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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
September 30, 1998.
___ Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period
from to .
----- -----
Commission File Number: 0-27468
ULTRADATA CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 94-2746681
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5000 Franklin Drive, Pleasanton, CA 94588-3031
(Address of principal executive offices) (Zip Code)
925/463-8356
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of November 1, 1998, Registrant had outstanding 7,724,737 shares of Common
Stock, $.001 par value.
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ULTRADATA CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART 1 FINANCIAL INFORMATION
ITEM 1 - Condensed Financial Statements
Condensed Balance Sheets as of September 30, 1998 and
December 31, 1997 3
Condensed Statements of Operations for the Three and Nine Months
Ended September 30, 1998 and 1997 4
Condensed Statements of Cash Flows for the Nine Months
Ended September 30, 1998 and 1997 5
Notes to Condensed Financial Statements 6
ITEM 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II OTHER INFORMATION
ITEM 6 - Exhibits and Report on Form 8-K 15
SIGNATURES 16
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ULTRADATA CORPORATION
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
ASSETS 1998 1997
- ------------------------------------------------------------------------------ ------------------- ---------------------
<S> <C> <C>
(Unaudited)
Current assets:
Cash and equivalents $ 1,236 $ 486
Short-term investments --- 303
Restricted cash 393 536
Trade accounts receivable, net 3,254 4,057
Unbilled revenues 4,187 2,330
Inventories 2,249 815
Prepaid expenses and other current assets 501 456
Income taxes receivable 28 53
------------------- ---------------------
Total current assets 11,848 9,036
Property and equipment, net 3,693 4,533
------------------- ---------------------
Total assets $15,541 $13,569
=================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Bank borrowings and current portion of long-term obligations $ 1,515 $ 663
Accounts payable 2,323 2,284
Accrued expenses 1,614 1,239
Deferred revenue and customer advances 1,425 1,852
------------------- ---------------------
Total current liabilities 6,877 6,038
Deferred revenue and customer advances 767 1,113
Long-term obligations, excluding current portion 764 120
------------------- ---------------------
Total liabilities 8,408 7,271
------------------- ---------------------
Stockholders' equity:
Preferred stock; par value $.001; 2,000,000 shares authorized; none
outstanding --- ---
Common stock; par value $.001; 23,000,000 shares authorized; 7,724,737
and 7,607,133 shares issued and outstanding in 1998 and 1997,
respectively 8 8
Additional paid in capital 15,406 15,202
Accumulated deficit (8,281) (8,912)
------------------- ---------------------
Total stockholders' equity 7,133 6,298
------------------- ---------------------
Total liabilities and stockholders' equity $15,541 $13,569
=================== =====================
</TABLE>
See accompanying notes to financial statements.
3
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ULTRADATA CORPORATION
Condensed Statements of Operations
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
--------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Software $3,104 $2,076 $ 8,510 $ 5,216
Maintenance 2,796 2,540 8,328 7,647
Services and other 1,667 1,378 3,785 4,668
--------------- -------------- -------------- -------------
Subtotal 7,567 5,994 20,623 17,531
Hardware 1,014 743 2,770 4,425
--------------- -------------- -------------- -------------
Total revenues 8,581 6,737 23,393 21,956
--------------- -------------- -------------- -------------
Cost of revenues:
Software 883 362 1,373 862
Maintenance 1,669 1,497 5,161 4,629
Services and other 1,116 1,300 3,095 4,330
Hardware 775 506 2,216 3,161
--------------- -------------- -------------- -------------
Total cost of revenues 4,443 3,665 11,845 12,982
--------------- -------------- -------------- -------------
Gross margin 4,138 3,072 11,548 8,974
--------------- -------------- -------------- -------------
Operating expenses:
Product development 1,211 1,104 3,613 3,601
Selling, general and administrative 2,549 2,285 7,308 9,358
Gain on sale of service bureau
contracts --- (558) --- (558)
--------------- -------------- -------------- -------------
3,760 2,831 10,921 12,401
--------------- -------------- -------------- -------------
Operating income (loss) 378 241 627 (3,427)
Interest income (expense), net (56) 19 (106) 18
Other income 56 --- 110 254
--------------- -------------- -------------- -------------
Net income (loss) $ 378 $ 260 $ 631 $(3,155)
=============== ============== ============== =============
Earnings (loss) per share information:
- --------------------------------------
Basic net income (loss) per share $0.05 $0.03 $0.08 $(0.42)
Diluted net income (loss) per share 0.05 0.03 0.08 (0.42)
Shares used to compute basic net
income (loss) per share 7,709 7,607 7,674 7,570
Shares used to compute diluted net income
(loss) per share 8,033 7,673 7,934 7,570
</TABLE>
See accompanying notes to financial statements.
