-----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, RioJv2H/GdWX3umex0207+S2FqGBn8U3lS1/Hw3xvtLvJpd6ks0nSO9YAFL9UxXQ mIuzIfXOSQi1WTIEtpfmhw== 0000909518-99-000719.txt : 19991214 0000909518-99-000719.hdr.sgml : 19991214 ACCESSION NUMBER: 0000909518-99-000719 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991031 FILED AS OF DATE: 19991213 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: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15502 FILM NUMBER: 99773559 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-Q 1 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 October 31, 1999 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 December 10, 1999 was 76,346,924. Page 1 of 20 Total Pages (Exhibit Index Appears on Page 16) PART I FINANCIAL INFORMATION ITEM 1. Financial Statements. Page ---- 1. Condensed Consolidated Balance Sheets as of January 31, 1999 and October 31, 1999 3 2. Condensed Consolidated Statements of Income for the Three and Nine Month Periods Ended October 31, 1998 and 1999 4 3. Condensed Consolidated Statements of Cash Flows for the Nine Month Periods Ended October 31, 1998 and 1999 5 4. Notes to Condensed Consolidated Financial Statements 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 8 Page 2 of 20 Pages COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS - ------ JANUARY 31, OCTOBER 31, 1999* 1999 (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 583,959 $ 302,429 Bank time deposits and short-term investments 73,658 424,455 Accounts receivable, net 192,317 238,034 Inventories 46,689 68,866 Prepaid expenses and other current assets 36,014 46,651 --------------- --------------- TOTAL CURRENT ASSETS 932,637 1,080,435 PROPERTY AND EQUIPMENT, net 61,445 117,175 INVESTMENTS 7,902 10,966 OTHER ASSETS 29,409 32,554 --------------- --------------- TOTAL ASSETS $ 1,031,393 $ 1,241,130 =============== =============== - ------------------------------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Accounts payable and accrued expenses $ 184,870 $ 229,999 Other current liabilities 40,486 52,083 --------------- --------------- TOTAL CURRENT LIABILITIES 225,356 282,082 CONVERTIBLE SUBORDINATED DEBENTURES 415,000 300,000 LIABILITY FOR SEVERANCE PAY 4,338 6,627 OTHER LIABILITIES 5,037 4,854 --------------- --------------- TOTAL LIABILITIES 649,731 593,563 --------------- --------------- STOCKHOLDERS' EQUITY: Common stock, $0.10 par value - authorized, 100,000,000 and 300,000,000 shares; issued and outstanding, 68,736,936 and 75,352,818 shares 6,874 7,535 Additional paid-in capital 253,065 403,388 Retained earnings 118,086 235,355 Accumulated other comprehensive income 3,637 1,289 --------------- --------------- TOTAL STOCKHOLDERS' EQUITY 381,662 647,567 --------------- --------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,031,393 $ 1,241,130 =============== ===============
*The Condensed Consolidated Balance Sheet as of January 31, 1999 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 20 Pages COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED THREE MONTHS ENDED OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, 1998 1999 1998 1999 Sales $ 505,992 $ 631,601 $ 178,107 $ 221,814 Cost of sales 204,530 239,718 70,949 83,225 ------------- ------------- --------------- -------------- Gross margin 301,462 391,883 107,158 138,589 Operating expenses: Research and development, net 96,812 121,691 34,226 42,820 Selling, general and administrative 110,806 133,716 38,644 46,722 Royalties and license fees 11,890 14,070 4,375 4,598 Merger expenses - 2,016 - 998 ------------- ------------- --------------- -------------- Income from operations 81,954 120,390 29,913 43,451 Interest and other income, net 5,717 10,505 2,263 4,177 ------------- ------------- --------------- -------------- Income before income tax provision 87,671 130,895 32,176 47,628 Income tax provision 8,513 11,168 3,055 3,939 ------------- ------------- --------------- -------------- Net income $ 79,158 $ 119,727 $ 29,121 $ 43,689 ============= ============= =============== ============== Earnings per share: Basic $ 1.20 $ 1.70 $ 0.44 $ 0.61 ============= ============= =============== ============== Diluted $ 1.12 $ 1.53 $ 0.41 $ 0.55 ============= ============= =============== ==============
The accompanying notes are an integral part of these financial statements. Page 4 of 20 Pages COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
