================================================================================
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 October 31, 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 December 5, 2000 was 165,992,693.
Page 1 of 24 Total Pages
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements.
Page
----
1. Condensed Consolidated Balance Sheets as
of January 31, 2000 and October 31, 2000 3
2. Condensed Consolidated Statements of Income
for the Three and Nine Month Periods
Ended October 31, 1999 and October 31, 2000 4
3. Condensed Consolidated Statements of Cash
Flows for the Nine Month Periods Ended
October 31, 1999 and October 31, 2000 5
4. Notes to Condensed Consolidated Financial
Statements 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 12
Page 2 of 24 Total Pages
<PAGE>
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
------
JANUARY 31, OCTOBER 31,
2000* 2000
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 342,535 $ 764,613
Bank time deposits and short-term investments 439,054 320,059
Accounts receivable, net 266,203 328,057
Inventories 101,728 124,626
Prepaid expenses and other current assets 41,243 63,106
------------- --------------
TOTAL CURRENT ASSETS 1,190,763 1,600,461
PROPERTY AND EQUIPMENT, net 126,101 160,602
INVESTMENTS 19,749 61,832
OTHER ASSETS 36,234 56,402
------------- --------------
TOTAL ASSETS $ 1,372,847 $ 1,879,297
============= ==============
-------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 235,860 $ 271,008
Advance payments from customers 94,777 121,211
Other current liabilities 1,822 3,584
------------- --------------
TOTAL CURRENT LIABILITIES 332,459 395,803
CONVERTIBLE SUBORDINATED DEBENTURES 300,000 300,000
LIABILITY FOR SEVERANCE PAY 6,185 9,659
OTHER LIABILITIES 9,364 9,530
------------- --------------
TOTAL LIABILITIES 648,008 714,992
------------- --------------
MINORITY INTEREST - 51,479
------------- --------------
STOCKHOLDERS' EQUITY:
Common stock, $0.10 par value -
authorized, 600,000,000 shares;
issued and outstanding, 155,776,298 and 165,701,001 shares 15,577 16,570
Additional paid-in capital 424,075 650,259
Retained earnings 282,764 443,279
Accumulated other comprehensive income 2,423 2,718
------------- --------------
TOTAL STOCKHOLDERS' EQUITY 724,839 1,112,826
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,372,847 $ 1,879,297
============= ==============
</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
and restated for pooling of interests with Loronix Information Systems, Inc.
The accompanying notes are an integral part of these financial statements.
Page 3 of 24 Total Pages
<PAGE>
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1999* 2000 1999* 2000
<S> <C> <C> <C> <C>
Sales $657,600 $878,505 $232,893 $317,966
Cost of sales 255,724 331,064 89,923 119,024
-------- -------- -------- --------
Gross margin 401,876 547,441 142,970 198,942
Operating expenses:
Research and development, net 122,895 166,306 43,183 60,461
Selling, general and administrative 140,831 185,766 50,287 67,549
Royalties and license fees 14,070 15,964 4,598 5,757
Merger expenses 2,016 15,971 998 4,348
-------- -------- -------- --------
Income from operations 122,064 163,434 43,904 60,827
Interest and other income, net 10,532 22,250 4,200 8,300
-------- -------- -------- --------
Income before income tax provision 132,596 185,684 48,104 69,127
Income tax provision 11,346 13,413 4,069 4,765
-------- -------- -------- --------
Net income $121,250 $172,271 $ 44,035 $ 64,362
======== ======== ======== ========
Earnings per share:
Basic $ 0.85 $ 1.08 $ 0.30 $ 0.39
======== ======== ======== ========
Diluted $ 0.76 $ 0.97 $ 0.27 $ 0.35
======== ======== ======== ========
</TABLE>
* Restated for pooling of interests with Loronix Information Systems, Inc.
The accompanying notes are an integral part of these financial statements.