4
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ULTRADATA CORPORATION
Condensed Statements of Cash Flows
In thousands
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------------------
1998 1997
------------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 631 $(3,155)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,291 958
Equity in earnings of unconsolidated subsidiary --- (16)
Gain on sale of joint venture --- (238)
Loss on disposition of property and equipment --- 17
Changes in operating assets and liabilities:
Trade accounts receivable, net 803 3,270
Unbilled revenues (1,857) 964
Inventories (1,434) 369
Prepaid expenses and other assets (45) 404
Income taxes receivable 25 953
Accounts payable 39 (1,626)
Accrued expenses 375 (809)
Deferred revenue and customer advances (773) (957)
Long-term obligations 1,716 ---
------------------- -------------------
Net cash provided by operating activities 771 134
------------------- -------------------
Cash flows from investing activities:
Capital expenditures (451) (2,130)
Proceeds from disposition of service bureau assets --- 192
Proceeds on sale of joint venture --- 500
Sale of short-term investments 303 1,018
------------------- -------------------
Net cash used for investing activities (148) (420)
------------------- -------------------
Cash flows from financing activities:
Bank borrowings --- 500
Repayment of debt (220) (323)
Restricted cash 143 (596)
Net proceeds from issuance of common stock 204 262
------------------- -------------------
Net cash provided by (used for) financing activities 127 (157)
------------------- -------------------
Net increase (decrease) in cash and equivalents 750 (443)
Cash and equivalents at beginning of period 486 1,583
------------------- -------------------
Cash and equivalents at end of period $ 1,236 $ 1,140
=================== ===================
</TABLE>
See accompanying notes to financial statements.
5
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ULTRADATA CORPORATION
Notes to Financial Statements
September 30, 1998 and 1997
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with the rules and regulations of the Securities and Exchange Commission for
interim financial statements, therefore, certain information and footnote
disclosures normally contained in annual financial statements have been
condensed or omitted. These financial statements should be read in conjunction
with the audited financial statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
The accompanying unaudited financial statements of the Company reflect all
adjustments, consisting solely of adjustments of a normal recurring nature which
are, in the opinion of management, necessary to fairly present the financial
position as of September 30, 1998 and the results of operations and cash flows
for the interim periods presented. The results for the interim periods ended
September 30, 1998 are not necessarily indicative of the results to be expected
for the entire year.
2. REVENUE RECOGNITION
The Company recognizes revenues from licenses of computer software provided that
a noncancelable license agreement has been signed, the software and related
documentation have been shipped, there are no material uncertainties regarding
customer acceptance, collection of the resulting receivable is deemed probable,
and no other significant vendor obligations exist. Maintenance revenues are
deferred and recognized over the related contract period, generally three months
to five years. Services and other revenues generated from professional
consulting and training services and software customization services are
recognized as the services are performed. Hardware revenues are recognized upon
shipment.
Effective January 1, 1998, the Company adopted Statement of Position ("SOP")
97-2 "Software Revenue Recognition," ("SOP 97-2") and SOP 98-4 "Deferral of the
Effective Date of a Provision of SOP 97-2, Software Revenue Recognition" ("SOP
98-4") which were issued October 27, 1997 and March 31, 1998, respectively, and
supersede SOP 91-1. These SOPs address revenue recognition from a conceptual
level and do not specifically address implementation guidance. These SOPs did
not have a material impact on the Company's results for the nine month period
ended September 30, 1998. The Company believes, based on its reading and
interpretation of these SOPs, that these statements may result in a deferral of
future revenue recognition, but the Company feels that any impact of this
statement will be reduced by its anticipated changes to its business practices.
