||||||||||||||||||
Issuance
of stock for deferred stock units
|
4 | - | - | ||||||||||||||||||||||||
Share-based
payment expense
|
713 | 713 | |||||||||||||||||||||||||
Tax
benefit of dividend on share-based payments
|
182 | 182 | |||||||||||||||||||||||||
Share-based
payment income tax deficiencies
|
(1,055 | ) | (1,055 | ) | |||||||||||||||||||||||
Balance,
January 31, 2010
|
11,045 | $ | - | $ | 96,691 | $ | (3,582 | ) | $ | 80 | $ | (1,032 | ) | $ | 92,157 |
The
accompanying notes are an integral part of the consolidated financial
statements.
F-5
ULTICOM,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
||||||||||||
Years
Ended January 31,
|
||||||||||||
2008
|
2009
|
2010
|
||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
income (loss)
|
$ | 3,887 | $ | (3,136 | ) | $ | (4,495 | ) | ||||
Adjustments
to reconcile net income (loss) to net cash provided by (used in) operating
activities:
|
||||||||||||
Depreciation
and amortization
|
2,210 | 2,056 | 1,467 | |||||||||
Deferred
income taxes
|
(1,858 | ) | (1,101 | ) | 481 | |||||||
Share-based
payment expense
|
2,190 | 1,721 | 726 | |||||||||
Excess
tax benefits from share-based payment arrangements
|
- | - | (182 | ) | ||||||||
Net
realized gains on sales of investments
|
(1,422 | ) | (475 | ) | (88 | ) | ||||||
Changes
in operating assets and liabilities:
|
||||||||||||
Accounts
receivable, net
|
(712 | ) | 3,987 | 876 | ||||||||
Inventories
|
514 | 567 | 82 | |||||||||
Prepaid
expenses and other current assets
|
158 | (4,510 | ) | 447 | ||||||||
Accounts
payable and accrued expenses
|
(1,429 | ) | (31 | ) | (1,989 | ) | ||||||
Deferred
revenue
|
(37 | ) | (397 | ) | (647 | ) | ||||||
Other,
net
|
585 | (92 | ) | (857 | ) | |||||||
Net
cash provided by (used in) operating activities
|
4,086 | (1,411 | ) | (4,179 | ) | |||||||
Cash
flows from investing activities:
|
||||||||||||
Purchases
of property and equipment
|
(2,328 | ) | (1,175 | ) | (364 | ) | ||||||
Purchases
of investments
|
(42,489 | ) | (94,759 | ) | (122,475 | ) | ||||||
Maturities
and sales of investments
|
85,262 | 25,475 | 132,365 | |||||||||
Net
cash provided by (used in) investing activities
|
40,445 | (70,459 | ) | 9,526 | ||||||||
Cash
flows from financing activities:
|
||||||||||||
Proceeds
from exercises of stock options
|
- | - | 409 | |||||||||
Excess
tax benefits from share-based payment arrangements
|
- | - | 182 | |||||||||
Payment
of special dividend
|
- | - | (199,718 | ) | ||||||||
Net
cash used in financing activities
|
- | - | (199,127 | ) | ||||||||
Effect
of exchange rate changes on cash and cash equivalents
|
343 | (322 | ) | 199 | ||||||||
Net
increase (decrease) in cash and cash equivalents
|
44,874 | (72,192 | ) | (193,581 | ) | |||||||
Cash
and cash equivalents, beginning of year
|
234,089 | 278,963 | 206,771 | |||||||||
Cash
and cash equivalents, end of year
|
$ | 278,963 | $ | 206,771 | $ | 13,190 | ||||||
Supplemental
disclosures of cash flow information:
|
||||||||||||
Cash
paid for interest
|
$ | - | $ | 5 | $ | - | ||||||
Cash
paid for income taxes
|
1,251 | 2,462 | 1,371 | |||||||||
Supplemental
disclosure of non-cash investing activity:
|
||||||||||||
Property
and equipment acquired but not yet paid
|
$ | 6 | $ | - | $ | 42 |
The
accompanying notes are an integral part of the consolidated financial
statements.
F-6
ULTICOM,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company Business and Background -
Ulticom, Inc. (together with its subsidiaries, the “Company”), a New
Jersey corporation and a majority-owned subsidiary of Comverse Technology, Inc.,
designs, develops, markets, licenses, and supports network signaling solutions
software and hardware for use in the communications industry.
Reverse Stock Split - As
discussed in Note 2, the Company’s Board of Directors authorized a one-for-four
reverse stock split of all outstanding shares of common stock, which became
effective on November 18, 2009. Except as noted, common share and per common
share data presented in these consolidated financial statements and related
notes hereto have been retroactively adjusted to account for the effects of the
reverse stock split for all periods presented prior to November 18,
2009.
Principles of Consolidation -
The consolidated financial statements include the accounts of Ulticom,
Inc. and its subsidiaries, each of which is wholly-owned. All intercompany
balances and transactions have been eliminated.
Use of Estimates - The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (“GAAP”) requires the
Company’s management to make estimates and assumptions, which may affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period. The
Company evaluates these estimates and judgments on an ongoing basis, and the
estimates are based on experience, current and expected future conditions,
third-party evaluations and various other assumptions that the Company believes
are reasonable under the circumstances. The results of estimates form the basis
for making judgments about the carrying amounts of assets and liabilities, as
well as identifying and assessing the accounting treatment with respect to
commitments and contingencies. Actual results could differ from those
estimates.
Cash and Cash Equivalents -
The Company’s cash equivalents consist of highly liquid investments with
original maturities of three months or less, when acquired.
Short-Term Investments -
Investments with original maturities of greater than three months and remaining
maturities of less than one year are classified as short-term
investments. Purchases and sales of investment securities are
recorded upon settlement of the transaction. Investments with stated
maturities beyond one year are classified as short-term if the securities are
marketable and highly liquid and if such marketable securities represent an
investment of cash that is available for current operations. All of
the Company’s short-term investments are classified as available-for-sale. At
the end of each reporting period, the carrying amount of each available-for-sale
security is adjusted to its fair value, and the resulting unrealized gain or
loss, net of income tax effects, is reported as a separate component of
shareholders’ equity under the caption accumulated other comprehensive income
(loss). Upon sale, the cumulative unrealized gain or loss associated
with the sold security that was previously recorded in accumulated other
comprehensive income (loss) is
F-7
reclassified
into the consolidated statement of operations as a realized gain (loss), which
is included in interest and other income, net.
Fair Value Measurements – Any
measurement of the fair value of an asset or liability is based on the price
that would be received to sell the asset or the price to transfer the liability
in an orderly transaction between market participants exclusive of any
transaction costs, and is determined by either the principal market or the most
advantageous market. Valuation techniques used by the Company to
determine fair value are dependent upon assumptions that market participants
would use in pricing the asset or liability, referred to as inputs to the
valuation technique. Inputs generally range from market data from
independent sources (i.e., observable inputs) to data based on assumptions about
the assumptions market participants would use in pricing an asset or liability
developed by the Company based on the best information available in the
circumstances (i.e., unobservable inputs). For each asset or
liability being valued, the inputs to the valuation technique used to measure
fair value are ranked by the Company according to their market price
observability as being one of the following levels:
Level 1 – Quoted prices in
active markets for identical instruments;
Level 2 – Quoted prices for
similar instruments in active markets; quoted prices for identical or similar
instruments in markets that are not active; and model derived valuations in
which all significant inputs and significant value drivers are observable in
active markets; and
Level 3 – Valuations derived
from valuation techniques in which one or more significant inputs or significant
value drivers are unobservable.
