UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-15502
COMVERSE TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 13-3238402
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
170 CROSSWAYS PARK DRIVE, WOODBURY, NY 11797
(Address of principal executive offices) (Zip Code)
(516) 677-7200
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of Common Stock, par value $0.10 per share,
outstanding as of September 9, 2002 was 187,622,121
Page 1 of 27 Total Pages
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements.
Page
----
1. Condensed Consolidated Balance Sheets as
of January 31, 2002 and July 31, 2002 3
2. Condensed Consolidated Statements of Operations
for the Three and Six Month Periods
Ended July 31, 2001 and July 31, 2002 4
3. Condensed Consolidated Statements of Cash
Flows for the Six Month Periods Ended
July 31, 2001 and July 31, 2002 5
4. Notes to Condensed Consolidated Financial
Statements 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 13
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings 25
ITEM 5. Shareholder Proposals and Director Nominations for 2002
Annual Meeting 25
Page 2 of 27
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
JANUARY 31, JULY 31,
2002* 2002
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,361,862 $ 1,391,705
Bank time deposits and short-term investments 530,622 415,294
Accounts receivable, net 371,928 291,169
Inventories 56,024 51,055
Prepaid expenses and other current assets 76,667 69,344
--------------- ---------------
TOTAL CURRENT ASSETS 2,397,103 2,218,567
PROPERTY AND EQUIPMENT, net 181,761 175,667
OTHER ASSETS 125,299 139,581
--------------- ---------------
TOTAL ASSETS $ 2,704,163 $ 2,533,815
=============== ===============
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 322,402 $ 255,998
Advance payments from customers 39,576 44,563
Other current liabilities 4,875 47,051
--------------- ---------------
TOTAL CURRENT LIABILITIES 366,853 347,612
CONVERTIBLE DEBENTURES 600,000 434,000
LIABILITY FOR SEVERANCE PAY 9,772 9,421
OTHER LIABILITIES 49,827 9,997
--------------- ---------------
TOTAL LIABILITIES 1,026,452 801,030
--------------- ---------------
MINORITY INTEREST 61,303 80,139
--------------- ---------------
STOCKHOLDERS' EQUITY:
Common stock, $0.10 par value -
authorized, 600,000,000 shares;
issued and outstanding, 186,248,350 and 186,981,198 shares 18,625 18,698
Additional paid-in capital 1,018,232 1,073,681
Retained earnings 574,763 555,110
Accumulated other comprehensive income 4,788 5,157
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 1,616,408 1,652,646
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,704,163 $ 2,533,815
=============== ===============
*The Condensed Consolidated Balance Sheet as of January 31, 2002
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 27
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED THREE MONTHS ENDED
JULY 31, JULY 31, JULY 31, JULY 31,
2001 2002 2001 2002
Sales $ 710,127 $ 392,404 $ 345,090 $ 181,210
Cost of sales 289,273 171,122 146,651 79,345
------------- ------------- --------------- --------------
Gross margin 420,854 221,282 198,439 101,865
Operating expenses:
Research and development, net 145,188 123,757 74,990 60,834
Selling, general and administrative 159,174 146,011 80,985 72,498
Workforce reduction and restructuring charges 8,875 2,798 8,875 2,798
------------- ------------- --------------- --------------
Income (loss) from operations 107,617 (51,284) 33,589 (34,265)
Interest and other income (expense), net 6,959 34,105 (3,421) 39,349
------------- ------------- ---------------- --------------
Income (loss) before income tax provision 114,576 (17,179) 30,168 5,084
Income tax provision 7,636 2,474 2,184 1,161
------------- ------------- --------------- --------------
Net income (loss) $ 106,940 $ (19,653) $ 27,984 $ 3,923
============= ============= =============== ==============
Earnings (loss) per share:
Basic $ 0.62 $ (0.11) $ 0.16 $ 0.02
============= ============= =============== ==============
Diluted $ 0.59 $ (0.11) $ 0.15 $ 0.02
============= ============= =============== ==============
The accompanying notes are an integral part of these financial statements.
Page 4 of 27
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
JULY 31, JULY 31,
2001 2002
Cash flows from operating activities:
Net cash from operations after adjustment
for non-cash items $ 136,894 $ 13,457
Changes in assets and liabilities:
Accounts receivable (82,257) 83,521
Inventories 35,121 6,340
Prepaid expenses and other current assets (1,377) 17,328
Accounts payable and accrued expenses 14,947 (79,668)
Liability for severance pay 2,563 (783)
Other (41,186) (2,377)
-------------- --------------
Net cash provided by operating activities 64,705 37,818
-------------- --------------
Cash flows from investing activities:
Maturities and sales (purchases) of bank time deposits
and investments, net 59,799 137,040
Purchases of property and equipment (31,613) (16,330)
Increase in software development costs (11,235) (7,594)
Net assets acquired - (27,765)
-------------- --------------
Net cash provided by investing activities 16,951 85,351
-------------- --------------
Cash flows from financing activities:
Net increase (decrease) of bank loans and other debt (229) (166,077)
Proceeds from issuance of common stock 17,585 72,751
-------------- --------------
Net cash provided by (used in) financing activities 17,356 (93,326)
-------------- --------------
Net increase in cash and cash equivalents 99,012 29,843
Cash and cash equivalents, beginning of period 1,275,105 1,361,862
-------------- --------------
Cash and cash equivalents, end of period $ 1,374,117 $ 1,391,705
============== ==============
The accompanying notes are an integral part of these financial statements.
Page 5 of 27
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION. Comverse Technology, Inc. ("CTI" and, together
with its subsidiaries, the "Company") is engaged in the design, development,
manufacture, marketing and support of computer and telecommunications systems
and software for multimedia communications and information processing
applications.
The accompanying financial information should be read in conjunction
with the financial statements, including the notes thereto, for the annual
period ended January 31, 2002. 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 and six month periods ended July 31, 2002 are not
necessarily indicative of the results to be expected for the full year.
RECLASSIFICATIONS. Certain prior year amounts have been reclassified
to conform to the manner of presentation in the current year.
