-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Dx3lja1iaA9iLF6jzzVzioeeXhctOrTEfNES5dL06LftGRvcL8tRIi40R7yZWTQC dd8cESjg/r8yGPftunSWZQ== 0000922423-98-000348.txt : 19980331 0000922423-98-000348.hdr.sgml : 19980331 ACCESSION NUMBER: 0000922423-98-000348 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMVERSE TECHNOLOGY INC/NY/ CENTRAL INDEX KEY: 0000803014 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 133238402 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-15502 FILM NUMBER: 98579587 BUSINESS ADDRESS: STREET 1: 170 CROSSWAYS PARK DR CITY: WOODBURY STATE: NY ZIP: 11797 BUSINESS PHONE: 5166777200 MAIL ADDRESS: STREET 1: 170 CROSSWAYS PARK DRIVE STREET 2: 170 CROSSWAYS PARK DRIVE CITY: WOODBURY STATE: NY ZIP: 11797 10-K 1 ANNUAL REPORT ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Fiscal Year ended December 31, 1997 Commission File Number 0-15502 COMVERSE TECHNOLOGY, INC. (Exact name of registrant as specified in its charter) New York 13-3238402 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 170 Crossways Park Drive Woodbury, New York 11797 (Address of principal executive offices) Registrant's telephone number, including area code: 516-677-7200 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered Not applicable Not applicable Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.10 par value per share (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes:[X] No: [_] ================================================================================ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant on March 24 , 1998 was approximately $1,975,000,000. The closing price of the registrant's common stock on the NASDAQ National Market System on March 24, 1998 was $47.25 per share. There were 43,461,824 shares of the registrant's common stock outstanding on March 24, 1998. DOCUMENTS INCORPORATED BY REFERENCE The registrant hereby incorporates by reference in this report the information required by Part III appearing in the registrant's proxy statement or information statement distributed in connection with the 1998 Annual Meeting of Shareholders of the registrant or in an amendment to this report on Form 10K/A. ---------------------------- TRILOGUE and Access NP are registered trademarks and TRILOGUE INfinity, AUDIODISK, ULTRA, and SignalWare are trademarks of the Company. - ii - PART I ITEM 1. BUSINESS. INTRODUCTION Comverse Technology, Inc., a New York corporation ("Comverse" and, together with its subsidiaries, the "Company"), designs, develops, manufactures, markets and supports computer and telecommunications systems and software for multimedia communications and information processing applications. The Company's products are used in a broad range of applications by fixed and wireless telephone network operators, government agencies, call centers, financial institutions and other public and commercial organizations worldwide. The Company's line of enhanced services platform products enable telecommunications network operators to offer a variety of revenue-generating services that are accessible to large numbers of simultaneous users, including a broad range of integrated messaging, information distribution and personal assistant services, such as call answering, voice mail, fax mail, unified messaging, pre-paid services, short text messaging and audiotext. The Company's Comverse Network Systems ("CNS") Division's principal market consists of organizations that use the systems to provide services to the public, usually on a subscription or pay-per-usage basis, and includes both fixed and wireless telephone network operators and other telecommunications services organizations. In January 1998, Boston Technology, Inc., a Delaware corporation ("Boston"), merged with and into Comverse in a transaction in which former shareholders of Boston received an aggregate of 18,141,185, shares of Comverse's Common Stock, par value $0.10 per share ("Common Stock"). Boston, like the Company's CNS Division, manufactures multimedia enhanced services platforms for service provider organizations, including both fixed and wireless telephone network operators. Boston's enhanced services platforms are similar in features to those of the Company, but have traditionally been sold to different market segments, which include, among others, several of the Regional Bell Operating Companies in the United States and NTT in Japan. Prior to its merger with Boston, Comverse's marketing efforts were focused primarily on international network operators, as well as wireless personal communications network operators in the United States. The business and assets of Boston have been combined with the CNS Division following the merger of Boston with Comverse (the "Merger"). Except for financial information and as otherwise indicated, discussion of the business of the Company in this report includes the business of Boston. The Company markets its enhanced services platforms throughout the world, with its own direct sales force and in cooperation with a number of leading international vendors of telecommunications infrastructure equipment. The Company is the market-share leader in providing large capacity enhanced services platforms for wireless and wireline telecommunications network operators. More than 250 fixed and wireless telephone network operators in more than 65 countries, including 13 of the 20 largest telephone companies in the world, have selected the Company's platforms to provide enhanced telecommunications services - 1 - to their public customers. CNS customers include, among others, AT&T (USA), Bell Atlantic (USA), BellSouth (USA), Deutsche Telekom (Germany), Hongkong Telecom (Hong Kong), NTT (Japan), SBC Communications (USA), SFR (France), Sprint PCS (USA), Telebras (Brazil), Telecom Italia (Italy), Telmex (Mexico) and Telstra (Australia). The Company's Comverse Information Systems ("CIS") Division manufactures multiple channel, multimedia digital monitoring systems, which support the monitoring, recording, surveillance, and information gathering and analysis activities of law enforcement and intelligence agencies, and digital recording systems which support the voice, fax and data recording and analysis activities of a variety of governmental and commercial organizations. The Company's monitoring systems enable many simultaneous users to monitor, record and process voice, image (facsimile) and data communications from multiple channels in a variety of analog and digital formats, provide facilities for archiving large volumes of recorded information and allow the use of computer database processing techniques for analysis, management and retrieval operations. The systems have been sold to law enforcement, military and intelligence agencies that monitor and record communication channels for a variety of purposes, such as surveillance in support of police actions and the collection and processing of information for intelligence analysis. Customers such as inbound and outbound call centers, commercial organizations, emergency service (e.g., "911") providers, correctional facilities, public health and safety organizations and financial institutions, use the Company's call recording systems to record and process large volumes of audio, image and data communications. Traditionally, analog tape recorders, alone or coupled with a variety of special purpose devices, have been used for these applications. The worldwide growth in telecommunications traffic in general and digital communications in particular, and the increasing use of a variety of digital transmission formats in telecommunications networks, have created a need for user organizations to modernize their monitoring, recording and processing capabilities. The Company's systems provide a number of advantages over analog, tape recorder-based equipment, including improvements in capacity, reliability, accuracy, processing efficiency and archiving and retrieval capabilities. Most importantly, the systems enable users to adapt efficiently to the emergence of new telecommunications technologies, such as digital transmission, Integrated Services Digital Network ("ISDN") and enhanced signaling systems, for which analog, tape recorder-based equipment was not designed. CIS Division products have been sold to end-users in more than 30 countries. The Company's DGM&S Telecom ("DGM&S") Division provides Signaling System Number Seven ("SS7") telecommunications software and hardware. DGM&S's products provide Intelligent Network ("IN") and Advanced Intelligent Network ("AIN") applications for voice, data and mobility communications services such as 800 number translation, voice mail, Internet routing, short text messaging, local number portability, cellular roaming and emergency "911" services. DGM&S's products are marketed to wireline and wireless equipment providers and network operators to enable global connectivity, inter-platform portability, client/server flexibility and clustering reliability. The products provide the global standards and national variants needed to communicate between the disparate signaling protocols worldwide, and enable operators to use either a UNIX or Windows NT platform. The products, which offer - 2 - mediated access to the telecommunications signaling network, operate in a client/server configuration. DGM&S's customers include, among others, Amdahl, Compaq, DSC Communications, Ericsson, MCI, Nokia, PTT Telecom (Netherlands), Qualcomm, Siemens, Sprint and Sun Microsystems. Through subsidiaries and affiliates, the Company is also involved in the development of technologies and products incorporating video compression and networking, the design and development of systems for telephone answering service bureaus, the operation of telemessaging service bureaus and capital market activities for its own account. Throughout this document, references are made to technologies, features, capabilities, capacities and specifications in conjunction with the Company's products and technological resources. Such references do not necessarily apply to all product lines, models, system configurations and Company operating Divisions. The Company was incorporated in the State of New York in October 1984. Its principal executive offices are located at 170 Crossways Park Drive, Woodbury, New York 11797, where its telephone number is (516) 677-7200. THE COMPANY'S PRODUCTS Comverse Network Systems Division: Enhanced Services Platform Product Family The market for network-based enhanced services platforms has grown rapidly over the past several years. The Company believes that a number of factors have contributed to this growth, including the heightened emphasis among wireless and wireline telecommunications network operators on offering new services for revenue-generation and competitive differentiation, the increasing public awareness and acceptance of multimedia messaging services resulting from the growing installed base of messaging systems in the business community, the expanding availability from the major telephone companies of call answering services, and the growing use of wireless telephone services, which almost universally offer a mailbox-based call answering service. The CNS Division's primary focus has been on supplying large-capacity enhanced services platforms, which are marketed under the names Access NP and TRILOGUE INfinity, to fixed and wireless telecommunications network operators. These organizations benefit from the ability to offer their customers a variety of revenue-generating services provided by the Company's systems, such as automated call answering, voice and fax messaging, unified messaging, pre-paid services, short text messaging, audiotext, voice activated dialing, call screening, one-touch call return, automated personal assistant services and "virtual telephone" service, usually on a subscription or pay-per-call basis. With call answering and voice and fax - 3 - messaging, telephone operating companies benefit not only from service subscription fees, but also from traffic revenue generated by the increase in billable completed calls. In addition, these services improve overall network efficiency by reducing congestion from repeated unbillable busy/no-answer calls. Wireless telephone service operators are almost universally adding voice mailboxes to their service offerings, and often as part of their basic service package, not only because of these benefits, but also because wireless messaging services directly increase billable airtime by stimulating outbound calls. The Company's enhanced services platforms have been designed and packaged to meet the capacity, reliability, scalability, maintainability and physical requirements of large telephone network operators. The systems are offered in a variety of sizes and configurations, extending to a capacity of up to 6,000 ports, 45,000 voice storage hours and 1,000,000 mailboxes. The systems also offer redundancy of critical components, so that no single failure will interrupt the service. The Company's platforms are available in both centralized and widely distributed configurations, and maintain their integrity as a single system in distributed configurations. The Company's systems also incorporate components that are compatible with the IN and AIN protocols for Intelligent Peripherals ("IP"), permitting the Company's network operator customers to develop and deploy services based on the overall IN/AIN architecture. In addition, when the system is configured as a Service Node ("SN"), it enables customers to offer next-generation IN/AIN-based services such as personal number, call screening/caller introduction, one-touch call return and pre-paid. The incorporation of IN and AIN-related software also allows a customer, which has not yet implemented intelligent network infrastructure, to purchase an enhanced services platform from the Company with the confidence that it contains a built-in migration path to IN/AIN standards, should the network operator decide to implement IN/AIN infrastructure in the future. The Company's platforms incorporate proprietary and third-party software, and industry standard and proprietary hardware, in an open system architecture. Most hardware is based on Industry Standard Architecture ("ISA"), which facilitates the integration of commercially available ISA technologies with the Company's core technologies. The systems support a wide variety of analog and digital telephony interfaces and signaling systems, enabling them to adapt to a variety of different telephony environments and IN/AIN applications, and provide a "universal port" -- a single port that supports any combination of voice and fax services at any time during a single call. The Company has also introduced Internet messaging capabilities, enabling end-users to access their voice, fax and e-mail text messages from anywhere in the world via the World Wide Web. Comverse Information Systems Division: Monitoring and Recording Systems Comverse's Information Systems Division develops, manufactures and markets monitoring and recording systems primarily for law enforcement, intelligence agencies, call centers and financial institutions. - 4 - The Company's AUDIODISK systems are multiple channel, multimedia digital monitoring systems, sold primarily to law enforcement and intelligence agencies, which enable multiple users simultaneously to monitor, record and process audio, image (facsimile) and data communications over multiple channels in a variety of analog and digital formats, and provide facilities for archiving large volumes of recorded information. The systems automatically decode and record a variety of signals without operator intervention and store the recorded information on magnetic and optical disks to permit quick and easy random access and the use of computer database techniques for analysis, archival and retrieval operations. AUDIODISK also enables multiple users to access the same recorded information simultaneously for processing and analysis. The Company's ULTRA line of multiple channel, multimedia digital recording systems are marketed primarily to call centers, financial institutions, emergency "911" service providers, correctional institutions, and other organizations that record large volumes of communications, and require fast and easy retrieval of recorded information. Traditionally, analog tape recorders, alone or coupled with a variety of other special purpose devices, have been utilized for communications monitoring, recording and related applications. The limited capacity and processing capability inherent in these systems have imposed constraints on organizations that process large amounts of multimedia information from multiple channels and that need to store the processed information for long periods while keeping it available for rapid retrieval. The Company's systems interface with a variety of analog and digital communications protocols and automatically recognize and adapt to voice, fax or modem content on each recorded channel. Most importantly, they also enable users to adapt efficiently to the emergence of new telecommunications technologies, such as digital transmission and enhanced signaling systems, for which analog, tape recorder-based equipment was not designed. The systems provide a number of advantages over analog, tape recorder-based systems, including improvements in capacity, reliability, accuracy, processing efficiency and archiving and retrieval capabilities. The AUDIODISK product design is based on open system architecture and client/server concepts, and supports a broad range of multimedia monitoring capabilities, such as the recording, processing and retrieval of analog audio signals, such as telephone and radio channels; analog facsimile and modem communications; digital audio and data signals, including ISDN, T1, E1 and X.25; and telephony signaling, including Pulse Dialing, DTMF, Calling Line Identification and Call Progress Tones (such as busy, no-answer and ringback). AUDIODISK systems simultaneously process incoming signals over multiple channels, apply digital signal processing technologies and use magnetic and optical disks for temporary and long-term digital storage. Digital signal processing technologies that are employed by AUDIODISK to enhance monitoring applications include, among others, signal compression, automatic signal identification, automatic signal interpretation and noise cancellation. Magnetic and optical disks permit virtually instantaneous retrieval and sharing of stored information among many users. The systems also enable users to transmit multimedia information among multiple sites over - 5 - communication links. AUDIODISK is designed to support various communications links, including T1, E1, ISDN, Dial-up telephone lines (over secure modems), satellite links, TCP/IP over Ethernet (with routers) and X.25. AUDIODISK systems also provide a facility for archiving large volumes of recorded information on rewritable optical disks. This archive function allows a single recording session, groups of sessions, a single recording channel, selected channels or all channels to be stored on the same disk. The archive disk records all the signals on a particular channel and automatically associates the signal-related information ("SRI") as well as the date and time with the recorded information. For larger AUDIODISK systems, automatic disk library systems, referred to as "jukeboxes", provide very large amounts of on-line storage. The product employs a database management system to provide a central facility for access to all stored information. This feature allows any operator to use computer database query techniques to retrieve the audio and SRI data quickly and efficiently. The Company offers AUDIODISK systems in a range of configurations, which share substantially the same hardware, software and user interface. The AUDIODISK systems' multimedia server can be configured in a variety of models to support a range of applications, including large, fixed-site audio monitoring platforms with up to 350 channels. Moreover, several AUDIODISK multimedia servers may be networked for increased capacity or to satisfy redundancy requirements. Storage configurations include magnetic disks, optical drives and optical jukebox devices. Up to 50 four-gigabyte