<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the Fiscal Year ended December 31, 1994
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)
Registrant's telephone number, including area code: 516-677-7200
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Not applicable Not applicable
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.10 PAR VALUE PER SHARE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes: [X] No: [_]
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
[X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 21, 1995 was approximately $240,000,000. The closing price
of the registrant's Common Stock on the NASDAQ National Market System on March
21, 1995 was $12-13/16 per share.
There were 19,923,304 shares of the registrant's Common Stock outstanding on
March 21, 1995.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant hereby incorporates by reference in this report the information
required by Part III appearing in the registrant's proxy statement or
information statement distributed in connection with the 1995 Annual Meeting of
Shareholders of the registrant or in an amendment to this report on Form 8.
____________________________
Unless otherwise specified in this report, all information included herein with
respect to the registrant's Common Stock, including information appearing in
financial tables concerning numbers of shares and earnings per share, has been
adjusted to give effect to the combination, or "reverse split", of the Common
Stock at the rate of one new share of Common Stock, par value $0.10 per share,
for each ten shares of Common Stock, par value $0.01 per share, issued and
outstanding on February 26, 1993.
____________________________
TRILOGUE is a registered trademark and TRILOGUE INfinity and AUDIODISK are
trademarks of the Company.
ii
<PAGE>
PART I
ITEM 1. BUSINESS.
INTRODUCTION.
Comverse Technology, Inc., a New York corporation ("Comverse" or the "Company"),
designs, develops, manufactures, markets and supports special purpose computer
and telecommunications systems for multimedia communications and information
processing applications. The Company's systems are used in a broad range of
applications by fixed and wireless telephone network operators, government
agencies, financial institutions and other public and commercial organizations
worldwide.
The Company has developed two main product lines -- the TRILOGUE family of
telephone-accessed, multimedia messaging and information processing systems, and
the AUDIODISK family of multiple channel, multimedia digital recording systems -
- both of which incorporate advanced technologies in the areas of digital signal
processing, facsimile protocols, telephony interfaces, mass storage, digital
networking, multi-processor computer architecture and real-time software design.
The Company's TRILOGUE systems enable many simultaneous users to access from any
telephone or fax machine a broad range of integrated messaging and information
services, such as call answering, voice mail, fax mail and audiotext.
TRILOGUE's principal market consists of subscriber service provider ("SSP")
organizations that use the systems to provide services to the public, usually on
a subscription basis, and includes both fixed and wireless telephone network
operators and other telecommunications services organizations. The Company's
Network Systems Division markets TRILOGUE systems throughout the world, with its
own direct sales force and subsidiaries located in seven countries, and in
cooperation with a number of leading international vendors of telecommunications
infrastructure equipment. The Company is a market-share leader in providing
large capacity messaging systems for international telephone network operators.
More than 65 international fixed and wireless telephone network operators in
more than 30 countries utilize TRILOGUE as their platform for messaging
services. Current TRILOGUE users include a number of large international
providers of public telecommunications services, such as Deutsche Telekom in
Germany, Telecom Australia, Telmex, Hongkong Telecom, Singapore Telecom and
several regional telephone companies in the People's Republic of China. The
objectives of the Network Systems Division include maintaining the Company's
international market share leadership and increasing the Company's presence in
the United States SSP markets as existing users expand and upgrade their
equipment and new providers of fixed and mobile network services enter the
market.
The Company's AUDIODISK systems enable many simultaneous users to monitor and
process voice, image (facsimile) and data communications from multiple channels
in a variety of analog and digital formats, provide facilities for archiving
large volumes of recorded information and allow the use of computer database
processing techniques for management and retrieval operations. The systems have
been sold primarily to law enforcement and intelligence agencies that monitor
and record communication channels for a variety of purposes, such as
surveillance in support of police actions and the collection and processing of
information for intelligence analysis. Various other government and commercial
organizations, such as emergency services providers, correctional facilities,
public health and safety organizations and financial
<PAGE>
institutions, also use AUDIODISK and its derivative products to record and
process large volumes of audio, image and data communications.
Traditionally, analog tape recorders, alone or coupled with a variety of special
purpose devices, have been utilized for these applications. The worldwide
growth in telecommunications traffic in general and digital communications in
particular, and the increasing use of a variety of digital transmission formats
in telecommunications networks, have created a need for user organizations to
modernize their monitoring, recording and processing capabilities. AUDIODISK
provides a number of advantages over analog, tape recorder-based systems,
including improvements in capacity, reliability, accuracy, processing efficiency
and archiving and retrieval capabilities. AUDIODISK systems interface with a
variety of analog and digital communications protocols and automatically
recognize and adapt to voice, fax or modem content on each recorded channel.
Most importantly, AUDIODISK systems enable users to adapt efficiently to the
emergence of new telecommunications technologies, such as digital transmission,
ISDN and enhanced signaling systems, for which analog, tape recorder-based
equipment was not designed. To date, AUDIODISK and its derivative systems have
been sold to end-users in 20 countries.
The Company has designed its products with an open system, modular architecture
to accommodate user requirements for flexibility of product configuration and
capacity, and to enable the integration of advanced technologies, including
intelligent networking capability. This architecture permits scalability across
the full range of product configurations. Current TRILOGUE single-system
configurations may include up to 1,000,000 mailboxes, with 6,000 ports and
storage capacity for 45,000 hours of voice or 6,750,000 fax pages. AUDIODISK
installations support multiple user workstations for monitoring up to 350
channels simultaneously, with storage capacities of up to 30,000 hours of audio
or 4,500,000 pages of fax, using both magnetic disk and optical media.
During 1994, the Company derived revenues of approximately $56,968,000 (61% of
total sales) from the TRILOGUE product line (and related products and services),
an increase of approximately $20,517,000 (56%) over the prior year, and
approximately $35,720,000 (39% of total sales) from the AUDIODISK product line
(and related products and services), an increase of approximately $4,462,000
(14%) over the prior year. At December 31, 1994, the Company had a backlog of
approximately $38,500,000, of which approximately $33,600,000 was scheduled for
delivery during 1995.
Through subsidiaries, the Company is involved in the provision of computer
design and consulting services, primarily for government customers in Canada,
the operation of a telemessaging service bureau in Israel and capital market
activities for its own account.
The Company was incorporated in the State of New York in October 1984. Its
principal executive offices are located at 170 Crossways Park Drive, Woodbury,
New York 11797, where its telephone number is (516) 677-7200.
-2-
<PAGE>
THE COMPANY'S PRODUCTS.
TRILOGUE PRODUCT FAMILY
OVERVIEW.
The market for telephone-accessed, multimedia messaging and information
processing systems has grown rapidly over the past several years. The Company
believes that a number of factors have contributed to this growth, including the
increasing public awareness and acceptance of multimedia messaging services
resulting from the growing installed base of systems in the business community,
the widespread availability from the major telephone companies of call answering
services, the growing use of cellular mobile and other wireless telephone
systems, which almost universally offer a mailbox-based call answering service,
and the popularity of pay-per-call audiotext services.
The Company's primary focus has been on supplying large-capacity messaging
systems to SSP organizations, including fixed and wireless telephone network
operators and other telecommunications services organizations worldwide. SSP
organizations benefit from the ability to offer their customers a variety of
services provided by the TRILOGUE system, such as automated call answering,
voice and fax messaging, audiotext and "virtual telephone" service, usually on a
subscription basis. With call answering and voice and fax messaging, telephone
operating companies benefit not only from service subscription fees, but also
from traffic revenue generated by the increase in billable completed calls. In
addition, these services improve overall network efficiency by reducing
congestion from repeated unbillable busy/no-answer calls. Cellular and other
wireless telephone service operators are almost universally adding voice
mailboxes to their service offerings, not only because of these benefits, but
also because their services are increasingly used as personal communication
systems in which call answering is an important element. Voice and fax
audiotext services increase the range of revenue producing value-added services
the organizations can provide to their business customers and also serve as a
direct source of pay-per-call revenue to the service providers. "Virtual
telephone" service offers an effective means for telephone companies to provide
telecommunications services in developing areas at a fraction of the time and
cost per subscriber required to create the infrastructure for traditional
telephone service.
PRODUCT DESCRIPTION AND CONFIGURATIONS.
TRILOGUE systems are available in four models, each designed to address a range
of capacities in a modular and scalable manner:
<TABLE>
<CAPTION>
PORTS VOICE HOURS
----------- --------------- MAXIMUM
MODEL From To From To Mailboxes
---------- ----------- --------------- ---------
<S> <C> <C> <C> <C> <C>
2500 4 16 12 58 32,000
4500 4 16 12 1,000 32,000
6500 16 64 45 1,000 32,000
INfinity 24 6,000 50 45,000 1,000,000
</TABLE>
-3-
<PAGE>
Through its universal port capability, all the ports on any TRILOGUE model can
be configured to support voice storage and retrieval only, or to support both
voice and fax storage and retrieval. Storage capacity, shown above in voice
hours, can be dynamically allocated to voice or fax on a demand basis, with a
fax capacity of approximately 150 pages per voice hour. The systems are
configured in different sizes designed for various market segments and
applications.
TRILOGUE 2500 is an ultra-compact model designed for small to medium-sized
organizations with messaging needs that are not likely to grow much beyond
1,000 users, or whose information distribution volume is not likely to exceed
600 one minute calls per hour.
TRILOGUE 4500 is designed to support the same number of users and information
traffic as the TRILOGUE 2500, but its larger package provides greater storage
capacity. The system is also field-upgradeable to the much greater port
capacity of the TRILOGUE 6500 with no loss of investment by the customer.
TRILOGUE 6500 is a compact model for large organizations and medium-sized
service providers. It can typically support between 5,000 and 10,000 messaging
users, or as many as 3,000 one minute calls per hour.
TRILOGUE INfinity is designed and packaged to meet the capacity, reliability,
maintainability and physical requirements of large telephone network
operators. In 1995, the Company announced a new INfinity system architecture
(see "New Product Architecture") that provides expanded capacity of up to
6,000 ports, 45,000 voice storage hours and 1,000,000 mailboxes, permitting
access to any mailbox from any port. The system also provides redundancy of
all critical components, so that no single failure will interrupt the service.
TRILOGUE INfinity is available in both centralized and widely distributed
configurations, and maintains its integrity as a single system in distributed
configurations.
All TRILOGUE models incorporate much of the same proprietary software, and much
of the same industry standard and proprietary hardware. Most of the software is
written in the C language using object oriented design techniques and providing
a high degree of portability and hardware independence. TRILOGUE's current
hardware is based on Industry Standard Architecture ("ISA"), which facilitates
the integration of commercially available ISA technologies with the Company's
core technologies.
TRILOGUE supports a wide variety of analog and digital telephony interfaces and
signaling systems, which makes the system adaptable to a variety of different
telephony environments and intelligent network applications. TRILOGUE also
provides a "universal port" -- a single port that supports any combination of
voice and fax services at any time during a single call.
TRILOGUE Applications.
TRILOGUE systems support a variety of software options and applications.
Included among the available TRILOGUE applications are the following:
-4-
<PAGE>
. Telephone Answering
If the telephone to which a call is placed is not answered or is busy, the call
is diverted to the TRILOGUE system, where the caller is greeted with the
subscriber's personal greeting and is instructed to leave a message. The
subscriber can then retrieve the message from any telephone.
. Voice Messaging
Voice messaging enables any TRILOGUE user to send a message to any other
TRILOGUE user 24 hours a day without calling the recipient directly. The
recipient can retrieve the message from any telephone and reply to the sender
with a single keystroke. TRILOGUE permits delivery of recorded messages to
lists of recipients, transferring of messages from one person to another with
attached comments, editing of messages and delivery of messages at any future
time designated by the sender.
. Virtual Telephone Service
The virtual telephone subscriber receives a published personal telephone number.
However, no telephone or line is installed on the subscriber's premises.
Instead, the subscriber receives a voice mailbox set up in a TRILOGUE system
connected to a public switch. Anyone who dials that number reaches the
subscriber's mailbox directly, hears the subscriber's voice greeting and records
a message. The subscriber may retrieve and respond to the messages from any
public telephone. This new service concept is especially targeted at developing
countries, where conventional telephone infrastructure and service are not
readily available or affordable.
. Virtual Replacement Telephone Service
Calls to a subscriber whose line is out of service are rerouted to a voice
mailbox. Each caller is informed that the call is being answered by a special
service of the telephone company and is invited to leave a message. The
subscriber may retrieve the messages from any operational telephone.
. Message Delivery
A caller dials a telephone number that is busy or does not answer. The caller
may then access TRILOGUE to record a message to be delivered later. The system
attempts to deliver the message by repeatedly calling the intended recipient at
designated intervals.
. Fax Answering (Never Busy Fax)
A fax call finds the destination fax machine busy or non-operational. The call
is forwarded to TRILOGUE, which answers the call and receives the fax in a
manner indistinguishable from a fax machine. TRILOGUE delivers the fax when the
destination fax machine is no longer busy.
-5-
<PAGE>
. Virtual Fax (Fax Mailbox)
Like a user of virtual telephone, a user of virtual fax has a published personal
telephone number. TRILOGUE answers calls to this number in the same manner as
they would be answered by a fax machine, receives a fax from the caller and
stores the fax in the subscriber's mailbox. The subscriber is then notified
that a fax message is waiting and can retrieve it either by calling from a fax
machine and requesting immediate delivery or by entering the phone number of a
fax machine, which the system then calls to deliver the fax.
. Fax Messaging
Fax messaging is the fax equivalent of voice messaging. Subscribers can send
faxes via TRILOGUE to mailboxes or to telephone numbers, using the future
delivery and the mailing list features of the mailbox. Fax messages received in
a mailbox can be printed and transferred to other mailboxes or other fax
machines.
. Integrated Voice and Fax Mail
TRILOGUE can provide a single mailbox that supports the storage and retrieval of
voice, fax and combined voice/fax messages using a common set of commands. This
capability is one of the most distinctive features of the TRILOGUE system.
. Network Messaging
TRILOGUE supports networking for voice and fax mailbox-to-mailbox communication
among a large community of subscribers whose mailboxes may reside on many
different systems throughout the world. TRILOGUE's network messaging not only
supports voice messaging between TRILOGUE systems, but also provides networking
between TRILOGUE and other vendors' systems, because it is compatible with AMIS,
the accepted standard for inter-vendor voice mail networking.
. Audiotext
Audiotext is an application that provides automated access to recorded
information via the telephone. This application provides information services,
such as public service announcements or product descriptions, at a lower cost
than using live operators, and permits service to be extended to 24 hours a day
at virtually no incremental cost to the information provider. TRILOGUE's
GenLogue software package, available as an option on all TRILOGUE models, is an
easy-to-use, menu-driven dialogue generator specifically designed for the
creation of audiotext programs.
. Voice Forms
A voice form is a question and answer dialogue with a caller. The system
prompts the caller for a series of information items, records the answer to each
question and, at the end, sends all the answers as one message to a voice
mailbox for later retrieval and transcription.
-6-
<PAGE>
. Fax-on-Demand and Voice/Fax Information-on-Demand
Fax-on-demand is the fax equivalent of audiotext, providing automated access to
printed information via fax. Prompts and menus can be provided in voice form,
and voice information can be mixed with fax. If the caller is calling from a
fax machine, faxes can be delivered in the same call. If the caller is calling
from an ordinary telephone, information can be delivered to any fax machine
specified by the caller.
. Calling Card Gateway
TRILOGUE INfinity systems provide calling card access to the public telephone
network in countries such as the People's Republic of China which have not
offered this service until recently. TRILOGUE supports a complete debit card
application including maintaining the calling card database and the account
balance of each subscriber, validating the card number and PIN of callers,
placing the validated calls, and monitoring the duration of calls to calculate
the account balance in real time and prevent balance overruns.
. Paging Gateway
A caller can activate and transmit a specific text or voice message to a pager
via TRILOGUE. The call is answered by TRILOGUE with the subscriber's personal
greeting and voice prompts, rather than with cryptic tones. The paging gateway
application works with tone-only pagers, numeric pagers, alphanumeric pagers and
voice pagers.
Short Message Service Center (SMSC)
For advanced digital wireless networks, such as those based on the new Global
System for Mobile Communications ("GSM") standard, TRILOGUE allows alphanumeric
messages to be received through the system and displayed on a subscriber's
handset.
. Live Answering Integration
TRILOGUE integrates with a number of computer-based live answering systems,
including systems manufactured by the Company as well as those of other vendors.
A live attendant answers the telephone with a client-specific greeting and
provides live answers to questions. The attendant may route the caller to a
TRILOGUE mailbox or take a message in person and then read it into the client's
mailbox. Clients retrieve the messages from TRILOGUE in the same manner as with
other voice messaging applications.
. Electronic Mail Integration
A data link between TRILOGUE and an electronic mail system updates the E-Mail
status of TRILOGUE subscribers. TRILOGUE notifies subscribers whenever they
receive E-Mail communications and informs them of the number of E-Mail messages
waiting for them as well as the number of voice and fax messages in their
TRILOGUE mailboxes.
-7-
<PAGE>
Multi-Application Enhanced Services Platform
SSP organizations increasingly require an integrated multi-application enhanced
services platform ("ESP"), both because multi-application ESPs reduce costs and
because they provide greater flexibility for service offerings. By combining
many different applications and service capabilities in a single system, ESPs
offer savings in comparison to the cost of the many separate systems that would
otherwise be required to provide the same services. In addition, having a
single platform reduces the cost of staffing and training personnel for
operations, administration and maintenance ("OA&M"), simplifies the integration
of the ESP OA&M with the customer's existing OA&M systems and procedures and
saves money on spare parts.
TRILOGUE was conceived and designed specifically as an ESP. TRILOGUE provides
seamless integration of call answering, audiotext, fax-on-demand and voice and
fax messaging applications to provide users with the benefits of all these
services in a single telephone call. All the applications listed above can be
offered on any TRILOGUE port, and all the software to provide these applications
can run concurrently. There is no limitation on the number of transitions
between different media and applications that a caller can make in a single
call.
New Product Architecture
The demand from SSP customers for high capacity and high reliability in ESP
platforms is increasing as enhanced services grow in popularity, and as
telephone network operators gain experience with the equipment they have
initially deployed. In 1995, the Company announced the general availability of
a new INfinity system architecture designed to meet the capacity and reliability
requirements of large telephone network operators, and to work with the Advanced
Intelligent Network environment of the future. The system is designed to
support an expanded capacity of up to 6,000 ports, 45,000 voice storage hours
and 1,000,000 mailboxes, permitting access to any mailbox from any port. The
system is also designed to provide redundancy of all critical components, so
that no single failure will interrupt the service.
The new INfinity architecture, which is available as a field upgrade for
existing INfinity systems, consists of up to 100 rack-mounted Message Management
Units ("MMU"s) and up to 50 Message Storage Units ("MSU"s), all linked by a High
Speed Backbone Network to each other and to the TRILOGUE Manager, a general
purpose computer serving as an administration processor, and to the TRILOGUE
Alarm Processor, an on-line testing and alarm notification device. TRILOGUE
INfinity is available in both centralized and widely distributed configurations,
and maintains its integrity as a single system in distributed configurations.
The new INfinity architecture also incorporates components that are compatible
with the Intelligent Network and Advanced Intelligent Network protocols for
Service Nodes and Intelligent Peripherals, permitting the Company's SSP
customers to design and develop their own TRILOGUE-based services without
relying solely on the development resources of the Company.
Markets, Sales and Marketing.
The Company's Network Systems Division markets TRILOGUE systems throughout the
world, with its own direct sales force and subsidiaries located in seven
countries, and in cooperation with a number of leading international vendors of
-8-
<PAGE>
telecommunications infrastructure equipment. The Company is a market-share
leader in providing large capacity messaging systems for international telephone
network operators, and has incorporated into TRILOGUE various capabilities that
were specifically developed for the international markets.
More than 65 international fixed and wireless telephone network operators in
more than 30 countries utilize TRILOGUE as their platform for messaging
services. Major TRILOGUE installations include, among others, Deutsche Telekom
in Germany, where a TRILOGUE INfinity system is installed with a current
capacity of 200,000 subscribers. The Company believes that this installation,
with over 1,200 voice/fax ports, is one of the largest single site voice and fax
messaging systems in the world. The Company's international SSP customers
include, among others, Hongkong Telecom, Singapore Telecom, Telecom Australia,
Telecom Finland, Helsinki Telephone Company, Bezek in Israel, Telmex and Telnor
in Mexico, Comvik and NordicTel in Sweden, CTC and Telecom Cellular in Chile,
Belgacom in Belgium, Netcom in Norway, Bell South New Zealand and several
provincial telephone companies in the People's Republic of China. The
objectives of the Network Systems Division include maintaining the Company's
international market share leadership and increasing the Company's presence in
the United States SSP markets as existing users expand and upgrade their
equipment and new providers of fixed and mobile network services enter the
market.