INVENTORIES. The composition of inventories at January 31, 2002 and
July 31, 2002 is as follows:
JANUARY 31, JULY 31,
2002 2002
(In thousands)
Raw materials $ 30,989 $ 31,376
Work in process 12,049 8,712
Finished goods 12,986 10,967
------------- -------------
$ 56,024 $ 51,055
============= =============
RESEARCH AND DEVELOPMENT EXPENSES. The Company has received periodic
reimbursement from the Israeli Government of a portion of the costs of approved
research and development projects conducted at its facilities in Israel. Such
reimbursement amounted to $1,516,000 and $7,183,000 in the three and six month
periods ended July 31, 2001, respectively, and $4,733,000 and $5,937,000 in the
three and six month periods ended July 31, 2002, respectively. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Certain Trends and Uncertainties." Under the terms of the applicable funding
agreements, the Company is required to pay royalties on revenues associated with
certain of its products resulting from certain projects that received government
funding, and certain products may not be manufactured outside of Israel without
government approval.
EARNINGS (LOSS) PER SHARE. The computation of basic earnings (loss)
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 calculation for earnings per
Page 6 of 27
share for the three and six month periods ended July 31, 2001 and 2002 is as
follows:
THREE MONTHS ENDED THREE MONTHS ENDED
JULY 31, 2001 JULY 31, 2002
--------------------------------- -----------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
(In thousands, except per share data)
BASIC EPS
Net Income $27,984 174,406 $ 0.16 $3,923 186,948 $ 0.02
======= =======
EFFECT OF DILUTIVE
SECURITIES
Options and warrants 6,836 465
------- ------- ------- ------ ------- -------
DILUTED EPS $27,984 181,242 $ 0.15 $3,923 187,413 $ 0.02
======= ======= ======= ====== ======= =======
SIX MONTHS ENDED SIX MONTHS ENDED
JULY 31, 2001 JULY 31, 2002
--------------------------------- -----------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
(In thousands, except per share data)
BASIC EPS
Net Income (loss) $106,940 172,592 $ 0.62 $(19,653) 186,762 $(0.11)
======= =======
EFFECT OF DILUTIVE
SECURITIES
Options and warrants 8,089
Convertible debentures 6,471 12,403
-------- ------- ------- --------- -------- -------
DILUTED EPS $113,411 193,084 $ 0.59 $(19,653) $186,762 $(0.11)
======== ======= ======= ========= ======== =======
The diluted earnings (loss) per share computation for the six months
ended July 31, 2002 excludes incremental shares of 1,261,553 related to employee
stock options. These shares are excluded due to their antidilutive effect as a
result of the Company's loss during the period. In addition, the Company's 1.5%
convertible debentures were not included in the computation of diluted earnings
(loss) per share because the effect of including them would be antidilutive.
COMPREHENSIVE INCOME (LOSS). Total comprehensive income (loss) was
$39,173,000 and $8,190,000 for the three month periods ended July 31, 2001 and
July 31, 2002, respectively, and $105,214,000 and $(19,284,000) for the six
month periods ended July 31, 2001 and July 31, 2002, respectively. The elements
of comprehensive income include net income, unrealized gains/losses on available
for sale securities and foreign currency translation adjustments.
CONVERTIBLE DEBENTURES. In November and December 2000, the Company
issued $600,000,000 aggregate principal amount of its 1.50% convertible senior
debentures due December 2005 (the "Debentures"). The Debentures are unsecured
senior obligations of the Company ranking equally with all of the Company's
Page 7 of 27
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 in certain events; 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%
of the principal amount if redeemed thereafter. The Debenture holders may
require the Company to repurchase the Debentures at par in the event that the
common stock ceases to be publicly traded and, in certain instances, upon a
change in control of the Company. Upon the occurrence of a change in control,
instead of paying the repurchase price in cash, the Company may pay the
repurchase price in common stock. During the three month period ended July 31,
2002, the Company acquired, in open market purchases, $166,000,000 of face
amount of its convertible debentures, resulting in a pre-tax gain, net of debt
issuance costs, of approximately $31,502,000. Between August 1, 2002 and
September 9, 2002, the Company acquired an additional $39,180,000 million of
face amount of the convertible debentures.
ACQUISTIONS. In February 2002, Verint Systems Inc. ("Verint"), a
subsidiary of CTI, acquired the digital video recording business of Lanex, LLC.
The Lanex business provides digital video recording solutions for security and
surveillance applications primarily to North American banks. The purchase price
consisted of $9.5 million in cash and a $2.2 million convertible note. The note
is non-interest bearing and matures on February 1, 2004. The holder of the note
may elect to convert the note, in whole or in part, into shares of Verint's
common stock at a conversion price of $16.06 per share. The note is guaranteed
by CTI. Pro forma results of operations have not been presented because the
effects of this acquisition are not material.
In June 2002, the Company acquired Odigo, Inc. ("Odigo"), a
privately-held provider of instant messaging and presence management solutions
to service providers. The purchase price was approximately $20.1 million in
cash. Prior to the acquisition, the Company was a strategic partner with Odigo
holding an equity position which it previously acquired for approximately $3
million. Pro forma results of operations have not been presented because the
effects of this acquisition are not material.
WORKFORCE REDUCTION AND RESTRUCTURING. During the year ended January
31, 2002, the Company took steps to better align its cost structure with the
business environment and to improve the efficiency of its operations. These
steps included a reduction in workforce announced in April 2001 and a
restructuring plan, which included an additional reduction in workforce,
announced in December 2001. During the three months ended July 31, 2002, the
Company reduced its workforce resulting in a charge of $2,798,000 for severance
and other restructuring related charges.
As of July 31, 2002 the Company had an accrual balance of
approximately $28,601,000 related to the workforce reduction and restructuring
plan. A roll forward of the workforce reduction and restructuring plan accrual
from January 31, 2002 is as follows:
Page 8 of 27
ACCRUAL ACCRUAL
BALANCE AT RESTRUCTURING BALANCE AT
JANUARY 31, AND OTHER CASH NON-CASH JULY 31,
2002 CHARGES PAYMENTS CHARGES 2002
---- ------- -------- ------- ----
(IN THOUSANDS)
Severance and related $11,862 $1,640 $9,922 $ - $3.580
Facilities 24,347 1,028 354 - 25,021
Property and equipment - 130 - 130 -
---------- ---------- ---------- ---------- ----------
Total $36,209 $2,798 $10,276 $130 $28,601
========== ========== ========== ========== ==========
Severance and related costs consist primarily of severance payments
to terminated employees, fringe related costs associated with severance
payments, other termination costs and legal and consulting costs. The balance of
these severance and related costs is expected to be paid by January 31, 2003.