magnetic disks can be configured in a disk array to provide a recording buffer. Removable optical cartridges are used for archiving, with each cartridge capable of storing up to 180 compressed audio hours. Multiple jukebox configurations provide automated management of optical media, storing up to 30,000 hours of audio or 4,500,000 pages of fax for rapid automated retrieval. ULTRA systems provide Computer-Telephony Integration ("CTI") enabled recording, including integration with major PBX/ACDs, Predictive Dialers and middleware products. The CTI connection allows the customer to easily search calls through database queries. In addition, selective recording is possible through time-driven schedules or event triggers. ULTRA systems support high volume of simultaneous playbacks over the telephone or through LANs, WANs, and the Internet. Immediate access to recordings is possible through advanced optical disk technology and jukeboxes. The ULTRA Series comprises six products, tailored to customer-specific requirements for capacity, storage and special features. DGM&S Telecom Division: Telecommunications Signaling Products The DGM&S Telecom Division provides SS7 telecommunications software and hardware, marketed under the name SignalWare. DGM&S's SignalWare products provide IN/AIN applications for voice, data and mobility communications services such as 800 number translation, voice mail, Internet routing, short text messaging, local number portability, cellular roaming and emergency "911" services. DGM&S's products are marketed to wireline and wireless equipment providers and network operators to enable global connectivity, inter-platform portability, client/server flexibility and clustering reliability. The products provide the global - 6 - standards and national variants needed to communicate between the disparate signaling protocols worldwide, and enable operators to use either a UNIX or Windows NT platform. SignalWare products, which offers mediated access to the telecommunications signaling network, operates in a client/server configuration. DGM&S's customers include, among others, Amdahl, Compaq, DSC Communications, Ericsson, MCI, Nokia, PTT Telecom (Netherlands), Qualcomm, Siemens, Sprint and Sun Microsystems. MARKETS, SALES AND MARKETING The Company's CNS Division markets enhanced services platforms throughout the world, with its own direct sales force and in cooperation with a number of leading international vendors of telecommunications infrastructure equipment. The Company is a market share leader in providing large capacity messaging systems for telephone network operators around the world. More than 250 fixed and wireless telephone network operators in more than 65 countries, including 13 of the 20 largest telephone companies in the world, have selected the Company's platforms for messaging and other enhanced services. The Company's network operator customers include, among others, AT&T (USA), Bell Atlantic (USA), BellSouth (USA), Deutsche Telekom (Germany), Hongkong Telecom (Hong Kong), NTT (Japan), SBC Commmunications (USA), SFR (France), Sprint PCS (USA), Telebras (Brazil), Telecom Italia (Italy), Telmex (Mexico) and Telstra (Australia). The Company provides its customers with programs of marketing consultation, seminars and materials designed to assist them in marketing enhanced telecommunications services, and also undertakes to play an ongoing supporting role in their business and market planning processes. The Company's CIS Division markets AUDIODISK and ULTRA systems worldwide through its direct sales force and, where appropriate, through agents, distributors and system integrators. The Company sells AUDIODISK directly to the law enforcement, military and intelligence markets. Primary target markets for the ULTRA Series include call centers, public safety and emergency services organizations and financial institutions. TECHNOLOGIES The Company's research and development efforts focus particularly on the design of very large, high throughput systems and digital signal processing technologies for voice, image and data communications. The Company's products use advanced technologies in the areas of digital signal processing, facsimile protocols, telephony interfaces, mass storage, digital networking, multi-processor computer architecture and real-time software design. The Company - 7 - also possesses considerable technology and expertise in the development of software products, solutions and applications within the IN and AIN environment. The Company's products are based upon flexible system architectures specifically designed to handle multiple channel, multimedia communication and processing applications. Multimedia processing computers require a much higher throughput than conventional data processing systems, especially when a large number of channels have to be processed simultaneously. The Company's products employ open system, modular architectures, which use distributed processors, rather than one large central processor, as well as multiple storage devices and digital networking. The product design is intended to be readily adaptable to the usage and capacity requirements of the individual end-user. The product architectures also allow the Company to add enhancements and new technologies to its systems without rendering existing products obsolete. A primary focus of the Company's research and development efforts has been digital signal processing technologies required for voice, image and data communications. Computer systems designed for signal processing applications, such as processing of voice and image communications, handle information differently from conventional data processing systems and require greater processing and storage resources. For example, a digitized voice message, even when subjected to data compression techniques, may require as much as 150 times the storage capacity as the same message processed in textual form. The computer must be designed to function at a fast and efficient rate to produce a form of speech acceptable to the human ear. The Company has developed a number of speech compression algorithms, which provide the Company's products with optimal compression taking into account the level of speech quality required for each application. The Company also has developed a special signal detector, which identifies signals as voice, fax or modem. Voice processing algorithms currently available with the Company's products include speech enhancement (noise reduction) and variable playback speed with pitch compensation. Fax and modem processing algorithms offered by the Company enable communication and interception of a large number of standard and non-standard communications protocols. The Company has developed interfaces for its products to most telephony environments used around the world, including digital interfaces, such as T1, E1 and ISDN, and SS7 interfaces designed to encompass both basic network connectivity and the IN/AIN capabilities of Intelligent Peripherals and Service Nodes. The Company has implemented facsimile communication and intercept protocols for Group 3 facsimile. Certain of the Company's products incorporate local area network and wide area network technologies used for the transfer of digitized voice, fax and modem information, as well as for the transfer of data among various network elements. The Company utilizes state-of-the-art mass storage technologies in many of its products. Proprietary algorithms developed by the Company are utilized for storage of multimedia information to facilitate real-time processing of large amounts of information and optimal use of media. A variable number of disks may be configured in a disk array to serve large numbers of users and to provide full or partial disk redundancy for critical applications. Special algorithms utilized by the Company to handle optical disks within a number of jukebox devices include automatic channel-to-disk allocation, automatic retrieval of multimedia information from any disk located in the jukeboxes and redundant archiving on two or more cartridges simultaneously. - 8 - RESEARCH AND DEVELOPMENT Because of the continuing technological changes that characterize the telecommunications and computer industries, the Company's success will depend, to a considerable extent, upon its ability to continue to develop competitive products through its research and development efforts. The Company is engaged in ongoing research and development efforts intended to expand and enhance the technical capabilities, features and range of uses of its products, and to design and develop new generations of its product offerings. The Company currently employs more than 1,200 scientists, engineers and technicians with broad experience in the areas of digital signal processing, computer architecture, facsimile protocols, telephony, digital networking, multi-processing, mass storage, and real-time software design. A substantial portion of the Company's research and development operations benefit from financial incentives provided by government instrumentalities to promote research and development activities, including its research and development activities situated in Israel. The cost of such efforts is affected by the continued availability of funding under such programs. The percentage of the Company's total research and development expenditures reimbursed under these programs has declined in recent years, and will continue to decline with the growth in the Company's overall operations and the increasing amount of research and development conducted by the Company at locations other than those in which reimbursement programs are available to it. The Company pays royalties on its sales of certain products developed in part with funding supplied under such programs. Permission from the government of Israel is required for the Company to manufacture outside of Israel products resulting from research and development activities funded under such programs, or to transfer outside of Israel related technology rights, and in order to obtain such permission the Company may be required to increase the royalties to the applicable funding agencies and/or repay certain amounts received as reimbursement of research and development costs. The Company expects to incur additional royalty expenses and/or repayment obligations as a result of the Merger and the location of certain manufacturing and research and development operations pertaining to its TRILOGUE product line at its Boston facilities. See "Business--Licenses and Royalties," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 3 to the financial statements. PATENTS AND INTELLECTUAL PROPERTY RIGHTS The Company currently holds a total of 17 United States patents and a number of foreign patents. While the Company files patent applications periodically, no assurance can be given that patents will be issued on the basis of such applications or that, if patents are issued, the claims allowed will be sufficiently broad to protect the Company's technology. In addition, no assurance can be given that any patents issued to the Company will not be challenged, invalidated or circumvented or that the rights granted under the patents will provide significant benefits to the Company. 9 In order to safeguard its unpatented proprietary know-how, trade secrets and technology, the Company relies primarily upon trade secret protection and non-disclosure provisions in agreements with employees and others having access to confidential information. There can be no assurance that these measures will adequately protect the Company from disclosure or misappropriation of its proprietary information. The Company and its customers from time to time receive communications from third parties, including some of the Company's competitors, alleging infringement by the Company of such parties' patent rights. While such communications are common in the computer and telecommunications industries and the Company has in the past been able to obtain any necessary licenses on commercially reasonable terms, there can be no assurance that the Company would prevail in any litigation to enjoin the Company from selling certain of its products on the basis of such alleged infringement, or that the Company would be able to license any valid patents on reasonable terms. LICENSES AND ROYALTIES The Company licenses certain technology, know-how and related rights for use in the manufacture and marketing of its products, and pays royalties to third parties under such licenses and under other agreements entered into in connection with research and development financing. The Company believes that its rights under such licenses and other agreements are sufficient for the manufacturing and marketing of its products and, in the case of licenses, extend for periods at least equal to the estimated useful lives of the related technology and know-how. The Company currently pays royalties on substantially all sales of enhanced services platforms and on certain sales of AUDIODISK, ULTRA and derivative products. The royalties vary in amount based upon the revenues attributable to the various components of such products. During 1995, 1996 and 1997, aggregate license and royalty payments by the Company amounted to approximately $2,419,000, $4,365,000 and $6,865,000, respectively. INTERNATIONAL SALES Sales of the Company's products outside of North America have increased from approximately $92,046,000 in 1995 to approximately $136,236,000 in 1996 and $205,988,000 in 1997. International sales and marketing efforts may be adversely affected by a number of factors, including the need for system customization and special integrations, government approvals and export licenses, instability in international trading relations, currency fluctuations and additional costs of marketing, service and support due to lack of proximity with the end-users. In certain cases, the Company's contracts are denominated in local currencies, and as such, the Company may be adversely affected by fluctuations in those currencies. International sales of certain systems manufactured by the Company also are subject to a variety of legal restrictions governing the export of such products. 10 While the Company believes that prevailing economic conditions in the Far East and Southeast Asia have reduced the demand for its systems in certain countries, overall sales in the region have increased over the past 12 months. The Company cannot currently predict the effect on its business should regional economic conditions fail to improve. For additional information regarding foreign operations, see Notes 16 and 18 of Notes to Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Certain Trends and Uncertainties" appearing elsewhere in this report. BACKLOG At December 31, 1997, the backlog of the Company amounted to approximately $87,644,000, compared with approximately $70,339,000 at December 31, 1996, an increase of approximately $17,305,000. Substantially all of the current backlog is expected to be delivered within the next 12 months. SERVICE AND SUPPORT The Company has a strong commitment to provide product service and support to its customers and emphasizes such commitment in its marketing. Because of the intensity of use of systems by telephone network operators and other customers of the Company's products, and their low tolerance for down-time, the Company is required to make a greater commitment to service and support of systems used by these customers, and such commitment increases operating costs. The Company's general warranty policy is to replace or repair any component that fails during a specified warranty period. Broader warranty and service coverage is provided in certain instances, and is usually made available to customers on a contractual basis for an additional charge. The Company provides centralized technical assistance from several locations around the world. Technical support is available for the Company's customers 24 hours-a-day, seven days-a-week. COMPETITION The enhanced services platform industry is highly competitive, and includes numerous products offering a broad range of features and capacities. The primary direct competitors of the CNS Division are manufacturers of stand-alone voice mail systems, including, among others, Brite Voice Systems, Inc., Centigram Communications Corporation, Glenayre Electronics, Inc., Octel Communications Corporation (acquired in 1997 by Lucent Technologies, Inc.), Tecnomen Oy, Unisys Corporation, and manufacturers of central office telecommunications equipment, including Northern Telecom Limited and Telefonaktiebolaget LM Ericsson. Competitors of the Company that manufacture other telecommunications equipment may derive a competitive advantage in selling voice processing and message management systems to customers that are purchasing or have previously purchased other compatible equipment from such manufacturers. 11 Indirect competition is provided by voice and fax messaging products employed at end-user sites as an alternative to the use of services available through telephone network operators. This "customer premises equipment" includes a broad range of products, such as stand-alone voice mail systems, products offering "call processing" services that are supplied with voice mail features or integrated with other voice mail systems, as well as personal computer modems and add-on cards and software designed to furnish voice processing and message management features. The Company believes that competition in the sale of enhanced services platforms is based on a number of factors, the most important of which are product features and functionality, system performance and reliability, marketing and distribution capability and price. Other important competitive factors include service and support and the capability to integrate systems with a variety of central office and cellular switches and other communications systems. The Company believes that the range of features provided by, and the ease of use of, its enhanced services platforms are competitive with other platforms currently being marketed, and that its products are among the leading systems designed specifically for telephone network operators. Neither the Company nor any of the Company's competitors is a dominant vendor of enhanced services platforms in any market segment or product line. The Company anticipates that a number of its direct and indirect competitors will be introducing new or improved enhanced services platforms during the next several years. The Company is aware of a relatively small number of manufacturers of products that compete with the AUDIODISK product line at the present time. Manufacturers of products that have been offered in competition with the AUDIODISK system include Applied Signal Technology, Inc., the E-Systems division of Raytheon Corporation, GTE Government Systems Division, Harris Corporation, JSI Corporation and Nice Systems, Ltd. Competition also has been provided by manufacturers and integrators of custom designed computer and telecommunications systems in response to particular government procurements in specific markets where they have entrenched customer relationships. The Company believes that it derives a competitive advantage over many potential competitors of its AUDIODISK product line by reason of its ability to offer prospective customers a family of products that can provide a solution to most customer requirements without extensive special development effort. The government market in general is highly competitive and difficult to penetrate, and the Company may be at a competitive disadvantage in respect of certain customers and market segments as a result of its small size in relation to other potential vendors and the existence of entrenched customer relationships with other vendors. The market in which ULTRA products are sold is also highly competitive. Primary competitors include Atis Assmann GmbH, Dictaphone Corporation, Kreutler GmbH, Nice Systems, Ltd., Racal Recorders Ltd., Seltronics Corp., TEAC America, Inc., Teknekron Infoswitch Corporation and Witness Systems, Inc. 12 Many of the Company's present and potential competitors are considerably larger than the Company, are more established, have a larger installed base of customers and have greater financial, technical, marketing and other resources. MANUFACTURING AND SOURCES OF SUPPLIES The Company's manufacturing operations consist primarily of final assembly and testing, involving the application of extensive testing and quality control procedures to materials, components, subassemblies and systems. The Company uses third parties to perform printed circuit board assembly and sheet metal fabrication. Although the Company generally uses standard parts and components in its products, certain components are presently available only from a limited number of sources. To date, the Company has been able to obtain adequate supplies of all components in a timely manner from existing sources or, when necessary, from alternative sources. However, the inability to obtain sufficient quantities of components or to locate alternative sources of supply if and as required in the future, would adversely affect the Company's operations. The Company maintains organization-wide quality assurance procedures, coordinating the quality control activities of the Company's research and development, manufacturing and service departments. The Company's primary manufacturing and research and development facilities have received certification to Quality Standard ISO 9001. CAPITAL MARKET ACTIVITIES The Company has organized a wholly-owned subsidiary, CTI Capital Corp. ("CTI Capital"), in support of its exploration of strategic acquisition and investment opportunities. CTI Capital, directly and through a wholly-owned subsidiary in Israel, Comverse Investments Ltd., seeks to identify and implement suitable strategic investments for the Company, and engages in portfolio investment and capital market activities, primarily in Israel. Such activities include, in addition to direct investment in public and private companies, investment and merchant banking activities and short-term trading of debt and equity securities. Through ComSor Investment Fund N.V., formed by CTI Capital in partnership with a subsidiary of Soros Fund Management LLC., the Company seeks to invest venture capital in high technology firms, primarily those located in Israel, and engages in other investment activities. The ComSor fund has a $25 million dollar capital commitment each from CTI Capital and a subsidiary of Soros Fund Management. Comverse also engages in direct strategic and capital management investment activities for its own account. 