UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2004
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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[X] Yes [ ] No
The number of shares outstanding of the registrant's common stock,
par value $0.10 per share, as of June 1, 2004 was 195,633,687.
TABLE OF CONTENTS
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Page
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
1. Condensed Consolidated Balance Sheets as
of January 31, 2004 and April 30, 2004 2
2. Condensed Consolidated Statements of Operations
for the Three Month Periods
Ended April 30, 2003 and April 30, 2004 3
3. Condensed Consolidated Statements of Cash Flows
for the Three Month Periods Ended
April 30, 2003 and April 30, 2004 4
4. Notes to Condensed Consolidated Financial Statements 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 30
ITEM 4. CONTROLS AND PROCEDURES. 30
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. 31
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 31
SIGNATURES 32
ii
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. Forward-looking statements are
often identified by future or conditional words such as "will," "plans,"
"expects," "intends," "believes," "seeks," "estimates," or "anticipates" or by
variations of such words or by similar expressions.
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 makes no commitment to revise or update any forward-looking
statements in order to reflect events or circumstances after the date any such
statement is made. 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.
1
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JANUARY 31, APRIL 30,
2004* 2004
(Unaudited)
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $1,530,995 $1,771,809
Bank time deposits and short-term investments 667,504 374,864
Accounts receivable, net 158,236 162,096
Inventories 54,751 53,735
Prepaid expenses and other current assets 50,798 59,353
------------- -------------
TOTAL CURRENT ASSETS 2,462,284 2,421,857
PROPERTY AND EQUIPMENT, net 125,023 119,896
OTHER ASSETS 140,735 170,901
------------- -------------
TOTAL ASSETS $2,728,042 $2,712,654
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 229,296 $ 226,526
Bank loans and other debt 2,649 8,864
Advance payments from customers 89,062 70,657
------------- -------------
TOTAL CURRENT LIABILITIES 321,007 306,047
CONVERTIBLE DEBT 544,723 514,228
OTHER LIABILITIES 28,288 19,178
------------- -------------
TOTAL LIABILITIES 894,018 839,453
------------- -------------
MINORITY INTEREST 161,478 171,551
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock, $0.10 par value -
authorized, 600,000,000 shares;
issued and outstanding, 194,549,886 and 195,575,044 shares 19,454 19,557
Additional paid-in capital 1,210,547 1,236,180
Unearned stock compensation (6,707) (6,276)
Retained earnings 439,899 446,900
Accumulated other comprehensive income 9,353 5,289
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 1,672,546 1,701,650
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,728,042 $2,712,654
============= =============
*The Condensed Consolidated Balance Sheet as of January 31,
2004 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.
2
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
APRIL 30, APRIL 30,
2003 2004
Sales $180,552 $221,395
Cost of sales 80,373 89,592
----------- -----------
Gross margin 100,179 131,803
Operating expenses:
Research and development, net 54,488 55,542
Selling, general and administrative 62,072 68,495
In-process research and development and other
acquisition-related charges - 4,635
Workforce reduction, restructuring and impairment
charges - 698
----------- -----------
Income (loss) from operations (16,381) 2,433
Interest and other income, net 13,336 7,645
----------- -----------
Income (loss) before income tax provision, minority interest
and equity in the earnings (losses) of affiliates (3,045) 10,078
Income tax provision 1,980 1,492
Minority interest and equity in the earnings (losses) of affiliates (794) (1,585)
----------- -----------
Net income (loss) $(5,819) $7,001
=========== ===========
Earnings (loss) per share:
Basic $(0.03) $0.04
=========== ===========
Diluted $(0.03) $0.03
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
APRIL 30, APRIL 30,
2003 2004
Cash flows from operating activities:
Net cash from operations after adjustment
for non-cash items $15,594 $31,266
Changes in operating assets and liabilities:
Accounts receivable, net 28,926 (3,860)
Inventories (3,300) 1,016
Prepaid expenses and other current assets 9,071 (7,610)
Accounts payable and accrued expenses (11,127) (5,721)
Advance payments from customers (882) (18,405)
Other, net (988) (2,392)
------------ ------------
Net cash provided by (used in) operating activities 37,294 (5,706)
------------ ------------
Cash flows from investing activities:
Maturities and sales (purchases) of bank time deposits
and investments, net 69,979 288,935
Purchase of property and equipment (8,487) (7,247)
Capitalization of software development costs (2,305) (1,093)
Net assets acquired - (35,599)
------------ ------------
Net cash provided by investing activities 59,187 244,996
------------ ------------
Cash flows from financing activities:
Repurchase of convertible debt (41,261) (30,038)
Repayment of bank loan (42,000) -
Net proceeds from issuance of stock 5,319 31,777
Other, net (3,084) (215)
------------ ------------
Net cash provided by (used in) financing activities (81,026) 1,524
------------ ------------
Net increase in cash and cash equivalents 15,455 240,814
Cash and cash equivalents, beginning of period 1,402,783 1,530,995
------------ ------------
Cash and cash equivalents, end of period $1,418,238 $1,771,809
============ ============
The accompanying notes are an integralpart of these financial statements.
4
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, 2004. The financial information included herein is
unaudited; however, such information reflects all adjustments (consisting solely
of normal recurring adjustments), which are, in the opinion of management,
necessary for a fair statement of results for the interim periods. The results
of operations for the three month period ended April 30, 2004 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 presentation in the current year.
STOCK-BASED COMPENSATION. The Company accounts for stock options under
the recognition and measurement principles of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. Accordingly, no stock-based employee compensation cost for
stock options is reflected in net income (loss) for any periods, as all options
granted had an exercise price at least equal to the market value of the
underlying common stock on the date of grant. During the year ended January 31,
2004, the Company and one of its subsidiaries granted shares of restricted stock
to certain key employees. For the three month periods ended April 30, 2003 and
2004, respectively, stock-based employee compensation expense relating to
restricted stock of approximately $0 and $431,000 is included in `Selling,
general and administrative' expenses in the Condensed Consolidated Statements of
Operations.
The Company estimated the fair value of employee stock options
utilizing the Black-Scholes option valuation model, using appropriate
assumptions, as required under accounting principles generally accepted in the
United States of America. The Black-Scholes model was developed for use in
estimating the fair value of traded options and does not consider the non-traded
nature of employee stock options, vesting and trading restrictions, lack of
transferability or the ability of employees to forfeit the options prior to
expiry. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of the Company's employee stock options.