These SOPs are complex issues that must be integrated into the Company's current
and future business practices. The final implementation of this statement may
differ from the Company's current interpretation with respect to the impact on
future earnings.
3. INVENTORIES
Inventories consist of hardware and software purchased from third parties
pending shipment to customers and are recorded at the lower of cost or market.
6
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4. COMPUTATION OF EARNINGS (LOSS) PER SHARE (IN THOUSANDS EXCEPT PER SHARE
DATA)
On December 31, 1997, the Company adopted SFAS No. 128, Earnings Per Share
("SFAS No. 128"). In accordance with SFAS No. 128, basic earnings per share is
computed using the weighted average number of common shares outstanding during
the period. Diluted earnings per share is computed using the weighted average
number of common and dilutive common equivalent shares outstanding during the
period, using the treasury stock method for options. The following is a
reconciliation of the denominator in the computation of diluted earnings per
share (the numerator equals the net income (loss)):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-----------------------------------------------------------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Weighted average outstanding shares 7,709 7,607 7,674 7,570
Common stock equivalents 324 66 260 ---
------------------------------------------------------- -----------------
Shares used to compute diluted net income
(loss) per share 8,033 7,673 7,934 7,570
============= ================ ================== =================
Antidilutive options excluded 1,663 1,715 1,724 1,781
============= ================ ================== =================
</TABLE>
5. RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). During the periods presented, the Company
had no changes in equity from transactions or other events and circumstances
from non-owner sources. Accordingly, a statement of comprehensive income has
not been provided as comprehensive income (loss) applicable to common
stockholders equals net income (loss) applicable to common stockholders for all
periods presented.
The FASB also recently issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 establishes
standards for the way public business enterprises are to report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports. SFAS No. 131 is effective for the Company beginning in 1998.
The Company is in the process of evaluating its business segments as defined by
SFAS No. 131.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which defines derivatives, requires that
all derivatives be carried at fair value, and provides for hedge accounting when
certain conditions are met. SFAS No. 133 is effective for the Company in 2000.
Although the Company has not fully assessed the implications of SFAS No. 133,
the Company does not believe adoption of this statement will have a material
impact on the Company's financial position or results of operations.
6. LONG-TERM OBLIGATIONS
Effective in the second quarter of 1998, the Company entered into a non-
cancelable license agreement to purchase new license technology which the
Company plans to incorporate into their suite of information management modules.
Payments under this agreement are due through December 2001, with a net present
value of $1,300,000 at September 30, 1998. This amount will be amortized over
the expected life of four years, at the greater of straight line or the
percentage of units sold to date to total expected unit sales. In addition, the
Company entered into a non-cancelable maintenance agreement with an annual
expense of $204,000 in 1998 and $326,000 each year thereafter through 2004
related to these purchased licenses.
7
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The net present value of the license payments, discounted at 12.5%, have been
recorded as a long-term obligation. The remaining principal payments of
$1,341,000 are due as follows: $121,000 in 1998, $595,000 in 1999, $323,000 in
2000, and $302,000 in 2001.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS INCLUDES A NUMBER OF FORWARD-LOOKING STATEMENTS WHICH REFLECT THE
COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE.
THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES,
INCLUDING THOSE DISCUSSED BELOW AND IN THE OTHER REPORTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION, THAT COULD CAUSE RESULTS TO DIFFER
MATERIALLY FROM HISTORICAL RESULTS OR THOSE ANTICIPATED. IN THIS REPORT, THE
WORDS "EXPECTS", "ANTICIPATES", "BELIEVES" AND SIMILAR EXPRESSIONS IDENTIFY
FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY
UNDERTAKES NO OBLIGATION TO PUBLICLY DISCLOSE ANY REVISIONS TO THESE FORWARD-
LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES OCCURRING SUBSEQUENT TO
THE FILING OF THIS FORM 10-Q WITH THE SECURITIES AND EXCHANGE COMMISSION.
