10-Q 1 the-q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 30, 2001 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 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, NY 11797 (Address of principal executive offices) (Zip Code) (516) 677-7200 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No APPLICABLE ONLY TO CORPORATE ISSUERS: The number of shares of Common Stock, par value $0.10 per share, outstanding as of June 6, 2001 was 171,386,757. Page 1 of 21 Total Pages (Exhibit Index Appears on Page 19) PART I FINANCIAL INFORMATION ITEM 1. Financial Statements. Page ---- 1. Condensed Consolidated Balance Sheets as of January 31, 2001 and April 30, 2001 3 2. Condensed Consolidated Statements of Income for the Three Month Periods Ended April 30, 2000 and April 30, 2001 4 3. Condensed Consolidated Statements of Cash Flows for the Three Month Periods Ended April 30, 2000 and April 30, 2001 5 4. Notes to Condensed Consolidated Financial Statements 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 10 Page 2 of 21 Total Pages COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)

ASSETS ------ JANUARY 31, APRIL 30, 2001* 2001 (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 1,275,105 $ 1,358,689 Bank time deposits and short-term investments 460,735 383,294 Accounts receivable, net 359,317 390,546 Inventories 115,799 103,074 Prepaid expenses and other current assets 64,729 67,668 --------------- --------------- TOTAL CURRENT ASSETS 2,275,685 2,303,271 PROPERTY AND EQUIPMENT, net 183,444 187,850 INVESTMENTS 96,870 100,491 OTHER ASSETS 69,265 71,786 --------------- --------------- TOTAL ASSETS $ 2,625,264 $ 2,663,398 =============== =============== ------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts payable and accrued expenses $ 288,921 $ 263,104 Advance payments from customers 122,175 101,616 Other current liabilities 4,210 4,531 --------------- --------------- TOTAL CURRENT LIABILITIES 415,306 369,251 CONVERTIBLE DEBENTURES 900,000 900,000 LIABILITY FOR SEVERANCE PAY 7,924 10,454 OTHER LIABILITIES 12,404 12,453 --------------- --------------- TOTAL LIABILITIES 1,335,634 1,292,158 --------------- --------------- MINORITY INTEREST 53,465 55,855 --------------- --------------- STOCKHOLDERS' EQUITY: Common stock, $0.10 par value - authorized, 600,000,000 shares; issued and outstanding, 168,643,623 and 171,119,637 shares 16,864 17,112 Additional paid-in capital 692,014 704,945 Retained earnings 520,144 599,100 Accumulated other comprehensive income 7,143 (5,772) --------------- --------------- TOTAL STOCKHOLDERS' EQUITY 1,236,165 1,315,385 --------------- --------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,625,264 $ 2,663,398 =============== ===============

*The Condensed Consolidated Balance Sheet as of January 31, 2001 has been summarized from the Company's audited Consolidated Balance Sheet as of that date. The accompanying notes are an integral part of these financial statements. Page 3 of 21 Total Pages COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)

THREE MONTHS ENDED APRIL 30, APRIL 30, 2000* 2001 Sales $ 268,469 $ 365,037 Cost of sales 102,051 136,438 ------------- ------------- Gross margin 166,418 228,599 Operating expenses: Research and development, net 50,717 70,198 Selling, general and administrative 56,512 78,189 Royalties and license fees 4,880 6,184 ------------- ------------- Income from operations 54,309 74,028 Interest and other income, net 6,545 10,380 ------------- ------------- Income before income tax provision 60,854 84,408 Income tax provision 4,648 5,452 ------------- ------------- Net income $ 56,206 $ 78,956 ============= ============= Earnings per share: Basic $ 0.36 $ 0.46 ============= ============= Diluted $ 0.32 $ 0.43 ============= =============

* Restated for pooling of interests with Loronix Information Systems, Inc. The accompanying notes are an integral part of these financial statements. Page 4 of 21 Total Pages COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)

THREE MONTHS ENDED APRIL 30, APRIL 30, 2000* 2001 Cash flows from operating activities: Net cash from operations after adjustment for non-cash items $ 66,984 $ 93,405 Changes in assets and liabilities: Accounts receivable (22,123) (31,229) Inventories (23,001) 12,725 Prepaid expenses and other current assets (8,202) (2,458) Accounts payable and accrued expenses (7,313) (25,817) Liability for severance pay 1,845 2,530 Other 10,353 (19,115) ------------- ------------- Net cash provided by operating activities 18,543 30,041 ------------- ------------- Cash flows from investing activities: Maturities and sales (purchases) of bank time deposits and investments, net (6,950) 61,204 Purchases of property and equipment (12,365) (15,535) Increase in software development costs (3,588) (5,405) -------------- ------------- Net cash provided by (used in) investing activities (22,903) 40,264 -------------- ------------- Cash flows from financing activities: Net proceeds (repayments) of bank loans and other debt 2,215 100 Proceeds from issuance of common stock 10,031 13,179 Proceeds from issuance of common stock of subsidiary 58,062 - ------------- ------------- Net cash provided by financing activities 70,308 13,279 ------------- ------------- Net increase in cash and cash equivalents 65,948 83,584 Cash and cash equivalents, beginning of period 342,535 1,275,105 ------------- -------------- Cash and cash equivalents, end of period $ 408,483 $ 1,358,689 ============= ==============