Page 4 of 24 Total Pages
<PAGE>
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
1999* 2000
<S> <C> <C>
Cash flows from operating activities:
Net cash from operations after adjustment
for non-cash items $ 143,784 $ 227,317
Changes in assets and liabilities:
Accounts receivable (46,526) (60,779)
Inventories (22,877) (25,742)
Prepaid expenses and other current assets (8,756) (20,977)
Accounts payable and accrued expenses 47,915 25,680
Liability for severance pay 2,289 3,464
Other 5,006 14,318
---------- -----------
Net cash provided by operating activities 120,835 163,281
---------- -----------
Cash flows from investing activities:
Maturities and sales (purchases) of bank time deposits
and investments, net (356,331) 77,025
Purchases of property and equipment (72,788) (69,978)
Increase in software development costs (9,993) (11,208)
----------- ------------
Net cash used in investing activities (439,112) (4,161)
----------- ------------
Cash flows from financing activities:
Net borrowings (repayments) of bank loans and other debt (992) (4,568)
Proceeds from issuance of common stock 38,274 71,049
Proceeds from issuance of common stock of subsidiary - 195,231
---------- -----------
Net cash provided by financing activities 37,282 261,712
---------- -----------
Net increase (decrease) in cash and cash equivalents (280,995) 420,832
Cash acquired in pooling of interests transactions 1,707 1,246
Cash and cash equivalents, beginning of period 585,584 342,535
---------- -----------
Cash and cash equivalents, end of period $ 306,296 $ 764,613
========== ===========
</TABLE>
* Restated for pooling of interests with Loronix Information Systems, Inc.
The accompanying notes are an integral part of these financial statements.
Page 5 of 24 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 and nine month periods ended
October 31, 2000 are not necessarily indicative of the results to be expected
for the full year.
In July 2000, the Company consummated a merger with Loronix
Information Systems, Inc., a Nevada corporation, ("Loronix"). The merger with
Loronix has been accounted for as a pooling of interests. This report presents
the financial information of the Company, as of and for the three month and nine
month periods ended October 31, 2000. The financial information for the 1999
periods combines the financial information of the Company as of and for the
three month and nine month periods ended October 31, 1999 with the financial
information of Loronix as of and for the three month and nine month periods
ended September 30, 1999.
INVENTORIES. The composition of inventories at January 31 and
October 31, 2000 is as follows:
JANUARY 31, OCTOBER 31,
2000 2000
(In thousands)
Raw materials $ 41,391 $ 46,947
Work in process 29,790 31,574
Finished goods 30,547 46,105
----------- -----------
$ 101,728 $ 124,626
=========== ===========
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 nine month
periods ended October 31, 2000, reimbursement from funding agencies amounted to
$5,662,000 and $15,603,000, respectively. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Certain Trends and
Uncertainties."
Page 6 of 24 Total Pages
<PAGE>
EARNINGS PER SHARE. For the three month and nine month periods
ended October 31, 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 October 1999 conversion of the
5-3/4% convertible subordinated debentures is assumed as of the beginning of the
three and nine month periods ending October 31, 1999 through the date of
redemption. The assumed conversion of the 4-1/2% convertible subordinated
debentures was not dilutive for the three month period ended October 31, 1999.
The shares used in the computations are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
1999 2000 1999 2000
(In thousands)
<S> <C> <C> <C> <C>
Basic 143,006 159,591 146,022 163,058
Diluted 177,594 188,439 165,782 191,774
</TABLE>
COMPREHENSIVE INCOME. For the three month and nine month
periods ended October 31, 1999 and 2000, total comprehensive income was
$42,748,000 and $63,308,000 and $118,902,000 and $172,566,000, 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.
INCREASE IN AUTHORIZED COMMON SHARES. At the Annual Meeting of
Shareholders held on October 8, 1999, the Company's shareholders approved an
amendment to the Company's Certificate of Incorporation to increase from
100,000,000 to 300,000,000 the aggregate number of authorized common shares of
the Company. At the Annual Meeting of Shareholders held on September 15, 2000,
the Company's shareholders approved an amendment to the Company's Certificate of
Incorporation to increase from 300,000,000 to 600,000,000 the aggregate number
of authorized common shares of the Company.
CONVERTIBLE SUBORDINATED DEBENTURES. In October 1996, the
Company issued $115,000,000 of convertible subordinated debentures bearing
interest at 5-3/4% per annum, payable semi-annually. In October 1999, the
Company called these debentures for redemption. The debentures were converted
into 7,540,916 shares of common stock.