NINE MONTHS ENDED OCTOBER 31, OCTOBER 31, 1998 1999 Cash flows from operating activities: Net cash from operations after adjustment for non-cash items $ 98,741 $ 141,184 Changes in assets and liabilities: Accounts receivable (114,515) (42,406) Inventories 7,302 (21,892) Prepaid expenses and other current assets (3,237) (8,786) Accounts payable and accrued expenses 44,863 43,389 Liability for severance pay 67 2,289 Other 14,598 5,006 ------------- ------------- Net cash provided by operating activities 47,819 118,784 Cash flows from investing activities: Maturities and sales (purchase) of bank time deposits and investments, net (303,637) (356,285) Purchases of property and equipment (17,112) (72,435) Increase in software development costs (6,676) (9,574) -------------- -------------- Net cash (used in) investing activities (327,425) (438,294) Cash flows from financing activities: Net proceeds from issuance of debentures 292,672 - Net payments of bank loans and other debt (21,974) (919) Proceeds from issuance of common stock 16,364 37,192 ------------- ------------- Net cash provided by financing activities 287,062 36,273 Net increase (decrease) in cash and cash equivalents 7,456 (283,237) Cash acquired in pooling of interests transactions - 1,707 Cash and cash equivalents, beginning of period 180,855 583,959 ------------- ------------- Cash and cash equivalents, end of period $ 188,311 $ 302,429 ============= =============
The accompanying notes are an integral part of these financial statements. Page 5 of 20 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, 1999. 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 and nine month periods ended October 31, 1999 are not necessarily indicative of the results to be expected for the full year. INVENTORIES. The composition of inventories at January 31 and October 31, 1999 is as follows: JANUARY 31, OCTOBER 31, 1999 1999 (In thousands) Raw materials $ 23,944 $ 28,716 Work in process 11,171 26,831 Finished goods 11,574 13,319 ------------- ------------- $ 46,689 $ 68,866 ============= ============= 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 and nine months periods ended October 31, 1999, reimbursement from funding agencies amounted to $3,784,000 and $9,293,000, respectively. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Certain Trends and Uncertainties." EARNINGS PER SHARE. For the three month and nine month periods ended October 31, 1998 and 1999, 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 conversion of the 5 3/4% convertible subordinated debentures is assumed as of the beginning of the three and nine month periods ending October 31, 1999 through the date of redemption. The assumed conversion of the 5-3/4% convertible subordinated debentures was antidilutive for the three and nine month periods ending October 31, 1998. The conversion of the 4-1/2 % convertible subordinated debentures is assumed as of the beginning of the nine month period ended October 31, 1999. The assumed conversion of the 4-1/2 % convertible subordinated debentures was antidilutive for the three and nine month periods ended October 31, 1998 and for the three month period ended October 31, 1999. The shares used in the computations are as follows: Page 6 of 20 Pages NINE MONTHS ENDED THREE MONTHS ENDED OCTOBER 31, OCTOBER 31, 1998 1999 1998 1999 (In thousands) Basic 65,801 70,579 66,389 72,077 Diluted 70,991 87,749 70,670 81,818 COMPREHENSIVE INCOME. Total comprehensive income was $30,902,000 and $80,169,000, respectively, for the three month and nine month periods ended October 31, 1998 and $42,402,000 and $117,379,000, respectively, for the corresponding periods ended October 31, 1999. The elements of comprehensive income include net income, unrealized gains on available for sale securities and foreign currency translation adjustments. ACQUISITIONS. In February 1999, the Company acquired all of the outstanding stock of Amarex Technology, Inc., a company that develops software-based applications for the telephone network operator and call center markets, for 346,007 shares of the Company's common stock and the assumption of options and warrants to purchase 119,643 shares of the Company's common stock. The combination has been accounted for as a pooling of interests. In August 1999, the Company acquired all of the outstanding stock of InTouch Systems, Inc., a company that develops and markets a suite of intelligent voice-controlled software applications, for 339,601 shares of the Company's common stock and the assumption of options to purchase 39,561 shares of the Company's common stock. The combination has been accounted for as a pooling of interests. The Company did not restate prior period financial statements for these acquisitions, as such restatements would not be material. STOCK SPLIT. 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. All share and per share information has been adjusted to give effect to this split. 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. In October 1999, the Company called these debentures for redemption. The debentures were converted into 3,770,458 shares of common stock. INCREASE IN AUTHORIZED COMMON SHARES. At the Annual Meeting of Shareholders held on October 8, 1999, the Company's shareholders approved an amendment to the Company's Certificate of Incorporation to increase from 100,000,000 to 300,000,000 the aggregate number of authorized common shares, par value $.10 per share, of the Company. Page 7 of 20 Pages ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS. Sales. Sales for the nine month and three month periods ended October 31, 1999 increased by approximately $125,609,000 (25%) and $43,707,000 (25%), respectively, from the 1998 periods. The increases are attributable primarily to a higher volume of sales of systems and parts of enhanced service systems and software. Cost