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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, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-15502
COMVERSE TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 13-3238402
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
170 CROSSWAYS PARK DRIVE, WOODBURY, NY 11797
(Address of principal executive offices) (Zip Code)
(516) 677-7200
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of Common Stock, par
value $0.10 per share, outstanding as
of September 10, 1999 was 71,277,851.
Page 1 of 19 Total Pages
(Exhibit Index Appears on Page 16)
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements.
Page
----
1. Condensed Consolidated Balance Sheets as
of January 31, 1999 and July 31, 1999 3
2. Condensed Consolidated Statements of Income
for the Three and Six Month Periods
Ended July 31, 1998 and 1999 4
3. Condensed Consolidated Statements of Cash
Flows for the Six Month Periods Ended
July 31, 1998 and 1999 5
4. Notes to Condensed Consolidated Financial
Statements 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 8
Page 2 of 19 Total Pages
<PAGE>
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
- ------
JANUARY 31, JULY 31,
1999* 1999
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 583,959 $ 303,444
Bank time deposits and short-term investments 73,658 409,384
Accounts receivable, net 192,317 224,834
Inventories 46,689 49,535
Prepaid expenses and other current assets 36,014 39,303
--------------- ---------------
TOTAL CURRENT ASSETS 932,637 1,026,500
PROPERTY AND EQUIPMENT, net 61,445 78,340
INVESTMENTS 7,902 9,723
OTHER ASSETS 29,409 33,023
--------------- ---------------
TOTAL ASSETS $ $ 1,031,393 $ 1,147,586
=============== ===============
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 184,870 $ 208,325
Other current liabilities 40,486 30,708
--------------- ---------------
TOTAL CURRENT LIABILITIES 225,356 239,033
CONVERTIBLE SUBORDINATED DEBENTURES 415,000 415,000
LIABILITY FOR SEVERANCE PAY 4,338 6,264
OTHER LIABILITIES 5,037 5,313
--------------- ---------------
TOTAL LIABILITIES 649,731 665,610
--------------- ---------------
STOCKHOLDERS' EQUITY:
Common stock, $0.10 par value -- authorized, 100,000,000 shares;
issued and outstanding, 68,736,936 and 70,722,029 shares 6,874 7,072
Additional paid-in capital 253,065 278,557
Retained earnings 118,086 193,771
Accumulated other comprehensive income 3,637 2,576
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 381,662 481,976
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,031,393 $ 1,147,586
=============== ===============
</TABLE>
*The Condensed Consolidated Balance Sheet as of January 31, 1999 has been
summarized from the Company's audited Consolidated Balance Sheet as of that
date. The accompanying notes are an integral part of these financial statements.
Page 3 of 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
July 31, July 31, July 31, July 31,
1998 1999 1998 1999
<S> <C> <C> <C> <C>
Sales $327,885 $409,787 $167,404 $209,280
Cost of sales 133,581 156,493 67,716 79,066
-------- -------- -------- --------
Gross margin 194,304 253,294 99,688 130,214
Operating expenses:
Research and development, net 62,586 78,871 31,932 40,454
Selling, general and administrative 72,162 86,994 36,838 44,149
Royalties and license fees 7,515 9,472 3,897 4,732
Merger expenses -- 1,018 -- --
-------- -------- -------- --------
Income from operations 52,041 76,939 27,021 40,879
Interest and other income, net 3,454 6,328 1,835 3,319
-------- -------- -------- --------
Income before income tax provision 55,495 83,267 28,856 44,198
Income tax provision 5,458 7,229 2,789 3,797
-------- -------- -------- --------
Net income $ 50,037 $ 76,038 $ 26,067 $ 40,401
======== ======== ======== ========
Earnings per share:
Basic $ 0.76 $ 1.09 $ 0.40 $ 0.57
======== ======== ======== ========
Diluted $ 0.70 $ 0.98 $ 0.36 $ 0.52
======== ======== ======== ========
</TABLE>
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
JULY 31, JULY 31,
1998 1999
<S> <C> <C>
Cash flows from operating activities:
Net cash from operations after adjustment