ISSUANCE OF SUBSIDIARY STOCK. In April 2000, a subsidiary of
the Company, Ulticom, Inc. ("Ulticom"), 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 was reduced to 80.4%. Proceeds from
the offering, based on the offering price of $13.00 per share, totaled
Page 7 of 24 Total Pages
<PAGE>
approximately $58.1 million, net of offering expenses. In October 2000, Ulticom
issued an additional 2,843,375 shares of its common stock in a public offering.
As a result of the public offering, the Company's ownership interest in Ulticom
was reduced to 74.5%. Proceeds from the offering, based on the offering price of
$50.00 per share, totaled approximately $137.1 million, net of offering
expenses. The Company recorded a gain of approximately $145.9 million which was
recorded as an increase in stockholders' equity as a result of these issuances.
ACQUISITIONS. In July 2000, the Company acquired all of the
outstanding stock of Loronix, a company that develops software-based digital
video recording and management systems, for 1,994,806 shares of the Company's
common stock and the assumption of options to purchase 370,101 shares of the
Company's common stock. The combination was accounted for as a pooling of
interests. For the six month and three month periods ended June 30, 2000,
Loronix had sales of approximately $18.1 million and $10.9 million, respectively
and a net loss, including merger related expenses, of approximately $2.3 million
and $2.1 million, respectively.
Unaudited pro forma consolidated statement of income data for the three
month and nine month periods ended October 31, 1999 are as follows:
<TABLE>
<CAPTION>
COMVERSE LORONIX COMBINED
-------- ------- --------
(In thousands, except per share data)
<S> <C> <C> <C>
THREE MONTHS ENDED OCTOBER 31, 1999
Sales $ 221,814 $ 11,079 $ 232,893
Net income $ 43,689 $ 346 $ 44,035
Earnings per share - diluted $ 0.28 $ 0.27
NINE MONTHS ENDED OCTOBER 31, 1999
Sales $ 631,601 $ 25,999 $ 657,600
Net income $ 119,727 $ 1,523 $ 121,250
Earnings per share - diluted $ 0.76 $ 0.76
</TABLE>
The unaudited pro forma consolidated statement of income data combines
the statement of income data of the Company for the three month and nine month
periods ended October 31, 1999 with the statement of income data of Loronix for
the three month and nine month periods ended September 30, 1999, respectively.
In July 2000, the Company acquired all of the outstanding stock of
Syborg Informationsysteme GmbH, ("Syborg") a company that develops
software-based digital voice and internet recording and workforce management
systems, for 201,251 shares of the Company's common stock. The combination was
accounted for as a pooling of interests. The Company did not restate prior
financial statements for this acquisition due to immateriality and recorded the
book value of the net assets of Syborg of approximately $(475,000) in the
statement of stockholders' equity.
In August 2000, the Company acquired all of the outstanding stock of
Gaya Software Industries Ltd., ("Gaya") a company specializing in software-based
intelligent internet protocol ("IP") gateways and voice-over-IP technology, for
283,758 shares of the Company's common stock and the assumption of options and
Page 8 of 24 Total Pages
<PAGE>
warrants to purchase 10,505 shares of the Company's common stock. The
combination was accounted for as a pooling of interests. The Company did not
restate prior financial statements for this acquisition due to immateriality and
recorded the book value of the net assets of Gaya of approximately $1,470,000 in
the statement of stockholders' equity.
In August 2000, the Company acquired all of the outstanding stock
of Exalink Ltd., ("Exalink") a company specializing in router-based protocol
gateways and applications software for the delivery of Internet-based services
to all types of wireless devices, for 5,261,211 shares of the Company's common
stock and the assumption of options and warrants to purchase 810,377 shares of
the Company's common stock. The combination was accounted for as a pooling of
interests. The Company did not restate prior financial statements for this
acquisition due to immateriality and recorded the book value of the net assets
of Exalink of approximately ($973,000) in the statement of stockholders' equity.