Fair Value of Financial Instruments –
The Company’s recorded amounts of cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses approximate fair value, due to
the short-term nature of these instruments. The fair values of short-term
investments are disclosed in Note 3.
Concentration of Credit Risk -
Financial instruments, the carrying amounts of which potentially expose
the Company to concentration of credit risk, consist primarily of cash and cash
equivalents, short-term investments and accounts
receivable. Approximately 67% of the Company’s cash equivalents as of
January 31, 2010 consisted of investments in institutional money market
funds. The Company believes no significant concentration of credit
risk exists with respect to its cash equivalents.
As of
January 31, 2010, short-term investments consisted of marketable debt
securities, principally U.S. government agency obligations, which the Company
has classified as available-for-sale. The Company’s investment policy
provides guidelines relative to diversification and maturities designed to
maintain reasonable levels of safety and liquidity. The Company
believes no significant concentration of credit risk exists with respect to its
investments in marketable securities.
The
Company sells its products to customers who are dispersed across many geographic
regions and who are principally in the communications industry. Three
customers accounted for approximately 68% and 48% of gross accounts receivable
as of January 31, 2009 and 2010, respectively. The Company’s accounts
receivable presented in the consolidated balance sheets is net of allowance
for
F-8
doubtful
accounts and uncollected amounts charged to customers for post-contract
maintenance and support services, as follows:
January
31,
|
||||||||
Accounts receivable, net (in
thousands)
|
2009
|
2010
|
||||||
Accounts
receivable, gross
|
$ | 12,963 | $ | 12,050 | ||||
Allowance
for doubtful accounts
|
(100 | ) | (138 | ) | ||||
Uncollected
post-contract service fees
|
(1,331 | ) | (1,255 | ) | ||||
Accounts
receivable, net
|
$ | 11,532 | $ | 10,657 |
The
Company analyzes the collectability of accounts receivable each accounting
period and adjusts its allowance for doubtful accounts accordingly. A
considerable amount of judgment is required in assessing the realization of
accounts receivables, including the current creditworthiness of each customer,
current and historical collection history and the related aging of past due
balances. The Company evaluates specific accounts when it becomes aware of
information indicating that a customer may not be able to meet its financial
obligations due to deterioration of its financial condition, lower credit
ratings, bankruptcy or other factors affecting the ability to render
payment. As of January 31, 2010, the Company has not experienced any
material losses resulting from uncollectibility of accounts
receivable.
Activity
in the allowance for doubtful accounts receivable for the years ended January
31, 2008, 2009 and 2010 was as follows:
Years
Ended January 31,
|
||||||||||||
Allowance for doubtful accounts (in
thousands)
|
2008
|
2009
|
2010
|
|||||||||
Balance,
beginning of year
|
$ | 7 | $ | 7 | $ | 100 | ||||||
Provision
charged to expense
|
5 | 93 | 59 | |||||||||
Uncollectible
receivables written off
|
(5 | ) | - | (21 | ) | |||||||
Balance,
end of year
|
$ | 7 | $ | 100 | $ | 138 |
Inventories – The Company’s
inventories principally consist of finished goods. The carrying amounts of raw
material inventory are not significant. Inventories are stated at the lower of
cost or market. Cost is determined by the first-in, first-out method. The
Company reduces inventory for excess and obsolete product, based primarily on
future demand forecasts.
Property and Equipment, net -
Property and equipment are reported in the consolidated balance sheet at
cost less accumulated depreciation and amortization. The Company depreciates its
furniture and equipment using the straight-line method of depreciation over the
estimated economic life, 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. The cost of repairs and
maintenance are expensed as incurred. Significant renewals and improvements are
capitalized. When assets are retired or disposed of, the cost and accumulated
depreciation or amortization thereon are removed and any resulting gain or loss
is recognized in the consolidated statement of operations.
Long-Lived Assets - All long-lived assets used
in the Company’s operations are subject to review for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability is assessed based on the future cash flows
expected to result from the use of the asset and its eventual disposition. If
the sum of the undiscounted cash flows is less than the carrying amount of the
asset, an impairment loss is recognized. Any impairment loss,
F-9
if
indicated, is measured as the amount by which the carrying amount of the asset
exceeds its estimated fair value and is recognized as a reduction in the
carrying amount of the asset. No impairment charges were recorded by the Company
in the years ended January 31, 2008, 2009 or 2010.
Income Taxes - The Company
accounts for income taxes using an asset and liability approach, which requires
estimates of taxes payable or refunds for the current period and estimates of
deferred income tax assets and liabilities for the anticipated future tax
consequences attributable to differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the corresponding amounts
used for income tax purposes. Current and deferred income tax assets and
liabilities are based on provisions of the enacted income tax laws and are
measured using the enacted income tax rates and laws that are expected to be in
effect when the future tax events are expected to reverse. The effects of future
changes in income tax laws or rates are not anticipated. The income tax
provision is comprised of the current income tax expense and the change in
deferred income tax assets and liabilities.
The
portion of any deferred tax asset for which it is more likely than not that a
tax benefit will not be realized is offset by recording a valuation allowance.
The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences
become deductible. The Company considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. For any specific jurisdiction where a history of three
years of cumulative losses has occurred or where there has been a substantial
change in the business, the Company does not rely on projections of future
taxable income. Instead, the Company determines its need for a valuation
allowance on deferred tax assets, if any, by determining an average steady-state
normalized taxable income amount over the last three years.
The
Company recognizes the impact of an income tax position if that position is more
likely than not of being sustained on audit, based on the technical merits of
the position. Measurement of the tax position’s effect on the income tax
provision is based on the largest amount of benefit that is greater than 50%
likely of being realized upon the ultimate settlement. Differences between the
amount of benefits taken or expected to be taken in the Company’s income tax
returns and the amount of benefits recognized based on this evaluation and
measurement of the related tax positions represent the unrecognized income tax
benefit, which is reflected as a liability.
The
Company includes interest and penalties related to unrecognized tax benefits in
interest expense in the consolidated statement of operations.
Revenue and Expense Recognition
- Product revenues, which include software license and hardware revenue,
are generally recognized in the period in which persuasive evidence of a sale or
service 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
unspecified product updates, upgrades, and enhancements, when and if available.
Revenue from these services is recognized ratably over the contract period.
Post-
F-10
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 multiple element software arrangements, the
fair value of any undelivered element is determined using VSOE. The Company
allocates revenue based on VSOE to the undelivered elements and the residual
revenue to the delivered elements. Where VSOE of the undelivered element cannot
be determined, the Company defers revenue for the delivered elements until the
undelivered elements are delivered.
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. After the initial year, the
maintenance plan must be renewed for a fee in order to continue to receive
support and software updates. Sales of development kits are deferred and
recognized as revenue over the estimated period of future customer software
deployments and related maintenance, which the Company considers to be the
economic life of the development kit. Additional development license fees are
deferred and recognized as revenue over the remaining estimated economic life of
the development kit. Portions of the development kit revenue recognized are
included in both product and service revenues.
When an
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. Board technical support is covered under a standard hardware
warranty that provides for repair or replacement of defective
boards.