for non-cash items $ 61,842 $ 90,059
Changes in assets and liabilities:
Accounts receivable (99,072) (29,251)
Inventories 8,059 (2,561)
Prepaid expenses and other current assets (7,349) (2,306)
Accounts payable and accrued expenses 21,246 22,616
Liability for severance pay 521 1,926
Other 12,648 (16,183)
------------- --------------
Net cash (used in) provided by operating activities (2,105) 64,300
Cash flows from investing activities:
Maturities and sales (purchase) of bank time deposits
and investments, net (301,379) (338,484)
Purchases of property and equipment (11,243) (26,432)
Increase in software development costs (4,612) (6,663)
-------------- --------------
Net cash (used in) investing activities (317,234) (371,579)
Cash flows from financing activities:
Net proceeds from issuance of debentures 292,672 -
Net borrowings of bank loans and other debt (20,779) (521)
Proceeds from issuance of common stock 13,138 25,605
------------- -------------
Net cash provided by financing activities 285,031 25,084
Net (decrease) in cash and cash equivalents (34,308) (282,195)
Cash acquired in pooling of Amarex Technology, Inc. - 1,680
Cash and cash equivalents, beginning of period 180,855 583,959
------------- -------------
Cash and cash equivalents, end of period $ 146,547 $ 303,444
============= =============
</TABLE>
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 annual period ended January 31, 1999. The
financial information included herein is unaudited; however, such information
reflects all adjustments (consisting solely of normal recurring adjustments)
which are, in the opinion of management, necessary for a fair statement of
results for the interim periods. The results of operations for the three month
and six month periods ended July 31, 1999 are not necessarily indicative of the
results to be expected for the full year.
INVENTORIES. The composition of inventories at January 31
and July 31, 1999 is as follows:
JANUARY 31, JULY 31,
1999 1999
(In thousands)
Raw materials $ 23,944 $ 19,685
Work in process 11,171 22,465
Finished goods 11,574 7,385
------------- -------------
$ 46,689 $ 49,535
============= =============
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 months
periods ended July 31, 1999, reimbursement from funding agencies amounted to
$3,268,000 and $5,509,000, respectively. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Certain Trends and
Uncertainties."
EARNINGS PER SHARE. For the three month and six month
periods ended July 31, 1998 and 1999, the computation of basic earnings per
share is based on the weighted average number of outstanding common shares.
Diluted earnings per share further assumes the issuance of common shares for all
dilutive potential common shares outstanding. The assumed conversion of the
convertible subordinated debentures was antidilutive for the three month periods
ended July 31, 1998 and 1999, respectively, and the six month period ended July
31, 1998. The shares used in the computations are as follows:
Page 6 of 19 Total Pages
<PAGE>
SIX MONTHS ENDED THREE MONTHS ENDED
JULY 31, JULY 31,
1998 1999 1998 1999
(In thousands)
Basic 65,499 69,889 65,763 70,291
Diluted 71,127 87,342 71,645 77,109
COMPREHENSIVE INCOME. For the three month and six month
periods ended July 31, 1998 and 1999, total comprehensive income was $24,614,000
and $40,754,000 and $49,266,000 and $74,977,000, respectively. The elements of
comprehensive income include net income, unrealized gains on available for sale
securities and foreign currency translation adjustments.
ACQUISITIONS. In February 1999, the Company acquired all of
the outstanding stock of Amarex Technology, Inc., a company that develops
software-based applications for the telephone network operator and call center
markets, for 346,007 shares of the Company's common stock and the assumption of
options and warrants to purchase 119,643 shares of the Company's common stock.
The combination has been accounted for as a pooling of interests. The Company
did not restate prior period financial statements for this acquisition, as such
restatement would not be material.
