10-Q 1 0001.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, 2000 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, 2000 was 156,015,230. Page 1 of 19 Total Pages (Exhibit Index Appears on Page 17) PART I FINANCIAL INFORMATION ITEM 1. Financial Statements. Page ---- 1. Condensed Consolidated Balance Sheets as of January 31, 2000 and April 30, 2000 3 2. Condensed Consolidated Statements of Income for the Three Month Periods Ended April 30, 1999 and April 30, 2000 4 3. Condensed Consolidated Statements of Cash Flows for the Three Month Periods Ended April 30, 1999 and April 30, 2000 5 4. Notes to Condensed Consolidated Financial Statements 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 9 Page 2 of 19 Total Pages COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)

ASSETS ------ JANUARY 31, APRIL 30, 2000* 2000 (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 338,638 $ 403,304 Bank time deposits and short-term investments 439,054 437,791 Accounts receivable, net 259,357 282,830 Inventories 97,653 120,192 Prepaid expenses and other current assets 40,829 47,900 ------------- -------------- TOTAL CURRENT ASSETS 1,175,531 1,292,017 PROPERTY AND EQUIPMENT, net 121,897 125,867 INVESTMENTS 19,749 30,187 OTHER ASSETS 35,191 50,546 ------------- -------------- TOTAL ASSETS $ 1,352,368 $ 1,498,617 ============= ============== ------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts payable and accrued expenses $ 231,245 $ 224,126 Advance payments from customers 94,171 96,806 Other current liabilities 1,289 3,504 ------------- -------------- TOTAL CURRENT LIABILITIES 326,705 324,436 CONVERTIBLE SUBORDINATED DEBENTURES 300,000 300,000 LIABILITY FOR SEVERANCE PAY 6,185 8,030 OTHER LIABILITIES 8,138 28,814 ------------- -------------- TOTAL LIABILITIES 641,028 661,280 ------------- -------------- STOCKHOLDERS' EQUITY: Common stock, $0.10 par value - authorized, 300,000,000 shares; issued and outstanding, 153,822,408 and 155,444,704 shares 15,382 15,544 Additional paid-in capital 407,645 475,313 Retained earnings 285,890 342,295 Accumulated other comprehensive income 2,423 4,185 ------------- -------------- TOTAL STOCKHOLDERS' EQUITY 711,340 837,337 ------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,352,368 $ 1,498,617 ============= ==============

*The Condensed Consolidated Balance Sheet as of January 31, 2000 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 19 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, 1999 2000 Sales $ 200,507 $ 261,282 Cost of sales 77,427 97,347 ----------- ----------- Gross margin 123,080 163,935 Operating expenses: Research and development, net 38,417 50,299 Selling, general and administrative 42,845 54,220 Royalties and license fees 4,740 4,880 Merger expenses 1,018 - ----------- ----------- Income from operations 36,060 54,536 Interest and other income, net 3,009 6,511 ----------- ----------- Income before income tax provision 39,069 61,047 Income tax provision 3,432 4,642 ----------- ----------- Net income $ 35,637 $ 56,405 =========== =========== Earnings per share: Basic $ 0.26 $ 0.36 =========== =========== Diluted $ 0.23 $ 0.33 =========== ===========

The accompanying notes are an integral part of these financial statements. Page 4 of 19 Total Pages COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)

THREE MONTHS ENDED APRIL 30, APRIL 30, 1999 2000 Cash flows from operating activities: Net cash from operations after adjustment for non-cash items $ 39,427 $ 66,758 Changes in assets and liabilities: Accounts receivable (18,259) (23,473) Inventories 4,750 (22,539) Prepaid expenses and other current assets 2,164 (7,944) Accounts payable and accrued expenses 8,979 (7,119) Liability for severance pay 2,134 1,845 Other (15,833) 9,714 ----------- ----------- Net cash provided by operating activities 23,362 17,242 Cash flows from investing activities: Maturities and sales (purchases) of bank time deposits and investments, net 4,459 (6,960) Purchases of property and equipment (11,325) (11,887) Increase in software development costs (3,198) (3,479) ----------- ------------ Net cash used in investing activities (10,064) (22,326) Cash flows from financing activities: Net borrowings (repayments) of bank loans and other debt (436) 1,920 Proceeds from issuance of common stock 12,068 9,768 Proceeds from issuance of common stock of subsidiary - 58,062 ---------- ----------- Net cash provided by financing activities 11,632 69,750 Net increase in cash and cash equivalents 24,930 64,666 Cash acquired in pooling of Amarex Technology, Inc. 1,680 - Cash and cash equivalents, beginning of period 583,959 338,638 ---------- ----------- Cash and cash equivalents, end of period $ 610,569 $ 403,304 ========== ===========