5
The following table illustrates the effect on net income (loss) and
earnings (loss) per share if the Company had applied the fair value recognition
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation", to stock-based employee compensation
for all periods:
THREE MONTHS ENDED APRIL 30,
---------------------------------------------
2003 2004
---- ----
(In thousands)
Net income (loss), as reported $(5,819) $7,001
Deduct: Total stock-based employee compensation expense determined under fair
value based method for all awards, net of related tax effects (37,136) (39,052)
-------------------- --------------------
Pro forma net loss $(42,955) $(32,051)
==================== ====================
Earnings (loss) per share:
Basic - as reported $ (0.03) $ 0.04
Basic - pro forma $ (0.23) $ (0.16)
Diluted - as reported $ (0.03) $ 0.03
Diluted - pro forma $ (0.23) $ (0.16)
INVENTORIES. The composition of inventories at January 31, 2004 and
April 30, 2004 is as follows:
JANUARY 31, APRIL 30,
2004 2004
(In thousands)
Raw materials $23,157 $15,826
Work in process 12,802 16,108
Finished goods 18,792 21,801
--------- ---------
$54,751 $53,735
========= =========
6
RESEARCH AND DEVELOPMENT EXPENSES. A significant portion of the
Company's research and development operations are located in Israel where the
Company derives benefits from participation in programs sponsored by the
Government of Israel for the support of research and development activities
conducted in that country. Certain of the Company's research and development
activities include projects partially funded by the Office of the Chief
Scientist of the Ministry of Industry and Trade of the State of Israel (the
"OCS") under which the funding organization reimburses a portion of the
Company's research and development expenditures under approved project budgets.
Certain of the Company's subsidiaries accrue royalties to the OCS for the sale
of products incorporating technology developed in these projects. Under the
terms of the applicable funding agreements, products resulting from projects
funded by the OCS may not be manufactured outside of Israel without government
approval. The amounts reimbursed by the OCS for the three month periods ended
April 30, 2003 and 2004 were approximately $1,208,000 and $2,451,000,
respectively.
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 of earnings (loss)
per share for the three month periods ended April 30, 2003 and 2004 is as
follows:
THREE MONTHS ENDED THREE MONTHS ENDED
APRIL 30, 2003 APRIL 30, 2004
-------------- --------------
Net Per Share Net Per Share
Loss Shares Amount Income Shares Amount
(In thousands, except per share data)
BASIC EPS
- ---------
Net income (loss) $(5,819) 188,094 $(0.03) $7,001 194,797 $0.04
======= =====
EFFECT OF DILUTIVE
SECURITIES
- ----------
Options - 6,979
----------------------------------------- --------------------------------------------------
DILUTED EPS $(5,819) 188,094 $(0.03) $7,001 201,776 $0.03
======== ======= ======= ====== ======= =====
The diluted loss per share computation for the three month period
ended April 30, 2003 excludes incremental shares of approximately 1,524,000
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. The
shares issuable upon the conversion of the Company's 1.50% Convertible Senior
Debentures due December 2005 (the "Debentures") were not included in the
computation of diluted earnings (loss) per share for all periods because the
effect of including them would be antidilutive. In addition, the shares issuable
upon the conversion of the Company's Zero Yield Puttable Securities due 2023
("ZYPS") were not included in the computation of diluted earnings (loss) per
share for all periods. The ZYPS are convertible into shares of the Company's
common stock contingent upon the occurrence of certain events that have not yet
occurred. As such, the contingent conversion feature has not been satisfied and
the ZYPS are not currently considered to be dilutive in accordance with the
provisions of SFAS No. 128, "Earnings per Share." A full conversion of the ZYPS
would result in the issuance of approximately 23,367,000 additional shares of
common stock.
7
COMPREHENSIVE INCOME (LOSS). Total comprehensive income (loss) was
approximately $(6,822,000) and $2,937,000 for the three month periods ended
April 30, 2003 and 2004, respectively. The elements of comprehensive income
(loss) include net income (loss), unrealized gains/losses on available for sale
securities and foreign currency translation adjustments.
CONVERTIBLE DEBT. In May 2003, the Company issued $420,000,000
aggregate principal amount of its ZYPS, for net proceeds of approximately $412.8
million. The ZYPS 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 ZYPS are convertible, contingent upon
the occurrence of certain events, into shares of the Company's common stock at a
conversion price of $17.97 per share. The ability of the holders to convert the
ZYPS into common stock is subject to certain conditions including: (i) during
any fiscal quarter, if the closing price per share for a period of at least a
thirty consecutive trading-day period ending on the last trading day of the
preceding fiscal quarter is more than 120% of the conversion price per share in
effect on that thirtieth day; (ii) on or before May 15, 2018, if during the five
business-day period following any ten consecutive trading-day period in which
the daily average trading price for the ZYPS for that ten trading-day period was
less than 105% of the average conversion value for the ZYPS during that period;
(iii) during any period, if following the date on which the credit rating
assigned to the ZYPS by Standard & Poor's Rating Services is lower than "B-" or
upon the withdrawal or suspension of the ZYPS rating at the Company's request;
(iv) if the Company calls the ZYPS for redemption; or (v) upon other specified
corporate transactions. The ZYPS mature on May 15, 2023. The Company has the
right to redeem the ZYPS for cash at any time on or after May 15, 2008, at their
principal amount. The holders have a series of put options, pursuant to which
they may require the Company to repurchase all or a portion of the ZYPS on each
of May 15 of 2008, 2013, and 2018 and upon the occurrence of certain events. The
ZYPS holders may require the Company to repurchase the ZYPS 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, under
certain circumstances, pay the repurchase price in common stock.
In November and December 2000, the Company issued $600,000,000
aggregate principal amount of its Debentures. 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 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, under certain
circumstances, pay the repurchase price in common stock.
During the three month periods ended April 30, 2003 and 2004, the
Company acquired, in open market purchases, $44,550,000 and $30,495,000 of face
amount of the Debentures, respectively, resulting in a pre-tax gain, net of debt
8
issuance costs, of approximately $2,809,000 and $244,000, respectively, included
in `Interest and other income, net' in the Condensed Consolidated Statements of
Operations.
As of April 30, 2004, the Company had outstanding Debentures of
$94,228,000. During May 2004, the Company acquired, in open market purchases,
$6,975,000 of face amount of the Debentures, resulting in a pre-tax gain, net of
debt issuance costs, of approximately $98,000.