In August 1999, the Company acquired all of the outstanding
stock of InTouch Systems, Inc., a company that develops and markets a suite of
intelligent voice-controlled software applications, for 339,601 shares of the
Company's common stock and the assumption of options to purchase 39,561 shares
of the Company's common stock. The combination has been accounted for as a
pooling of interests. The Company will not restate prior period financials for
this acquisition, as such restatement would not be material.
STOCK SPLIT. In April 1999, the Company effected a
three-for-two stock split by paying a 50% stock dividend to shareholders of
record on March 31, 1999. All share and per share information has been adjusted
to give effect to this split.
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, 1999 increased by approximately $81,902,000 (25%) and $41,876,000
(25%), respectively, from the 1998 periods. The increases are attributable
primarily to a higher volume of sales of systems and parts of enhanced service
platform products.
Cost of Sales. Cost of sales for the six month and three
month periods ended July 31, 1999 increased by approximately $22,912,000 (17%)
and $11,350,000 (17%), respectively, from the corresponding periods in 1998. The
increases are attributable primarily to increases in sales. Gross margin
(expressed as a percentage of sales) for the six month and three month periods
ended July 31, 1999 increased to approximately 61.8% and 62.2%, respectively,
from approximately 59.3% and 59.5%, respectively, in the corresponding 1998
periods.
Research and Development Expenses. Net research and
development expenses for the six month and three month periods ended July 31,
1999 increased by approximately $16,285,000 (26%) and $8,522,000 (27%),
respectively, from the corresponding periods in 1998 due to the overall growth
of research and development operations, the initiation of significant new
research and development projects, and increases in salaries and other costs
associated with research and development operations.
Selling, General and Administrative Expenses. Selling,
general and administrative expenses for the six month and three month periods
ended July 31, 1999 increased by approximately $14,832,000 (21%) and $7,311,000
(20%), respectively, from the corresponding periods in 1998. Such increases were
the result of increased sales, marketing and administrative activities
associated with the overall growth of the Company's operations, and particularly
with the expansion of direct sales and marketing activities.
Royalties and License Fees. Royalties and license fees for
the six and three month periods ended July 31, 1999 increased by approximately
$1,957,000 (26%) and $835,000 (21%), respectively, from the corresponding
periods in 1998.
Income Tax Provision. Provision for income taxes for the
six and three month periods ended July 31, 1999 increased by $1,771,000 (32%)
and $1,008,000 (36%), respectively, from the corresponding 1998 periods due to
increased pre-tax income. The Company's overall effective tax rate was
approximately 10% in the six and three month periods ended July 31, 1998, and 9%
in the six and three month periods ended July 31, 1999. The Company's overall
rate of tax is reduced significantly by the tax benefits associated with
qualified activities of its subsidiaries in Israel.
Page 8 of 19 Total Pages
<PAGE>
Net Income. Net income after taxes for the six month and
three month periods ended July 31, 1999 increased by approximately $26,001,000
(52%) and $14,334,000 (55%), respectively, from the 1998 periods, primarily as a
result of the factors described above. Net income after taxes as a percentage of
sales increased to approximately 18.6% and 19.3%, respectively, in the six and
three month periods ended July 31, 1999 from approximately 15.3% and 15.6%,
respectively, in the six and three month periods ended July 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES. At July 31, 1999, the Company had
cash and cash equivalents of approximately $303,444,000, bank time deposits and
short-term investments of approximately $409,384,000 and working capital of
approximately $787,467,000. The Company believes that its existing working
capital, together with funds generated from operations, will be sufficient to
provide for its planned operations for the foreseeable future.
The Company regularly examines opportunities for strategic
acquisitions of other companies or lines of business and anticipates that it may
from time to time issue additional debt and/or equity securities either as
direct consideration for such acquisitions or to raise additional funds to be
used (in whole or in part) in payment for acquired securities or assets. The
issuance of such securities could be expected to have a dilutive impact on the
Company's shareholders, and there can be no assurance as to whether or when any
acquired business would contribute positive operating results commensurate with
the associated investment.