13 OPERATIONS IN ISRAEL A substantial portion of the Company's research and development and manufacturing operations are conducted at its wholly-owned subsidiary, Efrat Future Technology Ltd. ("Efrat"), which is located in Israel and, accordingly, may be affected by economic, political and military conditions in that country. The Company's business is also dependent to some extent on trading relationships between Israel and other countries. Certain of the Company's products incorporate components imported into Israel from the United States and other countries and most of the Company's products are sold outside of Israel. Accordingly, the Company's operations would be adversely affected if major hostilities involving Israel should occur or if trade between Israel and its current trading partners were interrupted or curtailed. The Company benefits from various policies of the Government of Israel, including reduced taxation and special subsidy programs, designed to stimulate economic activity, particularly high technology industry, in that country. As a condition of its receipt of funds for various research and development projects conducted under programs sponsored by the Government of Israel, the Company has agreed that products resulting from these projects may not be manufactured, nor may the technology developed in the projects be transferred, outside of Israel without government consent. Since the establishment of Israel in 1948, a state of hostility has existed, varying in degree and intensity, between Israel and the Arab countries, and Israel and countries doing business with Israel have been the subject of an economic boycott by the Arab countries. Following the Six-Day War in 1967, Israel commenced administering the territories of the West Bank and the Gaza Strip and, since December 1987, increased civil unrest has existed in these territories and resulted in acts of violence in other parts of Israel. Although Israel has entered into various agreements with Arab countries and the Palestine Liberation Organization ("PLO"), and various declarations have been signed in connection with efforts to resolve some of the regional problems, no prediction can be made as to whether a full resolution of these problems can be achieved or as to the nature of any such resolution. To date, these problems have not had a material adverse impact on the financial condition or operations of the Company, although there can be no assurance that continuation of these problems will not have such an impact in the future. Israel is a member of the United Nations, the International Monetary Fund, the International Bank for Reconstruction and Development, and the International Finance Corporation, and is a signatory to the General Agreement on Tariffs and Trade, which provides for reciprocal lowering of trade barriers among its members. In addition, Israel has been granted preferences under the Generalized System of Preferences from the United States, Australia, Canada, and Japan. These preferences allow Israel to export the products covered by such programs either duty-free or at reduced tariffs. Israel and the European Union are parties to a Free Trade Agreement pursuant to which, subject to rules of origin, Israel's industrial exports to the European Union are exempt from customs duties and other non-tariff barriers and import restrictions. Israel also has an agreement with the United States to establish a Free Trade Area ("FTA") which is intended ultimately to eliminate all tariff and certain non-tariff barriers on most trade between the two countries. Under the FTA agreement, most products received immediate duty-free status in 1985, and all tariffs have since been eliminated. In 1993, Israel 14 entered into an agreement with the European Free Trade Association ("EFTA"), which includes Austria, Norway, Finland, Switzerland, Iceland and Liechtenstein, that established a free-trade zone between Israel and EFTA nations exempting manufactured goods and some agricultural goods and processed foods from customs duties, while reducing duties on other goods. Israel is the only country which has free-trade area agreements with the United States as well as with the European Union and EFTA states. The end of the Cold War has also enabled Israel to establish commercial and trade relations with a number of nations, including Russia, China and the nations of Eastern Europe, with whom Israel had not previously had such relations. Israel's economy has from time to time been subject to various destabilizing factors, including a period of rampant inflation in the early to mid-1980s, low foreign exchange reserves, fluctuations in world commodity prices, military conflicts and civil unrest. For these and other reasons, the Israeli Government has intervened in all sectors of the economy, employing, among other means, fiscal and monetary policies, import duties, foreign currency restrictions and controls of wages, prices and exchange rates. The Israeli Government has frequently changed its policies in all these areas. For the calendar years 1993 through 1997, the annual rates of inflation were approximately 11%, 14%, 8%, 11% and 7%, respectively. This inflation, and the associated increases in salaries that are linked by Israeli law to increases in the consumer price index, have increased the cost of the Company's operations in Israel, and salary costs have further increased as a result of the growing competition for qualified scientific, engineering and technical personnel in Israel. The increase in costs in recent periods has not been offset by proportional devaluation of the Israeli shekel against the U.S. dollar, and accordingly has had a negative impact on the Company's overall results of operations. The results of operations of the Company have been favorably affected by Efrat's participation in Israeli Government programs related to research and development, as well as its utilization of certain tax incentives and other incentives available under applicable Israeli laws and regulations, some of which have been reduced, discontinued or otherwise modified in recent years. In addition, the Company's ability to obtain benefits under various discretionary funding programs has declined and may continue to decline as its internal financial and operational resources increase relative to other applicants. The results of operations of the Company could be adversely affected if these programs were further reduced or eliminated and not replaced with equivalent programs or if Efrat's ability to participate in these programs were to be reduced significantly. EMPLOYEES At December 31, 1997, the Company employed 2,827 individuals, approximately 76% of whom are scientists, engineers and technicians engaged in research and development, marketing and support activities. 15 The Company is not a party to any collective bargaining or other agreement with any labor organization; however, certain provisions of the collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordinating Bureau of Economic Organizations (including the Industrialists' Association) are applicable to the Company's Israeli employees by order of the Israeli Ministry of Labor. Israeli law generally requires the payment by employers of severance pay upon the death of an employee, his retirement or upon termination of his employment, and the Company provides for such payment obligations through monthly contributions to an insurance fund. Israeli employees and employers are required to pay pre-determined sums to the National Insurance Institute, which payment covers medical and other benefits similar to the benefits provided by the United States Social Security Administration. The continuing success of the Company will depend, to a considerable extent, on the contributions of its senior management and key employees, many of whom would be difficult to replace, and on the Company's ability to attract and retain qualified employees in all areas of its business. Competition for such personnel is intense, particularly in the computer and telecommunications industries. In order to attract and retain talented personnel, and to provide incentives for their performance, the Company has emphasized the award of stock options as an important element of its compensation program, including, in the case of certain key management level personnel, options to purchase shares in certain of the Company's subsidiaries, and cash bonuses based on several parameters, including the profitability of their respective business units. ITEM 2. PROPERTIES. As of December 31, 1997, the Company, excluding Boston, leased an aggregate of approximately 548,000 square feet of space for its operations worldwide, including approximately 414,000 square feet in Tel Aviv, Israel, approximately 46,000 square feet in Woodbury, New York, approximately 31,000 square feet in Mt. Laurel, New Jersey, approximately 22,000 square feet in Irvine, California, and an aggregate of approximately 35,000 square feet at various other locations in the United States, Israel, Western Europe, the Far East and Australia. The aggregate base monthly rent for the facilities under lease at December 31, 1997 was approximately $604,000, and all of such leases are subject to various pass-throughs and escalation adjustments. In March 1998, the Company entered into a lease for approximately 93,500 square feet in Tel Aviv, Israel to increase the capacity of its Israeli operations. The monthly base rent for the new premises starts at approximately $103,000. The Company believes that its facilities currently under lease are adequate for its current operations, and that additional facilities are available on competitive market terms to provide for such future expansion of the Company's operations as may be warranted. 16 ITEM 3. LEGAL PROCEEDINGS. On November 16, 1995, a purported class action was filed in the United States District Court for the Eastern District of Pennsylvania against Boston and certain of its officers. Two similar complaints were filed on November 20, 1995 and November 21, 1995. The plaintiffs alleged violations of the Securities Exchange Act of 1934. On February 15, 1996, the Court consolidated the three cases into one captioned In re Boston Technology, Inc., Securities Litigation. On November 13, 1996, Boston was allowed to transfer the consolidated action to the United States District Court for the District of Massachusetts. On February 5, 1998, the Court issued an order granting the defendants' motion to dismiss the Amended Complaint. No final judgment has been entered in the case. The Company has received no information regarding any plans the plaintiffs may have to ask the Court to reconsider its order, attempt to re-plead their claims, or appeal from any judgment that might be entered. However, if any of these actions are taken by the plaintiffs, the Company and the other defendants intend to contest these actions vigorously. On or about March 11, 1997, a complaint was filed in the Fourteenth Judicial District Court of Dallas County, Case No. 9702187, by Syntellect Technology Corporation ("Syntellect"). The complaint alleges, among other things, breach of contract by Boston in failing or refusing to pay certain royalties allegedly due under the Patent License Agreement between Boston and Syntellect's predecessor, Dytel Corporation (the "License Agreement"). Syntellect claims that the License Agreement required Boston to pay royalties on sales of its software and hardware products. On February 10, 1998, the Court granted the Company partial summary judgment, holding that the License Agreement requires payment of royalties on software products only, and not on hardware sales. Discovery on the remaining claims continues, and a trial is scheduled for the summer of 1998. The Company is currently engaged in negotiations with Syntellect for the settlement of the litigation and the license by the Company of a number of patents for which Syntellect holds licensing rights. Should such negotiations not result in the settlement of the action, the Company intends to contest Syntellect's claims vigorously. On February 2, 1998, Computel Computadores e Telecommunicacoes S.A. ("Computel") filed a Request for Arbitration with the International Chamber of Commerce ("ICC") in Paris, France, claiming breaches by Boston and its wholly-owned subsidiary, Boston Technology Investments, Inc., in respect of agreements with Computel and its affiliates for the distribution of Boston's systems in Brazil. Computel claims, among other things, that the defendants have breached their obligations to Computel by engaging in the Merger and thereby competing with the joint venture established by the parties in connection with such distribution activities, by delivering equipment that did not conform to specification, by failing to support this equipment and by "fraudulently inducing" Computel to terminate the agreement that established the joint venture without advising it of the possibility of the Merger. In its prayer for relief, Computel alleges damages in excess of US $50 million as a result of lost business opportunities, injury to its business reputation, investment losses and losses due to currency devaluation. On March 10, 1998, the Company commenced an action against Computel and an affiliate in the Middlesex Superior Court of Massachusetts (Civil Action No. 98-1155) seeking declaratory judgments as to 17 arbitrability and the continuing validity of the Purchase and Sale Agreement between the parties, Computel's specific performance of such agreement and injunctions to prevent Computel from proceeding with the ICC arbitration. The Company also seeks damages in excess of $3,767,500 as a result of Computel's failure to pay monies owed under the Purchase and Sale Agreement, as well as costs and attorneys' fees. The Company has also filed a Demand for Arbitration with the American Arbitration Association in Boston, Massachusetts, against Computel and certain of its affiliates claiming breach of a Distribution Agreement between the parties and unfair and deceptive trade practices. The Company seeks to recover damages in excess of $12,000,000, plus interest, for systems shipped to respondents, and additional damages for respondents' repudiation and anticipatory breach of contract and unfair and deceptive trade practices. The Company intends to vigorously contest Computel's claims and assert its claims against Computel and its affiliates. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the 1997 Annual Meeting of Shareholders of Comverse, held on January 13, 1998, the following matters, in addition to the reelection of the incumbent Board of Directors, were approved by the shareholders with the votes indicated:
Number of Shares Abstentions and Voted For Voted Against Broker Non-Votes 1. Adoption of the Agreement and Plan of Merger providing for the Merger and related actions. 19,518,465 55,052 4,023,159 2. Ratification of the appointment of Deloitte & Touche LLP as Comverse's independent auditors for the fiscal year ending December 31, 1997. 23,419,355 17,998 75,567 3. Approval of Comverse's 1997 Stock Incentive Compensation Plan under which up to 2.5 million shares of Common Stock may be issued as equity-based compensation to Company employees and directors. 11,585,060 7,902,484 4,025,376 4. Approval of Comverse's 1997 Employee Stock Purchase Plan under which up to 250,000 shares of Common Stock may be issued for purchase by employees of the Company. 19,391,347 175,745 3,945,828
18 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Common Stock trades on the NASDAQ National Market System under the symbol CMVT. The following table sets forth the range of closing prices of the Common Stock as reported on NASDAQ for the past three calendar years and for the first calendar quarter of 1998, through March 24, 1998. YEAR CALENDAR QUARTER LOW HIGH 1995 First Quarter $ 11 $ 14-5/8 Second Quarter $ 13-1/4 $ 18-1/4 Third Quarter $ 17-9/64 $ 23-3/8 Fourth Quarter $ 19-15/16 $ 25-11/16 1996 First Quarter $ 16-5/8 $ 25-1/8 Second Quarter $ 23-3/8 $ 30-1/2 Third Quarter $ 23-3/4 $ 41-3/8 Fourth Quarter $ 32-9/16 $ 38-1/8 1997 First Quarter $ 36-7/8 $ 46-3/8 Second Quarter $ 36-1/2 $ 52 Third Quarter $ 45-15/16 $ 53-1/16 Fourth Quarter $ 32-5/16 $ 54-3/16 1998 First Quarter (through March 24, 1998) $ 30-5/8 $ 47-3/4 There were 3,005 holders of record of Common Stock at March 24, 1998. Such record holders include a number of holders who are nominees for an undetermined number of beneficial owners; the Company believes that the number of beneficial owners of the shares of Common Stock outstanding at such date was approximately 40,000. The Company has not declared or paid any cash dividends on its equity securities and does not expect to pay any cash dividends in the foreseeable future, but rather intends to retain its earnings to finance the development and growth of the Company's business. Any future determination as to the declaration and payment of dividends will be made by the Board of Directors in its discretion, and will depend upon the Company's earnings, financial condition, capital requirements and other relevant factors. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 19 ITEM 6. SELECTED FINANCIAL DATA. The following tables present selected consolidated financial data for the Company for each of the years in the five years ended December 31, 1997. Such information has been derived from the Company's audited consolidated financial statements and should be read in conjunction with the Company's consolidated financial statements and the notes to the consolidated financial statements included elsewhere in this report. All financial information presented herein for periods prior to the 1995 acquisition of DGM&S has been retroactively adjusted to account for that transaction as a pooling of interests.