of Sales. Cost of sales for the nine month and three month periods ended October 31, 1999 increased by approximately $35,188,000 (17%) and $12,276,000 (17%), respectively, from the corresponding periods in 1998. The increases are attributable primarily to increases in sales. Gross margin (expressed as a percentage of sales) for the nine month and three month periods ended October 31, 1999 increased to approximately 62.0% and 62.5%, respectively, from approximately 59.6% and 60.2%, respectively, in the corresponding 1998 periods. Research and Development Expenses. Net research and development expenses for the nine month and three month periods ended October 31, 1999 increased by approximately $24,879,000 (26%) and $8,594,000 (25%), respectively, from the corresponding periods in 1998 due to the 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. Selling, General and Administrative Expenses. Selling, general and administrative expenses for the nine month and three month periods ended October 31, 1999 increased by approximately $22,910,000 (21%) and $8,078,000 (21%), respectively, from the corresponding periods in 1998. Such increases were the 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. Royalties and License Fees. Royalties and license fees for the nine and three month periods ended October 31, 1999 increased by approximately $2,180,000 (18%) and $223,000 (5%), respectively, from the corresponding periods in 1998. Income Tax Provision. Provision for income taxes for the nine and three month periods ended October 31, 1999 increased by $2,655,000 (31%) and $884,000 (29%), respectively, from the corresponding 1998 periods due to increased pre-tax income. The Company's overall effective tax rate was approximately 10% and 9%, respectively, in the nine and three month periods ended October 31, 1998, and 9% and 8%, respectively, in the nine and three month periods ended October 31, 1999. The Company's overall rate of tax is reduced significantly by the tax benefits associated with qualified activities of its subsidiaries in Israel. Page 8 of 20 Pages Net Income. Net income after taxes for the nine month and three month periods ended October 31, 1999 increased by approximately $40,569,000 (51%) and $14,568,000 (50%), respectively, from the 1998 periods, primarily as a result of the factors described above. Net income after taxes as a percentage of sales increased to approximately 19.0% and 19.7%, respectively, in the nine and three month periods ended October 31, 1999 from approximately 15.6% and 16.4%, respectively, in the nine and three month periods ended October 31, 1998. LIQUIDITY AND CAPITAL RESOURCES. At October 31, 1999, the Company had cash and cash equivalents of approximately $302,429,000, bank time deposits and short-term investments of approximately $424,455,000 and working capital of approximately $798,353,000. 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 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 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, including any customer-requested custom software enhancements required in Page 9 of 20 Pages the course of product delivery. 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, 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 telecommunications industry is also affected by the advent of new technologies and alternatives for the delivery of services, such as digital transmission standards and Internet telephony. The Company's success will depend in part upon its ability to correctly anticipate technological changes and to provide the range of features and capabilities required by its customers to take advantage of new technological opportunities. The worldwide market for enhanced services platform ("ESP"s) systems 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. In January 1998, the Company merged with Boston Technology, Inc. ("Boston"), a manufacturer of ESP systems. 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 the Company before the merger, 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 the Company in prior years. 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 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 delay 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. This market is also highly Page 10 of 20 Pages regulated, and opportunities can be affected by the Company's ability to obtain and maintain in effect security clearances for personnel and facilities, to obtain export licenses and to comply with government procurement policies and practices. The lack of predictability in the timing and scope of government procurements have 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. 