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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, 1996
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, NEW YORK 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
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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:
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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 19, 1997 was approximately $955,805,620. The closing price
of the registrant's common stock on the NASDAQ National Market System on March
19, 1997 was $38.50 per share.
There were 24,826,120 shares of the registrant's common stock outstanding on
March 19, 1997.
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 1997 Annual Meeting
of Shareholders of the registrant or in an amendment to this report on Form
10K/A.
____________________________
TRILOGUE is a registered trademark and
TRILOGUE INfinity, GenLogue, AUDIODISK, ULTRA, UltraNet, SafeNet, Mentor,
Verify, Trade Shield and FaxNet are trademarks of the Company.
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PART I
ITEM 1. BUSINESS.
INTRODUCTION
Comverse Technology, Inc., a New York corporation ("Comverse" and, together
with its subsidiaries, the "Company"), designs, develops, manufactures, markets
and supports computer and telecommunications systems and software 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, call centers, financial institutions and
other public and commercial organizations worldwide.
The Company has developed three main product lines: the TRILOGUE family of
multimedia enhanced services platforms ("ESPs"), which enable wireless and
wireline telecommunications network operators to offer a range of advanced
revenue-generating services to their customers; the AUDIODISK family of multiple
channel, multimedia digital monitoring systems, which support the monitoring,
recording, surveillance, and information gathering and analysis activities of
law enforcement and intelligence agencies; and the ULTRA Series of digital
recording systems, which support the voice/fax/data recording and analysis
activities of a variety of organizations including call centers, financial
institutions, emergency (e.g. "911") service providers, correctional
institutions, and public safety (e.g. air traffic control) operations. The
Company's products incorporate advanced technologies in the areas of digital
signal processing, facsimile protocols, telephony interfaces, mass storage,
digital networking, multiprocessor computer architecture and real-time software
design.
The Company's TRILOGUE systems enable many simultaneous users to access a
broad range of enhanced services, such as call answering, voice and fax
messaging and information services, personal number and other "personal
assistant" services. 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 markets TRILOGUE systems throughout the world, with its own direct
sales force 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 130 wireline and wireless telephone network
operators in more than 50 countries have selected TRILOGUE to provide enhanced
telecommunications services.
The Company's AUDIODISK systems enable many simultaneous users to monitor,
record 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 analysis, management and retrieval
operations. The systems have been sold to law enforcement, military and
intelligence agencies that monitor and record communication channels for a
variety of purposes, such as surveillance in support of criminal investigations
and the collection and processing of
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information for intelligence analysis. 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.
The ULTRA product line is a family of digital recording systems, designed
to address the growing need for recording and playback operations in a variety
of public and private markets. The ULTRA Series comprises six products, each
designed to meet the specific needs of targeted market segments. Inbound and
outbound call centers, "911" emergency service providers, correctional
facilities, public health and safety organizations and financial institutions
use the ULTRA product line to record and process large volumes of audio, image
and data communications for a broad range of requirements.
To date, AUDIODISK and ULTRA systems have been sold to end-users in more
than 30 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 network ("IN") capabilities. 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 configurations support multiple user
workstations for monitoring up to 600 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. ULTRA configurations support up to 6,144
recording channels, with playback over the telephone, as well as over Local Area
Networks ("LANs"), Wide Area Networks ("WANs") and the Internet.
Through subsidiaries and affiliates, the Company is also involved in the
design and development of software for IN and advanced intelligent network
("AIN") architecture and services, the provision of computer design and
consulting services, primarily for government customers in Canada, the
development of technologies and products incorporating video compression and
networking, the design and development of systems for telephone answering
service bureaus, the operation of telemessaging service bureaus and capital
market activities for its own account and in partnership with a subsidiary of
Soros Fund Management LLC.
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During 1996, the Company derived sales of approximately $141,788,000 (72%
of total sales) from the TRILOGUE product line (and related products and
services), an increase of approximately $51,541,000 (57%) over the prior year,
and approximately $55,393,000 (28% of total sales) from the AUDIODISK and ULTRA
product lines (and related products and services), an increase of approximately
$8,491,000 (18%) over the prior year. At December 31, 1996, the Company had a
backlog of approximately $70,339,000, of which approximately $58,894,000 was
scheduled for delivery during 1997.
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.
THE COMPANY'S PRODUCTS
TRILOGUE PRODUCT FAMILY
OVERVIEW
The market for network-based enhanced services platforms ("ESPs") has grown
rapidly over the past several years. The Company believes that a number of
factors have contributed to this growth, including the heightened emphasis among
wireless and wireline telecommunications network operators on offering new
services for revenue-generation and competitive differentiation, the increasing
public awareness and acceptance of multimedia messaging services resulting from
the growing installed base of systems in the business community, the expanding
availability from the major telephone companies of call answering services, and
the growing use of wireless telephone services, which almost universally offer a
mailbox-based call answering service.
The Company's primary focus has been on supplying large-capacity, high
availability ESPs to SSP organizations, including fixed and wireless telephone
network operators and other telecommunications service organizations worldwide.
SSP organizations benefit from the ability to offer their customers a variety of
services provided by the TRILOGUE system, such as call answering, voice and fax
messaging and information services, personal number and other "personal
assistant" services on a subscription or pay-per-call basis. Through these
services, telephone operating companies benefit not only from service 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. Wireless telephone
service operators are almost universally adding voice mailboxes to their service
offerings, not only because of these benefits, but also because wireless
messaging services directly increase billable airtime, and increasingly, because
next-generation digital wireless personal communications services typically
incorporate call answering as an important service element. Voice and fax
information services increase the range of revenue producing value-added
services the network operators can provide to their business and residential
customers and also serve as a direct source of pay-per-call revenue to the
service providers.
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PRODUCT DESCRIPTION
TRILOGUE INfinity is a multimedia, multi-application ESP that enables
wireless and wireline network operators to offer a broad range of revenue-
generating services.
TRILOGUE is designed and packaged to meet the capacity, reliability,
maintainability and physical requirements of large telephone network operators.
TRILOGUE system architecture provides single-system 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.
Through its universal port capability, all the ports on any TRILOGUE system
can be configured to support voice storage and retrieval only, or to support
both voice and fax storage and retrieval. Storage capacity can be dynamically
allocated to voice or fax on a demand basis, with a fax capacity of
approximately 150 pages per voice hour.
The TRILOGUE INfinity architecture also incorporates components that are
compatible with the IN and AIN 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. TRILOGUE INfinity, when configured as an Intelligent
Peripheral/Service Node (IP/SN), enables customers to offer next-generation
IN/AIN-based services such as personal number, call screening/caller
introduction, single-key call return and voice activated dialing. The
incorporation of IN and AIN-related software into TRILOGUE also allows a
customer, which has not yet implemented IN infrastructure, to purchase a
Comverse ESP with the confidence that TRILOGUE contains a built-in migration
path to IN/AIN standards, should the network operator decide to implement IN/AIN
infrastructure in the future.
TRILOGUE incorporates proprietary and third-party software, and industry
standard and proprietary hardware, in an open system architecture. Most of the
software is written in the C and C++ languages, 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 IN 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.
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MULTI-APPLICATION ENHANCED SERVICES PLATFORM
Wireless and wireline telecommunications network operators increasingly
require an integrated multimedia, multi-application ESP, which reduces costs and
provides greater flexibility for service offerings. By combining many different
applications and service capabilities in a single system, a multi-application
ESP offers 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 for multiple services 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, saves money on spare parts and improves the network operator's
ability to offer a suite of enhanced services that work seamlessly with one
another.
TRILOGUE was conceived and designed specifically as a multimedia, multi-
application ESP. TRILOGUE provides seamless integration of call answering,
voice/fax/text messaging, voice/fax information applications and other
voice/fax/text automated personal assistant and personal communications
services, to provide users with the benefits of all these services in a single
telephone call. All TRILOGUE-supported services 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.
ENHANCED TELECOMMUNICATIONS SERVICES AVAILABLE THROUGH TRILOGUE
TRILOGUE systems support a variety of value-added enhanced
telecommunications services. The following is a partial list of services
available through TRILOGUE:
. CALL 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 invited 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 with attached comments, editing of
messages and delivery of messages at any future time designated by the sender.
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. 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
telephone. This 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 re-routed 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 available.
. VIRTUAL FAX (FAX MAILBOX)
Like a user of virtual telephone, a user of virtual fax has a published
personal fax 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
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mailing list features of the mailbox. Fax messages received in a mailbox can be
transferred to other mailboxes or to any fax machine for printing.
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.
. 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.
. 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 provides calling card access to the public telephone network.
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
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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, TRILOGUE allows alphanumeric text
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, or alternatively, whenever they receive E-Mail
messages designated "urgent," 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.
. PERSONAL NUMBER SERVICE
Personal number services can be offered to end-users in several different
forms, but all involve the concept of calling a person, rather than a place.
Personal number service is an IN-based "reachability" service -- the network,
through TRILOGUE, follows, or finds, the subscriber.
. CALLER INTRODUCTION/CALL SCREENING
Packaged either with a personal number service, or offered as a stand-alone
service, caller introduction gives subscribers control over the management and
disposition of incoming calls. With caller introduction, the subscriber hears
the name of the caller before deciding whether to accept the call, or divert the
call to a voice mailbox. This IN-based service is designed to be inoffensive to
callers, as the entire transaction sounds the same to the caller regardless of
whether the subscriber actually screened the call, or simply could not be
reached.
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. MOBILE ATTENDANT
Mobile attendant service is an IN-based service that allows wireless
network operators to offer a live attendant transfer feature to their call
answering service subscribers. This gives a caller the option of leaving a
message in the subscriber's personal mailbox, or touching "0" to transfer to a
live attendant for immediate, personal attention.
. SINGLE-KEY CALL RETURN
This IN-based service allows voice mail subscribers to reply to messages
with a single touch of the telephone keypad, even if the message originated from
a non-subscriber. Through this capability, an individual can review multiple
messages and return multiple calls, all in a single phone session.
. VOICE ACTIVATED DIALING/VOICE CONTROLLED MESSAGING
Using advanced speech recognition technology, TRILOGUE now supports
services through which users can initiate calls and navigate through voice/fax
messaging prompts and menus hands-free, using voice commands. This IN-based
service makes messaging services easier to use, and in the case of automobile-
based mobile telephone users, makes using the phone while driving safer.
MARKETS, SALES AND MARKETING
The Company markets TRILOGUE systems throughout the world, with its own
direct sales force located at offices in nine 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, and has
incorporated into TRILOGUE various capabilities that were specifically developed
for the international markets.