READERS ARE URGED TO CAREFULLY REVIEW AND CONSIDER THE VARIOUS DISCLOSURES MADE
BY THE COMPANY IN THIS REPORT AND IN THE COMPANY'S OTHER REPORTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION, INCLUDING ITS FORM 10-K AND ITS OTHER FORMS
10-Q, THAT ATTEMPT TO ADVISE INTERESTED PARTIES OF THE RISKS AND FACTORS THAT
MAY AFFECT THE COMPANY'S BUSINESS.
OVERVIEW
The Company provides information management software and solutions for
relationship-oriented financial institutions. These solutions allow the
Company's customers to provide, among other things, financial services such as
checking, savings and investment accounts, home banking, credit and debit cards,
ATM access and consumer lending. The Company's products are primarily targeted
at large and mid-sized credit unions who want to operate their system in-house.
For smaller credit unions, the Company works through value added resellers
("VARs") to provide the Company's products. Combining the in-house
installations with services provided by the Company's VARs, the approximately
425 credit unions using the Company's software represent over 5.6 million
members and $30.0 billion in assets.
The Company derives its revenues primarily from software license fees, service
fees including items such as training and installation, custom development and
disaster recovery, and maintenance fees. A significant portion of the Company's
revenues are derived from contracts with organizations that have long decision-
making cycles, typically from six to twelve months. The decision to purchase
the Company's products is followed by an installation and training cycle which
is labor-intensive and generally requires at least four months to complete.
Each new customer system consists of the Company's ULTRAFIS product and selected
information management applications, services and hardware.
RESULTS OF OPERATIONS
The following table sets forth the Company's revenues and gross margin and gross
margin as a percentage of revenues for the three month periods ended September
30, 1998 and 1997:
<TABLE>
<CAPTION>
REVENUES GROSS MARGIN GROSS MARGIN
(IN THOUSANDS) (IN THOUSANDS) %
THREE MONTHS ENDED % THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, INCREASE SEPTEMBER 30, SEPTEMBER 30, PERCENTAGE
1998 1997 (DECREASE) 1998 1997 1998 1997 CHANGE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Software $3,104 $2,076 50% $2,221 $1,714 72% 83% (11%)
Maintenance 2,796 2,540 10% 1,127 1,043 40% 41% (1%)
Services and other 1,667 1,378 21% 551 78 33% 6% 27%
- -------------------------------------------------------------------------------------------------------------
Subtotal core 7,567 5,994 26% 3,899 2,835 52% 47% 5%
Hardware 1,014 743 36% 239 237 24% 32% (8%)
- -------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $8,581 $6,737 27% $4,138 $3,072 48% 46% 2%
=============================================================================================================
</TABLE>
9
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The following table sets forth the Company's revenues and gross margin and gross
margin as a percentage of revenues for the nine month periods ended September
30, 1998 and 1997:
<TABLE>
<CAPTION>
REVENUES GROSS MARGIN GROSS MARGIN
(IN THOUSANDS) (IN THOUSANDS) %
NINE MONTHS ENDED % NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, INCREASE SEPTEMBER 30, SEPTEMBER 30, PERCENTAGE
1998 1997 (DECREASE) 1998 1997 1998 1997 CHANGE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Software $ 8,510 $ 5,216 63% $ 7,137 $4,354 84% 83% 1%
Maintenance 8,328 7,647 9% 3,167 3,018 38% 39% (1%)
Services and other 3,785 4,668 (19%) 690 338 18% 7% 11%
- -----------------------------------------------------------------------------------------------------------
Subtotal core 20,623 17,531 18% 10,994 7,710 53% 44% 9%
Hardware 2,770 4,425 (37%) 554 1,264 20% 29% (9%)
- -----------------------------------------------------------------------------------------------------------
TOTAL REVENUES $23,393 $21,956 7% $11,548 $8,974 49% 41% 8%
===========================================================================================================
</TABLE>
REVENUES
- --------
The Company's revenues are comprised of software, customer maintenance, services
and other revenues and hardware revenues. Revenues from the Company's core
business, which excludes hardware, increased 26% from $6.0 million for the three
months ended September 30, 1997 to $7.6 million for the three months ended
September 30, 1998. Revenues from the Company's core business increased 18%
from $17.5 million to $20.6 million for the nine month period ended September
30, 1997 and 1998, respectively. Total revenues (including the direct sale of
hardware from which the Company is transitioning to focus on its core business)
for the three months ended September 30, 1998 increased 27% over the same period
in the prior year from $6.7 million to $8.6 million, respectively, and increased
7% from $22.0 million for the nine months ended September 30, 1997 to $23.4
million for the nine months ended September 30, 1998.