ISSUANCE OF SUBSIDIARY STOCK. In February 2004, Starhome B.V.
("Starhome"), a subsidiary of CTI, received equity financing from an
unaffiliated investor group of approximately $14,700,000, net of expenses. The
Company recorded a gain of approximately $11,900,000, which was recorded as an
increase in stockholders' equity as a result of the issuance of subsidiary
stock. Upon the completion of this transaction, the Company's ownership interest
in Starhome was approximately 69.5%. In addition, Starhome received a commitment
for an additional $5,000,000 in equity financing from the unaffiliated investor
group.
ACQUISITION. On March 31, 2004, Verint Systems Inc. ("Verint")
acquired certain assets and assumed certain liabilities of the government
surveillance business of ECtel Ltd. ("ECtel"). The acquisition is expected to
provide Verint with additional communications interception capabilities for the
mass collection and analysis of voice and data communications. These
technologies will be integrated into Verint's existing product offerings. The
purchase price was $35,000,000. Verint incurred transaction costs, consisting
primarily of professional fees, amounting to approximately $1,067,000 in
connection with this acquisition.
The acquisition was accounted for using the purchase method. The
purchase price was allocated to the assets and liabilities of ECtel based on the
estimated fair value of those assets and liabilities as of March 31, 2004. The
results of operations of ECtel have been included in the Company's results of
operations since March 31, 2004. Identifiable intangible assets consist of sales
backlog, acquired technology, customer relationships, and non-competition
agreements and have estimated useful lives of up to ten years. Purchased
in-process research and development represents the value assigned to research
and development projects of the acquired business that were commenced but not
completed at the date of acquisition, for which technological feasibility had
not been established and which have no alternative future use in research and
development activities or otherwise. In accordance with SFAS No. 2, "Accounting
for Research and Development Costs," as interpreted by FASB Interpretation No.
4, amounts assigned to purchased in-process research and development meeting the
above criteria must be charged to expense at the acquisition date. At the
acquisition date, it was estimated that the purchased in-process research and
development was approximately 40% complete and it was expected that the
remaining 60% would be completed during the ensuing year. The fair value of the
purchased in-process research and development was determined by an independent
valuation using the income approach, which reflects the projected free cash
flows that will be generated by the purchased in-process research and
development projects and discounting the projected net cash flows back to their
present value using a discount rate of 21%.
As a result of the acquisition of the government surveillance
business of ECtel, Verint had certain capitalized software development costs
that became impaired due to the existence of duplicative technology and,
accordingly, were written-down to their net realizable value at the date of
acquisition. Such impairment charge amounted to approximately $1,481,000 and is
included in 'In-process research and development and other acquisition-related
charges' in the Condensed Consolidated Statements of Operations.
9
The following is a summary of the allocation of the purchase price
for this acquisition:
(IN THOUSANDS)
Purchase price $ 35,000
Acquisition costs 1,067
------------
Total purchase price $ 36,067
============
Fair value of assets acquired $ 1,417
Fair value of liabilities assumed (3,282)
In-process research and development 3,154
Sales backlog 854
Acquired technology 5,307
Customer relationships 1,382
Non-competition agreements 2,221
Goodwill 25,014
------------
Total purchase price $ 36,067
============
A summary of pro forma results of operations has not been presented
as the effect of this acquisition was not deemed material.
WORKFORCE REDUCTION, RESTRUCTURING AND IMPAIRMENT CHARGES. During the
year ended January 31, 2002, the Company committed to and began implementing a
restructuring program, including changes to its organizational structure and
product offerings, to better align its cost structure with the business
environment and to improve the efficiency of its operations via reductions in
workforce, restructuring of operations and the write-off of impaired assets. In
connection with these actions, during the three year period ended January 31,
2004, the Company incurred net charges to operations primarily pertaining to
severance and other related costs, the elimination of excess facilities and
related leasehold improvements and the write-off of certain property and
equipment and other impaired assets. During the three month period ended April
30, 2004, the Company incurred an additional charge of $698,000 relating to
severance and other related costs.
As of April 30, 2004, the Company had an accrual of approximately
$26,876,000 relating to workforce reduction and restructuring. A roll-forward of
the workforce reduction and restructuring accrual from January 31, 2004 is as
follows:
10
WORKFORCE
ACCRUAL REDUCTION, ACCRUAL
BALANCE AT RESTRUCTURING BALANCE AT
FEBRUARY 1, & IMPAIRMENT CASH APRIL 30,
2004 CHARGES PAYMENTS 2004
---- ------- -------- ----
(IN THOUSANDS)
Severance and related $ 3,068 $ 698 $ 1,669 $ 2,097
Facilities and related 26,427 - 1,648 24,779
-------- ------ -------- --------
Total $29,495 $ 698 $ 3,317 $ 26,876
======== ====== ======== ========
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 during the year ended
January 31, 2005.
Facilities and related costs consist primarily of contractually
obligated lease liabilities and operating expenses related to facilities that
were vacated primarily in the United States and Israel as a result of the
restructuring. The balance of these facilities and related costs is expected to
be paid at various dates through January 2011.
BUSINESS SEGMENT INFORMATION. The Company's reporting segments are as
follows:
Comverse Network Systems ("CNS") - Enable telecommunications service
providers ("TSP") to offer products to enhance the communication experience and
generate TSP traffic and revenue. These services comprise four primary
categories: call completion and call management solutions; advanced messaging
solutions for groups, communities and person-to-person communication; solutions
and enablers for the management and delivery of data and content-based services;
and real-time billing and account management solutions for dynamic service
environments and other components and applications.
Service Enabling Signaling Software - Enable equipment manufacturers,
application developers, and service providers to deploy revenue generating
infrastructure and enhanced services for wireline, wireless and Internet
communications. These services include global roaming, voice and text messaging,
prepaid calling and emergency-911. These products are also embedded in a range
of packet softswitching products to interoperate or converge voice and data
networks and facilitate services such as VoIP, hosted IP telephony, and virtual
private networks. This segment represents the Company's Ulticom subsidiary.
Security and Business Intelligence Recording - Provides analytic
software-based solutions for communications interception, networked video and
contact centers. 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.
Reconciling items - consists of the following:
Sales - elimination of intersegment revenues.
Income (Loss) from Operations - elimination of intersegment income
(loss) from operations and corporate operations.
