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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended January 31, 2005
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.)
909 THIRD AVENUE
NEW YORK, NEW YORK 10022
(Address of principal executive offices)
Registrant's telephone number, including area code: 212-652-6801
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Not applicable Not applicable
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.10 PAR VALUE PER SHARE
(Title of Class)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act).
[X] Yes [ ] No
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the closing price as of the last
business day of the registrant's most recently completed second fiscal quarter,
July 31, 2004, was approximately $3,336,772,000.
There were 199,543,867 shares of the registrant's common stock
outstanding on March 24, 2005.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the Annual Meeting
of Shareholders to be held on June 14, 2005, are incorporated by reference in
Part III.
___________________________________
Comverse, Comverse Technology, Total Communication and InSight, are trademarks
or service marks of the Company. Verint(R), Powering Actionable Intelligence(R),
LORONIX(R) Intelligent Recording(R), OpenStorage Portal(R), and SmartSight(R)
are registered trademarks and Actionable Intelligence, RELIANT, STAR-GATE,
ULTRA, VANTAGE, Universal Database and Verint Systems are trademarks of Verint
Systems Inc., a subsidiary of the Company. Signalware(R) and Ulticom(R) are
registered trademarks of Ulticom, Inc., a subsidiary of the Company.
ii
FORWARD-LOOKING STATEMENTS
Certain statements discussed in Item 1 (Business), Item 3 (Legal
Proceedings), Item 7 (Management's Discussion and Analysis of Financial
Condition and Results of Operations), and elsewhere in this Form 10-K constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other important factors that could cause the
actual results, performance or achievements of results to differ materially from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Important risks, uncertainties and other important
factors that could cause actual results to differ materially include, among
others: changes in the demand for the company's products; changes in capital
spending among the company's current and prospective customers; the risks
associated with the sale of large, complex, high capacity systems and with new
product introductions as well as the uncertainty of customer acceptance of these
new or enhanced products from either the company or its competition; risks
associated with rapidly changing technology and the ability of the company to
introduce new products on a timely and cost-effective basis; aggressive
competition may force the company to reduce prices; a failure to compensate any
decrease in the sale of the company's traditional products with a corresponding
increase in sales of new products; risks associated with changes in the
competitive or regulatory environment in which the company operates; risks
associated with prosecuting or defending allegations or claims of infringement
of intellectual property rights; risks associated with significant foreign
operations and international sales and investment activities, including
fluctuations in foreign currency exchange rates, interest rates, and valuations
of public and private equity; the volatility of macroeconomic and industry
conditions and the international marketplace; risks associated with the
company's ability to retain existing personnel and recruit and retain qualified
personnel; and other risks described in filings with the Securities and Exchange
Commission. These risks and uncertainties, as well as other factors, are
discussed in greater detail at the end of Item 7 (Management's Discussion and
Analysis of Financial Condition and Results of Operations) of this Form 10-K.
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.
1
COMVERSE TECHNOLOGY, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 31, 2005
INDEX
PAGE
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PART I
Item 1. Business. 3
Item 2. Properties. 14
Item 3. Legal Proceedings. 14
Item 4. Submission of Matters to a Vote of Security Holders. 14
PART II
Item 5. Market For Registrant's Common Equity And Related Stockholder Matters. 15
Item 6. Selected Financial Data. 16
Item 7. Management's Discussion And Analysis Of Financial Condition And Results Of Operations. 17
Item 7A. Quantitative And Qualitative Disclosures About Market Risk. 46
Item 8. Financial Statements And Supplementary Data. 47
Item 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure 47
Item 9A. Controls And Procedures. 47
Item 9B. Other Information. 47
PART III
Item 10. Directors And Executive Officers Of The Registrant. 47
Item 11. Executive Compensation. 48
Item 12. Security Ownership Of Certain Beneficial Owners And Management And
Related Stockholder Matters. 48
Item 13. Certain Relationships And Related Transactions. 48
Item 14. Principal Accounting Fees And Services. 48
PART IV
Item 15. Exhibits and Financial Statement Schedules. 49
2
PART I
ITEM 1. BUSINESS.
Comverse Technology, Inc. ("CTI" and, together with its subsidiaries,
the "Company"), a New York corporation incorporated in 1984, designs, develops,
manufactures, markets and supports software, systems, and related services for
multimedia communication and information processing applications. The Company's
products are used in a broad range of applications by wireless and wireline
telecommunications network operators and service providers, call centers, and
other government, public and commercial organizations worldwide.
The Company's subsidiary Comverse, Inc. ("Comverse") provides
telecommunications software, systems, and related services to telecommunications
service providers ("TSPs") that enable voice and data value-added enhanced
services and real-time billing of communication services. These products
comprise Comverse's Total Communication portfolio and address 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. These products are designed to enhance the communication
experience and generate TSP traffic and revenue. Comverse's principal market for
its systems consists of organizations that use the systems to provide services
to the public, often on a subscription or pay-per-usage basis, and includes both
wireless and wireline telecommunications network operators.
Comverse markets its systems throughout the world, with its own
direct sales force and in cooperation with a number of leading international
vendors of telecommunications infrastructure equipment.
Approximately 400 wireless and wireline TSPs in more than 110
countries, including the majority of the 20 largest telecom companies in the
world, have selected Comverse's products to provide enhanced telecommunications
services to their customers. Major network operators and service providers using
Comverse's systems include, among others, AT&T (USA), China Mobile, Cingular
(USA), Deutsche Telekom (multiple countries), O2 (Germany and UK), Orange
(multiple countries), Reliance Infocomm (India), SBC Communications (USA),
Sprint (USA), Telecom Italia (Italy), Telmex (Mexico), Telstra (Australia),
Verizon (USA), Vimpelcom (Russia), Vivo (Brazil), and Vodafone (multiple
countries).
Through its subsidiary, Verint Systems Inc. ("Verint"), the Company
provides analytic software-based solutions for communications interception,
networked video security and business intelligence. Verint's software generates
actionable intelligence through the collection, retention and analysis of
unstructured information contained in voice, fax, video, email, Internet and
data transmissions from voice, video and IP networks. Verint's analytic
solutions are designed to extract critical intelligence and deliver this
intelligence to decision makers for more effective action. The security market
consists primarily of communications interception by law enforcement and other
government agencies and networked video security utilized by government agencies
and public and private organizations for use in transportation, critical
infrastructure, public buildings and other government and corporate sites. The
business intelligence market consists primarily of solutions for enterprises
that rely on contact centers for voice, email and Internet interactions with
their customers. Additionally, an emerging segment of business intelligence
utilizes digital video information to allow enterprises and institutions to
generate actionable intelligence to enhance their operations, processes and
performance. Verint sells its business actionable intelligence solutions to
contact center service bureaus, financial institutions, retailers, utilities,
communication service providers, manufacturers and other enterprises. Verint has
established marketing relationships with a variety of global value-added
resellers and a network of systems integrators. Verint is listed on the NASDAQ
National Market System under the symbol "VRNT." CTI held approximately 59% of
Verint's outstanding common stock as of January 31, 2005.
3
Through its subsidiary Ulticom, Inc. ("Ulticom"), the Company
provides service enabling signaling software for wireline, wireless and Internet
communications. Ulticom's Signalware family of products are used by equipment
manufacturers, application developers and communication service providers to
deploy revenue generating infrastructure and enhanced services within the
mobility, messaging, payment and location segments. Signalware products are also
embedded in a range of packet softswitching products to interoperate or converge
voice and data networks and facilitate services such as voice-over-IP ("VoIP"),
hosted IP telephony, and virtual private networks. Ulticom is listed on the
NASDAQ National Market System under the symbol "ULCM." CTI held approximately
69% of Ulticom's outstanding common stock as of January 31, 2005.
The Company markets other telecommunication products and services,
including enhanced wireless roaming services, and automatic call distribution
and messaging systems for telephone answering service bureaus. The Company also
engages in venture capital investment and capital market activities for its own
account.
Throughout this document, references are made to technologies,
features, capabilities, capacities and specifications in conjunction with the
Company's products and technological resources. Such references do not
necessarily apply to all product lines, models and system configurations.
The Company was incorporated in the State of New York in October
1984. Its headquarters are located at 909 Third Avenue, New York, New York 10022
and its telephone number is (212) 652-6801.
The Company's Internet address is www.cmvt.com. The information
contained on the Company's website is not included as a part of, or incorporated
by reference into, this Annual Report on Form 10-K. The Company makes available,
free of charge, on its Internet website, its annual report on Form 10-K, its
quarterly reports on Form 10-Q, its current reports on Form 8-K and amendments
to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, as soon as reasonably practicable
after the Company has electronically filed such material with, or furnished it
to, the United States Securities and Exchange Commission.
4
THE COMPANY'S PRODUCTS
TOTAL COMMUNICATION PORTFOLIO
Comverse is a leading supplier of telecommunication software,
systems, and related services for voice and data value-added enhanced services.
