<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-15502
COMVERSE TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 13-3238402
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
170 CROSSWAYS PARK DRIVE, WOODBURY, NY 11797
(Address of principal executive offices) (Zip Code)
(516) 677-7200
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of Common Stock, par value $0.10 per share,
outstanding as of September 9, 1998 was 44,271,763.
Page 1 of 19 Total Pages
(Exhibit Index Appears on Page 16)
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements.
<TABLE>
Page
----
<S> <C> <C>
1. Condensed Consolidated Balance Sheets as
of January 31, 1998 and July 31, 1998 3
2. Condensed Consolidated Statements of Income
for the Three and Six Month Periods Ended June 30, 1997
and July 31, 1998 4
3. Condensed Consolidated Statements of Cash
Flows for the Six Month Periods Ended
June 30, 1997 and July 31, 1998 5
4. Notes to Condensed Consolidated Financial
Statements 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 8
</TABLE>
Page 2 of 19 Total Pages
<PAGE>
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
- ------
JANUARY 31, JULY 31,
1998* 1998
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $180,855 $146,547
Bank time deposits and
short-term investments 96,047 394,221
Accounts receivable, net 79,693 178,765
Inventories 63,024 54,965
Prepaid expenses and
other current assets 29,515 37,550
-------- --------
TOTAL CURRENT ASSETS 449,134 812,048
PROPERTY AND EQUIPMENT, NET 53,413 52,916
INVESTMENTS 6,838 9,463
OTHER ASSETS 18,267 28,438
-------- --------
TOTAL ASSETS $527,652 $902,865
======== ========
</TABLE>
- ----------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
<TABLE>
<CAPTION>
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable and accrued expenses $125,941 $147,187
Bank loans 16,600 61
Advance payments from customers 22,680 34,068
Other current liabilities 3,120 3,709
-------- --------
TOTAL CURRENT LIABILITIES 168,341 185,025
CONVERTIBLE SUBORDINATED DEBENTURES 115,000 415,000
LIABILITY FOR SEVERANCE PAY 4,481 5,002
OTHER LIABILITIES 8,440 4,044
-------- --------
TOTAL LIABILITIES 296,262 609,071
STOCKHOLDERS' EQUITY:
Common Stock, $0.10 par value authorized 100,000,000 shares,
issued and outstanding, 43,390,797 and 44,180,019 shares 4,339 4,418
Additional paid-in capital 219,362 232,421
Retained earnings 6,559 56,595
Accumulated other comprehensive income 1,130 360
-------- --------
TOTAL STOCKHOLDERS' EQUITY 231,390 293,794
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $527,652 $902,865
======== ========
</TABLE>
*The Condensed Consolidated Balance Sheet as of January 31, 1998 has been
summarized from the Company's audited Consolidated Balance Sheet as of that
date.
The accompanying notes are an integral part of these financial statements.
Page 3 of 19 Total Pages
<PAGE>
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JULY 31, JUNE 30, JULY 31,
1997* 1998 1997* 1998
<S> <C> <C> <C> <C>
Sales $259,860 $327,885 $133,012 $167,404
Cost of sales 105,538 133,581 52,911 67,716
-------- -------- -------- --------
Gross margin 154,322 194,304 80,101 99,688
Operating expenses:
Research and development, net 45,859 62,586 23,207 31,932
Selling, general and administrative 62,468 72,162 33,367 36,838
Royalties and license fees 7,137 7,515 3,546 3,897
-------- -------- -------- --------
Income from operations 38,858 52,041 19,981 27,021
Interest and other income, net 2,693 3,454 1,811 1,835
-------- -------- -------- --------
Income before income tax provision 41,551 55,495 21,792 28,856
Income tax provision 9,007 5,458 4,742 2,789
-------- -------- -------- --------
Net income $ 32,544 $ 50,037 $ 17,050 $ 26,067
======== ======== ======== ========
Earnings per share:
Basic $0.78 $1.15 $0.41 $ 0.59
======== ======== ======== ========
Diluted $0.71 $1.06 $0.37 $ 0.55
======== ======== ======== ========
</TABLE>
* Restated for pooling of interests with Boston Technology, Inc.
The accompanying notes are an integral part of these financial statements.