Total Assets - elimination of intersegment receivables and
unallocated corporate assets.
11
The table below presents information about sales, income (loss) from
operations and segment assets as of and for the three month periods ended April
30, 2003 and 2004:
Service Security and
Comverse Enabling Business
Network Signaling Intelligence All Reconciling Consolidated
Systems Software Recording Other Items Totals
------- -------- --------- ----- ----- ------
(In thousands)
THREE MONTHS ENDED APRIL 30, 2003:
Sales $ 125,876 $ 9,129 $ 44,415 $ 2,244 $ (1,112) $ 180,552
Income (loss) from
operations $ (18,312) $ 377 $ 3,499 $ (252) $ (1,693) $ (16,381)
THREE MONTHS ENDED APRIL 30, 2004:
Sales $ 150,081 $ 13,189 $ 56,638 $ 2,594 $ (1,107) $ 221,395
Income (loss) from
operations $ 1,841 $ 2,640 $ 861 $ (272) $ (2,637) $ 2,433
TOTAL ASSETS:
April 30, 2003 $ 959,043 $ 237,749 $ 173,698 $ 32,036 $ 899,697 $ 2,302,223
April 30, 2004 $ 829,682 $ 246,412 $ 342,005 $ 36,333 $ 1,258,222 $ 2,712,654
12
LITIGATION. On March 16, 2004, BellSouth Intellectual Property Corp.
("BellSouth") filed a complaint in the United States District Court for the
Northern District of Georgia against Comverse Technology, Inc. alleging
infringement of Patent Nos. 5,857,013 and 5,764,747, and, on March 17, 2004,
BellSouth amended the complaint, removing any and all references to Comverse
Technology, Inc., and naming Comverse, Inc., in an action captioned: BellSouth
Intellectual Property Corp. v. Comverse, Inc., Civil Action No. 1:04-CV-0739.
BellSouth alleges that Patent Nos. 5,857,013 and 5,764,747 cover certain aspects
of some of Comverse Inc.'s systems, and it seeks, among other relief, monetary
damages and injunctive relief. On May 5, 2004, Comverse, Inc. filed an answer
and counterclaims which, among other things, denies any infringement and seeks a
declaratory judgment that the patents at issue are invalid and unenforceable.
The Company believes all claims are without merit and Comverse, Inc. will
vigorously defend against BellSouth's claims.
From time to time, the Company is subject to claims in legal
proceedings arising in the normal course of its business. The Company does not
believe that it is currently party to any other pending legal action that could
reasonably be expected to have a material adverse effect on its business,
financial condition and results of operations.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
SUMMARY OF RESULTS
Consolidated results of operations in dollars and as a percentage of
sales for each of the three month periods ended April 30, 2003 and 2004 were as
follows:
Three months ended Three months ended
April 30, 2003 % of sales April 30, 2004 % of sales
--------------------------------------------------------------------------------
(In thousands)
Sales $ 180,552 100.0% $ 221,395 100.0%
Cost of sales 80,373 44.5% 89,592 40.5%
-------------- --------------
Gross margin 100,179 55.5% 131,803 59.5%
Operating expenses:
Research and development, net 54,488 30.2% 55,542 25.1%
Selling, general and administrative 62,072 34.4% 68,495 30.9%
In-process research and development and other
acquisition-related charges - - 4,635 2.1%
Workforce reduction, restructuring and impairment
charges - - 698 0.3%
-------------- --------------
Income (loss) from operations (16,381) (9.1)% 2,433 1.1%
Interest and other income, net 13,336 7.4% 7,645 3.5%
-------------- --------------
Income (loss) before income tax provision,
minority interest and equity in the earnings
(losses) of affiliates (3,045) (1.7)% 10,078 4.6%
Income tax provision 1,980 1.1% 1,492 0.7%
Minority interest and equity in the earnings
(losses) of affiliates (794) (0.4)% (1,585) (0.7)%
-------------- --------------
Net income (loss) $ (5,819) (3.2)% $ 7,001 3.2%
============== ==============
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 that has been experiencing a challenging capital
spending environment, although there is some evidence of recent improvement.
Both business units achieved year over year and sequential revenue growth and
operating income during the three month period ended April 30, 2004. Verint,
which services the security and business intelligence markets, achieved record
revenue based, in part, on increased sales due to heightened awareness
surrounding homeland defense and security related initiatives in the United
States and abroad as well as increased business intelligence sales. Overall, for
the three month period ended April 30, 2004, the Company experienced year over
14
year and sequential sales growth of 22.6% and 9.0%, respectively, with a
substantial majority of sales for the period generated from activities serving
the telecommunications industry. The Company generated operating and net income
for the period.
THREE MONTH PERIOD ENDED APRIL 30, 2004
COMPARED TO THREE MONTH PERIOD ENDED APRIL 30, 2003
Sales. Sales for the three month period ended April 30, 2004
increased by approximately $40.8 million, or 23%, compared to the three month
period ended April 30, 2003. This increase is attributable to an increase in
sales in the Company's three primary business units. CNS sales increased by
approximately $24.2 million due primarily to increased business in Europe and
Asia Pacific only partially offset by decreased business in the Americas.
Security and business intelligence recording sales increased by approximately
$12.2 million and service enabling signaling software sales increased by
approximately $4.1 million. On a consolidated basis, sales to customers in North
America represented approximately 40% and 44% of total sales for the three month
periods ended April 30, 2004 and 2003, respectively.
Cost of Sales. Cost of sales for the three month period ended April
30, 2004 increased by approximately $9.2 million, or 11%, compared to the three
month period ended April 30, 2003. The increase in cost of sales is primarily
attributable to increased materials and overhead and personnel-related costs of
approximately $4.7 million and $3.5 million, respectively, and net increase in
various other costs of approximately $1.0 million. Gross margins for the three
month period ended April 30, 2004 increased to approximately 59.5% from
approximately 55.5% in the corresponding 2003 period.
Research and Development, Net. Net research and development expenses
for the three month period ended April 30, 2004 increased by approximately $1.1
million, or 2%, compared to the three month period ended April 30, 2003. The
increase in net research and development expenses is primarily attributable to
increased personnel-related costs of approximately $1.0 million.