Deferred
revenue consists primarily of development kit sales and post-contract
maintenance and support services, for which amounts have been collected from
customers pursuant to terms specified in contracts in advance of recognizing the
related revenues. All costs associated with amounts recorded to deferred revenue
are expensed as incurred. The following summarizes the activity associated with
deferred development kit revenue for each of the years ended January 31, 2008,
2009 and 2010:
Years
Ended January 31,
|
||||||||||||
Deferred development kit revenue (in
thousands)
|
2008
|
2009
|
2010
|
|||||||||
Balance,
beginning of year
|
$ | 5,425 | $ | 5,480 | $ | 5,317 | ||||||
Collections
from sales of development kits
|
1,136 | 819 | 585 | |||||||||
Amount
recognized as revenue
|
(1,081 | ) | (982 | ) | (1,341 | ) | ||||||
Balance,
end of year
|
$ | 5,480 | $ | 5,317 | $ | 4,561 | ||||||
Comprised of:
|
||||||||||||
Amount
included in current liabilities
|
$ | 983 | $ | 936 | $ | 998 | ||||||
Amount
included in long-term liabilities
|
4,497 | 4,381 | 3,563 | |||||||||
Balance,
end of year
|
$ | 5,480 | $ | 5,317 | $ | 4,561 | ||||||
Included
in product revenues are license revenues amounting to approximately $24.4
million, $25.4 million and $20.5 million for the years ended January 31, 2008,
2009 and 2010, respectively. The related costs of revenues associated with these
license revenues include various personnel, duplication, and shipping costs,
which were not material in each of the periods presented.
F-11
Revenues
from providing customer training are recognized when training is provided.
Revenues from fee-based consulting and development services are recognized when
services are provided in accordance with customer’s specification. Historically,
these revenues have not been material.
Cost of
revenues includes employee salaries and related benefits, material costs,
depreciation and amortization, an overhead allocation, as well as other costs
associated with revenue-generating activities. Research and development costs
include employee salaries and related benefits as well as travel, depreciation
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 employee salaries and related benefits, travel,
depreciation and amortization, marketing and promotional materials, recruiting
expenses, professional fees, facilities 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.
Shipping and handling fees and expenses that are billed to customers are
recognized in revenue and the costs associated with such fees and expenses are
recorded in selling, general and administrative expenses. Historically, these
fees and expenses have not been material.
Foreign Currency Translation -
In preparing the consolidated financial statements, the Company is required to
translate the financial statements of the foreign subsidiaries from the
functional currency, generally the local currency, into U.S. dollars, the
reporting currency. This process results in exchange gains or losses which are
included in cumulative translation adjustments, a separate component of
shareholders’ equity under the caption accumulated other comprehensive income
(loss). Foreign currency gains and losses resulting from transactions
denominated in a currency other than the functional currency are recorded in the
consolidated statement of operations.
Share-based Payments – For all
share-based payment transactions in which the Company acquires services from
employees or directors by issuing shares of the Company’s common stock, options
to purchase shares or other equity instruments, the Company recognizes the cost
of awarded equity instruments that are ultimately expected to vest based on each
instrument’s grant-date fair value over the period during which the employee or
director is required to provide service in exchange for the award. For stock
option awards, the Company estimates the fair value of each award using the
Black-Scholes option-pricing model. The Company records share-based payment
expense to the appropriate classifications in the consolidated statement of
operations based on the classification in which the related payroll costs are
recorded. For awards containing only a service condition, the Company’s policy
is to recognize share-based payment expense on a straight-line basis over the
award’s requisite service period, which is generally the vesting period. At a
minimum, share-based payment expense is recognized in an amount at least equal
to the portion of the grant-date fair value of the award that is vested as of
the date of the Company’s consolidated balance sheet.
Recently Adopted Accounting Guidance
- Effective February 1, 2009, the Company adopted authoritative guidance
issued by the Financial Accounting Standards Board (“FASB”) regarding fair value
measurements that relates specifically to nonfinancial assets and nonfinancial
liabilities. This guidance defined fair value based upon an exit price model,
established a framework for measuring fair value and established a fair value
hierarchy disclosure framework that prioritizes and ranks the level of market
price observability used in measuring assets and liabilities at fair value.
The
F-12
application
of this guidance to the Company’s nonfinancial assets and nonfinancial
liabilities as of February 1, 2009 did not have a material effect on the
Company’s financial position, results of operations or cash flows.
In the
second quarter of fiscal year 2009, the Company adopted authoritative guidance
issued by the FASB that:
·
|
established
a new model for measuring other-than-temporary impairments for debt
securities, including establishing criteria for when to recognize a
write-down through earnings versus other comprehensive income;
|
·
|
clarified
the objective and method of fair value measurement even when there has
been a significant decrease in market activity for the asset being
measured; and
|
·
|
expanded
the fair value disclosures required for all financial instruments to
interim disclosures.
|
The
adoption of this guidance did not have a material impact on the Company
consolidated financial statements and related disclosures.
Effective
February 1, 2009, the Company adopted authoritative guidance issued by the FASB
that revised the accounting and disclosure requirements for business
combinations. As the Company did not complete an acquisition during the year
ended January 31, 2010, the adoption of this revised standard has had no impact
on the Company’s consolidated financial statements.
Effective
February 1, 2009, the Company retrospectively adopted authoritative guidance
issued by the FASB that, for purposes of applying the two-class method in
calculating earnings per share, includes as participating securities all
outstanding unvested share-based payment awards that contain rights to
non-forfeitable dividends, as such awards are considered to participate in the
undistributed earnings with the common shareholders. The effect of applying this
guidance did not have a material effect on the Company’s basic and diluted
earnings (loss) per share for all periods presented in the consolidated
statements of operations.
In the
second fiscal quarter of 2009, the Company adopted authoritative guidance issued
by the FASB regarding subsequent events that established general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued. This guidance was subsequently
amended in February 2010 to no longer require disclosure of the date through
which an entity has evaluated subsequent events. The Company’s
adoption of this guidance did not have a material impact on the Company’s
consolidated financial statements and notes thereto.
F-13
Recent Accounting Guidance Not Yet
Adopted - In October 2009, the FASB issued an accounting standards update
that provides authoritative guidance regarding revenue arrangements with
multiple deliverables. The guidance in this update:
·
|
provides
principles and application guidance on whether a revenue arrangement
contains multiple deliverables, how the arrangement should be separated,
and how the arrangement consideration should be
allocated;
|
·
|
requires
an entity to allocate revenue in a multiple-deliverable arrangement using
estimated selling prices of the deliverables if a vendor does not have
vendor-specific objective evidence or third-party evidence of selling
price;
|
·
|
eliminates
the use of the residual method and, instead, requires an entity to
allocate revenue using the relative selling price method;
and
|
·
|
expands
disclosure requirements with respect to multiple-deliverable revenue
arrangements.
|
Also, in
October 2009, the FASB issued an accounting standards update that applies to
multiple-deliverable revenue arrangements that contain both software and
hardware elements. This update removes tangible products from the scope of the
existing software revenue guidance and provides guidance on determining whether
software deliverables in an arrangement that includes a tangible product are
within the scope of the software revenue guidance. The guidance in both
accounting standards updates should be applied on a prospective basis for
applicable multiple-deliverable revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010. Alternatively, an
entity can elect to adopt the provisions of the guidance on a retrospective
basis. The Company is assessing the potential impact that the application of
this guidance may have on its consolidated financial statements and
disclosures.