* Restated for pooling of interests with Loronix Information Systems, Inc. The accompanying notes are an integral part of these financial statements. Page 5 of 21 Total Pages COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) BASIS OF PRESENTATION. The accompanying financial information should be read in conjunction with the financial statements, including the notes thereto, for the annual period ended January 31, 2001. The financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods. The results of operations for the three month period ended April 30, 2001 are not necessarily indicative of the results to be expected for the full year. In July 2000, the Company consummated a merger with Loronix Information Systems, Inc., a Nevada corporation, ("Loronix"). The merger with Loronix has been accounted for as a pooling of interests. This report presents the financial information of the Company, as of and for the three month period ended April 30, 2001. The financial information for the 2000 period combines the financial information of the Company as of and for the three month period ended April 30, 2000 with the financial information of Loronix as of and for the three month period ended March 31, 2000. INVENTORIES. The composition of inventories at January 31, 2001 and April 30, 2001 is as follows: JANUARY 31, APRIL 30, 2001 2001 (In thousands) Raw materials $ 49,014 $ 44,616 Work in process 27,423 25,969 Finished goods 39,362 32,489 ------------- ------------- $ 115,799 $ 103,074 ============= ============= RESEARCH AND DEVELOPMENT EXPENSES. The Company has historically supported a portion of its research and development activities through participation in government sponsored funding programs, which in general provide reimbursement for a portion of research and development expenditures incurred under project budgets that must be submitted for approval on an annual basis to the applicable funding agencies. During the three month period ended April 30, 2001, reimbursement from funding agencies amounted to $5,667,000. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Certain Trends and Uncertainties." EARNINGS PER SHARE. For the three month periods ended April 30, 2000 and 2001, the computation of basic earnings per share is based on the weighted average number of outstanding common shares. Diluted earnings per share further assumes the issuance of common shares for all dilutive potential common shares outstanding. The assumed conversion of the 1.50% convertible senior debentures issued in November and December 2000 was not dilutive for the three month period ended April 30, 2001. The shares used in the computations are as follows: Page 6 of 21 Total Pages THREE MONTHS ENDED APRIL 30, 2000 APRIL 30, 2001 (In thousands) Basic 157,163 170,747 Diluted 186,237 193,850 COMPREHENSIVE INCOME. For the three month periods ended April 30, 2000 and 2001, total comprehensive income was $57,968,000 and $66,041,000, respectively. The elements of comprehensive income include net income, unrealized gains/losses on available for sale securities and foreign currency translation adjustments. CONVERTIBLE DEBENTURES. In November and December 2000, the Company issued $600,000,000 aggregate principal amount of its 1.50% convertible senior debentures due December 2005 (the "Debentures"). The Debentures are unsecured senior obligations of the Company ranking equally with all of the Company's existing and future unsecured senior indebtedness and are senior in right of payment to any of the Company's existing and future subordinated indebtedness. The Debentures are convertible, at the option of the holders, into shares of the Company's common stock at a conversion price of $116.325 per share, subject to adjustment in certain events; and are subject to redemption at any time on or after December 1, 2003, in whole or in part, at the option of the Company, at redemption prices (expressed as percentages of the principal amount) of 100.375% if redeemed during the twelve-month period beginning December 1, 2003, and 100% of the principal amount if redeemed thereafter. 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. Upon the occurrence of a change in control, instead of paying the repurchase price in cash, the Company may pay the repurchase price in common stock. In June 1998, the Company issued $300,000,000 of convertible subordinated debentures bearing interest at 4.50% per annum, payable semi-annually. In June 2001, the Company called these debentures for redemption. The debentures are convertible into approximately 13,954,000 shares of the Company's common stock at a conversion price of $21.50 per share. ISSUANCE OF SUBSIDIARY STOCK. In April 2000, a subsidiary of the Company, Ulticom, Inc. ("Ulticom"), issued 4,887,500 shares of its common stock in an initial public offering. As a result of the initial public offering, the Company's ownership interest in Ulticom was reduced to 80.4%. Proceeds from the offering, based on the offering price of $13.00 per share, totaled approximately $58,062,000, net of offering expenses. In October 2000, Ulticom issued an additional 2,843,375 shares of its common stock in a public offering. As a result of the public offering, the Company's ownership interest in Ulticom was reduced to 74.5%. Proceeds from the offering, based on the offering price of $50.00 per share, totaled approximately $137,169,000, net of offering expenses. The Company recorded a gain of approximately $145,854,000 which was recorded as an increase in stockholders' equity as a result of these issuances. ACQUISITIONS. In July 2000, the Company acquired all of the outstanding stock of Loronix, a company that develops software-based digital video recording and management systems, for 1,994,806 shares of the Company's Page 7 of 21 Total Pages common stock and the assumption of options to purchase 370,101 shares of the Company's common stock. The combination was accounted for as a pooling of interests. Unaudited pro forma consolidated statement of income data for the three month period ended April 30, 2000 is as follows:

CTI LORONIX COMBINED --- ------- -------- (In thousands, except per share data amounts) APRIL 30, 2000 Sales $ 261,282 $ 7,187 $ 268,469 Net income (loss) $ 56,405 $ (199) $ 56,206 Earnings per share - diluted $ 0.33 $ 0.32

The unaudited pro forma consolidated statement of income data combines the statement of income data of the Company for the three month period ended April 30, 2000 with the statement of income data of Loronix for the three month period ended March 31, 2000. BUSINESS SEGMENT INFORMATION. The Company's reporting segments are as follows: Enhanced Services Platform Products - Enable telecommunications network operators to offer a variety of revenue-generating services, 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, wireless data and Internet-based services. Service Enabling Network Software Products - Interconnect the complex circuit switching, database and messaging systems and manage the number, routing and billing information of communication networks. These products also enable voice and data networks to interoperate, or converge, allowing service providers to offer such converged network services as voice over the Internet and Internet call waiting. This segment represents the Company's Ulticom subsidiary. Business Intelligence Through Intelligent Recording Products - Support the voice, fax, data and video recording and analysis activities of call centers and a variety of other commercial and governmental organizations and supports the monitoring, recording, surveillance, and information gathering and analysis activities of law enforcement and intelligence agencies. All Other - Includes other miscellaneous operations. The table below presents information about operating income/loss and segment assets as of and for the three month periods ended April 30, 2000 and 2001: Page 8 of 21 Total Pages

Service Enhanced Enabling Business Services Network Intelligence Platform Software Recording All Reconciling Consolidated Products Products Products Other Items Totals -------------------------------------------------------------------------------------------------------- (In thousands) THREE MONTHS ENDED APRIL 30, 2000: Sales $ 228,678 $ 8,826 $ 29,595 $ 3,948 $ (2,578) $ 268,469 Operating Income (Loss) $ 56,241 $ 1,333 $ 22 $ (317) $ (2,970) $ 54,309 Total Assets $ 756,838 $ 77,710 $ 100,844 $ 44,748 $ 539,660 $ 1,519,800 THREE MONTHS ENDED APRIL 30, 2001: Sales $ 313,346 $ 17,033 $ 34,558 $ 2,460 $ (2,360) $ 365,037 Operating Income (Loss) $ 71,585 $ 3,834 $ 85 $ (569) $ (907) $ 74,028 Total Assets $ 1,122,147 $ 238,412 $ 113,049 $ 83,253 $ 1,106,537 $ 2,663,398

Reconciling items consist of the following: Sales - elimination of intersegment revenues. Operating Income (Loss) - elimination of intersegment operating income and corporate operations. Total Assets - elimination of intersegment receivables and unallocated corporate assets. EFFECT OF NEW ACCOUNTING PRONOUNCEMENT. In 1998, the Financial Accounting Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" which was subsequently amended by SFAS Nos. 137 and 138 (collectively "SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivatives embedded in other contracts, and hedging activities and requires that an entity recognize all derivatives as either assets or liabilities and measure those instruments at fair value. Under SFAS 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company adopted SFAS 133 effective February 1, 2001. The adoption of SFAS 133 did not have a material effect on the Company's operations or financial position. Page 9 of 21 Total Pages ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS --------------------- INTRODUCTION Cost of sales include material costs, subcontractor costs, salary and related benefits for the operations and service departments, depreciation and amortization of equipment used in the operations and service departments, amortization of capitalized software costs, travel costs and an overhead allocation. Research and development costs include salary and related benefits as well as travel, depreciation and amortization of research and development equipment, an overhead allocation, as well as other costs associated with research and development activities. Selling, general and administrative costs include salary and related benefits, travel, depreciation and amortization, marketing and promotional materials, recruiting expenses, professional fees, facility costs, as well as other costs associated with sales, marketing, finance and administrative departments. THREE MONTH PERIOD ENDED APRIL 30, 2001 COMPARED TO THREE MONTH PERIOD ENDED APRIL 30, 2000 Sales. Sales for the three month period ended April 30, 2001 increased by approximately $96.6 million, or 36%, compared to the three month period ended April 30, 2000. This increase is primarily attributable to an increase in sales of enhanced services platform ("ESP") products of approximately $85.6 million. Such increase was principally due to increased sales to European and American customers. In