Page 4 of 19 Total Pages
<PAGE>
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, JULY 31,
1997* 1998
<S> <C> <C>
Cash flows from operating activities:
Net cash from operations after adjustment
for non-cash items $ 53,521 $ 61,842
Changes in assets and liabilities:
Accounts receivable (24,891) (99,072)
Inventories (6,181) 8,059
Prepaid expenses and other current assets (15,281) (7,349)
Accounts payable and accrued expenses 13,035 21,246
Advance payments from customers 8,507 11,388
Liability for severance pay 432 521
Other 535 1,260
-------- ---------
Net cash provided by (used in) operating activities 29,677 (2,105)
Cash flows from investing activities:
Maturities and sales (purchase) of bank time deposits
and investments, net (62,456) (301,379)
Purchases of property and equipment (19,215) (11,243)
Increase in software development costs (3,066) (4,612)
Other 281 -
-------- ---------
Net cash used in investing activities (84,456) (317,234)
Cash flows from financing activities:
Net proceeds from issuance of debentures - 292,672
Net borrowings (payments) of bank loans and other debt 9,871 (20,779)
Proceeds from issuance of common stock 13,350 13,138
-------- ---------
Net cash provided by financing activities 23,221 285,031
Net decrease in cash and cash equivalents (31,558) (34,308)
Cash acquired in pooling of Enhanced
Communications Corporation 1,658 -
Cash and cash equivalents, beginning of period 210,756 180,855
-------- ---------
Cash and cash equivalents, end of period $180,856 $ 146,547
======== =========
</TABLE>
* Restated for pooling of interests with Boston Technology, Inc.
The accompanying notes are an integral part of these financial statements.
Page 5 of 19 Total Pages
<PAGE>
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION. The accompanying financial information should
be read in conjunction with the financial statements, including the notes
thereto, for the transition period ended January 31, 1998. The financial
information included herein is unaudited; however, such information reflects all
adjustments (consisting solely of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair statement of results for the
interim periods. The results of operations for the three month and six month
periods ended July 31, 1998 are not necessarily indicative of the results to be
expected for the full year.
On January 14, 1998, Comverse Technology, Inc., a New York corporation
("Comverse" and, together with its subsidiaries, the "Company"), consummated a
merger (the "Merger") with Boston Technology, Inc., a Delaware corporation
("Boston") in a transaction in which former shareholders of Boston received an
aggregate of 18,141,185 shares of Comverse's Common Stock, par value $0.10 per
share ("Common Stock"). The Merger has been accounted for as a pooling of
interests and, in connection with the Merger, the Company changed its fiscal
year from the calendar year to the year ending January 31, coinciding with the
fiscal year of Boston. This report presents the financial statements of the
Company, at and for the six month and three month periods ended July 31, 1998.
The financial information for the 1997 periods combine the financial information
of the Company for the three month and six month periods ended June 30, 1997
with the financial information of Boston for the three month and six month
periods ended July 31, 1997.
INVENTORIES. The composition of inventories at January 31, 1998 and
July 31, 1998 is as follows:
<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
1998 1998
(In thousands)
<S> <C> <C>
Raw materials $29,735 $26,652
Work in process 20,413 16,190
Finished goods 12,876 12,123
------- -------
$63,024 $54,965
======= =======
</TABLE>
RESEARCH AND DEVELOPMENT EXPENSES. The Company has historically
supported a portion of its research and development activities through
participation in government sponsored funding programs, which in general provide
reimbursement for a portion of research and development expenditures incurred
under project budgets that must be submitted for approval on an annual basis to
the applicable funding agencies. During the three month and six month periods
ended July 31, 1998, reimbursement from funding agencies amounted to $4,670,000
and $9,450,000, respectively. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Certain Trends and
Uncertainties."
Page 6 of 19 Total Pages
<PAGE>
EARNINGS PER SHARE. For the three month and six month periods ended
June 30, 1997 and July 31, 1998, the computation of basic earnings per share is
based on the weighted average number of outstanding common shares. Diluted
earnings per share further assumes the issuance of common shares for all
dilutive potential common shares outstanding. The assumed conversion of the
convertible subordinated debentures was antidilutive for the three month and six
month periods ended June 30, 1997 and July 31, 1998. The shares used in the
computations are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JULY 31,
1997 1998 1997 1998
(In thousands)
<S> <C> <C> <C> <C>
Basic 41,618 43,666 41,847 43,842
Diluted 45,554 47,418 45,762 47,763
</TABLE>
COMPREHENSIVE INCOME. For the six month and three month periods
ended June 30, 1997 and July 31, 1998, total comprehensive income was
$36,434,000 and $21,511,000 and $49,266,000 and $24,614,000, respectively. The
elements of comprehensive income include net income, unrealized gains on
available for sale securities and foreign currency translation adjustments.