The Company's liquidity and capital resources have not been, and are
not anticipated to be, materially affected by restrictions pertaining to the
ability of its foreign subsidiaries to pay dividends or by withholding taxes
associated with any such dividend payments.
CERTAIN TRENDS AND UNCERTAINTIES. The Company has benefited from the
growth in its business and capital base over the past several years to make
significant new investment in its operations and infrastructure intended to
enhance its opportunities for future growth and profitability. The Company
intends to continue to make significant investments in the growth of its
business, and to examine opportunities for additional growth through
acquisitions and strategic investments. The impact of these decisions on future
profitability cannot be predicted with assurance, and the Company's commitment
to growth may increase its vulnerability to unforeseen downturns in its markets,
technology changes and shifts in competitive conditions. However, the Company
believes that significant opportunities exist in the markets for each of its
main product lines, and that continued strong investment in its technical,
product development, marketing and sales capabilities will enhance its
opportunities for long term growth and profitability.
The telecommunications industry is subject to rapid technological
change. The Company's revenue stream will depend on its ability to enhance its
existing products and to introduce new products on a timely and cost-effective
basis, including any customer-requested custom software enhancements required in
the course of product delivery. The Company's
Page 9 of 19 Total Pages
<PAGE>
products involve sophisticated hardware and software technology that performs
critical functions to highly demanding standards. There can be no assurance that
the Company's current or future products will not develop operational problems,
which could have a material adverse effect on the Company. In addition, if the
Company were to delay the introduction of new products, or to delay the delivery
of specific custom software enhancements, the Company's operating results could
be adversely affected. The Company sells a majority of its products to companies
in the telecommunications industry. This industry is undergoing significant
change as a result of deregulation and privatization worldwide, reducing
restrictions on competition in the industry. Unforeseen changes in the
regulatory environment may have an impact on the Company's revenues and/or costs
in any given part of the world. The telecommunications industry is also affected
by the advent of new technologies and alternatives for the delivery of services,
such as digital transmission standards and Internet telephony. The Company's
success will depend in part upon its ability to correctly anticipate
technological changes and to provide the range of features and capabilities
required by its customers to take advantage of new technological opportunities.
The worldwide market for enhanced services platform ("ESP"s) systems is already
highly competitive and the Company expects competition to intensify. The Company
believes that existing competitors will continue to present substantial
competition, and that other companies, many with considerably greater financial,
marketing and sales resources than the Company, may enter the ESP system
markets. Moreover, as the Company enters into new markets for enhanced services
as a result of its own research and development efforts or acquisitions, it is
likely to encounter new competitors. In January 1998, the Company merged with
Boston Technology, Inc. ("Boston"), a manufacturer of ESP systems. As a result
of its significantly greater concentration on a small number of large telephone
company customers, Boston's business has historically been considerably more
volatile than that of the Company before the merger, and the operations of the
combined Company are likely to be less predictable and subject to greater risks
from actions of individual customers than the operations of the Company in prior
years.
The market for telecommunications monitoring systems is also in a
period of significant transition. Budgetary constraints, uncertainties resulting
from the introduction of new technologies in the telecommunications environment
and shifts in the pattern of government expenditures resulting from geopolitical
events have increased uncertainties in the market, resulting in the attenuation
of government procurement programs beyond their originally expected performance
periods and an increased incidence of delay, cancellation or reduction of
planned projects. The delay and uncertainties surrounding the Communications
Assistance for Law Enforcement Act ("CALEA") have had a significant negative
impact on acquisition plans of law enforcement agencies in North America engaged
in monitoring activities. Competitive conditions in this sector have also been
affected by the increasing use by certain potential government customers of
their own internal development resources rather than outside vendors to provide
certain technical solutions. In addition, a number of established government
contractors, particularly developers and integrators of technology products,
have taken steps to redirect their marketing strategies and product plans in
reaction to cut-backs in their traditional areas of focus, resulting in an
increase in the number of competitors and the range of products offered in
response to particular requests for proposals. This market is also highly
regulated, and opportunities can be affected by the Company's ability to obtain
and maintain in effect
Page 10 of 19 Total Pages
<PAGE>
security clearances for personnel and facilities, to obtain export licenses and
to comply with government procurement policies and practices. The lack of
predictability in the timing and scope of government procurements have made
planning decisions more difficult and have increased the associated risks.