More than 130 fixed and wireless telephone network operators in more than
50 countries have selected TRILOGUE as their platform for messaging and other
enhanced services including, among others, Optus Vision and Telstra in
Australia; Microcell PCS in Canada; CTC in Chile; Helsinki Telephone Company and
Telecom Finland in Finland; Deutsche Telekom (DeTeMobil) in Germany; Hongkong
Telecom in Hong Kong; P.T. Telkom in Indonesia; Bezek and Pelephone in Israel;
Omnitel and Telecom Italia in Italy; BellSouth NZ in New Zealand; Netcom and
Telenor in Norway; Singapore Telecom in Singapore; Airtel in Spain; Comvik and
Europolitan in Sweden; AIS in Thailand; Energis in the United Kingdom; Aerial
PCS, American Personal Communications PCS, BellSouth (wireline and wireless
PCS), Pacific Bell and Powertel PCS in the United States; and several telephone
companies in India and the People's Republic of China. The objectives of the
Company 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.
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The Company provides its customers with SalesEdge, a program of 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 AND ULTRA PRODUCT FAMILIES
OVERVIEW
The AUDIODISK family of products consists of multiple channel, multimedia
digital monitoring systems, sold primarily to law enforcement and intelligence
agencies, which enable many users simultaneously to monitor, record 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 analysis, archival and retrieval operations.
AUDIODISK also enables a number of users to access the same recorded information
simultaneously for processing and analysis.
The ULTRA family of products consists of multiple channel, multimedia
digital recording systems, sold primarily to call centers, financial
institutions, emergency "911" service providers, correctional institutions, and
other organizations requiring communications recording, archiving, retrieval and
analysis.
Traditionally, analog tape recorders, alone or coupled with a variety of
other special purpose devices, have been utilized for communications monitoring,
recording 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 and ULTRA provide a number of
advantages over analog, tape recorder-based systems, including improvements in
capacity, reliability, accuracy, processing efficiency and archiving and
retrieval capabilities. AUDIODISK and ULTRA systems provide a transition from
multiple individual analog tape recorders to a multiple channel 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 and ULTRA
include immediate random access to large volumes of recorded information and the
ability concurrently to record and play back 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 monitoring and processing applications, such as law enforcement
and intelligence
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agencies, 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 alphanumeric data as the processed media. 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.
Similarly, organizations requiring the recording, archiving and analysis of
communications, such as inbound and outbound call centers, financial trading
operations, emergency services providers, correctional institutions and others,
have in the past used analog, reel-to-reel tape recorder-based equipment due to
the lack of a superior alternative. Recently, however, advances in the cost and
performance of digital technology have led to the development and availability
of digital recording systems, such as the Company's ULTRA Series. Digital
recording and processing technology offers several advantages over analog
equipment, including improvements in storage capacity and archive space
requirements, near-instant retrieval through random access technology, and
comprehensive database integration. Due to these and other advantages, a
transition is underway among users of call recording systems, in which analog
equipment is being replaced by digital technology as the preferred solution.
PRODUCT DESCRIPTIONS
The AUDIODISK product design is based on open system architecture and
client/server concepts. AUDIODISK operators utilize computer workstations to
access various servers across LANs and WANs. 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
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. 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 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 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 information quickly
and efficiently.
The ULTRA Series is based on open system architecture and client/server
concepts. The products consist of audio servers, database servers, open system
networking, and client workstations. ULTRA systems provide Computer-Telephony
Integration-based ("CTI"-based) recording, including integration with major
PBX/ACDs, predictive dialers and middleware products. For optimized
voice/fax/data integration, ULTRA stores recordings in a Structured Query
Language (SQL) multimedia relational database. The CTI connection allows the
customer to easily search calls through database queries. In addition,
selective recording is possible through time-driven schedules or event triggers.
ULTRA allows the customer to monitor and score call center agents for
performance evaluation, quality assurance, training and coaching. In addition
to the improvement of customer service, the system is used to enhance agents'
productivity and reduce unnecessary turnover.
ULTRA provides verification tools for organizations, such as telemarketing
and credit bureaus, to ensure accurate data entry. Campaigns can be verified
quickly, and additional cost savings are available through centralized
verification for distributed call centers.
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ULTRA systems support high volume of simultaneous playbacks over the
telephone or through LANs, WANs, and the Internet. Immediate access to
recordings is possible through advanced optical disk technology and jukeboxes.
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 several
models, offering capacity levels up to 600 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.
ULTRA is a multimedia digital recording and archival system, enabling the
synchronized capture and storage of voice, fax and screen-based information.
ULTRA is available in a wide range of capacity configurations, with a single
system providing recording for up to 6,144 channels simultaneously. Modular and
scaleable in design, ULTRA's rack mounted audio server modules support up to 96
channels, with each audio server capable of storing up to 3,200 hours of voice
communications. For expanded archival requirements, jukebox devices can be
employed. The ULTRA's jukebox capability increases the user's immediate playback
range by several orders of magnitude. Using disk array technology, the ULTRA's
storage subsystem can be configured to store tens-of-thousands of hours of
recordings on hard disks. This allows users to benefit from near-instant on-line
access to many months of recordings.
The ULTRA Series comprises six products, which can be offered alone, or in
certain combinations with other models:
UltraNet: Modular, CTI-based, client/server multimedia recording system
featuring comprehensive recording and high volume storage on tapes, optical
disks and jukeboxes.
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SafeNet: Compact and cost-effective recording for small applications, primarily
for public safety organizations and companies required to record certain
transactions by governmental order or regulation.
Mentor: Call center quality monitoring and enhanced productivity system
featuring CTI enabled voice recording and simultaneous screen capture. Mentor
automatically records random call samples from each agent according to pre-
defined criteria. Recorded transactions are typically used for quality control
and agent training and performance evaluation.
Verify: Automated data entry, transaction and phone call verification, used
primarily by call centers. Critical "closing" information from each call is
automatically recorded using interface links to the scripting system. Personnel
engaged in transaction verification can rapidly review transactions based on
telemarketing campaign, agent, customer ID, or call number.
Trade Shield: High volume financial trading floor recording system supporting
free seating and kiosk playbacks. All communication channels on the trading
turrets, telephones and "hoot-and-holler" lines are recorded and can be reviewed
in the event of a disputed transaction. Disputed trades can be easily and
quickly located and retrieved by turret-based traders or by audit personnel.
FaxNet: Centralized fax logging system for long-term archive of fax
communications. Recorded facsimiles can be retrieved and displayed on a
workstation screen or printed as hard copy.
MARKETS, SALES AND MARKETING
The Company markets AUDIODISK and ULTRA systems worldwide, directly to the
law enforcement, military and intelligence, call center, and other markets
through offices located in North America, Western Europe, Israel and the Far
East and, where appropriate, through agents, distributors and system
integrators.
The Company has dedicated substantial scientific and engineering resources
to the target markets for AUDIODISK and ULTRA, 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.
The Company's current target markets for AUDIODISK include law enforcement
and security and intelligence agencies. Target markets for the ULTRA Series
include call centers, public safety and emergency services organizations and
financial institutions.
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LAW ENFORCEMENT. Law enforcement agencies conduct large-scale
communication monitoring operations relating to criminal investigations and
prosecutions, including anti-terrorism activities. 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 (up to
600 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. The Company
currently offers its large AUDIODISK systems (up to 600 lines) for fixed site
intelligence processing facilities, and the AUDIODISK ruggedized version for
military and highly portable applications. 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.
INBOUND AND OUTBOUND CALL CENTERS. Call centers are using recording
technology for a variety of applications, including monitoring service quality,
training and coaching, data entry verification and dispute resolution. Mentor
and Verify, products of the ULTRA Series, are specifically designed to address
call center applications.
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 digital, computer-based systems for logging
applications enables the integration of logging activities with other computer
systems for improvements in response time and quality of service.
FINANCIAL SERVICES. Financial institutions worldwide, including banks,
mutual fund management firms and brokerage houses, conduct substantial portions
of their business over the telephone and through facsimile transmission. A
growing number of these institutions record voice and fax communications related
to financial and other transactions for archival and evidentiary purposes.
Digital logging systems such as ULTRA 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 products marketed to financial
services organizations provide, in addition to the optical disk medium, 8mm
digital tape with a storage capacity of over
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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. Additional markets for AUDIODISK and ULTRA products
include, among others, the military, courts and legislative bodies, correctional
institutions, air traffic control organizations, 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.
TECHNOLOGIES
The Company's research and development efforts focus primarily on the
design of very large, high throughput, high availability systems and digital
signal processing technologies 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, an ULTRA applications
group, and a core technologies group that serves the three applications groups.
Through Dale, Gesek, McWilliams & Sheridan, Inc. ("DGM&S"), a company acquired
by Comverse in 1995, the Company also possesses considerable technology and
expertise in the development of software products, solutions and applications
within the IN and AIN environment.
The Company 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
communications. Computer systems designed for signal processing applications,
such as the 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 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
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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
the communication with, 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 IN/AIN 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 LAN and WAN 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 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 more than 800 scientists, engineers
and technicians with broad experience in the areas of digital signal processing,
computer architecture, facsimile protocols, telephony, digital networking,
multi-processing, mass storage, and real-time software design. 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. The cost of such
efforts is affected to a considerable extent by the continued availability of
funding under such programs. Gross expenditures on research and development for
1994, 1995 and 1996 were approximately $18,117,000, $27,161,000 and $36,613,000
respectively, of which approximately
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$5,477,000, $7,735,000 and $9,172,000, 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", "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Certain Trends
and Uncertainties."
PATENTS AND INTELLECTUAL PROPERTY RIGHTS
The Company currently holds four United States patents, three of which
apply to the integration of voice and image (facsimile) technologies utilized by
the Company in certain of its products. The fourth patent applies to certain
potential applications of the Company's products for the emergency notification
and mobilization of many people. 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 certain 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 under such licenses and under other agreements entered into in
connection with research and development financing. The Company 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
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currently pays royalties on substantially all sales of TRILOGUE systems and on
certain sales of AUDIODISK, ULTRA and derivative products. The royalties vary in
amount based upon the revenues attributable to the various components of such
products. During 1994, 1995 and 1996, aggregate royalty payments amounted to
approximately $2,186,000, $2,419,000 and $4,365,000, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Certain Trends and Uncertainties."
INTERNATIONAL SALES
The Company's sales outside of North America have increased from
approximately $66,861,000 in 1994 to approximately $92,046,000 in 1995 and
$136,236,000 in 1996. 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Certain Trends and Uncertainties."
For additional financial information regarding foreign operations, see
Notes 14 and 16 of Notes to Consolidated Financial Statements appearing
elsewhere in this report.
BACKLOG
At December 31, 1996, the Company had a backlog of approximately
$70,339,000, compared with a backlog of approximately $50,200,000 at December
31, 1995, an increase of approximately $20,139,000. Approximately $58,894,000
of the backlog at December 31, 1996 was scheduled for delivery during 1997.
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 other
customers of the Company's products, 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.
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COMPETITION
The voice processing and ESP 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, Boston Technology,
Inc., Brite Voice Systems, Inc., Centigram Communications Corporation, Glenayre
Electronics, Inc., Octel Communications Corporation, Tecnomen Oy, Unisys
Corporation, and manufacturers of central office telecommunications equipment,
including Northern Telecom Limited and Telefonaktiebolaget LM Ericsson.