Facilities costs consist primarily of contractually obligated lease
liabilities and operating expenses related to facilities to be vacated primarily
in the United States and Israel as a result of the restructuring plan. The
balance of the facilities cost is expected to be paid at various dates through
January 2011.
In July 2002, the Company announced that it plans to further reduce
its workforce by approximately 1,200 people and expects to incur additional
significant restructuring charges, primarily in the quarter ending October 31,
2002 with some additional amount in the quarter ending January 31, 2003.
BUSINESS SEGMENT INFORMATION. The Company's reporting segments are
as follows:
Enhanced Services Solutions Products - Enable telecommunications
service providers to offer a variety of revenue-generating services accessible
to large numbers of simultaneous users. These services include a broad range of
integrated multimodal messaging, information distribution and personal
communications services, such as call answering with one-touch call return,
voicemail, IP-based unified messaging (voice, fax and email in a single mailbox,
media conversion such as email to voice and visual mailbox presentation),
value-added services for roamers, prepaid wireless calling services, wireless
data and Internet-based services such as short messaging services, wireless
information and entertainment services, multimedia messaging services, wireless
instant messaging services, interactive voice response, and voice portal
services, which are part of a voice-controlled portfolio of services such as
voice dialing, voice-controlled Web browsing and voice-controlled messaging, and
other applications.
Service Enabling Signaling Software Products - Interconnect the
complex circuit switching, database and messaging systems and manage vital
number, routing and billing information that form the backbone of today's public
telecommunications networks. These products also are embedded in a range of
packet softswitching products to interoperate or converge voice and data
networks and facilitate services such as voice over the Internet and Internet
offload. This segment represents the Company's Ulticom, Inc. subsidiary.
Page 9 of 27
Security and Business Intelligence Recording Products - Provides
analytic solutions for communications interception, digital video security and
surveillance, and enterprise business intelligence. The software generates
actionable intelligence through the collection, retention and analysis of voice,
fax, video, email, Internet and data transmissions from multiple types of
communications networks. This segment represents the Company's Verint
subsidiary.
All Other - Includes other miscellaneous operations.
The table below presents information about operating income (loss)
and segment assets as of and for the three and six month periods ended July 31,
2001 and 2002:
Security and
Enhanced Service Business
Services Enabling Intelligence
Platform Software Recording All Reconciling Consolidated
Products Products Products Other Items Totals
---------------------------------------------------------------------------------------------------------
(In thousands)
THREE MONTHS ENDED JULY 31, 2001:
Sales $ 295,357 $ 17,926 $ 32,017 $ 2,295 $ (2,505) $ 345,090
Operating Income
(Loss) $ 32,215 $ 4,231 $ (1,107) $ 127 $ (1,877) $ 33,589
THREE MONTHS ENDED JULY 31, 2002:
Sales $ 135,233 $ 6,103 $ 38,470 $ 2,588 $ (1,184) $ 181,210
Operating Income
(Loss) $ (29,117) $ (4,726) $ 2,232 $ (189) $ (2,465) $ (34,265)
SIX MONTHS ENDED JULY 31, 2001:
Sales $ 608,703 $ 34,959 $ 66,575 $ 4,755 $ (4,865) $ 710,127
Operating Income
(Loss) $ 103,800 $ 8,065 $ (1,022) $ (442) $ (2,784) $ 107,617
SIX MONTHS ENDED JULY 31, 2002:
Sales $ 301,771 $ 13,200 $ 74,787 $ 4,881 $ (2,235) $ 392,404
Operating Income
(Loss) $ (43,936) $ (7,627) $ 4,307 $ (454) $ (3,574) $ (51,284)
TOTAL ASSETS:
July 31, 2001 $ 1,200,436 $ 243,206 $ 111,205 $ 79,065 $ 1,084,551 $ 2,718,463
July 31, 2002 $ 1,098,474 $ 235,748 $ 192,962 $ 39,751 $ 966,880 $ 2,533,815
Page 10 of 27
Reconciling items consist of the following:
Sales - elimination of intersegment revenues.
Operating Income (Loss) - elimination of intersegment operating income
and corporate operations.
Total Assets - elimination of intersegment receivables and unallocated
corporate assets.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS. In June 2001, the FASB
issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142
addresses financial accounting and reporting for acquired goodwill and other
intangible assets. Under SFAS No. 142, goodwill and some intangible assets will
no longer be amortized, but rather reviewed for impairment on a periodic basis.
The provisions of this Statement are required to be applied starting with fiscal
years beginning after December 15, 2001. This Statement is required to be
applied at the beginning of the Company's fiscal year and is to be applied to
all goodwill and other intangible assets recognized in its financial statements
at that date. Impairment losses for goodwill and certain intangible assets that
arise due to the initial application of this Statement are to be reported as
resulting from a change in accounting principle. Goodwill and intangible assets
acquired after June 30, 2001 will be subject immediately to the provisions of
this Statement. The adoption of SFAS No. 142 did not have a material effect on
the Company's consolidated financial statements.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 establishes accounting standards for
recognition and measurement of a liability for an asset retirement obligation
and the associated asset retirement cost. SFAS No. 143 applies to legal
obligations associated with the retirement of a tangible long-lived asset that
result from the acquisition, construction, development and/or normal operation
of a long-lived asset. This Statement is effective for fiscal years beginning
after June 15, 2002; however, early adoption is encouraged. The adoption of SFAS
No. 143 is not expected to have a material effect on the Company's consolidated
financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supercedes certain provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets to Be Disposed Of" and Accounting Principles
Board Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." SFAS No. 144 is effective for
financial statements issued for fiscal years beginning after December 15, 2001
and interim periods within those fiscal years; however, early adoption is
encouraged. The adoption of SFAS No. 144 did not have a material effect on the
Company's consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145, rescinds SFAS No. 4, which required all gains and
losses from the extinguishment of debt to be classified as an extraordinary
item. SFAS No. 145 recognizes that the use of debt extinguishment has become
part of the risk management strategy of many companies and therefore may be
considered as part of a company's operating activities. The rescission of SFAS
No. 4 is effective for fiscal years beginning after May 15, 2002 with earlier
application encouraged. The Company adopted SFAS 145 in the three month period
Page 11 of 27
ended July 31, 2002. Accordingly, as the Company intends to periodically
extinguish its debt as part of its risk management strategy, the gain of
approximately $31.5 million on the extinguishment of debt relating to the
Company's 1.50% convertible debentures was recorded through continuing
operations in the Statement of Operations and is included in the "Net cash from
operations after adjustment for non-cash items" in the Statement of Cash Flows
during the period ended July 31, 2002. In addition, SFAS No. 145 also rescinds
SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers" and amends
SFAS No. 13 to require that certain lease modifications that have economic
effects similar to sale-leaseback transactions be accounted for in the same
manner as sale-leaseback transactions. The statement is generally effective for
transactions occurring after May 15, 2002 with earlier application encouraged
for these items.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities." This statement addresses the recognition, measurement and
reporting of costs that are associated with exit and disposal activities. This
statement includes the restructuring activities that are currently accounted for
pursuant to the guidance set forth in EITF 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to exit an Activity
(including Certain Costs Incurred in a Restructuring)," costs related to
terminating a contract that is not a capital lease and one-time benefit
arrangements received by employees who are involuntarily terminated - nullifying
the guidance under EITF 94-3. Under SFAS No. 146 the cost associated with an
exit or disposal activity is recognized in the periods in which it is incurred
rather than at the date the company committed to the exit plan. This statement
is effective for exit or disposal activities initiated after December 31, 2002
with earlier application encouraged. The Company is currently evaluating the
impact that SFAS No. 146 will have on its consolidated financial statements.