The Company provides its customers with marketing consultation, seminars and
materials designed to assist them in marketing TRILOGUE-based services, and also
undertakes to play an ongoing supporting role in their business and market
planning processes.
AUDIODISK Product Family
Overview.
The AUDIODISK family of products consists of multiple channel, multimedia
digital recording systems, which enable many users simultaneously to monitor and
process audio, image (facsimile) and data communications over many channels in a
variety of analog and digital formats and provide facilities for archiving large
volumes of recorded information. The systems automatically decode and record a
variety of signals without operator intervention and store the recorded
information on magnetic and optical disks to permit quick and easy random access
and the use of computer database techniques for archiving and retrieval
operations. AUDIODISK also enables a number of users to access the same
recorded information simultaneously for processing and analysis.
Traditionally, analog tape recorders, alone or coupled with a variety of other
special purpose devices, have been utilized for communications monitoring and
related applications. The limited capacity and processing capability inherent
in these systems have imposed constraints on organizations that process large
amounts of multimedia information from multiple channels and that need to store
the processed information for long periods while keeping it available for rapid
retrieval. AUDIODISK systems provide a transition from multiple individual
analog tape recorders to a multiple channel, optical disk-based digital
recording system, similar to the transition from analog cassette tapes to
digital compact disks in the consumer electronics market, affording the user
access to the capacity and processing capabilities available only with digital
technology. Digital processing capabilities provided by AUDIODISK include
immediate random
-9-
<PAGE>
access to large volumes of recorded information and the ability
concurrently to record and playback recorded information, access information
over a network and process information in various types of media through
multiple user workstations.
Organizations that have sought a comprehensive solution for multimedia, multiple
channel recording and processing applications historically have been required to
acquire, integrate and support many different systems, including recording
devices for audio transmissions, monitoring devices for fax and modem
communications, monitoring devices for telephony signaling, high-quality voice
recording and cellular recording systems, transcription systems, various
database management systems and various devices to decode and record different
kinds of telecommunication signals. AUDIODISK provides a fully integrated,
single-system solution for these applications. Multiple channels can be
processed on AUDIODISK by many users simultaneously in a computerized
environment analogous to a mainframe or mini-computer database application,
utilizing audio, image and modem signals rather than alphanumerical data as the
processed media.
AUDIODISK provides a number of advantages over analog, tape recorder-based
systems, including improvements in capacity, reliability, accuracy, processing
efficiency and archiving and retrieval capabilities. AUDIODISK systems
interface with a variety of analog and digital communications protocols and
automatically recognize and adapt to voice, fax or modem content on each
recorded channel. Most importantly, AUDIODISK also enables users to adapt
efficiently to the emergence of new telecommunications technologies, such as
digital transmission, ISDN and enhanced signaling systems, for which analog,
tape recorder-based equipment was not designed.
Product Description.
The AUDIODISK product design is based on open system architecture and
client/server concepts. AUDIODISK operators utilize computer workstations to
access various servers across local and wide area networks. These servers
include a multimedia server, which interfaces with incoming channels and records
information from each channel in digital format, a computer database server,
which enables automated searches and retrieval of stored information, and other
servers, which provide printing, electronic mail, file storage, mainframe
applications and operator support services.
AUDIODISK is designed to support a broad range of multimedia monitoring
capabilities, including the recording, processing and retrieval of:
. Analog audio signals, including telephone and radio channels.
. Analog facsimile and modem communications.
. Digital audio and data signals, including ISDN, T1, E1 and X.25.
. Telephony signaling, including Pulse Dialing, DTMF, Calling Line
Identification and Call Progress Tones (such as busy, no answer and
ringback)
AUDIODISK systems simultaneously process incoming signals over multiple
channels, apply digital signal processing technologies and utilize magnetic and
optical disks for temporary and long-term digital storage. Digital signal
processing
-10-
<PAGE>
technologies that are employed by AUDIODISK to enhance monitoring
applications include, among others, signal compression, automatic signal
identification, automatic signal interpretation and noise cancellation.
Magnetic and optical disks permit virtually instantaneous retrieval and sharing
of stored information among many users.
AUDIODISK systems also enable users to transmit multimedia information among
multiple sites over communication links. AUDIODISK is designed to support
various communications links, including T1, E1, ISDN, Dial-up telephone lines
(over secure modems), satellite links, TCP/IP over Ethernet (with routers) and
X.25.
AUDIODISK systems provide a facility for archiving large volumes of recorded
information on rewritable optical disks. This archive function allows a single
recording session, groups of sessions, a single recording channel, selected
channels or all channels to be stored on the same disk. The archive disk
records all the signals on a particular channel and automatically associates the
signal-related information ("SRI") as well as the date and time with the
recorded information. For larger AUDIODISK systems, automatic disk library
systems, referred to as "jukeboxes", provide very large amounts of on-line
storage.
AUDIODISK employs a database management system to provide a central facility for
access to all stored information. This feature allows any operator to use
computer database query techniques to retrieve the audio and SRI data quickly
and efficiently.
Product Configurations.
The Company offers AUDIODISK systems in a range of configurations, which share
substantially the same hardware, software and user interface. The AUDIODISK
systems' multimedia server currently can be configured in six models: Model 100,
with 2 channels; Model 1000, with up to 16 channels; Model 4000, with up to 32
channels; Model 5000, with up to 64 channels; Model 6000, with up to 160
channels; and Model 7000, with up to 350 channels. Moreover, several AUDIODISK
multimedia servers may be networked for increased capacity or to satisfy
redundancy requirements.
Storage configurations include magnetic disks, optical drives and optical
jukebox devices. Up to 50 four-gigabyte magnetic disks can be configured in a
disk array to provide a recording buffer. Removable optical cartridges are used
for archiving, with each cartridge capable of storing up to 180 compressed audio
hours. Multiple jukebox configurations provide automated management of optical
media, storing up to 30,000 hours of audio or 4,500,000 pages of fax for rapid
automated retrieval.
The AUDIODISK product family is available in a variety of packaging options to
support a range of applications in addition to large, fixed-site audio
monitoring operations. The AUDIODISK Observer is a transportable system
designed for field operations. A hand-carried AUDIODISK Court Playback Unit is
designed for the playback of recordings as trial evidence. Also available are a
TEMPEST model for electromagnetic radiation sensitive applications and a
ruggedized model for military applications. The Digital Voice Logger ("DVL") is
a derivative of AUDIODISK specifically tailored for multiple channel voice
logging applications that require archiving of large amounts of audio
information with relatively infrequent retrieval, such as financial transactions
and requests for emergency services.
-11-
<PAGE>
Markets, Sales and Marketing.
The Company markets AUDIODISK systems worldwide through its direct sales force
and, where appropriate, through agents, distributors and system integrators.
The Company sells AUDIODISK directly to the law enforcement and intelligence
markets through offices located in North America, Western Europe, Israel and the
Far East.
The Company has dedicated substantial scientific and engineering resources to
the target markets for AUDIODISK, permitting the Company to respond quickly and
effectively to customer requests for proposals, to provide cost-effective
product customization and, in many instances, to anticipate the requirements of
its potential customers for product design and special features.
Comverse's current target markets for AUDIODISK include law enforcement,
security and intelligence agencies, public safety and emergency services
organizations and financial institutions.
Law Enforcement. Law enforcement agencies conduct large-scale communication
monitoring operations relating to criminal investigations and prosecutions.
AUDIODISK improves monitoring capabilities in a number of ways, including its
ability to interface with and capture a variety of telephony signals and to
facilitate the use of digital signal processing technologies for analyzing and
interpreting those signals. Several versions of the AUDIODISK product family
are currently being marketed to law enforcement agencies, including large
AUDIODISK systems (16-350 lines) for agencies with central monitoring
facilities, portable Observer systems (1-16 lines) for field surveillance
operations and hand-carried Court Playback systems designed to facilitate
optical disk playback in court.
Intelligence. Security and intelligence agencies collect information in various
media on a large scale for analysis and evaluation. However, only a small
portion of that information is valuable, and intelligence agencies devote
significant resources to processing the information to extract and evaluate the
useful elements. The AUDIODISK system automates the process of retrieval,
analysis and dissemination of relevant information within a networked computer
environment. AUDIODISK provides users with a facility for archiving large
volumes of recorded information and applying sophisticated database management
and query techniques to automate retrieval and analysis operations. Comverse
currently offers its large AUDIODISK systems (16-350 lines) for fixed site
intelligence processing facilities, the AUDIODISK ruggedized version for
military and highly portable applications and the AUDIODISK TEMPEST
configuration for radiation sensitive environments. AUDIODISK's open system
architecture enables the Company to develop special purpose interfaces and other
custom features to address the highly specialized needs of individual customers
in this market.
Public Safety and Emergency Services. Organizations that provide public safety
and emergency services are required to log requests for services and related
communications, and to preserve the resulting records for evidentiary purposes.
Organizations in this market include, among others, providers of "911" emergency
services and municipal agencies responsible for health and public safety. The
introduction of computer-based systems for logging applications enables the
integration of logging activities with other computer systems for improvements
in response time
-12-
<PAGE>
and quality of service. Comverse designed the DVL system, an AUDIODISK
derivative, specifically for these and other voice logging applications.
Financial Services. Financial institutions worldwide, including banks and
brokerage houses, conduct substantial portions of their business over the
telephone. A growing number of these institutions record voice communications
related to financial transactions for archiving and evidentiary purposes.
Digital logging systems enable these users to archive large volumes of recorded
information and to accommodate the increasing use of fax and modem
communications to effect transactions. The DVL product marketed to financial
services organizations provides, in addition to the optical disk medium, 8mm
digital tape with a storage capacity of over 1,000 compressed voice hours per
cassette. The low cost, high capacity digital tape medium represents an
efficient archiving method for these organizations, many of which are required
to keep records for long periods.
Additional Markets. Actual and potential additional markets for AUDIODISK and
its derivative products include, among others, the military, courts and
legislative bodies, correctional institutions, hospitals and broadcast services,
all of which share the need to record and process large amounts of voice, fax
and computer modem communications and to maintain archived records of the
recorded information. Although the Company has committed only limited resources
to these markets, several AUDIODISK systems have been sold to selected
representative customers, such as the Swiss Parliament, which uses AUDIODISK to
record legislative sessions for multiple language transcribing and processing.
Technologies.
The Company's research and development efforts focus particularly on the design
of very large, high throughput systems and digital signal processing tech-
nologies for voice, image and data communications. The Company's products
utilize advanced technologies in the areas of digital signal processing,
facsimile protocols, telephony interfaces, mass storage, digital networking,
multi-processor computer architecture and real-time software design. The
Company's research and development organization consists of a TRILOGUE
applications group, an AUDIODISK applications group and a core technologies
group that serves the two applications groups.
Comverse has developed a flexible system architecture specifically designed to
handle multiple channel, multimedia communication and processing applications.
Multimedia processing computers require a much higher throughput than
conventional data processing systems, especially when a large number of channels
have to be processed simultaneously. The Company's products employ an open
system, modular architecture, which uses distributed processors, rather than one
large central processor, as well as multiple storage devices and digital
networking. The product design is intended to be readily adaptable to the usage
and capacity requirements of the individual end-user. The product architecture
also allows the Company to add enhancements and new technologies to its systems
without rendering existing products obsolete.
A primary focus of the Company's research and development efforts has been
digital signal processing technologies required for voice, image and data
communi-cations. Computer systems designed for signal processing applications,
such as processing of voice and image communications, handle information
differently from conventional data processing systems and require greater
processing and storage resources. For example, a digitized voice message, even
when subjected to data
-13-
<PAGE>
compression techniques, may require as much as 150 times the storage capacity as
the same message processed in textual form. The computer must be designed to
function at a fast and efficient rate to produce a form of speech acceptable to
the human ear. The Company has developed a number of speech compression
algorithms, which provide the Company's products with optimal compression taking
into account the level of speech quality required for each application. The
Company also has developed a special signal detector, which identifies signals
as voice, fax or modem. Voice processing algorithms currently available with the
Company's products include speech enhancement (noise reduction) and variable
playback speed with pitch compensation. Fax and modem processing algorithms
offered by the Company enable communication and interception of a large number
of standard and non-standard communications protocols.
The Company has developed interfaces for its products to most telephony
environments used around the world, including digital interfaces, such as T1, E1
and ISDN, and Signaling System #7 interfaces designed to encompass both basic
network connectivity and the Advanced Intelligent Network capabilities of
Intelligent Peripherals and Service Nodes. The Company has implemented
facsimile communication and intercept protocols for Group 3 facsimile. Certain
of the Company's products incorporate local area network and wide area network
technologies used for the transfer of digitized voice, fax and modem
information, as well as for the transfer of data among various network elements.
The Company utilizes state-of-the-art mass storage technologies in many of its
products, including two gigabyte hard disks, erasable optical disks and an
optical disk jukebox device. Proprietary algorithms developed by the Company
are utilized for storage of multimedia information to facilitate real-time
processing of large amounts of information and optimal use of media. A variable
number of disks may be configured in a disk array to serve large numbers of
users and to provide full or partial disk redundancy for critical applications.
Special algorithms utilized by the Company to handle optical disks within a
number of jukebox devices include automatic channel-to-disk allocation,
automatic retrieval of multimedia information from any disk located in the
jukeboxes and redundant archiving on two or more cartridges simultaneously.
Research and Development.
Because of the continuing technological changes that characterize the industries
in which the Company competes, the Company's success will depend, to a
considerable extent, upon its ability to continue to develop competitive
products through its research and development efforts.
The Company is engaged in ongoing research and development efforts intended to
expand and enhance the technical capabilities, features and range of uses of its
products, and to design and develop new generations of its product offerings.
The Company currently employs in its research and development operations, 265
scientists and engineers with broad experience in the areas of digital signal
processing, computer architecture, facsimile protocols, telephony, digital
networking, multi-processing, mass storage, real-time software design and neural
networks. A substantial portion of the Company's research and development
operations benefit from financial incentives provided by government
instrumentalities to promote research and development activities, including in
the case of the Company its research and development activities situated in
Israel and Canada. The cost of such efforts is affected to a considerable
extent by the continued availability of funding under such
-14-
<PAGE>
programs. Gross expenditures on research and development for 1992, 1993 and 1994
were approximately $6,648,000, $11,017,000 and $16,808,000, respectively, of
which approximately $3,030,000, 4,026,000 and $5,477,000, respectively, were
reimbursed under government funding programs. The percentage of the Company's
total research and development expenditures reimbursed under these programs has
declined over the three-year period, and is anticipated to continue to decline
with the growth in the Company's overall operations and the increasing amount of
research and development conducted by the Company at locations other than those
in which reimbursement programs are available to it. The Company pays royalties
on its sales of certain products developed in part with funding supplied under
such programs. See "Business--Licenses and Royalties."
Under an agreement entered into in 1982 in connection with an investment by
Tadiran Ltd. ("Tadiran"), an Israeli electronics manufacturer, in one of the
Company's Israeli subsidiaries, Efrat Future Technology Ltd. ("Efrat"), Tadiran
has a right to participate in certain development projects that may be
undertaken by Efrat and a right of first refusal to purchase any know-how
developed by Efrat and which Efrat determines to sell. To date, Tadiran has not
exercised its right to participate in any development projects of Efrat and
Efrat has not sought to dispose of any of its know-how.
Patents and Intellectual Property Rights.
The Company currently holds two United States patents, which apply to the
integration of voice and image (facsimile) technologies utilized by the Company
in certain of its products. The Company files patent applications periodically;
however, no assurance can be given that patents will be issued on the basis of
such applications or that, if patents are issued, the claims allowed will be
sufficiently broad to protect the Company's technology. In addition, no
assurance can be given that any patents issued to the Company will not be
challenged, invalidated or circumvented or that the rights granted under the
patents will provide significant benefits to the Company.
In order to safeguard its unpatented proprietary know-how, trade secrets and
technology, the Company relies primarily upon trade secret protection and non-
disclosure provisions in agreements with employees and others having access to
confidential information. There can be no assurance that these measures will
adequately protect the Company from disclosure or misappropriation of its
proprietary information.
The Company and its customers from time to time receive communications from
third parties, including some of the Company's competitors, alleging
infringement by the Company of such parties' patent rights. While such
communications are common in the computer and telecommunications industries and
the Company has in the past been able to obtain any necessary licenses on
commercially reasonable terms, there can be no assurance that the Company would
prevail in any litigation to enjoin the Company from selling certain of its
products on the basis of such alleged infringement, or that the Company would be
able to license any valid patents on reasonable terms.
Licenses and Royalties.
The Company licenses certain technology, know-how and related rights for use in
the manufacture and marketing of its products, and pays royalties to third
parties (including the Israeli Government) under such licenses and under other
agreements entered into in connection with research and development financing.
The Company
-15-
<PAGE>
believes that its rights under such licenses and other agreements are sufficient
for the manufacturing and marketing of its products and, in the case of
licenses, extend for periods at least equal to the estimated useful lives of the
related technology and know-how. The Company currently pays royalties on
substantially all sales of TRILOGUE systems and on certain sales of AUDIODISK
and derivative products. The royalties vary in amount based upon the revenues
attributable to the various components of such products. During 1992, 1993 and
1994, aggregate royalty payments amounted to approximately $774,000, $1,911,000
and $2,186,000, respectively. A portion of the 1993 and 1994 royalties included
amounts relating to marketing subsidies received under an Israeli Government
program, which has been discontinued.
International Sales.
The Company's sales outside of North America have increased from approximately
$20,047,000 in 1992 to approximately $42,663,000 in 1993 and approximately
$58,766,000 in 1994. International sales and marketing efforts may be adversely
affected by a number of factors, including the need for system customization and
special integrations, government approvals and export licenses, instability in
international trading relations, currency fluctuations and additional costs of
marketing, service and support due to lack of proximity with the end-users.
International sales of certain systems manufactured by the Company also are
subject to a variety of legal restrictions governing the export of such
products.
For additional financial information regarding foreign operations, see Notes 13
and 15 of Notes to Consolidated Financial Statements appearing elsewhere in this
report.
Major Customers and Backlog.
At December 31, 1994, the Company had a backlog of approximately $38,500,000,
compared with a backlog of approximately $36,300,000 at December 31, 1993, an
increase of approximately $2,200,000. Approximately $33,600,000 of the backlog
at December 31, 1994 was scheduled for delivery during 1995. During 1994, no
customer accounted for more than 8% of the Company's total sales.
Service and Support.
The Company has a strong commitment to provide product service and support to
its customers and emphasizes such commitment in its marketing. Because of the
intensity of use of systems by telephone network operators and their low
tolerance for down-time, the Company is required to make a greater commitment to
service and support of systems used by these customers, and such commitment
increases operating costs.
The Company's general warranty policy is to replace or repair any component that
fails during a specified warranty period, which is usually within one year after
shipment. Longer warranty periods are applicable to sales in certain
international and government markets. Broader warranty and service coverage is
provided in certain instances, and is usually made available to customers on a
contractual basis for an additional charge.
-16-
<PAGE>
Competition.
The voice processing and message management industry is highly competitive, and
includes numerous products offering a broad range of features and capacities.
The Company currently competes primarily for large system sales to telephone
network operators around the world, where its main competitors are manufacturers
of stand-alone voice mail systems, including, among others, Octel Communications
Corporation, Boston Technology, Inc., Unisys Corporation, Tecnomen and Centigram
Communications Corporation, and manufacturers of central office
telecommunications equipment, including Northern Telecom Limited and Ericsson.
Competitors of the Company that manufacture other telecommunications equipment
may derive a competitive advantage in selling voice processing and message
management systems to customers that are purchasing or have previously purchased
other compatible equipment from such manufacturers.
Indirect competition is provided by voice and fax messaging products, including
stand-alone systems and PBX systems that incorporate messaging capabilities,
employed at end-user sites as an alternative to the use of services available
through telephone network operators. This "customer premises equipment"
includes a broad range of products, such as stand-alone voice mail systems,
products offering "call processing" services that are supplied with voice mail
features or integrated with other voice mail systems, as well as personal
computer modems and add-on cards and software designed to furnish voice
processing and message management features.
The Company believes that competition in the sale of voice processing and
message management systems is based on a number of factors, the most important
of which are product features and functionality, marketing and distribution
capability and price. Other important competitive factors include system
performance and reliability, service and support and the capability to integrate
systems with a variety of central office and cellular switches and other
communications systems. The Company believes that the range of features
provided by, and the ease of use of, the TRILOGUE system are competitive with
other voice processing and message management systems currently being marketed,
and that the TRILOGUE system is one of the leading systems designed specifically
for telephone network operators.