CONVERTIBLE SUBORDINATED DEBENTURES. During the quarter ended July
31, 1998, the Company issued $300,000,000 aggregate principal amount of its 4-
1/2% Convertible Subordinated Debentures due 2005 (the "Debentures"). The
Debentures are subordinated in right of payment to all indebtedness of the
Company designated as senior indebtedness; are convertible, at the option of the
holders, into shares of the Company's Common Stock at a conversion price of
$64.50 per share, subject to adjustment in specified circumstances; and are
subject to redemption at any time on or after July 10, 2001, in whole or in
part, at the option of the Company, at redemption prices (expressed as
percentages of the principal amount) of 101.8% if redeemed during the twelve-
month period beginning July 10, 2001, 100.9% if redeemed during the twelve-month
period beginning July 10, 2002, and 100.0% if redeemed thereafter.
Page 7 of 19 Total Pages
<PAGE>
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
RESULTS OF OPERATIONS.
Sales. Sales for the six month and three month periods ended July 31,
-----
1998 increased by approximately $68,025,000 (26%) and $34,392,000 (26%),
respectively, from the 1997 periods. The increases are attributable primarily
to a higher volume of sales of systems and parts in Europe.
Cost of Sales. Cost of sales for the six month and three month
-------------
periods ended July 31, 1998 increased by approximately $28,043,000 (27%) and
$14,805,000 (28%), respectively, from the corresponding periods in 1997. The
increases are attributable primarily to increases in sales. Gross margin
(expressed as a percentage of sales) for the six month and three month periods
ended July 31, 1998 decreased to approximately 59.3% and 59.5%, respectively,
from approximately 59.4% and 60.2%, respectively, in the corresponding 1997
periods.
Research and Development Expenses. Net research and development
---------------------------------
expenses for the six month and three month periods ended July 31, 1998 increased
by approximately $16,727,000 (36%) and $8,725,000 (38%), respectively, from the
corresponding periods in 1997 due to the overall growth of research and
development operations, the initiation of significant new research and
development projects, and increases in salaries and other costs associated with
research and development operations.
Selling, General and Administrative Expenses. Selling, general and
--------------------------------------------
administrative expenses for the six month and three month periods ended July 31,
1998 increased by approximately $9,694,000 (16%) and $3,471,000 (10%),
respectively, from the corresponding periods in 1997. Such increases were the
result of increased sales, marketing and administrative activities associated
with the overall growth of the Company's operations, and particularly with the
expansion of direct sales and marketing activities.
Royalties and License Fees. Royalties and license fees for the six
--------------------------
and three month periods ended July 31, 1998 increased by approximately $378,000
(5%) and $351,000 (10%), respectively, from the corresponding periods in 1997.
Income Tax Provision. Provision for income taxes for the six and three
--------------------
month periods ended July 31, 1998 decreased by approximately $3,549,000 (39%)
and $1,953,000 (41%), respectively, from the corresponding 1997 periods due to
increased sales from lower tax jurisdictions. The Company's overall effective
tax rate was approximately 22% in the six and three month periods ended June 30,
1997, respectively, and 10% in the six and three month periods ended July 31,
1998, respectively. The Company's overall rate of tax is reduced significantly
by the tax benefits associated with qualified activities of one of its
subsidiaries in Israel.
Page 8 of 19 Total Pages
<PAGE>
Net Income. Net income after taxes for the six month and three month
----------
periods ended July 31, 1998 increased by approximately $17,493,000 (54%) and
$9,017,000 (53%), respectively, from the 1997 periods, primarily as a result of
the factors described above. Net income after taxes as a percentage of sales
increased to approximately 15.3% and 15.6%, respectively, in the six and three
month periods ended July 31, 1998 from approximately 12.5% and 12.8%,
respectively, in the six and three month periods ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES. At July 31, 1998, the Company had
cash and cash equivalents of approximately $146,547,000, bank time deposits and
short-term investments of approximately $394,221,000 and working capital of
approximately $627,023,000. The Company believes that its existing working
capital, together with funds generated from operations, will be sufficient to
provide for its planned operations for the foreseeable future.