Competitors of the Company that manufacture other telecommunications equipment
may derive a competitive advantage in selling voice processing and ESPs 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 ESP features.
The Company believes that competition in the sale of voice processing ESPs
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 ESPs
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 ESPs 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 ESPs 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 and systems that have been offered in competition with
AUDIODISK include Applied Signal Technology, Inc., the E-Systems division of
Raytheon Corporation, 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
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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
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 with respect to 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 market in which ULTRA is sold is also highly competitive.
Primary competitors include Atis Assmann GmbH, Dictaphone Corporation, Kreutler
GmbH, Nice Systems Ltd., Racal Recorders Ltd., Seltronics Corp. and TEAC
America, Inc.
Many of the Company's present and potential competitors 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 to expanding its business.
In August of 1995, the Company acquired DGM&S, a privately-held Mt. Laurel,
New Jersey-based provider of telecommunications software products and solutions,
especially those oriented to IN and AIN architecture design and network
elements, Signaling System #7, and ISDN. The transaction was accounted for as a
pooling of interests, with 1,078,944 shares of Comverse common stock issued to
the prior shareholders of DGM&S.
DGM&S's telecommunications network operator customers include, among
others, BellSouth, GTE, MCI and Sprint. Comverse believes that DGM&S's IN/AIN
expertise is an
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important element in the continuing evolution of the TRILOGUE product line to
support an expanding range of IN/AIN-based services, enhancing the value and
range of applicability of the TRILOGUE product line, and furthering the
Company's ongoing efforts to differentiate TRILOGUE from competitive offerings.
Comverse has organized a wholly-owned subsidiary, CTI Capital Corp., in
support of its exploration of strategic acquisition and investment
opportunities. The Company seeks to identify and implement suitable strategic
investments, and engages in portfolio investment and capital market activities.
Recently, CTI Capital Corp., in partnership with a subsidiary of Soros Fund
Management LLC., organized a joint venture with initial committed capital of $30
million to invest primarily in early-stage technology ventures.
OPERATIONS IN ISRAEL
A substantial portion of the Company's research and development and
manufacturing operations are conducted at its wholly-owned subsidiary, Efrat
Future Technology Ltd. ("Efrat"), which is located in Israel and, accordingly,
may be affected by economic, political and military conditions in that country.
The Company's business is also somewhat 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 could 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 Israel in 1948, a state of hostility has
existed, varying in degree and intensity, between Israel and the Arab countries,
and Israel and countries doing business with Israel have been the subject of an
economic boycott by the Arab countries. In 1967, Israel commenced administering
the territories of the West Bank and the Gaza Strip and, since December 1987,
increased civil unrest has existed in these territories and resulted in acts of
violence in other parts of Israel. Although Israel has entered into various
agreements with Arab countries and the Palestine Liberation Organization, and
various declarations have been signed in connection with efforts to resolve some
of the regional problems, no prediction can be made as to whether a full
resolution of these problems can be achieved or as to the nature of any such
resolution. To date, these problems have not had a material adverse impact on
the financial condition or operations of the Company, although there can be no
assurance that continuation of these problems will not have such an impact in
the future.
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Israel is a member of the United Nations, the International Monetary Fund,
the International Bank for Reconstruction and Development, and the International
Finance Corporation, and is a signatory to the General Agreement on Tariffs and
Trade, which provides for reciprocal lowering of trade barriers among its
members. In addition, Israel has been granted preferences under the Generalized
System of Preferences from the United States, Australia, Canada, and Japan.
These preferences allow Israel to export the products covered by such programs
either duty-free or at reduced tariffs.
Israel and the European Union are parties to a Free Trade Agreement
pursuant to which, subject to rules of origin, Israel's industrial exports to
the European Union are exempt from customs duties and other non-tariff barriers
and import restrictions. Israel also has an agreement with the United States to
establish a Free Trade Area ("FTA") which is intended ultimately to eliminate
all tariff and certain non-tariff barriers on most trade between the two
countries. Under the FTA agreement, most products received immediate duty-free
status in 1985, and all tariffs have since been eliminated. In 1993, Israel
entered into an agreement with the European Free Trade Association ("EFTA"),
which includes Austria, Norway, Finland, Switzerland, Iceland and Liechtenstein,
that established a free-trade zone between Israel and EFTA nations exempting
manufactured goods and some agricultural goods and processed foods from customs
duties, while reducing duties on other goods. The end of the Cold War has also
enabled Israel to establish commercial and trade relations with a number of
nations, including Russia, China and the nations of Eastern Europe, with whom
Israel had not previously had such relations.
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 1992 through 1996, the annual rates of inflation were
approximately 9%, 11%, 14%, 8% and 11%, respectively. This inflation, and the
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 1992 through 1996 occurred at the annual rates of
approximately 21%, 8%, 1%, 4% and 9%, and accordingly has 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 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
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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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Certain Trends and
Uncertainties."
EMPLOYEES
At December 31, 1996, the Company employed 1,243 individuals, approximately
69% of whom are scientists, engineers and technicians 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 pay pre-determined sums to the
National Insurance Institute, which payment covers medical and other 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, and cash bonuses based on several
parameters, including the profitability of their respective business units.
ITEM 2. PROPERTIES.
As of December 31, 1996, the Company leased an aggregate of approximately
321,000 square feet of space for its operations worldwide, including
approximately 40,000 square feet in Woodbury, New York, approximately 206,000
square feet in Tel Aviv, Israel, approximately 31,000 square feet in Mt.
Laurel, New Jersey, approximately 23,000 square feet in Irvine, California, and
an aggregate of approximately 21,000 square feet at various other locations in
the United States, Israel, Western Europe, the Far East and Australia. The
aggregate base monthly rent for the facilities under lease at December 31, 1996
was approximately $327,000, and all of
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<PAGE>
such leases are subject to various pass-throughs and escalation adjustments. In
January 1997, the Company commenced occupancy of approximately 234,000 square
feet of newly-leased space in Tel Aviv, Israel to increase the capacity of its
Israeli operations. The new lease will have a term of seven and one-half years,
with an option to extend for an additional two and one-half years, and the right
to cancel after five years with the payment of $250,000, which sum decreases
over the next five years. The annual base rent for the new premises starts at
approximately $2,500,000.
The Company believes that its facilities are adequate for its current
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 1996 Annual Meeting of Shareholders, held on December 5,
1996, the shareholders of the Company reelected the incumbent Board of Directors
and acted to (i) approve the adoption of the Company's 1996 Stock Option Plan
and to reserve an aggregate of 1,000,000 shares of common stock for future
issuance thereunder, and (ii) ratify the appointment of Deloitte & Touche LLP as
the auditors for the Company's 1996 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>
1996 Stock Option Plan 15,123,379 5,175,824 65,711 173,667
Ratification of Auditors 20,494,910 13,595 30,076 --
</TABLE>
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
Comverse's common stock trades on the NASDAQ National Market System under
the symbol CMVT. The Company's initial public offering was completed in December
1986. The following table sets forth the range of closing prices of the common
stock as reported on NASDAQ from January 1, 1994 through March 19, 1997.
YEAR CALENDAR QUARTER LOW HIGH
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 $11 $14-5/8
Second Quarter $13-1/4 $18-1/4
Third Quarter $17-9/64 $23-3/8
Fourth Quarter $19-15/16 $25-11/16
1996 First Quarter $16-5/8 $25-1/8
Second Quarter $23-3/8 $30-1/2
Third Quarter $23-3/4 $41-3/8
Fourth Quarter $32-9/16 $38-1/8
1997 First Quarter
(through March $36-7/8 $46-3/8
19, 1997)
There were 1,679 holders of record of common stock at March 19, 1997. 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
25,000.
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."
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<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, 1996. 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. All financial information presented herein
for periods prior to the 1995 acquisition of DGM&S has been retroactively
adjusted to account for that transaction as a pooling of interests.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1992(1) 1993(1) 1994(1) 1995 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Sales $ 50,956 $ 81,388 $ 108,150 $137,149 $197,181
Interest and other income 948 3,203 6,162 8,747 10,130
---------- ---------- ---------- -------- --------
Total revenues 51,904 84,591 114,312 145,896 207,311
Costs and Expenses:
Research and development 7,265 12,187 18,117 27,161 36,613
Less reimbursements 3,030 4,026 5,477 7,735 9,172
---------- ---------- ---------- -------- --------
Net research and development 4,235 8,161 12,640 19,426 27,441
Cost of sales 23,950 35,125 47,715 59,297 84,319
Selling, general and administrative 15,497 23,468 33,681 41,388 53,347
Interest expense and other 474 1,057 3,947 4,406 7,063
Royalties and license fees 774 1,911 2,186 2,419 4,365
Total costs and expenses 45,045 70,105 100,431 126,789 176,500
Income before income tax provision and
extraordinary item 6,859 14,486 13,881 19,107 31,346
Income tax provision 1,787 1,021 1,783 2,057 3,358
Extraordinary item - utilization of net
operating loss carryforward 788 - - - -
---------- ---------- ---------- -------- --------
Net income $ 5,860 $ 13,465 $ 12,098 $ 17,050 $ 27,988
========== ========== ========== ======== =========
Primary earnings per common and
common equivalent share $ 0.36 $ 0.65 $ 0.55 $ 0.75 $ 1.16
========== ========== ========== ======== =========
Primary weighted average number of common
and common equivalent shares outstanding 16,449 20,756 21,868 22,602 26,447
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1992(2) 1993(2) 1994 1995 1996
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $ 24,354 $ 138,149 $ 141,344 $ 155,064 $ 292,249
Total assets 55,245 174,468 192,502 221,454 390,901
Long-term debt, including current portion 3,905 63,232 62,810 61,086 115,605
Stockholders' equity 32,576 91,608 101,613 121,766 212,058
</TABLE>
(1) Includes results for DGM&S for its fiscal year ended September 30.
(2) Includes amounts for DGM&S as of its fiscal year ended September 30.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
The Company has benefited from the growth in its business and capital
base over the past three years to make significant new investment in its
operations and infrastructure intended to enhance its opportunities for future
growth and profitability.
The Company's results of operations reflect the significant increase
in its investment in operations over the past three years. The Company has
increased gross expenditures for research and development from $18,117,000 in
1994 to $36,613,000 in 1996, adding new features and capabilities to its
existing product lines, introducing new products 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. Regional offices
for sales, marketing and support services have been opened in Australia, Canada,
Finland, Germany, Hong Kong, Singapore, Thailand and the United Kingdom, and the
Company has increased its direct sales activities throughout Europe, North
America and the Far East. Total revenues increased throughout the period, from
$114,312,000 in 1994 to $207,311,000 in 1996, and the Company's backlog at
December 31, 1996 stood at a record $70,339,000.