Selling, General and Administrative. Selling, general and
administrative expenses for three month period ended April 30, 2004 increased by
approximately $6.4 million, or 10%, compared to the three month period ended
April 30, 2003, and as a percentage of sales for the three month period ended
April 30, 2004, decreased to approximately 30.9% from approximately 34.4% in the
corresponding 2003 period. The increase in the dollar amount of selling, general
and administrative expenses for three month period is primarily due to increased
employee and agent sales commissions, personnel-related costs, professional fees
and travel costs of approximately $2.5 million, $2.2 million, $1.4 million and
$1.3 million, respectively, and net increase in various other costs of
approximately $1.5 million, partially offset by lower bad debt expense of
approximately $2.5 million.
In-process Research and Development and Other Acquisition-related
Charges. During the three month period ended April 30, 2004, the Company
incurred approximately $4.6 million for in-process research and development and
other acquisition-related charges resulting from Verint's purchase of ECtel's
government surveillance business, as follows: (i) approximately $3.1 million of
purchased in-process research and development, which was charged to expense at
the acquisition, and (ii) approximately $1.5 million for the write-down of
15
certain capitalized software development costs to their net realizable value at
the date of acquisition, due to impairment caused by the existence of
duplicative technology.
Workforce reduction, restructuring and impairment charges. During the
year ended January 31, 2002, the Company committed to and began implementing a
restructuring program to better align its cost structure with the business
environment and to improve the efficiency of its operations via reductions in
workforce, restructuring of operations and the write-off of impaired assets. In
connection with the restructuring, the Company changed its organizational
structure and product offerings, resulting in the impairment of certain assets.
In connection with these actions, during the three months ended April 30, 2004,
the Company incurred charges to operations of approximately $0.7 million for
severance and other related costs. The Company expects to pay out approximately
$2.1 million for severance and related obligations during the year ended January
31, 2005 and approximately $24.8 million for facilities and related obligations
at various dates through January 2011.
Interest and Other Income, Net. Interest and other income, net, for
the three month period ended April 30, 2004 decreased by approximately $5.7
million compared to the three month period ended April 30, 2003. The principal
reasons for the decrease are (i) a decrease in foreign currency gains of
approximately $4.8 million; (ii) a decrease in the gain recorded as a result of
the Company's repurchases of its Debentures of approximately $2.6 million; and
(iii) other decreases of approximately $0.1 million, net. Such items were offset
by (i) decreased interest expense of approximately $1.3 million, due primarily
to the Company's repurchases of its Debentures and other debt reduction; (ii) a
change in the net gains/losses from the sale and write-down of investments of
approximately $0.3 million; and (iii) decreased interest and dividend income of
approximately $0.2 million.
Income Tax Provision. Provision for income taxes for the three month
period ended April 30, 2004 decreased by approximately $0.5 million, or 25%,
compared to the three month period ended April 30, 2003, due primarily to shifts
in the underlying mix of pre-tax income by entity and tax jurisdiction. The
Company's overall rate of tax is reduced significantly by the existence of net
operating loss carryforwards for Federal income tax purposes in the United
States, as well as 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.
Minority Interest and Equity in the Earnings (Losses) of Affiliates.
Minority interest and equity in the earnings (losses) of affiliates increased by
approximately $0.8 million as a result of increased minority interest expense of
approximately $0.3 million, primarily attributable to overall increased earnings
at majority-owned subsidiaries, and a change in equity in the earnings (losses)
of affiliates of approximately $0.5 million.
Net Income (Loss). Net income (loss) for the three month period ended
April 30, 2004 increased by approximately $12.8 million compared to the three
month period ended April 30, 2003, while as a percentage of sales was
approximately 3.2% and (3.2)% in the three month periods ended April 30, 2004
and 2003, respectively. These variances resulted primarily from the factors
described above.
16
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at April 30, 2004 and January 31, 2004
was approximately $2,115.8 million and $2,141.3 million, respectively. At April
30, 2004 and January 31, 2004, the Company had total cash and cash equivalents,
bank time deposits and short-term investments of approximately $2,146.7 million
and $2,198.5 million, respectively.
Operations for the three month periods ended April 30, 2004 and 2003,
after adjustment for non-cash items, provided cash of approximately $31.3
million and $15.6 million, respectively. During such periods, other changes in
operating assets and liabilities provided (used) cash of approximately $(37.0)
million and $21.7 million, respectively. This resulted in net cash provided by
(used in) operating activities of approximately $(5.7) million and $37.3
million, respectively.
Investing activities for the three month periods ended April 30, 2004
and 2003 provided cash of approximately $245.0 million and $59.2 million,
respectively. These amounts include (i) net maturities and sales (purchases) of
bank time deposits and investments of approximately $288.9 million and $70.0
million, respectively; (ii) purchases of property and equipment of approximately
$(7.2) million and $(8.5) million, respectively; (iii) capitalization of
software development costs of approximately $(1.1) million and $(2.3) million,
respectively; and (iv) net assets acquired as a result of an acquisition of
approximately $(35.6) million for the three months ended April 30, 2004.
Financing activities for the three month periods ended April 30, 2004
and 2003 provided (used) cash of approximately $1.5 million and $(81.0) million,
respectively. These amounts include (i) repurchases of Debentures of
approximately $(30.0) million and $(41.3) million, respectively; (ii) repayment
of bank loan of $(42.0) million for the three months ended April 30, 2003; (iii)
net proceeds from the issuance of stock in connection with the exercise of stock
options and employee stock purchase plans and the sale of stock by one of the
Company's subsidiaries of approximately $31.8 million and $5.3 million,
respectively, and (iv) other, net of approximately $(0.2) million and $(3.1)
million, respectively.
During the three month periods ended April 30, 2003 and 2004, the
Company acquired, in open market purchases, approximately $44.6 million and
$30.5 million of face amount of the Debentures, respectively, resulting in a
pre-tax gain, net of debt issuance costs, of approximately $2.8 million and $0.2
million, respectively, included in `Interest and other income, net' in the
Condensed Consolidated Statements of Operations.
As of April 30, 2004, the Company had outstanding Debentures of
approximately $94.2 million. During May 2004, the Company acquired, in open
market purchases, approximately $7.0 million of face amount of the Debentures,
resulting in a pre-tax gain, net of debt issuance costs, of approximately $0.1
million.
During February 2003, Verint repaid a bank loan in the amount of $42.0
million.
In February 2004, Starhome received equity financing from an
unaffiliated investor group of approximately $14.7 million, net of expenses. The
Company recorded a gain of approximately $11.9 million, which was recorded as an
increase in stockholders' equity as a result of the issuance of subsidiary
stock. Upon the completion of this transaction, the Company's ownership interest
in Starhome was approximately 69.5%. In addition, Starhome received a commitment
17
for an additional $5.0 million in equity financing from the unaffiliated
investor group.