The Company regularly examines opportunities for strategic
acquisitions of other companies or lines of business and anticipates that it may
from time to time issue additional debt and/or equity securities either as
direct consideration for such acquisitions or to raise additional funds to be
used (in whole or in part) in payment for acquired securities or assets. The
issuance of such securities could be expected to have a dilutive impact on the
Company's shareholders, and there can be no assurance as to whether or when any
acquired business would contribute positive operating results commensurate with
the associated investment.
The Company's liquidity and capital resources have not been, and are
not anticipated to be, materially affected by restrictions pertaining to the
ability of its foreign subsidiaries to pay dividends or by withholding taxes
associated with any such dividend payments.
CERTAIN TRENDS AND UNCERTAINTIES. The Company has benefited from
the growth in its business and capital base over the past several years to make
significant new investment in its operations and infrastructure intended to
enhance its opportunities for future growth and profitability. The Company's
results of operations reflect the significant increase in its investment in
operations over the past three years. The Company intends to continue to make
significant investments in the growth of its business, and to examine
opportunities for additional growth through acquisitions and strategic
investments. The impact of these decisions on future profitability cannot be
predicted with assurance, and the Company's commitment to growth may increase
its vulnerability to unforeseen downturns in its markets, technology changes and
shifts in competitive conditions. However, the Company believes that
significant opportunities exist in the markets for each of its main product
lines, and that continued strong investment in its technical, product
development, marketing and sales capabilities will enhance its opportunities for
long term growth and profitability.
The Merger involves the integration of two companies that have
previously operated independently. The combination of two sizable technology-
based companies involves significant complexities, and no assurance can be
given that the combined Company will be able to integrate the operations of
Boston into the Company without encountering difficulties or experiencing the
Page 9 of 19 Total Pages
<PAGE>
loss of key Comverse or Boston personnel or that the benefits expected from such
integration will be realized. The integration of two companies across
geographically dispersed operations can create the risk of disruption in
operations of the combined company, and neither company's management has
substantial experience in managing such integration or the operations of an
entity the size of the combined Company. The Company does not expect to realize
cost savings in the near future as a result of the Merger, and no assurance can
be given that any savings can be achieved in future periods. Furthermore, there
can be no certainty that the Merger will not adversely affect the relationships
with key customers, key vendors, or distributors of either company. As a result
of its significantly greater concentration on a small number of large telephone
company customers, Boston's business has historically been considerably more
volatile than that of Comverse, and the operations of the combined Company are
likely to be less predictable and subject to greater risks from actions of
individual customers than the operations of Comverse in recent years.
The telecommunications industry is subject to rapid technological
change. The Company's revenue stream will depend on its ability to enhance its
existing products and to introduce new products on a timely and cost-effective
basis. This includes any customer-requested custom software enhancements
required in the normal course of product delivery and customer demands for the
technological convergence of the Company's products. The Company's products
involve sophisticated hardware and software technology that performs critical
functions to highly demanding standards. There can be no assurance that the
Company's current or future products will not develop operational problems,
which could have a material adverse effect on the Company. In addition, if the
Company were to delay the introduction of new products, or to delay the delivery
of specific custom software enhancements, the Company's operating results could
be adversely affected. The Company sells a majority of its products to
companies in the telecommunications industry. This industry is undergoing
significant change as a result of deregulation and privatization worldwide,
reducing restrictions on competition in the industry. Unforeseen changes in the
regulatory environment may have an impact on the Company's revenues and/or costs
in any given part of the world. The worldwide enhanced services systems
industry is already highly competitive and the Company expects competition to
intensify. The Company believes that existing competitors will continue to
present substantial competition, and that other companies, many with
considerably greater financial, marketing and sales resources than the Company,
may enter the enhanced services systems markets. The 1997 acquisition of Octel
Communications Corporation, a significant competitor of the Company, by Lucent
Technologies, Inc. may intensify the competitive environment in the industry,
and there can be no assurance that similar business combinations or industry
consolidation will not occur in the future.
The enhanced services platforms industry has experienced a continuing
evolution of product offerings and alternatives for delivery of services. These
trends have affected and may be expected to have a significant continuing
influence on conditions in the industry, although the impact on the industry
generally and on the Company's position in the industry cannot be predicted with
assurance. Significant changes in the industry make planning decisions more
difficult and increase the risk inherent in the planning process.