The Company intends to continue during 1997 to make significant
investments in the growth of its business, and to examine opportunities for
additional growth through acquisitions and strategic investments. The impact of
these decisions on future profitability cannot be predicted with assurance, and
the Company's commitment to growth may increase its vulnerability to unforeseen
downturns in its markets, technology changes and shifts in competitive
conditions. However, the Company believes that significant opportunities exist
in the markets for each of its main product lines, and that continued strong
investment in its technical, product development, marketing and sales
capabilities will enhance its opportunities for long-term growth and
profitability.
RESULTS OF OPERATIONS
COMPARISON OF 1995 AND 1996 OPERATIONS
Total Revenues. Total revenues increased from 1995 to 1996 by
approximately $61,415,000 (42%), reflecting an increase in TRILOGUE (and related
products and services) sales of $51,541,000 (57%), an increase in
AUDIODISK/ULTRA (and related products and services) sales of $8,491,000 (18%)
and an increase in interest and other income of $1,383,000 (16%). The increase
in interest and other income resulted primarily from increased interest and
dividend income, the investment of funds generated through the issuance of
convertible subordinated debentures in October 1996, and realized gains on sales
of short-term investments.
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<PAGE>
Cost of Sales. Cost of sales increased by approximately $25,022,000
(42%) from 1995 to 1996 primarily as a result of the increase in sales. Gross
margins increased from approximately 56.8% in 1995 to approximately 57.2% in
1996.
Research and Development Expenses. Gross research and development
expenses during 1996 increased by approximately $9,452,000 (35%) over 1995 due
to overall growth of research and development operations, the initiation of
significant new research and development projects and increases in salaries and
other costs associated with research and development operations in Israel. Net
research and development expenses, after reimbursement of approved expenditures
under government funding programs, increased by approximately $8,015,000 (41%).
The higher rate of growth of net research and development expense in comparison
with gross research and development expense is primarily a result of an increase
in the portion of research and development activities not benefiting from
reimbursement arrangements and a lower rate of reimbursement associated with
certain projects conducted under government funding programs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from 1995 to 1996 by approximately $11,959,000
(29%) and as a percentage of total revenues decreased from approximately 28% in
1995 to approximately 26% in 1996. The increased amount was 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.
Royalties and License Fees. Royalties and license fees increased from
1995 to 1996 by approximately $1,946,000 (80%) due primarily to growth in sales
of royalty-bearing products. Royalties and license fees as a percentage of
total sales increased from approximately 1.8% in 1995 to approximately 2.2% in
1996, reflecting an increase in the royalty rate payable to a funding agency
that became effective in 1996.
Income Tax Provision. Provision for income taxes increased from 1995
to 1996 by approximately $1,301,000 (63%), while the Company's overall effective
tax rate decreased from approximately 10.8% during 1995 to approximately 10.7%
in 1996. The Company's overall rate of tax is reduced significantly by the tax
benefits associated with qualified activities of one of its Israeli
subsidiaries, which is entitled to favorable income tax rates under a program of
the Israeli Government for "Approved Enterprise" investments in that country.
Net Income. Net income after taxes increased from approximately
$17,050,000 in 1995 to approximately $27,988,000 in 1996, an increase of
approximately $10,938,000 (64%), while net income after taxes as a percentage of
total revenues increased from approximately 11.7% in 1995 to approximately 13.5%
in 1996. The increases resulted primarily from the factors described above.
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<PAGE>
COMPARISON OF 1994 AND 1995 OPERATIONS
Total Revenues. Total revenues increased from 1994 to 1995 by
approximately $31,584,000 (28%), reflecting an increase in TRILOGUE (and related
products and services) sales of $17,817,000 (25%), an increase in AUDIODISK (and
related products and services) sales of $11,182,000 (31%) and an increase in
interest and other income of $2,585,000 (42%). The increase in interest and
other income resulted primarily from increased interest and dividend income and
realized gains on sales of short-term investments.
Cost of Sales. Cost of sales increased by approximately $11,582,000
(24%) from 1994 to 1995 primarily as a result of the increase in sales. Gross
margins increased from approximately 55.9% in 1994 to approximately 56.8% in
1995.
Research and Development Expenses. Gross research and development
expenses during 1995 increased by approximately $9,044,000 (50%) over 1994 due
to overall growth of research and development operations, the initiation of
significant new research and development projects and increases in salaries and
other costs associated with research and development operations in Israel. Net
research and development expenses, after reimbursement of approved expenditures
under government funding programs, increased by approximately $6,786,000 (54%).
The higher rate of growth of net research and development expense in comparison
with gross research and development expense is primarily a result of an increase
in the portion of research and development activities not benefiting from
reimbursement arrangements and a lower rate of reimbursement associated with
certain projects conducted under government funding programs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from 1994 to 1995 by approximately $7,707,000
(23%) and as a percentage of total revenues decreased from approximately 29% in
1994 to approximately 28% in 1995. The increased amount was 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.
Royalties and License Fees. Royalties and license fees increased from
1994 to 1995 by approximately $233,000 (11%) due to growth in sales of royalty-
bearing products. Royalties and license fees as a percentage of total sales
decreased from approximately 2.0% in 1994 to approximately 1.8% in 1995,
reflecting an increase in the proportion of total sales comprised of products
bearing lower rates of royalty or for which no royalties are due.
Income Tax Provision. Provision for income taxes increased from 1994
to 1995 by approximately $274,000 (15%), while the Company's overall effective
tax rate decreased from approximately 12.8% during 1994 to approximately 10.8%
in 1995. The Company's overall rate of tax is reduced significantly by the tax
benefits associated with qualified activities of one of its Israeli
subsidiaries, which is entitled to favorable income tax rates under a program of
the Israeli Government for "Approved Enterprise" investments in that country.
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<PAGE>
Net Income. Net income after taxes increased from approximately
$12,098,000 in 1994 to approximately $17,050,000 in 1995, an increase of
approximately $4,952,000 (41%), while net income after taxes as a percentage of
total revenues increased from approximately 10.6% in 1994 to approximately 11.7%
in 1995. The increases resulted primarily from the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had cash and cash equivalents of
approximately $196,724,000, bank time deposits of approximately $10,000,000,
short-term investments of approximately $39,464,000 and working capital of
approximately $292,249,000. The Company believes that its existing working
capital, together with funds generated from operations, will be sufficient to
provide for its planned operations for at least through December 31, 1997.
The Company's liquidity and capital resources have not been, and are
not anticipated to be, materially affected by restrictions pertaining to the
ability of its foreign subsidiaries to pay dividends or by withholding taxes
associated with any such dividend payments.
CERTAIN TRENDS AND UNCERTAINTIES
The Company has experienced rapid growth in recent periods, and
intends to continue to grow, both through internal expansion and acquisitions.
The Company regularly examines opportunities to acquire additional companies,
businesses, technologies or product lines. Although the Company's management
believes that acquisitions present potentially cost-effective opportunities for
growth, they also present significant financial, operational and legal risks to
the Company. In order to maintain and improve operating results, the Company's
management will be required to manage growth and expansion effectively. The
Company's failure to effectively manage growth, including growth resulting from
acquisitions, could have a material adverse effect on the Company's results of
operations and financial condition. The Company may from time to time issue
additional debt and/or equity securities either as direct consideration for
acquisitions or to raise additional funds to be used (in whole or in part) in
payment for acquired securities or assets. The issuance of such securities
could be expected to have a dilutive impact on the Company's shareholders, and
there can be no assurance as to whether or when any acquired business would
contribute positive operating results commensurate with the associated
investment.
The Company maintains a portion of its assets in a variety of
financial instruments, including government and corporate debt obligations,
commercial paper, bank time deposits, money-market accounts, common and
preferred stocks and mutual funds, both for purposes of cash management and, to
some extent, as strategic and portfolio investments. Such activities subject
the Company to the risks inherent in the capital markets generally, and to the
performance of other businesses over which its has no direct control. The
Company has made several investments in early-stage technology ventures and
expects to make additional similar investments, primarily in Israel and in the
United States. Such investments entail substantial risks due to factors such as
the limited operating histories of such ventures and the typical
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<PAGE>
illiquidity of their securities. While the Company does not regard its portfolio
and strategic investment activities as a primary element of its overall business
plan, it expects to continue to allocate some of its liquid assets, comprising a
portion of funds not required for working capital or acquisition plans, for
these purposes. Given the magnitude of the Company's liquid assets relative to
its overall size, the results of its operations in the future may, to a greater
degree than in the past, be affected by the results of the Company's capital
management and investment activities and the risks associated with those
activities.
The Company encounters strong competition in all of its markets, and such
competition may be expected to continue to intensify in the foreseeable future.
Such competition affects both the prices that the Company is able to obtain for
its products and the associated payment terms. Rapid growth and increased
competition throughout the telecommunications industry, and particularly the
increase in the number of new telecommunications services operators that have
been organized in recent periods to take advantage of emerging opportunities,
such as personal communication services licensees, have increased the
competitive pressure on equipment vendors, such as the Company, to provide
financing for customers and to extend the payment terms that it offers to
customers. This trend is likely to continue for the foreseeable future, and may
draw increasingly on the Company's financial resources and liquidity and
increase its exposure to uncollectable accounts.
The industries in which the Company is principally involved are highly
competitive and characterized by frequent technological and market changes. The
voice processing and enhanced services platform industry has experienced a
continuing evolution of product offerings and alternatives for delivery of
services. These trends have affected and may be expected to have a significant
continuing influence on conditions in the industry, although the impact on the
industry generally and on the Company's position in the industry cannot be
predicted with assurance. Significant changes in the industry make planning
decisions more difficult and increase the risk inherent in the planning process.
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 increasing use by certain potential
government customers of their own internal development resources rather than
outside vendors to provide certain technical solutions. In addition, a number of
established government contractors, particularly developers and integrators of
technology products, have taken steps to redirect their marketing strategies and
product plans in reaction to cut-backs in their traditional areas of focus,
resulting in an increase in the number of competitors and the range of products
offered in response to particular requests for proposals. The lack of
predictability in the timing and scope of government procurements have similarly
made planning decisions more difficult and have increased the associated risks.
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<PAGE>
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 systems in
its product development and marketing strategies. Contracts for large
installations typically involve a lengthy and complex bidding and selection
process, and the ability of the Company to obtain particular contracts is
inherently difficult to predict. The Company believes that opportunities for
large installations will continue to grow in both its commercial and government
markets, and intends to continue to expand its research and development,
manufacturing, sales and marketing and product support capabilities in
anticipation of such growth. However, the timing and scope of these
opportunities and the pricing and margins associated with any eventual contract
award are difficult to forecast, and may vary substantially from transaction to
transaction. The Company's future operating results may accordingly exhibit a
higher degree of volatility than the operating results of other companies in its
industries that have adopted different strategies, and than the Company has
experienced in prior periods. Although the Company is actively pursuing a
number of significant procurement opportunities in the United States and
internationally, both the timing of any eventual procurements and the
probability of the Company's receipt of significant contract awards are
uncertain. The degree of dependence by the Company on large orders, and the
investment required to enable the Company to perform such orders, without
assurance of continuing order flow from the same customers and predictability of
gross margins on any future orders, increase the risk associated with its
business.