2. SPECIAL
DIVIDEND AND REVERSE STOCK SPLIT
On April
20, 2009, the Company paid a special cash dividend of $4.58 per share ($18.32
per share, adjusted for the effects of the reverse stock split) to its
shareholders of record as of the close of business on April 13, 2009. The total
amount of the dividend was approximately $199.8 million. As of January 31, 2010,
dividends totaling approximately $0.1 million are payable to holders of deferred
stock units awarded under the Company’s equity incentive plan pending delivery
of the shares of common stock subject to such awards. The Company’s retained
earnings as of the date of the dividend was approximately $65.9 million. As the
amount of the dividend exceeded the Company’s retained earnings as of the date
of the dividend, the remaining portion of the dividend, approximately $133.9
million, reduced additional paid-in capital. The Company’s accumulated deficit
as of January 31, 2010 represented the net loss of the Company from April 21,
2009 through January 31, 2010.
On
November 17, 2009, the Company announced that its Board of Directors authorized
a one-for-four reverse stock split of all outstanding shares of common stock and
decreases in the authorized common shares from 200,000,000 to 50,000,000 and
authorized undesignated shares from 10,000,000 to 2,500,000. These changes
became effective on November 18, 2009. Except as noted, common share and per
common share data presented in these consolidated financial statements and
related notes hereto have been retroactively adjusted to account for the effects
of the reverse stock split for all periods presented prior to November 18,
2009.
F-14
3. SHORT-TERM
INVESTMENTS
As of
January 31, 2009 and 2010, all of the Company’s short-term investments consisted
of marketable debt securities that were classified as available-for-sale and
summarized in the following tables:
(in
thousands)
|
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Estimated
Fair Value
|
Ranking
of
Market
Price
Observability
|
||||||||||||
As of January 31, 2009
|
|||||||||||||||||
U.S.
governmental agency obligations
|
$ | 74,759 | $ | 554 | $ | (89 | ) | $ | 75,224 |
Level
2
|
|||||||
As of January 31, 2010
|
|||||||||||||||||
U.S.
governmental agency obligations
|
$ | 64,959 | $ | 285 | $ | (157 | ) | $ | 65,087 |
Level
2
|
Contractual Maturities as of January 31,
2010
|
Cost
|
Estimated
Fair Value
|
||||||
Due
in one year or less
|
$ | 10,000 | $ | 10,125 | ||||
Due
after one year through three years
|
20,004 | 19,937 | ||||||
Due
after three years through five years
|
24,952 | 25,072 | ||||||
Due
after five years through ten years
|
10,003 | 9,953 |
The
Company’s measurements of the fair values of these financial instruments are
performed on a recurring basis and, as of January 31, 2009 and 2010, were based
on non-binding market consensus prices that can be corroborated with observable
market data. Accordingly, the inputs to the valuation technique used
to measure the fair values of these instruments were ranked, according to their
market price observability, as Level 2 inputs. As of January 31, 2009, the
Company had a purchase transaction for an U.S. governmental agency obligation
that had not settled until February 2009, and the purchased security had
experienced a decline in its fair value since the transaction’s trade date.
Accordingly, as of January 31, 2009, the Company recognized an unrealized loss
of approximately $0.1 million for the reduction in this security’s fair value as
an adjustment to the carrying amount of short-term investments.
The
following table presents information with respect to sales and maturities of the
Company’s available-for-sale investment securities, including the cumulative net
unrealized gain or loss associated with sold securities that was previously
recorded in accumulated other comprehensive income (loss) and that was
reclassified into the consolidated statement of operations as realized gains
(losses), presented below net of applicable income taxes:
(in
thousands)
|
Years
Ended January 31,
|
|||||||||||
2008
|
2009
|
2010
|
||||||||||
Proceeds
from investment sales and maturities
|
$ | 85,262 | $ | 25,475 | $ | 132,365 | ||||||
Gross
realized gains
|
1,422 | 475 | 177 | |||||||||
Gross
realized losses
|
- | - | (89 | ) | ||||||||
Net
realized gains reclassified to earnings, net of taxes
|
876 | 293 | 55 |
On a
regular basis, 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
F-15
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.
The
entire amount of gross unrealized losses on investments held at January 31,
2010 was attributable to short-term investments with an aggregate fair value of
approximately $40.0 million and, as of January 31, 2010, each one of these
investments was in a continuous unrealized loss position for less than 12
months. No investments held by the Company as of January 31, 2009 were in an
unrealized loss position.
4. PROPERTY
AND EQUIPMENT, NET
Property
and equipment, net consisted of the following:
January
31,
|
|||||||
(in
thousands)
|
2009
|
2010
|
|||||
Furniture
and equipment
|
$
|
13,262
|
$
|
13,251
|
|||
Leasehold
improvements
|
792
|
813
|
|||||
14,054
|
14,064
|
||||||
Less
accumulated depreciation and amortization
|
(11,213
|
)
|
(12,192
|
)
|
|||
$
|
2,841
|
$
|
1,872
|
Depreciation
and amortization expense was approximately $2.2 million, $2.1 million and $1.5
million for the years ended January 31, 2008, 2009 and 2010,
respectively.
5.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses consisted of the following:
January
31,
|
||||||
(in
thousands)
|
2009
|
2010
|
||||
Accounts
payable
|
$
|
589
|
$
|
661
|
||
Accrued
compensation and benefits
|
5,038
|
4,324
|
||||
Accrued
taxes
|
1,053
|
226
|
||||
Accrued
professional fees
|
712
|
430
|
||||
Other
accrued expenses
|
1,178
|
957
|
||||
$
|
8,570
|
$
|
6,598
|
F-16
6. RELATED
PARTY TRANSACTIONS
The
Company sells products and provides services to other subsidiaries of Comverse
Technology, Inc. Sales to and amounts due from subsidiaries of
Comverse Technology, Inc. are presented separately in the consolidated financial
statements.
The
Company had a corporate services agreement with Comverse Technology, Inc., under
which Comverse Technology, Inc. provided the Company with the following
services:
·
|
maintaining
in effect general liability and other insurance policies providing
coverage for the Company;
|
·
|
administration
of employee benefit plans;
|
·
|
routine
legal services; and
|
·
|
consulting
services with respect to the Company’s corporate
communications.
|
The
agreement provided that the Company pay to Comverse Technology, Inc. a quarterly
fee, payable in arrears at the end of each fiscal quarter, in consideration for
all services provided by Comverse Technology, Inc. during such fiscal quarter.
Payments of fees made under the agreement were $0.4 million in the year ended
January 31, 2008. In addition, the Company reimbursed Comverse Technology, Inc.
for any out-of-pocket expenses incurred by Comverse Technology, Inc. in
providing the services. The agreement was terminated effective February 1, 2008,
as the Company now provides for itself substantially all the services provided
for in the agreement.