addition, sales of business intelligence recording products and service enabling network software products increased by approximately $5.0 million and $7.5 million, respectively. Cost of Sales. Cost of sales for the three month period ended April 30, 2001 increased by approximately $34.4 million, or 34%, as compared to the three month period ended April 30, 2000. The increase in cost of sales is primarily attributable to increased materials and overhead costs of approximately $21.4 million due to the increase in sales, increased personnel-related costs of approximately $9.6 million due to hiring of additional personnel and increased compensation and benefits for existing personnel, increased travel-related costs of approximately $2.1 million and an increase in depreciation and amortization costs of approximately $0.8 million. Gross margins increased from approximately 62.0% in the three month period ended April 30, 2000 to approximately 62.6% in the three month period ended April 30, 2001. Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three month period ended April 30, 2001 increased by approximately $21.7 million, or 38%, compared to the three month period ended April 30, 2000, and as a percentage of sales increased from Page 10 of 21 Total Pages approximately 21.0% in the three month period ended April 30, 2000 to approximately 21.4% in the three month period ended April 30, 2001. The increase was primarily due to hiring of additional personnel and increased compensation and benefits for existing personnel to support the increased level of sales during the three month period ended April 30, 2001. Research and Development. Net research and development expenses for the three month period ended April 30, 2001 increased by approximately $19.5 million, or 38%, compared to the three month period ended April 30, 2000 due to overall growth of research and development operations and the initiation of significant new research and development projects. The increase was primarily due to hiring of additional personnel and increased compensation and benefits for existing personnel to support the higher volume of research and development activities. Royalties and License Fees. Royalties and license fees for the three month period ended April 30, 2001 increased by approximately $1.3 million, or 27%, compared to the three month period ended April 30, 2000. The increase was primarily a result of the growth in sales of royalty bearing products. Income Tax Provision. Provision for income taxes for the three month period ended April 30, 2001 increased by approximately $0.8 million, or 17%, compared to the three month period ended April 30, 2000 due to increased pre-tax income. The overall effective tax rate decreased from approximately 7.6% in the three month period ended April 30, 2000 to approximately 6.5% in the three month period ended April 30, 2001. The Company's overall rate of tax is reduced significantly by the tax benefits associated with qualified activities of certain of its Israeli subsidiaries, which are entitled to favorable income tax rates under a program of the Israeli Government for "Approved Enterprise" investments in that country. Net Income. Net income increased by approximately $22.8 million, or 40%, in the three month period ended April 30, 2001 compared to the three month period ended April 30, 2000, while as a percentage of sales increased from approximately 21% in the three month period ended April 30, 2000 to approximately 22% in the three month period ended April 30, 2001. The increase resulted primarily from the factors described above. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital at April 30, 2001 and January 31, 2001 was approximately $1,934.0 million and $1,860.4 million, respectively. Operations for the three month periods ended April 30, 2001 and 2000, after adding back non-cash items, provided cash of approximately $93.4 million and $67.0 million, respectively. During such periods, other changes in operating assets and liabilities used cash of approximately $63.4 million and $48.4 million, respectively. This resulted in cash provided by operating activities of approximately $30.0 million and $18.5 million, respectively. Page 11 of 21 Total Pages Investment activities for the three month periods ended April 30, 2001 and 2000 provided (used) cash of approximately $40.3 million and ($22.9) million, respectively. These amounts include (i) additions to property and equipment in the three month periods ended April 30, 2001 and 2000 of approximately $15.5 million and $12.4 million, respectively; (ii) maturities and sales (purchases) of bank time deposits and investments, net, of approximately $61.2 million and ($7.0) million, respectively; and (iii) capitalization of software development costs of approximately $5.4 million and $3.6 million, respectively. Financing activities for the three month periods ended April 30, 2001 and 2000 provided cash of approximately $13.3 million and $70.3 million, respectively. These amounts include (i) proceeds from the issuance of common stock in connection with the exercise of stock options, warrants and employee stock purchase plan in the three month periods ended April 30, 2001 and 2000 of approximately $13.2 million and $10.0 million, respectively; (ii) net proceeds (repayments) of bank loans and other debt of approximately $0.1 million and $2.2 million, respectively; and (iii) net proceeds from the issuance of common stock of a subsidiary in connection with an initial public offering in the 2000 period of approximately $58.1 million. As of April 30, 2001, the Company had outstanding convertible debentures of $900 million. In June 2001, the Company called for redemption its $300 million convertible subordinated debentures bearing interest at 4.50% per annum, payable semi-annually, issued in June 1998. The debentures are convertible into approximately 13,954,000 shares of the Company's common stock at a conversion price of $21.50 per share. The Company believes that its existing working capital, together with funds generated from operations, will be sufficient to provide for its planned operations for the foreseeable future. 