The Company has significantly increased its expenditures in all areas
of its operations during recent periods, including the areas of research and
development and marketing and sales, and the Company plans to further increase
these expenditures in the foreseeable future. The increase in research and
development expenditures reflects the Company's concentration on enhancing the
range of features and capabilities of its existing product lines and developing
new generations of its products. The Company believes that these efforts are
essential for the continuing competitiveness of its product offerings and for
positioning itself to participate in future growth opportunities in both the
commercial and government sectors. The increase in sales and marketing
expenditures primarily results from the Company's decision to expand its
activities and direct presence in a number of world markets. The cost to the
Company of attracting and retaining qualified scientific, engineering and
technical personnel is increasing and may be expected to continue to increase as
the demand for such personnel is growing rapidly worldwide. In particular, the
Company's costs of operations have been affected by increases in the cost of its
operations in Israel, resulting both from general inflation and increases in
personnel costs reflecting the rapid 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 has had a negative impact on the Company's overall results of
operations.
A significant portion of the Company's research and development and
manufacturing operations are located in Israel and may be affected by
regulatory, political, military and economic conditions in that country. The
Company's historical operating results reflect
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<PAGE>
substantial benefits from programs sponsored by the Israeli government for the
support of research and development, as well as favorable tax rates available to
"Approved Enterprises" in Israel. The Israeli government has indicated its
intention to reexamine certain of its policies in these areas. It recently acted
to increase, from between 2% and 3% of associated product sales to between 3%
and 5% of associated product revenues (including service and other related
revenues), the annual rate of royalties to be applied to repayment of amounts
received as reimbursement of qualified research and development expenditures
under a program administered by the Office of the Chief Scientist of the
Ministry of Industry and Trade, in which the Company has regularly participated
and under which it continues to receive significant reimbursement. The Company's
repayment of amounts received under the program will be accelerated through
these higher royalty rates until repayment is completed. The Israeli authorities
have also indicated that this funding program may be reduced in the future, and
the Company anticipates that the percentage of its total research and
development expenditures reimbursed under this program, which has declined
significantly in recent years, will continue to decline in the future. See
"Business - Research and Development." The Israeli government has also recently
shortened the period of the tax moratorium applicable to "Approved Enterprises"
from four years to two years. Although this change does not affect the tax
status of any of the Company's current projects, it will apply to any future
"Approved Enterprises" of the Company. If further changes in the law or
government policies regarding those programs were to result in their termination
or adverse modification, or if the Company were to become unable to participate
in or take advantage of those programs, the cost to the Company of its
operations in Israel would materially increase and there would be an adverse
effect on the results of the Company's operations as a whole.
The Company currently derives a majority of its sales from customers
outside of the United States. International transactions involve particular
risks, including political decisions affecting tariffs and trade conditions,
rapid and unforeseen changes in economic conditions in individual countries,
turbulence in foreign currency and credit markets, and increased costs resulting
from lack of proximity to the customer. Volatility in international currency
exchange rates may have a significant impact on the Company's operating results,
either as a result of adverse changes in exchange rates or by the cost of
hedging the risk of such changes. The Company is not always able to hedge the
exchange rate risks associated with its contracts denominated in foreign
currencies, and in certain instances elects not to hedge such risks as a result
of cost and other factors.
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
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<PAGE>
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 computer and telecommunications
industries generally, and in the voice processing industry in particular, which
may not have any direct relationship with the Company's business or prospects.
FORWARD-LOOKING STATEMENTS
From time to time, the Company makes forward-looking statements.
Forward-looking statements include financial projections, statements of plans
and objectives for future operations, statements of future economic performance,
and statements of assumptions relating thereto.
The Company may include forward-looking statements in its periodic
reports to the Securities and Exchange Commission on Forms 10-K, 10-Q, and 8-K,
in its annual report to shareholders, in its proxy statements, in other written
materials, and in statements made by employees to analysts, investors,
representatives of the media, and others.
By their very nature, forward looking statements are subject to
uncertainties, both general and specific, and risks exist that predictions,
forecasts, projections and other forward-looking statements will not be
achieved. Actual results may differ materially due to a variety of factors,
including without limitation those discussed under "Certain Trends and
Uncertainties" and elsewhere in this report. Investors and others should
carefully consider these and other uncertainties and events, whether or not the
statements are described as forward-looking.
Forward-looking statements made by the Company are intended to apply
only at the time they are made, unless explicitly stated to the contrary.
Moreover, whether or not stated in connection with a forward-looking statement,
the Company undertakes no obligation to correct or update a forward-looking
statement should the Company later become aware that it is not likely to be
achieved. If the Company were in any particular instance to update or correct a
forward-looking statement, investors and others should not conclude that the
Company will make additional updates or corrections thereafter.
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.
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<PAGE>
PART III
The information required by Part III is omitted pursuant to instruction G(3).
-36-
<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.
---------------------------------------
(1) Financial Statements.
---------------------
Index to Consolidated Financial Statements F-1
Independent Auditors' Report F-2
Consolidated Balance Sheets -
December 31, 1995 and 1996 F-3
Consolidated Statements of Income -
Years ended December 31,
1994, 1995 and 1996 F-5
Consolidated Statements of Stockholders' Equity -
Years ended December 31,
1994, 1995 and 1996 F-6
Consolidated Statements of Cash Flows -
Years ended December 31,
1994, 1995 and 1996 F-7
Notes to Consolidated Financial Statements F-9
(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.
-37-
<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.
**** 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, 1994. Exhibit number shown is the Exhibit number of the document
as filed with such Annual Report.
-38-
<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.*
4 Indenture dated as of October 4, 1996 from Comverse
Technology, Inc. to The Chase Manhattan Bank, N.A.,
Trustee.**
4(F) Specimen 5-3/4% Convertible Subordinated Debenture due
2006.***
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.****
______________
* 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 Current Report on Form
8-K under the Securities Exchange Act of 1934 filed October 10, 1996. Exhibit
number shown is the Exhibit number of the document as filed with such Current
Report.
*** Included in Exhibit 4.
**** 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.
-39-
<PAGE>
Exhibit
Number Description
------- -----------
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.**
10(19) 1994 Stock Option Plan.**
10(20) 1995 Stock Option Plan.***
10(21) 1996 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.****
________________
* 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, 1994. 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, 1995. 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.
-40-
<PAGE>
Exhibit
Number Description
------- -----------
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.**
11. Statement of Computation of Earnings Per Share.
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.
________________
* 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.
-41-
<PAGE>
Exhibit
Number Description
------- -----------
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.
-------------------
The registrant filed a Current Report on Form 8-K on October 10, 1996
reporting under Item 5 thereof the issuance of its 5-3/4% Convertible
Subordinated Debentures due 2006.
-42-
<PAGE>
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
PAGE
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 F-3
Consolidated Statements of Income for the Years Ended December 31,
1994, 1995 and 1996 F-5
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1994, 1995 and 1996 F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994, 1995 and 1996 F-7
Notes to Consolidated Financial Statements F-9
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, 1995 and
1996, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1996. 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, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
New York, New York
February 5, 1997
F-2
<PAGE>
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
ASSETS 1995 1996
- ------ ---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 99,862 $196,724
Bank time deposits - 10,000
Short-term investments (Note 4) 23,070 39,464
Accounts receivable, net of allowance for doubtful accounts of
$2,621 and $3,984 43,009 63,540
Inventories (Note 5) 15,773 31,494
Prepaid expenses and other current assets 7,815 9,034
Deferred income tax benefits (Note 15) 721 721
-------- --------
TOTAL CURRENT ASSETS 190,250 350,977
-------- --------
LONG-TERM RECEIVABLES - Net of allowance for
doubtful accounts of $272 and $258 2,105 1,033
-------- --------
PROPERTY AND EQUIPMENT:
Fixtures and equipment 20,251 28,943
Transportation vehicles 2,211 3,237
Leasehold improvements 256 283
-------- --------
22,718 32,463
Less accumulated depreciation and amortization (10,887) (14,422)
-------- --------
11,831 18,041
-------- --------
INVESTMENTS 3,880 5,788
GOODWILL - Net of accumulated amortization of $758 and $481 1,106 308
SOFTWARE DEVELOPMENT COSTS - Net of accumulated amortization of
$6,024 and $9,103 8,756 10,143
OTHER INTANGIBLE ASSETS - Net of accumulated amortization of
$685 and $952 1,597 1,330
DEFERRED COSTS AND OTHER ASSETS - Net of
accumulated amortization of $398 and $78 1,929 3,281
-------- --------
17,268 20,850
-------- --------
TOTAL ASSETS $221,454 $390,901
======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1996
- ------------------------------------ ------- --------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses (Note 7) $27,230 $ 40,531
Bank loans (Note 8) 610 11,195
Advance payments from customers 4,988 6,400
Due to related parties (Note 11) 364 502
Other current liabilities 1,994 100
------- --------
TOTAL CURRENT LIABILITIES 35,186 58,728
CONVERTIBLE SUBORDINATED DEBENTURES (Note 9) 60,000 115,000
LIABILITY FOR SEVERANCE PAY (Note 10) 2,299 2,708
OTHER LIABILITIES (Note 15) 1,939 2,407
MINORITY INTEREST 264 -
------- --------
TOTAL LIABILITIES 99,688 178,843
------- --------
<CAPTION>
COMMITMENTS AND CONTINGENCIES (Note 17)
STOCKHOLDERS' EQUITY (Notes 9, 12, 13 and 17):
<S> <C> <C>
Preferred stock, $0.01 par value--authorized, 2,500,000 shares;
issued, none - -
Common stock, $0.10 par value -- authorized, 100,000,000 shares;
issued and outstanding, 21,362,598 and 24,741,228 shares 2,136 2,474
Additional paid-in capital 75,752 136,737
Cumulative translation adjustment (136) (56)
Unrealized gain on available-for-sale securities, net of tax 646 1,547
Retained earnings 43,368 71,356
------- -------
TOTAL STOCKHOLDERS' EQUITY 121,766 212,058
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $221,454 $390,901
======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
REVENUES:
Sales $108,150 $137,149 $197,181
Interest and other income 6,162 8,747 10,130
-------- -------- --------
TOTAL REVENUES 114,312 145,896 207,311
-------- -------- --------
COSTS AND EXPENSES:
Research and development (Note 3) 18,117 27,161 36,613
Less reimbursements (Note 3) 5,477 7,735 9,172
-------- -------- --------
Net research and development 12,640 19,426 27,441
Cost of sales 47,715 59,297 84,319
Selling, general and administrative (Note 17) 33,681 41,388 53,347
Interest expense and other 3,947 4,406 7,063