Neither the Company nor any of the Company's competitors is a dominant vendor of
voice processing and message management systems in any market segment or product
line. The Company anticipates that a number of its direct and indirect
competitors will be introducing new or enhanced voice and image processing and
message management products during the next several years.
The Company is aware of a relatively small number of manufacturers of products
that compete with the AUDIODISK product line at the present time. Manufacturers
of products that have been offered in competition with the AUDIODISK system
include the MELPAR Division of E-Systems Inc., Loral Corporation, Applied Signal
Technology, Inc., GTE Government Systems Division and Harris Corporation.
Competition also has been provided by manufacturers and integrators of custom
designed computer and telecommunications systems in response to particular
government procurements in specific markets where they have entrenched customer
relationships. The Company believes that it derives a competitive advantage
over many potential competitors of its AUDIODISK product line by reason of its
ability to offer prospective customers a family of products that can provide a
solution to most
-17-
<PAGE>
customer requirements without extensive special development effort. The
government market in general is highly competitive and difficult to penetrate,
and the Company may be at a competitive disadvantage in respect of certain
customers and market segments as a result of its small size in relation to other
potential vendors and the existence of entrenched customer relationships with
other vendors. The voice logging market, where the company sells its DVL product
family, is highly competitive. Primary competitors include Dictaphone
Corporation, Racal Recorders Limited, TEAC America, Inc. and ATIS Ltd.
Many of the Company's present and potential competitors for both its AUDIODISK
and TRILOGUE product lines are considerably larger than the Company, are more
established, have a larger installed base of customers and have greater
financial, technical, marketing and other resources.
Manufacturing and Sources of Supplies.
The Company's manufacturing operations consist primarily of final assembly and
testing, involving the application of extensive testing and quality control
procedures to materials, components, subassemblies and systems. The Company
presently uses third parties to perform printed circuit board assembly and sheet
metal fabrication. Although the Company generally uses standard parts and
components in its products, certain components are presently available only from
a limited number of sources. To date, the Company has been able to obtain
adequate supplies of all components in a timely manner from existing sources or,
when necessary, from alternative sources. However, the inability to obtain
sufficient quantities of components or to locate alternative sources of supply
if and as required in the future, would adversely affect the Company's
operations.
The Company maintains organization-wide quality assurance procedures,
coordinating the quality control activities of the Company's research and
development, manufacturing and service departments. The Company's primary
manufacturing and research and development facilities have received
certification to Quality Standard ISO 9001 each year since 1991.
Acquisitions, Capital Market Activities and Other Subsidiary Operations.
The Company regularly examines opportunities for acquisitions and strategic
investment transactions as a means of expanding its business. During 1994, the
Company organized a wholly-owned subsidiary, CTI Capital Corp., in support of
its exploration of strategic acquisition and investment opportunities. The new
subsidiary, directly and through a wholly-owned subsidiary in Israel, Comverse
Investments Ltd., will seek to identify and implement suitable strategic
investments for the Company, and will also engage in portfolio investment,
financial services and capital markets activities on its own behalf and on
behalf of third-parties, primarily in Israel. Such activities are expected to
include, in addition to direct investment in public and private companies, the
provision of advisory and valuation services, investment and merchant banking
activities and short-term trading of debt and equity securities and options. In
February 1995, CTI Capital Corp. acquired 21.8% of DCL Technologies Ltd., a
developer of advanced software-based products and solutions, with specialized
expertise in communications processing. The Company's 51% owned Canadian
subsidiary, Applied Silicon Inc. Canada, is engaged in the provision of computer
design and consulting services primarily for government customers in Canada.
The Company is also engaged, through an Israeli subsidiary, Telemesser Ltd., in
the operation of a
-18-
<PAGE>
telemessaging service bureau in Israel. The Company owns approximately 75% of
this subsidiary, the remaining shares being held by Yedioth Ahronoth, a leading
Israeli newspaper.
Operations in Israel.
A substantial portion of the Company's research and development and
manufacturing operations are located in Israel and may be affected by economic,
political and military conditions in that country. The Company's business is
also dependent on trading relationships between Israel and other countries. The
Company's products incorporate components imported into Israel from the United
States and other countries and most of the Company's products are sold outside
of Israel. Accordingly, the Company's operations would be adversely affected if
major hostilities involving Israel should occur or if trade between Israel and
its current trading partners were interrupted or curtailed. The Company
benefits from various policies of the Government of Israel, including reduced
taxation and special subsidy programs, designed to stimulate economic activity,
particularly high technology industry, in that country. As a condition of its
receipt of funds for various research and development projects conducted under
programs sponsored by the Government of Israel, the Company has agreed that
products resulting from these projects may not be manufactured, nor may the
technology developed in the projects be transferred, outside of Israel without
government consent.
Since the establishment of the State of Israel in 1948, a condition of hostility
has existed, varying as to degree and intensity, among Israel and various Arab
countries. Israel entered into peace agreements with Egypt in 1979 and with
Jordan in 1994. In recent years, Israel and certain of her other neighbors have
held direct negotiations to end the state of hostility between them and
establish peace. Although recent negotiations have resulted in an agreement of
mutual recognition between Israel and certain of its neighbors, there can be no
assurance that such agreement will lead to a comprehensive peace agreement and
peaceful co-existence in the region, or to the conclusion of agreements with
other nations in the region. A resumption of armed conflict between Israel and
her neighbors and the continuation of such a condition for an extended period
could have a material adverse effect on the Israeli economy in general, and on
the Company's operations in particular, although to date the Company's
operations have not been materially affected by any hostilities in the region.
In April 1994, negotiations between Israel and the Palestinian Liberation
Organization resulted in the signing of an interim agreement to grant
Palestinian Arabs limited autonomy in certain areas under Israeli
administration. Implementation of the interim agreement began in May 1994, but
the outcome of the agreement and whether it will lead to a diminution of civil
unrest in those areas cannot be predicted with assurance.
Israel's economy has from time to time been subject to various destabilizing
factors, including a period of rampant inflation in the early to mid-1980s, low
foreign exchange reserves, fluctuations in world commodity prices, military
conflicts and civil unrest. For these and other reasons, the Israeli Government
has intervened in all sectors of the economy, employing, among other means,
fiscal and monetary policies, import duties, foreign currency restrictions and
controls of wages, prices and exchange rates. The Israeli Government has
frequently changed its policies in all these areas. For the calendar years 1990
through 1994, the annual rates of inflation were approximately 18%, 18%, 9%, 11%
and 14 respectively. This inflation, and the
-19-
<PAGE>
associated increases in salaries that are linked by Israeli law to increases in
the consumer price index, have increased the cost of the Company's operations in
Israel, and salary costs have further increased as a result of the growing
competition for qualified scientific, engineering and technical personnel in
Israel. The increase in costs in recent periods has not been offset by
proportional devaluation of the Israeli shekel against the U.S. dollar, which
during the period 1990 through 1994 occurred at the annual rates of
approximately 4%, 12%, 21%, 8% and 1%, and accordingly have had a negative
impact on the Company's overall results of operations.
The results of operations of the Company have been favorably affected by Efrat's
participation in Israeli Government programs related to research and
development, as well as its utilization of certain tax incentives and other
incentives available under applicable Israeli laws and regulations, some of
which have been reduced, discontinued or otherwise modified in recent years. In
addition, the Company's ability to obtain benefits under various discretionary
funding programs has declined and may continue to decline as its internal
financial and operational resources increase relative to other applicants. The
results of operations of the Company could be adversely affected if these
programs were further reduced or eliminated and not replaced with equivalent
programs or if Efrat's ability to participate in these programs were to be
reduced significantly.
Israel is a member of the United Nations, the International Monetary Fund, the
International Bank for Reconstruction and Development and the International
Finance Corporation. Israel is also a signatory to the General Agreement on
Tariffs and Trade, which provides for reciprocal lowering of trade barriers
among its members. Israel became associated with the European Economic
Community by an agreement concluded in 1975 which confers certain advantages
with respect to Israeli exports to most of the European countries and obliges
Israel to lower its tariffs with respect to imports from those countries over a
number of years. In 1985, Israel and the United States entered into an
agreement to establish a Free Trade Area, which is intended ultimately to
eliminate all tariff and certain non-tariff barriers on most trade between the
two countries. Under the agreement, most products received immediate duty-free
status in 1985, staged reductions are taking place on others and reductions on
tariffs relative to a third category may be accelerated prior to 1995, by which
year all tariffs are to have been eliminated. The tax treaty between Israel and
the United States that came into effect as of January 1, 1995 is not anticipated
to have any material effect on the Company.
Employees.
At December 31, 1994, the Company employed 722 individuals, approximately 54% of
whom are scientists and engineers engaged in research and development, marketing
and support activities.
The Company is not a party to any collective bargaining or other agreement with
any labor organization; however, certain provisions of the collective bargaining
agreements between the Histadrut (General Federation of Labor in Israel) and the
Coordinating Bureau of Economic Organizations (including the Industrialists'
Association) are applicable to the Company's Israeli employees by order of the
Israeli Ministry of Labor. Israeli law generally requires the payment by
employers of severance pay upon the death of an employee, his retirement or upon
termination of his employment, and the Company provides for such payment
obligations through monthly contributions to an insurance fund. Israeli
employees and employers are required to
-20-
<PAGE>
pay pre-determined sums to the National Insurance Institute, which provides
benefits similar to the benefits provided by the United States Social Security
Administration.
The continuing success of the Company will depend, to a considerable extent, on
the contributions of its senior management and key employees, many of whom would
be difficult to replace, and on the Company's ability to attract and retain
qualified employees in all areas of its business. Competition for such
personnel is intense, particularly in the computer and telecommunications
industries. In order to attract and retain talented personnel, and to provide
incentives for their performance, the Company has emphasized the award of stock
options as an important element of its compensation program, including, in the
case of certain key management level personnel, options to purchase shares in
certain of the Company's subsidiaries.
ITEM 2. PROPERTIES.
The Company leases an aggregate of approximately 204,000 square feet of space
for its operations worldwide, including approximately 29,000 square feet in
Woodbury, New York, approximately 132,000 square feet in Tel Aviv, Israel,
approximately 25,000 square feet in Irvine, California, and an aggregate of
approximately 18,000 square feet at various other locations in the United
States, Canada, Israel, Western Europe and the Far East. The aggregate base
monthly rent for the facilities under lease at December 31, 1994 was
approximately $178,000, and all of such leases are subject to various pass-
throughs and escalation adjustments.
The Company believes that its facilities are adequate for its current and
immediately foreseeable operations and that additional facilities are available
on competitive market terms to provide for such future expansion of the
Company's operations as may be warranted.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any legal proceedings the outcome of which is
believed by management to have a reasonable likelihood of having a material
adverse effect upon its business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Company's 1994 Annual Meeting of Shareholders, held on December 7, 1994,
the shareholders of the Company reelected the incumbent Board of Directors and
approved proposals to (i) amend the Company's Certificate of Incorporation to
increase from 25,000,000,000 to 100,000,000 the number of authorized shares of
Common Stock, (ii) approve the adoption of the Company's 1994 Stock Option Plan,
the prior grant thereunder of options to purchase an aggregate of 614,500 shares
of Common Stock and the reservation for issuance thereunder of an additional
335,500 shares and (iii) ratify the appointment of Deloitte & Touche as the
auditors for the Company's 1994 fiscal year. The proposals were approved by the
following vote:
<TABLE>
<CAPTION>
Number of Shares Voted Broker
Proposal In Favor Against Abstentions Non-Votes
<S> <C> <C> <C> <C>
Increase in shares 16,396,386 949,464 239,060
1994 Stock Option Plan 16,208,739 1,091,005 280,166 5,000
Ratification of auditors 17,297,222 100,697 186,991
</TABLE>
-21-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
Comverse's Common Stock has been traded in the over-the-counter market under the
NASDAQ symbol CMVT since the Company's initial public offering in December 1986.
On January 19, 1993, the Common Stock commenced trading on the NASDAQ National
Market System ("NMS"). The following table sets forth the range of trading
prices of the Common Stock as reported on NASDAQ (including the high and low bid
prices quoted from January 1 to January 18, 1993 and the high and low sale
prices thereafter) through March 21, 1995. Prices for the period prior to the
listing of the Common Stock on NASDAQ NMS represent quotations between dealers
without adjustments for retail markups, markdowns or commissions, and may not
represent actual transactions. Prices are adjusted to give effect to the 1-for-
10 combination, or "reverse split", of the Common Stock on February 26, 1993.
<TABLE>
<CAPTION>
Year Calendar Quarter Low High
<S> <C> <C> <C>
1993 First Quarter $15 $21-3/4
Second Quarter $15-3/4 $20-1/4
Third Quarter $11 $17-3/8
Fourth Quarter $10-3/8 $16-3/4
1994 First Quarter $ 8 $15-5/8
Second Quarter $ 8-1/4 $10-1/2
Third Quarter $ 8-3/4 $11-1/8
Fourth Quarter $ 9-7/8 $14-1/4
1995 First Quarter
(through March 21, 1995) $11 $13-1/8
</TABLE>
There were 3,047 holders of record of Common Stock at March 21, 1995. Such
record holders include a number of holders who are nominees for an undetermined
number of beneficial owners; the Company believes that the number of beneficial
owners of the shares of Common Stock outstanding at such date was approximately
29,000.
The Company has not declared or paid any cash dividends on its equity securities
and does not expect to pay any cash dividends in the foreseeable future, but
rather intends to retain its earnings to finance the development and growth of
the Company's business. Any future determination as to the declaration and
payment of dividends will be made by the Board of Directors in its discretion,
and will depend upon the Company's earnings, financial condition, capital
requirements and other relevant factors. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
-22-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following tables present selected consolidated financial data for the
Company for each of the years in the five years ended December 31, 1994. Such
information has been derived from the Company's audited consolidated financial
statements and should be read in conjunction with the Company's consolidated
financial statements and the notes to the consolidated financial statements
included elsewhere in this report.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1990 1991 1992 1993 1994
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Sales $15,790 $21,103 $37,499 $ 67,709 $ 92,688
Interest and other income 599 826 923 2,729 6,155
------- ------- ------- -------- --------
Total revenues 16,389 21,929 38,422 70,438 98,843
Costs and Expenses:
Research and development 4,299 4,438 6,648 11,017 16,808
Less reimbursements 1,937 2,476 3,030 4,026 5,477
------- ------- ------- -------- --------
Net research and development 2,362 1,962 3,618 6,991 11,331
Cost of sales 6,138 8,672 15,311 27,689 39,314
Selling, general and administrative 6,589 7,749 11,788 18,914 28,513
Interest expense and other 177 206 140 822 3,752
Royalties and license fees 378 509 774 1,911 2,186
Total costs and expenses 15,614 19,085 31,746 56,710 85,358
Income before income tax provision and
extraordinary item 1,041 2,844 6,676 13,728 13,485
Income tax provision 225 392 1,787 1,021 1,715
Extraordinary item - utilization of net operating
loss carryforward 188 24 788 - -
------- ------- ------- -------- --------
Net income $ 1,004 $ 2,476 $ 5,677 $ 12,707 $ 11,770
------- ------- ------- -------- --------
Earnings per common and
common equivalent share $0.08 $0.17 $0.37 $0.65 $0.57
------- ------- ------- -------- --------
Weighted average number of common and
common equivalent shares outstanding 13,381 14,293 15,370 19,677 20,789
<CAPTION>
Year Ended December 31,
---------------------------------------------
1990 1991 1992 1993 1994
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $ 9,812 $12,307 $22,717 $137,009 $144,659
Total assets 15,407 21,213 50,475 169,130 187,677
Long-term debt, including current portion 518 576 358 60,424 60,443
Stockholders' equity 11,684 15,595 32,176 90,450 102,572
</TABLE>
-23-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
The Company has benefited from strong operating cash flow and the growth in its
capital base over the past two 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 two years. The Company has increased
gross expenditures for research and development from $6,648,000 in 1992 to
$16,808,000 in 1994, adding new features and capabilities to its existing
product lines and supporting the planned introduction of its next generation of
products. At the same time, the Company has significantly expanded its sales
and marketing activities, both internationally and in the United States.
Regional offices for sales, marketing and support services have been opened in
the United Kingdom, Germany, Canada, Finland, Australia and Hong Kong, and the
Company has increased its direct sales activities throughout Europe, North
America and the Far East. Total revenues increased throughout the period, from
$38,422,000 in 1992 to $98,843,000 in 1994, and the Company's backlog at
December 31, 1994 stood at a record $38,500,000. In 1993, three customers
constituted 41% of the Company's total sales. In 1994, the Company increased
its customer base with no single customer constituting more than 8% of sales.
The Company intends to continue during 1995 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
both 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.
Results of Operations
Comparison of 1993 and 1994 Operations
Total Revenues. Total revenues increased from 1993 to 1994 by approximately
$28,405,000 (40%), reflecting an increase in TRILOGUE sales of $20,517,000
(56%), an increase in AUDIODISK sales of $4,462,000 (14%) and an increase in
interest and other income of $3,426,000 (126%). TRILOGUE sales increased in all
geographical regions, with the largest increases occurring in Europe, the Far
East and Australia. AUDIODISK sales increased primarily as a result of the
consolidation of DVL system operations previously conducted through a 50%-owned
joint venture. The increase in interest and other income resulted primarily
from the full-year investment of funds generated from operations and through the
issuance of securities during 1993, as well as an increase in interest rates
during 1994.
Cost of Sales. Cost of sales increased by approximately $11,625,000 (42%) from
1993 to 1994 as a result of the increase in sales. Gross margins decreased from
-24-
<PAGE>
approximately 59% in 1993 to approximately 58% in 1994, resulting primarily from
lower gross margins associated with the newly-consolidated DVL system
operations.
Research and Development Expenses. Gross research and development expenses
during 1994 increased by approximately $5,791,000 (53%) over 1993 due to overall
growth of research and development operations, the initiation of significant new
research and development projects for both product lines and increases in
salaries and other costs associated with research and development operations in
Israel. Net research and development expenses, after reimbursement of approved
expenditures under government funding programs, increased by approximately
$4,340,000 (62%). The higher rate of growth of net research and development
expense in comparison with gross research and development expense is primarily a
result of a lower rate of reimbursement associated with certain projects
conducted under government funding programs and an increase in the portion of
research and development activities not benefiting from reimbursement
arrangements.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from 1993 to 1994 by approximately $9,599,000
(51%) and as a percentage of total revenues increased from approximately 27% in
1993 to approximately 29% in 1994. Such increases were a result of increased
sales, marketing and administrative activities associated with the overall
growth of the Company's operations, and particularly with the expansion of
direct sales and marketing activities internationally and in the United States.
Royalties and License Fees. Royalties and license fees increased from 1993 to
1994 by approximately $275,000 (14%) due to growth in sales of royalty-bearing
products. Royalties and license fees as a percentage of total sales decreased
from approximately 2.8% in 1993 to approximately 2.4% in 1994. The decline
resulted primarily from a significant reduction in royalty payments made to the
Government of Israel in respect of marketing subsidies under a program
discontinued during 1993.
Income Tax Provision. Provision for income taxes increased from 1993 to 1994 by
approximately $694,000 (68%), reflecting an increase in the Company's overall
effective tax rate from approximately 7% during 1993 to approximately 13% in
1994. The increase resulted primarily from an increase in the tax on income
from the Company's United States operations, due in part to the substantial
utilization of net operating loss carryforwards that reduced the 1993 income tax
provision. Of the Company's remaining net operating loss carryforwards from
United States operations, aggregating approximately $6,100,000, approximately
$3,900,000 is derived from the compensation component of employee stock option
exercises andapproximately $2,200,000 is associated with an acquired subsidiary.
When utilized, these net operating loss carryforwards will not affect the income
tax provision of the Company's income statement, but will be reflected in the
determination of stockholders' equity and goodwill, respectively, on the
Company's balance sheet. The net operating loss carryforwards associated with
the acquired subsidiary may be utilized only to reduce the taxable income of
that subsidiary, and subject to an annual limitation of approximately $150,000.
The Company's overall rate of tax is reduced significantly by the tax benefits
associated with qualified activities of Efrat, which is entitled to favorable
income tax rates under a program of the Israeli Government for "Approved
Enterprise" investments in that country. The effective rate of tax applicable
to Efrat's operations was 4.5% in 1994 and 5.7% in 1993, reflecting the
substantial completion in each year of investments under new "Approved
Enterprise" projects.