These value-added enhanced services solutions along with Comverse's real-time
billing solutions from our Network Systems Division ("CNS") comprise Comverse's
Total Communication portfolio. Comverse's Total Communication portfolio
addresses four primary categories: call completion and call management solutions
(e.g., Call Answering, Who Called Service, and Interactive Voice Response
applications); advanced messaging solutions for groups, communities and
person-to-person communication (e.g., Voice Messaging, Short Messaging Service
(SMS), Videomail, Multimedia Messaging Service (MMS), Instant Messaging and
Mobile Email); solutions and enablers for the management and delivery of data
and content-based services (e.g., Video Portal, Presence Server, Personal
Address Book, Mobile Data Gateway, Media Server, Ringback Tones, Media and
Content Adaptation); and real-time billing and account management for dynamic
service environments (e.g., Prepaid Calling, Real-Time Data Billing, and
Converged Prepaid/Post-paid/Voice/Data Billing).
Comverse's InSight solution, a part of Comverse's Total Communication
portfolio, provides a single, open, modular architecture on which a wide variety
of advanced messaging and content services can be hosted. Insight is designed to
improve network efficiencies and leverage the built-in synergies between
next-generation communication and infotainment services to increase revenues for
wireline and wireless service providers.
Comverse's principal market for its software, systems, and related
services consists of organizations that use the systems to provide services to
the public, often on a subscription or pay-per-usage basis, and includes both
wireless and wireline telecommunications network operators. With Total
Communication, TSPs benefit from revenue generated by the increase in billable
completed calls, service-related fees, and increased customer loyalty that
results in an overall reduction in churn. Wireless TSPs are almost universally
adding call answering and messaging to their service offerings, often as part of
their basic service package, not only because of these benefits, but also
because wireless call answering and messaging services directly increase
billable airtime by stimulating outbound calls and increase billable
transactions by stimulating person-to-person messaging and information
retrieval.
Comverse's carrier grade Total Communication software, systems, and
related services have been designed and packaged to meet the capacity,
reliability, availability, scalability, maintainability, network and OMAP
(Operations, Maintenance, Administration, and Provisioning) interfaces and
physical requirements of large telecommunications network operators. The systems
are offered in a variety of sizes and configurations and can be clustered for
larger capacity installations. The systems are available with redundancy of
critical components, so that no single failure will interrupt the service.
Comverse's products are available in both centralized and distributed
configurations.
Comverse's systems also incorporate components that are compatible
with the Intelligent Network ("IN") and Advanced Intelligent Network ("AIN")
protocols for Service Control Points and Intelligent Peripherals, permitting
Comverse's network operator customers to develop and deploy services based on
the overall IN architecture.
Comverse's products incorporate both Comverse-developed and
third-party developed software, and Comverse-designed and third-party hardware,
and are available in an open, modular, IP standards-based system architecture.
The systems support a wide variety of digital telephony and IP interfaces and
signaling systems, allowing them to adapt to a variety of different network
environments and IN/AIN applications, and enable a "universal port" -- a single
port that supports multiple applications and services at any time during a
single call.
5
SECURITY AND BUSINESS INTELLIGENCE
Verint is a leading provider of analytic software-based solutions for
the security and business intelligence markets. Verint's software generates
actionable intelligence through the collection, retention and analysis of voice,
fax, video, email, Internet and data transmissions from multiple types of
communication networks.
Verint's STAR-GATE product line enables communications service
providers, Internet service providers, and communication equipment manufacturers
to overcome the complexities posed by global digital communication and comply
with governmental requirements. STAR-GATE enables communication service
providers in receipt of proper legal authorization to intercept simultaneous
communications over a variety of wireline, wireless and IP networks for delivery
to law enforcement and other government agencies. STAR-GATE's flexibility
supports multi-network, multi-vendor switch environments for a common interface
across communication networks and supports switches from communications
equipment manufacturers, such as Alcatel, Ericsson, Lucent, Nokia, Nortel and
Siemens. STAR-GATE also supports interfaces to packet data networks, such as the
Internet and Voice over Internet Protocol (VoIP), as well as general packet
radio services.
Verint's RELIANT and VANTAGE product lines provide intelligent
recording and analysis solutions for communications interception activities for
law enforcement organizations and intelligence agencies. The RELIANT and VANTAGE
solutions are comprised of a system administration workstation, an operator
workstation, and collection and storage databases and servers. RELIANT and
VANTAGE collect intercepted communications from multiple channels and stores
them for immediate access and further analysis. The system enables the review of
intercepted voice, fax and data transmissions in their original forms through an
easy to use interface and analytics to generate actionable intelligence from the
large amounts of information that can be collected. Law enforcement agencies,
ranging from local police agencies to national law enforcement agencies, are
using RELIANT to comply with communications interception legal regulations and
to generate evidence from intercepted communications that is admissible in a
court of law.
Verint Networked Video Solutions enable government and commercial
organizations to enhance the security of their facilities and infrastructure and
improve the performance of their operations by networking video across multiple
locations and applying advanced content analytics to extract actionable
intelligence from live and stored video. By alerting security personnel to
potential security threats, Verint Networked Video Solutions are designed to
help organizations prevent security breaches, improve response time and enhance
operational efficiency.
Verint's ULTRA products record and analyze customer interactions to
provide enterprises with business intelligence about their customers and help
monitor and improve the performance of their contact centers.
SERVICE ENABLING SIGNALING SOFTWARE
The Company's Ulticom subsidiary provides service enabling signaling
software for wireline, wireless and Internet communications. Ulticom's
Signalware family of products are used by equipment manufacturers, application
developers and communication service providers to deploy revenue generating
infrastructure and enhanced services within the mobility, messaging, payment and
location segments. Signalware products also are 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.
6
Signalware supports a range of applications across multiple networks.
In wireline networks, Signalware has been deployed as part of applications such
as voice messaging, calling name, and 800 number services. Signalware enables
wireless infrastructure applications such as global roaming and emergency-911,
and enhanced services such as text messaging and prepaid calling. Signalware
also enables the deployment of broadband services such as VoIP in wireline,
wireless and cable service provider networks.
Signalware provides signaling system #7 ("SS7"), the globally
accepted signaling standard protocol, which interconnects the complex switching,
database and messaging systems, and manages vital number, routing and billing
information that form the backbone of today's telecommunications networks.
Signalware works with multiple SS7 networks, supports a wide variety of SS7
protocol elements, and enables analog or digital wireline and wireless
transmissions. It provides the functionality needed for call set-up/termination
and call routing/billing. Signalware products also include features that enable
the transition from SS7 signaling to emerging packet signaling standards, as
defined by the Internet Engineering Task Force, such as Signaling Transport
("SIGTRAN") and Session Initiation Protocol ("SIP"). New solutions include a
Signalware SIGTRAN Gateway for enabling circuit to packet network
interoperability and Signalware SIP for developing next generation services for
all IP networks.
Signalware solutions run on a range of hardware platforms and
operating systems, including Sun Solaris, IBM AIX and Red Hat Linux. These
solutions can be used in single or multiple computing configurations for fault
resiliency and reliability. Signalware customers include equipment
manufacturers, such as Alcatel, Ericsson and Siemens; application developers,
such as Comverse, Fujitsu and Sonus; and service providers, such as Orange
Personal Communications, Reliance Infocomm, and Telefonica.
OTHER TELECOMMUNICATIONS PRODUCTS AND SERVICES
The Company's other telecommunications products and services are
developed and marketed through subsidiaries in the United States and
internationally. These include enhanced wireless roaming services, and automatic
call distribution and messaging systems for telephone answering service bureaus
and other organizations.
MARKETS, SALES AND MARKETING
Comverse is a leading supplier of telecommunications software,
systems, and related services for voice and data value-added enhanced services.
Comverse's Total Communication software, systems, and related services are
marketed by Comverse throughout the world, with its own direct sales force as
well as local distributors, and in cooperation with a number of leading
international vendors of telecommunications infrastructure equipment.
Approximately 400 wireless and wireline TSPs in more than 110
countries, including the majority of the 20 largest telecom companies in the
world, have selected Comverse's products to provide enhanced telecommunications
services to their customers. Major network operators and service providers using
Comverse's systems include, among others, AT&T (USA), China Mobile, Cingular
(USA), Deutsche Telekom (multiple countries), O2 (Germany and UK), Orange
(multiple countries), Reliance Infocomm (India), SBC Communications (USA),
Sprint (USA), Telecom Italia (Italy), Telmex (Mexico), Telstra (Australia),
Verizon (USA), Vimpelcom (Russia), Vivo (Brazil) and Vodafone (multiple
countries).
7
Comverse provides its customers with marketing consultation, seminars
and materials designed to assist them in marketing enhanced telecommunications
services, and also undertakes to play an ongoing supporting role in their
business and market planning processes.
Verint's products are marketed primarily through a combination of its
direct sales force and channels, including agents, distributors, value-added
resellers and systems integrators. Verint develops strategic marketing alliances
with leading companies in the industry to expand the coverage and support of its
direct sales force.
Verint's products are used by over 1000 organizations and are
deployed in over 50 countries, across many industries and markets. Many users of
the products are large corporations or government agencies that operate from
multiple locations and facilities across large geographic areas and sometimes
across several countries. These organizations typically implement Verint's
solutions in stages, with implementation in one or more sites and then gradually
expanding to a full enterprise, networked-based solution.
Verint's customers include Charter One Bank, CIBC, the Home Depot,
HSBC, the Internal Revenue Service, the London Underground, Orange, Target, the
U.S. Capitol, and U.S. Department of Defense. These are examples of Verint's
customers, though not necessarily representative, because Verint is often
restricted from disclosing the names of its customers for security reasons,
particularly its communications interception customers.
