-----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, D1+aq2BhHhgnBO26mymAM8GC0dc0vOXoR6nDwQAFgeT1O+ZmbE1v7/i4FVmovLXL ipkEvf3qzh0bAGLB8Vi4CQ== 0000950130-98-004467.txt : 19980914 0000950130-98-004467.hdr.sgml : 19980914 ACCESSION NUMBER: 0000950130-98-004467 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980731 FILED AS OF DATE: 19980911 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMVERSE TECHNOLOGY INC/NY/ CENTRAL INDEX KEY: 0000803014 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 133238402 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15502 FILM NUMBER: 98707962 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 QUARTERLY REPORT 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 July 31, 1998 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 September 9, 1998 was 44,271,763. Page 1 of 19 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, 1998 and July 31, 1998 3 2. Condensed Consolidated Statements of Income for the Three and Six Month Periods Ended June 30, 1997 and July 31, 1998 4 3. Condensed Consolidated Statements of Cash Flows for the Six Month Periods Ended June 30, 1997 and July 31, 1998 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 19 Total Pages COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
ASSETS - ------ JANUARY 31, JULY 31, 1998* 1998 (Unaudited) CURRENT ASSETS: Cash and cash equivalents $180,855 $146,547 Bank time deposits and short-term investments 96,047 394,221 Accounts receivable, net 79,693 178,765 Inventories 63,024 54,965 Prepaid expenses and other current assets 29,515 37,550 -------- -------- TOTAL CURRENT ASSETS 449,134 812,048 PROPERTY AND EQUIPMENT, NET 53,413 52,916 INVESTMENTS 6,838 9,463 OTHER ASSETS 18,267 28,438 -------- -------- TOTAL ASSETS $527,652 $902,865 ======== ========
- ---------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------
CURRENT LIABILITIES: Accounts payable and accrued expenses $125,941 $147,187 Bank loans 16,600 61 Advance payments from customers 22,680 34,068 Other current liabilities 3,120 3,709 -------- -------- TOTAL CURRENT LIABILITIES 168,341 185,025 CONVERTIBLE SUBORDINATED DEBENTURES 115,000 415,000 LIABILITY FOR SEVERANCE PAY 4,481 5,002 OTHER LIABILITIES 8,440 4,044 -------- -------- TOTAL LIABILITIES 296,262 609,071 STOCKHOLDERS' EQUITY: Common Stock, $0.10 par value authorized 100,000,000 shares, issued and outstanding, 43,390,797 and 44,180,019 shares 4,339 4,418 Additional paid-in capital 219,362 232,421 Retained earnings 6,559 56,595 Accumulated other comprehensive income 1,130 360 -------- -------- TOTAL STOCKHOLDERS' EQUITY 231,390 293,794 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $527,652 $902,865 ======== ========
*The Condensed Consolidated Balance Sheet as of January 31, 1998 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)
SIX MONTHS ENDED THREE MONTHS ENDED JUNE 30, JULY 31, JUNE 30, JULY 31, 1997* 1998 1997* 1998 Sales $259,860 $327,885 $133,012 $167,404 Cost of sales 105,538 133,581 52,911 67,716 -------- -------- -------- -------- Gross margin 154,322 194,304 80,101 99,688 Operating expenses: Research and development, net 45,859 62,586 23,207 31,932 Selling, general and administrative 62,468 72,162 33,367 36,838 Royalties and license fees 7,137 7,515 3,546 3,897 -------- -------- -------- -------- Income from operations 38,858 52,041 19,981 27,021 Interest and other income, net 2,693 3,454 1,811 1,835 -------- -------- -------- -------- Income before income tax provision 41,551 55,495 21,792 28,856 Income tax provision 9,007 5,458 4,742 2,789 -------- -------- -------- -------- Net income $ 32,544 $ 50,037 $ 17,050 $ 26,067 ======== ======== ======== ======== Earnings per share: Basic $0.78 $1.15 $0.41 $ 0.59 ======== ======== ======== ======== Diluted $0.71 $1.06 $0.37 $ 0.55 ======== ======== ======== ========
* Restated for pooling of interests with Boston Technology, Inc. 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)
SIX MONTHS ENDED JUNE 30, JULY 31, 1997* 1998 Cash flows from operating activities: Net cash from operations after adjustment for non-cash items $ 53,521 $ 61,842 Changes in assets and liabilities: Accounts receivable (24,891) (99,072) Inventories (6,181) 8,059 Prepaid expenses and other current assets (15,281) (7,349) Accounts payable and accrued expenses 13,035 21,246 Advance payments from customers 8,507 11,388 Liability for severance pay 432 521 Other 535 1,260 -------- --------- Net cash provided by (used in) operating activities 29,677 (2,105) Cash flows from investing activities: Maturities and sales (purchase) of bank time deposits and investments, net (62,456) (301,379) Purchases of property and equipment (19,215) (11,243) Increase in software development costs (3,066) (4,612) Other 281 - -------- --------- Net cash used in investing activities (84,456) (317,234) Cash flows from financing activities: Net proceeds from issuance of debentures - 292,672 Net borrowings (payments) of bank loans and other debt 9,871 (20,779) Proceeds from issuance of common stock 13,350 13,138 -------- --------- Net cash provided by financing activities 23,221 285,031 Net decrease in cash and cash equivalents (31,558) (34,308) Cash acquired in pooling of Enhanced Communications Corporation 1,658 - Cash and cash equivalents, beginning of period 210,756 180,855 -------- --------- Cash and cash equivalents, end of period $180,856 $ 146,547 ======== =========