-25-
<PAGE>
Net Income. Net income after taxes decreased from approximately $12,707,000 in
1993 to approximately $11,770,000 in 1994, a decrease of approximately $937,000
(7%), while net income after taxes as a percentage of total revenues decreased
from approximately 18% in 1993 to approximately 12% in 1994. The decreases
resulted primarily from the significant growth in the amounts invested in the
Company's operations during 1994, including substantial increases in research
and development and marketing and sales activities undertaken in support of the
Company's strategic growth plan.
Comparison of 1992 and 1993 Operations
Total Revenues. Total revenues increased from 1992 to 1993 by approximately
$32,016,000 (83%), reflecting primarily an increase in AUDIODISK sales in Europe
by approximately $13,177,000 and an increase in TRILOGUE sales in the Far East
and Australia by approximately $11,345,000. The increase in total revenues in
1993 also reflected the full-year consolidated operations of subsidiaries
acquired during 1992. Interest and other income increased by approximately
$1,806,000 (196%) resulting primarily from the investment of funds generated
from the issuance of securities during 1993.
Cost of Sales. Cost of sales increased by approximately $12,378,000 (81%) from
1992 to 1993 as a result of the increase in sales. Gross margins remained at
approximately 59%, reflecting the impact of large AUDIODISK system contracts
under performance during the year.
Research and Development Expenses. Gross research and development expenses
during 1993 increased by approximately $4,369,000 (66%) over 1992 due primarily
to the initiation of new research and development projects. Net research and
development expenses, after reimbursement of approved expenditures under
government funding programs, increased by approximately $3,373,000 (93%). The
higher rate of growth of net research and development expense in comparison with
gross research and development expense is primarily a result of a lower rate of
reimbursement associated with certain projects conducted under government
funding programs and unreimbursed research and development being conducted in
the United States.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from 1992 to 1993 by approximately $7,126,000
(60%) as a result of increased marketing, sales and administrative activities
associated with the overall growth of the Company's operations. Selling,
general and administrative expenses as a percentage of total revenues decreased
from approximately 31% in 1992 to approximately 27% in 1993.
Royalties and License Fees. Royalties and license fees increased from 1992 to
1993 by approximately $1,137,000 (147%) due to growth in sales of royalty-
bearing products and royalty payments relating to marketing subsidies provided
by the Government of Israel during prior periods. Royalties and license fees as
a percentage of total sales increased from approximately 2.1% in 1992 to
approximately 2.8% in 1993.
Income Tax Provision. Provision for income taxes after utilization of net
operating loss carryforwards increased from approximately $999,000 in 1992 to
approximately $1,021,000 in 1993, an increase of approximately $22,000 (2%).
The Company's overall effective tax rate after utilization of net operating loss
carryforwards
-26-
<PAGE>
decreased from approximately 15% during 1992 to approximately 7% in 1993. The
decrease was due primarily to a reduction in the effective rate of tax on
Efrat's operations from approximately 17% in 1992 to approximately 6% in 1993
due to the substantial completion during 1993 of an investment under a new
"Approved Enterprise" project. The Company's overall effective tax rate also
reflects utilization of net operating loss carryforwards to offset tax on income
from its United States operations.
Net Income. Net income after taxes increased from approximately $5,677,000 in
1992 to approximately $12,707,000 in 1993, an increase of approximately
$7,030,000 (124%), primarily as a result of the continued overall growth in
revenues, sustained gross margins, reduction in selling, general and
administrative expenses as a percentage of total revenues and lower effective
tax rates. Net income after taxes as a percentage of total revenues increased
from approximately 15% in 1992 to approximately 18% in 1993.
Liquidity and Capital Resources
At December 31, 1994, the Company had cash and cash equivalents of approximately
$38,496,000, bank time deposits of approximately $15,707,000, short-term
investments of approximately $73,661,000 and working capital of approximately
$144,659,000. 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 can be expected to have a dilutive impact on the Company's
shareholders, and there can be no assurance as to whether or when any acquired
business would contribute positive operating results commensurate with the
associated acquisition cost.
The Company's liquidity and capital resources have not been, and are not
anticipated to be, materially affected by restrictions pertaining to the ability
of its subsidiaries in Israel to pay dividends or by withholding taxes
associated with any such dividend payments. Cash dividends paid by an Israeli
corporation to foreign residents are subject to withholding of Israeli income
tax at source at rates of up to 15%, depending on the particular facilities that
have generated the earnings that are the source of the dividends. Efrat is
currently restricted by contract from paying dividends exceeding 75% of its
profits.
Certain Trends and Uncertainties
The industries in which the Company is principally involved are highly
competitive and characterized by frequent technological and market changes.
The voice processing and message management industry has undergone consolidation
in recent periods, as a result of corporate acquisitions and attrition. In
addition, the 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
-27-
<PAGE>
be predicted with assurance. Significant changes in the industry make planning
decisions more difficult and increase the risk inherent in the planning process.
The market for telecommunications monitoring systems is also in a period of
significant transition. Budgetary constraints, uncertainties resulting from the
introduction of new technologies in the telecommunications environment and
shifts in the pattern of government expenditures resulting from geopolitical
events have increased uncertainties in the market, resulting in certain
instances in the attenuation of government procurement programs beyond their
originally expected performance periods and an increased incidence of delay,
cancellation or reduction of planned projects. Competitive conditions in this
sector have also been affected by the efforts of government contractors,
particularly developers and integrators of technology products, 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 revenue and
operating profit from a relatively small number of contracts for large system
installations with customers in both the commercial and government sectors.
While the growth of the Company's business has reduced its dependence on any
specific customers, it continues to emphasize large capacity SSP systems in its
product development and marketing strategies. Contracts for SSP 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 SSP 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 during 1995. 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 long- and short- term 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
-28-
<PAGE>
activities and direct presence in a 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 U.S. dollar, and accordingly have had a negative
impact on the Company's overall results of operations.
The Company currently derives a majority of its total revenues from sales to
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 to the extent that it is unable to completely hedge
the exchange rate risk of long term contracts denominated in foreign currencies,
or by the cost of such hedging.
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. During recent periods, share prices of companies in
technology and government contracting businesses, and particularly smaller and
medium-sized publicly traded companies such as the Company, have exhibited 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, which 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 voice processing industry, which may not have any
direct relationship with the Company's business or prospects.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial information required by Item 8 is included elsewhere in this
report.
See Part IV, Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
The information required by Part III is omitted pursuant to instruction G(3).
-29-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K.
Page(s)
-------
(a) Documents filed as part of this report.
--------------------------------------
<TABLE>
<CAPTION>
(1) Financial Statements.
---------------------
<S> <C>
Index to Consolidated Financial Statements F-1
Independent Auditors' Report F-2
Consolidated Balance Sheets -
December 31, 1993 and 1994 F-3
Consolidated Statements of Income -
Years ended December 31,
1992, 1993 and 1994 F-5
Consolidated Statements of Stockholders' Equity -
Years ended December 31,
1992, 1993 and 1994 F-6
Consolidated Statements of Cash Flows -
Years ended December 31,
1992, 1993 and 1994 F-7
Notes to Consolidated Financial Statements F-9
</TABLE>
(2) Financial Statement Schedules.
-----------------------------
None
(3) Exhibits.
--------
The Index of Exhibits commences on the following page. Exhibits numbered
10(16), 10(18), 10(19), 10(K), 10(L), 10(ddd), 10(EEE) and 10(lll)
comprise material compensatory plans and arrangements of the registrant.
-30-
<PAGE>
Exhibit
Number Description
------ -----------
1. Not applicable.
2. Not applicable.
3. Articles of incorporation and By-Laws:
3(A) Certificate of Incorporation.*
3(A)(1) Certificate of Amendment of Certificate of Incorporation effective
February 26, 1993.**
3(A)(2) Certificate of Amendment of Certificate of Incorporation effective
January 12, 1995.
3(B) By-Laws, as amended.*
4. Instruments defining the rights of security
holders, including indentures:
4(A) Excerpts from Certificate of Incorporation.***
4(A)(1) Excerpt from Certificate of Amendment
of Certificate of Incorporation effective
February 26, 1993.**
4(A)(2) Excerpt from Certificate of Amendment
of Certificate of Incorporation effective
January 12, 1995.
4(B) Excerpts from By-Laws, as amended.**
4(C)(1) Specimen stock certificate.**
__________________
* Incorporated by reference to Exhibits filed with Annual Report on Form 10-K
under the Securities Exchange Act of 1934 for the year ended December 31, 1987.
Exhibit number shown is the Exhibit number of the document as filed with such
Annual Report.
** Incorporated by reference to Exhibits filed with Annual Report on Form 10-K
under the Securities Exchange Act of 1934 for the year ended December 31, 1992.
Exhibit number shown is the Exhibit number of the document as filed with such
Annual Report.
*** Incorporated by reference to Exhibits filed with Registration Statement on
Form S-1 under the Securities Act of 1933, Registration No. 33-9147. Exhibit
number shown is the Exhibit number of the document as filed with such
Registration Statement.
-31-
<PAGE>
Exhibit
Number Description
------ -----------
4(D) Indenture dated as of November 30, 1993 from Comverse Technology,
Inc. to The Chase Manhattan Bank, N.A., Trustee.*
4(E) Specimen 5-1/4% Convertible Subordinated Debenture due 2003.*
5. Not applicable.
6. Not applicable.
7. Not applicable.
8. Not applicable.
9. Not applicable.
10. Material contracts:
10(7) Proxy Agreement dated as of September 5, 1991 by and among Comverse
Government Systems Corporation, James R. Allen, Robert W. Bazley,
Robert T. Marsh and Comverse Technology, Inc.**
10(8) Visitation Approval Procedure Agreement dated as of September 5,
1991 by and among Comverse Government Systems Corporation, James R.
Allen, Robert W. Bazley, Robert T. Marsh and Comverse Technology,
Inc.**
10(16) Form of Stock Option Agreement pertaining to shares of certain
subsidiaries of Comverse Technology, Inc.*
10(17) Form of Asset Purchase Agreement dated as of March 1, 1994 by and
among Comverse Technology, Inc., Magnasync/Moviola Corporation,
Interactive Information Systems Corporation and Magnasync Comverse
Corporation.*
10(18) Employment Agreement effective as of July 1, 1994 by and between
Comverse Technology, Inc. and Kobi Alexander.
______________
* Incorporated by reference to Exhibits filed with Annual Report on Form 10-K
under the Securities Exchange Act of 1934 for the year ended December 31, 1993.
Exhibit number shown is the Exhibit number of the document as filed with such
Annual Report.
** Incorporated by reference to Exhibits filed with Annual Report on Form 10-K
under the Securities Exchange Act of 1934 for the year ended December 31, 1991.
Exhibit number shown is the Exhibit number of the document as filed with such
Annual Report.
-32-
<PAGE>
Exhibit
Number Description
------ -----------
10(19) 1994 Stock Option Plan.
10(Aa) Agreement among Efrat Future Technology, Ltd., Tadiran Israel
Electronics Industries Ltd., Boaz Misholi, Kobi Alexander and
Yechiam Yemini.*
10(K) 1984 Incentive Stock Option Plan.*
10(L) Form of Incentive Stock Option Agreement.*
10(GGg) Deed of Guarantee from Comverse Technology, Inc. to Bank Hapoalim
B.M. dated July 30, 1986.*
10(GGgg) Continuing Guarantee from Comverse Technology, Inc. to Bank Leumi
le-Israel B.M.*
10(XX) Patent License Agreement by and between Efrat Future Technology Ltd.
and VMX, Inc.*
10(CCC) Form of Indemnity Agreement between Comverse Technology, Inc. and
its Officers and Directors.**
10(ddd) 1987 Stock Option Plan, as amended.***
10(EEE) Form of Stock Option Agreement for options other than Incentive
Stock Options.**
10(JJJ) Agreement of Lease dated September 21, 1989 between Industrial &
Research Associates Co. and Comverse Technology, Inc.*
11. Statement re computation of per share earnings (included in Note 2
of Notes to Consolidated Financial Statements).
________________
* Incorporated by reference to Exhibits filed with Registration Statement on
Form S-1 under the Securities Act of 1933, Registration No. 33-9147. Exhibit
number shown is the Exhibit number of the document as filed with such
Registration Statement.
** Incorporated by reference to Exhibits filed with Annual Report on Form 10-K
under the Securities Exchange Act of 1934 for the year ended December 31, 1987.
Exhibit number shown is the Exhibit number of the document as filed with such
Annual Report.
*** Incorporated by reference to Exhibits filed with Annual Report on Form 10-K
under the Securities Exchange Act of 1934 for the year ended December 31, 1992.
Exhibit number shown is the Exhibit number of the document as filed with such
Annual Report.
-33-
<PAGE>
Exhibit
Number Description
------ -----------
12. Not applicable.
13. Not applicable.
14. Not applicable.
15. Not applicable.
16. Not applicable.
17. Not applicable.
18. Not applicable.
19. Not applicable.
20. Not applicable.
21. Subsidiaries of the Registrant.
22. Not applicable.
23. Not applicable.
24. Not applicable.
25. Not applicable.
26. Not applicable.
27. Financial Data Schedule.
28. Not applicable.
99. Not applicable.
(b) Reports on Form 8-K.
-------------------
None.
-34-
<PAGE>
COMPAQCOMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1993 and 1994 F-3
Consolidated Statements of Income for the Years Ended December 31,
1992, 1993 and 1994 F-5
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1992, 1993 and 1994 F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1992, 1993 and 1994 F-7
Notes to Consolidated Financial Statements F-9
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Comverse Technology, Inc.
Woodbury, New York
We have audited the accompanying consolidated balance sheets of Comverse
Technology, Inc. and subsidiaries (the "Company") as of December 31, 1993 and
1994, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Comverse Technology, Inc. and
subsidiaries as of December 31, 1993 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1994 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
New York, New York
March 4, 1995
F-2
<PAGE>
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1993 AND 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
---------------------------------
<TABLE>
<CAPTION>
ASSETS 1993 1994
---------------------------------------------------------------------- --------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $119,409 $ 38,496
Bank time deposits - 15,707
Short-term investments (Note 4) 6,783 73,661
Accounts receivable, net of allowance for doubtful accounts of
$1,483 and $2,378 12,113 22,592
Inventories (Note 5) 10,389 12,427
Prepaid expenses and other current assets 4,521 3,853
Deferred income tax benefits (Note 14) 533 587
-------- --------
TOTAL CURRENT ASSETS 153,748 167,323
-------- --------
LONG-TERM RECEIVABLES - Net of allowance for
doubtful accounts of $615 and $151 289 378
-------- --------
PROPERTY AND EQUIPMENT:
Fixtures and equipment 8,342 12,343
Transportation vehicles 735 1,268
Leasehold improvements 97 178
-------- --------
9,174 13,789
Less accumulated depreciation and amortization (3,376) (5,236)
-------- --------
5,798 8,553
-------- --------
GOODWILL - Net of accumulated amortization of $376 and $561 (Note 6) 1,569 1,384
SOFTWARE DEVELOPMENT COSTS - Net of accumulated amortization of
$1,294 and $3,015 4,368 5,863
OTHER INTANGIBLE ASSETS - Net of accumulated amortization of $707
and $421 (Note 6) 1,438 1,827
DEFERRED COSTS AND OTHER ASSETS - Net of
accumulated amortization of $16 and $206 1,920 2,349
-------- --------
9,295 11,423
-------- --------
TOTAL ASSETS $169,130 $187,677
======== ========
See notes to consolidated financial statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1993 1994
----------------------------------------------------------------- --------- --------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses (Note 7) $ 11,267 $ 17,908
Advance payments from customers 5,112 3,496
Due to related parties (Note 10) 127 278
Other current liabilities 233 982
-------- --------
TOTAL CURRENT LIABILITIES 16,739 22,664
5 1/4% CONVERTIBLE SUBORDINATED DEBENTURES (Note 8) 60,000 60,000
LIABILITY FOR SEVERANCE PAY (Note 9) 918 1,352
OTHER LIABILITIES (Note 14) 558 676
MINORITY INTEREST 465 413
-------- --------
TOTAL LIABILITIES 78,680 85,105
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 16)
STOCKHOLDERS' EQUITY (Notes 11, 12 and 16):
Preferred stock, $0.01 par value--authorized, 2,500,000 shares;
issued, none - -
Common Stock, $0.10 par value--authorized, 25,000,000 and 100,000,000
shares; issued and outstanding, 19,814,461 and 19,902,512 shares 1,981 1,990
Additional paid-in capital 73,047 73,398
Cumulative translation adjustment (95) (118)
Unrealized gain on available-for-sale securities, net of tax - 15
Retained earnings 15,517 27,287
-------- --------
TOTAL STOCKHOLDERS' EQUITY 90,450 102,572
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $169,130 $187,677
======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
(In thousands, except per share data)
--------------------------------------------
<TABLE>
<CAPTION>
1992 1993 1994
------- ------- -------
<S> <C> <C> <C>
REVENUES:
Sales $37,499 $67,709 $92,688
Interest and other income 923 2,729 6,155
------- ------- -------
TOTAL REVENUES 38,422 70,438 98,843
------- ------- -------
COSTS AND EXPENSES:
Research and development (Note 3) 6,648 11,017 16,808
Less reimbursements (Note 3) 3,030 4,026 5,477
------- ------- -------
Net research and development 3,618 6,991 11,331
Cost of sales 15,311 27,689 39,314
Selling, general and administrative 11,788 18,914 28,513
Interest expense and other 140 822 3,752
Royalties and license fees (Notes 3 and 16) 774 1,911 2,186
Minority interest in income (loss) of consolidated
subsidiaries 80 8 (52)
Equity in loss of affiliates 35 375 314
------- ------- -------
TOTAL COSTS AND EXPENSES 31,746 56,710 85,358
------- ------- -------
INCOME BEFORE INCOME TAX PROVISION AND
EXTRAORDINARY ITEM 6,676 13,728 13,485
INCOME TAX PROVISION (Note 14) 1,787 1,021 1,715
------- ------- -------
INCOME BEFORE EXTRAORDINARY ITEM 4,889 12,707 11,770
EXTRAORDINARY ITEM:
Utilization of net operating loss carryforward (Note 14) 788 - -
------- ------- -------
NET INCOME $ 5,677 $12,707 $11,770
======= ======= =======
EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE:
Income before extraordinary item $ 0.32 $ 0.65 $ 0.57
Extraordinary item 0.05 - -
------- ------- -------
EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE $ 0.37 $ 0.65 $ 0.57
======= ======= =======
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 15,370 19,677 20,789
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
(In thousands, except share data)
-----------------------------------------------
<TABLE>
<CAPTION>
Common Stock
---------------------- Additional Cumulative Unrealized Retained
Number of Par Paid-in Translation Gains Earnings
Shares Value Capital Adjustment (Losses) (Deficit) Total
<S> <C> <C> <C> <C> <C> <C> <C>
---------- ------ ---------- ----------- ---------- --------- --------
BALANCE, JANUARY 1, 1992 13,640,468 $1,364 $17,098 $ - $ $(2,867) $ 15,595
Common Stock issued in
connection with acquisition
of Startel (Note 6) 272,359 27 2,424 - - 2,451
Common Stock issued in
connection with acquisition
of ASIC (Note 6) 94,717 9 877 - - 886
Common Stock issued in
connection with exercise of
stock options and warrants
(Note 12) 2,466,647 247 7,380 - - 7,627
Translation adjustment - - - (60) - (60)
Net income, year ended
December 31, 1992 - - - - 5,677 5,677
---------- ------ ------- ----- ---- ------- --------
BALANCE, DECEMBER 31, 1992 16,474,191 1,647 27,779 (60) 2,810 32,176
Common Stock issued in
connection with public
offering (Note 11) 3,105,000 311 44,551 - - 44,862
Common Stock issued in
connection with exercise of
stock options and warrants
(Note 12) 235,270 23 717 - - 740
Translation adjustment - - - (35) - (35)
Net income, year ended
December 31, 1993 - - - - 12,707 12,707
---------- ------ ------- ----- ---- ------- --------
BALANCE, DECEMBER 31, 1993 19,814,461 1,981 73,047 (95) - 15,517 90,450
Adjustment to beginning
balance for unrealized
gain on available-for-sale
securities, net of tax - - - - 353 - 353
Unrealized loss on
available-for-sale
securities, net of tax
(Note 4) - - - - (338) - (338)
Common Stock issued in
connection with exercise of
stock options and warrants
(Note 12) 88,051 9 351 - - - 360
Translation adjustment - - - (23) - - (23)
Net income, year ended
December 31, 1994 - - - - - 11,770 11,770
---------- ------ ------- ----- ---- ------- --------
BALANCE, DECEMBER 31, 1994 19,902,512 $1,990 $73,398 $(118) $ 15 $27,287 $102,572
========== ====== ======= ===== ==== ======= ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
(In thousands)
--------------------------------------------
<TABLE>
<CAPTION>
1992 1993 1994
------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,677 $ 12,707 $ 11,770
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,365 2,564 4,185
Equity in loss of affiliate 35 375 314
Minority interest in income (loss) of consolidated subsidiary 80 8 (52)
Changes in assets and liabilities:
Accounts receivable (4,440) (822) (9,010)
Inventories (2,344) (4,627) (2,038)
Prepaid expenses and other receivables (383) (2,463) (317)
Other intangible assets (47) - -
Long-term receivables (191) (11) (76)
Accounts payable and accrued expenses 2,998 601 5,210
Advance payments from customers 4,737 (691) (1,616)
Liability for severance pay 238 374 434
Due to related parties 301 (369) 151
Other 62 (375) 818
------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,088 7,271 9,773
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of bank time deposits and short-term investments (1,758) (5,007) (113,923)
Purchase of property and equipment (1,490) (3,399) (4,546)
Capitalization of software development costs (1,424) (2,414) (3,216)
Proceeds from maturities and sales of short-term investments - 549 30,805
Proceeds from sale of property and equipment 26 50 -
Acquisition of consolidated subsidiaries, net of cash acquired 332 - -
Investment in joint venture (50) - (194)
------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (4,364) (10,221) (91,074)
------- -------- --------
</TABLE>
F-7
<PAGE>
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
(In thousands)
--------------------------------------------
<TABLE>
<CAPTION>
1992 1993 1994
------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of debentures $ - $ 58,102 $ -
Proceeds from issuance of Common Stock in connection with
public offering - 44,862 -
Proceeds from issuance of Common Stock in connection with
exercise of stock options and warrants 7,627 740 360
Other (246) 87 28
------- -------- --------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 7,381 103,791 388
------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 11,105 100,841 (80,913)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 7,463 18,568 119,409
------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $18,568 $119,409 $ 38,496
======= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 45 $ 21 $ 3,172
======= ======== ========
Cash paid during the year for income taxes $ 460 $ 1,460 $ 1,149
======= ======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES IN
CONNECTION WITH BUSINESS ACQUISITIONS
(NOTE 6):
Fair value of assets acquired $ 8,008 $ - $ 2,104
Fair value of consideration paid (4,264) - -
------- -------- --------
Liabilities assumed $(3,744) $ - $ (2,104)
======= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
--------------------------------------------
1. ORGANIZATION AND BUSINESS
Comverse Technology, Inc. ("Comverse" and, together with its subsidiaries, the
"Company") was organized as a New York corporation in October 1984. The Company
is engaged in the design, development, manufacture, marketing and support of
special purpose computer and telecommunications systems for multimedia
communications and information processing applications.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements include the
accounts of Comverse and its wholly-owned and majority-owned subsidiaries. All
material intercompany balances and transactions have been eliminated.