Royalties and license fees (Notes 3 and 17) 2,186 2,419 4,365
Minority interest in loss of consolidated
subsidiaries (52) (207) (260)
Equity in loss of affiliates 314 60 225
-------- -------- --------
TOTAL COSTS AND EXPENSES 100,431 126,789 176,500
-------- -------- --------
INCOME BEFORE GAIN ON ISSUANCE OF
SUBSIDIARY SHARES AND INCOME TAX PROVISION 13,881 19,107 30,811
GAIN ON ISSUANCE OF SUBSIDIARY SHARES - - 535
-------- -------- --------
INCOME BEFORE INCOME TAX 13,881 19,107 31,346
INCOME TAX PROVISION (Note 15) 1,783 2,057 3,358
-------- -------- --------
NET INCOME $ 12,098 $ 17,050 $ 27,988
======== ======== ========
EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE:
Primary $0.55 $0.75 $1.16
======== ======== ========
Fully diluted $0.55 $0.75 $1.15
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
------------------- ADDITIONAL CUMULATIVE UNREALIZED
NUMBER OF PAR PAID-IN TRANSLATION GAINS RETAINED
SHARES VALUE CAPITAL ADJUSTMENT (LOSSES) EARNINGS TOTAL
----------- ------- ---------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 20,893,405 $ 2,089 $ 72,949 $ (95) $ - $ 16,665 $91,608
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 13) 88,051 9 351 - - - 360
Translation adjustment - - - (23) - - (23)
Adjustment to conform fiscal
year of
pooled company (Note 6) - - - - - (2,445) (2,445)
Net income, year ended
December 31, 1994 - - - - - 12,098 12,098
---------- ------- -------- ----------- ------ ------- --------
BALANCE, DECEMBER 31, 1994 20,981,456 2,098 73,300 (118) 15 26,318 101,613
Unrealized gain on
available-for-sale
securities,
net of tax (Note 4) - - - - 631 - 631
Common stock issued in
connection with
exercise of stock options
(Note 13) 370,446 37 2,040 - - - 2,077
Common stock issued in
connection with acquisition
of additional interest in
majority-owned subsidiary 10,696 1 154 - - - 155
Tax benefit of disqualifying
dispositions of
incentive stock options
(Note 15) - - 258 - - - 258
Translation adjustment - - - (18) - - (18)
Net income, year ended
December 31, 1995 - - - - - 17,050 17,050
---------- ------- -------- ----------- ------ ------- --------
BALANCE, DECEMBER 31, 1995 21,362,598 2,136 75,752 (136) 646 43,368 121,766
Unrealized gain on
available-for-sale
securities,
net of tax (Note 4) - - - - 901 - 901
Common stock issued in
connection with
exercise of stock options
(Note 13) 276,362 27 1,490 - - - 1,517
Conversion of convertible
subordinated
debentures (Note 9) 3,096,768 310 58,335 - - - 58,645
Common stock issued in
connection with acquisition
of additional interest in
majority-owned subsidiary 5,500 1 148 - - - 149
Tax benefit of disqualifying
dispositions of
incentive stock options
(Note 15) - - 1,012 - - - 1,012
Translation adjustment - - - 80 - - 80
Net income, year ended
December 31, 1996 - - - - - 27,988 27,988
---------- ------- -------- ----------- ------ ------- --------
BALANCE, DECEMBER 31, 1996 24,741,228 $ 2,474 $136,737 $ (56) $1,547 $71,356 $212,058
========== ======= ======== =========== ====== ======= ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,1994, 1995 AND 1996
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 12,098 $ 17,050 $ 27,988
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and
amortization 4,846 5,874 7,132
Equity in loss of affiliate 314 60 225
Minority interest in loss of
consolidated subsidiary (52) (207) (260)
Changes in assets and
liabilities:
Accounts receivable (8,360) (18,828) (20,531)
Inventories (2,038) (3,346) (15,721)
Prepaid expenses and other current
assets (675) (3,811) (862)
Long-term receivables (1,192) (1,012) 1,072
Accounts payable and
accrued expenses 5,020 8,038 13,287
Advance payments from
customers (500) (399) 1,412
Liability for severance pay 434 947 409
Due to related parties 151 86 138
Other 1,476 2,248 (1,773)
-------- ----------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 11,522 6,700 12,516
-------- ----------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of bank time deposits and
investments (113,923) (18,848) (37,654)
Purchase of property and
equipment (4,840) (5,556) (9,745)
Capitalization of software development
costs (3,592) (4,697) (4,466)
Proceeds from maturities and
sales of bank time deposits
and short-term investments 30,805 82,454 11,862
Other (267) - -
-------- ----------- --------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (91,817) 53,353 (40,003)
-------- ----------- --------
</TABLE>
F-7
<PAGE>
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1994 1995 1996
--------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of debentures $ - $ - $111,899
Proceeds from issuance of common stock in connection with
exercise of stock options and warrants 360 2,077 1,665
Net proceeds from bank loans and other debt - - 10,785
Other (278) (1,493) -
-------- ------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 82 584 124,349
-------- ------- --------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (80,213) 60,637 96,862
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 119,438 39,225 99,862
-------- ------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 39,225 $99,862 $196,724
======== ======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for interest $ 3,417 $ 3,492 $ 3,138
======== ======= ========
Cash paid during the year for income taxes $ 1,190 $ 850 $ 2,882
======== ======= ========
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
- --------------------------------------------------------------------------------
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 telecommunica-tions systems and software
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 classifies all of its short-term
investments (including U.S. treasury bills) as available-for-sale, accounted for
at fair value, with resulting unrealized gains or losses reported as a separate
component of stockholders' equity, on a net-of-tax basis.
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 bank
time deposits, money market funds placed with major institutional banks and
financial institutions, and U.S. government obligations that have maturities of
one year or less. 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 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.
F-9
<PAGE>
INCOME TAXES - The Company accounts for its income taxes in accordance with
Statement of Financial Accounting Standards No. 109, which requires the asset
and liability method. Under this method, deferred tax assets and liabilities
are determined based on differences between financial reporting and tax bases of
assets and liabilities, and are measured using the enacted tax rates and laws
that are expected to be in effect when the differences are expected to reverse.
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. Revenues from a subsidiary engaged
in software development are recognized under the percentage of completion method
using actual costs incurred to total expected costs under the contract. 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 $3,592,000,
$4,697,000 and $4,466,000 were capitalized in 1994, 1995 and 1996, 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 $2,041,000, $2,453,000
and $3,079,000 in 1994, 1995 and 1996, 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 Telexis
Corporation (formerly Applied Silicon, Inc. Canada) ("Telexis"), a Canadian
corporation which designs, manufactures and markets a digital video compression
and transmission product for the security market and provides computer
consulting and development services primarily to government agencies in Canada.
Comverse owns approximately 75% of the outstanding shares of Telemesser. In
1995, Comverse increased its ownership of the outstanding shares of Telexis from
51% to 55%. In June 1996, Newbridge Networks Corporation, a Canadian
corporation, invested approximately $1,500,000 in Telexis, in exchange for newly
issued shares of Telexis. This resulted in a gain to the Company of
approximately $535,000. As a result of this transaction, the Company's equity
interest in Telexis decreased to 47.6%. Accordingly, the Company's investment
in Telexis is now carried on the equity method.
EQUITY IN AFFILIATES- Investments in affiliates are accounted for under the
equity method.
F-10
<PAGE>
FUNCTIONAL CURRENCY AND FOREIGN CURRENCY TRANSACTION GAINS AND LOSSES - The
United States dollar (the "dollar") is the functional currency of the major
portion of the Company's foreign operations. Most of the Company's sales, and
materials purchased for manufacturing, are denominated in or linked to the
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 dollar, the Company records
any necessary foreign currency translation adjustment, reflected in
stockholders' equity, at the end of each reporting period.
Net losses from foreign currency transactions, included in the consolidated
statements of income, approximated $3,000, $249,000 and $731,000 in 1994, 1995
and 1996, respectively.
The Company occasionally enters into foreign exchange forward contracts and
options on foreign currencies. 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. 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, 1996, there were outstanding forward
contracts to purchase approximately $9,250,000 and to sell approximately
$1,212,000 in Western European currencies. Deferred gains and losses from
hedging these commitments were not significant at December 31, 1996.
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 periods ranging from five to twelve years.
LONG-LIVED ASSETS - In accordance with Statement of Financial Accounting
Standards No. 121 ("FAS 121"), "Accounting for the Impairment of Long-Lived
Assets to be Disposed Of", the Company reviews for the impairment of long-lived
assets and certain identifiable intangibles whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Under FAS 121, an impairment loss would be recognized when
estimated future cash flows expected to result from the use of the asset and its
eventual disposition is less than its carrying amount. No such impairment
losses have been identified by the Company.
PERVASIVENESS OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
F-11
<PAGE>
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE - Primary and fully diluted
earnings per common and common equivalent share are determined by using the
weighted average number of shares of common stock and common stock equivalents
outstanding (using the treasury stock method) during each period. The
computation for 1996 further assumes the conversion of the Company's 5-1/4%
convertible subordinated debentures at the beginning of the year. The shares
used in the computations for the three years ended December 31, 1996 were as
follows:
1994 1995 1996
------ ------ ------
(IN THOUSANDS)
Primary 21,868 22,602 26,447
Fully diluted 21,868 22,709 26,572
RESTATEMENT FOR POOLING OF INTERESTS TRANSACTION - The consolidated financial
statements have been retroactively restated to include the financial statements
of Dale, Gesek, McWilliams & Sheridan, Inc. ("DGM&S") for all periods prior to
the consummation of the acquisition discussed in Note 6.
RECLASSIFICATIONS - Certain prior year amounts have been reclassified to conform
to the manner of presentation in the current year.
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
1994, 1995 and 1996, the Company's research and development activities included
projects partially funded by the Office of the Chief Scientist of the Ministry
of Industry and Trade of the State of Israel (the "OCS") and in 1994 included
projects partially funded by 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. The Company's research and
development activities also included projects partially 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 and by the Canadian government agency.
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 17). 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.
F-12
<PAGE>
4. SHORT-TERM INVESTMENTS
The Company classifies all of its short-term investments (including U.S.
treasury bills) as available-for-sale securities. The following is a summary of
available-for-sale securities as of December 31, 1996:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. treasury notes $ 347 $ 4 $ - $ 351
Corporate debt securities 12,493 5 - 12,498
U.S. government
agency bonds 746 2 - 748
------- ------ --------- -------
Total debt securities $13,586 $ 11 $ - $13,597
------- ------ --------- -------
Common stock 15,300 2,878 986 17,192
Mutual funds investing in
U.S. government and
agencies obligations 1,929 10 - 1,939
Preferred stock 6,431 349 44 6,736
------- ------ --------- -------
Total equity securities 23,660 3,237 1,030 25,867
------- ------ --------- -------
$37,246 $3,248 $1,030 $39,464
======= ====== ========= =======
</TABLE>
The following is a summary of available-for-sale securities as of December
31, 1995:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. treasury bills $ 4,990(1) $ 3 $ - $ 4,993
U.S. treasury notes 345 14 - 359
U.S. corporate bonds 100 - 3 97
------- ------ ---- -------
Total debt securities $ 5,435 $ 17 $ 3 $ 5,449
------- ------ ---- -------
Common stock 9,175 1,129 318 9,986
Mutual funds investing in
U.S. government and
agencies obligations 2,015 - - 2,015
Preferred stock 5,397 230 7 5,620
------- ------ ---- -------
Total equity securities 16,587 1,359 325 17,621
------- ------ ---- -------
$22,022 $1,376 $328 $23,070
======= ====== ==== =======
</TABLE>
(1) Amount includes $4,691,000 of cost plus $299,000 accretion of discount
included in interest and other income.