The Company has historically derived a significant portion of its
sales and operating profit from contracts for large system installations with
major customers. Boston's operating results, in particular, have often been
characterized by volatility and lack of predictability, reflecting its
traditional customer concentration among major telecommunications services
providers such as the Regional Bell Operating Companies. The Company continues
to emphasize large capacity systems in its product development and marketing
strategies. Contracts for large installations typically involve a lengthy and
complex bidding and selection process, and the ability of the Company to obtain
particular contracts is inherently difficult to predict. The Company believes
that opportunities for large installations will continue to grow in its
commercial markets, and intends to continue to expand its research and
development, manufacturing, sales and marketing and product support capabilities
in anticipation of such growth. However, the timing and scope of these
opportunities and the pricing and margins associated with any eventual contract
award are difficult to forecast, and may vary substantially from transaction to
transaction. The Company's future operating results may accordingly exhibit a
higher degree of volatility than the operating results of other companies in its
industries that have adopted different strategies, and than the Company has
experienced in prior periods. Although the Company is actively pursuing a number
of significant procurement opportunities in the United States and
internationally, both the timing of any eventual procurements and the
probability of the Company's receipt of significant contract awards are
uncertain. The degree of dependence by the Company on large system orders, and
the investment required to enable the Company to perform such orders, without
assurance of continuing order flow from the same customers and predictability of
gross margins on any future orders, increase the risk associated with its
business.
The Company has significantly increased its expenditures in all areas
of its operations during recent periods, including the areas of research and
development and marketing and sales, and the Company plans to further increase
these expenditures in the foreseeable future. The increase in research and
development expenditures reflects the Company's concentration on enhancing the
range of features and capabilities of its existing product lines and developing
new generations of its products. The Company believes that these efforts are
essential for the continuing competitiveness of its product offerings and for
positioning itself to participate in future growth opportunities in both the
commercial and government sectors. The increase in sales and marketing
expenditures primarily results from the Company's decision to expand its
activities and direct presence in a growing number of world markets. The
Company's costs of operations have also been affected by increases in the cost
of its operations in Israel, resulting both from general inflation and increases
in the cost of attracting and retaining qualified scientific, engineering and
technical personnel in Israel, where the demand for such personnel is growing
rapidly with the expansion of technology-based industries in that country. The
increase in these costs in recent years has not been offset in each instance by
proportional devaluation of the Israeli shekel against the United States dollar,
and accordingly has had a negative impact on
Page 11 of 19 Total Pages
<PAGE>
the Company's overall results of operations. Continuation of such trends may
have a material adverse effect on the Company's future results of operations.