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 could be expected to have a dilutive impact on the Company's shareholders, and there can be no assurance as to whether or when any acquired business would contribute positive operating results commensurate with the associated investment. 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 foreign subsidiaries to pay dividends or by withholding taxes associated with any such dividend payments. CERTAIN TRENDS AND UNCERTAINTIES The Company's future operating results and financial condition may be adversely affected should current conditions of general economic weakness continue. Revenues from the Company's business intelligence products are currently being adversely affected by reductions in capital expenditures by end-users. The Company's revenues from telecommunications systems and software Page 12 of 21 Total Pages may be adversely affected by the slowdown in infrastructure purchases by telecommunications services providers exhibited in recent periods, and by declines in technology expenditures in general, if such conditions continue. In addition, the severe recent decline in the public trading prices of equity securities, particularly in the technology and telecommunications sectors, and potential corresponding decline in values of privately-held companies and venture capital funds in which the Company has invested, may adversely affect the Company's financial results and costs of operations. The Company has benefited from the growth in its business and capital base over the past several years to make significant investment in its operations and infrastructure, the development of new products and technologies and its expansion into new lines of business intended to enhance its opportunities for future growth and profitability. The Company intends to continue to make significant investment in the growth of its business, and to examine opportunities for additional growth through acquisitions and strategic investments. These activities involve significant expenditures and obligations that cannot readily be curtailed or reduced if anticipated growth in demand for the associated products does not materialize or is delayed. The impact of these decisions on future profitability cannot be predicted with assurance, and the Company's commitment to growth may increase its vulnerability to downturns in its markets, technology changes and shifts in competitive conditions. The telecommunications industry has been particularly affected by worldwide conditions of economic weakness. Telecommunications services providers have announced reductions in actual or planned future expenditures to expand or replace infrastructure equipment and delays or reductions in the deployment of services, and a large number of telecommunications equipment providers have announced reductions in projected revenues and deterioration in projected operating results. While the Company's revenues and net income have continued to grow in recent periods, the continuation and/or exacerbation of those conditions may have an adverse effect on the Company's future results. In addition to loss of potential revenue, weakness in the telecommunications industry may affect the Company's business by increasing the risks of credit or business failures of suppliers, customers or distributors, by customer requirements for vendor financing, by delays in customer payments, and by price reductions instituted by competitors to retain market share. The telecommunications industry is subject to rapid technological change. The introduction of new technologies in the telecommunications market and new alternatives for the delivery of services are having, and can be expected to continue to have, a profound effect on competitive conditions in the market and the success of market participants, including the Company. The Company's continued success will depend on its ability to correctly anticipate technological trends in its industries, to react quickly and effectively to such trends and to enhance its existing products and to introduce new products on a timely and cost-effective basis. The Company's products involve sophisticated hardware and software technology that performs critical functions to highly demanding standards. There can be no assurance that the Company's current or future products will not develop operational problems, which could have a material adverse effect on the Company. Page 13 of 21 Total Pages The telecommunications 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 ESP system 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 ESP system markets. Moreover, as the Company enters into new markets as a result of its own research and development efforts or acquisitions, it is likely to encounter new competitors. The 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. Sales of the Company's business intelligence systems to customers in the private sector have been and may continue to be affected by general economic conditions and delays in planned capital expenditures by enterprise customers. 