Ulticom's products are used by more than 50 customers and are
deployed by more than 300 service providers in more than 100 countries. Ulticom
markets its products and services primarily through a direct sales organization
and through distributors. Customers include network equipment manufacturers such
as Alcatel, Ericsson and Siemens; application developers such as Comverse,
Fujitsu, and Sonus; and service providers such as Orange Personal
Communications, Reliance Infocomm, and Telefonica.
See "Financial Statements" in Item 15 for information on revenues,
operating profit and total assets of each of the Company's segments.
RESEARCH AND DEVELOPMENT
Because of the continuing technological changes that characterize the
telecommunications and computer industries, the Company's success will depend,
to a considerable extent, upon its ability to continue to develop competitive
products through its research and development efforts. The Company currently
employs more than 2,000 scientists, engineers and technicians in its research
and development efforts, located predominantly in the United States and Israel
with additional offices in France, Germany, India and Malaysia, with broad
experience in the areas of digital signal processing, computer architecture,
telephony, IP, data networking, multi-processing, databases, real-time software
design and application software design, among others.
A portion of the Company's research and development operations
benefit from financial incentives provided by government agencies to promote
research and development activities performed in Israel. The cost of such
operations is and will continue to be affected by the continued availability of
financial incentives under such programs. During the past fiscal year, the
Company's research and development activities included projects submitted for
partial funding under a program administered by the Office of the Chief
Scientist of the Ministry of Industry and Trade of the State of Israel ("OCS"),
under which reimbursement of a portion of the Company's research and development
expenditures will be made subject to final approval of project budgets. During
the year ended January 31, 2003, Comverse finalized an arrangement with the OCS
under which Comverse no longer would owe royalties to the OCS in return for a
lump sum payment for all past amounts received from the OCS. Under the
arrangement, Comverse began to receive lower amounts from the OCS than it had
8
historically received, but is not required to pay royalty amounts on such future
grants. Other subsidiaries of CTI were not part of Comverse's arrangement with
the OCS and they continue to owe royalties on their sale of certain products
developed, in part, with funding supplied under such programs. Permission from
the Government of Israel is required for the Company to manufacture outside of
Israel products resulting from research and development activities funded under
such programs. In order to obtain such permission the Company will 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
transfer outside of Israel of any intellectual property rights resulting from
research and development activities funded under OCS programs is not permitted.
See "Financial Statements" in Item 15, "Licenses and Royalties" and "Operations
in Israel" in Item 1 and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Item 7.
PATENTS AND INTELLECTUAL PROPERTY RIGHTS
The Company holds a number of United States and foreign patents.
While the Company files patent applications periodically, no assurance can be
given that patents will be issued on the basis of such applications or that, if
patents are issued, the claims allowed will be sufficiently broad to protect the
Company's technology. In addition, no assurance can be given that any patents
issued to the Company will not be challenged, invalidated or circumvented or
that the rights granted under the patents will provide significant benefits to
the Company.
In order to safeguard its unpatented proprietary know-how, trade
secrets and technology, the Company relies primarily upon trade secret
protection and non-disclosure provisions in agreements with employees and others
having access to confidential information. There can be no assurance that these
measures will adequately protect the Company from disclosure or misappropriation
of its proprietary information.
The Company and its customers from time to time receive
communications from third parties, including some of the Company's competitors,
alleging infringement by the Company of such parties' patent rights. While such
communications are common in the computer and telecommunications industries and
the Company has in the past been able to obtain any necessary licenses on
commercially reasonable terms, there can be no assurance that the Company would
prevail in any litigation to enjoin the Company from selling certain of its
products on the basis of such alleged infringement, or that the Company would be
able to license any valid patents on reasonable terms.
The Company attempts to avoid infringing known proprietary rights of
third parties in its product development efforts. The Company does not, however,
regularly conduct comprehensive patent searches to determine whether the
technology used in its products infringes patents held by third parties.
In January 2000, the Company and Lucent Technologies GRL Corp.
("Lucent") entered into a non-exclusive cross-licensing arrangement covering
current and certain future patents issued to the Company and its affiliates and
a portfolio of current and certain future patents in the area of
telecommunications technology issued to Lucent and its affiliates.
LICENSES AND ROYALTIES
The Company licenses certain technology, know-how and related rights
for use in the manufacture and marketing of its products, and pays royalties to
third parties under such licenses and under other agreements. The Company
believes that its rights under such licenses and other agreements are sufficient
for the manufacturing and marketing of its products and, in the case of
licenses, extend for periods at least equal to the estimated useful lives of the
related technology and know-how.
9
DOMESTIC AND INTERNATIONAL SALES AND LONG-LIVED ASSETS
See "Financial Statements" in Item 15 for a breakdown of the domestic
and international sales and long-lived assets for the years ended January 31,
2003, 2004 and 2005, and see "Certain Trends and Uncertainties" in Item 7 for a
description of risks attendant to the Company's foreign operations.
BACKLOG
At January 31, 2005, the backlog of the Company amounted to
approximately $568 million compared to approximately $400 million as of January
31, 2004. The Company believes that substantially all of such backlog will be
delivered within the next 12 months.
SERVICE AND SUPPORT
The Company has a strong commitment to provide product service and
support to its customers and emphasizes such commitment in its marketing.
Because of the intensity of use of systems by telecommunications network
operators and other customers of the Company's products, and their low tolerance
for down-time, the Company is required to make a greater commitment to service
and support of systems used by these customers, and such commitment increases
operating costs.
The Company's general warranty policy is to replace or repair any
component that fails during a specified warranty period. Broader warranty and
service coverage is provided in many cases, and is sometimes made available to
customers on a contractual basis for an additional charge.
The Company provides technical assistance from several locations
around the world. Technical support is available for the Company's customers 24
hours-a-day, seven days-a-week.
COMPETITION
The Company faces strong competition in the markets for all of its
products. The market for Total Communication software, systems, and related
services is highly competitive, and includes numerous products offering a broad
range of features and capacities. The primary competitors are suppliers of
turnkey systems and software, and indirect competitors that supply certain
components to systems integrators. Many of Comverse's competitors specialize in
a subset of Comverse's portfolio of products. Direct and/or indirect competitors
include, among others, Alcatel, Boston Communications, Ericsson, Glenayre,
Huawei, IBM, InterVoice, LogicaCMG, Lucent, Motorola, NEC, Nokia, Openwave, SS8
Networks, Tecnomen, Telcordia, and Unisys. Competitors of Comverse that
manufacture other telecommunications equipment may derive a competitive
advantage in selling systems to customers that are purchasing or have previously
purchased other compatible equipment from such manufacturers.
The Company faces indirect competition is from messaging and other
enhanced communication products employed at end-user sites as an alternative to
the use of services available through telecommunications network operators. This
"enterprise-based equipment" includes a broad range of products, such as
stand-alone voicemail systems, answering machines, telephone handsets with call
answering and other enhanced services capabilities, products offering "call
processing" services that are supplied with voicemail features or integrated
with other voicemail systems, as well as personal computer modems and add-on
cards and software designed to furnish enhanced communication capabilities.
Comverse believes that competition in the sale of Total Communication
systems is based on a number of factors, the most important of which are product
features and functionality, system capacity and reliability, marketing and
distribution capability and price. Other important competitive factors include
10
service and support and the capability to integrate systems with a variety of
telecom networks, IP networks and Operation and Support Systems (OSS). Comverse
believes that the range of capabilities provided by, and the ease of use of, its
systems compare favorably with other products currently marketed. Comverse
anticipates that a number of its direct and indirect competitors will introduce
new or improved systems during the next several years.
Verint faces strong competition in the markets for its products, both
in the United States and internationally. Verint expects competition to persist
and intensify in the security market, primarily due to increased demand for
homeland defense and security solutions. Verint's primary competitors are
suppliers of security and recording systems and software, and indirect
competitors that supply certain components to systems integrators. In the
business intelligence market, Verint faces competition from organizations
emerging from the traditional call logging or call recording market as well as
software companies that develop and sell products that perform specific
functions for this market. In addition, many of Verint's competitors specialize
in a subset of Verint's portfolio of products and services. Primary competitors
include, among others, Bosch, eTalk, ETI, General Electric, JSI Telecom, March
Networks, NICE Systems, Pelco, Raytheon, Siemens, SS8 Networks, Tyco, Honeywell
and Witness Systems. Verint believes it competes principally on the basis of
product performance and functionality, knowledge and experience in the industry,
product quality and reliability, customer service and support, and price.
Verint believes that its success depends primarily on its ability to
provide technologically advanced and cost effective solutions and to continue to
provide its customers with prompt and responsive customer support. Competitors
that manufacture other security-related systems or other recording systems may
derive a competitive advantage in selling to customers that are purchasing or
have previously purchased other compatible equipment from such manufacturers.
Further, Verint expects that competition will increase as other established and
emerging companies enter its markets and as new products, services and
technologies are introduced.
Competitors of Ulticom primarily are internal development
organizations within equipment manufactures and application developers who seek,
in a build-versus-buy decision, to develop substitutes for its products. Ulticom
also competes with a number of companies ranging from SS7 software solution
providers, such as Hughes Software Systems and SS8 Networks, to vendors of
communication and computing platforms, such as Continuous Computing Corporation
and Hewlett-Packard Company. Ulticom believes it competes principally on the
basis of product performance and functionality, product quality and reliability,
customer service and support, and price.