OPTION EXCHANGE PROGRAM. In May 2002, the Company announced the
commencement of a voluntary stock option exchange program for its eligible
employees. Under the program, which was approved by the Company's shareholders,
participating employees were given the opportunity to have unexercised stock
options previously granted to them cancelled, in exchange for replacement
options that will be granted at a future date. Replacement options will be
granted at a ratio of 0.85 new options for each existing option cancelled, at an
exercise price equal to the fair market value of the Company's stock on the date
of the re-grant, which currently is expected to be December 23, 2002. The
exchange program was designed in accordance with FASB Interpretation No. 44. As
per FASB No. 44, the grant of replacement options not less than six months and
one day after cancellation will not result in any variable compensation charges
relating to these options. As a result of the stock option exchange program, the
Company is currently obligated to grant replacement options to acquire a maximum
of approximately 14.8 million shares of the Company's common stock.
ISSUANCE OF SUBSIDIARY STOCK. In May 2002, Verint issued 4,500,000
shares of its common stock in an initial public offering. As a result of the
initial public offering, the Company's ownership interest in Verint was reduced
to approximately 79.5%. Proceeds from the offering, based on the offering price
of $16.00 per share, totaled approximately $65.4 million, net of offering
expenses. The Company recorded a gain of approximately $48.2 million which was
recorded as an increase in stockholders' equity as a result of the issuance.
Page 12 of 27
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
RESULTS OF OPERATIONS
INTRODUCTION
As explained in greater detail in "Certain Trends and Uncertainties",
the Company's two business units serving telecommunications markets are
operating within an industry experiencing a deep capital spending contraction
and, consequently, have experienced sequential and year over year revenue
declines. In contrast, Verint, which services the security and enterprise
business intelligence markets, achieved sequential revenue growth based, in
part, on heightened awareness surrounding homeland defense and security related
initiatives in the U.S. and worldwide. Overall, however, with a substantial
majority of the quarter's sales generated from activities serving the
telecommunications industry, during the quarter ended July 31, 2002 the Company
experienced a sequential sales decline of approximately 14% and a year over year
sales decline of approximately 47% resulting in an operating loss for the
quarter.
SIX MONTH AND THREE MONTH PERIODS ENDED JULY 31, 2002
COMPARED TO SIX MONTH AND THREE MONTH PERIODS ENDED JULY 31, 2001
Sales. Sales for the six month and three month periods ended July 31,
2002 decreased by approximately $317.7 million, or 45%, and $163.9 million, or
47%, respectively, compared to the six month and three month periods ended July
31, 2001. This decrease is primarily attributable to a decrease in sales of
enhanced services platform ("ESP") products in the six month and three month
periods ended July 31, 2002 of approximately $306.9 million and $160.1 million,
respectively. Such decrease was principally due to lower sales to European and
American customers. In addition, sales of business intelligence recording
products and service enabling software products increased (decreased) by
approximately $8.2 million and $(21.8) million, respectively, in the six month
period and approximately $6.5 million and $(11.8) million, respectively, in the
three month period.
Cost of Sales. Cost of sales for the six month and three month
periods ended July 31, 2002 decreased by approximately $118.2 million, or 41%,
and $67.3 million, or 46%, respectively, as compared to the six month and three
month periods ended July 31, 2001. The decrease in cost of sales in the six
month and three month periods ended July 31, 2002 is primarily attributable to
decreased materials and overhead costs of approximately $94.5 million and $56.9
million, respectively, due to the decrease in sales, and decreased royalty
expense of approximately $15.2 million and $9.1 million, respectively. Gross
margins as a percentage of sales for the six month and three month periods ended
July 31, 2002 decreased to approximately 56.4% and 56.2%, respectively, from
approximately 59.3% and 57.5%, respectively, in the corresponding 2001 periods.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the six month and three month periods ended July 31,
2002 decreased by approximately $13.2 million, or 8%, and $8.5 million, or 10%,
Page 13 of 27
respectively, compared to the six month and three month periods ended July 31,
2001, and as a percentage of sales for the six month and three month periods
ended July 31, 2002 increased to approximately 37.2% and 40.0%, respectively,
from approximately 22.4% and 23.5% in the corresponding 2001 periods. The
decrease in the dollar amount of the expense was primarily due to a reduction in
workforce.
Research and Development. Net research and development expenses for
the six month and three month periods ended July 31, 2002 decreased by
approximately $21.4 million, or 15%, and $14.2 million, or 19%, respectively, as
compared to the six month and three month periods ended July 31, 2001 due to a
reduction in workforce and a reduction of research and development projects
partially offset by an increase in reimbursement from government agencies.
Workforce Reduction and Restructuring Charges. During the three
months ended July 31, 2001 and 2002 the Company reduced its workforce. As a
result of these workforce reductions the Company recorded a charge of $8,875,000
and $2,798,000 to operations for severance and other related costs in the three
month period ended July 31, 2001 and 2002, respectively.