Page 10 of 19 Total Pages
<PAGE>
The market for telecommunications monitoring systems is also in a
period of significant transition. Budgetary constraints, uncertainties
resulting from the introduction of new technologies in the telecommunications
environment and shifts in the pattern of government expenditures resulting from
geopolitical events have increased uncertainties in the market, resulting in
certain instances in the attenuation of government procurement programs beyond
their originally expected performance periods and an increased incidence of
delay, cancellation or reduction of planned projects. The delay and
uncertainties surrounding the Communications Assistance for Law Enforcement Act
("CALEA") have had a significant negative impact on acquisition plans of law
enforcement agencies in North America engaged in monitoring activities.
Competitive conditions in this sector have also been affected by the increasing
use by certain potential government customers of their own internal development
resources rather than outside vendors to provide certain technical solutions. In
addition, a number of established government contractors, particularly
developers and integrators of technology products, have taken steps to redirect
their marketing strategies and product plans in reaction to cut-backs in their
traditional areas of focus, resulting in an increase in the number of
competitors and the range of products offered in response to particular requests
for proposals. The lack of predictability in the timing and scope of government
procurements have similarly made planning decisions more difficult and have
increased the associated risks.
The Company has historically derived a significant portion of its
sales and operating profit from contracts for large system installations with
major customers. Boston's operating results, in particular, have often been
characterized by volatility and lack of predictability, reflecting its
traditional customer concentration among major telecommunications services
providers such as the Regional Bell Operating Companies. The Company continues
to emphasize large capacity systems in its product development and marketing
strategies. Contracts for large installations typically involve a lengthy and
complex bidding and selection process, and the ability of the Company to obtain
particular contracts is inherently difficult to predict. The Company believes
that opportunities for large installations will continue to grow in both its
commercial and government markets, and intends to continue to expand its
research and development, manufacturing, sales and marketing and product support
capabilities in anticipation of such growth. However, the timing and scope of
these opportunities and the pricing and margins associated with any eventual
contract award are difficult to forecast, and may vary substantially from
transaction to transaction. The Company's future operating results may
accordingly exhibit a higher degree of volatility than the operating results of
other companies in its industries that have adopted different strategies, and
than the Company has experienced in prior periods. Although the Company is
actively pursuing a number of significant procurement opportunities in the
United States and internationally, both the timing of any eventual procurements
and the probability of the Company's receipt of significant contract awards are
uncertain. The degree of dependence by the Company on large orders, and the
investment required to enable the Company to perform such orders, without
assurance of continuing order flow from the same customers and predictability of
gross margins on any future orders, increase the risk associated with its
business.
The Company has significantly increased its expenditures in all areas
of its operations during recent periods, including the areas of research and
development and marketing and sales, and the Company plans to further increase
these expenditures in the foreseeable future. The
Page 11 of 19 Total Pages
<PAGE>
increase in research and development expenditures reflects the Company's
concentration on enhancing the range of features and capabilities of its
existing product lines and developing new generations of its products. The
Company believes that these efforts are essential for the continuing
competitiveness of its product offerings and for positioning itself to
participate in future growth opportunities in both the commercial and government
sectors. The increase in sales and marketing expenditures primarily results from
the Company's decision to expand its activities and direct presence in a growing
number of world markets. The Company's costs of operations have also been
affected by increases in the cost of its operations in Israel, resulting both
from general inflation and increases in the cost of attracting and retaining
qualified scientific, engineering and technical personnel in Israel, where the
demand for such personnel is growing rapidly with the expansion of technology-
based industries in that country. The increase in these costs in recent periods
has not been offset by proportional devaluation of the Israeli shekel against
the United States dollar, and accordingly has had a negative impact on the
Company's overall results of operations. Continuation of such trends may have a
material adverse effect on the Company's future results of operations.