Many of the Company's present and potential competitors are
considerably larger than the Company, are more established, have a larger
installed base of customers and have greater financial, technical, marketing and
other resources.
MANUFACTURING AND SOURCES OF SUPPLIES
The Company's manufacturing operations consist primarily of final
assembly and testing, involving the application of extensive testing and quality
control procedures to materials, components, subassemblies and systems. The
Company primarily uses third parties to perform modules and subsystem assembly,
component testing and sheet metal fabrication. Although the Company generally
uses standard parts and components in its products, certain components and
subassemblies are presently available only from a limited number of sources. To
date, the Company has been able to obtain adequate supplies of all components
and subassemblies in a timely manner from existing sources or, when necessary,
from alternative sources or redesign the system to incorporate new modules, when
applicable. However, the inability to obtain sufficient quantities of components
or to locate alternative sources of supply if and as required in the future,
would adversely affect the Company's operations.
11
The Company maintains organization-wide quality assurance procedures,
coordinating the quality control activities of the Company's research and
development, manufacturing and service departments.
CAPITAL MARKET ACTIVITIES
The Company seeks to identify and implement suitable investments, and
engages in portfolio investment and capital market activities, including venture
capital investments directly and indirectly through private equity funds. Both
directly and through a joint venture formed by the Company in partnership with
Quantum Industrial Holdings Ltd., an investment company managed by Soros Fund
Management LLC, the Company invests in venture capital in high technology firms,
and engages in other investment activities. The Company has significantly
reduced its new venture capital investments in recent periods.
OPERATIONS IN ISRAEL
A substantial portion of the Company's research and development,
manufacturing and other operations are located in Israel and, accordingly, may
be affected by economic, political and military conditions in that country.
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors, which in the
past and may in the future, lead to security and economic problems for Israel.
Current and future conflicts and political, economic and/or military conditions
in Israel and the Middle East region can directly affect the Company's
operations in Israel. From October 2000, until recently, terrorist violence in
Israel increased significantly, primarily in the West Bank and Gaza Strip, and
Israel has experienced terrorist incidents within its borders. There can be no
assurance that the recent relative calm and renewed discussions with Palestinian
representatives will continue. 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.
Israel is a member of the United Nations, the International Monetary
Fund, the International Bank for Reconstruction and Development, and the
International Finance Corporation, and is a signatory to the General Agreement
on Tariffs and Trade, which provides for reciprocal lowering of trade barriers
among its members. In addition, Israel has been granted preferences under the
Generalized System of Preferences from the United States, Australia, Canada, and
Japan. These preferences allow Israel to export the products covered by such
programs either duty-free or at reduced tariffs.
Israel has entered into free trade agreements with its major trading
partners. Israel and the European Union are parties to a Free Trade Agreement
pursuant to which, subject to rules of origin, Israel's industrial exports to
the European Union are exempt from customs duties and other non-tariff barriers
and import restrictions. Israel also has an agreement with the United States
that established a Free Trade Area eliminating all tariff and certain non-tariff
barriers on most trade between the two countries. Israel has also entered into
an agreement with the European Free Trade Association ("EFTA"), which currently
includes Iceland, Liechtenstein, Norway and Switzerland, that established a
free-trade zone between Israel and EFTA nations exempting manufactured goods and
some agricultural goods and processed foods from customs duties, while reducing
duties on other goods. Israel also has free trade agreements with a number of
other countries, such as Canada, Mexico and various European countries. The end
of the Cold War has also enabled Israel to establish commercial and trade
relations with a number of nations, including Russia and certain countries from
the former Soviet Union, China, India and the nations of Eastern Europe, with
whom Israel had not previously had such relations.
12
The Company's business is dependent to some extent on trading
relationships between Israel and other countries. Certain of the Company's
products incorporate components imported into Israel from the United States and
other countries and most of the Company's products are sold outside of Israel.
Accordingly, the Company's operations would be adversely affected if trade
between Israel and its current trading partners were interrupted or curtailed.
The sale of products manufactured in Israel has been adversely affected in
certain markets by restrictive laws, policies or practices directed toward
Israel or companies having operations in Israel. The continuation or
exacerbation of conflicts involving Israel and other nations may impede the
Company's ability to sell its products in certain markets.
The Company benefits from various policies of the Government of
Israel, including reduced taxation and special subsidy programs, designed to
stimulate economic activity, particularly the high technology exporting
industry, in that country. As a condition of its receipt of funds for various
research and development projects conducted under programs sponsored by the
Government of Israel, permission from the Government of Israel is required for
the Company to manufacture outside of Israel products resulting from the
research and development activities funded under these programs. In addition,
the transfer outside of Israel of any intellectual property rights resulting
from research and development activities funded under the program is not
permitted.
The results of operations of the Company have been favorably affected
by participation in Israeli government programs related to research and
development, as well as utilization of certain tax incentives and other
incentives available under applicable Israeli laws and regulations, some of
which have been reduced, discontinued or otherwise modified in recent years. In
addition, the Company's ability to obtain benefits under various discretionary
funding programs has declined and may continue to decline. The results of
operations of the Company could be adversely affected if these programs were
further reduced or eliminated and not replaced with equivalent programs or if
its ability to participate in these programs were to be reduced significantly.
EMPLOYEES
At January 31, 2005, the Company employed approximately 5,050
individuals, of whom approximately 80% are scientists, engineers and technicians
engaged in research and development, marketing, support and operations
activities. The Company considers its relationship with its employees to be
good.
The Company is not a party to any collective bargaining or other
agreement with any labor organization; however, certain provisions of the
collective bargaining agreements between the Histadrut (General Federation of
Labor in Israel) and the Coordinating Bureau of Economic Organizations
(including the Industrialists' Association) are applicable to the Company's
Israeli employees by order of the Israeli Ministry of Labor. Israeli law
generally requires the payment by employers of severance pay upon the death of
an employee, his or her retirement or upon termination of his or her employment,
and the Company provides for such payment obligations through monthly
contributions to an insurance fund. Israeli employees are required to pay and
employers are required to pay and withhold certain payroll, social security and
health tax payments, in respect of national health insurance and social security
benefits.
The continuing success of the Company will depend, to a considerable
extent, on the contributions of its senior management and key employees, many of
whom would be difficult to replace, and on the Company's ability to attract and
retain qualified employees in all areas of its business. Competition for such
13
personnel is intense. In order to attract and retain talented personnel, and to
provide incentives for their performance, the Company has emphasized the award
of stock options as an important element of its compensation program, including
options to purchase shares in certain of the Company's subsidiaries, and
provides cash bonuses based on several parameters, including the profitability
of the recipients' respective business units.
ITEM 2. PROPERTIES.
As of January 31, 2005, the Company leased an aggregate of
approximately 2,199,000 square feet of office space and manufacturing and
related facilities for its operations worldwide, including approximately
1,284,000 square feet in Tel Aviv, Israel, approximately 367,000 square feet in
Wakefield, Massachusetts, approximately 63,000 square feet in Long Island, New
York, approximately 85,000 square feet in Mt. Laurel, New Jersey, an aggregate
of approximately 132,000 square feet at various other locations in the United
States and an aggregate of approximately 268,000 square feet at various
locations in Europe, Asia-Pacific, South America, Africa and Canada.
Approximately 161,000 square feet of this space is sub-leased to others. The
aggregate base monthly rent for the facilities under lease as of January 31,
2005, net of sub-lease income, was approximately $2,548,000, and all of such
leases are subject to various pass-throughs and escalation adjustments.
In addition, the Company owns office space and manufacturing and
related facilities of approximately 40,000 square feet in Durango, Colorado,
approximately 29,000 square feet in Bexbach, Germany, and approximately 423,000
square feet of unimproved land in Ra'anana, Israel and 25 acres of land in
Durango, Colorado.
The Company believes that its facilities currently under lease are
more than adequate for its current operations, and may endeavor selectively to
reduce its existing facilities commitments as circumstances may warrant.
ITEM 3. 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 (the "Patents"), and it
subsequently amended the complaint to include Comverse Inc., in an action
captioned: BellSouth Intellectual Property Corp. v. Comverse Technology, Inc.
and Comverse, Inc., Civil Action No. 1:04-CV-0739. BellSouth alleged that the
Patents cover certain aspects of some of the Company's voicemail systems. The
Company retained outside legal counsel specializing in patent litigation, and
filed an Answer and Counterclaim denying all allegations. On or about December
20, 2004, the Company executed a settlement agreement with BellSouth and some of
its related entities covering the Company and the Company's customers.
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 a party to any pending legal action that could
reasonably be expected to have a material adverse effect on its business,
financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal year 2004.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
The Common Stock of CTI trades on the NASDAQ National Market System
under the symbol CMVT. The following table sets forth the range of closing
prices of the Common Stock as reported on NASDAQ for the past two fiscal years:
YEAR FISCAL QUARTER LOW HIGH
2003 2/1/03 - 4/30/03 $ 8.82 $13.33
5/1/03 - 7/31/03 $12.08 $16.64
8/1/03 - 10/31/03 $13.41 $18.04
11/1/03 - 1/31/04 $16.55 $19.95
2004 2/1/04 - 4/30/04 $16.36 $20.69
5/1/04 - 7/31/04 $16.10 $19.94
8/1/04 - 10/31/04 $15.48 $20.99
11/1/04 - 1/31/05 $20.59 $25.03
There were 1,584 holders of record of Common Stock at March 24, 2005.