Year Ended December 31, ---------------------------------------------------------------- 1993(1) 1994(1) 1995 1996 1997 (In thousands, except per share data) Statement of Operations Data: Revenues: Sales $ 81,388 $ 108,150 $ 137,149 $ 197,181 $ 280,281 Interest and other income 3,203 6,162 8,747 10,130 16,209 ---------- ---------- ---------- ---------- --------- Total revenues 84,591 114,312 145,896 207,311 296,490 Costs and Expenses: Cost of sales 35,125 47,715 59,297 84,319 118,857 Selling, general and administrative 23,468 33,681 41,388 53,347 74,064 Research and development, net 8,161 12,640 19,426 27,441 38,659 Interest expense and other 1,057 3,947 4,406 7,063 9,769 Royalties and license fees 1,911 2,186 2,419 4,365 6,865 Total costs and expenses 70,105 100,431 126,789 176,500 248,175 Income before income tax provision and extraordinary item 14,486 13,881 19,107 31,346 48,315 Income tax provision 1,021 1,783 2,057 3,358 4,815 ---------- ---------- ---------- ---------- --------- Net income $ 13,465 $ 12,098 $ 17,050 $ 27,988 $ 43,500 ========== ========== ========== ========== ========= Earnings per share -diluted $ 0.65 $ 0.55 $ 0.75 $ 1.16 $ 1.61 ========== ========== ========== ========== ========= Weighted average number of common and common equivalent shares outstanding 20,756 21,868 22,602 26,447 27,099 December 31, ---------------------------------------------------------------- 1993(2) 1994 1995 1996 1997 (In thousands) Balance Sheet Data: Working capital $ 138,149 $ 141,344 $ 155,064 $ 292,249 $ 330,303 Total assets 174,468 192,502 221,454 390,901 457,563 Long-term debt, including current portion 63,232 62,810 61,086 115,605 115,630 Stockholders' equity 91,608 101,613 121,766 212,058 261,482
(1) Includes results for DGM&S for its fiscal year ended September 30. (2) Includes amounts for DGM&S as of its fiscal year ended September 30. 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FORWARD-LOOKING STATEMENTS This report contains forward-looking statements that involve a number of risks and uncertainties, including without limitation information regarding competition and future trends in the industries in which the Company competes, the Company's future revenues and expenses, and the Company's plans, strategies and expectations for its business. There are a number of factors that could cause the Company's actual results and business plans to differ materially from those forecasted or projected in such forward-looking statements. These factors include, without limitation, those set forth below under the caption "Certain Trends and Uncertainties". Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligations to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. RESULTS OF OPERATIONS The following discussion and analysis of the Company's results of operations covers the operating results of Comverse and its consolidated subsidiaries for the fiscal years included in the foregoing selected financial data. The operating results of Boston are not included. In connection with the Merger, the fiscal year of the Company has been changed from the calendar year to the fiscal year ending January 31, corresponding to Boston's fiscal year. The Company is recognizing substantial charges relating to the Merger and the resulting combination of the two companies, effective upon the consummation of the Merger in January 1998. Sales in the January, 1998 one-month transition period (including Boston) were approximately $14,401,000, with a net loss of approximately $115,207,000. Comparison of 1996 and 1997 Operations Total Revenues. Total revenues increased from 1996 to 1997 by approximately $89,179,000 (43%). The increase is attributable primarily to a higher volume of sales of systems and parts. Sales increased from 1996 to 1997 by approximately $83,100,000 (42%), primarily resulting from increased sales in the TRILOGUE product line. Interest and other income increased from 1996 to 1997 by approximately $6,079,000 (60%), resulting primarily from increased interest and dividend income, the investment of funds generated through the issuance of convertible subordinated debentures in October 1996, and realized gains on sales of investments. Cost of Sales. Cost of sales increased by approximately $34,538,000 (41%) from 1996 to 1997 primarily as a result of the increase in sales. Gross margins increased from approximately 57.2% in 1996 to approximately 57.6% in 1997. 21 Selling, General and Administrative Expenses. Selling, general and administrative expenses increased from 1996 to 1997 by approximately $20,717,000 (39%) and as a percentage of total revenues decreased from approximately 26% in 1996 to approximately 25% in 1997. The increased amount was a result of increased sales, marketing and administrative activities associated with the overall growth of the Company's operations, and particularly with the expansion of direct sales and marketing activities. Research and Development Expenses. Net research and development expenses during 1997 increased by approximately $11,218,000 (41%) over 1996 due to overall growth of research and development operations, the initiation of significant new research and development projects and increases in salaries and other costs associated with research and development operations in Israel. Royalties and License Fees. Royalties and license fees increased from 1996 to 1997 by approximately $2,500,000 (57%) due primarily to growth in sales of royalty-bearing products. Royalties and license fees as a percentage of total sales increased from approximately 2.2% in 1996 to approximately 2.4% in 1997, reflecting an increase in the royalty rate payable to a funding agency that became effective in 1996. Income Tax Provision. Provision for income taxes increased from 1996 to 1997 by approximately $1,457,000 (43%), while the Company's overall effective tax rate decreased from approximately 10.7% during 1996 to approximately 10.0% in 1997. The Company's overall rate of tax is reduced significantly by the tax benefits associated with qualified activities of one of its Israeli subsidiaries, which is entitled to favorable income tax rates under a program of the Israeli Government for "Approved Enterprise" investments in that country. Net Income. Net income after taxes increased from approximately $27,988,000 in 1996 to approximately $43,500,000 in 1997, an increase of approximately $15,512,000 (55%), while net income after taxes as a percentage of total revenues increased from approximately 13.5% in 1996 to approximately 14.7% in 1997. The increases resulted primarily from the factors described above. Comparison of 1995 and 1996 Operations Total Revenues. Total revenues increased from 1995 to 1996 by approximately $61,415,000 (42%). The increase is attributable primarily to a higher volume of sales of systems and parts. Sales increased from 1995 to 1996 by approximately $60,032,000 (44%), primarily resulting from increased sales in the TRILOGUE product line. Interest and other income increased from 1995 to 1996 by approximately $1,383,000 (16%), resulting primarily from increased interest and dividend income, the investment of funds generated through the issuance of convertible subordinated debentures in October 1996, and realized gains on sales of short-term investments. 22 Cost of Sales. Cost of sales increased by approximately $25,022,000 (42%) from 1995 to 1996 primarily as a result of the increase in sales. Gross margins increased from approximately 56.8% in 1995 to approximately 57.2% in 1996. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased from 1995 to 1996 by approximately $11,959,000 (29%) and as a percentage of total revenues decreased from approximately 28% in 1995 to approximately 26% in 1996. The increased amount was a result of increased sales, marketing and administrative activities associated with the overall growth of the Company's operations, and particularly with the expansion of direct sales and marketing activities. Research and Development Expenses. Net research and development expenses during 1996 increased by approximately $8,015,000 (41%) over 1995 due to overall growth of research and development operations, the initiation of significant new research and development projects and increases in salaries and other costs associated with research and development operations in Israel. Royalties and License Fees. Royalties and license fees increased from 1995 to 1996 by approximately $1,946,000 (80%) due primarily to growth in sales of royalty-bearing products. Royalties and license fees as a percentage of total sales increased from approximately 1.8% in 1995 to approximately 2.2% in 1996, reflecting an increase in the royalty rate payable to a funding agency that became effective in 1996. Income Tax Provision. Provision for income taxes increased from 1995 to 1996 by approximately $1,301,000 (63%), while the Company's overall effective tax rate decreased from approximately 10.8% during 1995 to approximately 10.7% in 1996. The Company's overall rate of tax is reduced significantly by the tax benefits associated with qualified activities of one of its Israeli subsidiaries, which is entitled to favorable income tax rates under a program of the Israeli Government for "Approved Enterprise" investments in that country. Net Income. Net income after taxes increased from approximately $17,050,000 in 1995 to approximately $27,988,000 in 1996, an increase of approximately $10,938,000 (64%), while net income after taxes as a percentage of total revenues increased from approximately 11.7% in 1995 to approximately 13.5% in 1996. The increases resulted primarily from the factors described above. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1997, the Company had cash and cash equivalents of approximately $173,531,000, bank time deposits of approximately $40,700,000, short-term investments of approximately $60,787,000 and working capital of approximately $330,303,000. The Company believes that its existing working capital, together with funds generated from operations, will be sufficient to provide for its planned operations at least through December 31, 1998. 23 The Company regularly examines opportunities for strategic acquisitions of other companies or lines of business, and anticipates that it may from time to time issue additional debt and/or equity securities either as direct consideration for such acquisitions or to raise additional funds to be used (in whole or in part) in payment for acquired securities or assets. The issuance of such securities can be expected to have a dilutive impact on the Company's shareholders, and there can be no assurance as to whether or when any acquired business would contribute positive operating results commensurate with the associated acquisition cost. The Company's liquidity and capital resources have not been, and are not anticipated to be, materially affected by restrictions pertaining to the ability of its subsidiaries in Israel to pay dividends or by withholding taxes associated with any such dividend payments. Cash dividends paid by an Israeli corporation to United States residents are subject to withholding of Israeli income tax at source at rates of up to 25%, depending on the particular facilities that have generated the earnings that are the source of the dividends. YEAR 2000 The Company has taken actions to understand the nature and extent of the work required to make its systems, products and infrastructure Year 2000 compliant and has begun work to prepare its products and its financial, information and other computer-based systems for the Year 2000, including replacing and/or updating existing legacy systems. The Company continues to evaluate the estimated costs associated with these efforts. While these efforts will involve additional costs, the Company believes, based on available information, that it will be able to manage its total Year 2000 transition without any material adverse effect on its business operations, products or financial prospects. CERTAIN TRENDS AND UNCERTAINTIES The Company has benefited from the growth in its business and capital base over the past three years to make significant new investment in its operations and infrastructure intended to enhance its opportunities for future growth and profitability. The Company's results of operations reflect the significant increase in its investment in operations over the past three years. The Company intends to continue during 1998 to make significant investments in the growth of its business, and to examine opportunities for additional growth through acquisitions and strategic investments. The impact of these decisions on future profitability cannot be predicted with assurance, and the Company's commitment to growth may increase its vulnerability to unforeseen downturns in its markets, technology changes and shifts in competitive conditions. However, the Company believes that significant opportunities exist in the markets for each of its main product lines, and that continued strong investment in its technical, product development, marketing and sales capabilities will enhance its opportunities for long term growth and profitability. 24 The Merger involves the integration of two companies that have previously operated independently. The combination of two sizable technology-based companies involves significant complexities, and no assurance can be given that the combined Company will be able to integrate the operations of Boston into the Company without encountering difficulties or experiencing the loss of key Comverse or Boston personnel or that the benefits expected from such integration will be realized. The integration of two companies across geographically dispersed operations can create the risk of disruption in operations of the combined company, and neither company's management has substantial experience in managing such integration or the operations of an entity the size of the combined Company. The Company does not expect to realize cost savings in the near future as a result of the Merger, and no assurance can be given that any savings can be achieved in future periods. Furthermore, there can be no certainty that the Merger will not adversely affect the relationships with key customers or key vendors of either company. As a result of its significantly greater concentration on a small number of large telephone company customers, Boston's business has historically been considerably more volatile than that of Comverse, and the operations of the combined Company are likely to be less predictable and subject to greater risks from actions of individual customers than the operations of Comverse in recent years. The telecommunications industry is subject to rapid technological change. The Company's revenue stream will depend on its ability to enhance its existing products and to introduce new products on a timely and cost-effective basis. This includes any customer-requested custom software enhancements required in the normal course of product delivery and customer demands for the technological convergence of the Company's products. The Company's products involve sophisticated hardware and software technology that performs critical functions to highly demanding standards. There can be no assurance the Company's current or future products will not develop operational problems, which could have a material adverse effect on the Company. In addition, if the Company were to delay the introduction of new products, or to delay the delivery of specific custom software enhancements, the Company's operating results could be adversely affected. The Company sells a majority of its products to companies in the telecommunications industry. This industry is undergoing significant change as a result of deregulation and privatization worldwide, reducing restrictions on competition in the industry. Unforeseen changes in the regulatory environment may have an impact on the Company's revenues and/or costs in any given part of the world. The worldwide enhanced services systems industry is already highly competitive and the Company expects competition to intensify. The Company believes that existing competitors will continue to present substantial competition, and that other companies, many with considerably greater financial, marketing and sales resources than the Company, may enter the enhanced services systems markets. The 1997 acquisition of Octel Communications Corporation, a significant competitor of the Company, by Lucent Technologies, Inc. may intensify the competitive environment in the industry, and there can be no assurance that similar business combinations or industry consolidation will not occur in the future. 