Cash, Cash Equivalents and Bank Time Deposits - The Company considers all highly
liquid investments purchased with original maturities of three months or less to
be cash equivalents. Bank deposits with maturities in excess of three months
are classified as bank time deposits.
Short-Term Investments - The Company adopted Statement of Financial Accounting
Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
("SFAS 115") as of January 1, 1994. The Company classifies all of its
marketable securities (including U.S. treasury bills) as available-for-sale.
SFAS 115 requires investments in debt and equity securities classified as
available-for-sale to be accounted for at fair value, with resulting unrealized
gains or losses to be reported as a separate component of stockholders' equity,
on a net-of-tax basis. The effect of adopting SFAS 115 was to increase
stockholders' equity by $353,000 and $15,000 as of January 1, 1994 and December
31, 1994, respectively.
Concentration of Credit Risk - Financial instruments which potentially expose
the Company to concentration of credit risk, as defined by Statement of
Financial Accounting Standards No. 105, consist primarily of cash investments
and accounts receivable. The Company places its cash investments with high-
credit quality financial institutions and currently invests primarily in U.S.
government obligations that have maturities of one year or less, time deposits,
and money market funds placed with major international banks and financial
institutions. Accounts receivable are generally diversified due to the number
of commercial and government entities comprising the Company's customer base and
their dispersion across many geographical regions. The Company believes no
significant concentration of credit risk exists with respect to these cash
investments and accounts receivable.
Inventories - Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out method.
Property and Equipment - Property and equipment are carried at cost less
accumulated depreciation and amortization. The Company depreciates its property
and equipment on a
F-9
<PAGE>
straight-line basis over periods ranging from three to seven
years. The cost of maintenance and repairs is charged to operations as
incurred. Significant renewals and betterments are capitalized.
Income Taxes - The Company adopted Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" ("SFAS 109") effective January 1, 1993.
The Company, prior to January 1, 1993, had been accounting for income taxes
using Accounting Principles Board Opinion No. 11. The adoption of SFAS 109 did
not have a material effect on the Company's net income for 1993 or 1994;
however, pursuant to SFAS 109, the utilization of the net operating loss
carryforward in 1993 was credited to the income tax provision.
Revenue and Expense Recognition - Revenues from product sales are generally
recognized upon shipment. Products shipped for customer trials are carried in
finished goods inventory until customer acceptance is obtained, at which time
revenue is recognized.
Revenues from certain contracts are recognized under the percentage-of-
completion method on the basis of physical completion to date. This method is
used because management considers physical completion to be the best available
measure of the progress on these contracts. Amounts received from customers in
excess of revenues earned under the percentage-of-completion method are recorded
as advance payments from customers. Related contract costs include all direct
material and labor costs and those indirect costs related to contract
performance, and are included in cost of sales in the consolidated statements of
income.
Expenses incurred in connection with research and development activities, other
than certain software development costs that are capitalized, and selling,
general and administrative expenses are charged to operations as incurred.
Software Development Costs - Software development costs totaling $1,424,000,
$2,414,000 and $3,216,000 were capitalized in 1992, 1993 and 1994, respectively,
in accordance with Statement of Financial Accounting Standards No. 86.
Capitalized software development costs are amortized over the estimated useful
life of the software, which to date has been four years or less. Amortization
begins in the period in which the related product is available for general
release to customers. Amortization expenses amounted to $388,000, $798,000 and
$1,721,000 in 1992, 1993 and 1994, respectively.
Deferred Costs - Deferred costs include debt issue costs which are being
amortized over the ten-year term of the related debt, on a straight-line basis.
Minority Interest - Minority interest relates to Comverse's majority-owned
consolidated subsidiaries, Telemesser Ltd. ("Telemesser"), an Israeli
corporation which operates a telemessaging service bureau, and Applied Silicon,
Inc. Canada ("ASIC"), an Ontario corporation which provides computer consulting
and development services primarily to government agencies in Canada. Comverse
owns approximately 75% of the outstanding shares of Telemesser. The remaining
shares were issued in 1991 to Yedioth Ahronoth ("Yedioth"), a leading Israeli
newspaper. Comverse owns 51% of the outstanding shares of ASIC and holds an
option to purchase additional shares to increase its interest in ASIC to 55%.
This option expires in April 1995. The remaining shares of ASIC are held by its
management personnel.
Equity in Affiliates - Investments in affiliates are accounted for under the
equity method. This consists primarily of the Company's 50% interest in
Magnasync/Comverse Corporation ("Joint
F-10
<PAGE>
Venture"). In April 1994, the Company acquired the business and assets of the
Joint Venture in return for its agreement to assume certain of the Joint
Venture's liabilities (See Note 6).
Functional Currency and Foreign Currency Transaction Gains and Losses - The
dollar is the functional currency of most of the Company's foreign operations.
Most of the Company's sales and materials purchased for manufacturing of the
Company's products are denominated in or linked to the United States dollar.
Certain operating costs, principally salaries, of foreign operations are
denominated in local currencies. In those instances where a foreign subsidiary
has a functional currency other than the United States dollar, the Company
records any necessary foreign currency translation adjustment, reflected in
stockholders' equity, at the end of each reporting period.
Net gains (losses) from foreign currency transactions, included in the
consolidated statements of income, approximated $62,000, $(198,000) and $(3,000)
in 1992, 1993 and 1994, respectively.
The Company occasionally enters into foreign exchange forward contracts and
options on foreign currencies in order to hedge some of its future commitments.
The purpose of the Company's foreign currency hedging activities is to protect
the Company from the risk that the eventual dollar cash flows resulting from the
sale of products to international customers will be adversely affected by
changes in exchange rates. These transactions are accounted for in accordance
with Statement of Financial Accounting Standards No. 52, "Foreign Currency
Translation". In accordance with this Statement, any gain or loss on a foreign
exchange contract which hedges a firm commitment is deferred until the
underlying transaction is realized, at which time it is included in the
consolidated statement of income. At December 31, 1994, there were outstanding
forward contracts to purchase approximately $3,232,000 in Western European
currencies. Deferred gains and losses from hedging these commitments were not
significant at December 31, 1994.
Exchange Rate Insurance - Prior to September 1, 1993, Efrat Future Technology
Ltd. ("Efrat"), a wholly-owned Israeli subsidiary, participated in an Israeli
government program of exchange rate insurance that protected participating
Israeli exporters from the loss that would otherwise result from an
unanticipated widening of the gap between the inflation rate in Israel and the
rate of devaluation of the Israeli currency relative to a weighted basket of
currencies of Israel's major trading partners. At the end of each reporting
period, the Company recorded on the accrual basis the impact of exchange rate
insurance. This insurance program increased revenues by $440,000 and $251,000
in 1992 and 1993, respectively. This program was discontinued as of September
1993.
Other Intangible Assets - Licenses of patent rights and acquired "know-how" are
recorded at cost and amortized using the straight-line method over the estimated
useful lives of the related technology, not exceeding five years. Goodwill and
other intangible assets associated with acquired subsidiaries are amortized over
five to twelve years.
Earnings per Common and Common Equivalent Share - Earnings per common and common
equivalent share is determined by using the weighted average number of shares of
Common Stock and Common Stock equivalents outstanding during each period. The
calculation of income per share assuming full dilution is antidilutive.
Reclassifications - Certain prior year amounts have been reclassified to conform
to the manner of presentation in the current year.
F-11
<PAGE>
3. RESEARCH AND DEVELOPMENT
A significant portion of the Company's research and development operations are
located in Israel where the Company derives substantial benefits from
participation in programs sponsored by the Government of Israel for the support
of research and development activities conducted in that country. For the years
1992, 1993 and 1994, the Company's research and development activities included
projects funded by the Office of the Chief Scientist of the Ministry of Industry
and Trade of the State of Israel (the "OCS") and the Israel-United States
Binational Industrial Research and Development Foundation ("BIRD-F") under which
these funding organizations reimbursed a portion of the Company's research and
development expenditures under approved project budgets. In 1993 and 1994, the
Company's research and development activities also included projects funded by a
Canadian government agency, which reimbursed a portion of the Company's research
and development expenditures under approved project budgets. The Company is
currently involved in several ongoing research and development projects
supported by the OCS.
The Company is required to pay royalties to the respective funding organizations
based on the sale of products incorporating technology developed in these
projects (Note 16). In addition, under the terms of the applicable funding
agreements, products resulting from projects funded by the OCS may not be
manufactured outside of Israel without government approval and the governments
of the United States and Israel have certain nonexclusive, irrevocable, royalty-
free licenses to use for all governmental purposes any inventions developed in
the projects funded by BIRD-F.
4. SHORT-TERM INVESTMENTS
The Company classifies all of its marketable securities (including U.S. treasury
bills) as available-for-sale securities. The following is a summary of
available-for-sale securities as of December 31, 1994:
<TABLE>
<CAPTION>
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
------- ---------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C>
U.S. Treasury bills $59,712(1) $ - $ 327 $59,385
U.S. Treasury notes 339 2 337
U.S. corporate bonds 100 10 90
------- ------- ------ -------
Total debt securities 60,151 - 339 59,812
------- ------- ------ -------
Common stock 6,481 1,553 556 7,478
Mutual funds investing in
U.S. government and
agencies obligations 2,085 213 1,872
Preferred stock 4,919 25 445 4,499
------- ------- ------ -------
Total equity securities 13,485 1,578 1,214 13,849
------- ------- ------ -------
$73,636 $ 1,578 $1,553 $73,661
======= ======= ====== =======
</TABLE>
(1) Amount includes $58,649,000 of cost plus $1,063,000 accretion of discount
included in interest and other income.
F-12
<PAGE>
During 1994, the gross realized gains on sales of securities totaled
approximately $264,000 and the gross realized losses totaled approximately
$200,000.
The amortized cost and estimated fair value of debt securities at December 31,
1994, by contractual maturity, are as follows:
<TABLE>
<CAPTION>
Estimated
Cost Fair Value
------- ----------
(In thousands)
<S> <C> <C>
Due in one year or less $59,712 $59,385
Due after one year through three years 100 98
Due after three years 339 329
------- -------
$60,151 $59,812
======= =======
</TABLE>
5. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
December 31,
-------------------
1993 1994
------- -------
(In thousands)
<S> <C> <C>
Raw materials $ 4,628 $ 7,196
Work in process 3,036 2,342
Finished goods 2,725 2,889
------- -------
$10,389 $12,427
======= =======
</TABLE>
6. BUSINESS ACQUISITIONS
In April 1994, the Company acquired the business and assets of the Joint Venture
in return for its agreement to assume certain of the Joint Venture's
liabilities. The acquisition has been accounted for by the purchase method of
accounting and, accordingly, the purchase price has been allocated to the assets
acquired and the liabilities assumed based on the estimated fair values at the
date of acquisition. The liabilities assumed exceeded the assets acquired by
approximately $605,000 which has been assigned to other intangible assets and to
be amortized over five years. The operating results of the acquired business
are included in the Company's consolidated results of operations from April 1,
1994.
The Company acquired Startel Corporation, a California corporation that
manufactures and markets real time transactional processing systems ("Startel"),
in August 1992 by issuing 272,359 shares of Common Stock having a then fair
market value of approximately $2,451,000 in exchange for 4,713,907 shares of
Startel having a shareholders' deficiency of approximately $403,000. The
acquisition has been accounted for by the purchase method of accounting and,
accordingly, the purchase price has been allocated to the assets acquired and
the liabilities assumed based on the estimated fair values at the date of
acquisition. The purchase price and expenses associated with the acquisition
exceeded the net assets of Startel by approximately $3,322,000, of which
$1,550,000 has been assigned to goodwill, $1,423,000 has been assigned to
F-13
<PAGE>
other identifiable intangible assets, and $349,000 has been assigned to fixed
assets to be amortized over periods of ten, twelve and five years, respectively.
The operating results of Startel are included in the Company's consolidated
results of operations from August 1, 1992.
The Company acquired 51% of the shares of ASIC in April 1992 in exchange for
94,717 shares of Common Stock having a then fair market value of approximately
$886,000, issued to the previously controlling shareholders of ASIC, and a cash
equity investment in ASIC of $350,000. The acquisition has been accounted for
by the purchase method of accounting. The purchase price and expenses
associated with the acquisition exceeded the net assets of ASIC by approximately
$893,000, which has been assigned to goodwill to be amortized over a period of
ten years. The operating results of ASIC are included in the Company's
consolidated results of operations from April 1, 1992.
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of:
<TABLE>
<CAPTION>
December 31,
-----------------
1993 1994
------- -------
(In thousands)
<S> <C> <C>
Accounts payable $ 7,116 $10,113
Accrued salaries 935 2,223
Accrued vacation 800 1,360
Accrued royalties 631 1,405
Other accrued expenses 1,785 2,807
------- -------
$11,267 $17,908
======= =======
</TABLE>
8. 5 1/4% CONVERTIBLE SUBORDINATED DEBENTURES
On November 30, 1993, the Company issued $60 million of convertible subordinated
debentures bearing interest at 5 1/4% per annum, payable semi-annually. The
debentures mature on December 1, 2003. The debentures are convertible into
shares of the Company's Common Stock on or after June 1, 1994 at a conversion
price of $19.375 per share, subject to adjustment in certain events. The
debentures are subordinated in right of payment to all existing and future
senior indebtedness of the Company. The debentures are redeemable at the option
of the Company, in whole or in part, at prices decreasing from 102% of the face
amount on December 1, 1996 to par on December 1, 1998. However, the Company's
ability to redeem the debentures prior to December 1, 1998 is subject to certain
restrictions related to the market price of the Company's Common Stock. The
debenture holders may require the Company to repurchase the debentures at par in
the event that the Common Stock ceases to be publicly traded and, in certain
instances, upon a change in control of the Company.
F-14
<PAGE>
9. LIABILITY FOR SEVERANCE PAY
Liability for severance pay consists of the Company's unfunded liability for
severance pay to employees of certain foreign subsidiaries and accrued severance
to the Company's chief executive officer.
The Company's statutory obligation for severance pay to employees of Israeli
subsidiaries is determined on the basis of each individual's current salary and
length of employment. Funding is currently provided primarily by premiums paid
by the Company to insurance providers.
The Company is obligated under an agreement, which was amended during 1994, with
its chief executive officer to provide a severance payment upon the termination
of his employment with the Company. The severance payment will be $60,000 per
year of employment, which amount is increased by 5% per annum, compounded for
each year of employment commencing with 1995. Approximately $660,000 and
$720,000 has been accrued as of December 31, 1993 and 1994, respectively,
relating to this liability.
10. RELATED PARTIES
The Company paid or accrued legal fees to one of its directors in the amounts of
$325,000, $329,000 and $309,000 in 1992, 1993 and 1994, respectively.
Accounts receivable includes $886,000 due from the Joint Venture at December 31,
1993. Sales include $401,000 to the Joint Venture during 1993.
11. CAPITAL STOCK
In December 1994, the authorized shares of Common Stock of Comverse were
increased from 25,000,000 to 100,000,000.
In April 1993, Comverse issued 3,105,000 shares of Common Stock through a public
offering. The net proceeds from the issuance were $44,862,000.
See Note 6 and Note 12, respectively, concerning shares issued in connection
with acquisition transactions and upon the exercise of stock options and stock
purchase warrants. At December 31, 1994, there were 3,096,774 shares of Common
Stock reserved for conversion of the 5 1/4% convertible subordinated debentures
and 2,455,755 shares of Common Stock reserved for exercise of outstanding stock
options.
Comverse has granted to certain holders of its equity securities the right to
cause the Company to register such securities under applicable Federal and state
securities laws to permit the public sale of such securities upon the request of
such holders.
F-15
<PAGE>
12. STOCK OPTIONS AND WARRANTS
Employee Stock Options - At December 31, 1994, 2,455,755 shares of Common Stock
were reserved for issuance upon the exercise of options then outstanding and
610,225 shares of Common Stock were available for future grant under Comverse's
Stock Option Plans, under which options may be granted to key employees,
directors other than employees and other persons rendering services to the
Company. Options which are designated as "incentive stock options" under the
option plans may be granted with an exercise price not less than the fair market
value of the underlying shares at the date of grant and are subject to certain
quantity and other limitations specified in Section 422 of the Internal Revenue
Code. Options which are not intended to qualify as incentive stock options may
be granted at any price, but not less than the par value of the underlying
shares, and without restriction as to amount. The options and the underlying
shares are subject to adjustment in accordance with the terms of the plans in
the event of stock dividends, recapitalizations and similar transactions. The
right to exercise the options generally vests in annual increments over periods
of up to four years from the date of grant or the date of commencement of the
grantee's employment with the Company.
The changes in the number of shares subject to outstanding options were as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
Outstanding at beginning of year 1,463,603 1,462,656 1,746,072
Granted during the year 261,500 432,500 1,176,000
Exercised during the year (223,547) (115,748) (85,649)
Canceled, terminated and expired (38,900) (33,336) (380,668)
---------- ----------- -----------
Outstanding at end of year 1,462,656 1,746,072 2,455,755
========== =========== ===========
Aggregate exercise price $5,028,000 $10,220,000 $16,626,477
========== =========== ===========
At an exercise price range per share of $0.94 to $7.66 $0.94 to $18.50 $0.94 to $18.50
-------------- --------------- ---------------
</TABLE>
At December 31, 1994, options to purchase an aggregate of 1,246,172 shares were
vested and currently exercisable under the option plans and options to purchase
an additional 1,209,583 shares vest at various dates extending through 1998.
