================================================================================
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 April 30, 2000
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 June 6, 2000 was 156,015,230.
Page 1 of 19 Total Pages
(Exhibit Index Appears on Page 17)
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements.
Page
----
1. Condensed Consolidated Balance Sheets as
of January 31, 2000 and April 30, 2000 3
2. Condensed Consolidated Statements of Income
for the Three Month Periods Ended April 30, 1999
and April 30, 2000 4
3. Condensed Consolidated Statements of Cash
Flows for the Three Month Periods Ended
April 30, 1999 and April 30, 2000 5
4. Notes to Condensed Consolidated Financial
Statements 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 9
Page 2 of 19 Total Pages
<PAGE>
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
------
JANUARY 31, APRIL 30,
2000* 2000
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 338,638 $ 403,304
Bank time deposits and short-term investments 439,054 437,791
Accounts receivable, net 259,357 282,830
Inventories 97,653 120,192
Prepaid expenses and other current assets 40,829 47,900
------------- --------------
TOTAL CURRENT ASSETS 1,175,531 1,292,017
PROPERTY AND EQUIPMENT, net 121,897 125,867
INVESTMENTS 19,749 30,187
OTHER ASSETS 35,191 50,546
------------- --------------
TOTAL ASSETS $ 1,352,368 $ 1,498,617
============= ==============
-------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 231,245 $ 224,126
Advance payments from customers 94,171 96,806
Other current liabilities 1,289 3,504
------------- --------------
TOTAL CURRENT LIABILITIES 326,705 324,436
CONVERTIBLE SUBORDINATED DEBENTURES 300,000 300,000
LIABILITY FOR SEVERANCE PAY 6,185 8,030
OTHER LIABILITIES 8,138 28,814
------------- --------------
TOTAL LIABILITIES 641,028 661,280
------------- --------------
STOCKHOLDERS' EQUITY:
Common stock, $0.10 par value -
authorized, 300,000,000 shares;
issued and outstanding, 153,822,408 and 155,444,704 shares 15,382 15,544
Additional paid-in capital 407,645 475,313
Retained earnings 285,890 342,295
Accumulated other comprehensive income 2,423 4,185
------------- --------------
TOTAL STOCKHOLDERS' EQUITY 711,340 837,337
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,352,368 $ 1,498,617
============= ==============
</TABLE>
*The Condensed Consolidated Balance Sheet as of January 31, 2000 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>
THREE MONTHS ENDED
APRIL 30, APRIL 30,
1999 2000
<S> <C> <C>
Sales $ 200,507 $ 261,282
Cost of sales 77,427 97,347
----------- -----------
Gross margin 123,080 163,935
Operating expenses:
Research and development, net 38,417 50,299
Selling, general and administrative 42,845 54,220
Royalties and license fees 4,740 4,880
Merger expenses 1,018 -
----------- -----------
Income from operations 36,060 54,536
Interest and other income, net 3,009 6,511
----------- -----------
Income before income tax provision 39,069 61,047
Income tax provision 3,432 4,642
----------- -----------
Net income $ 35,637 $ 56,405
=========== ===========
Earnings per share:
Basic $ 0.26 $ 0.36
=========== ===========
Diluted $ 0.23 $ 0.33
=========== ===========
</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>
THREE MONTHS ENDED
APRIL 30, APRIL 30,
1999 2000
<S> <C> <C>
Cash flows from operating activities:
Net cash from operations after adjustment
for non-cash items $ 39,427 $ 66,758
Changes in assets and liabilities:
Accounts receivable (18,259) (23,473)
Inventories 4,750 (22,539)
Prepaid expenses and other current assets 2,164 (7,944)
Accounts payable and accrued expenses 8,979 (7,119)
Liability for severance pay 2,134 1,845
Other (15,833) 9,714
----------- -----------
Net cash provided by operating activities 23,362 17,242
Cash flows from investing activities:
Maturities and sales (purchases) of bank time deposits
and investments, net 4,459 (6,960)
Purchases of property and equipment (11,325) (11,887)
Increase in software development costs (3,198) (3,479)
----------- ------------
Net cash used in investing activities (10,064) (22,326)
Cash flows from financing activities:
Net borrowings (repayments) of bank loans and other debt (436) 1,920
Proceeds from issuance of common stock 12,068 9,768
Proceeds from issuance of common stock of subsidiary - 58,062
---------- -----------
Net cash provided by financing activities 11,632 69,750
Net increase in cash and cash equivalents 24,930 64,666
Cash acquired in pooling of Amarex Technology, Inc. 1,680 -
Cash and cash equivalents, beginning of period 583,959 338,638
---------- -----------
Cash and cash equivalents, end of period $ 610,569 $ 403,304
========== ===========
</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, 2000. 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 period ended April 30, 2000 are
not necessarily indicative of the results to be expected for the full year.