F-13
<PAGE>
During 1996, the gross realized gains on sales of securities totaled
approximately $1,922,000 and the gross realized losses totaled approximately
$1,338,000.
The amortized cost and estimated fair value of debt securities at December 31,
1996, by contractual maturity, are as follows:
ESTIMATED
COST FAIR VALUE
--------- ----------
(IN THOUSANDS)
Due in one year or less $12,543 $12,547
Due after one year through three years 993 999
Due after three years 50 51
------- -------
$13,586 $13,597
======= =======
5. INVENTORIES
Inventories consist of:
DECEMBER 31,
---------------------------
1995 1996
---- ----
(IN THOUSANDS)
Raw materials $10,364 $17,681
Work in process 2,638 7,853
Finished goods 2,771 5,960
------- -------
$31,494 $15,773
======= =======
6. BUSINESS ACQUISITIONS
On August 30, 1995, the Company acquired DGM&S, a corporation that develops
and markets telecommunications software products. To effect the acquisition,
the Company issued 1,078,944 shares of common stock for all of the outstanding
common stock of DGM&S. The acquisition has been accounted for as a pooling of
interests; therefore, prior financial statements and information have been
restated to include DGM&S, as if the companies had been combined for all periods
presented.
Prior to the acquisition, DGM&S prepared its financial statements with a
fiscal year ending September 30. In 1995, the combined companies reported on
the basis of Comverse's fiscal year, which ends on December 31. Accordingly,
the restated Statements of Income for 1994 include the results of DGM&S for the
year ended September 30, 1994. As a result, DGM&S's operations for the three
month period ended December 31, 1994 are not reflected in the Consolidated
Statements of Income or Cash Flows. DGM&S's operating results for the three
month period ended December 31, 1994, comprising total revenues and a net loss
of approximately $2,122,000 and $2,445,000, respectively, are reflected as an
adjustment to retained earnings.
F-14
<PAGE>
The table below sets forth the unaudited separate and combined results of
Comverse and DGM&S for 1994 and for the three month periods ended March 31,
1995, June 30, 1995 and September 30, 1995:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, JUNE 30, SEPTEMBER 30,
1994 1995 1995 1995
---- ---- ---- -------------
(IN THOUSANDS)
(UNAUDITED)
Total Revenues
- --------------
<S> <C> <C> <C> <C>
Comverse $ 98,843 $28,744 $31,918 $34,044
DGM&S 15,469 2,778 3,894 4,550
Less: Intercompany
eliminations - - - (269)
-------- ------- ------- -------------
$114,312 $31,522 $35,812 $38,325
======== ======= ======= =============
THREE MONTHS ENDED
MARCH 31, JUNE 30, SEPTEMBER 30,
1994 1995 1995 1995
----- -------- -------- -------------
(IN THOUSANDS)
(UNAUDITED)
Net Income
- ----------
Comverse $ 11,770 $ 3,517 $ 4,071 $ 4,418
DGM&S 328 (628) 205 310
Less: Intercompany
eliminations - - - (21)
-------- ------- ------- -------------
$ 12,098 $ 2,889 $ 4,276 $ 4,707
======== ======= ======= =============
</TABLE>
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of:
DECEMBER 31,
----------------
1995 1996
------- -------
(IN THOUSANDS)
Accounts payable $13,252 $19,929
Accrued salaries 3,706 4,737
Accrued vacation 2,109 2,951
Accrued royalties 1,954 3,426
Other accrued expenses 6,209 9,488
------- -------
$27,230 $40,531
======= =======
F-15
<PAGE>
8. BANK LOANS
In December 1996, a subsidiary of Comverse borrowed $11,000,000 from a bank. The
loan has an interest rate of 6% and is repayable in December 1997. The loan is
secured by an $11,000,000 deposit with the bank.
9. CONVERTIBLE SUBORDINATED DEBENTURES
In October 1996, the Company issued $115,000,000 of convertible subordinated
debentures bearing interest at 5-3/4% per annum, payable semi-annually. The
debentures mature on October 1, 2006. The debentures are convertible into shares
of the Company's common stock at a conversion price of $45.75 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 October 12, 1999 to par on
October 1, 2001. 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.
In November 1993, the Company issued $60,000,000 of convertible subordinated
debentures bearing interest at 5-1/4% per annum, payable semi-annually. In
November 1996, the Company called these debentures for redemption. All of the
debentures were converted into 3,096,768 shares of common stock.
10. 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 its
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 1995,
with its chief executive officer to provide a severance payment upon the
termination of his employment with the Company. The severance payment will be
$77,000 per year of employment, which amount is increased by 10% per annum,
compounded for each year of employment commencing with December 1996.
Approximately $1,001,000 and $1,186,000 has been accrued as of December 31, 1995
and 1996, respectively, relating to this liability.
11. RELATED PARTIES
The Company paid or accrued legal fees to one of its directors in the
amounts of $309,000, $298,000 and $254,000 in 1994, 1995 and 1996, respectively.
F-16
<PAGE>
12. CAPITAL STOCK
At December 31, 1996, there were 2,513,661 shares of common stock reserved
for conversion of the 5-3/4% convertible subordinated debentures, and 3,392,847
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.
13. STOCK OPTIONS
EMPLOYEE STOCK OPTIONS - At December 31, 1996, 3,392,847 shares of common
stock were reserved for issuance upon the exercise of options then outstanding
and 1,025,913 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, 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 options were as follows:
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
---------- ---------- ----------
Outstanding at beginning of year 1,746,072 2,455,755 2,677,333
Granted during the year 1,176,000 650,200 1,086,526
Exercised during the year (85,649) (370,442) (276,362)
Canceled, terminated and expired (380,668) (58,180) (94,650)
--------- --------- ---------
Outstanding at end of year 2,455,755 2,677,333 3,392,847
========= ========= =========
At December 31, 1996, options to purchase an aggregate of 1,423,521 shares
were vested and currently exercisable under the option plans and options to
purchase an additional 1,969,326 shares vest at various dates extending through
the year 2001.
F-17
<PAGE>
Weighted average option exercise price information for the years 1994, 1995 and
1996 was as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Outstanding at beginning of year $ 5.85 $ 6.77 $ 8.48
Granted during the year 9.99 13.58 25.17
Exercised during the year 3.92 5.62 5.63
Canceled, terminated and expired 13.14 11.22 14.95
Exercisable at year end 3.50 5.19 6.46
</TABLE>
Significant option groups outstanding at December 31, 1996 and related weighted
average price and life information were as follows:
<TABLE>
<CAPTION>
Weighted Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- -------------- ---------------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.40 - $3.13 680,738 3.94 $ 2.42 680,738 $ 2.42
$ 5.00 - $9.25 62,533 5.61 7.21 62,533 7.21
$10.00 - $10.00 982,750 7.73 10.00 616,500 10.00
$10.20 - $18.38 762,299 8.40 14.60 48,750 13.25
$18.50 - $33.25 904,527 9.53 26.57 15,000 18.50
------- ------ ---------- -------- ------
3,392,847 7.56 $13.88 1,423,521 $ 6.46
========== ======= ====== ========== ======
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and selected interpretations in accounting for its
option plans. Accordingly, as all options have been granted at exercise prices
equal to fair market value on the date of grant, no compensation expense has
been recognized by the Company in connection with its stock-based compensation
plans. Had compensation cost for the Company's stock option plans been
determined based upon the fair value at the grant date for awards under these
plans consistent with the methodology prescribed under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation", the
Company's net income and earnings per share would have been reduced by
approximately $1,067,000 and $2,676,000 or $.04 and $.09 per share in 1995 and
1996, respectively. The weighted average fair value of the options granted
during 1995 and 1996 is estimated at $8.40 and $13.66 on the date of grant
(using the Black-Scholes option pricing model) with the following weighted
average assumptions for 1995 and 1996, respectively: volatility of 67% and
55%, risk-free interest rate of 6.8% and 6.1%, and an expected life of 5 years
in 1995 and 1996.
OPTIONS ON SUBSIDIARY SHARES - Comverse has granted to its chief executive
officer, under the terms of his employment agreement, options to acquire 7.5% of
the equity of Comverse's subsidiaries, other than Efrat Future Technology, Ltd.
("Efrat"). In addition, Comverse has granted to certain other 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 in the aggregate between 2.4%
to 23.6% 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
F-18
<PAGE>
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 as determined by a committee of the Board of Directors.
Upon the exercise, in whole or in part, of any option, Comverse will receive an
irrevocable proxy to vote the 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.
14. FOREIGN OPERATIONS
Condensed net assets, exclusive of intercompany balances, applicable to all
foreign operations, principally located in Israel, included in the consolidated
balance sheets, are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1996
------- --------
(IN THOUSANDS)
<S> <C> <C>
Current assets $56,526 $ 85,841
Property and equipment, net 8,396 13,548
Software development costs, net 7,599 9,394
Other assets 271 80
------- --------
Total assets 72,792 108,863
------- --------
Current liabilities 22,378 32,323
Other liabilities 2,428 2,258
------- --------
Total liabilities 24,806 34,581
------- --------
Net assets $47,986 $ 74,282
======= ========
</TABLE>
Condensed operating information, exclusive of intercompany transactions,
applicable to all foreign operations, principally located in Israel, included in
the consolidated statements of income, is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1994 1995 1996
------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Total revenues $42,661 $72,843 $ 95,766
Costs and expenses 40,546 71,430 112,056
------- ------- --------
Operating income (loss) $ 2,115 $ 1,413 $(16,290)
======= ======= ========
</TABLE>
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 1996 were profitable
when intercompany transactions are included.