Interest and Other Income (Expense), Net. Interest and other income,
net, for the six month and three month periods ended July 31, 2002 increased by
approximately $27.1 million and $42.8 million, respectively, as compared to the
six month and three month periods ended July 31, 2001. The principal reasons for
the increase in the six month and three month periods ended July 31, 2002 are
(i) decreased interest expense of approximately $5.0 million and $1.7 million,
respectively, due to the redemption of the Company's $300 million 4.50%
convertible debentures in June 2001, as well as the Company buying back $166
million of its 1.50% convertible debentures during the three months ended July
31, 2002; (ii) change in foreign currency gains/losses of approximately $38.6
million and $24.2 million, respectively, due primarily to the strengthening of
the euro during the 2002 periods; and (iii) during the 2002 periods, the Company
recorded a gain of approximately $31.5 million as a result of buying back $166
million of its 1.50% convertible debentures. Such items were offset by (i)
decreased interest and dividend income of approximately $17.3 million and $6.0
million, respectively, due to the decline in interest rates in the 2002 periods;
and (ii) an increase in net losses from the sale and writedown of investments of
approximately $32.3 million and $10.6 million, respectively.
Income Tax Provision. Provision for income taxes for the six month
and three month periods ended July 31, 2002 decreased by approximately $5.2
million, or 68%, and $1.0 million, or 47%, respectively, as compared to the six
month and three month periods ended July 31, 2001 due to decreased pre-tax
income. 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 (Loss). Net income (loss) for the six month and three
month periods ended July 31, 2002 decreased by approximately $126.6 million, or
118%, and $24.1 million, or 86%, respectively, as compared to the six month and
three month periods ended July 31, 2001, and as a percentage of sales was
approximately 15.1% and (5.0%) in the six month periods ended July 31, 2001 and
Page 14 of 27
2002, respectively, and was approximately 8.1% and 2.2% in the three month
periods ended July 31, 2001 and 2002, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at July 31, 2002 and January 31, 2002
was approximately $1,871.0 million and $2,030.3 million, respectively.
Operations for the six month periods ended July 31, 2002 and 2001,
after adding back non-cash items, provided cash of approximately $13.5 million
and $136.9 million, respectively. During such periods, other changes in
operating assets and liabilities provided (used) cash of approximately $24.4
million and $(72.2) million, respectively. This resulted in cash provided by
operating activities of approximately $37.8 million and $64.7 million,
respectively.
Investment activities for the six month periods ended July 31, 2002
and 2001 provided cash of approximately $85.4 million and $17.0 million,
respectively. These amounts include (i) additions to property and equipment in
the six month periods ended July 31, 2002 and 2001 of approximately $16.3
million and $31.6 million, respectively; (ii) maturities and sales (purchases)
of bank time deposits and investments, net, of approximately $137.0 million and
$59.8 million, respectively; (iii) capitalization of software development costs
of approximately $7.6 million and $11.2 million, respectively and (iv) net
assets acquired as a result of acquisitions in the 2002 period of approximately
$27.8 million.
Financing activities for the six month periods ended July 31, 2002
and 2001 provided (used) cash of approximately $(93.3) million and $17.4
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 the Company and issuance of common stock of
Verint in the six month periods ended July 31, 2002 and 2001 of approximately
$72.8 million and $17.6 million, respectively; (ii) net proceeds (repayments) of
bank loans and other debt of approximately $(0.1) million and $(0.2) million,
respectively; and the repurchase of convertible debentures in the 2002 period of
approximately $166.0 million.
As of July 31, 2002, the Company had outstanding convertible
debentures of $434.0 million. In January 2002, Verint took a bank loan in the
amount of $42 million. This loan, which matures in February 2003, bears interest
at LIBOR plus 0.55% and may be prepaid without penalty. The loan is guaranteed
by CTI.
In February 2002, Verint acquired the digital video recording
business of Lanex, LLC. The Lanex business provides digital video recording
solutions for security and surveillance applications primarily to North American
banks. The purchase price consisted of $9.5 million in cash and a $2.2 million
convertible note. The note is non-interest bearing and matures on February 1,
2004. The holder of the note may elect to convert the note, in whole or in part,
into shares of Verint's common stock at a conversion price of $16.06 per share.
The note is guaranteed by CTI.
In June 2002, the Company acquired Odigo, a privately-held provider
of instant messaging and presence management solutions to service providers. The
purchase price was approximately $20.1 million in cash. Prior to the
Page 15 of 27
acquisition, the Company was a strategic partner with Odigo holding an equity
position which it previously acquired for approximately $3 million.
The Company believes that its existing working capital 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 derives the majority of its revenue from the
telecommunications industry, which continues to face an unprecedented recession.
This has resulted in a significant reduction of capital expenditures made by
telecommunications service providers ("TSP"). The Company's operating results
and financial condition have been, and will continue to be, adversely affected
by the severe decline in technology purchases and capital expenditures by TSPs
worldwide. Consequently, the Company's operating results have deteriorated
significantly in recent periods and likely will continue to deteriorate in
future periods if such conditions remain in effect. For these reasons and the
risk factors outlined below, it has been and continues to be very difficult for
the Company to accurately forecast future revenues and operating results.
The Company's business is particularly dependent on the strength of
the telecommunications industry. The telecommunications industry, in general,
and the Company, in particular, have been negatively affected by, among other
factors, the high costs and large debt positions incurred by some TSPs to expand
capacity and enable the provision of future services (and the corresponding
risks associated with the development, marketing and adoption of these services
as discussed below), including the cost of acquisitions of licenses to provide
future broadband services and reductions in TSPs' actual and projected revenues
and deterioration in their actual and projected operating results. Accordingly,
TSPs in general and the Company's customers in particular have significantly
reduced their actual and planned expenditures to expand or replace equipment and
delayed and reduced the deployment of services. A number of TSPs, including
certain customers of the Company, also have indicated the existence of
conditions of excess capacity in certain markets.