INVENTORIES. The composition of inventories at January 31 and April 30,
2000 is as follows:
JANUARY 31, APRIL 30,
2000 2000
(In thousands)
Raw materials $ 38,641 $ 43,179
Work in process 29,755 39,390
Finished goods 29,257 37,623
----------- -----------
$ 97,653 $ 120,192
=========== ===========
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 period ended April 30,
2000, reimbursement from funding agencies amounted to $4,468,000. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Certain Trends and Uncertainties."
EARNINGS PER SHARE. For the three month periods ended April 30, 1999
and 2000, 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 period ended April 30, 1999. The shares
used in the computations are as follows:
THREE MONTHS ENDED
APRIL 30, 1999 APRIL 30, 2000
(In thousands)
Basic 138,642 155,193
Diluted 151,702 184,267
Page 6 of 19 Total Pages
<PAGE>
COMPREHENSIVE INCOME. For the three month periods ended April 30, 1999
and 2000, total comprehensive income was $34,223,000 and $58,167,000,
respectively. The elements of comprehensive income include net income,
unrealized gains on available for sale securities and foreign currency
translation adjustments.
STOCK SPLITS. 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. In April 2000, the Company effected a two-for-one stock split by paying a
100% stock dividend to shareholders of record on March 27, 2000. All share and
per share information has been adjusted to give effect to these splits.
ISSUANCE OF SUBSIDIARY STOCK. In April 2000, a subsidiary of the
Company, Ulticom, Inc., issued 4,887,500 shares of its common stock in an
initial public offering. As a result of the initial public offering, the
Company's ownership interest in Ulticom, Inc. was reduced to 80.4%. Proceeds
from the offering, based on the offering price of $13.00 per share, totaled
approximately $58.1 million, net of offering expenses. The Company recorded a
gain of approximately $46.7 million which was recorded as an increase in
stockholders' equity as a result of the issuance.
BUSINESS COMBINATIONS. In March 2000, the Company signed a definitive
agreement to acquire all of the outstanding stock of Loronix Information
Systems, Inc. ("Loronix"), a company that develops software-based digital video
recording and management systems used in a variety of applications and
industries. The Company's acquisition of Loronix is expected to be accounted for
as a pooling of interests. The Company will issue 0.385 new common shares for
each outstanding Loronix share, or approximately 1,974,000 new shares to Loronix
shareholders, and will assume outstanding Loronix stock options. Loronix will
have the right to terminate the agreement if the value of the Company's shares
to be received by Loronix shareholders is less than $36 per Loronix share. In
such case, the Company will have the right to increase the exchange ratio to
adjust the consideration to $36 per share.
Unaudited pro forma consolidated statement of income data for the
three month periods ended April 30, 1999 and 2000 are as follows:
<TABLE>
<CAPTION>
CTI LORONIX COMBINED
--- ------- --------
(In thousands, except share data amounts)
<S> <C> <C> <C>
APRIL 30, 1999
Sales $ 200,507 $ 7,390 $ 207,897
Net income $ 35,637 $ 555 $ 36,192
Earnings per share - diluted $ 0.23 $ 0.24
APRIL 30, 2000
Sales $ 261,282 $ 7,187 $ 268,469
Net income $ 56,405 $ (199) $ 56,206
Earnings per share - diluted $ 0.33 $ 0.32
</TABLE>
The unaudited pro forma consolidated statement of income data
combines the statement of income data of the Company for the three month periods
ended April 30, 1999 and 2000 with the statement of income data of Loronix for
the three month periods ended March 31, 1999 and 2000, respectively.