Software revenues increased 50% from $2.1 million for the three months ended
September 30, 1997 to $3.1 million for the three months ended September 30,
1998, and increased 63% from $5.2 million for the nine months ended September
30, 1997 to $8.5 million for the nine months ended September 30, 1998. The
increase in software revenues is primarily attributable to the increase in sales
of the Company's information management modules to existing customers as well as
sales to new accounts.
The Company's maintenance revenues are derived from quarterly, annual, and
multi-year support agreements with its customers. Maintenance revenues
increased by 10% from $2.5 million for the three months ended September 30, 1997
to $2.8 million for the three months ended September 30, 1998. Maintenance
revenues increased 9% from $7.6 million for the nine months ended September 30,
1997 to $8.3 million for the nine months ended September 30, 1998. The increase
for both periods was primarily a result of increased new information management
application modules installed during 1997 and the first nine months of 1998.
Services and other revenues increased by 21% from $1.4 million for the three
months ended September 30, 1997 to $1.7 million for the three months ended
September 30, 1998, and decreased 19% from $4.7 million for the nine months
ended September 30, 1997 to $3.8 million for the nine months ended September 30,
1998. For the nine months ended September 30, 1998, the Company continued to
experience some customer requests to delay installations of products as these
customers focused on meeting Year 2000 preparation and testing requirements.
For the three month period ended September 30, 1998, the level of these delays
decreased as many of the Company's customers have satisfied their regulator-
mandated requirement to test all critical systems before year end. The revenue
decline for the nine month period ended September 30, 1998 was also attributable
to a decrease in training and installation activities due to lower new system
sales volumes during the first six months of 1998. Additionally, service
revenues declined due to the transfer of the Company's direct service bureau
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operations in the third quarter of 1997 to Premier Systems, Incorporated
("PSI"), the Company's largest service bureau VAR, for which the Company
recorded a gain of $0.6 million in the third quarter of 1997.
In the fourth quarter of 1997, the Company entered into a relationship with Ex-
Cel Solutions, Incorporated ("ESI") to configure, sell, distribute, and provide
service for the Company's HP and IBM hardware products and operating systems.
This decision was made to allow the Company to focus on its core businesses of
software, services, and maintenance. Accordingly, hardware revenues decreased
from $4.4 million for the nine months ended September 30, 1997 to $2.8 million
for the nine months ended September 30, 1998. The Company expects direct
hardware revenues in 1998 to continue to decline due to its newly formed
relationship with ESI. This revenue decline, however, is expected to be
partially offset by service fees from ESI's sale of hardware to the Company's
customers. For the three month ended September 30, 1998, hardware revenues
increased to $1.0 million from $0.7 million for the three month period ended
September 30, 1997. This is primarily attributable to hardware sold during the
first six months of 1998 but not shipped until the third quarter ended September
30, 1998.
GROSS MARGIN
- ------------
Gross margin as a percentage of total revenue increased two percentage points
from 46% for the three months ended September 30, 1997 to 48% for the three
months ended September 30, 1998 and increased eight percentage points from 41%
for the nine months ended September 30, 1997 to 49% for the nine months ended
September 30, 1998 primarily due to increased sales of software and the
Company's transition of lower margin hardware sales to ESI.
Software gross margin as a percentage of software revenue decreased 11
percentage points from 83% for the three months ended September 30, 1997 to 72%
for the three months ended September 30, 1998. This decline is attributable to
the release to customers in the third quarter of 1998 of products with
significant third party components. These third party components have lower
margins than the Company's internally developed software. While these products
are expected to continue to be a significant part of the Company's offerings,
the Company anticipates that software gross margin in future periods will
normalize at a level somewhere between the results released in the second
quarter ending June 30, 1998 and the third quarter ending September 30, 1998.