* Restated for pooling of interests with Boston Technology, Inc. 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 transition period ended January 31, 1998. 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 six month periods ended July 31, 1998 are not necessarily indicative of the results to be expected for the full year. On January 14, 1998, Comverse Technology, Inc., a New York corporation ("Comverse" and, together with its subsidiaries, the "Company"), consummated a merger (the "Merger") with Boston Technology, Inc., a Delaware corporation ("Boston") in a transaction in which former shareholders of Boston received an aggregate of 18,141,185 shares of Comverse's Common Stock, par value $0.10 per share ("Common Stock"). The Merger has been accounted for as a pooling of interests and, in connection with the Merger, the Company changed its fiscal year from the calendar year to the year ending January 31, coinciding with the fiscal year of Boston. This report presents the financial statements of the Company, at and for the six month and three month periods ended July 31, 1998. The financial information for the 1997 periods combine the financial information of the Company for the three month and six month periods ended June 30, 1997 with the financial information of Boston for the three month and six month periods ended July 31, 1997. INVENTORIES. The composition of inventories at January 31, 1998 and July 31, 1998 is as follows:
JANUARY 31, JULY 31, 1998 1998 (In thousands) Raw materials $29,735 $26,652 Work in process 20,413 16,190 Finished goods 12,876 12,123 ------- ------- $63,024 $54,965 ======= =======
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 six month periods ended July 31, 1998, reimbursement from funding agencies amounted to $4,670,000 and $9,450,000, respectively. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Certain Trends and Uncertainties." Page 6 of 19 Total Pages EARNINGS PER SHARE. For the three month and six month periods ended June 30, 1997 and July 31, 1998, 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 and six month periods ended June 30, 1997 and July 31, 1998. The shares used in the computations are as follows:
SIX MONTHS ENDED THREE MONTHS ENDED JUNE 30, JULY 31, 1997 1998 1997 1998 (In thousands) Basic 41,618 43,666 41,847 43,842 Diluted 45,554 47,418 45,762 47,763
COMPREHENSIVE INCOME. For the six month and three month periods ended June 30, 1997 and July 31, 1998, total comprehensive income was $36,434,000 and $21,511,000 and $49,266,000 and $24,614,000, respectively. The elements of comprehensive income include net income, unrealized gains on available for sale securities and foreign currency translation adjustments. CONVERTIBLE SUBORDINATED DEBENTURES. During the quarter ended July 31, 1998, the Company issued $300,000,000 aggregate principal amount of its 4- 1/2% Convertible Subordinated Debentures due 2005 (the "Debentures"). The Debentures are subordinated in right of payment to all indebtedness of the Company designated as senior indebtedness; are convertible, at the option of the holders, into shares of the Company's Common Stock at a conversion price of $64.50 per share, subject to adjustment in specified circumstances; and are subject to redemption at any time on or after July 10, 2001, in whole or in part, at the option of the Company, at redemption prices (expressed as percentages of the principal amount) of 101.8% if redeemed during the twelve- month period beginning July 10, 2001, 100.9% if redeemed during the twelve-month period beginning July 10, 2002, and 100.0% if redeemed thereafter. Page 7 of 19 Total Pages ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS. Sales. Sales for the six month and three month periods ended July 31, ----- 1998 increased by approximately $68,025,000 (26%) and $34,392,000 (26%), respectively, from the 1997 periods. The increases are attributable primarily to a higher volume of sales of systems and parts in Europe. Cost of Sales. Cost of sales for the six month and three month ------------- periods ended July 31, 1998 increased by approximately $28,043,000 (27%) and $14,805,000 (28%), respectively, from the corresponding periods in 1997. The increases are attributable primarily to increases in sales. Gross margin (expressed as a percentage of sales) for the six month and three month periods ended July 31, 1998 decreased to approximately 59.3% and 59.5%, respectively, from approximately 59.4% and 60.2%, respectively, in the corresponding 1997 periods. Research and Development Expenses. Net research and development --------------------------------- expenses for the six month and three month periods ended July 31, 1998 increased by approximately $16,727,000 (36%) and $8,725,000 (38%), respectively, from the corresponding periods in 1997 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 six month and three month periods ended July 31, 1998 increased by approximately $9,694,000 (16%) and $3,471,000 (10%), respectively, from the corresponding periods in 1997. 