Page 7 of 19 Total Pages
<PAGE>
BUSINESS SEGMENT INFORMATION. The Company's reporting segments are as
follows:
Enhanced Services Platform Products - Enable telecommunications network
operators to offer a variety of revenue-generating services, including a broad
range of integrated messaging, information distribution and personal assistant
services, such as call answering, voice mail, fax mail, unified messaging,
pre-paid services, wireless data and Internet-based services.
Signaling Software Products - Interconnect the switching, database and
messaging systems and manage the number, routing and billing information of
communication networks. These products also enable voice and data networks to
interoperate, or converge, allowing service providers to offer such converged
network services as voice over the Internet and Internet call waiting.
Digital Monitoring Systems Products - Support the voice, fax and data
recording and analysis activities of call centers and a variety of other
commercial and governmental organizations and supports the monitoring,
recording, surveillance, and information gathering and analysis activities of
law enforcement and intelligence agencies.
All Other - Includes other miscellaneous operations.
The table below presents information about operating income/loss and
segment assets as of and for the three month periods ended April 30, 1999 and
2000:
<TABLE>
<CAPTION>
Enhanced Digital
Services Signaling Monitoring
Platform Software Systems All Reconciling Consolidated
Products Products Products Other Items Totals
----------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED APRIL 30, 1999:
Sales $ 173,176 $ 5,363 $ 18,834 $ 4,406 $ (1,272) $ 200,507
Operating Income
(Loss) $ 38,428 $ 473 $ (488) $ (495) $ (1,858) $ 36,060
Total Assets $ 461,216 $ 11,157 $ 73,923 $ 27,038 $ 507,087 $ 1,080,421
THREE MONTHS ENDED APRIL 30, 2000:
Sales $ 228,678 $ 8,826 $ 22,408 $ 3,948 $ (2,578) $ 261,282
Operating Income
(Loss) $ 56,241 $ 1,333 $ 249 $ (317) $ (2,970) $ 54,536
Total Assets $ 756,838 $ 77,710 $ 79,661 $ 44,748 $ 539,660 $ 1,498,617
</TABLE>
Reconciling items consist of the following:
Sales - elimination of intersegment revenues.
Operating Income - elimination of intersegment operating income and
corporate operations. Total Assets - elimination of intersegment
receivables and unallocated corporate assets.
Page 8 of 19 Total Pages
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS.
----------------------
INTRODUCTION
Cost of sales include material costs, subcontractor costs, salary and
related benefits for the operations and service departments, depreciation and
amortization of equipment used in the operations and service departments,
amortization of capitalized software costs, travel costs and an overhead
allocation. Research and development costs include salary and related benefits
as well as travel, depreciation and amortization of research and development
equipment, an overhead allocation, as well as other costs associated with
research and development activities. Selling, general and administrative costs
include salary and related benefits, travel, depreciation and amortization,
marketing and promotional materials, recruiting expenses, professional fees,
facility costs, as well as other costs associated with sales, marketing, finance
and administrative departments.
THREE MONTH PERIOD ENDED APRIL 30, 2000
COMPARED TO THREE MONTH PERIOD ENDED ENDED APRIL 30, 1999
Sales. Sales for the three month period ended April 30, 2000 increased
by approximately $60.8 million, or 30%, compared to the three month period ended
April 30, 1999. This increase is primarily attributable to an increase in sales
of enhanced services platform ("ESP") products of approximately $54.4 million.
Such increase was principally due to increased sales to European customers. In
addition, sales of multimedia digital monitoring systems and network signaling
software products increased by approximately $3.6 million and $3.3 million,
respectively.