In addition, TSPs have delayed the planned introduction of new
services, such as broadband mobile telephone services, that would be supported
by certain of the Company's products. Certain of the Company's customers also
have implemented changes in procurement practices and procedures, including
limitations on purchases in anticipation of estimated future capacity
Page 16 of 27
requirements, and in the management and use of their networks, that have reduced
the Company's sales and order backlog, which also has made it very difficult for
the Company to project future sales. The continuation and/or exacerbation of
these negative trends will have an adverse effect on the Company's future
results. In addition to loss of revenue, weakness in the telecommunications
industry has affected and will continue to affect the Company's business by
increasing the risks of credit or business failures of suppliers, customers or
distributors, by customer requirements for vendor financing and longer payment
terms, by delays and defaults in customer or distributor payments, and by price
reductions instituted by competitors to retain or acquire market share.
The Company's current plan of operations is predicated in part on a
recovery in capital expenditures by its customers. In the absence of such
improvement, the Company would experience further deterioration in its operating
results, and may determine to modify its plan for future operations accordingly,
which may include, among other things, additional reductions in its workforce.
The Company intends to continue to make significant investments in
its business, and to examine opportunities for growth through acquisitions and
strategic investments. These activities may involve significant expenditures and
obligations that cannot readily be curtailed or reduced if anticipated demand
for the associated products does not materialize or is delayed. The impact of
these decisions on future financial results cannot be predicated with assurance,
and the Company's commitment to growth may increase its vulnerability to
downturns in its markets, technology changes and shifts in competitive
conditions. The Company also may not be able to identify future suitable merger
or acquisition candidates, and even if the Company does identify suitable
candidates, it may not be able to make these transactions on commercially
acceptable terms, or at all. If the Company does make acquisitions, it may not
be able to successfully incorporate the personnel, operations and customers of
these companies into the Company's business. In addition, the Company may fail
to achieve the anticipated synergies from the combined businesses, including
marketing, product integration, distribution, product development and other
synergies. The integration process may further strain the Company's existing
financial and managerial controls and reporting systems and procedures. This may
result in the diversion of management and financial resources from the Company's
core business objectives. In addition, an acquisition or merger may require the
Company to utilize cash reserves, incur debt or issue equity securities, which
may result in a dilution of existing stockholders, and the Company may be
negatively impacted by the assumption of liabilities of the merged or acquired
company. Due to rapidly changing market conditions, the Company may find the
value of its acquired technologies and related intangible assets, such as
goodwill as recorded in the Company's financial statements, to be impaired,
resulting in charges to operations. The Company may also fail to retain the
acquired or merged companies' key employees and customers.
The Company has made, and in the future, may continue to make
strategic investments in other companies. These investments have been made in,
and future investments will likely be made in, immature businesses with unproven
track records and technologies. Such investments have a high degree of risk,
with the possibility that the Company may lose the total amount of its
investments. The Company may not be able to identify suitable investment
candidates, and, even if it does, the Company may not be able to make those
Page 17 of 27
investments on acceptable terms, or at all. In addition, even if the Company
makes investments, it may not gain strategic benefits from those investments.
The telecommunications industry is subject to rapid technological
change. The introduction of new technologies in the telecommunications market,
including the delay in the adoption of such new technologies, 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
continued success 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. As a result, the life cycle of the Company's
products is difficult to estimate. In addition, changing industry and market
conditions may dictate strategic decisions to restructure some business units
and discontinue others. Discontinuing a business unit or product line may result
in the Company recording accrued liabilities for special charges, such as costs
associated with a reduction in workforce. These strategic decisions could result
in changes to determinations regarding a product's useful life and the
recoverability of the carrying basis of certain assets.
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. The Company relies on a limited number of suppliers and manufacturers
for specific components and may not be able to find alternate manufacturers that
meet its requirements and existing or alternative sources may not be available
on favorable terms and conditions. Thus, if there is a shortage of supply for
these components, the Company may experience an interruption in its product
supply. In addition, loss of third party software licensing would materially and
adversely affect the Company's business, financial condition and results of
operations.
The telecommunications industry continues to undergo significant
change as a result of deregulation and privatization worldwide, reducing
restrictions on competition in the industry. Unforeseen changes in the
regulatory environment also 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 as a result of its own
research and development efforts or acquisitions, it is likely to encounter new
competitors.
The market for the Company's digital security and surveillance and
enterprise business intelligence products in the past has been affected by
weakness in general economic conditions, delays or reductions in customers'
purchases of capital equipment and uncertainties relating to government
expenditure programs. The Company's business generated from government contracts
may be adversely affected if: (i) levels of government expenditures and
authorizations for law enforcement and security related programs decrease,
remain constant or shift to programs in areas where the Company does not provide
products and services, (ii) the Company is prevented from entering into new
Page 18 of 27
government contracts or extending existing government contracts based on
violations or suspected violations of procurement laws or regulations, (iii) the
Company is not granted security clearances required to sell products to domestic
or foreign governments or such security clearances are revoked, (iv) the
Company's reputation or relationship with government agencies is impaired, (v)
there is a change in government procurement procedures, or (vi) the Company is
suspended from contracting with a domestic or foreign government or any
significant law enforcement agency. Competitive conditions in this sector also
have been affected by the increasing use by certain potential 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 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 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 also may be more volatile
than the Company has experienced in prior periods. 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's gross margins also
may be adversely affected by increases in material or labor costs, obsolescence
charges, price competition and changes in channels of distribution or in the mix
of products sold.
Political, economic and military conditions in Israel directly affect
the Company's operations. Since the establishment of the State of Israel in
1948, a number of armed conflicts have taken place between Israel and its Arab
neighbors, and the continued state of hostility, varying in degree and
intensity, has led to security and economic problems for Israel. Since October
2000, there has been a significant increase in violence, primarily in the West
Bank and Gaza Strip, and more recently Israel has experienced terrorist
incidents within its borders. As a result, negotiations between Israel and
representatives of the Palestinian Authority have been sporadic and have failed
to result in peace. The Company could be adversely affected by hostilities
involving Israel, the interruption or curtailment of trade between Israel and
its trading partners, or a significant downturn in the economic or financial
condition of Israel. In addition, the sale of products manufactured in Israel
may be adversely affected in certain countries by restrictive laws, policies or
practices directed toward Israel or companies having operations in Israel. The
continuation or exacerbation of violent conflicts involving Israel and other
nations may impede the Company's ability to sell its products in certain
countries. In addition, some of the Company's employees in Israel are subject to
being called upon to perform military service in Israel, and their absence may
Page 19 of 27
have an adverse effect upon the Company's operations. Generally, unless exempt,
male adult citizens and permanent residents of Israel under the age of 54 are
obligated to perform up to 36 days of military reserve duty annually.