7. SHARE-BASED
PAYMENTS
Under the
Company’s equity incentive plans, stock options, restricted stock and deferred
stock units (“DSU”) have been awarded to employees, directors and other eligible
persons as compensation for their services. Share-based payment expense included
in the consolidated statements of operations was as follows:
Years
Ended January 31,
|
||||||||||||
Share-based payment expense
|
2008
|
2009
|
2010
|
|||||||||
(in
thousands)
|
||||||||||||
Stock
option expense
|
$ | 1,919 | $ | 1,416 | $ | 362 | ||||||
Restricted
stock and DSU expense
|
271 | 305 | 364 | |||||||||
Total
share-based payment expense
|
$ | 2,190 | $ | 1,721 | $ | 726 | ||||||
Share-based payment expense included
in:
|
||||||||||||
Cost
of revenues
|
$ | 251 | $ | 120 | $ | 60 | ||||||
Research
and development
|
416 | 371 | 69 | |||||||||
Selling,
general and administrative
|
1,523 | 1,230 | 597 | |||||||||
Total
share-based payment expense
|
$ | 2,190 | $ | 1,721 | $ | 726 |
Effective
as of April 21, 2009, the exercise prices of outstanding options to purchase
2,982,104 shares (unadjusted for the effects of the reverse stock split
disclosed in Note 2) of the Company’s common stock held by 237 current and
former employees were reduced in connection with the payment of the special cash
dividend on April 20, 2009. For the purpose of determining the amount of any
incremental share-based compensation cost that may have resulted from the
modification of the exercise prices, the Company re-measured the fair value of
each modified award immediately
F-17
prior and
subsequent to the modification and determined that none of the modifications
required the recognition of additional share-based payment expense.
The table
below summarizes the reductions in the exercise prices of the unexercised stock
options on April 21, 2009 (unadjusted for the effects of the reverse stock split
disclosed in Note 2):
Weighted
Average Exercise Prices
|
||||||||||||
Options to Purchase:
|
Original
Price
|
Modified
Price
|
Reduction
|
|||||||||
2,921,145
shares
|
$
|
11.49
|
$
|
6.91
|
$
|
4.58
|
||||||
60,959
shares
|
3.97
|
0.50
|
3.47
|
The
intent of the modification was to lower each outstanding option’s exercise price
by the per share amount of the special dividend, which, at the time it was paid,
was $4.58 per share. For the options with an original exercise price of $3.97
per share, the exercise price for these options was reduced to $0.50 per share
in order to preserve the options’ characterization under federal income tax
law.
As
provided for in the Company’s equity incentive plans, on November 18, 2009, all
outstanding stock options, nonvested restricted stock and undelivered shares
from DSU awards were adjusted to give effect to the one-for-four reverse stock
split (see Note 2) and the shares available for future grants were
proportionately reduced. Additionally, the exercise price of each outstanding
option was increased by a multiple of four. For the purpose of determining the
amount of any incremental share-based compensation cost that may have resulted
from the modification of the option exercise prices, the Company re-measured the
fair value of each modified option award immediately prior and subsequent to the
modification and determined that none of the modifications required the
recognition of additional share-based payment expense.
At
January 31, 2010, the number of shares of common stock available for share-based
payment awards was 106,849.
Stock
Options
Stock
options are normally granted with an exercise price not less than the fair
market value of the underlying shares at the date of
grant. Substantially all of the options outstanding as of January 31,
2010 vest in four equal annual increments from the date of grant. The maximum
term for all options granted is ten years.
The
following table presents a summary of the activity in the Company’s stock
options during the year ended January 31, 2010:
Number
of
Options
|
Weighted
Average
Exercise
Price
|
|||||||
Outstanding
at February 1, 2009
|
749,210 | $ | 26.97 | |||||
Granted
|
17,625 | 9.87 | ||||||
Exercised
|
(52,765 | ) | 7.75 | |||||
Forfeited
|
(771 | ) | 21.04 | |||||
Expired
|
(173,244 | ) | 29.95 | |||||
Outstanding
at January 31, 2010
|
540,055 | $ | 27.35 | |||||
Exercisable
at January 31, 2010
|
522,430 | $ | 27.94 |
F-18
The
weighted average remaining contractual terms of options outstanding and
exercisable as of January 31, 2010 were 3.2 years and 3.0 years,
respectively. For both outstanding and exercisable options as of
January 31, 2010, the aggregate intrinsic value was approximately $0.2
million. The aggregate intrinsic value of and cash received from
options exercised during the year ended January 31, 2010 were approximately $0.1
million and $0.4 million, respectively.
During
the year ended January 31, 2010, the Company made one option grant, which
occurred in January 2010 and had an estimated fair value of $5.42 per option
awarded. There were no stock options granted in the years ended January 31, 2008
and 2009. For purposes of calculating each stock option’s fair value, the
Company uses the Black-Scholes option pricing model, which involves the
determination of assumptions that become inputs into the model. The primary
inputs are expected volatility, expected term of the option, risk-free interest
rate and dividend yield. The assumptions used to determine fair value of each
option awarded during the year ended January 31, 2010 were as
follows:
Expected
volatility
|
55%
|
|
Expected
term
|
6.25
years
|
|
Risk-free
interest rate
|
2.9%
|
|
Dividend
yield
|
-
|
Expected
volatility was based on the historical performance of the Company’s common
stock. Prior to the option award made in January 2010, the Company had not made
an option award since December 2005 and all holders of options were prohibited
from exercising their vested options from April 17, 2006 through December 10,
2009. Accordingly, sufficient recent data regarding exercise behavior
did not exist in a form that could reasonably predict the term, or life, of an
option. Therefore, for the options granted during January 2010, the
Company estimated the expected term using the “simplified
method.” The risk-free interest rate was the implied yield available
as of the grant date on U.S. Treasury zero-coupon issues with a remaining term
equal to the option’s expected term. Prior to the Company’s special cash
dividend paid on April 20, 2009, the Company had not paid dividends and had not
declared any intentions of doing so. Accordingly, the dividend yield was assumed
to be zero.
As of
January 31, 2010, unrecognized share-based payment expense related to nonvested
stock options was approximately $0.1 million and is expected to be recognized
over a weighted average period of approximately 4 years.
Restricted
Stock and Deferred Stock Units (DSUs)
The
following is a summary of the changes in nonvested shares of restricted stock
and DSUs during the year ended January 31, 2010:
Number
of Shares
|
Weighted
Average Grant-Date Fair Value
|
|||||||
Nonvested shares at February 1,
2009
|
18,938 | $ | 33.79 | |||||
Shares granted
|
94,401 | 9.30 | ||||||
Shares vested
|
(14,063 | ) | 29.93 | |||||
Shares forfeited
|
- | - | ||||||
Nonvested shares at January 31,
2010
|
99,276 | $ | 11.05 |
F-19
As of
January 31, 2010, there was approximately $0.5 million of unrecognized
share-based payment expense related to nonvested restricted stock and deferred
stock units, which is expected to be recognized over a weighted average period
of approximately 2.3 years. The total fair value of shares vested during the
years ended January 31, 2008, 2009 and 2010 was approximately $0.3 million, $0.2
million and $0.4 million, respectively.
In
February 2009, each independent director of the Company’s Board of Directors was
awarded 5,500 DSUs for their service during the fiscal year ending January 31,
2010. In connection with the reverse stock split on November 18, 2009, these
DSUs were adjusted to 1,375 DSUs. As of January 31, 2010, all awarded DSUs were
vested. Shares of the Company’s common stock equal to the number of vested DSUs
will be issued to these directors on or before January 3, 2011. Based on the
fair market value of the Company’s common stock at the date of the grant,
share-based payment expense related to the grants of these DSUs totaled
approximately $0.1 million and was recognized in the consolidated statement of
operations for the year ended January 31, 2010.