Cost of Sales. Cost of sales for the three month period ended April 30,
2000 increased by approximately $19.9 million, or 25.7%, as compared to the
three month period ended April 30, 1999. The increase in cost of sales is
primarily attributable to increased materials and overhead costs of
approximately $7.8 million due to the increase in sales, increased
personnel-related costs of approximately $5.6 million due to hiring of
additional personnel and increased compensation and benefits for existing
personnel, increased travel-related costs of approximately $1.9 million and an
increase in depreciation and amortization costs of approximately $1.7 million.
Gross margins increased from approximately 61.4% in the three month period ended
April 30, 1999 to approximately 62.7% in the three month period ended April 30,
2000.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three month period ended April 30, 2000
increased by approximately $11.4 million, or 26.5%, compared to the three month
period ended April 30, 1999, but as a percentage of sales decreased from
approximately 21.4% in the three month period ended April 30, 1999 to
Page 9 of 19 Total Pages
<PAGE>
approximately 20.8% in the three month period ended April 30, 2000. The increase
was primarily due to hiring of additional personnel and increased compensation
and benefits for existing personnel to support the increased level of sales
during the three month period ended April 30, 2000.
Research and Development. Net research and development expenses for the
three month period ended April 30, 2000 increased by approximately $11.9
million, or 30.9%, compared to the three month period ended April 30, 1999 due
to overall growth of research and development operations and the initiation of
significant new research and development projects. The increase was primarily
due to hiring of additional personnel and increased compensation and benefits
for existing personnel to support the higher volume of research and development
activities.
Royalties and License Fees. Royalties and license fees for the three
month period ended April 30, 2000 increased by approximately $0.1 million, or
3%, compared to the three month period ended April 30, 1999. The increase was
primarily a result of the growth in sales of royalty bearing products.
Income Tax Provision. Provision for income taxes for the three month
period ended April 30, 2000 increased by approximately $1.2 million, or 35.3%,
compared to the three month period ended April 30, 1999 due to increased pre-tax
income. The overall effective tax rate decreased from approximately 9% during
the 1999 period to approximately 8% in the three month period ended April 30,
2000. The Company's overall rate of tax is reduced significantly by the tax
benefits associated with qualified activities of certain of its Israeli
subsidiaries, which are entitled to favorable income tax rates under a program
of the Israeli Government for "Approved Enterprise" investments in that country.
Net Income. Net income increased by approximately $20.8 million, or
58.3%, in the three month period ended April 30, 2000 compared to the three
month period ended April 30, 1999, while as a percentage of sales increased from
approximately 18% in the three month period ended April 30, 1999 to
approximately 22% in the three month period ended April 30, 2000. The increase
resulted primarily from the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at April 30, 2000 and January 31, 2000
was approximately $967.6 million and $848.8 million, respectively.
Operations for the three month periods ended April 30, 2000 and 1999,
after adding back non-cash items, provided cash of approximately $66.8 million
and $39.4 million, respectively. During such periods, other changes in operating
assets and liabilities used cash of approximately $49.5 million and $16.1
million, respectively. This resulted in cash being provided by operating
activities of approximately $17.2 million and $23.4 million, respectively.
Page 10 of 19 Total Pages
<PAGE>
Investment activities for the three month periods ended April 30, 2000
and 1999 used cash of approximately $22.3 million and $10.1 million,
respectively. These amounts include (i) additions to property and equipment in
the three month periods ended April 30, 2000 and 1999 of approximately $11.9
million and $11.3 million, respectively; (ii) maturities and sales (purchases)
of bank time deposits and investments, net, of approximately ($7.0) million and
$4.5 million, respectively; and (iii) capitalization of software development
costs of approximately $3.5 million and $3.2 million, respectively.
Financing activities for the three month periods ended April 30, 2000
and 1999 provided cash of approximately $69.8 million and $11.6 million,
respectively. These amounts include (i) proceeds from the issuance of common
stock in connection with the exercise of stock options, warrants and employee
stock purchase plan of approximately $9.8 million and $12.1 million,
respectively; (ii) net proceeds (repayments) of bank loans and other debt of
approximately $1.9 million and ($0.4) million, respectively; and (iii) net
proceeds from the issuance of common stock of a subsidiary in connection with an
initial public offering in the 2000 period of approximately $58.1 million.