Additionally, all such residents are subject to being called to active duty at
any time under emergency circumstances. These conditions could disrupt the
Company's operations in Israel and its business, financial condition and results
of operations could be adversely affected.
The Company's costs of operations have at times been affected by
changes in the cost of its operations in Israel, resulting from changes in the
value of the Israeli shekel relative to the United States dollar, which for
certain periods had a negative impact and from difficulties in attracting and
retaining qualified scientific, engineering and technical personnel in Israel,
where the availability of such personnel has at times been severely limited.
Changes in these cost factors have from time to time been significant and
difficult to predict, and could in the future have a material adverse effect on
the Company's results of operations.
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. Some of these programs and tax benefits have ceased and
others may not be continued in the future and the availability of such benefits
to the Company may be affected by a number of factors, including budgetary
constraints resulting from adverse economic conditions, government policies and
the Company's ability to satisfy eligibility criteria.
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 has regularly participated in a conditional
grant program administered by the OCS under which it has received significant
benefits through reimbursement of up to 50% of qualified research and
development expenditures. Verint 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 this program. Such royalty payments by Verint are
currently required to be made until the government has been reimbursed the
amounts received by the Company plus, for amounts received under projects
approved by the OCS after January 1, 1999, interest on such amount at a rate
equal to the 12-month LIBOR rate in effect on January 1 of the year in which
approval is obtained. During fiscal 2001, Comverse entered into an arrangement
with the OCS whereby Comverse agreed to pay a lump sum royalty amount for all
past amounts received from the OCS. In addition, Comverse will receive lower
amounts from the OCS than it has historically received, but will not have to pay
royalty amounts on future grants. The amount of reimbursement received by the
Company under this program has been reduced significantly, and the Company does
not expect to receive significant reimbursement under this program in the
future. 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 continued reduction in the benefits received by the
Page 20 of 27
Company under the program, or the termination of its eligibility to receive
these benefits at all in the future, could adversely affect the Company's
operating results.
The Company's overall effective tax rate benefits from the tax
moratorium provided by the Government of Israel for Approved Enterprises
undertaken in that country. The Company's effective tax rate may increase due
to, among other factors, the increased proportion of its taxable income
associated with activities in higher tax jurisdictions, and by the relative ages
of the Company's eligible investments in Israel. The tax moratorium on income
from the Company's Approved Enterprise investments made prior to 1997 is four
years, whereas subsequent Approved Enterprise projects are eligible for a
moratorium of only two years. Reduced tax rates apply in each case for certain
periods thereafter. To be eligible for these 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. Israeli authorities have indicated that additional limitations on the
tax benefits associated with Approved Enterprise projects may be imposed for
certain categories of taxpayers, which would include the Company. If further
changes in the law or government policies regarding those programs were to
result in their termination or adverse modification, or if the Company were to
become unable to participate in, or take advantage of, those programs, the cost
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.
The Company's success is dependent on recruiting and retaining key
management and highly skilled technical, managerial, sales, and marketing
personnel. The competition for highly skilled personnel remains very competitive
despite the current economic conditions. The Company's ability to attract and
retain employees also may be affected by recent cost control actions, including
reductions in the Company's workforce and the associated reorganization of
operations.
The occurrence or perception of security breaches within the Company
could harm the Company's business, financial condition and operating results.
While the Company implements sophisticated security measures, third parties may
attempt to breach the Company's security through computer viruses, electronic
break-ins and other disruptions. If successful, confidential information,
including passwords, financial information, or other personal information may be
improperly obtained and the Company may be subject to lawsuits and other
liability. Even if the Company is not held liable, a security breach could harm
the Company's reputation, and even the perception of security risks, whether or
not valid, could inhibit market acceptance of the Company's products.
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. The Company is
required to obtain export licenses and other authorizations from applicable
governmental authorities for certain countries within which it conducts
business. The failure to receive any required license or authorization would
Page 21 of 27
hinder the Company's ability to sell its products and could adversely affect the
Company's business, financial condition and results of operations. In addition,
legal uncertainties regarding liability, compliance with local laws and
regulations, labor laws, employee benefits, currency restrictions, difficulty in
accounts receivable collection, longer collection periods and other requirements
may have a negative impact on the Company's operating results.
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 currencies, particularly the euro. 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. The Company
may experience risk associated with the failure to hedge the exchange rate risks
associated with contracts denominated in foreign currencies and its operating
results have been negatively impacted for certain periods and recently have been
positively impacted and may continue to be 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.
While the Company generally requires employees, independent
contractors and consultants to execute non-competition and confidentiality
agreements, the Company's intellectual property or proprietary rights could be
infringed or misappropriated, which could result in expensive and protracted
litigation. The Company relies on a combination of patent, copyright, trade
secret and trademark law to protect its technology. Despite the Company's
efforts to protect its intellectual property and proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use its
products or technology. Effectively policing the unauthorized use of the
Company's products is time-consuming and costly, and there can be no assurance
that the steps taken by the Company will prevent misappropriation of its
technology, particularly in foreign countries where in many instances the local
laws or legal systems do not offer the same level of protection as in the United
States.
If others claim that the Company's products infringe their
intellectual property rights, the Company may be forced to seek expensive
licenses, reengineer its products, engage in expensive and time-consuming
litigation or stop marketing its products. The Company attempts to avoid
infringing known proprietary rights of third parties in its product development
efforts. The Company does not regularly conduct comprehensive patent searches to
determine whether the technology used in its products infringes patents held by
third parties, however. There are many issued patents as well as patent
applications in the fields in which the Company is engaged. Because patent
applications in the United States are not publicly disclosed until the patent is
issued, applications may have been filed which relate to the Company's software
and products. If the Company were to discover that its products violated or
potentially violated third-party proprietary rights, it might not be able to
obtain licenses to continue offering those products without substantial
reengineering. Any reengineering effort may not be successful, nor can the
Company be certain that any licenses would be available on commercially
reasonable terms.