Options on Subsidiary Shares - Comverse has granted to certain key executives of
the Company options to acquire shares of certain subsidiaries, other than Efrat,
as a means of providing incentives directly tied to the performance of those
subsidiaries for which different executives have direct responsibility. Such
options, which upon exercise would represent 9.1% to 19.5% of the outstanding
shares of each subsidiary, have terms of ten years and become exercisable and
vest in equal ratable annual increments over periods ranging from three to five
years from the first anniversary of the date of initial grant. The exercise
price of each option is equal to the higher of the book value of the underlying
shares at the date of grant or the fair market value of such shares at that date
determined on the basis of an arms'-length transaction with a third party or, if
no such transactions have occurred, on a reasonable basis by the Board of
Directors. The aggregate exercise price of these options at December 31, 1994
was approximately $3,177,000. Upon the exercise in whole or in part of any
option, Comverse will receive an irrevocable proxy to vote the
F-16
<PAGE>
underlying shares and a right of first refusal to purchase the shares upon any
proposed sale, transfer or other disposition, until such time as the shares
shall have been sold in a bona fide open market transaction.
Other Options and Warrants - During 1992, 1993 and 1994, Comverse issued an
aggregate of 2,243,054, 118,540 and 197 shares of Common Stock, respectively,
upon the exercise of stock purchase warrants and stock options (other than
employee stock options) at prices ranging from $1.02 to $7.00 per share for an
aggregate amount of $7,352,000 in 1992, $1.02 to $3.00 per share for an
aggregate amount of approximately $300,000 in 1993 and at $2.18 per share for an
aggregate amount of approximately $400 in 1994. At December 31, 1994, there
were no warrants or other options (other than employee stock options)
outstanding.
13. FOREIGN OPERATIONS
Condensed net assets, exclusive of intercompany balances, applicable to all
foreign operations, principally located in Israel, included in the consolidated
balance sheet, are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------
1993 1994
---- ----
(In thousands)
<S> <C> <C>
Current assets $16,514 $32,207
Property and equipment, net 3,899 6,251
Software development costs, net 4,368 5,863
Other assets - 276
------- -------
Total assets 24,781 44,597
------- -------
Current liabilities 8,540 12,638
Other liabilities 817 1,307
------- -------
Total liabilities 9,357 13,945
------- -------
Net assets $15,424 $30,652
======= =======
</TABLE>
Condensed operating information, exclusive of intercompany transactions,
applicable to all foreign operations, principally located in Israel, in the
consolidated statements of income, is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1992 1993 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Total revenues $15,535 $25,670 $42,661
Costs and expenses 15,971 26,194 40,546
------- ------- -------
Operating (loss) income $ (436) $ (524) $ 2,115
======= ======= =======
</TABLE>
F-17
<PAGE>
The operating results shown above reflect the inclusion in costs and expenses of
fixed charges incurred by Comverse's foreign subsidiaries necessary to support a
level of activity which is greater than that shown in the table due to the
exclusion of intercompany revenue. Foreign operations in 1992 and 1993 were
profitable when intercompany transactions are included.
14. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1992 1993 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Current:
Federal $ 780 $ 682 $ 667
State 65 176 284
Foreign 731 821 720
------ ------ ------
1,576 1,679 1,671
------ ------ ------
Deferred (benefit):
Federal - (31) -
State - (4) -
Foreign 211 (31) 44
------ ------ ------
211 (66) 44
------ ------ ------
1,787 1,613 1,715
Less credit from utilization of net
operating loss carryforward - 592 -
------ ------ ------
$1,787 $1,021 $1,715
====== ====== ======
</TABLE>
In 1992, the utilization of net operating loss carryforwards of $788,000 was
included as an extraordinary item in the consolidated statements of income.
The reconciliation of the U.S. Federal statutory tax rate to the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
U.S. Federal statutory rate 34% 35% 35%
Consolidated worldwide income
in excess of U.S. income (24) (34) (36)
Foreign income taxes 14 6 6
Utilization of net operating loss carryforward (12) (4) -
Other 3 4 8
--- --- ---
Company's effective tax rate 15% 7% 13%
=== === ===
</TABLE>
F-18
<PAGE>
Deferred income taxes reflect the net tax effects of (a) temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes and (b) operating loss
carryforwards. The tax effects of significant items comprising the Company's
deferred tax asset and liability at December 31, 1993 and 1994 are as follows:
<TABLE>
<CAPTION>
1993 1994
---- ----
(in thousands)
<S> <C> <C>
Deferred tax liability:
Expenses deductible for tax purposes and
not for financial reporting purposes $ 187 $ 275
======= =======
Deferred tax asset:
Reserves not currently deductible $ 1,789 1,763
Tax loss carryforwards 2,294 2,261
Inventory capitalization 95 589
Other - 283
------- -------
4,178 4,896
Less: valuation allowance (3,645) (4,309)
------- -------
Deferred tax asset $ 533 $ 587
======= =======
</TABLE>
At December 31, 1994, the Company had net operating loss carryforwards for U.S.
income tax reporting purposes resulting from employees' exercise of stock
options of approximately $3,900,000 expiring in various periods through 2009.
Utilization of such net operating loss carryforwards will increase Additional
Paid-in Capital.
At December 31, 1994, Startel had net operating loss carryforwards of
approximately $2,200,000 for U.S. income tax reporting purposes expiring in
various periods through 2005 which may be used to reduce future U.S. taxable
income of Startel. The Company is limited to utilizing approximately $150,000
per year of Startel's net operating loss carryforwards by Section 382 of the
Internal Revenue Code. Utilization of such set operating loss carryforwards
will reduce goodwill.
Income tax has not been provided on unrepatriated earnings of foreign
subsidiaries as currently it is the intention of the Company to reinvest such
foreign earnings in their operations.
15. BUSINESS SEGMENT INFORMATION
The Company is engaged in one business segment: the design, development,
manufacture, marketing and support of special purpose computer and
telecommunications systems for multimedia communications and information
processing applications.
Sales to major customers and sales by geographic regions, as a percentage of
total sales, for the years ended December 31, 1992, 1993 and 1994 were as
follows:
F-19
<PAGE>
<TABLE>
<CAPTION>
Major Customers -
1992 1993
---- ----
<S> <C> <C>
North American Government agency 16% 11%
Other Government agency - 20%
Far East customer - 10%
</TABLE>
In 1994, no customer constituted more than 10% of sales.
Geographic Regions -
<TABLE>
<CAPTION>
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
North America 47% 37% 37%
Europe 22% 33% 22%
Far East/Australia 8% 19% 24%
Latin America 7% 3% 9%
Israel 16% 8% 6%
Africa - - 2%
--- --- ---
Total 100% 100% 100%
=== === ===
</TABLE>
16. COMMITMENTS AND CONTINGENCIES
Leases - The Company leases office, manufacturing, and warehouse space under
non-cancelable operating leases. Rent expense for all leased premises
approximated $848,000, $1,395,000 and $1,951,000 in 1992, 1993, and 1994,
respectively.
As of December 31, 1994, the annual minimum rent obligations of the Company were
approximately as follows:
<TABLE>
<CAPTION>
Amount
(In thousands)
--------------
<S> <C>
1995 $1,992
1996 1,522
1997 1,032
1998 933
1999 593
------
$6,072
======
</TABLE>
Employment Agreements - The Company is obligated under employment contracts with
its chief executive officer providing salary, minimum bonuses, and fringe
benefits through June 30, 1999. Minimum salary payments under the contracts
currently amount to $336,000 per year and aggregate $1,428,000 through June 30,
1999. The executive is entitled to annual bonuses equal to at least 3% of the
Company's consolidated after tax net income during each year. Upon termination
or expiration of the term of employment, the executive is entitled to receive a
F-20
<PAGE>
severance payment equal to $60,000 for each year of his previous and current
employment with the Company, which is increased by the rate of 5% per annum
compounded for each year of employment commencing with 1995 (See Note 9), plus
continued employment-related benefits for the period of 36 months thereafter.
If the termination of employment results from a unilateral termination or
fundamental breach of the agreement by the Company, or the resignation of the
executive within six months following a change in control of the Company not
approved by the executive in his capacity as a director of Comverse, the
executive is entitled to an additional payment equal to 299% of the average
annual cash compensation, including salary and any bonus payments, received by
the executive from the Company during the three immediately preceding fiscal
years, plus an amount equal to the income tax resulting from such payment.
The Company is obligated under agreements with the chief executive officer of
ASIC providing for his employment for a period of five years ending April 14,
1997 with a base annual compensation of approximately $87,000, subject to annual
adjustment to reflect increases in the Canadian consumer price index. The
officer's employment can be terminated by the Company on notice of at least 180
days. Upon such termination, unless it is due to specified contractual defaults
by the officer, the Company is obligated to continue his compensation payments
for the period of 24 months following the effective date of termination, and, in
the event of such termination, the death or permanent disability of the officer
during the term of his employment or the failure of the Company to offer a
renewal of employment on reasonable terms at the expiration of the current
agreement, the Company is also obligated to repurchase shares of ASIC at the
time owned by the officer or certain of his affiliates. The repurchase price,
which varies with the circumstances of termination and the financial results and
condition of ASIC, would amount to approximately $905,000 as of December 31,
1994.
Most other employment agreements of the Company are terminable with or without
cause with prior notice of 60 days or less.
Licenses and Royalties - The Company licenses certain technology, "know-how,"
software and related rights for use in the manufacture and marketing of its
products, and pays royalties to third parties under such licenses and under
other agreements entered into in connection with research and product
development activities. The Company currently pays royalties on the sale of
substantially all of its TRILOGUE and AUDIODISK product lines in varying amounts
based upon the revenues attributed to the various components of such products.
Royalties typically range from approximately 1.5% to 5% of net sales of the
related products and, in the case of royalties due to government funding sources
in respect of research and development projects, are required to be paid until
the funding organization has received total royalties ranging from 100% to 150%
of the amounts received by the Company under the approved project budgets.
Dividend Restrictions - The ability of Comverse's Israeli subsidiaries to pay
dividends is governed by Israeli law, which provides that cash dividends may be
paid by an Israeli corporation only out of retained earnings as determined for
statutory purposes in Israeli currency. In the event of further devaluation of
Israeli currency against the dollar, the amount in dollars available for payment
of cash dividends out of prior years' earnings will decrease accordingly. Cash
dividends paid by an Israeli corporation to foreign residents are subject to
withholding of Israeli income tax at source at a rate of up to 15%, depending on
the particular facilities which have generated the earnings that are the source
of the dividends. In addition, Efrat is subject to contractual restrictions
prohibiting it from paying dividends exceeding 75% of its profits.
F-21
<PAGE>
Guaranties - The Company has obtained bank guaranties primarily for performance
of certain obligations under contracts with customers. These guaranties, which
aggregated approximately $5,649,000 at December 31, 1994, are to be released by
the Company's performance of specified contract milestones, which are scheduled
to be completed primarily during 1995.
Litigation - The Company is subject to certain legal actions arising in the
normal course of business. After taking into consideration legal counsel's
evaluation of such actions, management is of the opinion that their final
resolution will not have any significant adverse effect upon the Company's
business or its consolidated financial statements.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of Statement of Financial Accounting
Standards No. 107, "Disclosures About Fair Value of Financial Instruments." The
estimated fair value amounts have been determined by the Company, using
available market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that the Company could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated fair
value amounts.
December 31, 1994
---------------------
Carrying Estimated
Amount Fair Value
-------- ----------
(In thousands)
Liabilities:
5 1/4% convertible subordinated debentures $60,000 $48,000
Off-balance sheet financial instruments:
Foreign exchange forward contracts
used for hedging purposes - $ 1
Cash and Cash Equivalents, Bank Time Deposits, Short-Term Investments, Accounts
Receivable, Long-Term Receivables, and Accounts Payable - The carrying amounts
of these items are a reasonable estimate of their fair value.
Convertible Subordinated Debentures and Foreign Exchange Forward Contracts - The
fair value of these securities is estimated based on quoted market prices or
recent sales for those or similar securities.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1994. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes of
these financial statements since that date, and current estimates of fair value
may differ significantly from the amounts presented herein.
F-22
<PAGE>
18. SUBSEQUENT EVENTS
In February 1995, the Company acquired 21.8% of DCL Technologies Ltd. ("DCL")
for approximately $2,450,000. DCL is a developer of advanced software-based
products and solutions, with specialized expertise in communications processing.
The Company will account for this investment under the equity method.
F-23
<PAGE>
19. QUARTERLY INFORMATION (UNAUDITED)
The following table shows selected results of operations for each of the
quarters during 1993 and 1994.
<TABLE>
<CAPTION>
Fiscal Quarter Ended
March 31 June 30 Sep. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
1993 1993 1993 1993 1994 1994 1994 1994
-------- ------- ------- ------- -------- ------- -------- -------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $14,017 $17,033 $17,958 $18,701 $20,371 $22,995 $24,632 $24,690
Interest and Other Income 520 460 646 1,103 1,098 1,362 1,451 2,244
------- ------- ------- ------- ------- ------- ------- -------
Total Revenues $14,537 $17,493 $18,604 $19,804 $21,469 $24,357 $26,083 $26,934
======= ======= ======= ======= ======= ======= ======= =======
Gross profit $ 8,363 $10,044 $10,905 $10,908 $ 8,740 $13,299 $14,209 $14,235
Net income $ 2,437 $ 3,064 $ 3,515 $ 3,691 $ 2,457 $ 2,837 $ 3,111 $ 3,365
======= ======= ======= ======= ======= ======= ======= =======
Earnings per common and
common equivalent share $0.14 $0.15 $0.17 $0.18 $0.12 $0.14 $0.15 $0.16
======= ======= ======= ======= ======= ======= ======= =======
Weighted average number of
common and common
equivalent shares
outstanding 17,443 20,174 20,708 20,827 20,822 20,663 20,694 20,975
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
The difference between income per share for 1993 and the sum of the income
per share for the quarters comprising the year is due to differences in the
calculation of the weighted average number of shares outstanding over the
respective periods and rounding adjustments.
F-24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
COMVERSE TECHNOLOGY, INC.
(Registrant)
By: /s/ KOBI ALEXANDER
-------------------------
Kobi Alexander, President
Date: March 27, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
/s/ KOBI ALEXANDER March 27, 1995
------------------
Kobi Alexander, President,
Chairman of the Board and
Chief Executive Officer;
Director
/s/ IGAL NISSIM March 27, 1995
---------------
Igal Nissim, Vice President,
Finance and Chief Financial
Officer
/s/ ZVI ALEXANDER March 27, 1995
-----------------
Zvi Alexander, Director
/s/ SAM OOLIE March 27, 1995
-------------
Sam Oolie, Director
/s/ JOHN H. FRIEDMAN March 27, 1995
--------------------
John H. Friedman, Director
/s/ WILLIAM F. SORIN March 27, 1995
--------------------
William F. Sorin, Director
/s/ YECHIAM YEMINI March 27, 1995
------------------
Yechiam Yemini, Director
<PAGE>
Exhibit
Number Description
------ -----------
3(A)(2) Certificate of Amendment of Certificate of Incorporation effective
January 12, 1995.
4(A)(2) Excerpt from Certificate of Amendment
of Certificate of Incorporation effective
January 12, 1995.
10(18) Employment Agreement effective as of July 1, 1994 by and between
Comverse Technology, Inc. and Kobi Alexander.
10(19) 1994 Stock Option Plan.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.
<PAGE>
EXHIBIT 3(A)(2)
<PAGE>
[COMPOSITE CERTIFICATE OF INCOPORATION CONTAINING ALL AMENDMENTS]
CERTIFICATE OF INCORPORATION
OF
COMVERSE TECHNOLOGY, INC.
___________________
Under Section 402 of the Business Corporation Law
___________________
* * *
FIRST: The name of the corporation is
COMVERSE TECHNOLOGY, INC.
hereinafter sometimes called "the corporation".
SECOND: The purposes for which it is formed are as follows:
To engage in any lawful act or activity for which corporations may be
organized under the Business Corporation Law, provided, however, that the
corporation is not formed to engage in any act or activity requiring the
consent or approval of any state official, department, board, agency or
other body without first obtaining the consent of such body.
To purchase, manufacture, produce, assemble, receive, lease or in any
manner acquire, hold, own, use, operate, install, maintain, service,
repair, process, alter, improve, import, export, sell, lease, assign,
transfer and generally to trade and deal in and with, raw materials,
natural or manufactured articles or products, machinery, equipment,
devices, systems, parts, supplies, apparatus and personal property of every
kind, nature or description, tangible or intangible, used or capable of
being used for any purpose whatsoever and to engage and participate in any
mercantile, manufacturing or trading business of any kind or character.
To purchase, receive, lease or otherwise acquire and to manage, hold,
own, use, improve, convey, sell, mortgage, or otherwise deal in and with
lands, buildings and real property of every description, or any interest
therein.
<PAGE>
To adopt, apply for, obtain, register, purchase, lease or otherwise
acquire and to maintain, protect, hold, use, own, exercise, develop,
manufacture under, operate and introduce, and to sell and grant franchises
or other rights in respect of, assign or otherwise dispose of, turn to
account, or in any manner deal with and contract with reference to, any
trade marks, trade names, patents, patent rights, concessions, franchises,
designs, copyrights and distinctive marks and rights analogous thereto, and
inventions, devices, improvements, processes, recipes, formulae and the
like including such thereof as may be covered by, used in connection with,
or secured or received under, Letters Patent of the United States of
America or elsewhere or otherwise, and any licenses in respect thereof and
any or all rights connected therewith or appertaining thereto.
In furtherance of its corporate business and subject to the
limitations prescribed by statute, to acquire by purchase, exchange or
otherwise, all or any part of, or any interest in, the properties, assets,
business and goodwill of any one or more corporations, associations,
partnerships, firms, syndicates or individuals and to pay for the same in
cash, property or its own or other securities; to hold, operate,
reorganize, liquidate, mortgage, pledge, sell, exchange, or in any manner
dispose of the whole or any part thereof; and in connection therewith, to
assume or guarantee performance of any liabilities, obligations or
contracts of corporations, associations, partnerships, firms, syndicates or
individuals, and to conduct in any lawful manner the whole or any part of
any similar business thus acquired.
To acquire or become interested in, whether by subscription, purchase,
underwriting, loan, participation in syndicates or otherwise, to own, hold,
to sell, assign or otherwise dispose of, or in any manner to deal in or
with, stocks, bonds, debentures, warrants, rights, scrip, notes, evidences
of indebtedness, or other securities or obligations of any kind by
whomsoever issued, to exercise in respect thereof all powers and privileges
of individual ownership or interest therein, including the right to vote
thereon for any and all purposes; to consent, or otherwise act with respect
thereto, without limitations; and to issue in exchange therefor the
corporation's stock, bonds, debentures, warrants, rights, scrip, notes,
evidences of indebtedness or other securities or obligations of any kind.
To borrow money for its corporate purposes, and to make, accept,
endorse, execute and issue promissory notes, bills of exchange, bonds,
debentures or other obligations from time to time, for the purchase of
property, or for any purpose relating to the business of the company, and
if deemed proper, to secure the payment of any such obligations by
mortgage, pledge, guarantee, deed of trust or otherwise.
- 2 -
<PAGE>
To lend its uninvested funds from time to time to such extent, on such
terms and on such security, if any, as the Board of Directors of the
corporation may determine.
In furtherance of its corporate business and subject to the
limitations prescribed by statute, to be a promoter, partner, member,
associate or manager of other business enterprises or ventures, or to the
extent permitted in any other jurisdiction to be an incorporator of other
corporations of any type or kind and to organize, or in any way participate
in the organization, reorganization, merger or liquidation of any
corporation, association or venture and the management thereof.
Subject to the limitations prescribed by statute and in furtherance of
its corporate business, to pay pensions, establish and carry out pension,
profit sharing, share bonus, share purchase, share option, savings, thrift
and other retirement, incentive and benefit plans, trusts and provisions
for any or all of its directors, officers and employees.
To conduct its business in all or any of its branches, so far as
permitted by law, in the State of New York and in all other states of the
United States of America, in the territories and the District of Columbia
and in any or all dependencies or possessions of the United States of
America, and in foreign countries; and to hold, possess, purchase, lease,
mortgage and convey real and personal property and to maintain offices and
agencies either within or outside the State of New York.
To carry out all or any part of the foregoing purposes as principal,
factor, agent, broker, contractor or otherwise, either alone or in
conjunction with any persons, firms, associations, corporations, or others
in any part of the world; and in carrying on its business and for the
purpose of attaining or furthering any of its purposes, to make and perform
contracts of any kind and description, and to do anything and everything
necessary, suitable, convenient or proper for the accomplishment of any of
the purposes herein enumerated.
For the accomplishment of the aforesaid purposes, and in furtherance
thereof, the corporation shall have and may exercise all of the powers
conferred by the Business Corporation Law upon corporations formed
thereunder, subject to any limitations contained in Article 2 of said law
or in accordance with the provisions of any other statute of the State of
New York.