As of April 30, 2000, the Company had outstanding convertible
subordinated debentures of $300 million.
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
Page 11 of 19 Total Pages
<PAGE>
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 introduction of new technologies in the telecommunications market
and new alternatives for the delivery of services are having, and can be
expected to continue to have, a profound effect on competitive conditions in the
market and the success of market participants, including the Company. The
Company's revenue stream will depend on its ability to correctly anticipate
technological trends in its industries, to react quickly and effectively to such
trends and to enhance its existing products and to introduce new products on a
timely and cost-effective basis. 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, the Company's operating results could be
adversely affected.
The telecommunications 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 ESP system 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 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.
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 delays 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
Page 12 of 19 Total Pages
<PAGE>
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. 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, 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, developing new
generations of its products and expanding into new product areas. 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 appreciation of the
Israeli shekel relative to the United States dollar in certain periods and
devaluation of the Israeli shekel at rates insufficient to offset cost increases
in others, and from 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 high technology
industries in that country. Continuation of such trends could 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. The Company's historical
operating results reflect substantial benefits it has received from programs
sponsored by the Israeli government for the support of research and development,
as well as tax moratoriums and favorable tax rates associated with investments
Page 13 of 19 Total Pages
<PAGE>
in approved projects ("Approved Enterprises") in Israel. To be eligible for
these programs and tax benefits, the Company must continue to meet conditions,
including making specified investments in fixed assets and financing a
percentage of investments with share capital. If the Company fails to meet such
conditions in the future, the tax benefits would be canceled and the Company
could be required to refund the tax benefits already received.
These programs and tax benefits may not be continued in the future at
the current levels or at any level. The Israeli government has reduced the
benefits available under some of these programs in recent years, and Israeli
government authorities have indicated that the government may further reduce or
eliminate some of these benefits in the future. The Company currently pays
royalties, of between 3% and 5% (or 6% under certain circumstances) of
associated product revenues (including service and other related revenues), to
the Government of Israel for repayment of benefits received under a 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.
For amounts received under programs which have been, or will be, approved by the
Office of the Chief Scientist after January 1, 1999, repayment of the amount
received (calculated in U.S. 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, is required through the application of royalty payments. 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 these programs, or to transfer outside of Israel related
technology rights. 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 this funding program
will be further reduced significantly or eliminated in the future, particularly
for larger companies such as the Company. The termination or reduction of these
programs could adversely affect the Company's operating results.
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 subsequent
"Approved Enterprise" projects. 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 of the Company's operations in Israel
would increase and there could be a material adverse effect on the Company's
operations and financial results. To the extent that the Company increases its
activities outside Israel, which could result from, among other things, future
acquisitions, such increased activities will not be eligible for programs
sponsored by Israel.
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
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<PAGE>
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) 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's future operating results and financial condition will be
adversely affected should economic instability result in widespread slowdown or
recessionary conditions in major world markets, or in severe trade or currency
disruptions.
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 publicly
traded companies such as the Company, tend to exhibit a high degree of
volatility. Shortfalls in revenues or earnings from the levels anticipated by
the public markets could have an immediate and significant effect on the trading
price of the Company's shares in any given period. Such shortfalls may result
from events that are beyond the Company's immediate control, can be
unpredictable and, since a significant proportion of the Company's sales during
each fiscal quarter tend to occur in the latter stages of the quarter, may not
be discernible until the end of a financial reporting period. These factors 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 telecommunications equipment industry in general, and the Company's business
segments 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
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<PAGE>
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.
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<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. 19
27. Financial data schedule Filed electronically
(b) Reports on Form 8-K.
-------------------
None
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<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: June 13, 2000 /S/ Kobi Alexander
--------------------------------
Kobi Alexander
President, Chairman of the Board
and Chief Executive Officer
Dated: June 13, 2000 /S/ David Kreinberg
--------------------------------
David Kreinberg
Vice President of Finance
and Chief Financial Officer
Page 18 of 19 Total Pages