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 six -------------------------- and three month periods ended July 31, 1998 increased by approximately $378,000 (5%) and $351,000 (10%), respectively, from the corresponding periods in 1997. Income Tax Provision. Provision for income taxes for the six and three -------------------- month periods ended July 31, 1998 decreased by approximately $3,549,000 (39%) and $1,953,000 (41%), respectively, from the corresponding 1997 periods due to increased sales from lower tax jurisdictions. The Company's overall effective tax rate was approximately 22% in the six and three month periods ended June 30, 1997, respectively, and 10% in the six and three month periods ended July 31, 1998, respectively. The Company's overall rate of tax is reduced significantly by the tax benefits associated with qualified activities of one of its subsidiaries in Israel. Page 8 of 19 Total Pages Net Income. Net income after taxes for the six month and three month ---------- periods ended July 31, 1998 increased by approximately $17,493,000 (54%) and $9,017,000 (53%), respectively, from the 1997 periods, primarily as a result of the factors described above. Net income after taxes as a percentage of sales increased to approximately 15.3% and 15.6%, respectively, in the six and three month periods ended July 31, 1998 from approximately 12.5% and 12.8%, respectively, in the six and three month periods ended June 30, 1997. LIQUIDITY AND CAPITAL RESOURCES. At July 31, 1998, the Company had cash and cash equivalents of approximately $146,547,000, bank time deposits and short-term investments of approximately $394,221,000 and working capital of approximately $627,023,000. 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's results of operations reflect the significant increase in its investment in operations over the past three years. 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 Merger involves the integration of two companies that have previously operated independently. The combination of two sizable technology- based companies involves significant complexities, and no assurance can be given that the combined Company will be able to integrate the operations of Boston into the Company without encountering difficulties or experiencing the Page 9 of 19 Total Pages loss of key Comverse or Boston personnel or that the benefits expected from such integration will be realized. The integration of two companies across geographically dispersed operations can create the risk of disruption in operations of the combined company, and neither company's management has substantial experience in managing such integration or the operations of an entity the size of the combined Company. The Company does not expect to realize cost savings in the near future as a result of the Merger, and no assurance can be given that any savings can be achieved in future periods. Furthermore, there can be no certainty that the Merger will not adversely affect the relationships with key customers, key vendors, or distributors of either company. As a result of its significantly greater concentration on a small number of large telephone company customers, Boston's business has historically been considerably more volatile than that of Comverse, and the operations of the combined Company are likely to be less predictable and subject to greater risks from actions of individual customers than the operations of Comverse in recent years. The telecommunications industry is subject to rapid technological change. The Company's revenue stream will depend on its ability to enhance its existing products and to introduce new products on a timely and cost-effective basis. This includes any customer-requested custom software enhancements required in the normal course of product delivery and customer demands for the technological convergence of the Company's products. The Company's products involve sophisticated hardware and software technology that performs critical functions to highly demanding standards. There can be no assurance 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 worldwide enhanced services systems industry is already highly competitive and the Company expects competition to intensify. The Company believes that existing competitors will continue to present substantial competition, and that other companies, many with considerably greater financial, marketing and sales resources than the Company, may enter the enhanced services systems markets. The 1997 acquisition of Octel Communications Corporation, a significant competitor of the Company, by Lucent Technologies, Inc. may intensify the competitive environment in the industry, and there can be no assurance that similar business combinations or industry consolidation will not occur in the future. The enhanced services platforms industry has experienced a continuing evolution of product offerings and alternatives for delivery of services. These trends have affected and may be expected to have a significant continuing influence on conditions in the industry, although the impact on the industry generally and on the Company's position in the industry cannot be predicted with assurance. Significant changes in the industry make planning decisions more difficult and increase the risk inherent in the planning process. Page 10 of 19 Total Pages 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 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. 