In connection with the above acquisitions, the Company has charged
$15,971,000 to operations for merger related charges. Such charges relate to the
following:
Asset write-downs and impairments
---------------------------------
(In thousands)
Inventory $ 3,685
Property and equipment 1,528
Capitalized software costs 2,186
----------
Total asset write-downs and impairments $ 7,399
==========
In connection with the acquisitions, certain assets became impaired
due to the existence of duplicative technology, property and equipment and
inventory of the merged companies. Accordingly, these assets were written down
to their net realizable value at the time of the merger.
Professional fees and other direct merger expenses
--------------------------------------------------
In connection with the above acquisitions, the Company recorded a
charge of $8,572,000 for professional fees to lawyers, investment bankers and
accountants, as well as other direct merger costs, in connection with the
mergers.
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
Page 9 of 24 Total Pages
<PAGE>
interoperate, or converge, allowing service providers to offer such converged
network services as voice over the Internet and Internet call waiting. This
segment represents the Company's Ulticom subsidiary.
Digital Monitoring Systems Products - Support the voice, fax, data and
video 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 and nine month periods ended
October 31, 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 OCTOBER 31, 1999:
Sales $ 189,781 $ 6,792 $ 33,070 $ 5,174 $ (1,924) $ 232,893
Operating Income
(Loss) $ 45,401 $ 727 $ 576 $ 544 $ (3,344) $ 43,904
THREE MONTHS ENDED OCTOBER 31, 2000:
Sales $ 266,614 $ 12,823 $ 36,958 $ 3,435 $ (1,864) $ 317,966
Operating Income
(Loss) $ 63,924 $ 2,294 $ 1,954 $ (723) $ (6,622)(1) $ 60,827
NINE MONTHS ENDED OCTOBER 31, 1999:
Sales $ 540,884 $ 18,224 $ 88,023 $ 14,764 $ (4,295) $ 657,600
Operating Income
(Loss) $ 127,670 $ 1,829 $ 84 $ 445 $ (7,964) $ 122,064
NINE MONTHS ENDED OCTOBER 31, 2000:
Sales $ 741,934 $ 32,240 $ 100,146 $ 11,655 $ (7,470) $ 878,505
Operating Income
(Loss) $ 180,894 $ 5,347 $ (8,207)(1) $ (1,007) $ (13,593)(1) $ 163,434
TOTAL ASSETS:
October 31, 1999 $ 586,845 $ 12,257 $ 96,816 $ 27,064 $ 536,772 $ 1,259,754
October 31, 2000 $ 925,861 $ 223,215 $ 103,204 $ 78,047 $ 548,970 $ 1,879,297
</TABLE>
(1) Includes merger related expenses
Page 10 of 24 Total Pages
<PAGE>
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.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENT. In December 1999, the Securities
and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements". SAB 101 summarizes certain
of the SEC's views in applying generally accepted accounting principles to
revenue recognition in financial statements. The Company is required to adopt
SAB 101 in the fourth quarter of fiscal 2000. Management does not expect the
adoption of SAB 101 to have a material effect on the Company's operations or
financial position.
SUBSEQUENT EVENTS. In November 2000, the Company issued $500 million
aggregate principal amount of its 1.50% Convertible Senior Debentures due
December 2005 (the "Debentures"). In December 2000, the Company issued an
additional $100 million of the Debentures as a result of the initial purchaser
exercising in full their over-allotment option. The Debentures are unsecured
senior obligations of the Company ranking equally with all of the Company's
existing and future unsecured senior indebtedness and are senior in right of
payment to any of the Company's existing and future subordinated indebtedness.
The Debentures are convertible, at the option of the holders, into shares of the
Company's common stock at a conversion price of $116.325 per share, subject to
adjustment under certain circumstances; and are subject to redemption at any
time on or after December 1, 2003, in whole or in part, at the option of the
Company, at redemption prices (expressed as percentages of the principal amount)
of 100.375% if redeemed during the twelve-month period beginning December 1,
2003, and 100% if redeemed thereafter.
Page 11 of 24 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.