F-19
<PAGE>
15. INCOME TAXES
The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31,
------------------------
1994 1995 1996
(IN THOUSANDS)
Current:
Federal $ 667 $ 529 $1,544
State 340 272 560
Foreign 720 1,022 1,950
------ ------ ------
1,727 1,823 4,054
------ ------ ------
Deferred (benefit):
Federal - 25 (621)
State 12 (12) (97)
Foreign 44 221 22
------ ------ ------
56 234 (696)
------ ------ ------
$1,783 $2,057 $3,358
====== ====== ======
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,
--------------------------
1994 1995 1996
-------- ------- -------
<S> <C> <C> <C>
U.S. Federal statutory rate 35% 35% 35%
Consolidated worldwide income
in excess of U.S. income (36) (31) (30)
Foreign income taxes 6 7 6
Other 8 - -
---- ---- ----
Company's effective tax rate 13% 11% 11%
==== ==== ====
</TABLE>
F-20
<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, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liability:
Expenses deductible for tax purposes and
not for financial reporting purposes $ 904 $ 890
Unrealized gain on available-for-sale securities 384 674
------- -------
$ 1,288 $ 1,564
======= =======
Deferred tax asset:
Reserves not currently deductible $ 2,494 $ 3,024
Tax loss carryforwards 2,217 1,091
Inventory capitalization 138 197
Other 337 223
------- -------
5,186 4,535
Less: valuation allowance (4,465) (3,814)
------- -------
Total deferred tax asset $ 721 $ 721
======= =======
</TABLE>
At December 31, 1996, the Company had net operating loss carryforwards for
U.S. income tax purposes resulting from employees' exercise of stock options of
approximately $1,460,000 expiring in various periods through 2010. Utilization
of such net operating loss carryforwards will increase Additional Paid-in
Capital.
At December 31, 1996, Startel Corporation ("Startel"), a wholly-owned
subsidiary of Comverse, had net operating loss carryforwards of approximately
$1,490,000 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 $188,000 per year of Startel's
net operating loss carryforwards by Section 382 of the Internal Revenue Code.
The Company utilized approximately $188,000 of such accumulated net operating
loss carryforwards in 1996, which reduced goodwill by approximately $65,000.
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.
16. 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 and software for multimedia communications and
information processing applications.
F-21
<PAGE>
Sales by geographic regions, as a percentage of total sales, for the years ended
December 31, 1994, 1995 and 1996 were as follows:
<TABLE>
<CAPTION>
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
United States 27% 29% 28%
Canada 11% 4% 3%
Europe 26% 31% 39%
Far East/Australia 21% 24% 21%
Latin America 8% 2% 1%
Israel 5% 9% 7%
Africa 2% 1% 1%
---- ---- ----
Total 100% 100% 100%
==== ==== ====
</TABLE>
17. COMMITMENTS AND CONTINGENCIES
LEASES - The Company leases office, manufacturing, and warehouse space under
non-cancelable operating leases. Rent expense for all leased premises
approximated $2,562,000, $3,014,000 and $3,511,000 in 1994, 1995, and 1996,
respectively.
As of December 31, 1996, the annual minimum rent obligations of the Company
were approximately as follows:
AMOUNT
--------------
(IN THOUSANDS)
1997 $ 5,365
1998 5,322
1999 5,099
2000 4,469
2001 and thereafter 3,566
-------
$23,821
=======
EMPLOYMENT AGREEMENTS - The Company is obligated under employment contracts
with its chief executive officer to provide salary, bonuses, and fringe benefits
through June 30, 2000. Minimum salary payments under the contracts currently
amount to $350,000 per year and aggregate $1,100,000 through June 30, 2000. 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
severance payment equal to $77,000 for each year of his previous and current
employment with the Company, which is increased by the rate of 10% per annum
compounded for each year of employment commencing with December 1996 (See Note
10), 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
F-22
<PAGE>
during the three immediately preceding fiscal years, plus an amount equal to the
income tax resulting from such payment. The agreements also provide for the
executive to receive options entitling him to purchase 7-1/2% of the equity of
Comverse's subsidiaries, other than Efrat, at prices equal to the higher of book
value of the underlying shares at the date of option 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 as determined by the Board of Directors. See Note 13.
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
the 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.
INVESTMENTS - In January 1997, wholly-owned subsidiaries of Comverse and
Quantum Industrial Holdings Ltd. organized a new company, the primary focus of
which is investment in high technology ventures related to Israel. Each
participant committed $15,000,000 to the capital of the new company for use as
suitable investment opportunities are identified. Quantum Industrial Holdings
Ltd. is the principal direct investment vehicle of the Quantum Group, a group of
investment funds managed by Soros Fund Management LLC.
GUARANTIES - The Company has obtained bank guaranties primarily for
performance of certain obligations under contracts with customers. These
guaranties, which aggregated approximately $14,200,000 at December 31, 1996,
are to be released by the Company's performance of specified contract
milestones, which are scheduled to be completed primarily during 1997.
LITIGATION - The Company is subject to certain legal actions arising in the
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.
F-23
<PAGE>
18. 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. 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.
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------------- -------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------- ---------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Liabilities:
Convertible subordinated
debentures $60,000 $69,000 $115,000 $119,456
Off-balance sheet financial instruments:
Foreign exchange forward contracts
used for hedging purposes $ - $ (66) $ - $ 64
</TABLE>
CASH AND CASH EQUIVALENTS, BANK TIME DEPOSITS, SHORT-TERM INVESTMENTS, ACCOUNTS
RECEIVABLE, LONG-TERM RECEIVABLES, INVESTMENTS, 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, 1996. 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-24
<PAGE>
19. QUARTERLY INFORMATION (UNAUDITED)
The following table shows selected results of operations for each of the
quarters during 1995 and 1996.
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
1995 1995 1995 1995 1996 1996 1996 1996
-------- ------- -------- ------- -------- ------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $29,383 $33,627 $36,116 $38,023 $40,410 $46,629 $51,892 $58,250
Interest and Other Income 2,139 2,185 2,209 2,214 1,786 2,078 2,216 4,050
------- ------- ------- ------- ------- ------- ------- -------
Total Revenues $31,522 $35,812 $38,325 $40,237 $42,196 $48,707 $54,108 $62,300
======= ======= ======= ======= ======= ======= ======= =======
Gross profit $16,462 $19,334 $20,451 $21,605 $23,058 $26,615 $29,782 $33,407
Net income $ 2,889 $ 4,276 $ 4,707 $ 5,178 $ 5,507 $ 6,851 $ 7,235 $ 8,395
======= ======= ======= ======= ======= ======= ======= =======
Primary earnings per common
and common equivalent share $ 0.13 $ 0.19 $ 0.21 $ 0.23 $ 0.24 $ 0.29 $ 0.31 $ 0.33
======= ======= ======= ======= ======= ======= ======= =======
Fully-diluted earnings per
common and common
equivalent share $ 0.13 $ 0.19 $ 0.21 $ 0.23 $ 0.24 $ 0.29 $ 0.30 $ 0.33
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
The difference between income per share 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-25
<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 25, 1997
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 25, 1997
- -------------------------------------
Kobi Alexander, President,
Chairman of the Board and
Chief Executive Officer; Director
S / Igal Nissim March 25, 1997
- -------------------------------------
Igal Nissim, Chief Financial Officer
S / Zvi Alexander March 25, 1997
- -------------------------------------
Zvi Alexander, Director
S / Sam Oolie March 25, 1997
- -------------------------------------
Sam Oolie, Director
S / John H. Friedman March 25, 1997
- -------------------------------------
John H. Friedman, Director
S / William F. Sorin March 25, 1997
- -------------------------------------
William F. Sorin, Director
S / Yechiam Yemini March 25, 1997
- -------------------------------------
Yechiam Yemini, Director
<PAGE>
EXHIBIT 10(21)
COMVERSE TECHNOLOGY, INC.
1996 STOCK OPTION PLAN
1. Purpose.
-------
The purpose of this 1996 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 October 31, 1996, 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 1996 Annual Meeting of
Shareholders of the Company.
3. Stock Subject to Plan.
---------------------
1,000,000 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 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.
<PAGE>
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 previously-adopted Stock Option Plans, 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.
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.
-2-
<PAGE>
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 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.
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
Subsidiary 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 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
canceled 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 canceled shall, to
the extent it is exercisable on the date of such Participant's death and to the
extent it shall not
-3-
<PAGE>
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 canceled 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 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 canceled 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.
-----------------------------------
-4-
<PAGE>
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.
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 October 31, 2006 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.
-5-
<PAGE>
EXHIBIT 11
COMVERSE TECHNOLOGY, INC.
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995 1996
---- ----
<S> <C> <C>
Primary earnings per share:
Net income $17,050 $27,988
Interest expense on 5-1/4% Convertible Subordinated
Debentures, net of tax /(1)/ - 2,586
------- -------
If-converted earnings $17,050 $30,574
======= =======
Weighted average number of outstanding common shares 21,122 21,931
Additional shares assuming exercise of stock options 1,480 1,815
Additional shares assuming conversion of
5-1/4% Convertible Subordinated Debentures
at beginning of year - 2,701
------- -------
Weighted average number of outstanding common
and common equivalent shares 22,602 26,447
======= =======
Primary earnings per share $ 0.75 $ 1.16
======= =======
<CAPTION>
Fully diluted earnings per share:
<S> <C> <C>
Net income $17,050 $27,988
Interest expense on 5-1/4% Convertible Subordinated
Debentures, net of tax /(1)/ - 2,586
------- -------
If-converted earnings $17,050 $30,574
======== =======
Weighted average number of outstanding common shares 21,122 21,931
Additional shares assuming exercise of stock options 1,587 1,940
Additional shares assuming conversion of
5-1/4% Convertible Subordinated Debentures
at beginning of year - 2,701
-------- -------
Weighted average number of outstanding common shares
assuming full dilution 22,709 26,572
======= =======
Fully diluted earnings per share $ 0.75 $ 1.15
======= =======
</TABLE>
/(1)/ The assumed conversion of the 5-1/4% Convertible Subordinated Debentures
for the year ended December 31, 1995 was antidilutive.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF COMVERSE TECHNOLOGY, INC.
JURISDICTION OF
SUBSIDIARY CORPORATION INCORPORATION
Efrat Future Technology Ltd. Israel
Comverse Government Systems Corp. New York
CTI Capital Corp. Delaware
Startel Corporation California
Dale, Gesek, McWilliams & Sheridan, Inc. New Jersey
Telemesser Ltd. Israel
Comverse Technology (Europe) Ltd. United Kingdom
Comverse Asia Pacific Limited Hong Kong
Comverse Technology GmbH Germany
Comverse Technology Nordic Oy Finland
Comverse Australasia Pty. Ltd. Australia
Comverse Technology Singapore Pte Ltd. Singapore
Netology Ltd. Israel
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
10-K FOR 12/31/96 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-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 196,724
<SECURITIES> 49,464
<RECEIVABLES> 67,524
<ALLOWANCES> 3,984
<INVENTORY> 31,494
<CURRENT-ASSETS> 350,977
<PP&E> 32,463
<DEPRECIATION> 14,422
<TOTAL-ASSETS> 390,901
<CURRENT-LIABILITIES> 58,728
<BONDS> 115,000
<COMMON> 2,474
0
0
<OTHER-SE> 209,584
<TOTAL-LIABILITY-AND-EQUITY> 390,901
<SALES> 197,181
<TOTAL-REVENUES> 207,311
<CGS> 84,319
<TOTAL-COSTS> 176,500
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,063
<INCOME-PRETAX> 31,346
<INCOME-TAX> 3,358
<INCOME-CONTINUING> 27,988
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,988
<EPS-PRIMARY> 1.16
<EPS-DILUTED> 1.15
</TABLE>
