****UNITED STATES****

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

| x | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|---|---------------------------------------------------------------------------------------------|

For the quarterly period ended July 31, 2009

or

| o | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|---|----------------------------------------------------------------------------------------------|

 

**Commission File Number: 0-30121**

 

**ULTICOM, INC.**

(Exact name of registrant as specified in its charter)

 

| **New Jersey**                                                 |   | **22-2050748**                       |
|----------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of incorporation or organization) |   | (I.R.S. Employer Identification No.) |
|                                                           |   |                                 |
| **1020 Briggs Rd. Mt. Laurel, NJ**                             |   | **08054**                            |
| (Address of principal executive offices)                       |   | (Zip Code)                           |

**(856) 787-2700**

(Registrant's telephone number, including area code)

 

**Not Applicable**

(Former name, former address and former fiscal year,

if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

|   | o | Yes |   | x | No |   |
|--------|---|-----|--------|---|----|--------|

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

|   | o | Yes |   | x | No |   |
|--------|---|-----|--------|---|----|--------|

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

|   | o | Yes |   | x | No |   |
|--------|---|-----|--------|---|----|--------|

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

The number of shares of Common Stock, no par value, outstanding as of October 15, 2009 was 43,926,643.

 

----

 

|                       |   | **TABLE OF CONTENTS**                                                                                     |   |   |
|----------------------------|--------|-----------------------------------------------------------------------------------------------------------|--------|--------|
|                       |   | **Page**                                                                                                  |
|                       |   |                                                                                                      |
| Forward Looking Statements |   |                                                                                                      |
| Explanatory Note           |   |                                                                                                      |
|                       |   |                                                                                                      |   |   |
|                       |   | **PART I - Financial Information**                                                                        |   |   |
|                       |   |                                                                                                      |   |   |
| **ITEM 1.**                |   | **Condensed Consolidated Financial Statements (Unaudited).**                                              |   |   |
|                       |   | Condensed Consolidated Balance Sheets as of January 31, 2009 and July 31, 2009                            |   |   |
|                       |   | Condensed Consolidated Statements of Operations for the Three and Six Months ended July 31, 2008 and 2009 |   |   |
|                       |   | Condensed Consolidated Statements of Cash Flows for the Six Months ended July 31, 2008 and 2009           |   |   |
|                       |   | Notes to Condensed Consolidated Financial Statements                                                      |   |   |
|                       |   |                                                                                                      |   |   |
| **ITEM 2.**                |   | **Management's Discussion and Analysis of Financial Condition and Results of Operations.**                |   |   |
|                       |   |                                                                                                      |   |   |
| **ITEM 3.**                |   | **Quantitative and Qualitative Disclosures about Market Risk.**                                           |   |   |
|                       |   |                                                                                                      |   |   |
| **ITEM 4.**                |   | **Controls and Procedures.**                                                                              |   |   |
|                       |   |                                                                                                      |   |   |
|                       |   | **PART II - Other Information**                                                                           |   |   |
|                       |   |                                                                                                      |   |   |
| **ITEM 1.**                |   | **Legal Proceedings.**                                                                                    |   |   |
|                       |   |                                                                                                      |   |   |
| **ITEM 1A.**               |   | **Risk Factors.**                                                                                         |   |   |
|                       |   |                                                                                                      |   |   |
| **ITEM 2.**                |   | **Unregistered Sales of Equity Securities and Use of Proceeds.**                                          |   |   |
|                       |   |                                                                                                      |   |   |
| **ITEM 3.**                |   | **Defaults Upon Senior Securities.**                                                                      |   |   |
|                       |   |                                                                                                      |   |   |
| **ITEM 4.**                |   | **Submission of Matters to a Vote of Security Holders.**                                                  |   |   |
|                       |   |                                                                                                      |   |   |
| **ITEM 5.**                |   | **Other Information.**                                                                                    |   |   |
|                       |   |                                                                                                      |   |   |
| **ITEM 6.**                |   | **Exhibits.**                                                                                             |   |   |
|                       |   |                                                                                                      |   |   |
|                       |   | **SIGNATURES**                                                                                            |   |   |
|                       |   |                                                                                                      |   |   |
| **EX-31.1**                |   | **(CERTIFICATION OF CHIEF EXECUTIVE OFFICER)**                                                            |   |   |
| **EX-31.2**                |   | **(CERTIFICATION OF CHIEF FINANCIAL OFFICER)**                                                            |   |   |
| **EX-32.1**                |   | **(CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER)**                                |   |   |

 

 

----

**FORWARD-LOOKING STATEMENTS**

 

Certain statements by Ulticom, Inc. (referred to herein as “Ulticom,” “the Company,” “we,” “our” or “us”) appearing in the Explanatory Note, Item 2 (Management’s Discussion and Analysis of Financial Condition and the Results of Operations) and elsewhere in this Quarterly Report on Form 10-Q constitute “forward-looking            statements” for purposes of the Private Securities Litigation Reform Act of 1995. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “estimates,” “believes,” “potential” or “continue” or the negative thereof or other comparable terminology.

 

The Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2009 (“Fiscal Year 2008 Form 10-K”), which was filed with the Securities and Exchange Commission (“SEC”) on September 30, 2009, included the Company’s consolidated financial statements as of and for the fiscal years ended January 31, 2006, 2007, 2008 and 2009.

 

As described in the Fiscal Year 2008 Form 10-K, there are numerous risks and uncertainties that could cause actual results and the timing of events to differ materially from those anticipated by the forward-looking statements made therein and in this Quarterly Report on Form 10-Q and that may give rise to future claims and increase our exposure to contingent liabilities. These risks and uncertainties            arise from (among other factors):

|   | **•** | our improper accounting practices identified by the Audit Committee of the Board of Directors (the “Audit Committee”) in the course of its investigations described in this Form 10-Q (the “Audit Committee Investigations”), that necessitated our making restatement adjustments in our consolidated financial statements, resulted in                            our inability to file required periodic reports with the Securities and Exchange Commission (“SEC”) from the quarter ended October 31, 2005 until the filing of the Fiscal Year 2008 Form 10-K on September 30, 2009, caused us to incur substantial accounting, legal and other expenses, and resulted in litigation and governmental enforcement action; |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | our incorrect application of the accounting guidance in AICPA Statement of Position No. 97-2, “Software Revenue Recognition,” for a portion of our revenues (i.e., certain software sales contracts with third-party customers) in each of the fiscal years from fiscal year 1998 through fiscal year 2004 and our incorrect application of                            accounting principles with respect to the recognition of depreciation expense, that required us to make additional restatement adjustments in our consolidated financial statements as of February 1, 2005; |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | our disclosure controls and procedures were ineffective as of January 31, 2009 and July 31, 2009, due to our inability to timely file our financial reports and because of the material weaknesses in our internal control over financial reporting described in the Fiscal Year 2008 Form 10-K; |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | a Final Judgment that has been 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 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; |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

ii

 

----

|   | **•** | our common stock is currently listed in the “Pink Sheets” and the over-the-counter market and stockholders may experience limited liquidity due to, among other things, the absence of market makers; |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | our inability to list our common stock on The NASDAQ Capital Market or on any other established national securities exchange; |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | 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, the filing date of the Fiscal Year 2008 Form 10-K and Quarterly Report on Form 10-Q for the quarterly period ended October 31, 2008, and, as indicated in our Current Report on Form 8-K dated April 16, 2006, such reports cannot be relied upon; |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | the interests of our majority shareholder, Comverse Technology, Inc., may not be aligned with the interests of our other shareholders; |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | 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 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 cash equivalents and short-term 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; |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | 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; |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | our ability to recruit and retain qualified personnel; and |
|--------|------------|------------------------------------------------------------|

|   | **•** | our inability to use equity incentive programs to attract and retain talented employees and any associated increase in employment costs. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------|

 

iii

 

----

These risks and uncertainties, as well as other factors, are discussed in greater detail in Item 1A (Risk Factors) in the Fiscal Year 2008 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.

 

**EXPLANATORY NOTE**

The improper accounting practices identified by the Audit Committee in the course of the Audit Committee Investigations (as defined below) necessitated certain restatement adjustments in our consolidated financial statements. In addition, the Company’s incorrect application of the accounting guidance in AICPA Statement of Position No. 97-2, “Software Revenue Recognition” (“SOP            No. 97-2”), for a portion of its revenues in each of the fiscal years from fiscal year 1998 through fiscal year 2004 and its incorrect application of accounting principles with respect to the recognition of depreciation expense required the Company to make additional restatement adjustments in its consolidated financial statements as of February 1, 2005. As a result, the Company was unable to file periodic reports with the Securities and Exchange Commission (“SEC”)            during the period from December 2005 to September 30, 2009, the filing date of the Fiscal Year 2008 Form 10-K. 

The Company’s fiscal year begins on February 1 and ends on January 31. The Company’s fiscal year end has been January 31 since the fiscal year ended January 31,1999 (i.e., fiscal year 1998).Prior to fiscal year 1998, the Company’s annual reporting period was on a calendar year basis (i.e., December 31 year end).

The Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2009 (“Fiscal Year 2008 Form 10-K”), which was filed with the SEC on September 30, 2009, contained, among other things:

1) the Company’s consolidated financial statements for the fiscal years ended January 31, 2006, 2007, 2008 and 2009, as well as a Management’s Discussion and Analysis of Financial Condition and Results of Operations as of and for the fiscal years presented;

2) restatement of certain financial data presented in “Selected Consolidated Financial Data” in Item 6 of the Company’s Fiscal Year 2008 Form 10-K as of and for the fiscal year ended January 31, 2005; 

3) disclosures of the results of the Company’s Audit Committee Investigations regarding certain improper option grant-related accounting practices, excess expense accruals and improper deferral of revenues (collectively, the “Audit Committee Investigations”), each of which impacted certain originally reported amounts in the Company’s consolidated financial            statements for each of the fiscal years beginning with the fiscal year ended December 31, 1996 and concluding with the fiscal year ended January 31, 2005, and each of which resulted in restatement adjustments; and 

4) disclosures of the restatement adjustments to correct material errors resulting from incorrect application of the accounting guidance in SOP No. 97-2, for that portion of the Company’s revenues impacted by SOP No. 97-2 (i.e., certain software sales contracts with third-party customers), for each of the fiscal years from fiscal year 1998 through fiscal year 2004. Also            included were disclosures of restatement adjustments to correct errors in the recognition of depreciation expense for each of the fiscal years from fiscal year 1999 through fiscal year 2004.

 

iv

 

----

With the filing of the Fiscal Year 2008 Form 10-K, the Company has provided its audited annual consolidated financial statements for each of the fiscal years ended January 31, 2006, 2007, 2008 and 2009. In addition the Company, on September 30, 2009, filed its Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 2008 and is filing contemporaneously with this Quarterly Report on Form            10-Q for the fiscal quarter ended July 31, 2009, its Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2009. The Company does not plan to file Quarterly Reports on Form 10-Q for the fiscal quarters ended April 30, 2006; July 31, 2006; October 31, 2006; April 30, 2007; July 31, 2007; October 31, 2007; April 30, 2008 and July 31, 2008.

The Company has not amended and does not plan to amend its Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q that were filed by the Company since its initial public offering on April 5, 2000 and prior to September 30, 2009, the filing date of the Fiscal Year 2008 Form 10-K and the Quarterly Report on Form 10-Q for the quarterly period ended October 31, 2008. Accordingly, as disclosed in            the Company’s Current Report on Form 8-K dated April 16, 2006, the consolidated financial statements and related financial information contained in such previously filed reports should not be relied upon. For the same reason, investors also should not rely on any financial results previously reported in Current Reports on Form 8-K filed prior to September 30, 2009. 