In May
and October 2009, executive officers of the Company were granted, in the
aggregate, 361,113 shares of restricted common stock. In connection with the
reverse stock split on November 18, 2009, these restricted shares were adjusted
to 90,276 shares, of which 48,212 shares vest over time while vesting of the
remaining shares is based on the achievement of defined performance targets
during the year ended January 31, 2010. Restricted stock awards have all the
rights and privileges of the Company’s common stock, subject to certain
restrictions and forfeiture provisions. Each time-based restricted stock award
vests in three equal annual installments beginning on the first anniversary of
the award’s grant date, subject to each executive’s continued employment on such
vesting dates. Based on the fair market value of the Company’s common stock at
the date of each grant, share-based payment expense related to the time-based
awards totaled approximately $0.4 million, which is being recognized in the
consolidated statement of operations pro-rata over the vesting period of each
grant.
As of
January 31, 2010, the Company determined that satisfaction of the performance
conditions associated with the performance-based restricted stock awards, and
therefore vesting of these awards, was not a probable outcome. During March
2010, the performance-based stock awards were forfeited and the related shares,
totaling 42,064 shares, were returned to the Company and became available for
reissuance. Accordingly, no share-based payment expense was recognized for the
awards containing performance conditions during the year ended January 31,
2010.
F-20
Payments
for Expired Stock Options
On
February 4, 2008, the Company approved payments to 16 persons who were then
current employees with respect to certain options to purchase the Company's
common stock that expired on February 3, 2008. The payments made to the
employees were based on an amount equal to the difference between the exercise
price of each expired option and the average price at which the common stock of
the Company was trading for the five days prior to the expiration date. The
distribution of the payments to the employees was conditioned upon the receipt
from each employee of a waiver of their respective rights to bring an action
against the Company in respect of the expired options. The entire payment was
recorded as compensation expense in the consolidated statement of operations for
the year ended January 31, 2009 as follows:
Compensation expense for expired option
payments:
|
(in
thousands)
|
|||
Cost
of revenues
|
$ | 175 | ||
Research
and development
|
273 | |||
Selling,
general and administrative
|
1,860 | |||
$ | 2,308 |
8. EARNINGS
(LOSS) PER SHARE
Basic
earnings (loss) per share is determined by using the weighted average number of
shares of common stock outstanding during each period. Diluted earnings (loss)
per share further assumes the issuance of common shares for all dilutive
potential shares outstanding. The share amounts used in the computations of
basic and diluted loss per share were retroactively adjusted to account for the
effects of the reverse stock split for all periods presented and were as
follows:
(in
thousands)
|
Years
Ended January 31,
|
||||||||||
2008
|
2009
|
2010
|
|||||||||
Basic
share amounts
|
10,871
|
10,875
|
10,896
|
||||||||
Effect
of dilutive potential shares:
|
|||||||||||
Options
|
157
|
-
|
-
|
||||||||
Restricted
stock and deferred stock units
|
23
|
-
|
-
|
||||||||
Diluted
share amounts
|
11,051
|
10,875
|
10,896
|
For
purposes of computing basic earnings (loss) per share, any nonvested shares of
restricted stock that have been issued by the Company and are contingently
returnable to the Company are excluded from the weighted average number of
shares of common stock outstanding. Incremental potential common shares from
stock options and nonvested restricted stock and DSUs are included in the
computation of diluted earnings per share except when the effect would be
antidilutive. Accordingly, diluted earnings (loss) per share for the years ended
January 31, 2008, 2009 and 2010 excluded approximately 0.6 million, 0.8 million
and 0.6 million potential common shares associated with outstanding stock
options and nonvested restricted stock and DSUs, as these potential common
shares would have had an antidilutive effect.
9. DEFINED
CONTRIBUTION PLAN
The
Company sponsors a qualified defined contribution plan covering substantially
all U.S. employees. The expense recorded for the Company’s contributions to this
plan totaled approximately $0.5 million, $0.5 million and $0.4 million for the
years ended January 31, 2008, 2009 and 2010, respectively.
F-21
10.
INTEREST AND OTHER INCOME, NET
Interest
and other income, net consisted of the following:
(in
thousands)
|
Years
Ended January 31,
|
|||||||||||
2008
|
2009
|
2010
|
||||||||||
Interest
and dividend income
|
$ | 10,773 | $ | 6,681 | $ | 2,001 | ||||||
Realized
gains on sales of investments, net
|
1,422 | 475 | 88 | |||||||||
Other
|
169 | (58 | ) | (136 | ) | |||||||
$ | 12,364 | $ | 7,098 | $ | 1,953 |
11. INCOME
TAXES
The
Company and its subsidiaries are subject to U.S. federal income tax, as well as
income tax of multiple foreign and state jurisdictions. Income (loss)
before income tax benefit was as follows:
(in
thousands)
|
Years
Ended January 31,
|
||||||||||
2008
|
2009
|
2010
|
|||||||||
United
States
|
$ | 2,292 | $ | (5,303 | ) | $ | (6,551 | ) | |||
Foreign
|
880 | 515 | 1,429 | ||||||||
Income
(loss) before income tax benefit
|
$ | 3,172 | $ | (4,788 | ) | $ | (5,122 | ) |
Income
tax benefit consisted of the following:
(in
thousands)
|
Years
Ended January 31,
|
|||||||||||
2008
|
2009
|
2010
|
||||||||||
Current
tax expense (benefit):
|
||||||||||||
Federal
|
$ | 380 | $ | (1,092 | ) | $ | (1,370 | ) | ||||
State
|
301 | (17 | ) | (15 | ) | |||||||
Foreign
|
462 | 558 | 277 | |||||||||
Total
current tax expense (benefit)
|
1,143 | (551 | ) | (1,108 | ) | |||||||
Deferred
tax expense (benefit):
|
||||||||||||
Federal
|
(1,810 | ) | (888 | ) | 520 | |||||||
State
|
(48 | ) | (213 | ) | (39 | ) | ||||||
Total
deferred tax expense (benefit)
|
(1,858 | ) | (1,101 | ) | 481 | |||||||
Income
tax benefit
|
$ | (715 | ) | $ | (1,652 | ) | $ | (627 | ) |
Included
in other comprehensive income (loss) were the amounts of deferred income tax
expense (benefit) associated with the unrealized gains (losses) on the Company’s
available-for-sale marketable securities of approximately $(0.4) million, $0.1
million and $(0.1) million for the years ended January 31, 2008, 2009 and 2010,
respectively. During the year ended January 31, 2010, the Company recorded, as a
reduction of additional paid-in capital, the income tax effects associated with
reductions in deferred income tax assets primarily resulting from exercises and
expirations of stock options. Additionally, income tax benefits of
approximately $0.2 million were realized from the payment of dividends to
holders of nonvested common shares or share equivalents as part of the payment
of the special dividend in April 2009 and were recognized as an increase in
additional paid-in capital.
F-22
The
reconciliation of the United States federal statutory income tax expense
(benefit) rate to the Company’s effective rate was as follows:
Years
Ended January 31,
|
||||||||
2008
|
2009
|
2010
|
||||||
U.