The accompanying notes are an integral part of these financial statements. Page 5 of 19 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, 2000. 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, 2000 are not necessarily indicative of the results to be expected for the full year. INVENTORIES. The composition of inventories at January 31 and April 30, 2000 is as follows: JANUARY 31, APRIL 30, 2000 2000 (In thousands) Raw materials $ 38,641 $ 43,179 Work in process 29,755 39,390 Finished goods 29,257 37,623 ----------- ----------- $ 97,653 $ 120,192 =========== =========== 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, 2000, reimbursement from funding agencies amounted to $4,468,000. 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, 1999 and 2000, 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 convertible subordinated debentures was antidilutive for the three month period ended April 30, 1999. The shares used in the computations are as follows: THREE MONTHS ENDED APRIL 30, 1999 APRIL 30, 2000 (In thousands) Basic 138,642 155,193 Diluted 151,702 184,267 Page 6 of 19 Total Pages COMPREHENSIVE INCOME. For the three month periods ended April 30, 1999 and 2000, total comprehensive income was $34,223,000 and $58,167,000, respectively. The elements of comprehensive income include net income, unrealized gains on available for sale securities and foreign currency translation adjustments. STOCK SPLITS. In April 1999, the Company effected a three-for-two stock split by paying a 50% stock dividend to shareholders of record on March 31, 1999. In April 2000, the Company effected a two-for-one stock split by paying a 100% stock dividend to shareholders of record on March 27, 2000. All share and per share information has been adjusted to give effect to these splits. ISSUANCE OF SUBSIDIARY STOCK. In April 2000, a subsidiary of the Company, Ulticom, Inc., 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, Inc. was reduced to 80.4%. Proceeds from the offering, based on the offering price of $13.00 per share, totaled approximately $58.1 million, net of offering expenses. The Company recorded a gain of approximately $46.7 million which was recorded as an increase in stockholders' equity as a result of the issuance. BUSINESS COMBINATIONS. In March 2000, the Company signed a definitive agreement to acquire all of the outstanding stock of Loronix Information Systems, Inc. ("Loronix"), a company that develops software-based digital video recording and management systems used in a variety of applications and industries. The Company's acquisition of Loronix is expected to be accounted for as a pooling of interests. The Company will issue 0.385 new common shares for each outstanding Loronix share, or approximately 1,974,000 new shares to Loronix shareholders, and will assume outstanding Loronix stock options. Loronix will have the right to terminate the agreement if the value of the Company's shares to be received by Loronix shareholders is less than $36 per Loronix share. In such case, the Company will have the right to increase the exchange ratio to adjust the consideration to $36 per share. Unaudited pro forma consolidated statement of income data for the three month periods ended April 30, 1999 and 2000 are as follows:

CTI LORONIX COMBINED --- ------- -------- (In thousands, except share data amounts) APRIL 30, 1999 Sales $ 200,507 $ 7,390 $ 207,897 Net income $ 35,637 $ 555 $ 36,192 Earnings per share - diluted $ 0.23 $ 0.24 APRIL 30, 2000 Sales $ 261,282 $ 7,187 $ 268,469 Net income $ 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 periods ended April 30, 1999 and 2000 with the statement of income data of Loronix for the three month periods ended March 31, 1999 and 2000, respectively. Page 7 of 19 Total Pages 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. Signaling Software Products - Interconnect the 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. Digital Monitoring Systems Products - Support the voice, fax and data 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, 1999 and 2000:

Enhanced Digital Services Signaling Monitoring Platform Software Systems All Reconciling Consolidated Products Products Products Other Items Totals ---------------------------------------------------------------------------------------- (In thousands) THREE MONTHS ENDED APRIL 30, 1999: Sales $ 173,176 $ 5,363 $ 18,834 $ 4,406 $ (1,272) $ 200,507 Operating Income (Loss) $ 38,428 $ 473 $ (488) $ (495) $ (1,858) $ 36,060 Total Assets $ 461,216 $ 11,157 $ 73,923 $ 27,038 $ 507,087 $ 1,080,421 THREE MONTHS ENDED APRIL 30, 2000: Sales $ 228,678 $ 8,826 $ 22,408 $ 3,948 $ (2,578) $ 261,282 Operating Income (Loss) $ 56,241 $ 1,333 $ 249 $ (317) $ (2,970) $ 54,536 Total Assets $ 756,838 $ 77,710 $ 79,661 $ 44,748 $ 539,660 $ 1,498,617