 

**Background of Restatement**

 

On March 13, 2006, the Company’s Audit Committee of the Board of Directors (the “Audit Committee”) was informed by the Company's Chief Executive Officer, Shawn Osborne (“Osborne”), that the Company’s majority shareholder, Comverse Technology, Inc., had determined, on a preliminary basis, that the stated dates of certain Comverse Technology, Inc. stock option grants            differed from the measurement dates required to be used for purposes of determining the value of such grants, and that a similar issue might exist with respect to option grants made by the Company. That day, the Company's Audit Committee began a review of all matters relating to its historical stock option grant practices, including, but not limited to, the accuracy of the stated dates of option grants and whether proper corporate procedures had been followed with respect to those            grants. The Audit Committee retained independent legal counsel, Dickstein Shapiro, LLP (“Dickstein”), who in turn retained AlixPartners, a forensic accounting firm, to analyze the impact such matters may have on our historical financial statements. The Company announced the commencement of this independent investigation on March 14, 2006 (“Phase I”).

 

Concurrent with the commencement of the investigation by the Audit Committee, on March 14, 2006, Comverse Technology, Inc. announced the creation of a Special Committee of its Board of Directors to review matters relating to Comverse Technology, Inc.’s stock option grants, including, but not limited to, the accuracy of the stated dates of option grants and whether all proper corporate procedures            were followed. Once informed that Comverse Technology, Inc.’s Special Committee had determined that the stated dates of certain Comverse Technology, Inc.’s stock option grants differed from the measurement dates required to be used for purposes of determining the value of such grants and to recognize the related compensation expense in accordance with accounting principles generally accepted in the United States of America (“GAAP”), the Company was also            required to record non-cash charges for stock-based compensation expenses with respect to the issuance by Comverse Technology, Inc. of options to purchase Comverse Technology, Inc.’s common stock to Company employees during periods that the Company was a wholly-owned subsidiary of Comverse Technology, Inc. Since the 

 

v

 

----

Company’s public offering in October 2000, Comverse Technology, Inc. has owned approximately 68% of the outstanding shares of the Company.

 

In August 2006, the U. S. Securities and Exchange Commission (“SEC”) filed a civil complaint against Jacob “Kobi” Alexander (“Alexander”), Comverse Technology, Inc.’s former Chairman and Chief Executive Officer who was also the Chairman of the Board of Directors of the Company, David Kreinberg (“Kreinberg”), Comverse Technology, Inc.’s former            Executive Vice President and Chief Financial Officer who was also a member of the Company’s Board of Directors and served as the Company’s Chief Financial Officer from December 1999 through early September 2001, and William Sorin (“Sorin”), formerly Comverse Technology, Inc.’s General Counsel and subsequently its Senior Counsel who was also a member of the Company’s Board of Directors and served as the Company's de facto legal counsel and            Secretary until June 2004, alleging that they engaged in fraudulent practices with respect to the option grant processes of Comverse Technology, Inc. and the Company. Subsequently, Kreinberg and Sorin have pled guilty to fraud charges and there is a pending indictment against Alexander, who has fled the United States. A warrant has been issued for Mr. Alexander’s arrest and his 690,000 shares of Ulticom common stock (representing 1.57% of our issued and outstanding common            stock as of October 15, 2009) are now in the possession of the U.S. Marshals Service Asset Forfeiture Office. 

 

In addition to the investigation regarding past stock option grant practices, on November 16, 2006, the Company announced that its Audit Committee had commenced an investigation into past accounting practices not related to stock option grants, including the treatment of accounting reserves and the shortening of the depreciable lives of certain computer assets (“Phase II”). The            investigation, which was expanded to include the improper deferral of revenue recognition on certain inter-company transactions, reviewed the fiscal years beginning in 1996 through 2004. The Audit Committee was again assisted by Dickstein and AlixPartners. The Audit Committee initiated the Phase II investigation because of certain allegations made by the former CFO of Comverse Technology, Inc. that he directed the finance and accounting officers of Comverse Technology, Inc.’s            subsidiaries to make adjustments to their quarter-end expense accruals and reserve accounts.

 

During the process of correcting the errors in its consolidated financial statements resulting from the aforementioned accounting practices, the Company determined that it had incorrectly applied the provisions of SOP No. 97-2 with respect to the recognition of revenue of certain software sales contracts with third-party customers. Specifically, the Company had been providing one year of free            maintenance to certain customers licensing its software, but had not been deferring any portion of the software licensing fees. On November 29, 2007, the Company announced it was conducting an evaluation of certain revenue recognition practices to determine whether, under SOP No. 97-2, it should have deferred a portion of the revenues that were recognized under certain customer contracts, amounting to the fair value of the first-year software maintenance included under such            contracts, to subsequent fiscal periods in the following twelve months. In order to be able to defer only the first year maintenance value under the relevant customer contracts (rather than the entire contract value), the Company had to demonstrate that vendor specific objective evidence ("VSOE") existed for the fair value of the first year of software maintenance included under the contracts. The Company subsequently determined that VSOE of fair value existed and that the required            corrective adjustments impacted the timing of revenue recognition, but did not call into question the validity of the underlying transactions or revenue. The Company also determined that revenue related to the sale of software development kits should have been deferred over the estimated period of future customer software 

 

vi

 

----

deployments and related maintenance. The years impacted by the errors in recognizing software revenue were each of the fiscal years from 1998 to 2004.

 

Additionally, the Company determined that certain errors had been made in its recognition of depreciation expense for each of the fiscal years from 1999 to 2004. These errors primarily resulted in the Company reflecting more depreciation expense in the first year the assets were placed in service than is permitted under GAAP.

 

The cumulative impact to correct all of the aforementioned errors, net of related income tax effects, was to reduce retained earnings by approximately $6.8 million as of February 1, 2005, the commencement date of the first fiscal year covered by the Fiscal Year 2008 Form 10-K. The Company has made corrective adjustments for each of these errors, including related income tax effects, by restating its            consolidated retained earnings as of February 1, 2005 as follows:

 

|                                              | **Pre-tax Corrective Adjustments Recorded in Retained Earnings as of****February 1, 2005** |    | **Income Tax Effects of Adjustments Recorded in Retained Earnings as of February 1, 2005** |   | **Net Increase (Decrease) in Retained Earnings as of February 1, 2005** |
|---------------------------------------------------|--------------------------------------------------------------------------------------------|---------|--------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------|
|                                              | **(In thousands)**                                                                         |
|                                              |                                                                                       |    |                                                                                       |   |                                                                    |   |   |   |   |   |   |
| Stock-based compensation expense (Phase I)        | $                                                                                          | (4,220  | )                                                                                          |   | $                                                                       | 1,606 |   |   | $ | (2,614 | ) |
| Expense accruals and revenue deferrals (Phase II) |                                                                                       | 31      |                                                                                       |   |                                                                    | (12 | ) |   |   | 19 |   |
| SOP No. 97-2 revenue arrangements                 |                                                                                       | (7,091  | )                                                                                          |   |                                                                    | 2,699 |   |   |   | (4,392 | ) |
| Depreciation expense                              |                                                                                       | 227     |                                                                                       |   |                                                                    | (86 | ) |   |   | 141 |   |
| Net reduction in retained earnings                | $                                                                                          | (11,053 | )                                                                                          |   | $                                                                       | 4,207 |   |   | $ | (6,846 | ) |

 

**Results and Conclusions of Phase I of the Audit Committee Investigations (Stock Option**

**Grant Practices)**

 

On March 28, 2008, the Company filed a Current Report on Form 8-K announcing the findings and conclusions of the Audit Committee Investigations, together with related remedial measures.

 

In the course of Phase I of the Audit Committee Investigations, approximately 70,000 documents and data files were reviewed and analyzed and 25 interviews of current and former Comverse Technology, Inc. and Company personnel and Stock Option Committee members were conducted by Dickstein. During the course of the Phase I investigation (March through May, 2006), Dickstein had 13 in-person and telephonic            meetings with the Audit Committee at which the investigation was thoroughly discussed. In addition, Dickstein provided the Audit Committee its interview memoranda and selected documents. Management cooperated fully in the investigations.

 

The scope of Phase I of the Audit Committee Investigations encompassed the Company’s practices relating to option grants from April 2000 (the year of the Company's initial public offering) through fiscal 2005, and entailed the examination of 22 separate grants of options to purchase more than 5,806,248 shares of common stock to approximately 433 individuals. 

 

The salient factual findings of Phase I were as follows:

 

vii

 

----

On February 1, 1998, the Company entered into a Services Agreement with Comverse Technology, Inc. pursuant to which Comverse Technology, Inc. agreed to provide consulting on financial planning and reporting, routine legal services, administration of employee benefit plans, directors’ and officers’ insurance, umbrella insurance and consulting on public relations to the Company in exchange            for a quarterly fee.

 

Certain former executive officers of Comverse Technology, Inc. exercised a high degree of control over the legal and financial reporting functions of the Company. From the date of Comverse Technology, Inc.'s acquisition of the Company's predecessor on August 30, 1995, until he resigned from his position on April 28, 2006, Alexander, Comverse Technology, Inc.’s former Chairman and Chief Executive            Officer, was the Chairman of the Board of Directors of the Company. From at least 2000 until he resigned from his position on April 28, 2006, Kreinberg, Comverse Technology, Inc.’s former Executive Vice President and Chief Financial Officer, was a member of the Company’s Board of Directors and served as the Company’s Chief Financial Officer from December 1999 through early September 2001, when the Company’s current Chief Financial Officer, Mark Kissman            (“Kissman”), joined the Company and assumed that position. From at least 2000 through May 2004, Sorin, formerly Comverse Technology, Inc.’s General Counsel and subsequently its Senior Counsel, was also a member of the Company’s Board of Directors, and served as the Company's de facto legal counsel and Secretary until June 2004.

 

Kreinberg would instruct Company employees responsible for administering the option grants to select a grant date by looking back at the closing price of the Company’s stock for a period of time and select the date on which the price was lowest during that period. Based on templates initially prepared by Sorin, a unanimous written consent (“UWC”) reflecting “as of” grant            dates was prepared and circulated to the Company’s Stock Option Committee members to obtain their approval of the option grant.

 

Pursuant to Kreinberg’s direction and with the knowledge and participation of Sorin, historical grant dates were selected with respect to eight grants of stock options to the Company’s management and employees between April 2000 and April 2004; however, the selection of historical dates resulted in significantly advantageous exercise prices with respect to only the first three grants            during this period, the last of which was in March 2001. None of the advantageously priced options were exercised by the Company’s CEO or current CFO.