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 contracts for large system installations with major customers. 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. The degree of dependence by the Company on large system orders, and the investment required to enable the Company to perform such Page 14 of 21 Total Pages 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. 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. The Company's costs of operations have been affected by increases in the cost of its operations in Israel, resulting both from appreciation of the Israeli shekel relative to the United States dollar in certain periods and devaluation of the Israeli shekel at rates insufficient to offset cost increases in others, and from increases in the cost of attracting and retaining qualified scientific, engineering and technical personnel in Israel, where the demand for such personnel has grown rapidly with the expansion of high technology industries in that country. Continuation of such trends could 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. The Company's historical operating results reflect substantial benefits it has received from programs sponsored by the Israeli government for the support of research and development, as well as tax moratoriums and favorable tax rates associated with investments in approved projects ("Approved Enterprises") in Israel. To be eligible for these programs and tax benefits, the Company must continue to meet conditions, including making specified investments in fixed assets and financing a percentage of investments with share capital. If the Company fails to meet such conditions in the future, the tax benefits would be canceled and the Company could be required to refund the tax benefits already received. These programs and tax benefits may not be continued in the future at the current levels or at any level, and the availability of such benefits may be affected by budgetary constraints resulting from adverse economic conditions. The Israeli government has reduced the benefits available under some of these programs in recent years, and Israeli government authorities have indicated that the government may further reduce or eliminate some of these benefits in the future. The Company currently pays royalties, of between 3% and 5% (or 6% under certain circumstances) of associated product revenues (including service and other related revenues), to the Government of Israel for repayment of benefits received under a 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 up to 50% of qualified research and development expenditures. Such royalty payments are required to be made until the government has been reimbursed the amounts received by the Company plus, for amounts received under projects approved by the Office of the Chief Scientist after January 1, 1999, interest on such amount at a rate equal to the 12-month LIBOR rate in effect at the time of approval. 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 these programs, or to transfer outside of Israel related technology rights. 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 Israeli authorities have also indicated that this funding program will be further Page 15 of 21 Total Pages reduced significantly or eliminated in the future, particularly for larger companies such as the Company. The termination or reduction of these programs could adversely affect the Company's operating results. 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 the Company's projects that were eligible for the moratorium prior to 1997, it applies to subsequent "Approved Enterprise" projects. Recently, the government announced a proposal to impose additional limitations on the tax benefits associated with Approved Enterprise projects for certain categories of taxpayers, which would include the Company, although it has not submitted legislation to the Israeli Parliament. 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 of the Company's operations in Israel would increase and there could be a material adverse effect on the Company's operations and financial results. To the extent that the Company increases its activities outside Israel, which could result from, among other things, future acquisitions, such increased activities will not be eligible for programs sponsored by Israel. 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 risk of currency instability is increased by prevailing conditions of economic weakness in a number of world markets, and the potential for recession. The Company has, and anticipates that it will continue to receive, significant contracts denominated in foreign (primarily Western European) 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 it is the Company's practice to hedge the exchange rate risks associated with contracts denominated in foreign currencies only to a limited extent, if at all, its operating results have been and may in the future be negatively affected to a material extent by the impact of currency fluctuations. Operating results may also be affected by the cost of such hedging activities that the Company does undertake. The Company holds a large proportion of its net assets in cash equivalents and short-term investments, including a variety of public and private debt and equity instruments, and has made significant venture capital