A significant portion of the Company's research and development and
manufacturing operations are located in Israel and may be affected by
regulatory, political, military and economic conditions in that country. The
Company's historical operating results reflect substantial benefits from
programs sponsored by the Israeli government for the support of research and
development, as well as favorable tax rates available to "Approved Enterprises"
in Israel. The Israeli government has indicated its intention to reexamine
certain of its policies in these areas. Recently, the government acted to
increase, from between 2% and 3% of associated product sales to 3% of associated
product revenues (including service and other related revenues), the annual rate
of royalties to be applied to repayment of benefits under the conditional grant
program administered by the Office of the Chief Scientist of the Ministry of
Industry and Trade, a program in which the Company has regularly participated
and under which it continues to receive significant benefits through
reimbursement of qualified research and development expenditures. The Company's
repayment of amounts received under the program will be accelerated through
these higher royalty rates until repayment is completed. In addition,
permission from the government of Israel is required for the Company to
manufacture outside of Israel products resulting from research and development
activities funded under such programs, or to transfer outside of Israel related
technology rights, and in order to obtain such permission the Company may be
required to increase the royalties to the applicable funding agencies and/or
repay certain amounts received as reimbursement of research and development
costs. The Company expects to incur additional royalty expenses and/or
repayment obligations as a result of the Merger and the location of certain
manufacturing and research and development operations pertaining to its TRILOGUE
product line at its Boston facilities. The Israeli authorities have also
indicated that these research and development funding programs will be
significantly further reduced in the future, particularly for larger entities
such as the Company. The Israeli government has also shortened the period of
the tax moratorium applicable to "Approved Enterprises" from four years to two
years. Although this change has not affected the tax status of the Company's
projects that were eligible for the moratorium prior to 1997, it applies to the
subsequent "Approved Enterprises" of the Company. If further changes in the law
or government policies regarding those programs were to result in their
termination or adverse modification, or if the Company were to become unable to
participate
Page 12 of 19 Total Pages
<PAGE>
in or take advantage of those programs, the cost to the Company of its
operations in Israel would materially increase and there would be an adverse
effect on the results of the Company's operations as a whole. To the extent the
Company increases its activities outside Israel, which will result from the
Merger and possible future acquisitions, such increased activities will not be
eligible for programs sponsored by Israel. Most of the Company's research and
development and manufacturing operations attributable to Boston are expected to
continue to be located in the United States and thus will not be eligible for
the benefits of those programs. Accordingly, the effective cost to the Company
of its future research and development activities in particular, and its
operations in general, could significantly increase relative to that of
Comverse, historically.
The Company currently derives a significant portion of its total sales from
customers outside of the United States. International transactions involve
particular risks, including political decisions affecting tariffs and trade
conditions, rapid and unforeseen changes in economic conditions in individual
countries, turbulence in foreign currency and credit markets, and increased
costs resulting from lack of proximity to the customer. Volatility in
international currency exchange rates may have a significant impact on the
Company's operating results. The Company has, and anticipates that it will
continue to receive, significant contracts denominated in foreign (primarily
Western European and Japanese) currencies. As a result of the unpredictable
timing of purchase orders and payments under such contracts and other factors,
it is often not practicable for the Company to effectively hedge the risk of
significant changes in currency rates during the contract period. Since the
Company will hedge the exchange rate risks associated with long-term contracts
denominated in foreign currencies only to a limited extent, operating results
can be affected by the impact of currency fluctuations as well as the cost of
such hedging.
Prevailing economic conditions in the Far East and Southeast Asia have
significantly reduced the demand for the Company's systems in certain countries.
The Company cannot currently predict the effect on its business should regional
economic conditions fail to improve. Moreover, the Company's future operating
results and financial condition will be adversely affected should current
economic instability result in more widespread slowdown or recessionary
conditions in other major world markets, or in severe trade or currency
disruptions.
The Company has undertaken a comprehensive program to evaluate "Year 2000
compliance" of its products and systems. The Company considers a product to be
"Year 2000 compliant" if the product, when used properly and in conformity with
the product information provided by the Company, will accurately store, display,
process, provide and/or receive data from, into and between the twentieth and
twenty-first centuries, including leap year calculations, provided that all
other technology used in combination with the Company product properly exchanges
date data with the product.
Although the Company believes that its current products generally either
are, or upon the completion of current modification programs will be, Year 2000
compliant, no assurance can be given that its Year 2000 compliance efforts will
prove to be fully successful or that unanticipated costs and problems will not
be encountered in such efforts. In addition, the Company has determined that
older generations of certain of its products are not and cannot, without
unreasonable effort and expense, be made Year 2000 compliant. The costs
incurred to date
Pages 13 of 19 Total Pages
<PAGE>
related to the Company's Year 2000 compliance program have not been material.
The program is expected to continue through fiscal 1999 and thereafter, but is
not anticipated to have a material adverse effect on the Company's business or
financial condition.