 

The Audit Committee concluded that:

 

|   | **•** | Improper procedures were followed with respect to eight of the twenty-two option grants that Ulticom made to its management and employees from April 2000 through April 2004 and, based on information provided by Comverse Technology, Inc., improper procedures were followed with respect to four grants of options to purchase Comverse Technology,                            Inc.’s common stock made by Comverse Technology, Inc. to Ulticom’s employees during 1995 through 1997, when Ulticom was a wholly-owned subsidiary of Comverse Technology, Inc. These improper procedures resulted in a restatement adjustment of approximately $2.6 million, net of related income tax effects, to reduce retained earnings as of February 1, 2005, so as to correct the errors in the Company’s stock-based compensation expense occurring in each                            of the years beginning with 1996 and ending with the year ended January 31, 2005; |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

viii

 

----

|   | **•** | The Company personnel directed by Kreinberg and Sorin were not aware that the look-back procedure might be improper or of the impact it might have on the Company’s financial statements; |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | Neither Osborne nor Kissman were involved in selecting historical dates for any of the Company’s option grants and there is no indication that they were aware of any irregularity in the Company’s option grant process prior to the commencement of Phase I of the Audit Committee Investigations; and |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | The members of the Company’s Stock Option Committee had no knowledge that the “as of” dates on the UWCs approving the option grants had been selected through the look-back procedure, nor were they aware of any impropriety with respect to the use of “as of” dates as the option grant dates. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

On March 28, 2008, the Board of Directors unanimously approved the following remedial measures recommended by the Audit Committee with respect to the improper historical stock option grant practices:

 

|   | **•** | Every new stock option grant shall be approved at a meeting of the Stock Option Committee, the date of which becomes the grant date and not by means of a Unanimous Written Consent; |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | The stock option grant process shall be administered by the Company’s General Counsel; and |
|--------|------------|--------------------------------------------------------------------------------------------------|

 

|   | **•** | On an annual basis, the Company shall conduct an internal audit of its stock option grant process with an emphasis upon compliance with the terms of the relevant stock option plan(s) and adequate documentation of the approval of each grant. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Results and Conclusions of Phase II of the Audit Committee Investigations (Non-Option Grant-Related Accounting Practices)**

 

As announced by the Company on November 16, 2006, the Audit Committee expanded its investigation and adopted a comprehensive work plan, implemented with the assistance of Dickstein and AlixPartners, that focused upon two areas that, according to allegations made by Kreinberg to government prosecutors, Comverse Technology, Inc. and its subsidiaries had manipulated: (1) adjustment of accruals and            reserves, and (2) improper shortening of depreciable lives on the Company’s computers in fiscal 2001. Ultimately, the depreciable lives of the Company’s computers were found to be appropriate. The Audit Committee authorizedDickstein and AlixPartners to expand the investigation into any other practices that appeared to be problematic or in violation of GAAP. One such other improper practice was in fact subsequently discovered – namely, the            inappropriate deferral of recognition of certain inter-company revenues.

 

During the course of Phase II of the Audit Committee Investigations (December 2006 through August 2007), approximately 20,000 documents and data files were reviewed and analyzed and 19 interviews of current and former Company personnel were conducted by Dickstein and AlixPartners. Dickstein had well over 20 in-person and telephonic meetings with the Audit Committee at which the investigation was            thoroughly discussed and provided the Audit 

 

ix

 

----

Committee its interview memoranda and selected documents. Management cooperated fully in the investigations. 

 

Phase II of the Audit Committee Investigations resulted in a net restatement adjustment of approximately $19,000, net of related income tax effects, to increase retained earnings as of February 1, 2005, as a consequence of correcting errors made to various accrued expenses for each of the years beginning with 1996 and ending with the fiscal year ended January 31, 2004.

 

The Audit Committee found that the accounting practices at issue (excess accruals and improper deferral of revenue) were implemented at the Company under the direction of Kreinberg, who was Chief Financial Officer of Comverse Technology, Inc. throughout the period at issue and Chief Financial Officer of the Company from December 1999 through early September 2001, for the purpose of achieving an upward            trend of growth in the Company’s revenue and income. From fiscal 1996 (year ended December 31, 1996) through early September 2001, Kreinberg managed and controlled the financial reporting process at the Company. All quarterly reporting packages were reviewed and approved by Kreinberg, who directed Lisa Roberts (“Roberts”), the Company’s highest ranking finance officer from late 1996 through late 1999 and second highest ranking finance officer during            Kreinberg’s tenure as Chief Financial Officer at the Company, to make any changes and to resubmit the reporting packages to him. The Audit Committee and the Company’s independent registered public accounting firm had no knowledge of the practices at issue.

 

The Audit Committee found that the Company’s Chief Executive Officer, Osborne, reasonably relied upon Kreinberg’s accounting expertise and control over the financial reporting process at the Company and did not participate in and was not aware of any of the Phase II–covered accounting practices at the time these practices were occurring.

 

With respect to the allegations of excess/unsupported accruals described above, the Audit Committee found that:

 

|   | **•** | During fiscal 1996 through August 2001, Roberts implemented Kreinberg’s directives to increase various trade accrual accounts to excessive/unsupported levels. It was determined in the context of Phase II that some of these accruals were appropriately supported while others were excessive; |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | Shortly after Kissman’s arrival at the Company in late 2001, Roberts informed him that there were excess/unsupported accruals reflected in the Company’s books and gave him a folder containing the above-mentioned spreadsheets. The spreadsheets had not been shown to the Company’s independent registered public accounting firm; nor were                            they shown to that firm subsequent to being provided to Kissman. Kissman implemented substantial downward revisions to certain accrual accounts during the fourth quarter of fiscal 2001, but did not entirely eliminate excess/unsupported accruals and reserves; |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | With respect to fiscal 2002, Kissman delegated the task of addressing any remaining excess/unsupported accruals and reserves to his immediate subordinate and did not effectively follow up with respect to that issue. As a result, the Company continued to have significant excess/unsupported accruals on its books during fiscal 2002 (fiscal year ended                            January 31, 2003); and |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

x

 

----

|   | **•** | Kissman did not knowingly misrepresent any issue related to accruals to the Company’s independent registered public accounting firm during the fiscal 2001 or 2002 audits or direct his subordinates to provide any false or inaccurate information to the independent registered public accounting firm. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

With respect to improper deferral of revenue, the Audit Committee found that:

 

|   | **•** | At the conclusion of fiscal 1998 (year ended January 31, 1999), Kreinberg directed Roberts to reverse $775,000 of the revenues recognized during the fourth quarter of fiscal 1998 with respect to an inter-company contract between the Company and CNS-Israel (a wholly owned subsidiary of Comverse Technology, Inc.) and she did so. Pursuant to                            Kreinberg’s direction, Roberts also prepared a written analysis for presentation to the Company’s independent registered public accounting firm during the fiscal 1998 audit supporting the improper deferral; |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | Kreinberg also directed Roberts to defer $412,000 in revenues on another inter-company contract with CNS-Israel during the fourth quarter of 1998, notwithstanding that the Company had already issued an invoice in that amount to CNS-Israel and that there was no legitimate justification for the deferral of revenue. Roberts also implemented this                            directive; and |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | Beginning in October 1999 and continuing through April 2001, Kreinberg directed Roberts and her subordinate that the recognition of revenue on certain shipments from the Company to CNS-Israel was to be “pushed” into subsequent quarters. They implemented his directives. The “pushing” of the revenue connected with these                            shipments into subsequent quarters was contrary to the Company’s policy of recognizing revenue upon shipment of the product to the customer and was not appropriate from an accounting standpoint. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The Company’s Board of Directors unanimously approved various remedial measures recommended by the Audit Committee with respect to the accounting practices investigation including:

 

|   | **•** | On a quarterly basis, the Company shall evaluate its financial reporting and accounting processes with an emphasis upon its documentation of the support/rationale for various accrual accounts and its documentation of the justification for deferral of revenues from one quarter to the next. The results of the review shall be reported to the Audit                            Committee and any internal control weaknesses that are identified shall be addressed by the Company’s management pursuant to the recommendations of the Audit Committee; |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | The involvement of the CEO and General Counsel in the financial reporting process shall increase as a result of scheduled meetings with the Company’s independent registered public accounting firm audit team at the inception and again at the conclusion of each annual audit for the purpose of discussing any issues or information of relevance to                            the Company’s financial statements and financial reporting processes; |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | The Company shall commence a program geared toward reemphasizing the importance of training and ethical conduct in all aspects of its operations, which shall include education and training to all personnel involved in the financial reporting process or accounting-related functions; |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

xi

 

----

 

|   | **•** | The General Counsel shall report directly to the Chief Executive Officer and following a reasonable transition period determined by the Chief Executive Officer subject to the oversight of the Audit Committee, the General Counsel shall be accorded the status of an Executive Officer of the Company; |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | Kissman shall attend continuing education at his own expense; and |
|--------|------------|-------------------------------------------------------------------|

 

|   | **•** | Roberts resigned from her position at the Company in October 2007 in connection with the Audit Committee’s findings. |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------|

 

In response to the above remedial measures approved by the Board, the Company has implemented the following changes to address these issues:

 

|   | **•** | During the Company’s restatement process, Audit Committee meetings were scheduled on a weekly basis with management and the independent registered public accounting firm in attendance; |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | After the Company becomes current in its financial reporting obligations, Audit Committee meetings will continue to be held for a review of financial reporting and accounting processes no less than quarterly; |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | During its regular meetings the Audit Committee addresses issues relating to the Company’s finance reporting and accounting processes and related disclosure control issues; |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | The CEO and the General Counsel are included in regularly scheduled Audit Committee meetings with its independent registered public accounting firm; |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | The Company has reviewed, updated and reissued its new code of ethics and business procedures and will conduct bi-yearly training on appropriate business and ethical conduct; |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | A General Counsel has been retained and reports directly to the Chief Executive Officer; and |
|--------|------------|----------------------------------------------------------------------------------------------|

 

|   | **•** | Kissman attended continuing education at his own expense. |
|--------|------------|-----------------------------------------------------------|

 

**Results and Conclusions of Revenue Recognition Practices Evaluation**

 

In connection with the preparation of its financial statements, and independent of the Audit Committee’s Investigations, in November, 2007, the Company commenced an evaluation of its software revenue recognition practices for complex contractual arrangements under SOP No. 97-2. The results of the Company’s evaluation were disclosed to the Audit Committee and the Audit Committee            specifically considered the Company’s revenue recognition practices under SOP No. 97-2. Directed by the Audit Committee, Dickstein and AlixPartners LLP, reviewed documentary evidence and interviewed Lisa Roberts, who served as Ulticom’s highest ranking and second highest ranking financial officer during the period when the accounting treatment was first developed and implemented. The Audit Committee concluded that if Ulticom misapplied SOP 

 

xii

 

----

No. 97-2 with respect to the recognition of revenue on the third-party software contracts at issue, the misapplication was a good faith mistake and not part of any attempt to manipulate or distort the Company’s financial results.

 

The Company determined that under SOP No. 97-2, it should have deferred a portion of the revenues that were recognized under certain customer contracts; specifically, the fair value of the first-year software maintenance included under such contracts should have been deferred and amortized to revenues over the initial maintenance period, generally twelve months. The Company has also determined that            revenue related to the sale of software development kits should have been deferred and amortized to revenues over the estimated period of future customer software deployments and related maintenance. The errors resulting from improper application of SOP No. 97-2 impacted fiscal years beginning with the fiscal year ended January 31, 1999 and ending with the fiscal year ended January 31, 2005. The cumulative effect of these errors for these fiscal years resulted in overstatements of            revenues and cost of revenues of approximately $7.5 million and $0.4 million, respectively, or a net overstatement of income before income tax expense of approximately $7.1 million. Including related income tax effects, the net cumulative adjustment to properly reflect the deferral of revenue and costs in accordance with SOP No. 97-2 was a reduction of retained earnings as of February 1, 2005 of approximately $4.4 million.

 

**Results and Conclusions of Depreciation Expense Recognition Evaluation**

 

During the fourth quarter of fiscal year 2007, independent of the Audit Committee’s Investigations, the Company determined that certain errors had been made in its recognition of depreciation expense for each of the fiscal years from 1999 to 2004. These errors primarily resulted in the Company reflecting more depreciation expense in the first year the assets were placed in service than is            permitted under GAAP and their correction required a cumulative increase of approximately $141,000, net of related income tax effects, in the Company’s retained earnings as of February 1, 2005.