Software gross margin increased one percentage point from 83% for the nine
months ended September 30, 1997 to 84% for the nine months ended September 30,
1998. The Company's software margins will continue to fluctuate depending on the
mix of sales of the Company's internally developed software versus software
purchased or licensed from a third party.
Gross margin percentage from maintenance revenues decreased by one percentage
point from 41% for the three months ended September 30, 1997 to 40% for the
three months ended September 30, 1998. Gross margin percentage from maintenance
decreased by one percentage point from 39% for the nine month period ended
September 30, 1997 to 38% for the nine month period ended September 30, 1998.
These slight decreases were primarily due to investments to improve customer
service and higher fees for third party maintenance costs.
Gross margin percentage from services and other revenues increased 27 percentage
points from 6% for the three months ended September 30, 1997 to 33% for the
three months ended September 30, 1998. Services and other revenues increased 11
percentage points from 7% for the nine months ended September 30, 1997 to 18%
for the nine months ended September 30, 1998. These increases are primarily
attributable to increased productivity in the service delivery area, price
increases made for certain services, and service fees received from ESI's
sale of hardware to the Company's customers.
Hardware gross margin as a percentage of hardware revenues decreased eight
percentage points to 24% for the three month period ended September 30, 1998
from 32% for the three month period ended September 30, 1997. For the nine
month period ended September 30, 1998, hardware margins decreased nine
percentage points compared to the same period in 1997. These declines are
attributable to higher discounts for hardware as well as sales of an increased
proportion of lower margin third-party hardware. As
11
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previously discussed, the Company has entered into a relationship under which
ESI will sell and configure hardware in order to allow the Company to focus on
its core businesses. The Company expects direct hardware revenue in 1998 to
continue to decline, and does not expect to have any appreciable sales or margin
from hardware by the end of 1998. This revenue decline, however, is expected to
be partially offset by service fees received from ESI's sale of hardware to the
Company's customers.
OPERATING EXPENSES
- ------------------
Product development expenses increased from $1.1 million for the three months
ended September 30, 1997 to $1.2 million for the three months ended September
30, 1998. The increase in total dollar spending was primarily the result of
additional costs for new information management module development. Product
development as a percent of total revenues decreased from 16% for the three
months ended September 30, 1997 to 14% for the three months ended September 30,
1998 and decreased slightly from 16% to 15% of total revenues for the nine month
period ended September 30, 1997 and 1998, respectively.
Selling, general and administrative expenses increased from $2.3 million for the
three months ended September 30, 1997 to $2.5 million for the three months ended
September 30, 1998. This increase is primarily attributable to increases in
administrative expenses. Selling, general and administrative expenses decreased
from $9.4 million for the nine months ended September 30, 1997 to $7.3 million
for the nine months ended September 30, 1998. This decrease is primarily
attributable to reductions in staffing levels at the end of the first quarter in
1997.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
MARKET CONDITIONS
- -----------------
The Company's future operating results will depend upon conditions in its market
that may affect demand for its products and its ability to enhance its existing
products and introduce new products that meet market demands on a timely basis.
The Company must also manage growth and change effectively as failure to do so
could materially and adversely affect its business and operating results.
INSTALLATION ISSUES
- -------------------
Installation of the Company's ULTRAFIS system is a complex process that must
typically be done without any disruption of the customer's service. Failure by
the Company to successfully install an ULTRAFIS system could result in
significant loss of revenue in a particular quarter and fluctuation in the
Company's results of operations. Although the Company schedules the
installations of its products several months in advance, its ability to achieve
its revenue plans, both in the near term and in the long term, depends on the
Company's continued ability to sign new customer contracts and to complete such
contracts on schedule. Failure to close new customer contracts as a result of
lost sales or deferrals of customer decisions could have a material adverse
impact on the future operating results. There can be no assurance that sales or
installations will continue to occur at historical rates or in accordance with
the Company's expectations. Because the Company's operating expenses are based
on anticipated revenue levels and a high percentage of the Company's expenses
are relatively fixed, a small variation in the timing of the recognition of
specific revenues could cause significant variations in operating results from
quarter to quarter.