Such record holders include a number of holders who are nominees for an
undetermined number of beneficial owners. The Company believes that the number
of beneficial owners of the shares of Common Stock outstanding at such date was
approximately 40,000.
The Company has not declared or paid any cash dividends on its equity
securities and currently does not expect to pay any cash dividends in the near
future, but rather intends to retain its earnings to finance the development of
the Company's business. Any future determination as to the declaration and
payment of dividends will be made by the Board of Directors in its discretion,
and will depend upon the Company's earnings, financial condition, capital
requirements and other relevant factors. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
15
ITEM 6. SELECTED FINANCIAL DATA.
The following tables present selected consolidated financial data for the
Company for the years ended January 31, 2001, 2002, 2003, 2004 and 2005. Such
information has been derived from the Company's audited consolidated financial
statements and should be read in conjunction with the Company's consolidated
financial statements and the notes to the consolidated financial statements
included elsewhere in this report. All per share data has been restated to
reflect a two-for-one stock split effected as a 100% stock dividend to
shareholders of record on March 27, 2000, distributed on April 3, 2000.
YEAR ENDED JANUARY 31,
---------------------------------------------------------------------------
2001 2002 2003 2004 2005
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Operations Data:
Sales $1,225,058 $1,270,218 $735,889 $765,892 $959,442
Acquisition expenses 15,971 - - - 4,635
Workforce reduction, restructuring and
impairment charges (credits) - 63,562 66,714 (2,123) 62
Income (loss) from operations 234,624 64,844 (182,741) (30,378) 46,933
Net income (loss) 249,136 54,619 (129,478) (5,386) 57,330
Earnings (loss) per share - diluted 1.39 0.29 (0.69) (0.03) 0.28
JANUARY 31,
---------------------------------------------------------------------------
2001 2002 2003 2004 2005
(IN THOUSANDS)
Balance Sheet Data:
Working capital $1,860,379 $2,030,250 $1,766,507 $2,141,277 $2,139,789
Total assets 2,625,264 2,704,163 2,403,659 2,728,042 2,925,286
Long-term debt, including current portion 906,723 648,611 439,628 555,941 518,254
Stockholders' equity 1,236,165 1,616,408 1,549,692 1,672,546 1,794,029
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those that are both most important
to the portrayal of a company's financial position and results of operations,
and require management's most difficult, subjective or complex judgments.
Although not all of the Company's critical accounting policies require
management to make difficult, subjective or complex judgments or estimates, the
following policies and estimates are those that the Company deems most critical.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
The Company recognizes revenues in accordance with the provisions of
Statement of Position 97-2, "Software Revenue Recognition", and related
Interpretations. The Company's systems are generally a bundled hardware and
software solution that are shipped together. Revenue is generally recognized at
the time of shipment for sales of systems which do not require significant
customization to be performed by the Company when the following criteria are
met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred
and acceptance is determinable, (3) the fee is fixed or determinable and (4)
collectibility is probable.
Amounts received from customers pursuant to the terms specified in
contracts but for which revenue has not yet been recognized are recorded as
advance payments from customers.
Post-contract customer support ("PCS") services are sold separately
or as part of a multiple element arrangement, in which case the related PCS
element is determined based upon vendor-specific objective evidence of fair
value, such that the portion of the total fee allocated to PCS services is
generally recognized as revenue ratably over the term of the PCS arrangement.
Revenues from certain development contracts are recognized under the
percentage-of-completion method on the basis of physical completion to date or
using actual costs incurred to total expected costs under the contract.
Revisions in estimates of costs and profits are reflected in the accounting
period in which the facts that require the revision become known. At the time a
loss on a contract is known, the entire amount of the estimated loss is accrued.
Amounts received from customers in excess of revenues earned under the
percentage-of-completion method are recorded as advance payments from customers.
Cost of sales include material costs, subcontractor costs,
personnel-related costs for the operations and service departments, depreciation
and amortization of equipment used in the operations and service departments,
amortization of capitalized software development costs, royalties and license
fee costs, travel costs and an overhead allocation. Research and development
costs include subcontractor costs, personnel-related costs, travel, depreciation
and amortization of research and development equipment, an overhead allocation,
as well as other costs associated with research and development activities.
Selling, general and administrative costs include personnel-related costs, sales
commissions, bad debt expense, travel, depreciation and amortization, marketing
and promotional materials, professional fees, insurance costs, facility costs,
as well as other costs associated with sales, marketing, finance and
administrative departments.
17
Accounts receivable are generally diversified due to the large number
of commercial and government entities comprising the Company's customer base and
their dispersion across many geographical regions. As of January 31, 2005, there
was no single customer balance that comprised 10% of the overall accounts
receivable balance. The Company is required to estimate the collectibility of
its accounts receivable each accounting period and record a reserve for bad
debts. A considerable amount of judgment is required in assessing the
realization of these receivables, including the current creditworthiness of each
customer, current and historical collection history and the related aging of
past due balances. The Company evaluates specific accounts when it becomes aware
of information indicating that a customer may not be able to meet its financial
obligations due to deterioration of its financial condition, lower credit
ratings, bankruptcy or other factors affecting the ability to render payment.
Reserve requirements are based on the facts available and are re-evaluated and
adjusted as additional information is received. The Company's policy is to
account for recoveries of previously reserved for doubtful accounts upon the
receipt of cash where there is no evidence of recoverability for items
specifically reserved for prior to the receipt of cash. During the year ended
January 31, 2005, the Company recorded expenses of approximately $7.1 million,
which increased the allowance for doubtful accounts. The Company recorded
recoveries of approximately $19.4 million for the year ended January 31, 2005,
which reduced the allowance for doubtful accounts. The recoveries were recorded
in the period that the cash was received from customers for items that had
previously been reserved for as doubtful of collection.
Software development costs are capitalized upon the establishment of
technological feasibility and are amortized over the estimated useful life of
the software, which to date has been four years or less. Amortization begins in
the period in which the related product is available for general release to
customers. During the year ended January 31, 2005, the Company capitalized
approximately $4.2 million of software development costs and amortized
approximately $14.3 million of such costs. In addition, during the year ended
January 31, 2005, the Company recorded write-downs of approximately $5.0 million
of capitalized software development costs to its estimated net realizable value,
primarily as a result of the Company's transition to its newer product line as
well as duplicative technology that arose as a result of Verint's acquisitions
during the period.
18
RESULTS OF OPERATIONS
HISTORICAL RESULTS
Consolidated results of operations in dollars and as a percentage of
sales for each of the three years in the period ended January 31, 2005 were as
follows:
January 31, January 31, January 31,
2003 % 2004 % 2005 %
---- ---- ---- ---- ---- ----
(In thousands)
Sales:
Product revenues $ 547,141 74.4% $ 534,585 69.8% $ 700,970 73.1%
Service revenues 188,748 25.6% 231,307 30.2% 258,472 26.9%
------------ ------------ ------------
735,889 100.0% 765,892 100.0% 959,442 100.0%
Cost of sales:
Product costs 184,413 33.7% 181,059 33.9% 215,023 30.7%
Service costs 153,708 81.4% 146,501 63.3% 165,687 64.1%
------------ ------------ ------------
338,121 45.9% 327,560 42.8% 380,710 39.7%
Gross margin 397,768 54.1% 438,332 57.2% 578,732 60.3%
Operating expenses:
Research and development, net 232,593 31.6% 216,457 28.3% 236,657 24.7%
Selling, general and administrative 281,202 38.2% 254,376 33.2% 290,445 30.3%
In-process research and development
and other acquisition-related charges - 0.0% - 0.0% 4,635 0.5%
Workforce reduction, restructuring
and impairment charges (credits) 66,714 9.1% (2,123) -0.3% 62 0.0%
------------ ------------ ------------
Income (loss) from operations (182,741) -24.8% (30,378) -4.0% 46,933 4.9%
Interest and other income, net 58,902 8.0% 38,958 5.1% 36,223 3.8%
------------ ------------ ------------
Income (loss) before income tax
provision, minority interest and
equity in the earnings
(losses) of affiliates (123,839) -16.8% 8,580 1.1% 83,156 8.7%
Income tax provision 3,294 0.4% 8,206 1.1% 13,214 1.4%
Minority interest and equity in the
earnings (losses) of affiliates (2,345) -0.3% (5,760) -0.8% (12,612) -1.3%
------------ ------------ ------------
Net income (loss) $ (129,478) -17.6% $ (5,386) -0.7% $ 57,330 6.0%
============ ============ ============
19
A detailed description of the Company's business segments as well as
additional financial data, can be found in Note 19 of the Notes to the
Consolidated Financial Statements. The following is a summary of sales and
income (loss) from operations by segment in dollars and as a percentage of
sales, for each segment and in total, for each of the three years in the period
ended January 31, 2005:
January 31, January 31, January 31,
2003 % 2004 % 2005 %
---- --- ---- --- ---- ---
(In thousands)
Sales:
- ------
CNS $ 542,984 73.8% $ 529,597 69.1% $ 642,692 67.0%
Ulticom 29,231 4.0% 38,378 5.0% 63,436 6.6%
Verint 157,775 21.4% 192,744 25.2% 249,824 26.0%
All other 9,602 1.3% 9,983 1.3% 10,132 1.1%
Reconciling items (3,703) -0.5% (4,810) -0.6% (6,642) -0.7%
------------ ------------ ------------
Consolidated total $ 735,889 100.0% $765,892 100.0% $959,442 100.0%
============ ============ ============
Income (loss) from operations:
- ------------------------------
CNS $ (179,492) -33.1% $ (40,913) -7.7% $ 20,550 3.2%
Ulticom (8,362) -28.6% 2,824 7.4% 20,566 32.4%
Verint 10,051 6.4% 17,189 8.9% 17,384 7.0%
All other (615) -6.4% (1,152) -11.5% (788) -7.8%
Reconciling items (4,323) n/m (8,326) n/m (10,779) n/m
------------ ------------ ------------
Consolidated total $ (182,741) -24.8% $ (30,378) -4.0% $ 46,933 4.9%
============ ============ ============
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 evidence of recent improvement. Both
business units achieved year over year revenue, operating income and net income
growth during the year ended January 31, 2005. Verint, which services the
security and business intelligence markets, achieved record revenue, operating
income and net income during the year ended January 31, 2005 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 year ended January 31,
2005, the Company experienced year over year sales growth of approximately
25.3%, with a substantial majority of sales generated from activities serving
the telecommunications industry. The Company generated operating and net income
for the year ended January 31, 2005.