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. Boston's operating results, in particular, have often been characterized by volatility and lack of predictability, reflecting its traditional customer concentration among major telecommunications services providers such as the Regional Bell Operating Companies. The Company continues to emphasize large capacity systems in its product development and marketing strategies. Contracts for large installations typically involve a lengthy and complex bidding and selection process, and the ability of the Company to obtain particular contracts is inherently difficult to predict. The Company believes that opportunities for large installations will continue to grow in both its commercial and government markets, and intends to continue to expand its research and development, manufacturing, sales and marketing and product support capabilities in anticipation of such growth. However, the timing and scope of these opportunities and the pricing and margins associated with any eventual contract award are difficult to forecast, and may vary substantially from transaction to transaction. The Company's future operating results may accordingly exhibit a higher degree of volatility than the operating results of other companies in its industries that have adopted different strategies, and than the Company has experienced in prior periods. Although the Company is actively pursuing a number of significant procurement opportunities in the United States and internationally, both the timing of any eventual procurements and the probability of the Company's receipt of significant contract awards are uncertain. The degree of dependence by the Company on large orders, and the investment required to enable the Company to perform such orders, without assurance of continuing order flow from the same customers and predictability of gross margins on any future orders, increase the risk associated with its business. 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 Page 11 of 19 Total Pages increase in research and development expenditures reflects the Company's concentration on enhancing the range of features and capabilities of its existing product lines and developing new generations of its products. The Company believes that these efforts are essential for the continuing competitiveness of its product offerings and for positioning itself to participate in future growth opportunities in both the commercial and government sectors. The increase in sales and marketing expenditures primarily results from the Company's decision to expand its activities and direct presence in a growing number of world markets. The Company's costs of operations have also been affected by increases in the cost of its operations in Israel, resulting both from general inflation and increases in the cost of attracting and retaining qualified scientific, engineering and technical personnel in Israel, where the demand for such personnel is growing rapidly with the expansion of technology- based industries in that country. The increase in these costs in recent periods has not been offset by proportional devaluation of the Israeli shekel against the United States dollar, and accordingly has had a negative impact on the Company's overall results of operations. Continuation of such trends may have a material adverse effect on the Company's future results of operations. A significant portion of the Company's research and development and manufacturing operations are located in Israel and may be affected by regulatory, political, military and economic conditions in that country. The Company's historical operating results reflect substantial benefits from programs sponsored by the Israeli government for the support of research and development, as well as favorable tax rates available to "Approved Enterprises" in Israel. The Israeli government has indicated its intention to reexamine certain of its policies in these areas. Recently, the government acted to increase, from between 2% and 3% of associated product sales to 3% of associated product revenues (including service and other related revenues), the annual rate of royalties to be applied to repayment of benefits under the conditional grant program administered by the Office of the Chief Scientist of the Ministry of Industry and Trade, a program in which the Company has regularly participated and under which it continues to receive significant benefits through reimbursement of qualified research and development expenditures. The Company's repayment of amounts received under the program will be accelerated through these higher royalty rates until repayment is completed. In addition, permission from the government of Israel is required for the Company to manufacture outside of Israel products resulting from research and development activities funded under such programs, or to transfer outside of Israel related technology rights, and in order to obtain such permission the Company may be required to increase the royalties to the applicable funding agencies and/or repay certain amounts received as reimbursement of research and development costs. The Company expects to incur additional royalty expenses and/or repayment obligations as a result of the Merger and the location of certain manufacturing and research and development operations pertaining to its TRILOGUE product line at its Boston facilities. The Israeli authorities have also indicated that 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 Page 12 of 19 Total Pages in or take advantage of those programs, the cost to the Company of its operations in Israel would materially increase and there would be an adverse effect on the results of the Company's operations as a whole. To the extent the Company increases its activities outside Israel, which will result from the Merger and possible future acquisitions, such increased activities will not be eligible for programs sponsored by Israel. 