On March 31, 2004, Verint acquired certain assets and assumed certain
liabilities of the government surveillance business of ECtel. The purchase price
was $35.0 million. Verint incurred transaction costs, consisting primarily of
professional fees, amounting to approximately $1.1 million in connection with
this acquisition.
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.
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 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.
CERTAIN TRENDS AND UNCERTAINTIES
The Company derives the majority of its revenue from the
telecommunications industry, which is experiencing a challenging capital
spending environment. While there is some evidence that the capital spending
environment has improved, the spending by the Company's customers remains
uncertain. The Company's operating results and financial condition have been
adversely affected by declines in technology purchases and capital expenditures
by TSPs, and the Company's operating results and financial condition will be
adversely affected in the event deterioration in capital expenditures by TSPs
resumes. 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, including the
Company, 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 broadband services and
reductions in TSPs' actual and projected revenues and deterioration in their
actual and projected operating results. Accordingly, TSPs, including the
Company's customers, 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.
18
In addition, certain 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
requirements, and in the management and use of their networks, that have reduced
the Company's sales, 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 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 predicted 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.
In May 2003, the Company issued $420,000,000 aggregate principal
amount of its ZYPS. The ZYPS are convertible into shares of the Company's common
stock at a conversion price of $17.97 per share, which would result in the
issuance of an aggregate of approximately 23.4 million shares, subject to
19
adjustment upon the occurrence of specified events. The ability of the holders
to convert the ZYPS into common stock is subject to certain conditions
including: (i) during any fiscal quarter, if the closing price per share for a
period of at least a thirty consecutive trading-day period ending on the last
trading day of the preceding fiscal quarter is more than 120% of the conversion
price per share in effect on that thirtieth day; (ii) on or before May 15, 2018,
if during the five business-day period following any ten consecutive trading-day
period in which the daily average trading price for the ZYPS for that ten
trading-day period was less than 105% of the average conversion value for the
ZYPS during that period; (iii) during any period, if following the date on which
the credit rating assigned to the ZYPS by Standard & Poor's Rating Services is
lower than "B-" or upon the withdrawal or suspension of the ZYPS rating at the
Company's request; (iv) if the Company calls the ZYPS for redemption; or (v)
upon other specified corporate transactions. The ZYPS mature on May 15, 2023.
The Company has the right to redeem the ZYPS for cash at any time on or after
May 15, 2008, at their principal amount. The holders have a series of put
options, pursuant to which they may require the Company to repurchase all or a
portion of the ZYPS on each of May 15 of 2008, 2013, and 2018 and upon the
occurrence of certain events. The ZYPS holders may require the Company to
repurchase the ZYPS 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. The Company may not have enough cash or have the ability to access
enough cash to pay the ZYPS. If any of the conditions for conversion of the ZYPS
is achieved it will result in dilution of the Company's earnings per share by
adding approximately 23.4 million shares to the share count in calculating the
Company's earnings per share. If the ZYPS are converted into the Company's
shares it will result in dilution of existing stockholders.
The Company has made, and in the future, may continue to make
strategic and other investments in 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
investments on acceptable terms, or at all. In addition, even if the Company
makes investments, it may not gain strategic or other benefits from those
investments.
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 offers complex products that may contain undetected defects
or errors, particularly when first introduced or as new versions are released.
The Company may not discover such defects or errors until after a product has
been released and used by the customer. Significant costs may be incurred to
correct undetected defects or errors in the Company's products and these defects
or errors could result in future lost sales. Defects or errors in the Company's
products also may result in product liability claims, which could cause adverse
publicity and impair their market acceptance. In addition, the Company may incur
fees or penalties in connection with problems associated with its products and
services.
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
20
continue to have, a profound effect on competitive conditions in the market and
the success of market participants, including the Company. In addition, some of
the Company's products, such as call answering, have experienced declines in
usage resulting from, among other factors, the introduction of new technologies
and the adoption and increased use of existing technologies, which may include
enhanced areas of coverage for mobile telephones and Caller ID type services.
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. The Company's new product
offerings may not enter the market in a timely manner for their acceptance. New
product offerings may not properly integrate into existing platforms, and the
failure of these offerings to be accepted by the market could have a material
adverse effect on the Company's business, results of operations, and financial
condition. The Company's sales and operating results may be adversely affected
in the event customers delay purchases of existing products as they await the
Company's new product offerings.
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 has made and continues to make significant investments in
the areas of sales and marketing, and research and development. The Company's
research and development activities, which may be delayed and behind schedule,
include ongoing significant investment in the development of additional features
and functionality for its existing and new product offerings. The success of
these initiatives will be dependent upon, among other things, the emergence of a
market for these types of products and their acceptance by existing and new
customers. The Company's business may be adversely affected by its failure to
correctly anticipate the emergence of a market demand for certain products or
services, and changes in the evolution of market opportunities. If a sufficient
market does not emerge for new or enhanced product offerings developed by the
Company, if the Company is late in introducing new product offerings, or if the
Company is not successful in marketing such products, the Company's continued
growth could be adversely affected and its investment in those products may be
lost.
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 could 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 enhanced services 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
21
greater financial, marketing and sales resources than the Company, may enter the
enhanced services 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 Company's competitors may be able to develop more quickly or
adapt faster to new or emerging technologies and changes in customer
requirements, or devote greater resources to the development, promotion and sale
of their products. Some of the Company's competitors have, in relation to it,
longer operating histories, larger customer bases, longer standing relationships
with customers, greater name recognition and significantly greater financial,
technical, marketing, customer service, public relations, distribution and other
resources. New competitors continue to emerge and there continues to be
consolidation among existing competitors, which may reduce the Company's market
share. In addition, some of the Company's customers may in the future decide to
develop internally their own solutions instead of purchasing them from the
Company. Increased competition could force the Company to lower its prices or
take other actions to differentiate its products.