NINE MONTH AND THREE MONTH PERIODS ENDED OCTOBER 31, 2000
COMPARED TO NINE MONTH AND THREE MONTH PERIODS ENDED OCTOBER 31, 1999
Sales. Sales for the nine month and three month periods ended October
31, 2000 increased by approximately $220.9 million (34%) and $85.1 million
(37%), respectively, compared to the nine month and three month periods ended
October 31, 1999. This increase is primarily attributable to an increase in
sales of enhanced services platform ("ESP") products in the nine month and three
month periods ended October 31, 2000 of approximately $200.6 million and $77.7
million, respectively. Such increase was principally due to increased sales to
European and American customers. In addition, sales of multimedia digital
monitoring systems and network signaling software products increased by
approximately $12.2 million and $11.2 million, respectively, in the nine month
period ended October 31, 2000 and approximately $4.1 million and $5.0 million,
respectively, in the three month period ended October 31, 2000.
Cost of Sales. Cost of sales for the nine month and three month periods
ended October 31, 2000 increased by approximately $75.3 million (29%) and $29.1
million (32%), respectively, as compared to the nine month and three month
periods ended October 31, 1999. The increase in cost of sales in the nine month
and three month periods ended October 31, 2000 is primarily attributable to (i)
increased materials and overhead costs of approximately $43.4 million and $17.4
million, respectively, due to the increase in sales, (ii) increased
personnel-related costs of approximately $21.9 million and $9.3 million,
respectively, due to hiring of additional personnel and increased compensation
and benefits for existing personnel, and (iii) increased travel-related costs of
approximately $5.3 million and $2.1 million, respectively. Gross margins as a
percentage of sales for the nine month and three month periods ended October 31,
2000 increased to approximately 62.3% and 62.6%, respectively, from
approximately 61.1% and 61.4%, respectively, in the corresponding 1999 periods.
Page 12 of 24 Total Pages
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the nine month and three month periods ended October
31, 2000 increased by approximately $44.9 million (32%) and $17.3 million (34%),
respectively, compared to the nine month and three month periods ended October
31, 1999, but as a percentage of sales decreased from approximately 21.4% and
21.6%, respectively, in the nine month and three month periods ended October 31,
1999 to 21.1% and 21.2%, respectively, in the nine month and three month periods
ended October 31, 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.
Research and Development. Net research and development expenses for the
nine month and three month periods ended October 31, 2000 increased by
approximately $43.4 million (35%) and $17.3 million (40%), respectively, as
compared to the nine month and three month periods ended October 31, 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 nine
month and three month periods ended October 31, 2000 increased by approximately
$1.9 million (13%) and $1.2 million (25%), respectively, as compared to the nine
month and three month periods ended October 31, 1999. The increase was primarily
a result of the growth in sales of royalty bearing products.
Merger Expenses. 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. 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. In July 2000, the Company
acquired all of the outstanding stock of Loronix, a company that develops
software-based digital video recording and management systems, and all of the
outstanding stock of Syborg, a company that develops software-based digital
voice and internet recording and workforce management systems. In August 2000,
the Company acquired all of the outstanding stock of Gaya, a company
specializing in software-based intelligent IP gateways and voice-over-IP
technology, and all of the outstanding stock of Exalink, a company specializing
in protocol gateways and applications software for the delivery of
Internet-based services to all types of wireless devices. These combinations
were accounted for as pooling of interests.
In connection with the above acquisitions, the Company has charged to
operations $2,016,000 and $15,971,000 in the nine month periods ended October
31, 1999 and 2000, respectively and $998,000 and $4,348,000 in the three month
periods ended October 31, 1999 and 2000, respectively, for merger related
charges. Such charges relate to the following:
Page 13 of 24 Total Pages
<PAGE>
Asset write-downs and impairments
---------------------------------
In connection with the acquisitions in the nine month period ended
October 31, 2000, certain assets became impaired due to the existence of
duplicative technology, property and equipment and inventory of the merged
companies. Accordingly, these assets were written down to their net realizable
value at the time of the mergers and a charge of $7,399,000 was charged to
operations.
Professional fees and other direct merger expenses
--------------------------------------------------
In connection with the acquisitions in the nine month periods ended
October 31, 1999 and 2000, the Company recorded a charge of $2,016,000 and
$8,572,000, respectively, for professional fees to lawyers, investment bankers
and accountants, as well as other direct merger costs, in connection with the
mergers.