25 The enhanced services platforms industry has experienced a continuing evolution of product offerings and alternatives for delivery of services. These trends have affected and may be expected to have a significant continuing influence on conditions in the industry, although the impact on the industry generally and on the Company's position in the industry cannot be predicted with assurance. Significant changes in the industry make planning decisions more difficult and increase the risk inherent in the planning process. The market for telecommunications monitoring systems is also in a period of significant transition. Budgetary constraints, uncertainties resulting from the introduction of new technologies in the telecommunications environment and shifts in the pattern of government expenditures resulting from geopolitical events have increased uncertainties in the market, resulting in certain instances in the attenuation of government procurement programs beyond their originally expected performance periods and an increased incidence of delay, cancellation or reduction of planned projects. The continuing delay and uncertainties surrounding the Communications Assistance for Law Enforcement Act ("CALEA") have had a significant impact on acquisition plans of law enforcement agencies in North America engaged in monitoring activities, and no assurances can be given as to the timing or ultimate content of the proposed legislation. Competitive conditions in this sector have also been affected by the increasing use by certain potential government customers of their own internal development resources rather than outside vendors to provide certain technical solutions. In addition, a number of established government contractors, particularly developers and integrators of technology products, have taken steps to redirect their marketing strategies and product plans in reaction to cut-backs in their traditional areas of focus, resulting in an increase in the number of competitors and the range of products offered in response to particular requests for proposals. The lack of predictability in the timing and scope of government procurements have similarly made planning decisions more difficult and have increased the associated risks. The Company has historically derived a significant portion of its sales and operating profit from a relatively small number of contracts for large system installations with major customers. Boston's operating results, in particular, have often been characterized by volatility and lack of predictability, reflecting its traditional customer concentration among major telecommunications services providers such as the Regional Bell Operating Companies. The Company continues to emphasize large capacity systems in its product development and marketing strategies. Contracts for large installations typically involve a lengthy and complex bidding and selection process, and the ability of the Company to obtain particular contracts is inherently difficult to predict. The Company believes that opportunities for large installations will continue to grow in both its commercial and government markets, and intends to continue to expand its research and development, manufacturing, sales and marketing and product support capabilities in anticipation of such growth. However, the timing and scope of these opportunities and the pricing and margins associated with any eventual contract award are difficult to forecast, and may vary substantially from transaction to transaction. The Company's future operating results may accordingly exhibit a higher degree of volatility than the operating results of other companies in its industries that have adopted different strategies, and than the Company has experienced in prior periods. Although the Company is actively pursuing a number of significant procurement opportunities in the United States and internationally, both the timing of any eventual procurements and the probability of the Company's receipt of significant contract awards are uncertain. The degree of dependence by the Company on large orders, and the investment required to enable the Company to perform such orders, without assurance of continuing order flow from the same customers and predictability of gross margins on any future orders, increase the risk associated with its business. 26 The Company has significantly increased its expenditures in all areas of its operations during recent periods, including the areas of research and development and marketing and sales, and the Company plans to further increase these expenditures in the foreseeable future. The increase in research and development expenditures reflects the Company's concentration on enhancing the range of features and capabilities of its existing product lines and developing new generations of its products. The Company believes that these efforts are essential for the continuing competitiveness of its product offerings and for positioning itself to participate in future growth opportunities in both the commercial and government sectors. The increase in sales and marketing expenditures primarily results from the Company's decision to expand its activities and direct presence in a growing number of world markets. The Company's costs of operations have also been affected by increases in the cost of its operations in Israel, resulting both from general inflation and increases in the cost of attracting and retaining qualified scientific, engineering and technical personnel in Israel, where the demand for such personnel is growing rapidly with the expansion of technology-based industries in that country. The increase in these costs in recent periods has not been offset by proportional devaluation of the Israeli shekel against the United States dollar, and accordingly has had a negative impact on the Company's overall results of operations. Continuation of such trends may have a material adverse effect on the Company's future results of operations. A significant portion of the Company's research and development and manufacturing operations are located in Israel and may be affected by regulatory, political, military and economic conditions in that country. The Company's historical operating results reflect substantial benefits from programs sponsored by the Israeli government for the support of research and development, as well as favorable tax rates available to "Approved Enterprises" in Israel. The Israeli government has indicated its intention to reexamine certain of its policies in these areas. Recently, the government acted to increase, from between 2% and 3% of associated product sales to 3% of associated product revenues (including service and other related revenues), the annual rate of royalties to be applied to repayment of benefits under the conditional grant program administered by the Office of the Chief Scientist of the Ministry of Industry and Trade, a program in which the Company has regularly participated and under which it continues to receive significant benefits through reimbursement of qualified research and development expenditures. The Company's repayment of amounts received under the program will be accelerated through these higher royalty rates until repayment is completed. In addition, permission from the government of Israel is required for the Company to manufacture outside of Israel products resulting from research and development activities funded under such programs, or to transfer outside of Israel related technology rights, and in order to obtain such permission the Company may be required to increase the royalties to the applicable funding agencies 27 and/or repay certain amounts received as reimbursement of research and development costs. The Company expects to incur additional royalty expenses and/or repayment obligations as a result of the Merger and the location of certain manufacturing and research and development operations pertaining to its TRILOGUE product line at its Boston facilities. The Israeli authorities have also indicated that this funding program will be further reduced in the future, particularly for larger entities such as the Company. The Israeli government has also shortened the period of the tax moratorium applicable to "Approved Enterprises" from four years to two years. Although this change has not affected the tax status of most of the Company's current projects, it will apply to any future "Approved Enterprises" of the Company. If further changes in the law or government policies regarding those programs were to result in their termination or adverse modification, or if the Company were to become unable to participate in or take advantage of those programs, the cost to the Company of its operations in Israel would materially increase and there would be an adverse effect on the results of the Company's operations as a whole. To the extent the Company increases its activities outside Israel, which will result from the Merger and possible future acquisitions, such increased activities will not be eligible for programs sponsored by Israel. The Company's research and development and manufacturing operations attributable to Boston are expected to continue to be located in the United States and thus will not be eligible for the benefits of those programs. Accordingly, the effective cost to the Company of its future research and development activities in particular, and its operations in general, could significantly increase relative to that of Comverse, historically. The Company currently derives a significant portion of its total sales from customers outside of the United States. International transactions involve particular risks, including political decisions affecting tariffs and trade conditions, rapid and unforeseen changes in economic conditions in individual countries, turbulence in foreign currency and credit markets, and increased costs resulting from lack of proximity to the customer. Volatility in international currency exchange rates may have a significant impact on the Company's operating results. The Company has, and anticipates that it will continue to receive, significant contracts denominated in foreign (primarily Western European and Japanese) currencies. As a result of the unpredictable timing of purchase orders and payments under such contracts and other factors, it is often not practicable for the Company to effectively hedge the risk of significant changes in currency rates during the contract period. Since the Company will hedge the exchange rate risks associated with long-term contracts denominated in foreign currencies only to a limited extent, operating results can be affected by the impact of currency fluctuations as well as the cost of such hedging. While the Company believes that prevailing economic conditions in the Far East and Southeast Asia have reduced the demand for its systems in certain countries, overall sales in the region have increased over the past 12 months. The Company cannot currently predict the effect on its business should regional economic conditions fail to improve. The trading price of the Company's shares may be affected by the factors noted above as well as prevailing economic and financial trends and conditions in the public securities markets. Share prices of companies in technology and government contracting businesses, and particularly smaller and medium-sized publicly traded companies such as the Company, tend to 28 exhibit a high degree of volatility. The Company's revenues and earnings may be more volatile than that of Comverse historically as a result of the greater concentration of Boston's business on a limited number of large customers. Shortfalls in revenues or earnings from the levels anticipated by the public markets could have an immediate and significant effect on the trading price of the Company's shares in any given period. Such shortfalls may result from events that are beyond the Company's immediate control, can be unpredictable and, since a significant proportion of the Company's sales during each fiscal quarter tend to occur in the latter stages of the quarter, may not be discernible until the end of a financial reporting period. These factors contribute to the volatility of the trading value of its shares regardless of the Company's long-term prospects. The trading price of the Company's shares may also be affected by developments, including reported financial results and fluctuations in trading prices of the shares of other publicly-held companies in the voice processing industry, which may not have any direct relationship with the Company's business or prospects. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial information required by Item 8 is included elsewhere in this report. See Part IV, Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III The information required by Part III is omitted pursuant to instruction G(3). 29 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
Page(s) ------- (a) Documents filed as part of this report. --- --------------------------------------- (1) Financial Statements. --- --------------------- Index to Consolidated Financial Statements F-1 Independent Auditors' Report F-2 Consolidated Balance Sheets - December 31, 1996 and 1997 F-3 Consolidated Statements of Income - Years ended December 31, 1995, 1996 and 1997 F-4 Consolidated Statements of Stockholders' Equity - Years ended December 31, 1995, 1996 and 1997 F-5 Consolidated Statements of Cash Flows - Years ended December 31, 1994, 1995 and 1996 F-7 Notes to Consolidated Financial Statements F-8 (2) Financial Statement Schedules. --- ------------------------------ None (3) Exhibits. --- --------- The Index of Exhibits commences on the following page. Exhibits numbered 10.3 through 10.8, 10.13 through 10.16 and 10.24 through 10.30 comprise material compensatory plans and arrangements of the registrant.
- 30 - EXHIBITS No. Description 2.1* Agreement and Plan of Merger dated as of August 20, 1997, between Registrant and Boston Technology, Inc. (Incorporated by reference to the Definitive Proxy Materials for the Registrant's Annual Meeting of Stockholders held January 13, 1998.) 3 Articles of Incorporation and By-Laws: 3.1* Certificate of Incorporation. (Incorporated by reference to the Registrant's Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1987.) 3.2* Certificate of Amendment of Certificate of Incorporation effective February 26, 1993. (Incorporated by reference to the Registrant's Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1992.) 3.3* Certificate of Amendment of Certificate of Incorporation effective January 12, 1995. (Incorporated by reference to the Registrant's Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1994.) 3.4* By-Laws, as amended. (Incorporated by reference to the Registrant's Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1987.) 4 Instruments defining the rights of security holders including indentures: 4.1* Excerpts from Certificate of Incorporation. (Incorporated by reference to the Registrant's Registration Statement on Form S-1 under the Securities Exchange Act of 1933, Registration No. 33-9147.) 4.2* Excerpt from Certificate of Amendment of Certificate of Incorporation effective February 26, 1993. (Incorporated by reference to the Registrant's Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1992.) 4.3* Excerpt from Certificate of Amendment of Certificate of Incorporation effective January 12, 1995. (Incorporated by reference to the Registrant's Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1994.) 4.4* Excerpts from By-Laws, as amended. (Incorporated by reference to the Registrant's Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1992.) 4.5* Specimen stock certificate. (Incorporated by reference to the Registrant's Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1992.) - 31 - 4.6* Indenture dated as of October 4, 1996 from Comverse Technology, Inc. to The Chase Manhattan Bank, N.A., Trustee. (Incorporated by reference to the Registrant's Current Report on Form 8-K under the Securities Exchange Act of 1934 filed October 10, 1996.) 4.7* Specimen 5 3/4% Convertible Subordinated Debenture due 2006. (Incorporated by reference to the Registrant's Current Report on Form 8-K under the Securities Exchange Act of 1934 filed October 10, 1996.) 10 Material contracts: 10.1* Proxy Agreement dated as of September 5, 1991 by and among Comverse Government Systems Corporation, James R. Allen, Robert W. Bazley, Robert T. Marsh and Comverse Technology, Inc. (Incorporated by reference to the Registrant's Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1991.) 