 

**SEC Enforcement Settlement and Final Judgment**

 

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 Securities Exchange Act of 1934 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 Securities Exchange Act of 1934 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 Securities Exchange Act of 1934 and SEC Rule 14a-9, which prohibit any solicitation by means of a proxy statement or other written or oral |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

xiii

 

----

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, the Company 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 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 Securities Exchange Act of 1934 and SEC Rules 13a-1, 13a-11, 13a-13 and 14a-9. The Final Judgment also orders the Company to become current in its reporting obligations under Section 13(a) of the Securities Exchange Act of 1934 on or before November 9, 2009. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

xiv

 

----

**PART I – FINANCIAL INFORMATION**

 

| **ITEM 1.** | **CONDENSED CONSOLIDATED FINANCIAL STATEMENTS****.** |
|-------------|------------------------------------------------------|

 

**ULTICOM, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

**(In thousands, except share data)**

 

|                                                                                                                                                                      |   |   | **January 31,** |   |   |   | **July 31,** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|-----------------|--------|--------|--------|--------------|--------|
|                                                                                                                                                                      |   |   | **2009***       |   |   |   | **2009**     |   |
| **ASSETS**                                                                                                                                                                |   |   |            |   |   |   |         |   |
| Current Assets:                                                                                                                                                           |   |   |            |   |   |   |         |   |
| Cash and cash equivalents                                                                                                                                                 |   | $      | 206,771         |   |   | $      | 17,917       |   |
| Short-term investments                                                                                                                                                    |   |   | 75,224          |   |   |   | 64,979       |   |
| Accounts receivable, net                                                                                                                                                  |   |   | 11,532          |   |   |   | 10,659       |   |
| Inventories                                                                                                                                                               |   |   | 1,101           |   |   |   | 1,234        |   |
| Prepaid expenses and other current assets                                                                                                                                 |   |   | 8,059           |   |   |   | 5,957        |   |
| Total current assets                                                                                                                                                      |   |   | 302,687         |   |   |   | 100,746      |   |
| Property and equipment, net                                                                                                                                               |   |   | 2,841           |   |   |   | 2,317        |   |
| Other assets                                                                                                                                                              |   |   | 9,423           |   |   |   | 10,444       |   |
| Total assets                                                                                                                                                              |   | $      | 314,951         |   |   | $      | 113,507      |   |
|                                                                                                                                                                      |   |   |            |   |   |   |         |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                            |   |   |            |   |   |   |         |   |
| Current Liabilities:                                                                                                                                                      |   |   |            |   |   |   |         |   |
| Accounts payable and accrued expenses                                                                                                                                     |   | $      | 8,570           |   |   | $      | 6,707        |   |
| Deferred revenue                                                                                                                                                          |   |   | 2,619           |   |   |   | 4,596        |   |
| Total current liabilities                                                                                                                                                 |   |   | 11,189          |   |   |   | 11,303       |   |
| Long-term Liabilities:                                                                                                                                                    |   |   |            |   |   |   |         |   |
| Deferred revenue                                                                                                                                                          |   |   | 4,654           |   |   |   | 4,248        |   |
| Unrecognized income tax benefits                                                                                                                                          |   |   | 2,273           |   |   |   | 2,399        |   |
| Other long-term liabilities                                                                                                                                               |   |   | 369             |   |   |   | 94           |   |
| Total liabilities                                                                                                                                                         |   |   | 18,485          |   |   |   | 18,044       |   |
|                                                                                                                                                                      |   |   |            |   |   |   |         |   |
| Commitments and Contingencies                                                                                                                                             |   |   |            |   |   |   |         |   |
|                                                                                                                                                                      |   |   |            |   |   |   |         |   |
| Shareholders’ Equity:                                                                                                                                               |   |   |            |   |   |   |         |   |
| Common stock, no par value, 200,000,000 shares authorized, 43,590,105 and 43,926,643 shares issued and outstanding as of January 31, 2009 and July 31, 2009, respectively |   |   | -               |   |   |   | -            |   |
| Additional paid-in capital                                                                                                                                                |   |   | 230,373         |   |   |   | 96,842       |   |
| Retained earnings (accumulated deficit)                                                                                                                                   |   |   | 66,775          |   |   |   | (512         | )      |
| Accumulated other comprehensive loss                                                                                                                                      |   |   | (682            | )      |   |   | (867         | )      |
| Total shareholders’ equity                                                                                                                                          |   |   | 296,466         |   |   |   | 95,463       |   |
| Total liabilities and shareholders’ equity                                                                                                                          |   | $      | 314,951         |   |   | $      | 113,507      |   |
|                                                                                                                                                                      |   |   |            |   |   |   |         |   |

 

* The Condensed Consolidated Balance Sheet as of January 31, 2009 has been derived from the Company’s audited Consolidated Balance Sheet as of that date.

 

The accompanying notes are an integral part of these unaudited financial statements.

 

|  | 1 |
|--|---|

 

----

**ULTICOM, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

**(In thousands, except per share data)**

 

|                                | **Three months ended** |   |   | **Six months ended** |   |
|-------------------------------------|------------------------|--------|--------|----------------------|--------|
|                                | **July 31,**           |   |   | **July 31,**         |   |   | **July 31,** |   |   | **July 31,** |   |
|                                | **2008**               |   |   | **2009**             |   |   | **2008** |   |   | **2009** |   |
| Revenues from:                      |                   |   |   |                 |   |   |   |   |   |   |   |   |   |   |   |
| Products                            | $                      | 13,021 |   |                 | $      | 8,527 |   |   | $ | 26,064 |   |   | $ | 16,831 |   |
| Services                            |                   | 2,738  |   |                 |   | 3,337 |   |   |   | 5,585 |   |   |   | 6,589 |   |
| Total revenues                      |                   | 15,759 |   |                 |   | 11,864 |   |   |   | 31,649 |   |   |   | 23,420 |   |
|                                |                   |   |   |                 |   |   |   |   |   |   |   |   |   |   |   |
| Cost of revenues:                   |                   |   |   |                 |   |   |   |   |   |   |   |   |   |   |   |
| Product costs                       |                   | 2,696  |   |                 |   | 1,628 |   |   |   | 4,959 |   |   |   | 3,435 |   |
| Service costs                       |                   | 1,575  |   |                 |   | 1,262 |   |   |   | 3,222 |   |   |   | 2,473 |   |
| Total cost of revenues              |                   | 4,271  |   |                 |   | 2,890 |   |   |   | 8,181 |   |   |   | 5,908 |   |
|                                |                   |   |   |                 |   |   |   |   |   |   |   |   |   |   |   |
| Gross profit                        |                   | 11,488 |   |                 |   | 8,974 |   |   |   | 23,468 |   |   |   | 17,512 |   |
|                                |                   |   |   |                 |   |   |   |   |   |   |   |   |   |   |   |
| Operating expenses:                 |                   |   |   |                 |   |   |   |   |   |   |   |   |   |   |   |
| Research and development            |                   | 4,318  |   |                 |   | 3,367 |   |   |   | 8,890 |   |   |   | 6,857 |   |
| Selling, general and administrative |                   | 8,477  |   |                 |   | 6,732 |   |   |   | 19,821 |   |   |   | 14,077 |   |
|                                |                   |   |   |                 |   |   |   |   |   |   |   |   |   |   |   |
| Loss from operations                |                   | (1,307 | )      |                 |   | (1,125 | ) |   |   | (5,243 | ) |   |   | (3,422 | ) |
| Interest and other income, net      |                   | 2,097  |   |                 |   | 373 |   |   |   | 4,121 |   |   |   | 1,226 |   |
|                                |                   |   |   |                 |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss) before income taxes   |                   | 790    |   |                 |   | (752 | ) |   |   | (1,122 | ) |   |   | (2,196 | ) |
| Income tax expense (benefit)        |                   | 270    |   |                 |   | (237 | ) |   |   | (384 | ) |   |   | (770 | ) |
| Net income (loss)                   | $                      | 520    |   |                 | $      | (515 | ) |   | $ | (738 | ) |   | $ | (1,426 | ) |
|                                |                   |   |   |                 |   |   |   |   |   |   |   |   |   |   |   |
| Earnings (loss) per share:          |                   |   |   |                 |   |   |   |   |   |   |   |   |   |   |   |
| Basic                               | $                      | 0.01   |   |                 | $      | (0.01 | ) |   | $ | (0.02 | ) |   | $ | (0.03 | ) |
| Diluted                             | $                      | 0.01   |   |                 | $      | (0.01 | ) |   | $ | (0.02 | ) |   | $ | (0.03 | ) |
|                                |                   |   |   |                 |   |   |   |   |   |   |   |   |   |   |   |

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these unaudited financial statements.

 

|  | 2 |
|--|---|

 

----

 

**ULTICOM, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

**(In thousands)**

 

|                                                                                      |   |   | **Six months ended** |   |
|-------------------------------------------------------------------------------------------|--------|--------|----------------------|--------|
|                                                                                      |   |   | **July 31,**         |   |   |   | **July 31,** |   |
|                                                                                      |   |   | **2008**             |   |   |   | **2009** |   |
| **Cash flows from operating activities:**                                                 |   |   |                 |   |   |   |   |   |
| Net loss                                                                                  |   | $      | (738                 | )      |   | $ | (1,426 | ) |
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |   |   |                 |   |   |   |   |   |
| Depreciation and amortization                                                             |   |   | 1,095                |   |   |   | 808 |   |
| Deferred income taxes                                                                     |   |   | (280                 | )      |   |   | (852 | ) |
| Share-based payment expense                                                               |   |   | 830                  |   |   |   | 356 |   |
| Net realized gains on sales of investments                                                |   |   | (475                 | )      |   |   | (128 | ) |
| Changes in operating assets and liabilities:                                              |   |   |                 |   |   |   |   |   |
| Accounts receivable, net                                                                  |   |   | 1,115                |   |   |   | 874 |   |
| Inventories                                                                               |   |   | 902                  |   |   |   | (133 | ) |
| Prepaid expenses and other current assets                                                 |   |   | (3,422               | )      |   |   | 2,386 |   |
| Accounts payable and accrued expenses                                                     |   |   | (1,707               | )      |   |   | (2,004 | ) |
| Deferred revenue                                                                          |   |   | 719                  |   |   |   | 1,571 |   |
| Other, net                                                                                |   |   | 569                  |   |   |   | (628 | ) |
| Net cash provided by (used in) operating activities                                       |   |   | (1,392               | )      |   |   | 824 |   |
|                                                                                      |   |   |                 |   |   |   |   |   |
| **Cash flows from investing activities:**                                                 |   |   |                 |   |   |   |   |   |
| Purchases of property and equipment                                                       |   |   | (694                 | )      |   |   | (163 | ) |
| Purchases of investments                                                                  |   |   | (40,005              | )      |   |   | (67,468 | ) |
| Maturities and sales of investments                                                       |   |   | 5,475                |   |   |   | 77,330 |   |
| Net cash provided by (used in) investing activities                                       |   |   | (35,224              | )      |   |   | 9,699 |   |
|                                                                                      |   |   |                 |   |   |   |   |   |
| **Cash flows from financing activities:**                                                 |   |   |                 |   |   |   |   |   |
| Payment of special dividend                                                               |   |   | -                    |   |   |   | (199,643 | ) |
| Net cash used in financing activities                                                     |   |   | -                    |   |   |   | (199,643 | ) |
|                                                                                      |   |   |                 |   |   |   |   |   |
| Effect of exchange rate changes on cash and cash equivalents                              |   |   | 5                    |   |   |   | 266 |   |
| **Net decrease in cash and cash equivalents**                                             |   |   | (36,611              | )      |   |   | (188,854 | ) |
|                                                                                      |   |   |                 |   |   |   |   |   |
| **Cash and cash equivalents, beginning of period**                                        |   |   | 278,963              |   |   |   | 206,771 |   |
| **Cash and cash equivalents, end of period**                                              |   | $      | 242,352              |   |   | $ | 17,917 |   |
|                                                                                      |   |   |                 |   |   |   |   |   |

 

 

The accompanying notes are an integral part of these unaudited financial statements.