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 its commercial 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 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 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 years has not been offset in each instance by proportional devaluation of the Israeli shekel against the United States dollar, Page 11 of 20 Pages 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. In recent years, the government has acted to increase 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 up to 50% of qualified research and development expenditures. Increases in royalties, which currently amount to 3% of affected product revenues (including service and other related revenues), have the effect of increasing the Company's expenses and accelerating the Company's repayment of amounts received under the program until repayment is completed. Repayment of any amounts received under programs which have been, or will be, approved by the Office of the Chief Scientist after January 1, 1999 will entail repayment of the amount received (calculated in US 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. 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 and/or repay certain amounts received as reimbursement of research and development costs. The Israeli authorities have also indicated that these research and development funding programs will be significantly 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 the Company's projects that were eligible for the moratorium prior to 1997, it applies to the subsequent "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 a significant adverse effect on the results of the Company's operations as a whole. To the extent the Company increases its activities outside Israel, such increased activities will not be eligible for programs sponsored by Israel. Most of 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. Page 12 of 20 Pages 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. The recent recession in the Far East and Southeast Asia reduced the demand for the Company's systems in certain countries, and the Company's future operating results and financial condition could be adversely affected by prevailing regional economic conditions and related trade or currency disruptions. Moreover, the Company's future operating results and financial condition will be adversely affected should recessionary conditions appear in other major world markets. 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, if at all, operating results can be affected by the impact of currency fluctuations as well as the cost of such hedging. The Company has undertaken a comprehensive program to evaluate "Year 2000 compliance" of its products and systems. The Company considers a product to be "Year 2000 compliant" if the product, when used properly and in conformity with the product information provided by the Company, will accurately store, display, process, provide and/or receive data from, into and between the twentieth and twenty-first centuries, including leap year calculations, provided that all other technology used in combination with the Company product properly exchanges date data with the product. Although the Company believes that its current products generally either are, or upon the completion of current modification programs will be, Year 2000 compliant, no assurance can be given that its Year 2000 compliance efforts will prove to be fully successful or that unanticipated costs and problems will not be encountered in such efforts. In addition, the Company has determined that older generations of certain of its products are not and cannot, without unreasonable effort and expense, be made Year 2000 compliant. The costs incurred to date related to the Company's Year 2000 compliance program have been less than $10,000,000. The program is expected to continue through fiscal 1999, but is not anticipated to have a material adverse effect on the Company's business or financial condition. The Company anticipates that widespread litigation may be brought in the future against vendors of systems and components of systems that are unable to properly manage data related to the Year 2000. The Company's agreements with customers typically contain provisions designed to limit generally the Company's liability for customer claims. It is possible, however, that these measures will not provide protection from Year 2000 liability claims, as a result of existing or future laws or unfavorable judicial decisions. Any such claims could result in a material adverse affect on the Company's business, financial condition and Page 13 of 20 Pages results of operations, including increased warranty costs, customer satisfaction issues and potential legal damages. The Company has implemented a comprehensive program to address Year 2000 readiness in its internal systems and with its customers and suppliers. The Company's program has been designed to address its most critical internal systems first and to gather information regarding the Year 2000 compliance of products supplied to it and into which the Company's products are integrated. Assessment and remediation are proceeding in tandem, and the Company intends to have its critical internal systems in Year 2000 compliance by the end of 1999. These activities are intended to encompass all major categories of systems in use by the Company, including manufacturing, engineering, sales, finance and human resources. The costs incurred to date related to these programs have been less than $5,000,000. The Company currently expects that the total