Reconciling items consist of the following: Sales - elimination of intersegment revenues. Operating Income - elimination of intersegment operating income and corporate operations. Total Assets - elimination of intersegment receivables and unallocated corporate assets. Page 8 of 19 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, 2000 COMPARED TO THREE MONTH PERIOD ENDED ENDED APRIL 30, 1999 Sales. Sales for the three month period ended April 30, 2000 increased by approximately $60.8 million, or 30%, compared to the three month period ended April 30, 1999. This increase is primarily attributable to an increase in sales of enhanced services platform ("ESP") products of approximately $54.4 million. Such increase was principally due to increased sales to European customers. In addition, sales of multimedia digital monitoring systems and network signaling software products increased by approximately $3.6 million and $3.3 million, respectively. Cost of Sales. Cost of sales for the three month period ended April 30, 2000 increased by approximately $19.9 million, or 25.7%, as compared to the three month period ended April 30, 1999. The increase in cost of sales is primarily attributable to increased materials and overhead costs of approximately $7.8 million due to the increase in sales, increased personnel-related costs of approximately $5.6 million due to hiring of additional personnel and increased compensation and benefits for existing personnel, increased travel-related costs of approximately $1.9 million and an increase in depreciation and amortization costs of approximately $1.7 million. Gross margins increased from approximately 61.4% in the three month period ended April 30, 1999 to approximately 62.7% in the three month period ended April 30, 2000. Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three month period ended April 30, 2000 increased by approximately $11.4 million, or 26.5%, compared to the three month period ended April 30, 1999, but as a percentage of sales decreased from approximately 21.4% in the three month period ended April 30, 1999 to Page 9 of 19 Total Pages approximately 20.8% in the three month period ended April 30, 2000. 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, 2000. Research and Development. Net research and development expenses for the three month period ended April 30, 2000 increased by approximately $11.9 million, or 30.9%, compared to the three month period ended April 30, 1999 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, 2000 increased by approximately $0.1 million, or 3%, compared to the three month period ended April 30, 1999. 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, 2000 increased by approximately $1.2 million, or 35.3%, compared to the three month period ended April 30, 1999 due to increased pre-tax income. The overall effective tax rate decreased from approximately 9% during the 1999 period to approximately 8% in the three month period ended April 30, 2000. 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 $20.8 million, or 58.3%, in the three month period ended April 30, 2000 compared to the three month period ended April 30, 1999, while as a percentage of sales increased from approximately 18% in the three month period ended April 30, 1999 to approximately 22% in the three month period ended April 30, 2000. The increase resulted primarily from the factors described above. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital at April 30, 2000 and January 31, 2000 was approximately $967.6 million and $848.8 million, respectively. Operations for the three month periods ended April 30, 2000 and 1999, after adding back non-cash items, provided cash of approximately $66.8 million and $39.4 million, respectively. During such periods, other changes in operating assets and liabilities used cash of approximately $49.5 million and $16.1 million, respectively. This resulted in cash being provided by operating activities of approximately $17.2 million and $23.4 million, respectively. Page 10 of 19 Total Pages Investment activities for the three month periods ended April 30, 2000 and 1999 used cash of approximately $22.3 million and $10.1 million, respectively. These amounts include (i) additions to property and equipment in the three month periods ended April 30, 2000 and 1999 of approximately $11.9 million and $11.3 million, respectively; (ii) maturities and sales (purchases) of bank time deposits and investments, net, of approximately ($7.0) million and $4.5 million, respectively; and (iii) capitalization of software development costs of approximately $3.5 million and $3.2 million, respectively. Financing activities for the three month periods ended April 30, 2000 and 1999 provided cash of approximately $69.8 million and $11.6 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 of approximately $9.8 million and $12.1 million, respectively; (ii) net proceeds (repayments) of bank loans and other debt of approximately $1.9 million and ($0.4) 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, 2000, the Company had outstanding convertible subordinated debentures of $300 million. 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 has benefited from the growth in its business and capital base over the past several years to make significant new investment in its operations and infrastructure intended to enhance its opportunities for future growth and profitability. The Company intends to continue 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 Page 11 of 19 Total Pages 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. 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 revenue stream 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. In addition, if the Company were to delay the introduction of new products, the Company's operating results could be adversely affected. 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 for enhanced services 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. The delays and uncertainties surrounding the Communications Assistance for Law Enforcement Act ("CALEA") have had a significant negative impact on acquisition plans of law enforcement agencies in North America engaged in monitoring activities. 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 Page 12 of 19 Total Pages 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. Although the Company is actively pursuing a number of significant procurement opportunities, 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 system 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. 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, developing new generations of its products and expanding into new product areas. 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 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 is growing 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 Page 13 of 19 Total Pages 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. 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. For amounts received under programs which have been, or will be, approved by the Office of the Chief Scientist after January 1, 1999, repayment of the amount received (calculated in U.S. Dollars), plus interest on such amount at a rate equal to the 12-month LIBOR rate in effect at the time of the approval of the program, is required through the application of royalty payments. 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 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. 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 Page 14 of 19 Total Pages 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) 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, if at all, operating results can be affected by the impact of currency fluctuations as well as the cost of such hedging. The Company's future operating results and financial condition will be adversely affected should economic instability result in widespread slowdown or recessionary conditions in major world markets, or in severe trade or currency disruptions. 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 publicly traded companies such as the Company, tend to exhibit a high degree of volatility. 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 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 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 Page 15 of 19 Total Pages 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 16 of 19 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. 19 27. Financial data schedule Filed electronically (b) Reports on Form 8-K. ------------------- None Page 17 of 19 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 13, 2000 /S/ Kobi Alexander -------------------------------- Kobi Alexander President, Chairman of the Board and Chief Executive Officer Dated: June 13, 2000 /S/ David Kreinberg -------------------------------- David Kreinberg Vice President of Finance and Chief Financial Officer Page 18 of 19 Total Pages