THIRD: The office of the corporation in the State of New York is to be
located in the County of Suffolk.
- 3 -
<PAGE>
FOURTH: The total number of shares of stock which the Corporation is
authorized to issue is one hundred and two million, five hundred thousand
(102,500,000) shares, of which one hundred million (100,000,000) shares shall be
denominated Common Stock, having a par value of ten cents ($0.10) per share, and
two million, five hundred thousand (2,500,000) shares shall be denominated
Preferred Stock, having a par value of one cent ($0.01) per share. Preferred
Stock may be issued in one or more series with such designations, relative
rights, preferences and limitations as may be fixed from time to time by the
Board of Directors of the Corporation. Except as may be specifically provided
in the resolution or resolutions authorizing issuance of Preferred Stock, no
holders of capital shares of the Corporation, by reason of the ownership
thereof, shall have any preemptive rights to subscribe for, purchase or
otherwise acquire any securities of the Corporation.
FIFTH: The Secretary of State is designated as the agent of the
corporation upon whom process against the corporation may be served, and the
address to which the Secretary of State shall mail a copy of any process against
the corporation served upon him is Zimet, Haines, Moss & Friedman, 460 Park
Avenue, New York, New York 10022.
SIXTH: No director of the corporation shall be personally liable to the
corporation or its shareholders for damages for any breach of duty in such
capacity, provided that nothing contained in this Article SIXTH shall eliminate
or limit the liability of any director if a judgment or other final adjudication
adverse to him establishes that his acts or omissions were in bad faith or
involved intentional misconduct or a knowing violation of law or that he
personally gained in fact a financial profit or other advantage to which he was
not legally entitled or that his acts violated Section 719 of the New York
Business Corporation Law. Notwithstanding the foregoing, nothing in this
Article SIXTH shall eliminate or limit the liability of a director for any act
or omission occurring prior to the date of filing of the Certificate of
Amendment to the Certificate of Incorporation of the corporation that includes
this Article SIXTH.
* * *
- 4 -
<PAGE>
EXHIBIT 4(A)(2)
<PAGE>
Article FOURTH of Certificate of Incorporation, as amended:
"FOURTH: The total number of shares of stock which the Corporation is
authorized to issue is one hundred and two million, five hundred thousand
(102,500,000) shares, of which one hundred million (100,000,000) shares
shall be denominated Common Stock, having a par value of ten cents ($0.10)
per share, and two million, five hundred thousand (2,500,000) shares shall
be denominated Preferred Stock, having a par value of one cent ($0.01) per
share. Preferred Stock may be issued in one or more series with such
designations, relative rights, preferences and limitations as may be fixed
from time to time by the Board of Directors of the Corporation. Except as
may be specifically provided in the resolution or resolutions authorizing
issuance of Preferred Stock, no holders of capital shares of the
Corporation, by reason of the ownership thereof, shall have any preemptive
rights to subscribe for, purchase or otherwise acquire any securities of
the Corporation. "
<PAGE>
EXHIBIT 10(18)
<PAGE>
AGREEMENT OF EMPLOYMENT, effective as of July 1, 1994, by and between COMVERSE
TECHNOLOGY, INC., a New York corporation (the "Company"), and KOBI ALEXANDER
(the "Executive").
WHEREAS, the Executive has heretofore served as a senior executive officer and
director of the Company pursuant to an agreement dated as of July 1, 1993; and
WHEREAS, the Company and the Executive desire to amend, modify and supersede
such prior agreement and to provide for the continuing services of the Executive
to the Company upon the terms and subject to the conditions hereinafter set
forth;
NOW, THEREFORE, in consideration of the premises and of the mutual covenants
and agreements hereinafter set forth, the parties hereto hereby agree as
follows:
Section 1.
---------
1.1 Upon the terms and subject to the conditions of this Agreement, the
Company hereby agrees to engage the Executive in the capacities hereinafter
described, and the Executive hereby accepts such engagement.
1.2 The Executive shall serve as President, Chairman of the Board and Chief
Executive Officer of the Company and shall have the authority and
responsibilities normally associated with the position of Chief Executive
Officer.
1.3 The Company shall nominate, and shall use its best efforts to cause the
shareholders of the Company to elect, the Executive to the Board of Directors of
the Company, and the Executive agrees to serve as a director of the Company
during the term of his engagement hereunder. The Executive shall also serve as
the Chairman of the Board of Directors of each subsidiary of the Company and as
Chairman of any Executive Committee of the Board of Directors of the Company.
1.4 The Executive's services shall be rendered with due regard by the
Executive for the prompt, efficient and economical operation of the Company's
business to the end of achieving the objectives set forth in the Company's
business plans. The Executive shall separately render services in Israel to the
Company's wholly-owned subsidiary Efrat Future Technology Ltd. ("Efrat")
pursuant to agreement between the Executive and Efrat.
1.5 In the event that the Executive shall request a change is his position
with the Company, the Company will try to provide the Executive with another
position of senior managerial authority reasonably acceptable to the Executive,
and such request by the Executive will not constitute a breach of this
Agreement.
1.6 The Executive shall be entitled to cumulative paid vacations of 30
business days per year. In the event that the demands of his activities on
behalf of the Company preclude or limit the ability of the Executive to take all
or part of such vacation in any year, the Executive shall be entitled to the
balance of such vacation in any succeeding year or, at his election, to receive
a payment (in addition to the compensation otherwise due in respect of such
vacation period) equal to the Executive's then current base salary under
subsection 3.1 applied to the vacation time not taken during such year.
Section 2.
---------
2.1 The term of this Agreement and the Executive's engagement hereunder shall
be deemed effective as of July 1, 1994 (the "Effective Date") and, except as
hereinafter otherwise
<PAGE>
provided, shall terminate on June 30, 1999. This Agreement, and the term of the
Executive's engagement hereunder, shall be automatically renewed for a two-year
period at the expiration of the stated term hereof unless either party, by
written notice to the other at least 30 days prior to such expiration, elects
not to renew this Agreement.
2.2 The Executive shall be entitled to terminate his engagement hereunder at
any time with prior written notice to the Company of at least 90 days, and the
Executive's engagement hereunder shall terminate in the event of the physical
incapacity or inability of the Executive to perform his duties for a consecutive
period of l50 days or a non-consecutive period of l80 days during any twelve
month period, or upon the death of the Executive.
2.3 In the event of the termination or expiration of this Agreement, pursuant
to the foregoing provisions or otherwise, except as otherwise provided in
Subsection 2.4, and in consideration of the past services of the Executive and
his continuing services hereunder through the date of such termination or
expiration, the Company shall pay to the Executive an amount (the "Basic
Severance Payment") determined in accordance with the provisions hereof. The
Basic Severance Payment shall equal the the sum of (i) the amount determined by
multiplying (a) the number of years (plus any partial years) of employment of
the Executive by the Company and any of its subsidiaries from January 1, 1983
through the earlier of the date of termination or December 31, 1994 by (b)
$60,000 plus (ii) the amount determined by multiplying (a) the number of years
(plus any partial years) of employment of the Executive by the Company and any
of its subsidiaries from January 1, 1995 through the earlier of the date of
termination or the date of expiration of this Agreement by (b) $60,000 increased
by the rate of 5% per annum compounded for each year of the Executive's
employment commencing with 1995. The Basic Severance Payment shall be paid in a
lump sum not later than 30 days following the date of termination or expiration.
2.4 In the event that (i) this Agreement is unilaterally terminated by the
Company over the objections of the Executive and not as a result of a
fundamental breach of his obligations hereunder, (ii) this Agreement is
terminated by the Executive as a result of a fundamental breach by the Company
of its obligations hereunder (including any breach which shall materially affect
the terms and conditions of the Executive's services hereunder, such as, without
limitation, the removal of the Executive, without his consent, from any of the
positions specified in section 1, the involuntary relocation of the site of the
Executive's activities or a diminution in the Executive's authority or in the
level of the Executive's employment-related benefits) or (iii) the Executive
shall resign from his engagement by the Company hereunder within six months
following a change in control of the Company (as hereinafter defined) to which
the Executive shall not have given his approval in his capacity as a director of
the Company, the Executive shall be entitled to payment of the sum of (A) the
the applicable Basic Severance Payment determined under subsection 2.3 hereof
plus (B) 299% of the average annual cash compensation, including salary and any
bonus payments, received by the Executive from the Company and Efrat during the
three completed fiscal years of the Company immediately preceding the date of
such termination or expiration. Such amount shall be paid in a lump sum not
later than 30 days following the date of termination. For the purposes of this
subsection 2.4, a change in control of the Company shall be deemed to occur upon
(a) the consummation of any merger or consolidation to which the Company is a
party and in which the Company either is not the resulting or surviving entity
or, if the Company is the resulting or surviving entity, the shareholders of the
Company immediately prior to the effective date of such merger or consolidation
shall hold less than a majority of the voting shares of the resulting or
surviving entity immediately after the effective date of such merger or
consolidation, (b) the sale, transfer or other disposition in any single
transaction or series of related transactions of all or substantially all of the
business and assets of the Company otherwise than in the ordinary course of
business, (c) the acquisition by any person, or affiliated group of persons
within the meaning of Section 13 of the Securities Exchange Act of 1934, as
amended, in any single transaction or series of related transactions, of
beneficial ownership of more than 15% of the issued and outstanding voting
shares of the Company, or (d) the change in the composition of a majority of the
members of the Board of Directors of the Company during any period of 12
consecutive months.
-2-
<PAGE>
2.5 The Company shall pay into a trust account to be established by the
Company for the purposes hereof such amounts as shall be required from time to
time to provide for the full payment of then current amount that would be
payable to the Executive under subsection 2.3 upon the termination of his
employment in accordance with the provisions thereof. Such trust account shall
be established with a bank or trust company in New York City designated by the
Executive, or such other trustee or escrow agent as the Company and the
Executive shall mutually agree upon, and shall provide for the payment of the
balance in such account to the Executive upon the termination of his engagement
hereunder in partial satisfaction of the obligations of the Company pursuant to
subsection 2.3 or subsection 2.4, as the case may be. The costs of such trust
arrangement shall be born by the Company. The provisions hereof shall not be
deemed discharged by the participation of the Executive in any pension plan or
similar arrangement providing for the payment of retirement benefits to the
Company's executives or employees.
2.6 In the event of the termination or expiration of this Agreement, pursuant
to the foregoing provisions or otherwise, in consideration of the past services
of the Executive and his continuing services hereunder through the date of such
termination or expiration, the Executive shall be entitled during the ensuing
period of 36 months to continue to receive all fringe benefits (including,
without limitation, those provided for under subsections 3.4 through 3.7 hereof)
which the Executive was receiving or eligible to receive at the date of such
termination or expiration.
2.7 None of the payments or other benefits due to the Executive under this
section 2 shall be reduced or diminished by other severance payments or benefits
due to the Executive under any other arrangements, whether established by law or
by agreement, in effect with respect to the Executive's employment with the
Company or any of its subsidiaries.
Section 3.
---------
3.1 The Executive shall receive during his engagement hereunder, in accordance
with the terms hereof, a base salary, commencing on the Effective Date, payable
at the rate of $293,600 per annum. Such base salary shall be subject to
increase based on annual good faith review by the Remuneration and Stock Option
Committee of the Board of Directors of the Company, to be conducted not later
than June 30 of each year during the term hereof. The Company hereby
acknowledges its intention to provide an appropriate increase in such base
annual salary. In no event shall the Executive's base salary at any time be
less than that of any other officer or employee of the Company or any of its
subsidiaries.
3.2 The compensation provided pursuant to subsection 3.1 shall be paid during
any year, as to all or any portion thereof, at such time or times as may be
requested by the Executive; provided, that the amount of such compensation that
may be prepaid at any one time shall not exceed the compensation due for the
ensuing six months.
3.3 For each of the calendar years 1994 through 1999, the Executive shall be
entitled to bonus compensation in an amount to be negotiated annually, but not
less than three percent of the Company's consolidated after tax net income in
each year. The final amount of the bonus for each such year shall be determined
and paid not later than April 15 of the immediately succeeding year. The
Executive shall be entitled to receive, not later than 45 days after the close
of each calendar quarter, a prepayment of bonus compensation based on the then
applicable percentage rate of bonus compensation times 70% of the consolidated
after tax net income of the Company for such quarter, subject to adjustment upon
the final determination of bonus compensation for the year.
3.4 The Company will reimburse the Executive for expenses, reasonably incurred
by the Executive in connection with his engagement hereunder, including, without
limitation, all expenses of telephone, business entertainment, travel (including
the regular use of an automobile owned or leased by the Company), lodging and
board while the Executive is performing services for and on
-3-
<PAGE>
behalf of the Company, all in a manner and style commensurate with the
Executive's position with the Company.
3.5 The Company shall furnish to the Executive and shall pay the cost of legal
and accounting, administrative and similar services and charges incurred by the
Executive on his own behalf, and the cost of medical and dental care and
treatment for the Executive and his wife and children.
3.6 In the event that any of the benefits provided the Executive under
subsections 2.4, 3.4, 3.5 and/or 3.7 shall be subject to income tax in the
United States, the Company shall pay the Executive such additional sums as shall
equal the tax payable in respect of such benefits (including any tax
attributable to additional amounts payable under this subsection 3.6) at the
highest marginal rate of taxation then applicable to the Executive.
3.7 The Company shall provide the Executive with insurance coverage and
pension benefits, through participation of the Executive in the disability,
pension, group insurance, hospitalization, or other arrangements of the Company
in effect with respect to its employees, or otherwise, on a basis commensurate
with the Executive's position and level of compensation, and such other fringe
benefits, to be determined from time to time by the Board of Directors of the
Company, as are made available to its senior management generally. Without
limitation of the foregoing, the Company will maintain on behalf of the
Executive during the term of his engagement hereunder, with sound and reputable
insurance carriers (i) whole life insurance providing death benefits in the
amount of $1,000,000, payable to the Executive's estate or named beneficiary,
(ii) disability insurance providing for lifetime disability payments at a level
not less than the Executive's annual salary pursuant to Section 3.1 and (iii) at
the request of the Executive, if such insurance is available to other directors
of the Company, director's liability insurance in an amount comparable to such
insurance normally provided by corporations similarly situated.
3.8 The Company will provide the Executive with the option to purchase shares
of the capital stock of each subsidiary of the Company organized or acquired
during the term of this Agreement. For the purposes hereof, the term
"subsidiary" shall include any corporation, partnership, joint venture or other
entity of which the Company shall hold at least 50% of the outstanding equity
interest. Except as hereinafter provided, each such option shall be granted
within three months of the organization or acquisition of such subsidiary and
shall entitle the Executive, during the period of 10 years from the date of
option grant, to purchase, from the Company or from such subsidiary, as the
Executive may determine, such number of shares of the capital stock of such
subsidiary ("Option Shares") as shall equal 7.5% of the total number of such
shares issued and outstanding (including the Option Shares issuable upon
exercise of such option) as at the date of option grant for a price equal to the
higher of the fair market value of such shares or the book value of such shares
determined as at the date of grant. If such fair market value shall not be
determinable from an arms length transaction with a third party, it shall be
determined by the Remuneration and Stock Option Committee of the Board of
Directors in consultation with the legal counsel for the Company; provided that
if the Executive disputes such determination of fair market value and the
Company and the Executive are unable to otherwise agree within 45 days after
such determination, such fair market value shall be determined by a recognized
investment banking firm selected in good faith by the Board of Directors of the
Company. In the event of the organization or acquisition by the Company of a
subsidiary (an "intermediate subsidiary") that is the parent organization of one
or more other subsidiaries ('junior subsidiaries" and, together with such
intermediate subsidiary and its other direct and indirect junior subsidiaries,
the "subsidiary group"), or the organization or acquisition of one or more
junior subsidiaries by an entity which is an intermediate subsidiary of the
Company, the Executive may elect, within three months after such organization or
acquisition, to convert the option rights hereunder that would otherwise apply
to the equity securities of such intermediate subsidiary into an option on
equivalent terms to purchase, for the fair market value thereof at the time of
such organization or acquisition, up to 7.5% of the equity securities
(determined as provided in subsection 3.8) of any one or more of the junior
-4-
<PAGE>
subsidiaries of such intermediate subsidiary, in such proportions as the
Executive may specify by notice to the Company. As soon as practicable after
the Company's receipt of such notice, the Corporate Planning and Structure
Committee of the Board of Directors of the Company (or, in its absence, the
Board of Directors of the Company or any other committee that it may designate)
shall determine the relative fair market values of the intermediate subsidiary
and all junior subsidiaries comprising the applicable subsidiary group. As a
condition of the grant of the Executive's option rights hereunder to purchase
the equity securities of any junior subsidiary, the option to acquire equity
securities of its parent intermediate subsidiary shall be reduced, as to number
of shares and aggregate exercise price, by the same proportion as the fair
market value of such junior subsidiaries bears to the fair market value of its
subsidiary group, as determined in good faith by such committee or the Board of
Directors.
3.9 The exercise of any option granted pursuant to subsection 3.8 shall be
subject to the condition that the voting rights pertaining to the Option Shares
shall be exercisable by the Company, pursuant to proxy granted to the Company by
the Executive, which proxy shall be deemed to be coupled with an interest and
irrevocable until the occurrence of the earliest of the following events: (i)
the reduction of the voting rights represented by the shares held by the Company
(including any voting rights pertaining to the Option Shares) to less than 50%
of the total vote represented by all issued and outstanding shares of the
subsidiary, (ii) the sale or other disposition of all or substantially all of
the assets of the subsidiary, (iii) the sale of the Option Shares by the
Executive to any unaffiliated third party, provided that the Executive shall
have first offered to sell the Option Shares to the Company on the same or
equivalent terms and conditions, or (iv) the expiration of three years after the
termination of the Executive's employment with the Company.
3.10 All options granted to the Executive pursuant to subsection 3.8, as well
as any options to purchase shares of the Company held by the Executive under any
stock option plan or arrangement, shall become immediately vested, fully
exercisable and non-forfeitable upon the occurrence or continuance of any of the
events that would entitle the Executive to the payments specified in subsection
2.4.
3.11 The Company shall be liable for all payments due to the Executive under
his employment agreement with Efrat if and to the extent that such payments are
not made by Efrat, as and when the same become due and payable, including,
without limitation, past and future payments of salary, severance payments,
employment-related benefits and other amounts owed or to be owed by Efrat to the
Executive.
Section 4.
---------
4.1 The Executive hereby assigns to the Company all right, title and interest
in and to inventions, patents or patent applications conceived or developed, in
whole or in part, by the Executive, alone or with others, at any time during the
term of his association with the Company and its subsidiaries which relate to
the business of the Company or its subsidiaries.
4.2 The Executive agrees that, during his engagement with the Company and for
a period of two years after the termination of his engagement with the Company
(for any reason whatsoever), except to the extent approved by the Board of
Directors of the Company he shall not (otherwise than in the good faith
performance of his duties on behalf of the Company) disclose to any person,
corporation, firm, partnership or other entity whatsoever (except the Company)
or any officer, director, stockholder, partner, associate, employee, agent or
representative of any such partnership, firm or corporation, any confidential,
proprietary information and trade secrets received by him during the course of
his association with the Company, except only information which is otherwise
generally available to the public.
-5-
<PAGE>
4.3 During his engagement with the Company, the Executive shall exercise
reasonable precautions to protect the integrity of the Company's customer and
prospective customer lists, agreements, contracts or any other documents
embodying any information of the type described in subsection 4.2.
4.4 During his engagement with the Company and (subject to the provisions of
subsection 4.5) for a period of 18 months after the termination of his
engagement with the Company for any reason whatsoever, the Executive shall not,
in any way, unless otherwise approved by the Board of Directors of the Company,
be engaged, directly or indirectly, in the United States or Canada, as an
employee, partner, proprietor, officer, director, consultant, agent, or
stockholder of any corporation, partnership, proprietorship or other form of
business entity, which is engaged in the business of creating, manufacturing or
marketing products substantially similar to or directly competitive with the
communications monitoring and message management products of the Company or its
subsidiaries, to the extent that such activity or association involves products
substantially similar to or directly competitive with such products of the
Company or its subsidiaries. Notwithstanding the foregoing, the Executive may
own, as an inactive investor, securities of any corporation of a class either
listed on any United States securities exchange or traded on the over-the-
counter market in the United States and listed on any generally accepted
quotation service, so long as his holdings in any one such corporation shall
not, in the aggregate, have a cost of more than $1,000,000 or constitute more
than 2-1/2% of the voting stock of such corporation.