cost of its Year 2000 readiness programs over the current fiscal year will not exceed $5,000,000. Additional costs are expected to be incurred in the next fiscal year, but neither current nor currently projected future expenditures in these programs are anticipated to have a material adverse effect on the Company's business or financial condition. The total cost estimate does not include potential costs related to any customer or other claims or the costs of internal software or hardware replaced in the normal course of business. The total cost estimate is based on the current assessment of the Company's Year 2000 readiness needs and is subject to change as the projects proceed. The Company is communicating with its significant suppliers and financial institutions to determine the extent to which the Company is vulnerable to those third parties' failure to remedy their own Year 2000 concerns, and has received assurances of Year 2000 compliance from a number of those contacted. Most of the suppliers under existing contracts with the Company are under no contractual obligation to provide such information to the Company. While the Company currently expects that the Year 2000 issue will not pose significant operational problems, failure to fully identify all Year 2000 dependencies in the Company's systems and in the systems of its suppliers, customers and financial institutions could have material adverse consequences, including delays in the delivery or sale of products. The Company has under consideration various contingency plans which will be developed as needed to assure continuing operations in the event such problems arise. 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 exhibit a high degree of volatility. The Company's revenues and earnings may be more volatile than those 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 Page 14 of 20 Pages 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 telecommunications equipment industry in general, and the Company's industry 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 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 15 of 20 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. 18 - 19 27. Financial data schedule Filed electronically (b) Reports on Form 8-K. None Page 16 of 20 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: December 13, 1999 /s/ Kobi Alexander ------------------------------------- Kobi Alexander President, Chairman of the Board and Chief Executive Officer Dated: December 13, 1999 /s/ David Kreinberg ------------------------------------- David Kreinberg Vice President of Finance and Chief Financial Officer Page 17 of 20 Pages EX-11 2 EXHIBIT 11 COMVERSE TECHNOLOGY, INC. STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED OCTOBER 31, 1998 OCTOBER 31, 1999 Basic earnings per share: Net income $ 29,121 $ 43,689 ============ ============= Weighted average number of outstanding common shares 66,389 72,077 ============ ============= Basic earnings per share $ 0.44 $ 0.61 ============ ============= Diluted earnings per share: Net income $ 29,121 $ 43,689 Interest expense on 53/4% convertible debentures, net of tax - 1,385 ------------ ------------- Adjusted net income $ 29,121 $ 45,074 ============ ============= Weighted average number of outstanding common shares 66,389 72,077 Additional shares assuming exercise of stock options 4,281 6,758 Additional shares assuming conversion of 53/4% convertible debentures at beginning period - 2,983 ------------ ------------- Weighted average number of outstanding common shares assuming full dilution 70,670 81,818 ============ ============ Diluted earnings per share $ 0.41 $ 0.55 ============ ==============
Page 18 of 20 Pages EXHIBIT 11 COMVERSE TECHNOLOGY, INC. STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED OCTOBER 31, 1998 OCTOBER 31, 1999 Basic earnings per share: Net income $ 79,158 $ 119,727 ============ ============= Weighted average number of outstanding common shares 65,801 70,579 ============ ============= Basic earnings per share $ 1.20 $ 1.70 ============ ============= Diluted earnings per share: Net income $ 79,158 $ 119,727 Interest expense on convertible debentures, net of tax - 14,405 ------------ ------------- Adjusted net income $ 79,158 $ 134,132 ============ ============= Weighted average number of outstanding common shares 65,801 70,579 Additional shares assuming exercise of stock options 5,190 6,686 Additional shares assuming conversion of convertible debentures - 10,484 ------------ ------------- Weighted average number of outstanding common shares assuming full dilution 70,991 87,749 ============ ============= Diluted earnings per share $ 1.12 $ 1.53 ============ =============
Page 19 of 20 Pages EX-27 3
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR 10/31/99 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS JAN-31-2000 FEB-01-1999 OCT-31-1999 302,429 424,455 238,034 0 68,866 1,080,435 117,175 0 1,241,130 282,082 300,000 7,535 0 0 640,032 1,241,130 631,601 631,601 239,718 239,718 271,493 0 0 130,895 11,168 119,727 0 0 0 119,727 1.70 1.53
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