The market for Verint's security and business intelligence products
in the past has been affected by weakness in general economic conditions, delays
or reductions in customers' information technology spending and uncertainties
relating to government expenditure programs. Verint's business generated from
government contracts may be adversely affected if: (i) Verint's reputation or
relationship with government agencies is impaired, (ii) Verint is suspended or
otherwise prohibited from contracting with a domestic or foreign government or
any significant law enforcement agency, (iii) levels of government expenditures
and authorizations for law enforcement and security related programs decrease,
remain constant or shift to programs in areas where Verint does not provide
products and services, (iv) Verint is prevented from entering into new
government contracts or extending existing government contracts based on
violations or suspected violations of laws or regulations, including those
related to procurement, (v) Verint is not granted security clearances required
to sell products to domestic or foreign governments or such security clearances
are revoked, (vi) there is a change in government procurement procedures, or
(vii) there is a change in political climate that adversely affects Verint's
existing or prospective relationships. 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 markets for Verint's security and business intelligence products
are still emerging. Verint's growth is dependent on, among other things, the
size and pace at which the markets for its products develop. If the markets for
its products decrease, remain constant or grow slower than Verint anticipates,
Verint will not be able to maintain its growth. Continued growth in the demand
for Verint's products is uncertain as, among other reasons, its existing
customers and potential customers may: (i) not achieve a return on their
investment in its products; (ii) experience technical difficulty in utilizing
its products; or (iii) use alternative solutions to achieve their security,
intelligence or business objectives. In addition, as Verint's enterprise
business intelligence products are sold primarily to contact centers, slower
22
than anticipated growth or a contraction in the number of contact centers will
have a material adverse effect on the Verint's ability to maintain its growth.
The global market for analytical solutions for security and business
applications is intensely competitive, both in the number and breadth of
competing companies and products and the manner in which products are sold. For
example, Verint often competes for customer contracts through a competitive
bidding process that subjects it to risks associated with: (i) the frequent need
to bid on programs in advance of the completion of their design, which may
result in unforeseen technological difficulties and cost overruns; and (ii) the
substantial time and effort, including design, development and marketing
activities, required to prepare bids and proposals for contracts that may not be
awarded to Verint.
A subsidiary of Verint, Verint Technology Inc. ("Verint Technology"),
which sells and supports its communications interception solutions to various
U.S. government agencies, is required by the National Industrial Security
Program to maintain facility security clearances and to be insulated from
foreign ownership, control or influence. The Company, Verint, Verint Technology
and the Department of Defense entered into a proxy agreement, under which
Verint, among other requirements, appointed three U.S. citizens holding the
requisite security clearances to exercise all prerogatives of ownership of
Verint Technology (including, without limitation, oversight of Verint
Technology's security arrangements) as holders of proxies to vote Verint
Technology stock. The proxy agreement may be terminated and Verint Technology's
facility security clearances may be revoked in the event of a breach of the
proxy agreement, or if it is determined by the Department of Defense that
termination is in the national interest. If Verint Technology's facility
security clearance is revoked, sales to U.S. government agencies will be
adversely affected and may adversely affect sales to other international
government agencies. In addition, concerns about the security of Verint, its
personnel or its products may have a material adverse affect on Verint's
business, financial condition and results of operations, including a negative
impact on sales to U.S. and international government agencies.
Many of Verint's government contracts contain provisions that give
the governments party to those contracts rights and remedies not typically found
in private commercial contracts, including provisions enabling the governments
to: (i) terminate or cancel existing contracts for convenience; (ii) in the case
of the U.S. government, suspend Verint from doing business with a foreign
government or prevent Verint from selling its products in certain countries;
(iii) audit and object to Verint's contract- related costs and expenses,
including allocated indirect costs; and (iv) change specific terms and
conditions in Verint's contracts, including changes that would reduce the value
of its contracts. In addition, many jurisdictions have laws and regulations that
deem government contracts in those jurisdictions to include these types of
provisions, even if the contract itself does not contain them. If a government
terminates a contract with Verint for convenience, Verint may not recover its
incurred or committed costs, any settlement expenses or profit on work completed
prior to the termination. If a government terminates a contract for default,
Verint may not recover those amounts, and, in addition, it may be liable for any
costs incurred by a government in procuring undelivered items and services from
another source. Further, an agency within a government may share information
regarding Verint's termination with other government agencies. As a result,
Verint's on-going or prospective relationships with such other government
agencies could be impaired.
Verint must comply with domestic and foreign laws and regulations
relating to the formation, administration and performance of government
contracts. These laws and regulations affect how Verint does business with
23
government agencies in various countries and may impose added costs on its
business. For example, in the United States, Verint is subject to the Federal
Acquisition Regulations, which comprehensively regulate the formation,
administration and performance of federal government contracts, and to the Truth
in Negotiations Act, which requires certification and disclosure of cost and
pricing data in connection with contract negotiations. Verint is subject to
similar regulations in foreign countries as well.
If a government review or investigation uncovers improper or illegal
activities, Verint may be subject to civil and criminal penalties and
administrative sanctions, including termination of contracts, forfeiture of
profits, suspension of payments, fines and suspension or debarment from doing
business with government agencies, which could materially and adversely affect
its business, financial condition and results of operations. In addition, a
government may reform its procurement practices or adopt new contracting rules
and regulations that could be costly to satisfy or that could impair Verint's
ability to obtain new contracts.
Verint's products are often used by customers to compile and analyze
highly sensitive or confidential information and data, including information or
data used in intelligence gathering or law enforcement activities. Verint may
come into contact with such information or data when it performs support or
maintenance functions for its customers. While Verint has internal policies,
procedures and training for employees in connection with performing these
functions, even the perception that such potential contact may pose a security
risk or that any of Verint's employees has improperly handled sensitive or
confidential information and data of a customer could harm its reputation and
could inhibit market acceptance of its products.
As the communications industry continues to evolve, governments may
increasingly regulate products that monitor and record voice, video and data
transmissions over public communications networks, such as Verint's solutions.
For example, products which Verint sells in the United States to law enforcement
agencies and which interface with a variety of wireline, wireless and Internet
protocol networks, must comply with the technical standards established by the
Federal Communications Commission pursuant to the Communications Assistance for
Law Enforcement Act and products that it sells in Europe must comply with the
technical standards established by the European Telecommunications Standard
Institute. The adoption of new laws governing the use of Verint's products or
changes made to existing laws could cause a decline in the use of its products
and could result in increased expenses for Verint, particularly if it is
required to modify or redesign its products to accommodate these new or changing
laws.
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,
24
increase the risk associated with its business. Because a significant proportion
of the Company's sales of these large system installations occur in the late
stages of a quarter, a delay, cancellation or other factor resulting in the
postponement or cancellation of such sales may cause the Company to miss its
financial projections, which may not be discernible until the end of a financial
reporting period. 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.