4.5 If any of the restrictions on competitive activities contained in this
Section 4 shall for any reason be held by a court of competent jurisdiction to
be excessively broad as to duration, geographical scope, activity or subject,
such restrictions shall be construed so as to thereafter be limited or reduced
to be enforceable to the extent compatible with applicable law as it shall then
appear; it being understood that by the execution of this Agreement the parties
hereto regard such restrictions as reasonable and compatible with their
respective rights.
Section 5.
---------
5.1 This Agreement constitutes the entire agreement between the Company and
the Executive in any way relating to the engagement of the Executive and merges
all prior agreements and understandings between them.
5.2 This Agreement may not be altered or amended except by a writing signed by
the party against whom such alteration or amendment is sought to be enforced.
No waiver by either party of any provision or condition of this Agreement by him
or it to be performed shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or any prior or subsequent time.
Section 6.
---------
This Agreement is personal and non-assignable by the Executive. It shall be
binding upon and inure to the benefit of any corporation or other entity with
which the Company shall merge or consolidate or to which the Company shall sell
or otherwise convey all or substantially all of its assets. Any assignee must
assume all the obligations of the Company hereunder, but such assignment and
assumption shall not serve as a release of the Company.
Section 7.
---------
Any notices or other communications required or permitted hereunder shall be in
writing and shall be duly given if personally delivered or sent by certified or
registered mail, return receipt requested, to the following addresses:
-6-
<PAGE>
(i) If to the Executive: (ii) If to the Company:
Kobi Alexander Comverse Technology, Inc.
177 Briarcliff Road 170 Crossways Park Drive
Briarcliff Manor, NY 10510 Woodbury, New York 11797
Either party may alter the address for the sending of notices to such party by
a written notice sent in conformity with this Agreement.
Section 8.
---------
This Agreement was negotiated in the State of New York and shall be governed by
and construed in accordance with the laws of the State of New York with respect
to agreements made and to be performed wholly therein.
Section 9.
---------
If any of the provisions of this Agreement shall be held invalid, the remainder
of the Agreement shall not be affected thereby.
IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement as
of the day and year first above written.
COMVERSE TECHNOLOGY, INC.
By: /s/ Igal Nissim /s/ William F. Sorin
--------------- ---------------------
Igal Nissim William F. Sorin
Chief Financial Officer Secretary
On behalf of the Remuneration Committee of the Board of Directors:
/s/ John H. Friedman /s/ Sam Oolie /s/ Yechiam Yemini
-------------------- ------------- ------------------
John H. Friedman Sam Oolie Yechiam Yemini
THE EXECUTIVE:
/s/ Kobi Alexander
------------------
Kobi Alexander
-7-
<PAGE>
EXHIBIT 10(19)
<PAGE>
COMVERSE TECHNOLOGY, INC.
1994 STOCK OPTION PLAN
1. Purpose.
-------
The purpose of this 1994 Stock Option Plan (the "Plan") is to induce key
personnel, including employees, directors, independent contractors, and other
persons rendering valued services, to remain in the employ or service of
Comverse Technology, Inc. (the "Company"), and its present and future subsidiary
corporations (each of which is hereinafter referred to as a "Subsidiary"), to
attract new personnel and to encourage such personnel to secure or increase on
reasonable terms their stock ownership in the Company. The Board of Directors
of the Company (the "Board") believes that the granting of options (the
"Options") under the Plan will promote continuity of management and increased
incentive and personal interest in the welfare of the Company by those who are
or may become primarily responsible for shaping and carrying out the long range
plans of the Company and securing its continued growth and financial success.
Options granted hereunder are intended to be either (a) "incentive stock
options" (which term, when used herein, shall have the meaning ascribed thereto
by the provisions of Section 422(b) of the Internal Revenue Code of 1986, as
amended (the "Code")) or (b) options which are not incentive stock options or
(c) a combination thereof, as determined by the Committee (the "Committee")
(referred to in Section 5 hereof) at the time of the grant thereof.
2. Effective Date of the Plan.
--------------------------
The Plan became effective on September 16, 1994, by resolution of the Board,
subject to ratification of the Plan by the vote of the holders of a majority of
the outstanding shares of the common stock, $0.10 par value, of the Company (the
"Common Stock") present in person or by proxy at the 1994 Annual Meeting of
Shareholders of the Company.
3. Stock Subject to Plan.
---------------------
950,000 of the authorized but unissued shares of the Common Stock are hereby
reserved for issue upon the exercise of Options; provided, however, that the
number of shares so reserved may from time to time be reduced to the extent that
a corresponding number of issued and outstanding shares of the Common Stock are
purchased by the Company and set aside for issue upon the exercise of Options.
If any Options expire or terminate for any reason without having been exercised
in full, the unpurchased shares subject thereto shall again be available for the
purposes of the Plan.
4. Administration.
--------------
The Plan shall be administered by the Committee referred to in Section 5 hereof.
If a Committee shall not be so established, the Board shall perform the duties
and functions ascribed herein to the Committee. Subject to the express
provisions of the Plan, the Committee shall have complete authority, in its
discretion, to interpret the Plan, to prescribe, amend and rescind rules and
regulations relating to it, to determine the terms and provisions of the
respective option agreements (which need not be identical), to determine the
individuals (the "Participants") to whom and the times and the prices at which
Options shall be granted, to establish the option periods, the number of shares
of the Common Stock to be subject to each Option, whether each Option shall be
exercisable immediately or in installments and, if in installments, the time and
size thereof, whether each Option shall be an incentive stock option
<PAGE>
or an Option which is not an incentive stock option, and to make all other
determinations necessary or advisable for the administration of the Plan. In
making such determinations, the Committee may take into account the nature of
the services rendered by the respective Participants, their present and
potential contributions to the success of the Company and the Subsidiaries and
such other factors as the Committee, in its discretion, shall deem relevant. The
Committee's determination on all of the matters referred to in this Section 4
shall be conclusive.
5. Committee.
---------
The Committee shall consist of at least three individuals who may, but need not,
be members of the Board and all of whom shall be "disinterested persons" within
the meaning of Rule 16b-3(c)(2)(i) promulgated under the Securities Exchange Act
of 1934, as amended. The Committee shall be appointed by the Board, which may
at any time and from time to time remove any member of the Committee, with or
without cause, appoint additional members of the Committee and fill vacancies,
however caused, in the Committee. A majority of the members of the Committee
shall constitute a quorum. All determinations of the Committee shall be made by
a majority of its members. Any decision or determination of the Committee
reduced to writing and signed by all of the members of the Committee shall be
fully as effective as if it had been made at a meeting duly called and held.
6. Eligibility.
-----------
A. An Option which is an incentive stock option may be granted only to key
employees of the Company or a Subsidiary.
B. An Option which is not an incentive stock option may be granted only to key
employees of the Company or a Subsidiary, independent contractors hired by the
Company or a Subsidiary and, upon the terms and subject to the conditions set
forth in paragraph C of this Section, members of the Board who are not employees
of the Company or a Subsidiary.
C. Each director of the Company who is not an employee of the Company or any
Subsidiary, who does not receive compensation from the Company or any Subsidiary
in any capacity other than as a director of the Company and whose membership on
the Board is not attributable to any contract between the Company and such
director or any other entity with which such director is affiliated, shall
receive in each fiscal year of the Company Options to purchase 6,000 shares of
Common Stock having an option price per share equal to the fair market value of
a share of Common Stock determined (in accordance with Paragraph C of Section 7)
as of the date two business days after the publication of the audited year-end
financial statements of the Company for the immediately preceding fiscal year,
such Options to be forfeited to the extent of 1,200 shares per meeting in the
event that such director, during the year of grant, fails to attend, in the
aggregate, at least five meetings of the Board and any committees of the Board
of which such director is a member; provided, however, that during the
continuation of the Company's 1987 Stock Option Plan, as amended, options
granted thereunder shall be deemed to be granted under the Plan for the purposes
of this Section 6.
7. Option Prices.
-------------
A. The initial per share option price of any Option which is an incentive stock
option shall not be less than the fair market value of a share of the Common
Stock on the date of grant; provided, however, that, in the case of a
Participant who owns more than 10% of the total combined voting power of the
Common Stock at the time an incentive stock option is granted to him, the
initial per share option price shall not be less than 110% of the fair market
value of the Common Stock.
-2-
<PAGE>
B. The initial per share option price of any Option which is not an incentive
stock option shall not be less than $0.10; provided, that the initial per share
option price of any Option granted to a member of the Board who is not an
employee of the Company or any Subsidiary shall be fixed in accordance with
paragraph C of Section 6.
C. For the purposes hereof, the fair market value of a share of the Common
Stock on any date shall be equal to the closing sale price of a share of the
Common Stock as published by a national securities exchange on which the shares
of the Common Stock are traded on such date or, if there is no sale of the
Common Stock on such date, the average of the bid and asked prices on such
exchange at the close of trading on such date or, if the shares of the Common
Stock are not listed on a national securities exchange on such date, the closing
price in the over the counter market, or if the Common Stock is not traded on a
national securities exchange or the over the counter market, the fair market
value of a share of the Common Stock on such date as shall be determined in good
faith by the Committee in compliance with Section 422(b)(4) of the Code and the
applicable regulations promulgated thereunder.
8. Option Term.
-----------
Participants shall be granted Options for such term as the Committee shall
determine, not in excess of ten years from the date of the granting thereof;
provided, however, that (i) in the case of a Participant who owns more than 10%
of the total combined voting power of the Common Stock at the time an Option
which is an incentive stock option is granted to him, the term with respect to
such Option shall not be in excess of five years from the date of the granting
thereof and (ii) in the case of Options received by directors who are not
employees of the Company or any Subsidiary, the term shall be five years from
the last day of the fiscal year of the Company in respect of which the Option is
granted.
9. Limitation on Amount of Incentive Stock Options Granted.
-------------------------------------------------------
The aggregate fair market value (determined at the date of grant) of the shares
of the Common Stock for which any Participant may be granted incentive stock
options which are exercisable for the first time in any calendar year (whether
under the terms of the Plan or any other stock option plan of the Company) shall
not exceed $100,000. To the extent that any Option which is intended to be an
incentive stock option fails to satisfy the requirements of this Section, the
Option shall be treated as an Option which is not an incentive stock option.
This Section shall be applied by taking Options into account in the order in
which they are granted.
10. Exercise of Options.
-------------------
A. Options granted to employees of and consultants to the Company or any
Subisidary shall become exercisable at such times and in such installments as
the Committee shall determine at the time of the grant thereof. Options
received by directors other than employees of the Company or any Subsidiary
shall become exercisable on the first day of the fiscal year of the Company next
following the year in respect of which such Options are granted.
B. Except as hereinbefore otherwise set forth, an Option may be exercised
either in whole or in part at any time or from time to time.
C. An Option may be exercised only by a written notice of intent to exercise
such Option with respect to a specified number of shares of the Common Stock and
payment to the Company of the amount of the option price for the number of
shares of the Common Stock so
-3-
<PAGE>
specified; provided, however, that, if the Committee shall in its sole
discretion so determine at the time of the grant of any Option, all or any
portion of such payment may be made in kind by the delivery of shares of the
Common Stock having a fair market value, on the date of delivery (as determined
in the manner set forth in paragraph C of Section 7 hereof), equal to the
portion of the option price so paid.
11. Transferability.
---------------
No Option shall be assignable or transferable except by will and/or by the laws
of descent and distribution and, during the life of any Participant, each Option
granted to him may be exercised only by him.
12. Termination of Employment.
-------------------------
A. Except as otherwise determined by the Committee, in the event a Participant
leaves the employ or service of the Company and the Subsidiaries for any reason
other than death, retirement or disability (as such term is defined in section
22(e) of the Code), whether voluntarily or otherwise, each Option theretofore
granted to him which shall not have expired or otherwise been cancelled shall,
to the extent it is exercisable on the date of such termination of employment or
service and to the extent it shall not have theretofore been exercised or become
unexercisable, terminate upon the earlier to occur of (i) the expiration of a
period of 90 days after such termination of employment or service or (ii) the
date specified in said Option.
B. In the event a Participant's employment or service with the Company and the
Subsidiaries terminates by reason of his death, each Option theretofore granted
to him which shall not have expired or otherwise been cancelled shall, to the
extent it is exercisable on the date of such Participant's death and to the
extent it shall not have theretofore been exercised or become unexercisable,
terminate upon the earlier to occur of (i) the expiration of a period of one
year after such Participant's death or (ii) the date specified in said Option.
C. In the event a Participant's employment or service with the Company and the
Subsidiaries terminates by reason of his retirement, whether voluntarily or as
may be required by any pension plan, or by reason of his disability (as such
term is defined in section 22(e) of the Code), each Option theretofore granted
to him which shall not have expired or otherwise been cancelled shall become
immediately exercisable in full and shall, to the extent it shall not have
theretofore been exercised or become unexercisable, terminate upon the earlier
to occur of (i) the expiration of 90 days after the date of such Participant's
retirement or disability or (ii) the date specified in said Option.
D. The Committee or the Board may in its discretion extend the period during
which an Option held by any employee of or consultant to the Company or any
Subsidiary may be exercised to such period, not to exceed three years following
the termination of a Participant's employment or service with the Company or any
of the Subsidiaries, as the Committee or the Board may determine to be
appropriate in any particular instance.
13. Adjustment of Number of Shares.
------------------------------
A. In the event that a dividend shall be declared upon the Common Stock payable
in shares of the Common Stock, the number of shares of the Common Stock then
subject to any Option and the number of shares of the Common Stock reserved for
issuance in accordance with the provisions of the Plan but not yet covered by an
Option shall be adjusted by adding to each share the number of shares which
would be distributable thereon if such share had been outstanding on the date
fixed for determining the shareholders entitled to receive such stock dividend.
In the event that the outstanding shares of the Common Stock
-4-
<PAGE>
shall be changed into or exchanged for a different number or kind of shares of
stock or other securities of the Company or of another corporation, whether
through reorganization, recapitalization, stock split-up, combination of shares,
sale of assets, merger or consolidation, then, there shall be substituted for
each share of the Common Stock then subject to any Option and for each share of
the Common Stock reserved for issuance in accordance with the provisions of the
Plan but not yet covered by an Option, the number and kind of shares of stock or
other securities into which each outstanding share of the Common Stock shall be
so changed or for which each such share shall be exchanged; provided, however,
that, in the event of a merger or consolidation in which the Company is not the
surviving corporation or of a sale by the Company of all or substantially all of
its assets to a corporation not controlled by the Company (within the meaning of
section 1563(a)(1) of the Code) immediately prior to such transaction, the Board
determines, in its discretion, that such change or exchange cannot be effected
or would be inappropriate, then, each Option theretofore granted to a
Participant which shall not have expired or otherwise been cancelled shall
become immediately exercisable in full and shall terminate upon the later to
occur of (i) the expiration of 30 days following notice to the Participant by
the Company of such merger, consolidation or sale, or (ii) the date of such
merger, consolidation or sale.
B. In the event that there shall be any change, other than as specified in this
Section 13, in the number or kind of outstanding shares of the Common Stock, or
of any stock or other securities into which the Common Stock shall have been
changed, or for which it shall have been exchanged, then, if the Committee
shall, in its sole discretion, determine that such change equitably requires an
adjustment in the number or kind of shares then subject to any Option and the
number or kind of shares reserved for issuance in accordance with the provisions
of the Plan but not yet covered by an Option, such adjustment shall be made by
the Committee and shall be effective and binding for all purposes of the Plan
and of each stock option agreement entered into in accordance with the
provisions of the Plan.
C. In the case of any substitution or adjustment in accordance with the
provisions of this Section 13, the option price in each stock option agreement
for each share covered thereby prior to such substitution or adjustment shall be
the option price for all shares of stock or other securities which shall have
been substituted for such share or to which such share shall have been adjusted
in accordance with the provisions of this Section 13. No adjustment or
substitution provided for in this Section 13 shall require the Company to sell a
fractional share under any stock option agreement.
14. Purchase for Investment and Waivers.
-----------------------------------
A. Unless the shares to be issued upon the exercise of an Option by a
Participant shall be registered prior to the issuance thereof under the
Securities Act of 1933, as amended, such Participant shall, as a condition of
the Company's obligation to issue such shares, be required to give a
representation in writing that he is acquiring such shares for his own account
as an investment and not with a view to, or for sale in connection with, the
distribution of any thereof.
B. In the event of the death of a Participant, an additional condition of
exercising any Option shall be the delivery to the Company of such tax waivers
and other documents as the Committee shall determine.
C. Each Participant shall be required, as a condition of exercising any Option
which is not an incentive stock option, to make such arrangements with the
Company with respect to withholding as the Committee shall determine.
-5-
<PAGE>
15. Amendment of Plan.
-----------------
The Board may at any time make such modifications of the Plan as it shall deem
advisable; provided, however, that (i) the provisions hereof relating to the
receipt of Options by directors of the Company who are not employees of the
Company or any Subsidiary, the exercise price and terms and conditions of the
exercise thereof may not be amended more than once in any period of six months,
except as may be required to comply with changes in the Code or the Employee
Retirement Income Security Act of 1974, as amended, and (ii) the Board may not
without further approval of shareholders representing a majority of the voting
power present in person or by proxy at any special or annual meeting of
shareholders increase the number of shares of the Common Stock as to which
Options may be granted under the Plan (as adjusted in accordance with the
provisions of Section 13 hereof), or change the class of persons eligible to
participate in the Plan or change the manner of determining the option prices
which would result in a decrease in the option price, or extend the period
during which an Option may be granted or exercised. Except as otherwise
provided in Section 16 hereof, no termination or amendment of the Plan may,
without the consent of the Participant to whom any Option shall theretofore have
been granted, adversely affect the rights of such Participant under such Option.
16. Expiration and Termination of the Plan.
--------------------------------------
The Plan shall terminate on September 15, 2004 or at such earlier time as the
Board may determine. Options may be granted under the Plan at any time and from
time to time prior to its termination. Any Option outstanding under the Plan at
the time of the termination of the Plan shall remain in effect until such Option
shall have been exercised or shall have expired in accordance with its terms.
17. Options Granted in Connection with Acquisitions.
-----------------------------------------------
In the event that the Committee determines that, in connection with the
acquisition by the Company of another corporation which shall become a
Subsidiary of the Company (such corporation being hereinafter referred to as an
"Acquired Subsidiary"), Options may be granted hereunder to key employees of an
Acquired Subsidiary in exchange for then outstanding options to purchase
securities of the Acquired Subsidiary, such Options may be granted at such
option prices, may be exercisable immediately or at any time or times either in
whole or in part, may be granted without the requirement that the Participant
enter into an agreement with the Company that he will remain in the employ or
service of the Company or a Subsidiary for any required period of time and may
contain such other provisions not inconsistent with the Plan, or the requirement
set forth in Section 15 hereof that certain amendments to the Plan must be
approved by the shareholders of the Company, as the Committee, in its
discretion, shall deem appropriate at the time of the granting of such Options.
-6-
<PAGE>
EXHIBIT 21
<PAGE>
SUBSIDIARIES OF COMVERSE TECHNOLOGY, INC.
Jurisdiction of
Subsidiary Corporation Incorporation
Comverse Government Systems Corporation New York
Interactive Information Systems Corporation Delaware
Startel Corporation California
CTI Capital Corporation Delaware
Applied Silicon Inc. Canada Ontario, Canada
Efrat Future Technology Ltd. Israel
Telemesser Ltd. Israel
Comverse Investments Ltd. Israel
Comverse Technology (Europe) Ltd. United Kingdom
Comverse Asia Pacific Limited Hong Kong
Comverse Technology GmbH Germany
Comverse Technology Nordic Oy Finland
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ANNUAL
REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 54,203
<SECURITIES> 73,661
<RECEIVABLES> 24,970
<ALLOWANCES> (2,378)
<INVENTORY> 12,427
<CURRENT-ASSETS> 167,323
<PP&E> 13,789
<DEPRECIATION> (5,236)
<TOTAL-ASSETS> 187,677
<CURRENT-LIABILITIES> 22,664
<BONDS> 60,000
<COMMON> 1,990
0
0
<OTHER-SE> 100,582
<TOTAL-LIABILITY-AND-EQUITY> 187,677
<SALES> 92,688
<TOTAL-REVENUES> 98,843
<CGS> 39,314
<TOTAL-COSTS> 85,096
<OTHER-EXPENSES> 262
<LOSS-PROVISION> 981
<INTEREST-EXPENSE> 3,752
<INCOME-PRETAX> 13,485
<INCOME-TAX> 1,715
<INCOME-CONTINUING> 11,770
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,770
<EPS-PRIMARY> 0.57
<EPS-DILUTED> 0.57
</TABLE>