CUSTOMER ACCEPTANCE
- -------------------
The Company's quarterly and annual revenues and operating results have varied
significantly in the past, and may continue to do so in the future. Operating
results may fluctuate due to factors such as the demand for the Company's
products, the introduction and acceptance of new products and product
enhancements by the Company or its competitors, changes in the levels of
operating expenses, customer order deferrals in anticipation of new products,
competitive conditions in the credit union and financial services markets and
economic conditions generally or in various industry segments. In addition, a
significant portion of the
12
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Company's business has been derived from substantial contracts with large
organizations with long decision-making cycles, and the timing of such orders
has caused material fluctuations in the Company's operating results. The
Company's expense levels are based in part on its expectations regarding future
revenues and in the short term are fixed to a large extent. Therefore, the
Company may be unable to adjust spending in a timely manner to compensate for
any unexpected revenue shortfall. As a result, if anticipated revenues do not
occur or are delayed, the Company's operating results would be
disproportionately affected. The Company expects quarterly and annual
fluctuations to continue for the foreseeable future. Accordingly, the Company
believes that period-to-period comparisons of its financial results should not
be relied upon as an indication of future performance.
LEGISLATIVE ACTIVITY
- --------------------
On February 25, 1998, the United States Supreme Court affirmed a ruling by a
United States District Court providing that federal credit unions may not extend
membership benefits to individuals who are not part of the credit union's
original charter group. This ruling imposes limits on new customers that a
federal credit union may attract. As a result, some federal credit unions have
expressed a reluctance to pursue extensive capital purchases until the impact of
the ruling is further assessed. While federal credit unions represent
approximately 60% of all credit unions, less than half of these credit unions
are affected by this ruling. The interpretation of this ruling could have a
material adverse effect upon the Company's business, financial conditions, and
results of operations. Since this Supreme Court ruling, there has been
significant congressional legislative activity. On August 7, 1998, President
Clinton signed into law the Credit Union Membership Access Act ("CUMAA"). The
CUMAA allows multiple Select Employee Groups to have membership in the
same credit union. While the CUMAA is effective immediately, certain provisions
of the CUMAA require the enactment of rules and regulations prior to
implementation. The Company is currently assessing the impact that the CUMAA
may have on its operations and continues to monitor all legislative activity
that may affect its operations.
YEAR 2000
- ---------
Many software computer programs in the industry rely on internal date formats
using two-digit data programs to perform computation and decision-making
functions that may cause computer systems generally to malfunction with respect
to dates beginning with the Year 2000. The Company's products use an internal
date format that has never relied on two-digit data programs and which was
upgraded and made available to the Company's customers in August, 1994. The
Company believes that date entry will not be a material issue either with
Company's information management software products or the Company's own
information management applications.
The costs for Year 2000 compliance have been immaterial. The Company estimates
that such costs the Company has incurred through September 30, 1998 have been
substantially less than $100,000. Such costs have primarily resulted from the
Company's investment of staff time understanding Year 2000 compliance issues as
well as understanding obligations of the Company's customers to undergo
extensive Year 2000 compliance testing of their critical systems.
The Company has conducted its own Year 2000 compliance testing of its currently
marketed products and has found no significant Year 2000 related issues.
In addition, on April 15, 1998, the Information Technology Association of
America ("ITAA") announced that the Company had achieved Year 2000
certification. ITAA is a trade association dealing with Year 2000 software
compliance in the information technology industry. ITAA * 2000 is the ITAA's
century date change certification program. The ITAA * 2000 Certification Program
provides information technology companies with the opportunity to have a neutral
and objective third-party evaluation of their Year 2000 processes and methods.
13
<PAGE>
The Company has not evaluated its customers' Year 2000 compliance status. The
Company's customers are, however, required by the National Credit Union
Association ("NCUA") to test their critical systems for Year 2000 compliance
prior to December 31, 1998. Due to this extensive testing process, the Company's
products have been undergoing Year 2000 compliance testing since June, 1998 at
many customer sites. To date, no significant issues have been reported.