S. federal statutory expense (benefit) rate
|
34
|
% |
34
|
% |
34
|
% | ||
State
taxes, net of federal income tax effect
|
4
|
3
|
1
|
|||||
Foreign
income taxed at different rate
|
(1
|
)
|
(2
|
)
|
(1
|
)
|
||
Reserve
activity
|
(4
|
)
|
-
|
-
|
||||
Nondeductible
compensation
|
-
|
(7
|
)
|
-
|
||||
Tax
exempt interest income
|
(70
|
)
|
12
|
-
|
||||
Share-based
payments
|
12
|
(5
|
)
|
(1
|
)
|
|||
Change
in deferred tax asset valuation allowance
|
-
|
-
|
(18
|
)
|
||||
Other
|
2
|
-
|
(3
|
)
|
||||
Company’s
effective tax rate
|
(23
|
)%
|
35
|
% |
12
|
% |
The Company’s significant deferred
income tax assets and liabilities at January 31, 2009 and 2010 were as
follows:
(in
thousands)
|
January
31, 2009
|
January
31, 2010
|
||||||||||||||
Current
|
Noncurrent
|
Current
|
Noncurrent
|
|||||||||||||
Deferred
income tax assets:
|
||||||||||||||||
Federal
and state tax credits
|
$ | - | $ | 2,519 | $ | - | $ | 3,308 | ||||||||
Accrued
liabilities and other
|
506 | - | 510 | 13 | ||||||||||||
Deferred
revenue
|
550 | 1,734 | 308 | 1,377 | ||||||||||||
Share-based
payments
|
- | 2,546 | 29 | 1,682 | ||||||||||||
Depreciation
and amortization
|
- | 308 | - | 255 | ||||||||||||
Net
operating losses
|
- | - | 30 | 389 | ||||||||||||
Other
|
210 | 474 | 234 | 176 | ||||||||||||
|
1,266 | 7,581 | 1,111 | 7,200 | ||||||||||||
Less:
valuation allowance
|
- | - | (120 | ) | (823 | ) | ||||||||||
Total
deferred income tax assets
|
1,266 | 7,581 | 991 | 6,377 | ||||||||||||
Deferred
income tax liabilities:
|
||||||||||||||||
Unrealized
gains on investment
|
(178 | ) | - | (49 | ) | - | ||||||||||
Federal
impact of state tax credits
|
- | (11 | ) | - | - | |||||||||||
Other
|
- | (13 | ) | (87 | ) | - | ||||||||||
Total
deferred income tax liabilities
|
(178 | ) | (24 | ) | (136 | ) | - | |||||||||
Net
deferred income tax assets
|
$ | 1,088 | $ | 7,557 | $ | 855 | $ | 6,377 |
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 net current deferred income tax
asset is included in prepaid expenses and other current assets in the Company’s
consolidated balance sheets. A valuation allowance has been provided against a
portion of deferred income tax assets associated with foreign tax credit
carryforwards, the benefits of which management believes will not be fully
realized prior to the expected carryforward expiration dates. The
Company has not provided for a valuation allowance against the remaining
deferred income tax assets, as the Company has determined it is more likely than
not that these deferred tax assets will be realized.
As of
January 31, 2010, the Company had federal income tax credit carryforwards of
approximately $3.3 million, which primarily consisted of the alternative minimum
income tax (“AMT”) credit and the foreign tax credit, and state net operating
loss carryforwards of approximately $12.0 million. The
F-23
federal
AMT credit carryforward has no expiration date, the foreign tax credit
carryforwards begin to expire in 2016, and the state net operating loss
carryforwards begin to expire in 2014.
As of
January 31, 2010, undistributed earnings of the Company’s foreign subsidiaries
were approximately $4.3 million, of which the Company intends to repatriate
approximately $2.0 million during the year ended January 31, 2011. The income
tax effect of this repatriation was recognized in income tax expense during the
year ended January 31, 2010 and was less than $0.1 million. The Company intends
to permanently reinvest the remaining undistributed earnings of its foreign
subsidiaries. Accordingly, no additional income tax expense related to such
undistributed earnings was provided and determination of any related deferred
income tax liability was not practicable.
Included
in the Company’s current and long-term liabilities as of January 31, 2009 were
unrecognized income tax benefit obligations of approximately $1.0 million and
$2.3 million, respectively. As of January 31, 2010, all of the Company’s
unrecognized income tax benefits were long-term obligations. Included in these
recorded liabilities were accrued interest and penalties related to the
unrecognized income tax benefits totaling approximately $0.5 million and $0.2
million as of January 31, 2009 and 2010, respectively. For each of the fiscal
years ended January 31, 2008, 2009 and 2010, the total amount of interest and
penalties recognized in the consolidated statements of operations was less than
$0.1 million. The following is a summary of the changes in unrecognized income
tax benefits for the years ended January 31, 2008, 2009 and 2010, excluding
accrued interest and penalties:
(in
thousands)
|
Years
Ended January 31,
|
||||||||||
2008
|
2009
|
2010
|
|||||||||
Unrecognized
income tax benefits, beginning of year
|
$
|
3,038
|
$
|
2,916
|
$
|
2,797
|
|||||
Gross
increase resulting from tax positions taken in the current fiscal
year
|
446
|
337
|
-
|
||||||||
Gross
increase resulting from tax positions taken in a prior fiscal
year
|
-
|
-
|
94
|
||||||||
Reductions
resulting from settlements with taxing authorities
|
-
|
-
|
(875
|
)
|
|||||||
Reductions
resulting from lapses of statute of limitations
|
(568
|
)
|
(456
|
)
|
(567
|
)
|
|||||
Unrecognized
income tax benefits, end of year
|
$
|
2,916
|
$
|
2,797
|
$
|
1,449
|
As of January 31, 2010, tax years beginning with the year ended January 31, 2007 remained open and subject to examination by the Internal Revenue Service. Tax years beginning with the year ended January 31, 2006 remained open and subject to examination by state taxing jurisdictions. Tax years beginning with the year ended January 31, 2005 remained open and subject to examination by foreign taxing jurisdictions. During the fiscal year ended January 31, 2010, the Company reached a settlement with the Internal Revenue Service regarding federal income tax audits for the years ended January 31, 2005 and 2006, resulting in an approximate $1.0 million decrease in the portion of the unrecognized income tax benefit obligation that was included in accrued expenses in the consolidated balance sheet. Additional changes in the Company’s unrecognized income tax benefit obligation within the next twelve months are expected to result in a reduction in this liability of approximately $1.0 million, as certain tax positions are expected to be effectively settled during this period. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was approximately $0.4 million as of January 31, 2010.
12. SEGMENT
INFORMATION
The
Company is engaged in one operating segment: the design, development,
manufacture, marketing, and support of software and hardware for use in the
communications industry.
F-24
Based on
the geographic location of the Company’s customers, the following table presents
revenues attributable to the United States and any significant revenues
attributable to a foreign country, as a percentage of total
revenues:
Years
Ended January 31,
|
|||||||||
2008
|
2009
|
2010
|
|||||||
United
States
|
28
|
%
|
24
|
%
|
32
|
%
|
|||
Germany
|
33
|
32
|
16
|
||||||
France
|
4
|
8
|
10
|
||||||
United
Kingdom
|
7
|
8
|
7
|
||||||
Israel
|
10
|
7
|
5
|
||||||
Other
|
18
|
21
|
30
|
||||||
Total
|
100
|
%
|
100
|
%
|
100
|
%
|
For each
of the three years ended January 31, 2008, 2009 and 2010, three customers
accounted for revenues of 10% or greater. For the year ended January 31, 2008,
these customers accounted for approximately 35%, 16%, and 11% of the Company’s
total revenues. For the year ended January 31, 2009, these customers accounted
for approximately 33%, 13%, and 14% of the Company’s total revenues. For the
year ended January 31, 2010, these customers accounted for approximately 18%,
17%, and 22% of the Company’s total revenues.