During the year ended January 31, 2005, the Company recorded
recoveries of approximately $19.4 million, which reduced the allowance for
doubtful accounts and increased the Company's operating and net income. The
recoveries were recorded as a result of cash being collected from approximately
20 customers for items that previously had been reserved for as doubtful of
collection during the period that the telecommunications industry experienced a
severe capital spending recession. Such recoveries, which the Company attributes
to factors including the improved environment for the telecommunications
industry as a whole, and the Company's wireless carrier customers in particular,
were recorded in the period that the cash was received. In addition, the Company
recorded expenses of approximately $7.1 million during the year ended January
31, 2005, which increased the allowance for doubtful accounts thereby reducing
the Company's operating and net income.
20
During the year ended January 31, 2005, the Company recorded
write-downs of approximately $4.1 million of fixed assets to its estimated net
realizable value, primarily as a result of the obsolescence of such fixed
assets. Such write-downs reduced Property and Equipment, Net and decreased
operating and net income. In addition, during the year ended January 31, 2005,
the Company recorded write-downs of approximately $5.0 million of capitalized
software development costs to its estimated net realizable value, primarily as a
result of the Company's transition to its newer product line as well as
duplicative technology that arose as a result of Verint's acquisitions during
the period. Such write-downs reduced Other Assets and decreased operating and
net income. In addition, during the year ended January 31, 2005, the Company
incurred approximately $0.9 million of transaction costs as a result of the
Company's offer to exchange its Zero Yield Puttable Securities ("ZYPS") (the
"Existing ZYPS") for new ZYPS (the "New ZYPS"). Such costs are included in
`Interest and other income, net' in the Consolidated Statements of Operations.
Also, during the year ended January 31, 2005, the Company incurred a charge of
approximately $3.1 million of purchased in-process research and development as a
result of Verint's purchase of ECtel's government surveillance business.
YEAR ENDED JANUARY 31, 2005 COMPARED TO YEAR ENDED JANUARY 31, 2004
Sales. Sales for the fiscal year ended January 31, 2005 ("fiscal
2004") increased by approximately $193.6 million, or 25%, compared to the fiscal
year ended January 31, 2004 ("fiscal 2003"). This increase is attributable to an
increase in sales in the Company's three primary business units. CNS sales
increased by approximately $113.1 million, due primarily to increased business
in Europe and the Americas. Security and business intelligence recording sales
increased by approximately $57.1 million, and service enabling signaling
software sales increased by approximately $25.1 million. On a consolidated
basis, service revenues represented approximately 27% and 30% of sales for
fiscal 2004 and fiscal 2003, respectively, and sales to international customers
represented approximately 69% and 66% of sales for fiscal 2004 and fiscal 2003,
respectively.
Cost of Sales. Cost of sales for fiscal 2004 increased by
approximately $53.2 million, or 16%, compared to fiscal 2003. The increase in
cost of sales is primarily attributable to increased materials and overhead
costs net of overhead absorption of approximately $35.9 million, due primarily
to increased sales, increased personnel-related costs of approximately $18.0
million and write-downs of approximately $3.6 million of capitalized software
development costs to its estimated net realizable value, primarily as a result
of the Company's transition to its newer product line. Such increases were
partially offset by increased recoveries of doubtful debts, which increased from
approximately $1.5 million in fiscal 2003 to approximately $5.8 million in
fiscal 2004, an increase of approximately $4.3 million. Gross margins increased
to approximately 60.3% in fiscal 2004 from approximately 57.2% in fiscal 2003.
Research and Development, Net. Net research and development expenses
for fiscal 2004 increased by approximately $20.2 million, or 9%, compared to
fiscal 2003. However, net research and development expenses as a percentage of
sales decreased to approximately 24.7% in fiscal 2004 from approximately 28.3%
in fiscal 2003. The increase in the dollar amount of net research and
development expenses is primarily attributable to increased subcontractor costs
of approximately $12.0 million and increased personnel-related costs of
approximately $8.7 million, partially offset by a net decrease in various other
costs of approximately $0.5 million.
Selling, General and Administrative. Selling, general and
administrative expenses for fiscal 2004 increased by approximately $36.1
million, or 14%, compared to fiscal 2003. However, selling, general and
administrative expenses as a percentage of sales decreased to approximately
30.3% in fiscal 2004 from approximately 33.2% in fiscal 2003. The increase in
the dollar amount of selling, general and administrative expenses is primarily
attributable to increased personnel-related costs, employee and agent sales
commissions, professional fees and travel costs of approximately $20.7 million,
$14.4 million, $4.0 million and $3.2 million, respectively, and net increase in
various other costs of approximately $2.1 million. Such increases were partially
offset by decreased bad debt expense of approximately $5.4 million and increased
recoveries of doubtful debts, which increased from approximately $10.7 million
in fiscal 2003 to approximately $13.6 million in fiscal 2004, an increase of
approximately $2.9 million.
21
In-process Research and Development and Other Acquisition-related
Charges. During fiscal 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 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 (credits).
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 fiscal 2003 and fiscal
2004, the Company incurred net charges (credits) to operations of approximately
$(2.1) million and $0.1 million, respectively. The fiscal 2003 net credit of
approximately $2.1 million is comprised of a charge of approximately $4.5
million for severance and other related costs, a credit of approximately $8.0
million for the reversal of a previously taken charge for the elimination of
excess facilities and related leasehold improvements, primarily as a result of
the sublet of a portion of the excess facilities, and a charge of approximately
$1.4 million for the write-off of certain property and equipment. The fiscal
2004 net charge of approximately $0.1 million is comprised of a charge of
approximately $0.6 million for severance and other related costs, a credit of
approximately $0.7 million for the reversal of a previously taken charge for the
elimination of excess facilities and related leasehold improvements, primarily
as a result of the sublet of a portion of the excess facilities, and a charge of
approximately $0.2 million for the write-off of certain property and equipment.
The Company expects to pay out approximately $0.1 million for severance and
related obligations through July 31, 2005 and approximately $21.5 million for
facilities and related obligations at various dates through January 2011.
Income (Loss) from Operations. Income (loss) from operations for
fiscal 2004 increased by approximately $77.3 million compared to fiscal 2003,
and as a percentage of sales was approximately 4.9% in fiscal 2004 compared to
approximately (4.0)% in fiscal 2003. These changes resulted primarily from the
factors described above.
On a business segment basis, income (loss) from operations for CNS
for fiscal 2004 increased by approximately $61.5 million compared to fiscal
2003, and as a percentage of sales was approximately 3.2% in fiscal 2004
compared to approximately (7.7)% in fiscal 2003. Income from operations for
Verint for fiscal 2004 increased by approximately $0.2 million compared to
fiscal 2003, but as a percentage of sales decreased to approximately 7.0% in
fiscal 2004 from approximately 8.9% in fiscal 2003. Income from operations for
Ulticom for fiscal 2004 increased by approximately $17.7 million compared to
fiscal 2003, and as a percentage of sales increased to approximately 32.4% in
fiscal 2004 from approximately 7.4% in fiscal 2003.
Interest and Other Income, Net. Interest and other income, net for
fiscal 2004 decreased by approximately $2.7 million compared to fiscal 2003. The
principal reasons for the decrease are (i) a decrease in the gain recorded as a
result of the Company's repurchases of its 1.50% convertible senior debentures
due December 2005 (the "Debentures") of approximately $9.9 million; (ii) a
decrease in foreign currency gains of approximately $2.2 million; (iii)
approximately $0.9 million of transaction costs incurred during fiscal 2004 as a
result of the Company's offer to exchange the Existing ZYPS for the New ZYPS;
and (vi) other decreases of approximately $1.1 million, net. Such items were
22
offset by (i) increased interest and dividend income of approximately $6.5
million, due primarily to the rise in interest rates; (ii) decreased interest
expense of approximately $3.0 million, due primarily to the Company's
repurchases of its Debentures and other debt reduction; and (iii) a change in
the net gains/losses from the sale and write-down of investments of
approximately $1.9 million.