 

|  | 3 |
|--|---|

 

----

**ULTICOM, INC. AND SUBSIDIARIES**

**Notes to Condensed Consolidated Financial Statements**

**(Unaudited)**

 

**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 service enabling signaling software for fixed, mobile, and internet communications software and hardware for use in the communications            industry.

 

**Basis of Presentation -**The accompanying financial information should be read in conjunction with the consolidated financial statements, including the notes thereto, contained in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2009. The condensed consolidated financial information included herein is unaudited; however, such information            reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for a fair statement of results for the interim periods. The results of operations for the three and six months ended July 31, 2008 and 2009 are not necessarily indicative of the results to be expected for the full year. In preparing the accompanying financial information, the Company has evaluated all subsequent events through October 30, 2009, the date            of filing of this Quarterly Report on Form 10-Q.

 

**Adoption of Accounting Pronouncements -**Effective February 1, 2009, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”) that relate to nonfinancial assets and nonfinancial liabilities. SFAS No. 157 applies to other accounting            pronouncements that require or permit fair value measurements, defines fair value based upon an exit price model, establishes a framework for measuring fair value and expands the applicable disclosure requirements. SFAS No. 157 establishes 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. Market price observability is impacted by a number of factors, including the            type of asset or liability and their characteristics. This hierarchy prioritizes the inputs into three broad levels as follows:

 

*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.

 

The application of SFAS No. 157 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.

|  | 4 |
|--|---|

 

----

 

In April 2009, the Financial Accounting Standards Board (“FASB”) issued the following three FASB Staff Positions (“FSP”) that are intended to provide additional application guidance and enhance disclosures about fair value measurements and impairments of securities: 

|   | **•** | FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4”); |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2”); and |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures About Fair Value of Financial Instruments” (“FSP FAS 107-1”). |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------|

FSP FAS 157-4 clarifies the objective and method of fair value measurement even when there has been a significant decrease in market activity for the asset being measured. FSP FAS 115-2 establishes 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. FSP            FAS 107-1 expands the fair value disclosures required for all financial instruments within the scope of SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” to interim periods. All of these FSPs were effective as of the beginning of the Company’s fiscal quarter ended July 31, 2009 and their adoption did not have a material impact on the Company consolidated financial statements and related disclosures. 

 

Effective February 1, 2009, the Company adopted SFAS No. 141(R), "Business Combinations" ("SFAS No. 141(R)"). SFAS No. 141(R) replaces SFAS No. 141, "Business Combinations,” but retains the requirement that the purchase method of accounting for acquisitions be used for all business combinations. As it relates to the Company, SFAS No. 141(R) became effective for any business combination with an            acquisition date occurring on or after February 1, 2009. As the Company did not complete an acquisition during the six months ended July 31, 2009, the adoption of SFAS No. 141(R) has had no impact on the Company’s consolidated financial statements.

 

Effective February 1, 2009, the Company adopted FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 provides that all outstanding unvested share-based payment awards that contain rights to non-forfeitable dividends participate in the undistributed            earnings with the common shareholders and are therefore participating securities. Companies with participating securities are required to apply the two-class method in calculating basic and diluted earnings per share, the effects of which must be applied retrospectively. The effect of applying the guidance of FSP EITF 03-6-1 did not have a material effect on the Company’s basic and diluted earnings per share for all periods presented in the condensed consolidated statements of            operations.

 

In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS No. 165"). SFAS No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. Effective as of the beginning of the Company’s fiscal quarter ended July 31, 2009, the Company’s adoption of SFAS No. 165 did            not have a material impact on the Company’s consolidated financial statements and notes thereto.

 

|  | 5 |
|--|---|

 

----

**Recent Accounting Pronouncements -**In September 2009, the FASB ratified the consensuses reached by the Emerging Issues Task Force (“EITF”) regarding the following issues involving revenue recognition:

 

|   | **•** | Issue No. 08-1, “Revenue Arrangements with Multiple Deliverables” (“EITF No. 08-1”); and |
|--------|------------|------------------------------------------------------------------------------------------------------------------|

|   | **•** | Issue No. 09-3, “Certain Revenue Arrangements That Include Software Elements” (“EITF No. 09-3”). |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------|

EITF No. 08-1 applies to multiple-deliverable revenue arrangements that are currently within the scope of EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF No. 08-1 also:

 

|   | **•** | 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. |
|--------|------------|--------------------------------------------------------------------------------------------|

EITF No. 09-3 applies to multiple-deliverable revenue arrangements that contain both software and hardware elements, focusing on determining which revenue arrangements are within the scope of the software revenue guidance in AICPA Statement of Position No. 97-2, “Software Revenue Recognition.” EITF No. 09-3 removes tangible products from the scope of the 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 accounting guidance in EITF No. 08-1 and EITF No. 09-3 should be applied on a prospective basis for 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 these issues on a retrospective basis. The            Company is assessing the potential impact that the application of EITF No. 08-1 and EITF No. 09-3 may have on its consolidated financial statements and disclosures.

 

| **2.** | **SPECIAL DIVIDEND** |
|--------|----------------------|

 

On April 20, 2009, the Company paid a special cash dividend of $4.58 per share to its shareholders of record as of the close of business on April 13, 2009, totaling approximately $199.6 million. The total amount of the dividend was approximately $199.8 million, which includes approximately $0.2 million of dividends to be paid to holders of deferred stock units awarded under the Company’s equity            incentive plan upon each issuance of common stock subject to such awards. The Company’s retained earnings as of the date of the dividend was approximately $66.0 million. As the amount of the dividend exceeded the Company’s retained 

 

|  | 6 |
|--|---|

 

----

earnings as of the date of the dividend, the remaining portion of the dividend, approximately $133.8 million, reduced additional paid-in capital. The Company’s accumulated deficit as of July 31, 2009 represents the net loss of the Company since the date of the dividend.

 

| **3.** | **SHORT-TERM INVESTMENTS** |
|--------|----------------------------|

 

As of July 31, 2009, all of the Company’s short-term investments were marketable debt securities that were classified as available-for-sale and summarized in the following table:

 

| **(Amounts in thousands)**

 

  | **Cost** |   | **Gross Unrealized Gains** |   | **Gross Unrealized Losses** |   | **Estimated Fair Value** |   | **Ranking of Market Price Observability** |
|--------------------------------------------|----------|--------|----------------------------|--------|-----------------------------|--------|--------------------------|--------|-------------------------------------------|
| U.S. governmental agency obligations       | $        | 65,026 |                       | $      | 266                         |   | $                        | (313   | )                                         | $ | 64,979 |   | Level 2 |
|                                            |          |        |                            |        |                             |        |                          |        |                                           |  |  |  |  |

The Company’s measurements of the fair values of these financial instruments are performed on a recurring basis and, as of July 31, 2009, were based on non-binding market consensus prices that can be corroborated with observable market data. Accordingly, the fair value measurements of these financial instruments were classified as Level 2 in accordance with SFAS No.            157.

| **4.** | **INTEREST AND OTHER INCOME, NET** |
|--------|------------------------------------|

 

Interest and other income, net consisted of the following:

 

| **(Amounts in thousands)** | **Three months ended** |   |   | **Six months ended** |   |
|----------------------------|------------------------|--------|--------|----------------------|--------|

|                                        | **July 31,** |   |   | **July 31,** |   |   | **July 31,** |   |   | **July 31,** |   |
|---------------------------------------------|--------------|--------|--------|--------------|--------|--------|--------------|--------|--------|--------------|--------|
|                                        | **2008**     |   |   | **2009**     |   |   | **2008**     |   |   | **2009**     |   |
|                                        |         |   |   |         |   |   |         |   |   |         |   |   |   |   |   |
| Interest income                             | $            | 1,606  |   |         | $      | 422    |         |   | $      | 3,650        |   |   | $ | 1,159 |   |
| Realized gains on sales of investments, net |         | 475    |   |         |   | 4      |         |   |   | 475          |   |   |   | 128 |   |
| Other                                       |         | 16     |   |         |   | (53    | )            |   |   | (4           | )      |   |   | (61 | ) |
|                                        |         |   |   |         |   |   |         |   |   |         |   |   |   |   |   |
|                                        | $            | 2,097  |   |         | $      | 373    |         |   | $      | 4,121        |   |   | $ | 1,226 |   |

| **5.** | **COMPREHENSIVE INCOME** |
|--------|--------------------------|

 

For the three and six months ended July 31, 2008 and 2009, comprehensive income (loss) consisted of the following:

 

| **(Amounts in thousands)**                                                             | **Three months ended** |   |   | **Six months ended** |   |
|----------------------------------------------------------------------------------------|------------------------|--------|--------|----------------------|--------|
|                                                                                   | **July 31,**           |   |   | **July 31,**         |   |   | **July 31,** |   |   | **July 31,** |   |
|                                                                                   | **2008**               |   |   | **2009**             |   |   | **2008** |   |   | **2009** |   |
|                                                                                   |                   |   |   |                 |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                                                      | $                      | 520    |   |                 | $      | (515 | ) |   | $ | (738 | ) |   | $ | (1,426 | ) |
| Unrealized losses on investments, net of reclassification adjustments and income taxes |                   | (233   | )      |                 |   | (187 | ) |   |   | (196 | ) |   |   | (317 | ) |
| Foreign currency translation adjustments                                               |                   | (64    | )      |                 |   | 80 |   |   |   | 81 |   |   |   | 132 |   |
|                                                                                   |                   |   |   |                 |   |   |   |   |   |   |   |   |   |   |   |
| Total comprehensive income (loss)                                                      | $                      | 223    |   |                 | $      | (622 | ) |   | $ | (853 | ) |   | $ | (1,611 | ) |

 

Upon the sale of an available-for-sale investment security, the cumulative unrealized gain or loss associated with the sold security that was previously recorded in accumulated other comprehensive income (loss) is reclassified into the condensed consolidated statement of operations as a realized gain (loss). For the three months ended July 31, 2008, realized gains, net 

 

|  | 7 |
|--|---|

 

----

of applicable income taxes, reclassified into net income were approximately $0.3 million. For the three months ended July 31, 2009, realized gains, net of applicable income taxes, reclassified into net income were less than $0.1 million. For the six months ended July 31, 2008 and 2009, realized gains, net of applicable income taxes, reclassified into net income were approximately $0.3            million and $0.1 million, respectively.