The Company anticipates that widespread litigation may be brought in the
future against vendors of systems and components of systems that are unable to
properly manage data related to the Year 2000. The Company's agreements with
customers typically contain provisions designed to limit generally the Company's
liability for customer claims. It is possible, however, that these measures
will not provide protection from Year 2000 liability claims, as a result of
existing or future laws or unfavorable judicial decisions. Any such claims
could result in a material adverse affect on the Company's business, financial
condition and results of operations, including increased warranty costs,
customer satisfaction issues and potential legal damages.
The Company has initiated a comprehensive program to address Year 2000
readiness in its internal systems and with its customers and suppliers. The
Company's program has been designed to address its most critical internal
systems first and to gather information regarding the Year 2000 compliance of
products supplied to it and into which the Company's products are integrated.
Assessment and remediation are proceeding in tandem, and the Company intends to
have its critical internal systems in Year 2000 compliance by the end of the
second quarter of 1999. These activities are intended to encompass all major
categories of systems in use by the Company, including manufacturing,
engineering, sales, finance and human resources. The costs incurred to date
related to these programs have not been material.
The Company currently expects that the total cost of its Year 2000
readiness programs over the next fiscal year will not exceed an amount in the
range of $3,000,000 to $5,000,000. The total cost estimate does not include
potential costs related to any customer or other claims or the costs of internal
software or hardware replaced in the normal course of business. The total cost
estimate is based on the current assessment of the Company's Year 2000 readiness
needs and is subject to change as the projects proceed.
The Company is communicating with its significant suppliers and financial
institutions to determine the extent to which the Company is vulnerable to those
third parties' failure to remedy their own Year 2000 concerns, and has received
assurances of Year 2000 compliance from a number of those contacted. Most of
the suppliers under existing contracts with the Company are under no contractual
obligation to provide such information to the Company. While the Company
currently expects that the Year 2000 issue will not pose significant operational
problems, failure to fully identify all Year 2000 dependencies in the Company's
systems and in the systems of its suppliers, customers and financial
institutions could have material adverse consequences, including delays in the
delivery or sale of products. The Company has under consideration various
contingency plans which will be developed as needed to assure continuing
operations in the event such problems arise.
The trading price of the Company's shares may be affected by the factors
noted above as well as prevailing economic and financial trends and conditions
in the public securities markets. Share prices of companies in technology and
government contracting businesses, and particularly
Page 14 of 19 Total Pages
<PAGE>
smaller and medium-sized publicly traded companies such as the Company, tend to
exhibit a high degree of volatility. The Company's revenues and earnings may be
more volatile than those of Comverse historically as a result of the greater
concentration of Boston's business on a limited number of large customers.
Shortfalls in revenues or earnings from the levels anticipated by the public
markets could have an immediate and significant effect on the trading price of
the Company's shares in any given period. Such shortfalls may result from events
that are beyond the Company's immediate control, can be unpredictable and, since
a significant proportion of the Company's sales during each fiscal quarter tend
to occur in the latter stages of the quarter, may not be discernible until the
end of a financial reporting period. These factors contribute to the volatility
of the trading value of its shares regardless of the Company's long-term
prospects. The trading price of the Company's shares may also be affected by
developments, including reported financial results and fluctuations in trading
prices of the shares of other publicly-held companies in the telecommunications
equipment industry in general, and the enhanced services platform industry in
particular, which may not have any direct relationship with the Company's
business or prospects.
FORWARD-LOOKING STATEMENTS. From time to time, the Company makes forward-
looking statements. Forward-looking statements include financial projections,
statements of plans and objectives for future operations, statements of future
economic performance, and statements of assumptions relating thereto.
The Company may include forward-looking statements in its periodic reports
to the Securities and Exchange Commission on Forms 10-K, 10-Q, and 8-K, in its
annual report to shareholders, in its proxy statements, in its press releases,
in other written materials, and in statements made by employees to analysts,
investors, representatives of the media, and others.
By their very nature, forward-looking statements are subject to
uncertainties, both general and specific, and risks exist that predictions,
forecasts, projections and other forward-looking statements will not be
achieved. Actual results may differ materially due to a variety of factors,
including without limitation those discussed under "Certain Trends and
Uncertainties" and elsewhere in this report. Investors and others should
carefully consider these and other uncertainties and events, whether or not the
statements are described as forward-looking.
Forward-looking statements made by the Company are intended to apply only
at the time they are made, unless explicitly stated to the contrary. Moreover,
whether or not stated in connection with a forward-looking statement, the
Company undertakes no obligation to correct or update a forward-looking
statement should the Company later become aware that it is not likely to be
achieved. If the Company were in any particular instance to update or correct a
forward-looking statement, investors and others should not conclude that the
Company will make additional updates or corrections thereafter.