Income Tax Provision. Provision for income taxes for fiscal 2004
increased by approximately $5.0 million, or 61%, compared to fiscal 2003, due
primarily to increased pre-tax income accompanied by shifts in the underlying
mix of pre-tax income by entity and tax jurisdiction. The Company's effective
tax rate was approximately 16% for fiscal 2004 compared to approximately 96% for
fiscal 2003. 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 $6.9 million as a result of increased minority interest expense of
approximately $5.6 million, primarily attributable to overall increased earnings
at majority-owned subsidiaries, and a change in equity in the earnings (losses)
of affiliates of approximately $1.3 million.
Net Income (Loss). Net income (loss) increased by approximately $62.7
million in fiscal 2004 compared to fiscal 2003, while as a percentage of sales
was approximately 6.0% in fiscal 2004 compared to approximately (0.7)% in fiscal
2003. These changes resulted primarily from the factors described above.
YEAR ENDED JANUARY 31, 2004 COMPARED TO YEAR ENDED JANUARY 31, 2003
Sales. Sales for fiscal 2003 increased by approximately $30.0
million, or 4%, compared to the fiscal year ended January 31, 2003 ("fiscal
2002"). This increase is primarily attributable to an increase in security and
business intelligence recording sales of approximately $35.0 million, primarily
as a result of increased security and surveillance sales, and increased service
enabling signaling software sales of approximately $9.1 million. These increases
were partially offset by a decrease in CNS sales of approximately $13.4 million.
The decrease in CNS sales was due primarily to decreased business in Asia
Pacific and the Americas, only partially offset by increased business in Europe.
On a consolidated basis, service revenues represented approximately 30% and 26%
of sales for fiscal 2003 and fiscal 2002, respectively, and sales to
international customers represented approximately 66% and 65% of sales for
fiscal 2003 and fiscal 2002, respectively.
Cost of Sales. Cost of sales for fiscal 2003 decreased by
approximately $10.6 million, or 3%, compared to fiscal 2002. The decrease in
cost of sales is primarily attributable to decreased personnel-related and
travel costs of approximately $18.1 million and $4.9 million, respectively,
primarily the result of workforce reduction and other cost reduction efforts,
and net decrease in various other costs of approximately $0.1 million, partially
offset by increased royalty expense of approximately $12.5 million, primarily
the result of a prior period credit realized upon a settlement with the OCS.
Gross margins increased to approximately 57.2% in fiscal 2003 from approximately
54.1% in fiscal 2002.
Research and Development, Net. Net research and development expenses
for fiscal 2003 decreased by approximately $16.1 million, or 7%, compared to
fiscal 2002. This decrease is primarily attributable to decreased
personnel-related costs of approximately $17.2 million, which is primarily the
result of workforce reduction and other cost reduction efforts and a reduction
of research and development projects.
23
Selling, General and Administrative. Selling, general and
administrative expenses for fiscal 2003 decreased by approximately $26.8
million, or 10%, compared to fiscal 2002, and as a percentage of sales decreased
to approximately 33.2% in fiscal 2003 from approximately 38.2% in fiscal 2002.
The decrease in the dollar amount of selling, general and administrative
expenses is primarily attributable to lower bad debt expense of approximately
$42.2 million, partially offset by increased personnel-related costs of
approximately $13.6 million, due primarily to an overall increase in sales and
marketing staff, increased headcount at Verint and increased sales commissions,
and net increase in various other costs of approximately $1.8 million.
Workforce Reduction, Restructuring and Impairment Charges (Credits).
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 fiscal 2002 and fiscal
2003, the Company incurred charges (credits) to operations of approximately
$66.7 million and $(2.1) million, respectively. The fiscal 2002 charge of
approximately $66.7 million is comprised of approximately $26.8 million for
severance and other related costs, approximately $19.4 million for the
elimination of excess facilities and related leasehold improvements and
approximately $20.5 million for the write-off of certain property and equipment,
including a reduction in the value of certain unimproved land in Israel, that
the Company had acquired with a view to the future construction of facilities
for its Israeli operations. The fiscal 2003 net credit of approximately $2.1
million is comprised of a charge of approximately $4.5 million for severance and
other related costs, a credit of approximately $8.0 million for the reversal of
a previously taken charge for the elimination of excess facilities and related
leasehold improvements, primarily as a result of the sublet of a portion of the
excess facilities, and a charge of approximately $1.4 million for the write-off
of certain property and equipment. The Company expects to pay out approximately
$3.1 million for severance and related obligations during the year ended January
31, 2005 and approximately $26.4 million for facilities and related obligations
at various dates through January 2011.
Loss from Operations. Loss from operations for fiscal 2003 decreased
by approximately $152.4 million, or 83%, compared to fiscal 2002, and as a
percentage of sales was approximately (4.0)% in fiscal 2003 compared to
approximately (24.8)% in fiscal 2002. These changes resulted primarily from the
factors described above.
On a business segment basis, loss from operations for CNS for fiscal
2003 decreased by approximately $138.6 million, or 77%, compared to fiscal 2002,
and as a percentage of sales was approximately (7.7)% in fiscal 2003 compared to
approximately (33.1)% in fiscal 2002, as a result of the decrease in workforce
reduction, restructuring and impairment charges (credits) of approximately $66.2
million and the decrease in other costs and expenses of approximately $85.8
million, primarily the result of workforce reduction and other cost reduction
efforts, partially offset by decreased sales of approximately $13.4 million.
Income from operations for Verint for fiscal 2003 increased by approximately
$7.1 million, or 71%, compared to fiscal 2002, and as a percentage of sales
increased to approximately 8.9% in fiscal 2003 from approximately 6.4% in fiscal
2002. Income (loss) from operations for Ulticom for fiscal 2003 increased by
approximately $11.2 million compared to fiscal 2002, and as a percentage of
sales increased to approximately 7.4% in fiscal 2003 from approximately (28.6)%
in fiscal 2002.
Interest and Other Income (Expense), Net. Interest and other income
(expense), net for fiscal 2003 decreased by approximately $19.9 million compared
to fiscal 2002. The principal reasons for the decrease are (i) a decrease in the
gain recorded as a result of the Company's repurchases of its 1.50% convertible
senior debentures due December 2005 (the "Debentures") of approximately $29.2
million; (ii) a decrease in foreign currency gains of approximately $22.8
million; (iii) decreased interest and dividend income of approximately $12.7
24
million due primarily to the decline in interest rates partially offset by an
increase in invested assets; and (iv) other decrease of approximately $0.2
million, net. Such items were offset by (i) a decrease in net losses from the
sale and write-down of investments of approximately $40.4 million; and (ii)
decreased interest expense of approximately $4.6 million due primarily to the
Company's repurchases of its Debentures and other debt reduction.
Income Tax Provision. Provision for income taxes increased from
fiscal 2002 to fiscal 2003 by approximately $4.9 million, or 149%, 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 $3.4 million as a result of increased minority interest expense of
approximately $5.7 million, primarily attributable to overall increased earnings
at majority-owned subsidiaries, partially offset by a change in equity in the
earnings (losses) of affiliates of approximately $2.3 million.
Net Loss. Net loss decreased by approximately $124.1 million in
fiscal 2003 compared to fiscal 2002, while as a percentage of sales was
approximately (0.7)% in fiscal 2003 compared to approximately (17.6)% in fiscal
2002. These changes resulted primarily from the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at January 31, 2005 and 2004 was
approximately $2,139.8 million and $2,141.3 million, respectively. At January
31, 2005 and 2004, the Company had total cash and cash equivalents, bank time
deposits and short-term investments of approximately $2,249.6 million and
$2,198.5 million, respectively.
Operations for fiscal 2004, fiscal 2003 and fiscal 2002, after
adjustment for non-cash items, provided (used) cash of approximately $150.6
million, $80.3 million and $(34.1) million, respectively. During such years,
other changes in operating assets and liabilities provided (used) cash of
approximately $(33.6) million, $48.3 million and $130.9 million, respectively.
This resulted in net cash provided by operating activities of approximately
$117.0 million, $128.6 million and $96.8 million during fiscal 2004, fiscal 2003
and fiscal 2002, respectively.
Investing activities for fiscal 2004, fiscal 2003 and fiscal 2002
used cash of approximately $(57.9) million, $(500.8) million and $(436.6)
million, respectively. These amounts include (i) net maturities and sales
(purchases) of bank time deposits and investments of approximately $38.1
million, $(451.8) million and $(358.0) million, respectively; (ii) purchases of
property and equipment of approximately $(46.2) million, $(35.4) million and
$(34.1) million, respectively; (iii) capitalization of software development
costs of approximately $(4.2) million, $(7.8) million and $(13.4) million,
respectively; and (iv) net assets acquired as a result of acquisitions of
approximately $(45.6) million, $(5.9) million and $(31.1) million in fiscal
2004, fiscal 2003 and fiscal 2002, respectively.