 

| **6.** | **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 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 earnings (loss) per share are as follows:

 

| **(Amounts in thousands)** | **Three months ended** |   |   | **Six months ended** |   |
|----------------------------|------------------------|--------|--------|----------------------|--------|
|                       | **July 31,**           |   |   | **July 31,**         |   |   | **July 31,** |   |   | **July 31,** |   |

|                                      | **2008** |   |   | **2009** |   |   | **2008** |   |   | **2009** |   |
|-------------------------------------------|----------|--------|--------|----------|--------|--------|----------|--------|--------|----------|--------|
|                                      |     |   |   |     |   |   |     |   |   |     |   |   |   |   |   |
| Basic share amounts                       |     | 43,498 |   |     |   | 43,607 |     |   |   | 43,496   |   |   |   | 43,552 |   |
| Effect of dilutive potential shares:      |     |   |   |     |   |   |     |   |   |     |   |   |   |   |   |
| Options                                   |     | 290    |   |     |   | -      |     |   |   | -        |   |   |   | - |   |
| Restricted stock and deferred stock units |     | 170    |   |     |   | -      |     |   |   | -        |   |   |   | - |   |
| Diluted share amounts                     |     | 43,958 |   |     |   | 43,607 |     |   |   | 43,496   |   |   |   | 43,552 |   |

 

For purposes of computing basic earnings (loss) per share, any nonvested shares of restricted stock that have been issued by the Company and which vest solely on the basis of a service condition 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 deferred stock units            (“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 three and six months ended July 31, 2008 excluded outstanding stock options totaling approximately 2.2 million and 3.1 million, respectively, and diluted loss per share for each of the three and six month periods ended July 31, 2009 excluded outstanding stock options totaling approximately 3.0            million, as these potential common shares would have had an antidilutive effect. Also excluded from the computation of diluted loss per share for each of the three and six month periods ended July 31, 2009 and for the six months ended July 31, 2008 were potential common shares of approximately 0.4 million and 0.3 million, respectively, associated with nonvested restricted stock and DSUs, as these potential common shares would have had an antidilutive effect.

 

| **7.** | **RELATED PARTY TRANSACTIONS** |
|--------|--------------------------------|

 

The Company sells products and provides services to other subsidiaries of Comverse Technology, Inc. For the three months ended July 31, 2008 and 2009, included in the Company’s revenues were sales to subsidiaries of Comverse Technology, Inc. of approximately $1.4 million and $0.3 million, respectively. For the six months ended July 31, 2008 and 2009, included in the Company’s revenues were            sales to subsidiaries of Comverse Technology, Inc. of approximately $2.6 million and $0.8 million, respectively.

 

As of January 31, 2009 and July 31, 2009, the amount due from subsidiaries of Comverse Technology, Inc. was approximately $0.1 million and $0.2 million, respectively.

 

8

 

 

 

| **8.** | **SHARE-BASED PAYMENT TRANSACTIONS** |
|--------|--------------------------------------|

 

**Stock Option Modifications**

 

Effective as of April 21, 2009, the exercise prices of outstanding options to purchase 2,982,104 shares 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 of $4.58 per share. 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 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:

 

|                     | **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 |   |

 

For the options with an original exercise price of $3.97 per share, a full reduction of $4.58 per share was not possible in order to preserve the option’s characterization under federal income tax law. The exercise price for these options was therefore reduced by $3.47 to $0.50 per share.

**Equity Award Grants**

 

In February 2009, each independent director of the Company’s Board of Directors was awarded 5,500 deferred stock units (“DSUs”) for their service during the fiscal year ended January 31, 2010. The DSUs vest 25% on April 30, 2009; 25% on July 31, 2009; 25% on October 31, 2009; and 25% on January 31, 2010. 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 condensed consolidated statement of operations for the six months ended July 31, 2009 on a pro rata basis in proportion to the number of vested DSUs as of July 31, 2009.

 

In May 2009, executive officers of the Company were granted equity incentive awards of 336,538 shares of restricted common stock. Restricted stock awards have all the rights and privileges of the Company’s common stock, subject to certain restrictions and forfeiture provisions. One-half of each executive officer’s restricted stock award vests over time, while vesting of the remaining half            is based on the achievement of defined performance targets during fiscal year 2009. The time-based portion of the restricted stock awards vests in three equal annual installments beginning on May 5, 2010, 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 the grant, share-based payment expense related to the time-based portion of these awards totaled approximately $0.4            million, which is recognized in the consolidated statement of operations pro-rata over the vesting period of the grant. 

 

|  | 9 |
|--|---|

 

----

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 performance-based portion of these awards totaled approximately $0.4 million. As of the end of the Company’s fiscal quarter ended July 31, 2009, the Company determined that satisfaction of the award’s performance conditions, and therefore vesting of            one-half of each award, was not a probable outcome. Accordingly, no share-based payment expense was recognized for the portion of these awards containing performance conditions during the three and six months ended July 31, 2009. If the performance targets are met, the performance-based portion of the awards vests in three equal annual installments beginning on May 5, 2010, subject to each executive’s continued employment on such vesting dates. 

 

| **9.** | **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. For all periods presented in the condensed consolidated statements of operations, the Company’s income tax expense (benefit) reflects current and deferred income taxes associated with each of these taxing jurisdictions. During the three months ended July 31,            2009, 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 condensed consolidated balance sheet. Additional changes in the Company’s unrecognized income tax benefit obligation within the next twelve months are not expected            to be material. 

 

| **10.** | **COMMITMENTS AND CONTINGENCIES** |
|---------|-----------------------------------|

 

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 Explanatory Note immediately preceding Part I, Item 1 of this Quarterly Report on Form 10-Q. 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, our current director and officer liability insurance does not provide coverage with respect to our historical stock option granting practices. 

 

**SEC Enforcement Settlement and Final Judgment**

 

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; |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------|

|  | 10 |
|--|----|

 

----

 

|   | 2) | Section 13(a) of the Securities Exchange Act of 1934 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 Securities Exchange Act of 1934 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 Securities Exchange Act of 1934 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, the Company 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 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 Securities Exchange Act of 1934 and SEC Rules 13a-1, 13a-11, 13a-13 and 14a-9. The Final Judgment also orders the Company to become current in its reporting obligations under Section 13(a) of the Securities Exchange Act of 1934 on or before November 9, 2009. 

 

 

 

 

 

 

 

 

 

 

 

|  | 11 |
|--|----|

 

----

| **ITEM 2.** | **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 the Fiscal Year 2008 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” of the Fiscal Year 2008 Form 10-K.

 

**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 and short-term investments. |
|--------|------------|----------------------------------------------------------------|

 

During the third quarter of fiscal year 2008, the Company’s financial results began to be adversely affected by the ongoing slowdown of infrastructure spending by communication service providers and by 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 is expected to be approximately $1.3 million lower than the comparable amount for fiscal year 2008.

 

Revenues for the three and six months ended July 31, 2009 declined 25% and 26%, respectively, as compared to the same periods in fiscal year 2008. While the Company has seen modest improvement in quarterly revenues subsequent to the third quarter of fiscal year 2008, management believes that the timing or extent of any recovery in quarterly revenues is uncertain. As a result, 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.

 

|  | 12 |
|--|----|

 

----

For the fiscal quarters and six months ended July 31, 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. These expenses are expected to decrease during the fourth quarter of fiscal year 2009.

 

On April 20, 2009, the Company paid a special cash dividend of $4.58 per share to its shareholders of record as of the close of business on April 13, 2009. The total amount of the dividend was 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 will be significantly lower in fiscal quarters subsequent to the first fiscal quarter of 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 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. |
|--------|------------|------------------------------------------------------------------------------------------------|

 

**RESULTS OF OPERATIONS**

 

**Three Months Ended July 31, 2009 Compared to Three Months Ended July 31, 2008**

 

*Revenues.*

 

|                 | **Three Months Ended** |     |         |
|----------------------|------------------------|----------|--------------|
| ***(in thousands)*** | **July 31,**           |     | **July 31,** |   |   |
|                      |                        | **2008** |              |  |  | **2009** |  |  |  | **Change** |  |
| Product revenues     | $                      | 13,021   |         |   | $ | 8,527 |   |   | $ | (4,494 | ) |
| Service revenues     |                   | 2,738    |         |   |   | 3,337 |   |   |   | 599 |   |
| Total revenues       | $                      | 15,759   |         |   | $ | 11,864 |   |   | $ | (3,895 | ) |

 

13

 

 

installed base of software licenses continued to grow, consequently generating higher levels of fees for software maintenance and support.

 

*Cost of Revenues.*

 

|                                       | **Three Months Ended** |     |         |
|--------------------------------------------|------------------------|----------|--------------|
| ***(dollar amounts in thousands)***        | **July 31,**           |     | **July 31,** |   |   |
|                                            |                        | **2008** |              |  |  | **2009** |  |  |  | **Change** |  |
|                                            |                        |          |              |  |  |  |  |  |  |  |  |
| Product costs                              | $                      | 2,696    |         |   | $ | 1,628 |   |   | $ | (1,068 | ) |
| Service costs                              |                   | 1,575    |         |   |   | 1,262 |   |   |   | (313 | ) |
| Total cost of revenues                     | $                      | 4,271    |         |   | $ | 2,890 |   |   | $ | (1,381 | ) |
|                                       |                   |     |         |   |   |   |   |   |   |   |   |
| Gross margin (as a percentage of revenues) |                   | 73%      |         |   |   | 76% |   |   |   |   |   |

 

Lower materials and production costs from the lower volume of sales orders resulted in an approximate $0.7 million decrease in cost of product revenues. Personnel and other labor-related expenses included in total cost of revenues were lower by approximately $0.5 million, primarily as a result of the Company employing fewer production personnel during the three months ended July 31, 2009, as compared            to the same period in fiscal year 2008.

 

*Research and Development Expenses*.

 

|                                | **Three Months Ended** |     |         |
|-------------------------------------|------------------------|----------|--------------|
| ***(dollar amounts in thousands)*** | **July 31,**           |     | **July 31,** |   |   |
|                                     |                        | **2008** |              |  |  | **2009** |  |  |  | **Change** |  |
|                                     |                        |          |              |  |  |  |  |  |  |  |  |
| Research and development expenses   | $                      | 4,318    |         |   | $ | 3,367 |   |   | $ | (951 | ) |
| As a percentage of revenues         |                   | 27%      |         |   |   | 28% |   |   |   |   |   |

 

Personnel and other labor-related costs charged to research and development expenses were lower by approximately $0.7 million, primarily as a result of the Company employing fewer research and development personnel during the three months ended July 31, 2009, as compared to the same period in fiscal year 2008. 

 

*Selling, General and Administrative Expenses.*

 

|                                         | **Three Months Ended** |     |         |
|----------------------------------------------|------------------------|----------|--------------|
| ***(dollar amounts in thousands)***          | **July 31,**           |     | **July 31,** |   |   |
|                                              |                        | **2008** |              |  |  | **2009** |  |  |  | **Change** |  |
|                                              |                        |          |              |  |  |  |  |  |  |  |  |
| Selling, general and administrative expenses | $                      | 8,477    |         |   | $ | 6,732 |   |   | $ | (1,745 | ) |
| As a percentage of revenues                  |                   | 54%      |         |   |   | 57% |   |   |   |   |   |

 

Included in selling, general and administrative expenses were various costs associated with investigation and restatement activities, corporate development, workforce reductions and employee retention, as summarized in the following table:

 

14

 

 

 

|                                           | **Three Months Ended** |     |         |
|------------------------------------------------|------------------------|----------|--------------|
| ***(dollar amounts in thousands)***            | **July 31,**           |     | **July 31,** |   |   |
|                                                |                        | **2008** |              |  |  | **2009** |  |  |  | **Change** |  |
|                                                |                        |          |              |  |  |  |  |  |  |  |  |
| Investigation and restatement related expenses | $                      | 1,127    |         |   | $ | 1,311 |   |   | $ | 184 |   |
| Corporate development related expenses         |                   | 636      |         |   |   | 63 |   |   |   | (573 | ) |
| Retention and reduction in force expenses      |                   | 218      |         |   |   | 488 |   |   |   | 270 |   |
| Total                                          | $                      | 1,981    |         |   | $ | 1,862 |   |   | $ | (119 | ) |

 

The investigative activities were completed in early 2008, while restatement related activities have continued into fiscal year 2009 as the Company completes its financial statements and related SEC filings. The Company’s corporate development related activities occurring during the second fiscal quarter of 2008 consisted primarily of exploring various strategic options. During each of the            fourth fiscal quarters of 2007 and 2008, 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 summarized in the paragraph and table above, selling, general and administrative expenses decreased by approximately $1.6 million during the three months ended July 31, 2009, as compared to the same fiscal period in 2008. Personnel and other labor-related expenses were lower by approximately $1.2 million, primarily as a result of reductions in the Company’s sales,            marketing and administrative staff and related travel expenses. 