10.2* Visitation Approval Procedure Agreement dated as of September 5, 1991 by and among Comverse Government Systems Corporation, James R. Allen, Robert W. Bazley, Robert T. Marsh and Comverse Technology, Inc. (Incorporated by reference to the Registrant's Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1991.) 10.3* Form of Stock Option Agreement pertaining to shares of certain subsidiaries of Comverse Technology, Inc. (Incorporated by reference to the Registrant's Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1993.) 10.4* Employment Agreement effective as of July 1, 1994 by and between Comverse Technology, Inc. and Kobi Alexander. (Incorporated by reference to the Registrant's Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1994.) 10.5* 1994 Stock Option Plan. (Incorporated by reference to the Registrant's Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1994.) 10.6* 1995 Stock Option Plan. (Incorporated by reference to the Registrant's Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1995.) - 32 - 10.7* 1996 Stock Option Plan. (Incorporated by reference to the Registrant's Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1996.) 10.8* Form of Incentive Stock Option Agreement. (Incorporated by reference to the Registrant's Registration Statement on Form S-1 under the Securities Act of 1933, Registration No. 33-9147.) 10.9* Deed of Guarantee from Comverse Technology, Inc. to Bank Hapoalim B.M. dated July 30, 1986. (Incorporated by reference to the Registrant's Registration Statement on Form S-1 under the Securities Act of 1933, Registration No. 33-9147.) 10.10* Continuing Guarantee from Comverse Technology, Inc. to Bank Leumi le-Israel B.M. (Incorporated by reference to the Registrant's Registration Statement on Form S-1 under the Securities Act of 1933, Registration No. 33-9147.) 10.11* Patent License Agreement by and between Efrat Future Technology Ltd. and VMX, Inc. (Incorporated by reference to the Registrant's Registration Statement on Form S-1 under the Securities Act of 1933, Registration No. 33-9147.) 10.12* Form of Indemnity Agreement between Comverse Technology, Inc. and its Officers and Directors. (Incorporated by reference to the Registrant's Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1987.) 10.13* 1987 Stock Option Plan, as amended. (Incorporated by reference to the Registrant's Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1987.) 10.14* Form of Stock Option Agreement for options other than Incentive Stock Options. (Incorporated by reference to the Registrant's Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1987.) 10.15* 1997 Employee Stock Purchase Plan. (Incorporated by reference to the Definitive Proxy Materials for the Registrant's Annual Meeting of Stockholders held January 13, 1998.) 10.16* 1997 Stock Incentive Compensation Plan. (Incorporated by reference to the Definitive Proxy Materials for the Registrant's Annual Meeting of Stockholders held January 13, 1998.) 10.17* Memorandum of Agreement dated November 22, 1995 between Boston Technology, Inc. and AT&T. (Incorporated by reference to the Annual Report of Boston Technology, Inc. on Form 10-K under the Securities Exchange Act of 1934 for the year ended January 31, 1996, confidential treatment requested as to certain portions.) - 33 - 10.18* Lease dated November 5, 1990 between Boston Technology, Inc. and Wakefield Park Limited Partnership. (Incorporated by reference to the Annual Report of Boston Technology, Inc. on Form 10-K under the Securities Exchange Act of 1934 for the year ended January 31, 1991.) 10.19* First Amendment dated as of March 31, 1993 to Lease dated November 5, 1990 between Boston Technology, Inc. and Wakefield Park Limited Partnership. (Incorporated by reference to the Quarterly Report of Boston Technology, Inc. on Form 10-Q under the Securities Exchange Act of 1934 for the quarter ended October 31, 1993.) 10.20* Second Amendment dated as of August 31, 1994 to Lease dated November 5, 1990 between Boston Technology, Inc. and Wakefield Park Limited Partnership. (Incorporated by reference to the Annual Report of Boston Technology, Inc. on Form 10-K under the Securities Exchange Act of 1934 for the year ended January 31, 1995.) 10.21* License Agreement dated November 15, 1988 between Boston Technology, Inc. and VMX, Inc. (Incorporated by reference to the Registration Statement of Boston Technology, Inc. on Form S-1 under the Securities Act of 1933, Registration No. 33-32134.) 10.22* License Agreement dated January 22, 1990 between Boston Technology, Inc. and Dytel Corporation. (Incorporated by reference to the Annual Report of Boston Technology, Inc. on Form 10-K under the Securities Exchange Act of 1934 for the year ended January 31, 1990.) 10.23* Settlement Agreement dated December 28, 1993 between the Boston Technology, Inc. and Theis Research, Inc. and Peter F. Theis. (Incorporated by reference to the Annual Report of Boston Technology, Inc. on Form 10-K under the Securities Exchange Act of 1934 for the year ended January 31, 1994.) 10.24* Boston Technology, Inc. 1995 Director Stock Option Plan. (Incorporated by reference to the Quarterly Report of Boston Technology, Inc. on Form 10-Q under the Securities Exchange Act of 1934 for the quarter ended July 31, 1995.) 10.25* Boston Technology, Inc. 1992 Directors' Stock Option Plan, as amended. (Incorporated by reference to the Annual Report of Boston Technology, Inc. on Form 10-K under the Securities Exchange Act of 1934 for the year ended January 31, 1994.) 10.26* Boston Technology, Inc. 1994 Stock Incentive Plan. (Incorporated by reference to the Annual Report of Boston Technology, Inc. on Form 10-K under the Securities Exchange Act of 1934 for the year ended January 31, 1994.) - 34 - 10.27* Boston Technology, Inc. 1989 Incentive Stock Option Plan, as amended. (Incorporated by reference to the Definitive Proxy Materials for Boston Technology, Inc.'s Annual Meeting of Stockholders held July 14, 1992.) 10.28* Boston Technology, Inc. Employee Savings and Profit Sharing Plan. (Incorporated by reference to Registration Statement of Boston Technology, Inc. on Form S-1 under the Securities Act of 1933, Registration No. 33-32134.) 10.29* Boston Technology, Inc. Employee Severance Benefit Plan. (Incorporated by reference to the Current Report of Boston Technology, Inc. on Form 8-K under the Securities Exchange Act of 1934 dated May 9, 1991.) 10.30* Boston Technology, Inc. 1996 Stock Incentive Plan. (Incorporated by reference to the Definitive Proxy Materials for Boston Technology, Inc.'s Annual Meeting of Stockholders held June 25, 1996.) 10.31* Lease dated June 7, 1996 between Boston Technology, Inc. and WBAM Limited Partnership. (Incorporated by reference to the Annual Report of Boston Technology, Inc. on Form 10-K under the Securities Exchange Act of 1934 for the year ended January 31, 1997.) 21 Subsidiaries of Registrant. 27 Financial Data Schedule - - ---------------- * Incorporated by reference. - 35 - COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Page Independent Auditors' Report F-2 Consolidated Balance Sheets as of December 31, 1996 and 1997 F-3 Consolidated Statements of Income for the Years Ended December 31, 1995, 1996 and 1997 F-4 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1995, 1996 and 1997 F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997 F-7 Notes to Consolidated Financial Statements F-8 F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Comverse Technology, Inc. Woodbury, New York We have audited the accompanying consolidated balance sheets of Comverse Technology, Inc. and subsidiaries (the "Company") as of December 31, 1996 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Comverse Technology, Inc. and subsidiaries as of December 31, 1996 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Deloitte & Touche LLP New York, New York February 12, 1998 F-2 COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1997 (In thousands, except share data)
ASSETS 1996 1997 - ------ ---- ---- CURRENT ASSETS: Cash and cash equivalents $ 196,724 $ 173,531 Bank time deposits 10,000 40,700 Short-term investments 39,464 60,787 Accounts receivable, net of allowance for doubtful accounts of $3,984 and $3,524 63,540 79,783 Inventories 31,494 35,220 Prepaid expenses and other current assets 9,034 13,315 Deferred income tax benefits 721 2,163 ---------- ---------- TOTAL CURRENT ASSETS 350,977 405,499 ---------- ---------- PROPERTY AND EQUIPMENT, net 18,041 25,105 INVESTMENTS 5,788 6,859 OTHER ASSETS 16,095 20,100 ---------- ---------- TOTAL ASSETS $ 390,901 $ 457,563 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1997 - ------------------------------------ ---- ---- CURRENT LIABILITIES: Accounts payable and accrued expenses $ 40,531 $ 48,732 Bank loans 11,195 16,970 Advance payments from customers 6,400 9,292 Other current liabilities 602 202 ---------- ---------- TOTAL CURRENT LIABILITIES 58,728 75,196 ---------- ---------- CONVERTIBLE SUBORDINATED DEBENTURES 115,000 115,000 LIABILITY FOR SEVERANCE PAY 2,708 3,515 OTHER LIABILITIES 2,407 2,370 ---------- ---------- TOTAL LIABILITIES 178,843 196,081 ---------- ---------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock, $0.01 par value--authorized, 2,500,000 shares; issued, none - - Common stock, $0.10 par value -- authorized, 100,000,000 shares; issued and outstanding, 24,741,228 and 25,199,176 shares 2,474 2,519 Additional paid-in capital 136,737 142,998 Cumulative translation adjustment (56) (8) Unrealized gain on available-for-sale securities, net of tax 1,547 1,117 Retained earnings 71,356 114,856 ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 212,058 261,482 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 390,901 $ 457,563 ========== ==========
See notes to consolidated financial statements. F-3 COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (In thousands, except per share data)
1995 1996 1997 ---- ---- ---- REVENUES: Sales $ 137,149 $ 197,181 $ 280,281 Interest and other income 8,747 10,130 16,209 ----------- ----------- ----------- TOTAL REVENUES 145,896 207,311 296,490 ----------- ----------- ----------- COSTS AND EXPENSES: Cost of sales 59,297 84,319 118,857 Selling, general and administrative 41,388 53,347 74,064 Research and development, net 19,426 27,441 38,659 Interest expense and other 4,406 7,063 9,769 Royalties and license fees 2,419 4,365 6,865 Minority interest (207) (260) 29 Equity in loss (gain) of affiliates 60 225 (68) ----------- ----------- ----------- TOTAL COSTS AND EXPENSES 126,789 176,500 248,175 ----------- ----------- ----------- INCOME BEFORE GAIN ON ISSUANCE OF SUBSIDIARY SHARES AND INCOME TAX PROVISION 19,107 30,811 48,315 GAIN ON ISSUANCE OF SUBSIDIARY SHARES - 535 - ----------- ----------- ----------- INCOME BEFORE INCOME TAX 19,107 31,346 48,315 INCOME TAX PROVISION 2,057 3,358 4,815 ----------- ----------- ----------- NET INCOME $ 17,050 $ 27,988 $ 43,500 =========== =========== ============ EARNINGS PER SHARE: Basic $ 0.81 $ 1.28 $ 1.74 =========== =========== =========== Diluted $ 0.75 $ 1.16 $ 1.61 =========== =========== ===========
See notes to consolidated financial statements. F-4 COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (In thousands, except share data)
Common Stock Additional Cumulative Unrealized ----------------------- Number of Par Paid-in Translation Gains Shares Value Capital Adjustment (Losses) ------ ----- ------- ---------- -------- BALANCE, JANUARY 1, 1995 $ 20,981,456 $ 2,098 $ 73,300 $ (118) $ 15 Unrealized gain on available-for-sale securities, net of tax - - - - 631 Common stock issued in connection with exercise of stock options 370,446 37 2,040 - - Common stock issued in connection with acquisition of additional interest in majority-owned subsidiary 10,696 1 154 - - Tax benefit of disqualifying dispositions of incentive stock options - - 258 - - Translation adjustment - - - (18) - Net income, year ended December 31, 1995 - - - - ------------ --------- ----------- ---------- ---------- BALANCE, DECEMBER 31, 1995 21,362,598 2,136 75,752 (136) 646 Unrealized gain on available-for-sale securities, net of tax - - - - 901 Common stock issued in connection with exercise of stock options 276,362 27 1,490 - - Conversion of convertible subordinated debentures 3,096,768 310 58,335 - - Common stock issued in connection with acquisition of additional interest in majority-owned subsidiary 5,500 1 148 - - Tax benefit of disqualifying dispositions of incentive stock options - - 1,012 - - Translation adjustment - - - 80 - Net income, year ended December 31, 1996 - - - - - ------------ --------- ----------- ---------- ---------- BALANCE, DECEMBER 31, 1996 24,741,228 2,474 136,737 (56) 1,547 Unrealized gain on available-for-sale securities, net of tax - - - - (430) Common stock issued in connection with exercise of stock options 457,948 45 3,331 - - Tax benefit of disqualifying dispositions of incentive stock options - - 2,930 - - Translation adjustment - - - 48 - Net income, year ended December 31, 1997 - - - - - ------------ --------- ----------- ---------- ---------- BALANCE, DECEMBER 31, 1997 25,199,176 $ 2,519 $ 142,998 $ (8) $ 1,117 ============ ========= =========== =========== ========== See notes to consolidated financial statements.
F-5
Retained Earnings Total -------- ----- BALANCE, JANUARY 1, 1995 $ 26,318 $ 101,613 Unrealized gain on available-for-sale securities, net of tax - 631 Common stock issued in connection with exercise of stock options - 2,077 Common stock issued in connection with acquisition of additional interest in majority-owned subsidiary - 155 Tax benefit of disqualifying dispositions of incentive stock options - 258 Translation adjustment - (18) Net income, year ended December 31, 1995 17,050 17,050 ----------- ---------- BALANCE, DECEMBER 31, 1995 43,368 121,766 Unrealized gain on available-for-sale securities, net of tax - 901 Common stock issued in connection with exercise of stock options - 1,517 Conversion of convertible subordinated debentures - 58,645 Common stock issued in connection with acquisition of additional interest in majority-owned subsidiary - 149 Tax benefit of disqualifying dispositions of incentive stock options - 1,012 Translation adjustment - 80 Net income, year ended December 31, 1996 27,988 27,988 ----------- ---------- BALANCE, DECEMBER 31, 1996 71,356 212,058 Unrealized gain on available-for-sale securities, net of tax - (430) Common stock issued in connection with exercise of stock options - 3,376 Tax benefit of disqualifying dispositions of incentive stock options - 2,930 Translation adjustment - 48 Net income, year ended December 31, 1997 43,500 43,500 ----------- ---------- BALANCE, DECEMBER 31, 1997 $ 114,856 $ 261.482 =========== ==========
F-6 COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (In thousands)
1995 1996 1997 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 17,050 $ 27,988 $ 43,500 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,874 7,132 9,700 Equity in loss (gain) of affiliates 60 225 (68) Minority interest (207) (260) 29 Changes in assets and liabilities: Accounts receivable (18,828) (20,531) (16,243) Inventories (3,346) (15,721) (3,726) Prepaid expenses and other current assets (3,811) (862) (4,337) Accounts payable and accrued expenses 8,038 13,287 8,201 Advance payments from customers (399) 1,412 2,892 Liability for severance pay 947 409 807 Other 1,322 (563) (1,009) ----------- ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 6,700 12,516 39,746 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Maturities and sales (purchases) of bank time deposits and investments, net 63,606 (25,792) (53,524) Purchase of property and equipment (5,556) (9,745) (12,580) Capitalization of software development costs (4,697) (4,466) (6,008) ------------ ------------ ----------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 53,353 (40,003) (72,112) ----------- ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of debentures $ - $ 111,899 $ - Proceeds from issuance of common stock in connection with exercise of stock options and warrants 2,077 1,665 3,376 Net proceeds from bank loans and other debt - 10,785 5,797 Other (1,493) - - ------------ ---------- ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES 584 124,349 9,173 ----------- ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 60,637 96,862 (23,193) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 39,225 99,862 196,724 ----------- ---------- ---------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 99,862 $ 196,724 $ 173,531 =========== ========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for interest $ 3,492 $ 3,138 $ 7,397 =========== ========== ========== Cash paid during the year for income taxes $ 850 $ 2,882 $ 2,646 =========== ========== ========== See notes to consolidated financial statements.