During the period between the evaluation and purchase of a system,
customers may defer or scale down proposed orders of the Company's products for,
among other reasons: (i) changes in budgets and purchasing priorities; (ii)
reduced need to upgrade existing systems; (iii) deferrals in anticipation of
enhancements or new products; (iv) introduction of products by the Company's
competitors; and (v) lower prices offered by the Company's competitors.
Geopolitical, economic and military conditions could directly affect
the Company's operations. The outbreak of severe acute respiratory syndrome
("SARS") curtailed travel to and from certain countries (primarily in the
Asia-Pacific region). Restrictions on travel to and from these and other regions
on account of additional incidents of SARS could have a material adverse effect
on the Company's business, results of operations, and financial condition. The
continued threat of terrorism and heightened security and military action in
response to this threat, or any future acts of terrorism, may cause disruptions
to the Company's business. To the extent that such disruptions result in delays
or cancellations of customer orders, or the manufacture or shipment of the
Company's products, the Company's business, operating results and financial
condition could be materially and adversely affected. More recently, the U.S.
military involvement in overseas operations including, for example, the war with
Iraq, could have a material adverse effect on the Company's business, results of
operations, and financial condition.
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.
During this period, peace negotiations between Israel and representatives of the
Palestinian Authority have been sporadic and currently are suspended. The
Company could be materially 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
materially 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 violence in Israel or the outbreak of
violent conflicts involving Israel may impede the Company's ability to sell its
products or otherwise adversely affect the Company. In addition, many of the
Company's Israeli employees in Israel are required to perform annual compulsory
military service in Israel and are subject to being called to active duty at any
time under emergency circumstances. The absence of these employees may have an
adverse effect upon the Company's operations.
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
25
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 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. Certain of the Company's subsidiaries currently pay
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 are currently required to be made until the government has
been reimbursed the amounts received by the Company, which is linked to the U.S.
dollar, 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. As of
April 30, 2004, such subsidiaries of the Company received approximately $54.7
million in cumulative grants from the OCS and recorded approximately $23.0
million in cumulative royalties to the OCS. During the year ended January 31,
2003, one of the Company's subsidiaries finalized an arrangement with the OCS
whereby the subsidiary agreed to pay a lump sum royalty amount for all past
amounts received from the OCS. In addition, this subsidiary began to receive
lower amounts from the OCS than it had historically received, but will not have
to pay royalty amounts on such 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
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 in the
future 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
26
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 results of operations and financial
condition.
The Company's success is dependent on recruiting and retaining key
management and highly skilled technical, managerial, sales, and marketing
personnel. The market 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
hinder the Company's ability to sell its products and could adversely affect the
Company's business, results of operations and financial condition. 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, contracts denominated in foreign
currencies, particularly the euro. As a result of the unpredictable timing of
27
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 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.
While the Company occasionally files patent applications, it cannot
be assured that patents will be issued on the basis of such applications or
that, if such patents are issued, they will be sufficiently broad to protect its
technology. In addition, the Company cannot be assured that any patents issued
to it will not be challenged, invalidated or circumvented.
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
products in different industry segments overlaps. In addition, the Company has
agreed to indemnify certain 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
28
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, 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. 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
significantly rely on equity incentive arrangements as a means to recruit and
retain talented employees.
The Company's operating results have fluctuated in the past and may
do so in the future. 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, which at times is unrelated to the operating
performance of a company. 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
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.
The Company's board of directors' ability to designate and issue up
to 2,500,000 shares of preferred stock and to issue additional shares of common
stock could adversely affect the voting power of the holders of common stock,
29
and could have the effect of making it more difficult for a person to acquire,
or could discourage a person from seeking to acquire, control of the Company. If
this occurs, investors could lose the opportunity to receive a premium on the
sale of their shares in a change of control transaction.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
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.
ITEM 4. CONTROLS AND PROCEDURES.
(a) The Company's management evaluated, with the participation of the
Company's principal executive and principal financial officers, the
effectiveness of the Company's disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")), as of April 30, 2004. Based on their evaluation,
the Company's principal executive and principal financial officers concluded
that the Company's disclosure controls and procedures were effective as of April
30, 2004.
(b) There has been no change in the Company's internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) that occurred during the Company's fiscal quarter ended April 30,
2004, that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
30
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On March 16, 2004, BellSouth Intellectual Property Corp.
("BellSouth") filed a complaint in the United States District Court for the
Northern District of Georgia against Comverse Technology, Inc. alleging
infringement of Patent Nos. 5,857,013 and 5,764,747, and, on March 17, 2004,
BellSouth amended the complaint, removing any and all references to Comverse
Technology, Inc., and naming Comverse, Inc., in an action captioned: BellSouth
Intellectual Property Corp. v. Comverse, Inc., Civil Action No. 1:04-CV-0739.
BellSouth alleges that Patent Nos. 5,857,013 and 5,764,747 cover certain aspects
of some of Comverse Inc.'s systems, and it seeks, among other relief, monetary
damages and injunctive relief. On May 5, 2004, Comverse, Inc. filed an answer
and counterclaims which, among other things, denies any infringement and seeks a
declaratory judgment that the patents at issue are invalid and unenforceable.
The Company believes all claims are without merit and Comverse, Inc. will
vigorously defend against BellSouth's claims.
From time to time, the Company is subject to claims in legal
proceedings arising in the normal course of its business. The Company does not
believe that it is currently party to any other pending legal action that could
reasonably be expected to have a material adverse effect on its business,
financial condition and results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit Index.
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) of the Exchange Act, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) of the Exchange Act, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32 Certifications of Chief Executive Officer and Chief
Financial Officer pursuant to Rule 13a-14(b) of the
Exchange Act and 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
During the first quarter of 2004, the Company furnished a report on
Form 8-K dated March 10, 2004, reporting under Items 7 and 12 that on
March 10, 2004, the Company issued a press release announcing its
financial results for the fourth quarter and fiscal year ended
January 31, 2004.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMVERSE TECHNOLOGY, INC.
Dated: June 8, 2004 /s/ Kobi Alexander
-----------------------------------
Kobi Alexander
Chairman of the Board
and Chief Executive Officer
Dated: June 8, 2004 /s/ David Kreinberg
-----------------------------------
David Kreinberg
Executive Vice President
and Chief Financial Officer
32