Substantial litigation regarding intellectual property rights exists
in technology related industries, and the Company expects that its products may
be increasingly subject to third-party infringement claims as the number of
competitors in its industry segments grows and the functionality of software
Page 22 of 27
products in different industry segments overlaps. In addition, the Company has
agreed to indemnify customers in certain situations should it be determined that
its products infringe on the proprietary rights of third parties. Any
third-party infringement claims could be time consuming to defend, result in
costly litigation, divert management's attention and resources, cause product
and service delays or require the Company to enter into royalty or licensing
agreements. Any royalty or licensing arrangements, if required, may not be
available on terms acceptable to the Company, if at all. A successful claim of
infringement against the Company and its failure or inability to license the
infringed or similar technology could have a material adverse effect on its
business, financial condition and results of operations.
The Company holds a large proportion of its net assets in cash
equivalents and short-term investments, including a variety of public and
private debt and equity instruments, and has made significant venture capital
investments, both directly and through private investment funds. Such
investments subject the Company to the risks inherent in the capital markets
generally, and to the performance of other businesses over which it has no
direct control. Given the relatively high proportion of the Company's liquid
assets relative to its overall size, the results of its operations are
materially affected by the results of the Company's capital management and
investment activities and the risks associated with those activities. Declines
in the public equity markets have caused, and may be expected to continue to
cause, the Company to experience realized and unrealized investment losses. In
addition, while the Company's interest and other income has benefited from the
positive spread between the fixed interest it pays on its outstanding
indebtedness and interest earned on the investment of its cash balances,
reduction in prevailing interest rates due to economic conditions or government
policies has had and may continue to have an adverse impact on the Company's
results of operations.
The severe decline in the public trading prices of equity securities,
particularly in the technology and telecommunications sectors, and corresponding
decline in values of privately-held companies and venture capital funds in which
the Company has invested, have, and may continue to have, an adverse impact on
the Company's financial results and costs of operations. The Company has in the
past benefited from the long-term rise in the public trading price of its shares
in various ways, including its ability to use equity incentive arrangements as a
means of attracting and retaining the highly qualified employees necessary for
the growth of its business and its ability to raise capital on relatively
attractive conditions. The decline in the price of the Company's shares, and the
overall decline in equity prices generally, and in the shares of technology
companies in particular, can be expected to make it more difficult for the
Company to rely on equity incentive arrangements as a means to recruit and
retain talented employees, and negatively has impacted the ability of the
Company to raise capital on terms as advantageous to the Company as in the past.
The trading price of the Company's shares has been affected by the
factors disclosed herein as well as prevailing economic and financial trends and
conditions in the public securities markets. Share prices of companies in
technology-related industries, such as the Company, tend to exhibit a high
degree of volatility. The announcement of financial results that fall short of
the results anticipated by the public markets could have an immediate and
significant negative 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
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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
carefully consider these and other uncertainties and events, whether or not the
statements are described as forward-looking.
Forward-looking statements made by the Company are intended to apply
only at the time they are made, unless explicitly stated to the contrary.
Moreover, whether or not stated in connection with a forward-looking statement,
the Company undertakes no obligation to correct or update a forward-looking
statement should the Company later become aware that it is not likely to be
achieved. If the Company were in any particular instance to update or correct a
forward-looking statement, investors and others should not conclude that the
Company will make additional updates or corrections thereafter.
MARKET RISK DISCLOSURES
Refer to Item 7A in the Company's Annual Report on Form 10-K for a
discussion about the Company's exposure to market risks.
Page 24 of 27
PART II
Other Information
ITEM 1. Legal Proceedings
On or about October 19, 2001, a securities class action complaint
entitled Kevin Beier v. Comverse Technology, Inc., et al., CV 016972, was filed
against CTI and certain of its executive officers ("CTI") in the United States
District Court for the Eastern District of New York. An amended consolidated
complaint was filed on March 4, 2002. The consolidated complaint generally
alleges violations of federal securities laws on behalf of individuals who
allege that they purchased CTI's common stock during a purported class period
between April 30, 2001 and July 10, 2001. The consolidated complaint seeks an
unspecified amount in damages on behalf of persons who purchased CTI stock
during the purported class period. On April 22, 2002, CTI filed a Motion to
Dismiss the consolidated complaint in its entirety. On June 6, 2002, the
plaintiffs filed their opposition to the Motion to Dismiss. On July 8, 2002, CTI
filed a reply in support of its Motion to Dismiss. The Motion currently is
pending before the court. The Company believes all claims in the consolidated
complaint to be without merit and will vigorously defend against these claims.
ITEM 5. Shareholder Proposals and Director Nominations for 2002 Annual Meeting
The Company's 2002 Annual Meeting of Shareholders is currently
scheduled to be held on December 3, 2002, which is more than 30 calendar days
after the anniversary of the Company's prior annual meeting. As a result, the
deadline for submissions of shareholder proposals and director nominations
relating to the 2002 Annual Meeting has changed from the dates specified in last
year's proxy statement.
If a shareholder intends to present a proposal for action at the 2002
Annual Meeting and wishes to have such proposal considered for inclusion in the
Company's proxy materials in reliance on Rule 14a-8 under the Securities
Exchange Act of 1934, the proposal must be submitted in writing and received by
the Secretary of the Company by October 3, 2002. Such proposal must also meet
the other requirements of the rules of the Securities and Exchange Commission
relating to shareholders' proposals.
In addition, if a shareholder submits a proposal outside of Rule
14a-8 for the 2002 Annual Meeting, then the Company's proxy may confer
discretionary authority on the persons being appointed as proxies on behalf of
the Board of Directors to vote on the proposal. Proposals and nominations should
be addressed to the Secretary of the Company, William F. Sorin, Comverse
Technology, Inc., 170 Crossways Park Drive, Woodbury, New York 11797.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibit Index.
-------------
None.
(b) Reports on Form 8-K.
-------------------
None.
Page 25 of 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMVERSE TECHNOLOGY, INC.
Dated: September 13, 2002 /s/ Kobi Alexander
-----------------------------------
Kobi Alexander
Chairman of the Board
and Chief Executive Officer
Dated: September 13, 2002 /s/ David Kreinberg
-----------------------------------
David Kreinberg
Vice President of Finance
and Chief Financial Officer
Page 26 of 27
CERTIFICATIONS
--------------
I, Kobi Alexander, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Comverse Technology,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: September 13, 2002 /s/ Kobi Alexander
-----------------------------------
Name: Kobi Alexander
Title: Chief Executive Officer
I, David Kreinberg, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Comverse Technology,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: September 13, 2002 /s/ David Kreinberg
-----------------------------------
Name: David Kreinberg
Title: Chief Financial Officer
Page 27 of 27