The Company has evaluated Year 2000 compliance issues with the third party
products the Company currently markets. While the Company has identified no
significant Year 2000 related issues with such products, the Company is in the
process of obtaining written verification of Year 2000 compliance from the
vendors of such products.
The Company has considered obtaining Year 2000 compliance insurance as well as
developing various contingency plans. Given that both internal and customer
testing has indicated the Company's current products are Year 2000 compliant,
the Company has concluded that neither Year 2000 compliance insurance nor
contingency plans are necessary. For these same reasons, the Company has also
concluded that any future Year 2000 compliance costs, if any, will not be
material.
The Company is currently not aware of any significant Year 2000 issues with its
major internal systems.
The Company expects no material impact to its financial position as a result of
any pending Year 2000 issues related to its products.
LIQUIDITY AND CAPITAL RESOURCES
The Company's management believes current cash, cash equivalents and short-term
investments and expected cash generated from operations will satisfy its
expected working capital and capital expenditure requirements for the
foreseeable future.
The Company has a factoring agreement and a capital equipment facility. The
factoring agreement provides for a 0.5% administrative fee for each receivable
purchased and a 1.75% monthly finance charge for as long as each purchased
receivable remains outstanding. The factoring agreement renews, unless
terminated by the Company or the bank, in April 1999. As of September 30, 1998,
the Company has not utilized the factoring agreement. As of September 30, 1998,
the outstanding balance on the capital equipment facility was $393,000. The
capital equipment facility bears interest at prime plus 0.25%. No further draws
are available and the Company established cash collateral for the capital
equipment facility balance. The Company is paying off this balance and reducing
the cash collateral in monthly installments of $17,000. Borrowings under the
factoring agreement and capital equipment facility are secured by all tangible
and intangible assets of the Company.
Capital expenditures of $0.5 million during the first nine months of 1998 were
primarily for computer and miscellaneous equipment.
Net cash provided by operations was $0.8 million for the nine months ended
September 30, 1998, including a $631,000 net income for the nine months ended
September 30, 1998. For the nine months ended September 30, 1997, net cash
provided by operations was $0.1 million. Unbilled revenues increased $1.9
million from $2.3 million to $4.2 million. This increase can be attributed to
the large number of information management module orders signed late in the
third quarter that have yet to be installed. Inventories increased $1.4 million
from September 1997 to September 1998 due primarily to the purchase of third
party software licenses as discussed below. The increase of $1.7 million in
long-term obligations is also related to the purchase of these software
licenses.
Effective in the second quarter of 1998, the Company entered into a non-
cancelable license agreement to purchase new license technology which the
Company plans to incorporate into their suite of information management modules.
Payments under this agreement are due through December 2001, with a net present
value of $1,300,000. This amount will be amortized over the expected life of
four years, at the greater of straight line or the percentage of units sold to
date to total expected unit sales. In addition, the Company entered into a non-
cancelable maintenance agreement with an annual expense of $204,000 in 1998 and
$326,000 each year thereafter through 2004 related to these purchased licenses.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 6 - Exhibits and report on form 8-K
(a) Exhibits
EXHIBIT NUMBER EXHIBIT TITLE
27.01 Financial Data Schedule, which is submitted electronically
to the Securities and Exchange Commission for information
only and is not filed.
(b) Reports filed on Form 8-K during the quarter ended September 30, 1998.
NONE
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, ULTRADATA
Corporation has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ULTRADATA CORPORATION
Date November 16, 1998 By /s/ Robert J. Majteles
------------------------- ---------------------------
Robert J. Majteles
President and Chief Executive Officer
By /s/ Ronald H. Bissinger
---------------------------
Ronald H. Bissinger
Chief Financial Officer
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE QUARTER ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY AS REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,236
<SECURITIES> 393
<RECEIVABLES> 8,749
<ALLOWANCES> (1,308)
<INVENTORY> 2,249
<CURRENT-ASSETS> 11,848
<PP&E> 8,521
<DEPRECIATION> (4,828)
<TOTAL-ASSETS> 15,541
<CURRENT-LIABILITIES> 6,877
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0
<COMMON> 8
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<TOTAL-LIABILITY-AND-EQUITY> 15,541
<SALES> 23,393
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