F-7 COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 - -------------------------------------------------------------------------------- 1. ORGANIZATION AND BUSINESS Comverse Technology, Inc. ("Comverse" and, together with its subsidiaries, "CTI" or the "Company") was organized as a New York corporation in October 1984. The Company is engaged in the design, development, manufacture, marketing and support of special purpose computer and telecommunications systems and software for multimedia communications and information processing applications. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation - The consolidated financial statements include the accounts of Comverse and its wholly-owned and majority-owned subsidiaries. All material intercompany balances and transactions have been eliminated. Cash, Cash Equivalents and Bank Time Deposits - The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Bank deposits with maturities in excess of three months are classified as bank time deposits. Short-Term Investments - The Company classifies all of its short-term investments (including U.S. treasury bills) as available-for-sale, accounted for at fair value, with resulting unrealized gains or losses reported as a separate component of stockholders' equity, on a net-of-tax basis. Concentration of Credit Risk - Financial instruments which potentially expose the Company to concentration of credit risk, consist primarily of cash investments and accounts receivable. The Company places its cash investments with high-credit quality financial institutions and currently invests primarily in bank time deposits, money market funds placed with major banks and financial institutions, corporate commercial paper, corporate medium-term notes, and U.S. government obligations that have maturities of one year or less. Accounts receivable are generally diversified due to the number of commercial and government entities comprising the Company's customer base and their dispersion across many geographical regions. The Company believes no significant concentration of credit risk exists with respect to these cash investments and accounts receivable. Inventories - Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out method. Property and Equipment - Property and equipment are carried at cost less accumulated depreciation and amortization. The Company depreciates its property and equipment on a straight-line basis over periods ranging from three to seven years. The cost of maintenance and repairs is charged to operations as incurred. Significant renewals and betterments are capitalized. Income Taxes - The Company accounts for its income using the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. F-8 Revenue and Expense Recognition - Revenues from product sales are generally recognized upon shipment. Products shipped for customer trials are carried in finished goods inventory until customer acceptance is obtained, at which time revenue is recognized. Revenues from certain contracts are recognized under the percentage-of-completion method on the basis of physical completion to date or using actual costs incurred to total expected costs under the contract. Amounts received from customers in excess of revenues earned under the percentage-of-completion method are recorded as advance payments from customers. Related contract costs include all direct material and labor costs and those indirect costs related to contract performance, and are included in cost of sales in the consolidated statements of income. Expenses incurred in connection with research and development activities, other than certain software development costs that are capitalized, and selling, general and administrative expenses are charged to operations as incurred. Software Development Costs - Software development costs are capitalized upon the establishment of technological feasibility and are amortized over the estimated useful life of the software, which to date has been four years or less. Amortization begins in the period in which the related product is available for general release to customers. Amortization expenses amounted to $2,453,000, $3,079,000 and $3,546,000 in 1995, 1996 and 1997, respectively. Functional Currency and Foreign Currency Transaction Gains and Losses - The United States dollar (the "dollar") is the functional currency of the major portion of the Company's foreign operations. Most of the Company's sales, and materials purchased for manufacturing, are denominated in or linked to the dollar. Certain operating costs, principally salaries, of foreign operations are denominated in local currencies. In those instances where a foreign subsidiary has a functional currency other than the dollar, the Company records any necessary foreign currency translation adjustment, reflected in stockholders' equity, at the end of each reporting period. Net losses from foreign currency transactions, included in the consolidated statements of income, approximated $249,000, $731,000 and $1,555,000 in 1995, 1996 and 1997, respectively. The Company occasionally enters into foreign exchange forward contracts and options on foreign currencies. The purpose of the Company's foreign currency hedging activities is to protect the Company from the risk that the eventual dollar cash flows resulting from the sale of products to international customers will be adversely affected by changes in exchange rates. Any gain or loss on a foreign exchange contract which hedges a firm commitment is deferred until the underlying transaction is realized, at which time it is included in the consolidated statement of income. At December 31, 1997, there were outstanding forward contracts to purchase approximately $3,500,000 in Western European currencies. The Company also purchases foreign exchange options which permit, but do not require, the Company to exchange foreign currencies at a future date with another party at a contracted exchange rate. To finance premiums paid on such options, from time to time the Company may also write offsetting options at exercises prices which limit, but do not eliminate, the effect of purchased options as a hedge. As of December 31, 1997, the Company had purchased foreign exchange options of $8,000,000 and written foreign exchange options of $8,000,000 in Western European currencies. F-9 Other Assets - Licenses of patent rights and acquired "know-how" are recorded at cost and amortized using the straight-line method over the estimated useful lives of the related technology, not exceeding five years. Goodwill and other intangible assets associated with acquired subsidiaries are amortized over periods ranging from five to twelve years. Debt issue costs are amortized over the ten-year term of the related debt, on a straight-line basis. Long-Lived Assets - The Company reviews for the impairment of long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. No such impairment losses have been identified by the Company. Pervasiveness of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications - Certain prior year amounts have been reclassified to conform to the manner of presentation in the current year. 3. RESEARCH AND DEVELOPMENT A significant portion of the Company's research and development operations are located in Israel where the Company derives substantial benefits from participation in programs sponsored by the Government of Israel for the support of research and development activities conducted in that country. For the years 1995, 1996 and 1997, the Company's research and development activities included projects partially funded by the Office of the Chief Scientist of the Ministry of Industry and Trade of the State of Israel (the "OCS") under which the funding organization reimbursed a portion of the Company's research and development expenditures under approved project budgets. The Company is currently involved in several ongoing research and development projects supported by the OCS. The Company is required to pay royalties to the OCS based on the sale of products incorporating technology developed in these projects. In addition, under the terms of the applicable funding agreements, products resulting from projects funded by the OCS may not be manufactured outside of Israel without government approval. The amounts reimbursed by the OCS for the years 1995, 1996 and 1997 were $7,735,000, $9,172,000 and $16,276,000, respectively. F-10 4. SHORT-TERM INVESTMENTS The Company classifies all of its short-term investments as available-for-sale securities. The following is a summary of available-for-sale securities as of December 31, 1997:
Gross Gross Estimated Unrealized Unrealized Fair Cost Gains Losses Value ---------------------------------------------------------------------- (In thousands) U.S. treasury notes $ 248 $ 4 $ - $ 252 Corporate debt securities 35,685 50 - 35,735 U.S. Government agency bonds 749 - - 749 --------- -------- ------- ---------- Total debt securities 36,682 54 - 36,736 --------- -------- ------- ---------- Common stock 14,359 2,787 1,687 15,459 Mutual funds investing in U.S. government and agencies obligations 1,929 35 - 1,964 Preferred stock 5,981 880 233 6,628 ---------- -------- ------- ---------- Total equity securities 22,269 3,702 1,920 24,051 ---------- -------- ------- ---------- $ 58,951 $ 3,756 $ 1,920 $ 60,787 ========== ======== ======= ========== The following is a summary of available-for-sale securities as of December 31, 1996: Gross Gross Estimated Unrealized Unrealized Fair Cost Gains Losses Value ---------------------------------------------------------------------- (In thousands) U.S. treasury notes $ 347 $ 4 $ - $ 351 Corporate debt securities 12,493 5 - 12,498 U.S. government agency bonds 746 2 - 748 --------- -------- ------- ---------- Total debt securities 13,586 11 - 13,597 --------- -------- ------- ---------- Common stock 15,300 2,878 986 17,192 Mutual funds investing in U.S. government and agencies obligations 1,929 10 - 1,939 Preferred stock 6,431 349 44 6,736 ---------- -------- ------- ---------- Total equity securities 23,660 3,237 1,030 25,867 ---------- -------- ------- ---------- $ 37,246 $ 3,248 $ 1,030 $ 39,464 ========== ======== ======= ==========
During 1997, the gross realized gains on sales of securities totaled approximately $4,037,000 and the gross realized losses totaled approximately $2,503,000. The amortized cost and estimated fair value of debt securities at December 31, 1997, by contractual maturity, are as follows:
Estimated Cost Fair Value ---- ---------- (In thousands) Due in one year or less $ 15,041 $ 15,047 Due after one year through three years 21,591 21,638 Due after three years 50 51 --------- --------- $ 36,682 $ 36,736 ========= =========
F-11 5. INVENTORIES
Inventories consist of: December 31, ------------------------- 1996 1997 ---- ---- (In thousands) Raw materials $ 17,681 $ 15,766 Work in process 7,853 10,098 Finished goods 5,960 9,356 -------- --------- $ 31,494 $ 35,220 ======== =========
6. PROPERTY AND EQUIPMENT Property and equipment consists of:
December 31, ------------------------- 1996 1997 ---- ---- (In thousands) Fixtures and equipment $ 28,943 $ 41,826 Transportation vehicles 3,237 2,845 Leasehold improvements 283 372 -------- --------- 32,463 45,043 Less accumulated depreciation and amortization (14,422) (19,938) --------- ---------- $ 18,041 $ 25,105 ======== =========
F-12 7. OTHER ASSETS Other assets consist of:
December 31, ------------------------- 1996 1997 ---- ---- (In thousands) Software development costs, net of accumulated amortization of $9,103 and $12,649 $ 10,143 $ 12,605 Other assets 5,952 7,495 -------- --------- $ 16,095 $ 20,100 ======== =========
8. ACQUISITIONS On January 14, 1998, Boston Technology, Inc., a Delaware corporation, ("BTI") merged with and into Comverse in a transaction that will be accounted for as a pooling of interests. BTI designs, develops, manufactures, markets and supports standard and customized enhanced services platforms and software applications for the telephone network operator market. Pursuant to the merger, the issued and outstanding shares of BTI at the effective date of the merger were converted into an aggregate of approximately 18,141,185 shares of Comverse's common stock and outstanding options and warrants to purchase BTI stock were converted into options and warrants to purchase an aggregate of 3,458,265 Comverse shares. Unaudited pro forma consolidated statement of income data for the years ended December 31, 1995, 1996, and 1997 are as follows:
CTI BTI Adjustments Combined --- --- ----------- -------- (In thousands, except per share amounts) 1995 Sales $ 137,149 $ 105,267 $ 242,416 Net income (loss) $ 17,050 $ (14,890) $ 2,160 Earnings per share - diluted $ 0.75 $ 0.06 1996 Sales $ 197,181 $ 192,458 $ 389,639 Net income $ 27,988 $ 14,149 $ 42,137 Earnings per share - diluted $ 1.16 $ 1.01 1997 Sales $ 280,281 $ 210,525 $ (1,866) $ 488,940 Net income (loss) $ 43,500 $ (7,503) $ (1,472) $ 34,525 Earnings per share - diluted $ 1.61 $ 0.75
F-13 The pro forma adjustments relate to the elimination of intercompany transactions between CTI and BTI. The unaudited pro forma consolidated statement of income data combine the historical statement of income data of the Company for the years ended December 31, 1995, 1996 and 1997 with the historical statement of income data of BTI for the fiscal years ended January 31, 1996 and 1997 and the eleven months ended December 31, 1997, respectively. On August 30, 1995, the Company acquired DGM&S, a corporation that develops and markets telecommunications software products. To effect the acquisition, the Company issued 1,078,944 shares of common stock for all of the outstanding common stock of DGM&S. The acquisition has been accounted for as a pooling of interests; therefore, prior financial statements and information have been restated to include DGM&S, as if the companies had been combined for all periods presented. 9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of:
December 31, ------------------------- 1996 1997 ---- ---- (In thousands) Accounts payable $ 19,929 $ 23,387 Accrued salaries 4,737 7,491 Accrued vacation 2,951 4,286 Accrued royalties 3,426 5,052 Other accrued expenses 9,488 8,516 -------- --------- $ 40,531 $ 48,732 ======== =========
10. BANK LOANS As of December 31, 1997, a subsidiary of Comverse has a bank loan of $16,500,000. The loan has an interest rate of 6% and is repayable in July 1998. The loan is secured by a $16,500,000 deposit with the bank. 11. CONVERTIBLE SUBORDINATED DEBENTURES In October 1996, the Company issued $115,000,000 of convertible subordinated debentures bearing interest at 5-3/4% per annum, payable semi-annually. The debentures mature on October 1, 2006. The debentures are convertible into shares of the Company's common stock at a conversion price of $45.75 per share, subject to adjustment in certain events. The debentures are subordinated in right of payment to all existing and future senior indebtedness of the Company. The debentures are redeemable at the option of the Company, in whole or in part, at prices decreasing from 102% of the face amount on October 12, 1999 to par on October 1, 2001. The debenture holders may require the Company to repurchase the debentures at par in the event that the common stock ceases to be publicly traded and, in certain instances, upon a change in control of the Company. F-14 In November 1993, the Company issued $60,000,000 of convertible subordinated debentures bearing interest at 5-1/4% per annum, payable semi-annually. In November 1996, the Company called these debentures for redemption. All of the debentures were converted into 3,096,768 shares of common stock. 12. LIABILITY FOR SEVERANCE PAY Liability for severance pay consists of the Company's unfunded liability for severance pay to employees of certain foreign subsidiaries and accrued severance to the Company's chief executive officer. The Company's statutory obligation for severance pay to employees of its Israeli subsidiaries is determined on the basis of each individual's current salary and length of employment. Funding is currently provided primarily by premiums paid by the Company to insurance providers. The Company is obligated under an agreement with its chief executive officer to provide a severance payment upon the termination of his employment with the Company. Approximately $1,186,000 and $1,398,000 has been accrued as of December 31, 1996 and 1997, respectively, relating to this liability. 13. RELATED PARTIES The Company paid or accrued legal fees to one of its directors in the amounts of $298,000, $254,000, and $422,000 in 1995, 1996 and 1997, respectively. 14. STOCK OPTIONS Employee Stock Options - At December 31, 1997, 3,719,516 shares of common stock were reserved for issuance upon the exercise of options then outstanding and 239,763 options were available for future grant under Comverse's Stock Option Plans, under which options may be granted to key employees, directors, and other persons rendering services to the Company. Options which are designated as "incentive stock options" under the option plans may be granted with an exercise price not less than the fair market value of the underlying shares at the date of grant and are subject to certain quantity and other limitations specified in Section 422 of the Internal Revenue Code. Options which are not intended to qualify as incentive stock options may be granted at any price, but not less than the par value of the underlying shares, and without restriction as to amount. The options and the underlying shares are subject to adjustment in accordance with the terms of the plans in the event of stock dividends, recapitalizations and similar transactions. The right to exercise the options generally vests in annual increments over periods of up to four years from the date of grant or the date of commencement of the grantee's employment with the Company. The changes in the number of options were as follows: F-15
Year Ended December 31, ----------------------------------------------------- 1995 1996 1997 ---- ---- ---- Outstanding at beginning of year 2,455,755 2,677,333 3,392,847 Granted during the year 650,200 1,086,526 897,400 Exercised during the year (370,442) (276,362) (457,948) Canceled, terminated and expired (58,180) (94,650) (112,783) ---------- ----------- -------- Outstanding at end of year 2,677,333 3,392,847 3,719,516 =========== ========== ============
At December 31, 1997, options to purchase an aggregate of 1,441,428 shares were vested and currently exercisable under the option plans and options to purchase an additional 2,278,088 shares vest at various dates extending through the year 2001. Weighted average option exercise price information for the years 1995, 1996 and 1997 was as follows:
1995 1996 1997 ---- ---- ---- Outstanding at beginning of year $ 6.77 $ 8.48 $ 13.86 Granted during the year 13.58 25.17 42.92 Exercised during the year 5.62 5.63 7.83 Canceled, terminated and expired 11.22 14.95 25.89 Exercisable at year end 5.19 6.46 8.01
Significant option groups outstanding at December 31, 1997 and related weighted average price and life information were as follows:
Weighted Average Weighted Weighted Range of Number Remaining Average Number Average Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price -------------- ----------- ---------------- -------------- ----------- -------------- $ 1.40 - $10.00 1,402,545 5.32 $ 7.22 1,258,045 $ 6.90 $ 10.20 - $23.75 1,139,571 7.87 18.68 180,983 15.29 $ 33.25 - $44.25 1,157,000 9.34 40.36 0 0 $ 45.25 - $45.25 20,400 5.49 45.25 2,400 $ 45.25 ----------- ---- -------- --------- ------- 3,719,516 7.35 $ 21.25 1,441,428 $ 8.01 =========== ==== ======== ========= =======