 

*Interest and Other Income, net.*Interest and other income, net decreased $1.7 million to approximately $0.4 million for the three months ended July 31, 2009, as compared to the same fiscal period in 2008. 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 $1.2 million. The remaining decrease is primarily due to an approximate $0.5 million decrease in realized gains from the sales of investments.

 

*Income Tax Expense (Benefit)*. The provision for income taxes decreased approximately $0.5 million, resulting in an income tax benefit of approximately $0.2 million for the fiscal quarter ended July 31, 2009. The Company’s overall effective tax rate was 34% and 32% for the three months ended July 31, 2008 and 2009, respectively. 

 

**Six Months Ended July 31, 2009 Compared to Six Months Ended July 31, 2008**

 

*Revenues.*

 

|                 | **Six Months Ended** |   |         |
|----------------------|----------------------|--------|--------------|
| ***(in thousands)*** | **July 31,**         |   | **July 31,** |   |   |
|                 | **2008**             |   | **2009**     |   | **Change** |
|                 |                 |   |         |   |   |
| Product revenues     | $                    | 26,064 |         |   | $ | 16,831 |   |   | $ | (9,233 | ) |
| Service revenues     |                 | 5,585  |         |   |   | 6,589 |   |   |   | 1,004 |   |
| Total revenues       | $                    | 31,649 |         |   | $ | 23,420 |   |   | $ | (8,229 | ) |

 

The decrease in the Company’s product revenues was due primarily to decreases in the sales of boards and licenses totaling approximately $7.5 million, most of which was attributable to one of the Company’s largest customers. Additionally, product revenues declined as a result of lower sales to affiliates of Comverse Technology, Inc. of approximately $1.8 million. The Company believes that            the demand for its products has been 

 

15

 

 

 

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 revenues increased as the installed base of software licenses continued to grow, consequently            generating higher levels of fees for software maintenance and support.

 

*Cost of Revenues.*

 

|                                       | **Six Months Ended** |     |         |
|--------------------------------------------|----------------------|----------|--------------|
| ***(dollar amounts in thousands)***        | **July 31,**         |     | **July 31,** |   |   |
|                                            |                      | **2008** |              |  |  | **2009** |  |  |  | **Change** |  |
|                                            |                      |          |              |  |  |  |  |  |  |  |  |
| Product costs                              | $                    | 4,959    |         |   | $ | 3,435 |   |   | $ | (1,524 | ) |
| Service costs                              |                 | 3,222    |         |   |   | 2,473 |   |   |   | (749 | ) |
| Total cost of revenues                     | $                    | 8,181    |         |   | $ | 5,908 |   |   | $ | (2,273 | ) |
|                                       |                 |     |         |   |   |   |   |   |   |   |   |
| Gross margin (as a percentage of revenues) |                 | 74%      |         |   |   | 75% |   |   |   |   |   |

 

Lower materials and production costs from the lower volume of sales orders resulted in an approximate $1.1 million decrease in cost of product revenues. Excluding payments to compensate holders of certain expired options of approximately $0.2 million charged to cost of revenues in the first fiscal quarter of 2008, personnel and other labor-related expenses included in total cost of revenues were lower            by approximately $0.9 million, primarily as a result of the Company employing fewer production personnel during the six months ended July 31, 2009, as compared to the same period in fiscal year 2008.

 

*Research and Development Expenses*.

 

|                                | **Six Months Ended** |     |         |
|-------------------------------------|----------------------|----------|--------------|
| ***(dollar amounts in thousands)*** | **July 31,**         |     | **July 31,** |   |   |
|                                     |                      | **2008** |              |  |  | **2009** |  |  |  | **Change** |  |
|                                     |                      |          |              |  |  |  |  |  |  |  |  |
| Research and development expenses   | $                    | 8,890    |         |   | $ | 6,857 |   |   | $ | (2,033 | ) |
| As a percentage of revenues         |                 | 28%      |         |   |   | 29% |   |   |   |   |   |

 

Personnel and other labor-related costs charged to research and development expenses were lower by approximately $1.4 million, primarily as a result of the Company employing fewer research and development personnel during the six months ended July 31, 2009, as compared to the same period in fiscal year 2008. Additionally, research and development expenses for the six months ended July 31, 2008            included cash payments to compensate holders of expired options in February 2008 of approximately $0.3 million. 

 

*Selling, General and Administrative Expenses.*

 

|                                         | **Six Months Ended** |     |         |
|----------------------------------------------|----------------------|----------|--------------|
| ***(dollar amounts in thousands)***          | **July 31,**         |     | **July 31,** |   |   |
|                                              |                      | **2008** |              |  |  | **2009** |  |  |  | **Change** |  |
|                                              |                      |          |              |  |  |  |  |  |  |  |  |
| Selling, general and administrative expenses | $                    | 19,821   |         |   | $ | 14,077 |   |   | $ | (5,744 | ) |
| As a percentage of revenues                  |                 | 63%      |         |   |   | 60% |   |   |   |   |   |

 

 

16

 

 

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:

 

|                                           | **Six Months Ended** |     |         |
|------------------------------------------------|----------------------|----------|--------------|
| ***(dollar amounts in thousands)***            | **July 31,**         |     | **July 31,** |   |   |
|                                                |                      | **2008** |              |  |  | **2009** |  |  |  | **Change** |  |
|                                                |                      |          |              |  |  |  |  |  |  |  |  |
| Investigation and restatement related expenses | $                    | 2,935    |         |   | $ | 2,480 |   |   | $ | (455 | ) |
| Corporate development related expenses         |                 | 1,098    |         |   |   | 348 |   |   |   | (750 | ) |
| Payments for expired options                   |                 | 1,860    |         |   |   | - |   |   |   | (1,860 | ) |
| Retention and reduction in force expenses      |                 | 416      |         |   |   | 761 |   |   |   | 345 |   |
| Total                                          | $                    | 6,309    |         |   | $ | 3,589 |   |   | $ | (2,720 | ) |

 

The investigative activities were completed in early 2008, while restatement related activities have continued into fiscal year 2009 as the Company completes its financial statements and related SEC filings. The Company’s corporate development related activities consisted primarily of exploring various strategic options during the first six months of fiscal 2008 and, for the six months ended            July 31, 2009, the evaluation of the special dividend that was paid in April 2009. During each of the fourth fiscal quarters of 2007 and 2008, 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 $3.0 million during the six months ended July 31, 2009, as compared to the same fiscal period in 2008. Personnel and other labor-related expenses were lower by approximately $2.1 million, primarily as a result of reductions in the Company’s sales, marketing and administrative staff and            related travel expenses. 

 

*Interest and Other Income, net.*Interest and other income, net decreased $2.9 million to approximately $1.2 million for the six months ended July 31, 2009, as compared to the same period in fiscal year 2008, primarily due to lower interest income of approximately $2.5 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 $1.2 million. The remaining decrease in interest income was primarily due to the significant declines in interest rates on the Company’s cash equivalents and short-term investments occurring throughout fiscal year 2008 and the first quarter of fiscal year 2009.

 

*Income Tax Expense (Benefit)*. For the six months ended July 31, 2008 and 2009, the Company recorded income tax benefits of approximately $0.4 million and $0.8 million, respectively. The Company’s overall effective tax rate was 34% and 35% for the six months ended July 31, 2008 and 2009, respectively. 

 

 

17

 

 

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

At January 31, 2009 and July 31, 2009, the Company’s cash and cash equivalents and short-term investments totaled approximately $282.0 million and $82.9 million, respectively. On April 20, 2009, the Company paid a special cash dividend of $4.58 per share to its shareholders of record as of the close of business on April 13, 2009. The total amount of the dividend was 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 retained after payment of the special dividend 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 debt or additional 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 the six months ended July 31, 2008 used cash of approximately $1.4 million, and operations for the comparable period in fiscal year 2009 provided cash of approximately $0.8 million. The increase in cash flows from operating activities was primarily attributable to decreases in the use of cash for expenses associated with investigation and restatement activities, corporate development and            payments to compensate employees for certain expired options.

 

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 2009, the Company has committed to spending less for capital expenditures than it had in fiscal year 2008.

 

For the six months ended July 31, 2009, the Company’s financing activities consisted solely of the payment of the special dividend in April 2009. For the six months ended July 31, 2008, there were no cash flows from financing activities.

 

**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. Actual results could differ from those estimates. 

 

18

 

 

 

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.

 

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 our 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.

 

**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

 

|  | 19 |
|--|----|

 

----

meet its financial obligations due to 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. Accordingly, if            inventory previously reserved for is subsequently sold, improved gross profit margins may be realized on those transactions in the period the related revenue is recognized. 

 

**Accounting for Share-based Payment Transactions**

 

Stock options have been awarded to employees and directors under the Company’s equity incentive plans during fiscal years prior to fiscal year 2006. The cost of each option award was measured based on the fair value of the option as of the date of 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. Historical data of exercise behavior is used to estimate the average number of years that an option will remain outstanding prior to its exercise, factoring in the vesting period, contractual life of the            option and post-vesting employment termination behavior, including the anticipated effects on employee exercises of the blackout periods restricting employee transactions involving the Company’s common stock. 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 was 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 Company’s employee stock options.

 

Prior to the vesting of the Company’s share-based payment awards, which, in addition to stock options, have included awards of restricted stock (stock that is subject to forfeiture upon the happening of specified events) and deferred stock units (awards that represent the right to receive common stock at the end of a specified deferral period), share-based payment expense is based            on the fair value of the grants that are 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 

 

|  | 20 |
|--|----|

 

----

performance conditions, on the probable outcome of the performance conditions. 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 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 carry back 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 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.

 

21

 

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. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|

 

**ADOPTION OF ACCOUNTING PRONOUNCEMENTS**

 

Effective February 1, 2009, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”) that relate to nonfinancial assets and nonfinancial liabilities. SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair            value measurements. While SFAS No. 157 does not require any new fair value measurements, it applies under other accounting pronouncements that require fair value measurements. SFAS No. 157 clarifies the definition of fair value as an exit price and emphasizes that fair value is a market-based measurement. The application of SFAS No. 157 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 April 2009, the Financial Accounting Standards Board (“FASB”) issued the following three FASB Staff Positions (“FSP”) that are intended to provide additional application guidance and enhance disclosures about fair value measurements and impairments of securities: 

|   | **•** | FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4”); |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2”); and |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures About Fair Value of Financial Instruments” (“FSP FAS 107-1”). |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------|

FSP FAS 157-4 clarifies the objective and method of fair value measurement even when there has been a significant decrease in market activity for the asset being measured. FSP FAS 115-2 establishes 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. FSP            FAS 107-1 expands the fair value disclosures required for all financial instruments within the scope of SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” to interim periods. All of these FSPs were effective as of the beginning of

 

22

 

 

the Company’s fiscal quarter ended July 31, 2009 and their adoption did not have a material impact on the Company consolidated financial statements and related disclosures. 