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. The Company currently derives a significant portion of its total sales from customers outside of the United States. International transactions involve particular risks, including political decisions affecting tariffs and trade conditions, rapid and unforeseen changes in economic conditions in individual countries, turbulence in foreign currency and credit markets, and increased costs resulting from lack of proximity to the customer. Volatility in international currency exchange rates may have a significant impact on the Company's operating results. The Company has, and anticipates that it will continue to receive, significant contracts denominated in foreign (primarily Western European and Japanese) currencies. As a result of the unpredictable timing of purchase orders and payments under such contracts and other factors, it is often not practicable for the Company to effectively hedge the risk of significant changes in currency rates during the contract period. Since the Company will hedge the exchange rate risks associated with long-term contracts denominated in foreign currencies only to a limited extent, operating results can be affected by the impact of currency fluctuations as well as the cost of such hedging. Prevailing economic conditions in the Far East and Southeast Asia have significantly reduced the demand for the Company's systems in certain countries. The Company cannot currently predict the effect on its business should regional economic conditions fail to improve. Moreover, the Company's future operating results and financial condition will be adversely affected should current economic instability result in more widespread slowdown or recessionary conditions in other major world markets, or in severe trade or currency disruptions. 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 Pages 13 of 19 Total Pages related to the Company's Year 2000 compliance program have not been material. The program is expected to continue through fiscal 1999 and thereafter, 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 results of operations, including increased warranty costs, customer satisfaction issues and potential legal damages. The Company has initiated 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 the second quarter 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 not been material. The Company currently expects that the total cost of its Year 2000 readiness programs over the next fiscal year will not exceed an amount in the range of $3,000,000 to $5,000,000. 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 Page 14 of 19 Total Pages 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 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 enhanced services platform 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. Page 15 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. 18-19 27. Financial data schedule Filed electronically (b) Reports on Form 8-K. -------------------
On July 2, 1998, the Company filed a Current Report on Form 8-K reporting the issuance of the Debentures. Page 16 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: September 11, 1998 /s/ Kobi Alexander ------------------ Kobi Alexander President, Chairman of the Board and Chief Executive Officer Dated: September 11, 1998 /s/ Igal Nissim --------------- Igal Nissim Chief Financial Officer Page 17 of 19 Pages EX-11 2 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 COMVERSE TECHNOLOGY, INC. STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
Three months ended JUNE 30, 1997* JULY 31, 1998 Basic earnings per share: Net income $17,050 $26,067 ======= ======= Weighted average number of outstanding common shares 41,847 43,842 ======= ======= Basic earnings per share $ 0.41 $ 0.59 ======= ======= Diluted earnings per share: Net income $17,050 $26,067 ======= ======= Weighted average number of outstanding common shares 41,847 43,842 Additional shares assuming exercise of stock options 3,915 3,921 ------- ------- Weighted average number of outstanding common shares assuming full dilution 45,762 47,763 ======= ======= Diluted earnings per share $ 0.37 $ 0.55 ======= =======
* Restated for pooling of interests with Boston Technology, Inc. Page 18 of 19 Total Pages EXHIBIT 11 COMVERSE TECHNOLOGY, INC. STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED JUNE 30, 1997* JULY 31, 1998 Basic earnings per share: Net income $32,544 $50,037 ======= ======= Weighted average number of outstanding common shares 41,618 43,666 ======= ======= Basic earnings per share $ 0.78 $ 1.15 ======= ======= Diluted earnings per share: Net income $32,544 $50,037 ======= ======= Weighted average number of outstanding common shares 41,618 43,666 Additional shares assuming exercise of stock options 3,936 3,752 ------- ------- Weighted average number of outstanding common shares assuming full dilution 45,554 47,418 ======= ======= Diluted earnings per share $ 0.71 $ 1.06 ======= =======
* Restated for pooling of interests with Boston Technology, Inc. Page 19 of 19 Total Pages EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM * 10-Q FOR 7/31/98 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. *Identify the financial statement(s) to be referenced in the legend: 1,000 6-MOS 6-MOS JAN-31-1999 DEC-31-1997 FEB-01-1998 JAN-01-1997 JUL-31-1998 JUN-30-1997 146,547 180,856 394,221 111,175 178,765 137,674 0 0 54,965 56,721 812,048 522,515 52,916 56,325 0 0 902,865 611,179 185,025 136,666 415,000 115,000 0 0 0 0 4,418 4,284 289,376 336,273 902,865 611,179 327,885 259,860 327,885 259,860 133,581 105,538 133,581 105,538 142,263 115,464 0 0 0 0 55,495 41,551 5,458 9,007 50,037 32,544 0 0 0 0 0 0 50,037 32,544 1.15 0.78 1.06 0.71 Six months ended June 30, 1997 is restated to reflect pooling of interests with Boston Technology, Inc.
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