Income Tax Provision. Provision for income taxes for the nine month and
three month periods ended October 31, 2000 increased by approximately $2.1
million (18%) and $0.7 million (17%), respectively, as compared to the nine
month and three month periods ended October 31, 1999 due to increased pre-tax
income. The overall effective tax rate decreased from approximately 8.6% and
8.5% during the nine month and three month periods ended October 31, 1999,
respectively, to approximately 7.2% and 6.9% during the nine month and three
month periods ended October 31, 2000, respectively. 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 for the nine month and three month periods ended
October 31, 2000 increased by approximately $51.0 million (42%) and $20.3
million (46%), respectively, as compared to the nine month and three month
periods ended October 31, 1999, while as a percentage of sales increased from
approximately 18.4% and 18.9%, respectively, in the nine and three month periods
ended October 31, 1999 to approximately 19.6% and 20.2%, respectively, in the
nine month and three month periods ended October 31, 2000. The changes resulted
primarily from the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at October 31, 2000 and January 31, 2000
was approximately $1,204.7 million and $858.3 million, respectively.
Operations for the nine month periods ended October 31, 2000 and 1999,
after adding back non-cash items, provided cash of approximately $227.3 million
and $143.8 million, respectively. During such periods, other changes in
operating assets and liabilities used cash of approximately $64.0 million and
$22.9 million, respectively. This resulted in cash being provided by operating
activities of approximately $163.3 million and $120.8 million, respectively.
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Investment activities for the nine month periods ended October 31, 2000
and 1999 used cash of approximately $4.2 million and $439.1 million,
respectively. These amounts include (i) additions to property and equipment of
approximately $70.0 million and $72.8 million, respectively; (ii) maturities and
sales (purchases) of bank time deposits and investments, net, of approximately
$77.0 million and ($356.3) million, respectively; and (iii) capitalization of
software development costs of approximately $11.2 million and $10.0 million,
respectively.
Financing activities for the nine month periods ended October 31, 2000
and 1999 provided cash of approximately $261.7 million and $37.3 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 $71.0 million and $38.3 million,
respectively; (ii) net borrowings (repayments) of bank loans and other debt of
approximately ($4.6) million and ($1.0) million, respectively; and (iii) net
proceeds from the issuance of common stock of a subsidiary in connection with
public offerings in the 2000 period of approximately $195.2 million.
As of October 31, 2000, the Company had outstanding convertible
subordinated debentures of $300 million. In November 2000, the Company issued an
additional $500 million aggregate principal amount of its 1.50% convertible
senior debentures due December 2005. In December 2000, the Company issued an
additional $100 million aggregate principal amount of its 1.50% convertible
senior debentures due December 2005 as a result of the initial purchaser
exercising in full their over-allotment option.
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 investments in its
operations and infrastructure intended to enhance its opportunities for future
Page 15 of 24 Total Pages
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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 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
Page 16 of 24 Total Pages
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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. 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
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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
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. Recently, the government announced a proposal to
impose additional limitations on the tax benefits associated with Approved
Enterprise projects for certain categories of taxpayers, which would include the
Company, although it has not submitted legislation to the Israeli Parliament. 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
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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
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 it is the Company's
practice to hedge the exchange rate risks associated with contracts denominated
in foreign currencies only to a limited extent, if at all, its operating results
have been and may in the future be negatively affected to a material extent by
the impact of currency fluctuations. Operating results may also be affected by
the cost of such hedging activities that the Company does undertake.
The Company's future operating results and financial condition will be
adversely affected should economic weakness 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.
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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.
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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. 23
27. Financial data schedule Filed electronically
(b) Reports on Form 8-K.
-------------------
The registrant filed a Current Report on Form 8-K on September 28,
2000, reporting its restatement of its consolidated financial statements for the
years ended December 31, 1997 and January 31, 1999 and 2000 as a result of its
acquisition of Loronix Information Systems, Inc. which was accounted for as a
pooling of interests.
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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: December 11, 2000 /s/ Kobi Alexander
-------------------------------------
Kobi Alexander
President, Chairman of the Board
and Chief Executive Officer
Dated: December 11, 2000 /s/ David Kreinberg
-------------------------------------
David Kreinberg
Vice President of Finance
and Chief Financial Officer
Page 22 of 24 Total Pages