 

Effective February 1, 2009, the Company adopted SFAS No. 141(R), "Business Combinations" ("SFAS No. 141(R)"). SFAS No. 141(R) replaces SFAS No. 141, "Business Combinations,” but retains the requirement that the purchase method of accounting for acquisitions be used for all business combinations. As it relates to the Company, SFAS No. 141(R) became effective for any business combination with an            acquisition date occurring on or after February 1, 2009. As the Company did not complete an acquisition during the six months ended July 31, 2009, the adoption of SFAS No. 141(R) has had no impact on the Company’s consolidated financial statements.

 

Effective February 1, 2009, the Company adopted FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 provides that all outstanding unvested share-based payment awards that contain rights to non-forfeitable dividends participate in the undistributed earnings with the            common shareholders and are therefore participating securities. Companies with participating securities are required to apply the two-class method in calculating basic and diluted earnings per share, the effects of which must be applied retrospectively. The effect of applying the guidance of FSP EITF 03-6-1 did not have a material effect on the Company’s basic and diluted earnings per share for all periods presented in the condensed consolidated statements of            operations.

 

In April 2009, the FASB issued the following three FSPs that are intended to provide additional application guidance and enhance disclosures about fair value measurements and impairments of securities: 

|   | **•** | FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4”); |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2”); and |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures About Fair Value of Financial Instruments” (“FSP FAS 107-1”). |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------|

FSP FAS 157-4 clarifies the objective and method of fair value measurement even when there has been a significant decrease in market activity for the asset being measured. FSP FAS 115-2 establishes 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. FSP            FAS 107-1 expands the fair value disclosures required for all financial instruments within the scope of SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” to interim periods. All of these FSPs were effective as of the beginning of the Company’s fiscal quarter ended July 31, 2009 and their adoption did not have a material impact on the Company consolidated financial statements and related disclosures. 

 

In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS No. 165"). SFAS No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. Effective as of the beginning of the Company’s fiscal quarter ended July 31, 2009, the Company’s adoption of SFAS No. 165 did not have a            material impact on the Company’s consolidated financial statements and notes thereto.

 

23

 

 

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

 

In September 2009, the FASB ratified the consensuses reached by the Emerging Issues Task Force (“EITF”) regarding the following issues involving revenue recognition:

 

|   | **•** | Issue No. 08-1, “Revenue Arrangements with Multiple Deliverables” (“EITF No. 08-1”); and |
|--------|------------|------------------------------------------------------------------------------------------------------------------|

|   | **•** | Issue No. 09-3, “Certain Revenue Arrangements That Include Software Elements” (“EITF No. 09-3”). |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------|

EITF No. 08-1 applies to multiple-deliverable revenue arrangements that are currently within the scope of EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF No. 08-1 also:

 

|   | **•** | 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. |
|--------|------------|--------------------------------------------------------------------------------------------|

EITF No. 09-3 applies to multiple-deliverable revenue arrangements that contain both software and hardware elements, focusing on determining which revenue arrangements are within the scope of the software revenue guidance in AICPA Statement of Position No. 97-2, “Software Revenue Recognition.” EITF No. 09-3 removes tangible products from the scope of the 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 accounting guidance in EITF No. 08-1 and EITF No. 09-3 should be applied on a prospective basis for 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 these issues on a retrospective basis. The            Company is assessing the potential impact that the application of EITF No. 08-1 and EITF No. 09-3 may have on its consolidated financial statements and disclosures.

 

24

 

 

 

| **ITEM 3.** | **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 have not been used to manage these risks.

 

As discussed in Note 3 to the Condensed Consolidated Financial Statements, short-term investments as of July 31, 2009 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 safety and liquidity.            Historically, the Company’s investment purchases consisted primarily of corporate and municipal short and medium-term notes, U. S. government obligations, U. S. government agency obligations and/or mutual funds investing in the like. 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 July 31, 2009 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 July 31, 2009, 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 July 31, 2009, cash and cash equivalents and short-term investments totaled approximately $82.9 million. If, during the fiscal year ending January 31, 2010, average short-term interest rates increase or decrease by 50 basis points relative to average rates realized during the year ended January 31, 2009, 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 at July 31, 2009. 

 

The Company’s cash equivalents primarily consist of investments in institutional 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.

 

| **ITEM 4.** | **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. 

 

|  | 25 |
|--|----|

 

----

In connection with the preparation of this Quarterly Report on Form 10-Q, the Company completed an evaluation, as of July 31, 2009, 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, because of the material weaknesses in its internal control over financial reporting described in its Annual Report on Form 10-K for the fiscal year ended January 31, 2009 (the “Fiscal Year 2008 Form 10-K”), and its inability to file this report within the required time period, the Company’s disclosure controls and procedures were not effective as of July 31, 2009. 

 

**CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING**

Under applicable SEC rules (Exchange Act Rules 13a-15(c) and 15d-15(c)), management (with the participation of the Chief Executive Officer and the Chief Financial Officer) is only required to evaluate the effectiveness of the Company’s internal control over financial reporting as of the end of each fiscal year. However, Exchange Act Rules 13a-15(c) and 15d-15(c) require management (with the            participation of the Chief Executive Officer and the Chief Financial Officer) to evaluate any change in the Company’s internal control over financial reporting that occurred during each fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. In evaluating whether there were any reportable changes in the Company’s internal control over financial reporting during the quarter            ended July 31, 2009, management determined (with the participation of the Chief Executive Officer and the Chief Financial Officer) that there was such a change in the form of additional remedial procedures either commenced or enhanced during this quarter to address the material weaknesses in the Company’s internal control over financial reporting identified in the Fiscal Year 2008 Form 10-K. 

 

As explained in greater detail under Item 9A of the Fiscal Year 2008 Form 10-K, the Company and its management undertook a broad range of remedial procedures prior to September 30, 2009, the filing date of the Fiscal Year 2008 Form 10-K, most of which had been instituted before the interim period ended July 31, 2009, to address the material weaknesses in the Company’s internal control over            financial reporting identified by management in its Report on Internal Control Over Financial Reporting in such Form 10-K (under Item 9A). With respect to the material weaknesses that are identified in the Fiscal Year 2008 Form 10-K, during the fiscal quarter ended July 31, 2009, management implemented a procedure whereby the Company, with oversight by the General Counsel, conducts an internal audit of its equity award process with an emphasis upon (i) compliance with the terms of            the relevant equity compensation plans, (ii) adequate documentation of the approval of each equity award; and (iii) the integration of the granting, administration, calculation and reporting activities relating to share-based accounting, which action the Company believes constitutes a change in internal control over financial reporting during the fiscal quarter ended July 31, 2009 that either has materially affected, or is reasonably likely to materially affect, the Company’s            internal control over financial reporting. 

 

While the Company’s management believes that it has 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 Fiscal Year 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.            Accordingly, the Company has performed additional manual procedures and analysis and other post-closing procedures in order to prepare the

 

26

 

 

consolidated financial statements included in this Quarterly Report on Form 10-Q. As a result of these expanded procedures, the Company believes the consolidated financial statements contained in this report present fairly, in all material respects, the Company’s financial condition, results of operation and cash flows for the fiscal years covered thereby in conformity with GAAP. 

 

For a more comprehensive discussion of the material weaknesses in internal control over financial reporting identified by management as of January 31, 2009, and the remedial measures undertaken to address these material weaknesses, which remedial measures continued during the fiscal period covered by this Quarterly Report on Form 10-Q, investors are encouraged to review Item 9A, Controls and            Procedures, of the Fiscal Year 2008 Form 10-K filed on September 30, 2009. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27

 

----

**PART II**

 

| **ITEM 1.** | **LEGAL PROCEEDINGS.** |
|-------------|------------------------|

***Settled SEC Civil Injunctive Action***

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, the Company 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 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 also orders the Company to become current in its reporting obligations under Section 13(a) of the Exchange Act on or before November 9, 2009. 

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 1A.** | **RISK FACTORS.** |
|--------------|-------------------|

|  | 28 |
|--|----|

 

----

 

| **ITEM 2.** | **UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.** |
|-------------|------------------------------------------------------------------|

 

During the fiscal quarter ended July 31, 2009, the Company issued unregistered securities to its executive officers as more fully described in Part III, Item 11 of the Fiscal Year 2008 Form 10-K under the heading “Compensation Discussion and Analysis – Long-Term Incentive Program.” 

 

Such unregistered securities were issued pursuant to an exemption from registration afforded by Section 4(2) of the Securities Act of 1933, as amended. Each issuance was to an executive officer deemed an “Accredited Investor” that was approved by a Committee of the Board of Directors of the Company solely for compensation purposes and the Company did not receive any cash consideration for            such securities. Each certificate issued for such unregistered securities contained a legend stating that such securities have not been registered under the Securities Act of 1933, as amended, and setting forth the restrictions on the transferability and sale of such securities. 

 

The following unregistered securities were issued to the Company’s executive officers during the fiscal quarter ended July 31, 2009:

 

 

|                                                            |           | **Number of Securities** |
|-----------------------------------------------------------------|----------------|--------------------------|
| **Name**                                                        | **Grant Date** | **Restricted Shares**    |
| Shawn Osborne, President and Chief Executive Officer            | May 5, 2009    | 168,269 (1)              |
| Mark Kissman, Senior Vice President and Chief Financial Officer | May 5, 2009    | 72,115 (1)               |
| James Johnston, Senior Vice President - Operations              | May 5, 2009    | 48,077 (1)               |
| Shila Roohi, Senior Vice President - Engineering                | May 5, 2009    | 48,077 (1)               |

 

| (1) | One-half of each executive officer’s restricted stock award vests over time, while the remaining half is subject to the achievement of certain revenue goals set by the Compensation Committee for fiscal year 2009. The time-based portion of the restricted stock awards vests in three equal annual installments beginning on May 5, 2010, subject to                            each executive’s continued employment on such vesting dates. If the financial conditions are met, the performance based portion of the restricted stock awards vests ratably over a 3-year period from the date of the grant. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **ITEM 3.** | **DEFAULTS UPON SENIOR SECURITIES.** |
|-------------|--------------------------------------|

 

None.

 

**ITEM 4.**        **SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**

 

None.

|  | 29 |
|--|----|

 

----

 

| **ITEM 5.** | **OTHER INFORMATION.** |
|-------------|------------------------|

 

None.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

|  | 30 |
|--|----|

 

----

| **ITEM 6.** | **EXHIBITS.** |
|-------------|---------------|

 

| (a) | Exhibit Index. |
|-----|----------------|

 

31.1     Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2     Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1     Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

|   |   |             | ULTICOM, INC.                                     |
|--------|--------|------------------|---------------------------------------------------|
|   |   |             |                                              |
|   |   |             |                                              |
| Dated: |   | October 30, 2009 | /s/ Shawn K. Osborne                              |
|   |   |             | Shawn K. Osborne                                  |
|   |   |             | President and Chief Executive Officer             |
|   |   |             |                                              |
|   |   |             |                                              |
| Dated: |   | October 30, 2009 | /s/ Mark A. Kissman                               |
|   |   |             | Mark A. Kissman                                   |
|   |   |             | Senior Vice President and Chief Financial Officer |

 

 

 

 

 

 

 

 

 

 

 

 

 

 

|  | 31 |
|--|----|