A significant portion of the Company's research and development and
manufacturing operations are located in Israel and may be affected by
regulatory, political, military and economic conditions in that country. The
Company's historical operating results reflect substantial benefits from
programs sponsored by the Israeli government for the support of research and
development, as well as favorable tax rates available to "Approved Enterprises"
in Israel. The Israeli government has indicated its intention to reexamine
certain of its policies in these areas. In recent years, the government has
acted to increase the annual rate of royalties to be applied to repayment of
benefits under the conditional grant program administered by the Office of the
Chief Scientist of the Ministry of Industry and Trade, a program in which the
Company has regularly participated and under which it continues to receive
significant benefits through reimbursement of up to 50% of qualified research
and development expenditures. Increases in royalties, which currently amount to
3% of affected product revenues (including service and other related revenues),
have the effect of increasing the Company's expenses and accelerating the
Company's repayment of amounts received under the program until repayment is
completed. Repayment of any amounts received under programs which have been, or
will be, approved by the Office of the Chief Scientist after January 1, 1999
will entail repayment of the amount received (calculated in US Dollars), plus
interest on such amount at a rate equal to the 12-month LIBOR rate in effect at
the time of the approval of the program. In addition, permission from the
government of Israel is required for the Company to manufacture outside of
Israel products resulting from research and development activities funded under
such programs, or to transfer outside of Israel related technology rights, and
in order to obtain such permission the Company may be required to increase the
royalties to the applicable funding agencies and/or repay certain amounts
received as reimbursement of research and development costs. The Israeli
authorities have also indicated that these research and development funding
programs will be significantly further reduced in the future, particularly for
larger entities such as the Company. The Israeli government has also shortened
the period of the tax moratorium applicable to "Approved Enterprises" from four
years to two years. Although this change has not affected the tax status of the
Company's projects that were eligible for the moratorium prior to 1997, it
applies to the subsequent "Approved Enterprises" of the Company. If further
changes in the law or government policies regarding those programs were to
result in their termination or adverse modification, or if the Company were to
become unable to participate in or take advantage of those programs, the cost to
the Company of its operations in Israel would materially increase and there
would be a significant adverse effect on the results of the Company's operations
as a whole. To the extent the Company increases its activities outside Israel,
such increased activities will not be eligible for programs sponsored by Israel.
Most of the Company's research and development and manufacturing operations
attributable to Boston are expected to continue to be located in the United
States and thus will not be eligible for the benefits of those programs.
Accordingly, the effective cost to the Company of its future research and
development activities in particular, and its operations in general, could
significantly increase relative to that of Comverse, historically.
The Company currently derives a significant portion of its total
sales from customers outside of the United States. International transactions
involve particular risks,
Page 12 of 19 Total Pages
<PAGE>
including political decisions affecting tariffs and trade conditions, rapid and
unforeseen changes in economic conditions in individual countries, turbulence in
foreign currency and credit markets, and increased costs resulting from lack of
proximity to the customer. The recent recession in the Far East and Southeast
Asia reduced the demand for the Company's systems in certain countries, and the
Company's future operating results and financial condition could be adversely
affected by prevailing regional economic conditions and related trade or
currency disruptions. Moreover, the Company's future operating results and
financial condition will be adversely affected should recessionary conditions
appear in other major world markets. Volatility in international currency
exchange rates may have a significant impact on the Company's operating results.
The Company has, and anticipates that it will continue to receive, significant
contracts denominated in foreign (primarily Western European and Japanese)
currencies. As a result of the unpredictable timing of purchase orders and
payments under such contracts and other factors, it is often not practicable for
the Company to effectively hedge the risk of significant changes in currency
rates during the contract period. Since the Company will hedge the exchange rate
risks associated with long-term contracts denominated in foreign currencies only
to a limited extent, if at all, operating results can be affected by the impact
of currency fluctuations as well as the cost of such hedging.
The Company has undertaken a comprehensive program to evaluate "Year
2000 compliance" of its products and systems. The Company considers a product to
be "Year 2000 compliant" if the product, when used properly and in conformity
with the product information provided by the Company, will accurately store,
display, process, provide and/or receive data from, into and between the
twentieth and twenty-first centuries, including leap year calculations, provided
that all other technology used in combination with the Company product properly
exchanges date data with the product.
Although the Company believes that its current products generally
either are, or upon the completion of current modification programs will be,
Year 2000 compliant, no assurance can be given that its Year 2000 compliance
efforts will prove to be fully successful or that unanticipated costs and
problems will not be encountered in such efforts. In addition, the Company has
determined that older generations of certain of its products are not and cannot,
without unreasonable effort and expense, be made Year 2000 compliant. The costs
incurred to date related to the Company's Year 2000 compliance program have been
less than $7,000,000. The program is expected to continue through fiscal 1999,
but is not anticipated to have a material adverse effect on the Company's
business or financial condition.