investments, both directly and through private investment funds. Such investments subject the Company to the risks inherent in the capital markets generally, and to the performance of other businesses over which it has no direct control. Given the relatively high proportion of the Company's liquid assets relative to its overall size, the results of its operations in the future will reflect, to a greater extent than in the past, the results of the Company's capital management and investment activities and the risks associated with those activities. Declines in the public equity markets have caused, and may be expected to continue to cause, the Company to experience realized and unrealized Page 16 of 21 Total Pages investment losses. In addition, while the Company's interest and other income has benefited from the positive spread between the fixed interest it pays on its outstanding indebtedness and interest earned on the investment of its cash balances, reduction in prevailing interest rates due to economic conditions or government policies can be expected to have an adverse impact on the Company's results of operations. The Company has benefited from the long-term rise in the public trading price of its shares in various ways, including its ability to use equity incentive arrangements as a means of attracting and retaining the highly qualified employees necessary for the growth of its business and its ability to raise capital on relatively attractive conditions. The recent decline in the price of the Company's shares, and the overall decline in equity prices generally, and in the shares of technology companies in particular, can be expected to make it more difficult for the Company to rely on equity incentive arrangements as a means to recruit and retain talented employees, and may limit the ability of the Company to raise capital on terms as advantageous to the Company as in the past. The Company's ability to attract and retain employees may also be affected by recent cost control actions, including staff reductions announced by the Company in April 2001 and associated charges of up to $9 million, which will be recorded in the three month period ended July 31, 2001. 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-related industries, such as the Company, tend to exhibit a high degree of volatility. The announcement of financial results that fall short of the results 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 may 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 telecommunications equipment industry in general, and the Company's business segments in particular, which may not have any direct relationship with the Company's business or prospects. FORWARD-LOOKING STATEMENTS From time to time, the Company makes forward-looking statements. Forward-looking statements include financial projections, statements of plans and objectives for future operations, statements of future economic performance, and statements of assumptions relating thereto. The Company may include forward-looking statements in its periodic reports to the Securities and Exchange Commission on Forms 10-K, 10-Q, and 8-K, in its annual report to shareholders, in its proxy statements, in its press Page 17 of 21 Total Pages releases, in other written materials, and in statements made by employees to analysts, investors, representatives of the media, and others. By their very nature, forward-looking statements are subject to uncertainties, both general and specific, and risks exist that predictions, forecasts, projections and other forward-looking statements will not be achieved. Actual results may differ materially due to a variety of factors, including without limitation those discussed under "Certain Trends and Uncertainties" and elsewhere in this report. Investors and others should carefully consider these and other uncertainties and events, whether or not the statements are described as forward-looking. Forward-looking statements made by the Company are intended to apply only at the time they are made, unless explicitly stated to the contrary. Moreover, whether or not stated in connection with a forward-looking statement, the Company undertakes no obligation to correct or update a forward-looking statement should the Company later become aware that it is not likely to be achieved. If the Company were in any particular instance to update or correct a forward-looking statement, investors and others should not conclude that the Company will make additional updates or corrections thereafter. MARKET RISK DISCLOSURES Refer to Item 7A in the Company's Annual Report on Form 10-K for a discussion about the Company's exposure to market risks. Page 18 of 21 Total Pages PART II Other Information ----------------- ITEM 6. Exhibits and Reports on Form 8-K. -------------------------------- (a) Exhibit Index. ------------- Item Number Exhibit Page ------ ------- ---- 11. Statement re computation of per share earnings. 21 (b) Reports on Form 8-K. ------------------- The registrant filed a Current Report on Form 8-K on April 12, 2001, reporting the date for its annual shareholders' meeting. Page 19 of 21 Total Pages SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMVERSE TECHNOLOGY, INC. Dated: June 11, 2001 /S/ Kobi Alexander ------------------------------------ Kobi Alexander Chairman of the Board and Chief Executive Officer Dated: June 11, 2001 /S/ David Kreinberg ------------------------------------ David Kreinberg Vice President of Finance and Chief Financial Officer Page 20 of 21 Total Pages