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its option plans. Accordingly, as all options have been granted at exercise prices equal to fair market value on the date of grant, no compensation expense has been recognized by the Company in connection with its stock-based compensation plans. Had compensation cost for the Company's stock option plans been determined based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed under Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation", the Company's net income and earnings per share would have been reduced by approximately $1,067,000, $2,676,000 and $7,401,000 or $.04, $.09 and $.28 per diluted share in 1995, 1996 and 1997, respectively. The weighted average fair value of the options granted during 1995, 1996 and 1997 is estimated at $8.40, $13.66 and $23.14 on the date of grant (using the Black-Scholes option pricing model) with the following weighted average assumptions for 1995, 1996 and 1997, respectively: volatility of 67%, 55% and 54%, risk-free interest rate of 6.8%, 6.1% and 6.5%, and an expected life of five years in 1995, 1996 and 1997. F-16 Options on Subsidiary Shares - Comverse has granted to its chief executive officer, under the terms of his employment agreement, options to acquire 7.5% of the equity of Comverse's subsidiaries, other than Efrat Future Technology, Ltd. ("Efrat"). In addition, Comverse has granted to certain other key executives of the Company options to acquire shares of certain subsidiaries, other than Efrat, as a means of providing incentives directly tied to the performance of those subsidiaries for which different executives have direct responsibility. Such options, which upon exercise would represent in the aggregate up to 23.6% of the outstanding shares of each subsidiary, have terms of ten years and become exercisable and vest in equal ratable annual increments over periods ranging from three to five years from the first anniversary of the date of initial grant. The exercise price of each option is equal to the higher of the book value of the underlying shares at the date of grant or the fair market value of such shares at that date determined on the basis of an arms'-length transaction with a third party or, if no such transactions have occurred, on a reasonable basis as determined by a committee of the Board of Directors. Upon the exercise, in whole or in part, of any option, Comverse will receive an irrevocable proxy to vote the underlying shares and a right of first refusal to purchase the shares upon any proposed sale, transfer or other disposition, until such time as the shares shall have been sold in a bona fide open market transaction. 15. EARNINGS PER SHARE ("EPS") In 1997, the Company adopted SFAS No. 128, "Earnings Per Share". Basic earnings 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 common shares outstanding. The calculation for earnings per share for each of the three years ended December 31, 1997 was as follows:
1995 1996 1997 ----------------------------- -------------------------- -------------------------- Per-Share Per Share Per Share Income Shares Amount Income Shares Amount Income Shares Amount (In thousands, except per share data) Basic EPS Net Income $ 17,050 21,122 $ 0.81 $ 27,988 21,931 $ 1.28 $ 43,500 25,017 $ 1.74 ====== ====== ======= Effect of Dilutive Securities Options 1,480 1,815 2,082 Convertible debentures 2,586 2,701 -------- ------- ------ -------- ------- Diluted EPS $ 17,050 22,602 $ 0.75 $ 30,574 26,447 $ 1.16 $ 43,500 27,099 $ 1.61 ======== ======= ====== ======== ======= ====== ======== ====== =======
Debentures convertible into 3,096,768 shares, 2,513,661 shares and 2,513,661 shares were outstanding as of December 31, 1995, 1996 and 1997, respectively, but were not included in the computation of diluted EPS because the effect of including them would be antidilutive. F-17 16. FOREIGN OPERATIONS Condensed net assets, exclusive of intercompany balances, applicable to all foreign operations, principally located in Israel, included in the consolidated balance sheets, are summarized as follows:
December 31, ---------------------------- 1996 1997 ---- ---- (In thousands) Current assets $ 85,841 $ 131,262 Property and equipment, net 13,548 19,523 Software development costs, net 9,394 12,134 Other assets 80 1,757 ----------- ----------- Total assets 108,863 164,676 ----------- ----------- Current liabilities 32,323 43,942 Other liabilities 2,258 2,849 ----------- ----------- Total liabilities 34,581 46,791 ----------- ----------- Net assets $ 74,282 $ 117,885 =========== ===========
Condensed operating information, exclusive of intercompany transactions, applicable to all foreign operations, principally located in Israel, included in the consolidated statements of income, is summarized as follows:
Year Ended December 31, ----------------------------------------- 1995 1996 1997 ---- ---- ---- (In thousands) Total revenues $ 72,843 $ 95,766 $ 156,337 Costs and expenses 71,430 112,056 166,726 --------- ---------- ----------- Operating income (loss) $ 1,413 $ (16,290) $ (10,389) ========= =========== ============
The operating results shown above reflect the inclusion in costs and expenses of fixed charges incurred by Comverse's foreign subsidiaries necessary to support a level of activity which is greater than that shown in the table due to the exclusion of intercompany revenue. Foreign operations in 1996 and 1997 were profitable when intercompany transactions are included. F-18 17. INCOME TAXES The provision for income taxes consists of the following:
Year Ended December 31, ----------------------------------- 1995 1996 1997 ---- ---- ---- (In thousands) Current: Federal $ 529 $ 1,544 $ 3,471 State 272 560 678 Foreign 1,022 1,950 1,941 --------- --------- --------- 1,823 4,054 6,090 --------- --------- --------- Deferred (benefit): Federal 25 (621) (1,151) State (12) (97) (107) Foreign 221 22 (17) --------- --------- ---------- 234 (696) (1,275) --------- ---------- ---------- $ 2,057 $ 3,358 $ 4,815 ========= ========= =========
The reconciliation of the U.S. Federal statutory tax rate to the Company's effective tax rate is as follows:
Year Ended December 31, ----------------------------------- 1995 1996 1997 ---- ---- ---- U.S. Federal statutory rate 35% 35% 35% Consolidated worldwide income in excess of U.S. income (31) (30) (28) Foreign income taxes 7 6 4 Other - - (1) ------- --------- -------- Company's effective tax rate 11% 11% 10% ======= ========= ========
Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and (b) operating loss carryforwards. The tax effects of significant items comprising the Company's deferred tax asset and liability at December 31, 1996 and 1997 are as follows: F-19
1996 1997 ---- ---- (In thousands) Deferred tax liability: Expenses deductible for tax purposes and not for financial reporting purposes $ 890 $ 846 Unrealized gain on available-for-sale securities 674 679 -------- -------- $ 1,564 $ 1,525 ======== ======== Deferred tax asset: Reserves not currently deductible $ 3,024 $ 3,092 Tax loss carryforwards 1,091 482 Inventory capitalization 197 420 Other 223 853 -------- -------- 4,535 4,847 Less: valuation allowance (3,814) (2,684) --------- --------- Total deferred tax asset $ 721 $ 2,163 ======== ========
Income tax has not been provided on unrepatriated earnings of foreign subsidiaries as currently it is the intention of the Company to reinvest such foreign earnings in their operations. 18. BUSINESS SEGMENT INFORMATION The Company is engaged in one business segment: the design, development, manufacture, marketing and support of special purpose computer and telecommunications systems and software for multimedia communications and information processing applications. Sales by geographic regions, as a percentage of total sales, for the years ended December 31, 1995, 1996 and 1997 were as follows:
1995 1996 1997 ---- ---- ---- United States 29% 28% 25% Canada 4% 3% 2% Europe 31% 39% 45% Far East/Australia 24% 21% 17% Latin America 2% 1% 4% Other 10% 8% 7% ------ ------ ----- Total 100% 100% 100% ====== ====== =====
19. COMMITMENTS AND CONTINGENCIES Leases - The Company leases office, manufacturing, and warehouse space under non-cancelable operating leases. Rent expense for all leased premises approximated $3,014,000, $3,511,000 and $6,287,000 in 1995, 1996, and 1997, respectively. F-20 As of December 31, 1997, the minimum rent obligations of the Company were approximately as follows: Amount ------ (In thousands) 1998 $ 7,585 1999 4,047 2000 2,892 2001 2,639 2002 and thereafter 6,971 ---------- $ 24,134 Employment Agreements - The Company is obligated under employment contracts with its chief executive officer to provide salary, bonuses, and fringe benefits through June 30, 2000. Minimum salary payments under the contracts currently amount to $350,000 per year and aggregate $875,000 through June 30, 2000. The executive is entitled to annual bonuses equal to at least 3% of the Company's consolidated after-tax net income during each year. Upon termination or expiration of the term of employment, the executive is entitled to receive a severance payment equal to $93,170 for each year of his previous and current employment with the Company, which is increased by the rate of 10% per annum compounded for each year of employment, plus continued employment-related benefits for the period of 36 months thereafter. If the termination of employment results from a unilateral termination or fundamental breach of the agreement by the Company, or the resignation of the executive within six months following a change in control of the Company not approved by the executive in his capacity as a director of Comverse, the executive is entitled to an additional payment equal to 299% of the average annual cash compensation, including salary and any bonus payments, received by the executive from the Company during the three immediately preceding fiscal years, plus an amount equal to the income tax resulting from such payment. The agreements also provide for the executive to receive options entitling him to purchase 7-1/2% of the equity of Comverse's subsidiaries, other than Efrat, at prices equal to the higher of book value of the underlying shares at the date of option grant or the fair market value of such shares at that date determined on the basis of an arms'-length transaction with a third party or, if no such transactions have occurred, on a reasonable basis as determined by the Board of Directors. Most other employment agreements of the Company are terminable with or without cause with prior notice of 60 days or less. Licenses and Royalties - The Company licenses certain technology, "know-how," software and related rights for use in the manufacture and marketing of its products, and pays royalties to third parties under such licenses and under other agreements entered into in connection with research and product development activities. The Company currently pays royalties on the sale of substantially all of its TRILOGUE and AUDIODISK product lines in varying amounts based upon the revenues attributed to the various components of such products. Royalties typically range from approximately 1.5% to 6% of net sales of the related products and, in the case of royalties due to government funding sources in respect of research and development projects, are required to be paid until the funding organization has received total royalties ranging from 100% to 150% of the amounts received by the Company under the approved project budgets. F-21 Dividend Restrictions - The ability of Comverse's Israeli subsidiaries to pay dividends is governed by Israeli law, which provides that cash dividends may be paid by an Israeli corporation only out of retained earnings as determined for statutory purposes in Israeli currency. In the event of a devaluation of the Israeli currency against the dollar, the amount in dollars available for payment of cash dividends out of prior years' earnings will decrease accordingly. Cash dividends paid by an Israeli corporation to United States residents are subject to withholding of Israeli income tax at source at a rate of up to 25%, depending on the particular facilities which have generated the earnings that are the source of the dividends. Investments - In 1997, wholly-owned subsidiaries of Comverse and Quantum Industrial Holdings Ltd. organized two new companies to make investments primarily relating to Israel, including investments in high technology ventures. Each participant committed a total of $25,000,000 to the capital of the new companies, for use as suitable investment opportunities are identified. Quantum Industrial Holdings Ltd. is the principal direct investment vehicle of the Quantum Group, a group of investment funds managed by Soros Fund Management LLC. Guaranties - The Company has obtained bank guaranties primarily for performance of certain obligations under contracts with customers. These guaranties, which aggregated approximately $11,800,000 at December 31, 1997, are to be released by the Company's performance of specified contract milestones, which are scheduled to be completed primarily during 1998. Litigation - The Company is subject to certain legal actions arising in the normal course of business. After taking into consideration legal counsel's evaluation of such actions, management is of the opinion that their final resolution will not have any significant adverse effect upon the Company's business or its consolidated financial statements. 20. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value amounts have been determined by the Company, using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
December 31, 1996 December 31, 1997 --------------------------- ------------------------ Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ------ ---------- ------ ---------- (In thousands) Liabilities: Convertible subordinated debentures $ 115,000 $ 119,456 $ 115,000 $ 122,188 Off-balance sheet financial instruments: Foreign exchange forward contracts used for hedging purposes $ - $ 64 $ - $ (157)
F-22 Cash and Cash Equivalents, Bank Time Deposits, Short-Term Investments, Accounts Receivable, Long-Term Receivables, Investments, and Accounts Payable The carrying amounts of these items are a reasonable estimate of their fair value. Convertible Subordinated Debentures and Foreign Exchange Forward Contracts - The fair value of these securities is estimated based on quoted market prices or recent sales for those or similar securities. The fair value estimates presented herein are based on pertinent information available to management as of December 31, 1997. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and current estimates of fair value may differ significantly from the amounts presented herein. 21. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income". This Statement requires that changes in comprehensive income be shown in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 130 is effective for periods beginning after December 15, 1997. In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information". SFAS No. 131 specifies new guidelines for determining a company's operating segments and related requirements for disclosure. The Company is in the process of evaluating the impact of the new standard on the presentation of its financial statements and the disclosures therein. SFAS No. 131 is effective for periods beginning after December 15, 1997. In October 1997, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") No. 97-2, "Software Revenue Recognition". This Statement specifies certain changes for determining the recognition of software revenue. The Company is in the process of evaluating the impact of the SOP on its revenue recognition policies. SOP No. 97-2 is effective for periods beginning after December 15, 1997. F-23 22. QUARTERLY INFORMATION (UNAUDITED) The following table shows selected results of operations for each of the quarters during 1996 and 1997.
Fiscal Quarter Ended March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, 1996 1996 1996 1996 1997 1997 1997 1997 ---- ---- ---- ---- ---- ---- ---- ---- (In thousands, except per share amounts) Sales $ 40,410 $ 46,629 $ 51,892 $ 58,250 $ 63,473 $ 67,015 $ 72,193 $ 77,600 Interest and Other Income 1,786 2,078 2,216 4,050 4,045 4,176 3,751 4,236 --------- --------- --------- -------- -------- --------- --------- --------- Total Revenues $ 42,196 $ 48,707 $ 54,108 $ 62,300 $ 67,518 $ 71,191 $ 75,944 $ 81,836 ========= ========= ========= ======== ======== ========= ========= ========= Gross profit $ 23,058 $ 26,615 $ 29,782 $ 33,407 $ 36,540 $ 38,576 $ 41,612 $ 44,696 Net income $ 5,507 $ 6,851 $ 7,235 $ 8,395 $ 9,587 $ 10,770 $ 11,338 $ 11,805 ========== ========== =========== ========= ============ =========== ======== =========
Earnings per share: Basic $ 0.26 $ 0.32 $ 0.34 $ 0.36 $ 0.39 $ 0.43 $ 0.45 $ 0.47 ======== ======== ========= ======= ======= ========= ========= ========= Diluted $ 0.24 $ 0.29 $ 0.30 $ 0.33 $ 0.36 $ 0.40 $ 0.42 $ 0.44 ======== ======== ========= ======= ======= ========= ========= =========
The difference between income per share and the sum of the income per share for the quarters comprising the year is due to differences in the calculation of the weighted average number of shares outstanding over the respective periods and rounding adjustments. F-24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMVERSE TECHNOLOGY, INC. (Registrant) By: S / Kobi Alexander ------------------------- Kobi Alexander, President Date: March 25, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Kobi Alexander March 25, 1998 - -------------------------------------------- Kobi Alexander, President, Chairman of the Board and Chief Executive Officer; Director /s/ Igal Nissim March 25, 1998 - -------------------------------------------- Igal Nissim, Chief Financial Officer /s/ Zvi Alexander March 25, 1998 - -------------------------------------------- Zvi Alexander, Director /s/ Gregory C. Carr March 25, 1998 - -------------------------------------------- Gregory Carr, Director /s/ John H. Friedman March 25, 1998 - -------------------------------------------- John H. Friedman, Director /s/ Francis E. Girard March 25, 1998 - -------------------------------------------- Francis Girard, Director /s/ Sam Oolie March 25, 1998 - -------------------------------------------- Sam Oolie, Director /s/ William F. Sorin March 25, 1998 - -------------------------------------------- William F. Sorin, Director /s/ Carmel Vernia March 25, 1998 - -------------------------------------------- Carmel Vernia, Director /s/ Shaula Yemini March 25, 1998 - -------------------------------------------- Shaula Yemini, Director EX-21 2 SUBSIDIARIES OF COMVERSE TECHNOLOGY, INC SUBSIDIARIES OF COMVERSE TECHNOLOGY, INC. Jurisidiction of Subsidiary Incorporation Comverse Government Systems Corp. New York Comverse Network Systems, Inc. Delaware CTI Capital Corporation Delaware Comverse Information Systems Corp. Delaware Comverse Infomedia Systems Corp. Delaware Boston Technology International, Inc. Delaware Boston Technology Securities Delaware Voice Mail One Delaware Boston Technology Japan Delaware Boston Technology Mexico Delaware Boston Technology Europe Delaware Boston Technology Investments Delaware Boston Technology Pac Rim Delaware Boston Technology Australia/New Zealand Delaware Boston Technology India Delaware Enhanced Communications Corporation Delaware Startel Corporation California Dale, Gesek, McWilliams & Sheridan, Inc. New Jersey Efrat Future Technology Limited Israel Telemesser Limited Israel C.I.S. Comverse Information Systems Ltd. Israel Comverse Investments Ltd. Israel Telemesser International (1995) Ltd. Israel Netology Ltd.Israel Comverse Technology (Europe) Ltd. U.K. Comverse Technology GmbH Germany Comverse Technology Nordic OY Finland Comverse Asia Pacific Limited Hong Kong Comverse Australasia Pty. Ltd. Australia Boston Technology Limited Virgin Islands Boston Technology International Inc., S.A. de C.V. Mexico Boston Technology Servicios Mexico S.C. Mexico Boston Technology Far East Ltd. Hong Kong Comverse Technology Singapore Pte Ltd. Singapore EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL REPORT ON FORM 10-K TO WHICH IT IS ATTACHED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 173,531 101,487 79,783 3,524 35,220 405,499 45,043 19,938 457,563 75,196 115,000 0 0 2,519 258,963 457,563 280,281 296,490 118,857 248,175 0 0 9,769 48,315 43,500 43,500 0 0 0 43,500 1.74 1.61
-----END PRIVACY-ENHANCED MESSAGE-----