The Company anticipates that widespread litigation may be brought in
the future against vendors of systems and components of systems that are unable
to properly manage data related to the Year 2000. The Company's agreements with
customers typically contain provisions designed to limit generally the Company's
liability for customer claims. It is possible, however, that these measures will
not provide protection from Year 2000 liability claims, as a result of existing
or future laws or unfavorable judicial decisions. Any such claims could result
in a material adverse affect on the Company's business, financial condition and
results of operations, including increased warranty costs, customer satisfaction
issues and potential legal damages.
Page 13 of 19 Total Pages
<PAGE>
The Company has implemented a comprehensive program to address Year
2000 readiness in its internal systems and with its customers and suppliers. The
Company's program has been designed to address its most critical internal
systems first and to gather information regarding the Year 2000 compliance of
products supplied to it and into which the Company's products are integrated.
Assessment and remediation are proceeding in tandem, and the Company intends to
have its critical internal systems in Year 2000 compliance by the end of 1999.
These activities are intended to encompass all major categories of systems in
use by the Company, including manufacturing, engineering, sales, finance and
human resources. The costs incurred to date related to these programs have been
less than $5,000,000.
The Company currently expects that the total cost of its Year 2000
readiness programs over the current fiscal year will not exceed $5,000,000. The
total cost estimate does not include potential costs related to any customer or
other claims or the costs of internal software or hardware replaced in the
normal course of business. The total cost estimate is based on the current
assessment of the Company's Year 2000 readiness needs and is subject to change
as the projects proceed.
The Company is communicating with its significant suppliers and
financial institutions to determine the extent to which the Company is
vulnerable to those third parties' failure to remedy their own Year 2000
concerns, and has received assurances of Year 2000 compliance from a number of
those contacted. Most of the suppliers under existing contracts with the Company
are under no contractual obligation to provide such information to the Company.
While the Company currently expects that the Year 2000 issue will not pose
significant operational problems, failure to fully identify all Year 2000
dependencies in the Company's systems and in the systems of its suppliers,
customers and financial institutions could have material adverse consequences,
including delays in the delivery or sale of products. The Company has under
consideration various contingency plans which will be developed as needed to
assure continuing operations in the event such problems arise.
The trading price of the Company's shares may be affected by the
factors noted above as well as prevailing economic and financial trends and
conditions in the public securities markets. Share prices of companies in
technology and government contracting businesses, and particularly smaller and
medium-sized publicly traded companies such as the Company, tend to exhibit a
high degree of volatility. The Company's revenues and earnings may be more
volatile than those of Comverse historically as a result of the greater
concentration of Boston's business on a limited number of large customers.
Shortfalls in revenues or earnings from the levels anticipated by the public
markets could have an immediate and significant effect on the trading price of
the Company's shares in any given period. Such shortfalls may result from events
that are beyond the Company's immediate control, can be unpredictable and, since
a significant proportion of the Company's sales during each fiscal quarter tend
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
Page 14 of 19 Total Pages
<PAGE>
in the telecommunications equipment industry in general, and the Company's
industry in particular, which may not have any direct relationship with the
Company's business or prospects.
FORWARD-LOOKING STATEMENTS. From time to time, the Company makes
forward-looking statements. Forward-looking statements include financial
projections, statements of plans and objectives for future operations,
statements of future economic performance, and statements of assumptions
relating thereto.
The Company may include forward-looking statements in its periodic
reports to the Securities and Exchange Commission on Forms 10-K, 10-Q, and 8-K,
in its annual report to shareholders, in its proxy statements, in its press
releases, in other written materials, and in statements made by employees to
analysts, investors, representatives of the media, and others.
By their very nature, forward-looking statements are subject to
uncertainties, both general and specific, and risks exist that predictions,
forecasts, projections and other forward-looking statements will not be
achieved. Actual results may differ materially due to a variety of factors,
including without limitation those discussed under "Certain Trends and
Uncertainties" and elsewhere in this report. Investors and others should
carefully consider these and other uncertainties and events, whether or not the
statements are described as forward-looking.