Page 15 of 19 Total Pages
<PAGE>
PART II
Other Information
-----------------
ITEM 6. Exhibits and Reports on Form 8-K.
--------------------------------
<TABLE>
<CAPTION>
(a) Exhibit Index.
-------------
<S> <C> <C>
Item
Number Exhibit Page
------ ------- ----
11. Statement re computation of
per share earnings. 18-19
27. Financial data schedule Filed electronically
(b) Reports on Form 8-K.
-------------------
</TABLE>
On July 2, 1998, the Company filed a Current Report on Form 8-K reporting
the issuance of the Debentures.
Page 16 of 19 Total Pages
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMVERSE TECHNOLOGY, INC.
Dated: September 11, 1998 /s/ Kobi Alexander
------------------
Kobi Alexander
President, Chairman of the Board
and Chief Executive Officer
Dated: September 11, 1998 /s/ Igal Nissim
---------------
Igal Nissim
Chief Financial Officer
Page 17 of 19 Pages
<PAGE>
EXHIBIT 11
COMVERSE TECHNOLOGY, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three months ended
JUNE 30, 1997* JULY 31, 1998
<S> <C> <C>
Basic earnings per share:
Net income $17,050 $26,067
======= =======
Weighted average number of outstanding common shares 41,847 43,842
======= =======
Basic earnings per share $ 0.41 $ 0.59
======= =======
Diluted earnings per share:
Net income $17,050 $26,067
======= =======
Weighted average number of outstanding common shares 41,847 43,842
Additional shares assuming exercise of stock options 3,915 3,921
------- -------
Weighted average number of outstanding common shares
assuming full dilution 45,762 47,763
======= =======
Diluted earnings per share $ 0.37 $ 0.55
======= =======
</TABLE>
* Restated for pooling of interests with Boston Technology, Inc.
Page 18 of 19 Total Pages
<PAGE>
EXHIBIT 11
COMVERSE TECHNOLOGY, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1997* JULY 31, 1998
<S> <C> <C>
Basic earnings per share:
Net income $32,544 $50,037
======= =======
Weighted average number of outstanding common shares 41,618 43,666
======= =======
Basic earnings per share $ 0.78 $ 1.15
======= =======
Diluted earnings per share:
Net income $32,544 $50,037
======= =======
Weighted average number of outstanding common shares 41,618 43,666
Additional shares assuming exercise of stock options 3,936 3,752
------- -------
Weighted average number of outstanding common shares
assuming full dilution 45,554 47,418
======= =======
Diluted earnings per share $ 0.71 $ 1.06
======= =======
</TABLE>
* Restated for pooling of interests with Boston Technology, Inc.
Page 19 of 19 Total Pages
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM * 10-Q FOR 7/31/98 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
*Identify the financial statement(s) to be referenced in the legend:
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> JAN-31-1999 DEC-31-1997
<PERIOD-START> FEB-01-1998 JAN-01-1997
<PERIOD-END> JUL-31-1998 JUN-30-1997 <F1>
<CASH> 146,547 180,856
<SECURITIES> 394,221 111,175
<RECEIVABLES> 178,765 137,674
<ALLOWANCES> 0 0
<INVENTORY> 54,965 56,721
<CURRENT-ASSETS> 812,048 522,515
<PP&E> 52,916 56,325
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 902,865 611,179
<CURRENT-LIABILITIES> 185,025 136,666
<BONDS> 415,000 115,000
0 0
0 0
<COMMON> 4,418 4,284
<OTHER-SE> 289,376 336,273
<TOTAL-LIABILITY-AND-EQUITY> 902,865 611,179
<SALES> 327,885 259,860
<TOTAL-REVENUES> 327,885 259,860
<CGS> 133,581 105,538
<TOTAL-COSTS> 133,581 105,538
<OTHER-EXPENSES> 142,263 115,464
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 55,495 41,551
<INCOME-TAX> 5,458 9,007
<INCOME-CONTINUING> 50,037 32,544
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 50,037 32,544
<EPS-PRIMARY> 1.15 0.78
<EPS-DILUTED> 1.06 0.71
<FN>
<F1> Six months ended June 30, 1997 is restated to reflect pooling of interests
with Boston Technology, Inc.
</FN>
</TABLE>