The
Company had long-lived assets of approximately $1.6 million in the United
States, $1.1 million in France and $0.1 million in Singapore at January 31,
2009. The Company had long-lived assets of approximately $0.9 million
in the United States and $0.9 million in France at January 31,
2010.
13. COMMITMENTS
AND CONTINGENCIES
Leases - The Company leases
office space and certain other equipment under non-cancelable operating leases.
Rent expense approximated $1.4 million, $1.5 million and $1.6 million for the
years ended January 31, 2008, 2009 and 2010, respectively.
Purchase Obligations – As of
January 31, 2010, the Company’s commitments under purchase agreements with
suppliers totaled approximately $1.8 million.
As of January 31, 2010, the minimum
annual commitments under operating leases and purchase obligations were
approximately as follows:
Years Ending January 31,
|
Operating
Leases
|
Purchase
Obligations
|
||||||
(in
thousands)
|
||||||||
2011
|
$ | 1,193 | $ | 1,545 | ||||
2012
|
658 | 179 | ||||||
2013
|
351 | 29 | ||||||
2014
|
300 | - | ||||||
2015
and thereafter
|
- | - |
F-25
Warranty Liability – The
following summarizes the activity associated with the Company’s warranty
liability included in accrued expenses in the consolidated balance sheets for
each of the years ended January 31, 2008, 2009 and 2010:
(in
thousands)
|
Years
Ended January 31,
|
||||||||||
2008
|
2009
|
2010
|
|||||||||
Warranty
liability, beginning of year
|
$
|
320
|
$
|
43
|
$
|
62
|
|||||
Provision
charged/(credited) to expense
|
(37
|
)
|
19
|
51
|
|||||||
Warranty
charges
|
(240
|
)
|
-
|
(42
|
)
|
||||||
Warranty
liability, end of year
|
$
|
43
|
$
|
62
|
$
|
71
|
Legal Proceedings - The Company does not believe that it is currently party to any pending legal actions that could reasonably be expected to have a material adverse effect on its business, financial condition, results of operations or cash flows.
Subject
to certain limitations, the Company has agreed to indemnify its current and
former directors, officers and employees in connection with any regulatory or
litigation matter relating to the improper stock option granting practices
described in the Company’s Annual Report on Form 10-K for the fiscal year ended
January 31, 2009. Such obligations may arise under the terms of the Company’s
articles of incorporation, as amended, the Company’s amended and restated
bylaws, applicable agreements and New Jersey law. An obligation to indemnify
generally means that the Company is required to pay or reimburse the
individual’s reasonable legal expenses and possibly damages and other
liabilities that may be incurred. The Company’s insurance policies for periods
prior to June 29, 2007 are unlikely to provide adequate coverage for expenses
resulting from the historical stock option granting practices and any such
coverage may have to be shared with related parties. Factors that may affect
such coverage are minimum retention requirements and exceptions for certain
non-qualifying expenses. Additionally, the Company’s current director and
officer liability insurance does not provide coverage with respect to its
historical stock option granting practices.
14. QUARTERLY
INFORMATION (UNAUDITED)
The
following table shows selected results of operations for each of the quarters
during the fiscal years ended January 31, 2009 and 2010 (amounts in thousands,
except per share data):
Fiscal
Quarters
|
Fiscal
Quarters
|
|||||||||||||||||||||||||||||||
Apr.
30,
2008
|
July
31,
2008
|
Oct.
31,
2008
|
Jan.
31,
2009
|
Apr.
30,
2009
|
July
31,
2009
|
Oct.
31,
2009
|
Jan.
31,
2010
|
|||||||||||||||||||||||||
Revenues
|
$ | 15,890 | $ | 15,759 | $ | 10,342 | $ | 11,056 | $ | 11,556 | $ | 11,864 | $ | 10,770 | $ | 11,648 | ||||||||||||||||
Gross
profit
|
11,980 | 11,488 | 7,326 | 7,753 | 8,538 | 8,974 | 7,540 | 8,795 | ||||||||||||||||||||||||
Net
income (loss)
|
(1,258 | ) | 520 | (820 | ) | (1,578 | ) | (911 | ) | (515 | ) | (2,142 | ) | (927 | ) | |||||||||||||||||
Diluted
earnings (loss) per share
|
$ | (0.12 | ) | $ | 0.05 | $ | (0.08 | ) | $ | (0.15 | ) | $ | (0.08 | ) | $ | (0.05 | ) | $ | (0.20 | ) | $ | (0.08 | ) |
The sum
of the quarterly per share amounts may not equal the annual per share amount due
to relative changes in the weighted average number of shares used in the per
share computation.
F-26
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of
1934, the company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ULTICOM
INC.
|
||
April
20, 2010
|
/s/ Shawn
K. Osborne
|
|
Shawn
K. Osborne
|
||
President
and
|
||
Chief
Executive Officer
|
||
April
20, 2010
|
/s/ Mark
A. Kissman
|
|
Mark
A. Kissman
|
||
Senior
Vice President and
|
||
Chief
Financial Officer
|
||
[Principal
Financial Officer and Accounting
Officer]
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
Signature
|
Capacity
|
Date
|
||
/s/ Andre
Dahan
|
Chairman
of the Board and
|
April
20, 2010
|
||
Andre
Dahan
|
Director
of Ulticom, Inc.
|
|||
/s/ Shawn
K. Osborne
|
President,
Chief Executive
|
April
20, 2010
|
||
Shawn
K. Osborne
|
Officer
and Director of
|
|||
Ulticom,
Inc. [Principal
|
||||
Executive
Officer]
|
||||
/s/ Paul
D. Baker
|
Director
of Ulticom, Inc.
|
April
20, 2010
|
||
Paul
D. Baker
|
||||
/s/ John
A. Bunyan
|
Director
of Ulticom, Inc.
|
April
20, 2010
|
||
John
A. Bunyan
|
||||
/s/ Michael
J. Chill
|
Director
of Ulticom, Inc.
|
April
20, 2010
|
||
Michael
J. Chill
|
||||
/s/ Ron
Hiram
|
Director
of Ulticom, Inc.
|
April
20, 2010
|
||
Ron
Hiram
|
||||
/s/ Joel
E. Legon
|
Director
of Ulticom, Inc.
|
April
20, 2010
|
||
Joel
E. Legon
|
||||
/s/ Shefali
A. Shah
|
Director
of Ulticom, Inc.
|
April
20, 2010
|
||
Shefali
A. Shah
|
||||
/s/ Rex
A. McWilliams
|
Director
of Ulticom, Inc.
|
April
20, 2010
|
||
Rex
A. McWilliams
|
||||
/s/ Mark
A. Kissman
|
Senior
Vice President
|
April
20, 2010
|
||
Mark
A. Kissman
|
and
Chief Financial Officer
|
|||
[Principal
Accounting Officer]
|