Forward-looking statements made by the Company are intended to apply
only at the time they are made, unless explicitly stated to the contrary.
Moreover, whether or not stated in connection with a forward-looking statement,
the Company undertakes no obligation to correct or update a forward-looking
statement should the Company later become aware that it is not likely to be
achieved. If the Company were in any particular instance to update or correct a
forward-looking statement, investors and others should not conclude that the
Company will make additional updates or corrections thereafter.
MARKET RISK DISCLOSURES. Refer to Item 7A in the Company's Annual
Report on Form 10-K for a discussion about the Company's exposure to market
risks.
Page 15 of 19 Total Pages
<PAGE>
PART II
Other Information
-----------------
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibit Index.
Item
Number Exhibit Page
------ ------- ----
11. Statement re computation of
per share earnings. 18 - 19
27. Financial data schedule Filed electronically
s(b) Reports on Form 8-K.
None
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 14, 1999 /s/ Kobi Alexander
------------------------------------
Kobi Alexander
President, Chairman of the Board
and Chief Executive Officer
Dated: September 14, 1999 /s/ David Kreinberg
------------------------------------
David Kreinberg
Vice President of Finance
and Chief Financial Officer
Page 17 of 19 Total Pages
EXHIBIT 11
COMVERSE TECHNOLOGY, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31, 1998 JULY 31, 1999
<S> <C> <C>
Basic earnings per share:
Net income $26,067 $40,401
======= =======
Weighted average number of outstanding common shares 65,763 70,291
======= =======
Basic earnings per share $ 0.40 $ 0.57
======= =======
Diluted earnings per share:
Net income $26,067 $40,401
======= =======
Weighted average number of outstanding common shares 65,763 70,291
Additional shares assuming exercise of stock options 5,882 6,818
------- -------
Weighted average number of outstanding common shares
assuming full dilution 71,645 77,109
======= =======
Diluted earnings per share $ 0.36 $ 0.52
======= =======
</TABLE>
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
JULY 31, 1998 JULY 31, 1999
<S> <C> <C>
Basic earnings per share:
Net income $ 50,037 $ 76,038
============ =============
Weighted average number of outstanding common shares 65,499 69,889
============ =============
Basic earnings per share $ 0.76 $ 1.09
============ =============
Diluted earnings per share:
Net income $ 50,037 $ 76,038
Interest expense on Convertible Subordinated
Debentures, net of tax - 9,814
------------ -------------
Adjusted net income $ 50,037 $ 85,852
============ =============
Weighted average number of outstanding common shares 65,499 69,889
Additional shares assuming exercise of stock options 5,628 6,706
Additional shares assuming conversion of Convertible
Subordinated Debentures - 10,747
------------ -------------
Weighted average number of outstanding common shares
assuming full dilution 71,127 87,342
============ =============
Diluted earnings per share $ 0.70 $ 0.98
============ =============
Page 19 of 19 Total Pages
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR 7/31/99 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> JUL-31-1999
<CASH> 303,444
<SECURITIES> 409,384
<RECEIVABLES> 224,834
<ALLOWANCES> 0
<INVENTORY> 49,535
<CURRENT-ASSETS> 1,026,500
<PP&E> 78,340
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,147,586
<CURRENT-LIABILITIES> 239,033
<BONDS> 415,000
<COMMON> 7,072
0
0
<OTHER-SE> 474,904
<TOTAL-LIABILITY-AND-EQUITY> 1,147,586
<SALES> 409,787
<TOTAL-REVENUES> 409,787
<CGS> 156,493
<TOTAL-COSTS> 156,493
<OTHER-EXPENSES> 176,355
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 83,267
<INCOME-TAX> 7,229
<INCOME-CONTINUING> 76,038
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 76,038
<EPS-BASIC> 1.09
<EPS-DILUTED> 0.98
</TABLE>