Financing activities for fiscal 2004, fiscal 2003 and fiscal 2002
provided (used) cash of approximately $39.1 million, $310.2 million and $(91.8)
million, respectively. These amounts include (i) net proceeds from the issuance
of the Company's Existing ZYPS of approximately $412.8 million during fiscal
2003; (ii) the partial repurchase of the Company's Debentures of approximately
$(36.9) million, $(253.3) million and $(169.8) million, respectively; (iii)
proceeds from the issuance of common stock in connection with the exercise of
25
stock options and employee stock purchase plan of approximately $45.5 million,
$61.3 million and $12.4 million, respectively; (iv) net proceeds from the
issuance of common stock of subsidiaries in connection with stock sales and the
exercise of stock options and employee stock purchase plans of approximately
$32.2 million, $129.0 million and $68.7 million, respectively; (v) repayment of
bank loan of $(42.0) million in fiscal 2003; and (vi) other, net of
approximately $(1.7) million, $2.4 million and $(3.1) million in fiscal 2004,
fiscal 2003 and fiscal 2002, respectively.
In May 2003, the Company issued $420,000,000 aggregate principal
amount of its Existing ZYPS for net proceeds of approximately $412.8 million. On
January 26, 2005, the Company completed an offer to the holders of the
outstanding Existing ZYPS to exchange the Existing ZYPS for New ZYPS. Of the
$420,000,000 worth of Existing ZYPS outstanding prior to the exchange offer,
approximately $417,700,000 aggregate principal amount representing approximately
99.5% of the original issue of Existing ZYPS were validly tendered in exchange
for an equal principal amount of New ZYPS. In connection with this offer, the
Company incurred transaction costs, consisting primarily of professional fees,
amounting to approximately $903,000 included in `Interest and other income, net'
in the Consolidated Statements of Operations.
Both the Existing ZYPS and the New ZYPS have a conversion price of
$17.97 per share. The ability of the holders to convert either the Existing ZYPS
or New 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 twenty days in the 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
Existing ZYPS or New ZYPS for that ten trading-day period was less than 105% of
the average conversion value for the Existing ZYPS or New ZYPS during that
period; (iii) during any period, if following the date on which the credit
rating assigned to the Existing ZYPS or New ZYPS by Standard & Poor's Rating
Services is lower than "B-" or upon the withdrawal or suspension of the Existing
ZYPS or New ZYPS rating at the Company's request; (iv) if the Company calls the
Existing ZYPS or New ZYPS for redemption; or (v) upon other specified corporate
transactions. Both the Existing ZYPS and the New ZYPS mature on May 15, 2023. In
addition, the Company has the right to redeem the Existing 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, at par, all or a portion of the Existing ZYPS on each of May 15 of
2008, 2013, and 2018 and upon the occurrence of certain events. The Existing
ZYPS holders may require the Company to repurchase the Existing 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 New ZYPS have substantially similar terms as the Existing ZYPS,
except that the New ZYPS (i) have a net share settlement feature, (ii) allow the
Company to redeem some or all of the New ZYPS at any time on or after May 15,
2009 (rather than May 15, 2008 as provided for in the Existing ZYPS) and (iii)
allow the holders of the New ZYPS to require the Company to repurchase their New
ZYPS for cash on each of May 15, 2008, 2009, 2013 and 2018. The net share
settlement feature of the New ZYPS provides that, upon conversion, the Company
would pay to the holder cash equal to the lesser of the conversion value and the
principal amount of the New ZYPS being converted, which is currently
$417,700,000, and would issue to the holder the remainder of the conversion
value in excess of the principal amount, if any, in shares of the Company's
common stock (the "New Conversion Method").
The offer followed the September 30, 2004 conclusion by the Emerging
Issues Task Force ("EITF") of the Financial Accounting Standards Board ("FASB")
on EITF Issue No. 04-8, "The Effect of Contingently Convertible Debt on Diluted
Earnings Per Share" ("EITF 04-8") requiring contingently convertible debt to be
included in diluted earnings per share computations (if dilutive) as if the
notes were converted into common shares at the time of issuance (the "if
converted" method) regardless of whether market price triggers or other
26
contingent features have been met. EITF 04-8 was effective for reporting periods
ending after December 15, 2004. Because these recent accounting changes would
have required the Company to include the shares of common stock underlying the
Existing ZYPS in its diluted earnings per share computations, pursuant to the
exchange offer, the Company offered to the Existing ZYPS holders, New ZYPS
convertible under the New Conversion Method.
Under EITF 04-8, the Company is not required to include any shares
issuable upon conversion of the New ZYPS issued in the exchange offer in its
diluted shares outstanding unless the market price of the Company's common stock
exceeds the conversion price, and would then only have to include that number of
shares as would then be issuable based upon the in-the-money value of the
conversion rights under the New ZYPS. Therefore, the New ZYPS are dilutive in
calculating diluted earnings per share if the Company's common stock is trading
above $17.97 to the extent of the number of shares the Company would be required
to issue to satisfy a conversion right of the New ZYPS over and above
$417,700,000. For the year ended January 31, 2005, this resulted in
approximately 1,610,000 of additional share dilution in calculating diluted
earnings per share. The Existing ZYPS are immediately dilutive in calculating
diluted earnings per share to the extent of the full number of shares underlying
the Existing ZYPS, which as of January 31, 2005 is 128,516 shares. These shares
are deemed to be outstanding for the purpose of calculating diluted earnings per
share, whether or not the Existing ZYPS may be converted pursuant to their
terms, and therefore decreases the Company's diluted earnings per share. The
adoption of EITF 04-8 did not have an effect on reported diluted earnings (loss)
per share for any periods presented.
During the fourth quarter of fiscal 2004, the closing price per share
on at least 20 trading days in the 30 consecutive trading-day period ending on
January 31, 2005 was more than 120% of the conversion price per share for both
the Existing ZYPS and New ZYPS. As such, a conversion privilege for both the
Existing ZYPS and the New ZYPS was triggered and both the Existing ZYPS and New
ZYPS were convertible into cash and/or the Company's common stock at the option
of the holders for the first fiscal quarter of 2005.
During fiscal 2004, 2003 and 2002 the Company acquired, in open
market purchases, approximately $37.5 million, $266.1 million and $209.2 million
of face amount of the Debentures, respectively, for approximately $36.9 million,
$253.3 million and $169.8 million in cash, respectively, resulting in pre-tax
gains, net of debt issuance costs, of approximately $0.3 million, $10.2 million
and $39.4 million, respectively, included in `Interest and other income, net' in
the Consolidated Statements of Operations. As of January 31, 2005, the Company
had outstanding Debentures of approximately $87.3 million, included in the
current liabilities section of the Consolidated Balance Sheets.
In January 2002, Verint took a bank loan in the amount of $42.0
million. The loan, which matured in February 2003, bore interest at LIBOR plus
0.55% and was guaranteed by CTI. During February 2003, Verint repaid the bank
loan.
In May 2002, Verint issued 4,500,000 shares of its common stock in an
initial public offering. Proceeds from the offering, based on the offering price
of $16.00 per share, totaled approximately $65.4 million, net of offering
expenses. The Company recorded a gain of approximately $48.1 million during the
year ended January 31, 2003, which was recorded as an increase in stockholders'
equity as a result of the issuance.
In June 2003, Verint completed a public offering of 5,750,000 shares
of its common stock at a price of $23.00 per share. The shares offered included
149,731 shares issued to Smartsight Networks Inc.'s ("Smartsight") former
shareholders in connection with its acquisition. The proceeds of the offering
were approximately $122.2 million, net of offering expenses. The Company
recorded a gain of approximately $62.9 million, which was recorded as an
increase in stockholders' equity as a result of the issuance. As of January 31,
2005, the Company's ownership interest in Verint was approximately 58.9%.
27
In February 2004, Starhome B.V. ("Starhome"), a subsidiary of CTI,
received equity financing from an unaffiliated investor group of approximately
$14.5 million, net of expenses. The Company recorded a gain of approximately
$11.8 million, which was recorded as an increase in stockholders' equity as a
result of the issuance. Upon the completion of this transaction, the Company's
ownership interest in Starhome was approximately 69.5%; this interest was
unchanged as of January 31, 2005. In addition, during the year ended January 31,
2005, Starhome received a commitment for an additional $5.0 million in equity
financing from the unaffiliated investor group, which funds are currently being
held in escrow.
In September 2004, Verint, through a subsidiary, acquired all of the
outstanding stock of RP Sicherheitssysteme GmbH ("RP Security"), a company in
the business of developing and selling mobile digital video security solutions
for transportation applications. The purchase price consisted of approximately
$9.0 million in cash and 90,144 shares of Verint's common stock. In addition,
the shareholders of RP Security will be entitled to receive earn-out payments
over three years based on Verint's worldwide sales, profitability and backlog of
mobile video products in the transportation market during that period. Shares
issued as part of the purchase price were accounted for with a value of
approximately $3.0 million, or $33.03 per share. In connection with this
acquisition, Verint incurred transaction costs, consisting primarily of
professional fees, amounting to approximately $0.5 million.
In March 2004, Verint acquired certain assets and assumed certain
liabilities of the government surveillance business of ECtel Ltd. ("ECtel"),
which provided Verint with additional communications interception capabilities
for the mass collection and analysis of voice and data communications. The
purchase price was approximately $35.0 million in cash. Verint incurred
transaction costs, consisting primarily of professional fees, amounting to
approximately $1.1 million in connection with this acquisition.
In May 2003, Verint acquired all of the issued and outstanding shares
of Smartsight, a Canadian corporation that develops IP-based video edge devices
and software for wireless video transmission. The purchase price consisted of
approximately $7.1 million in cash and 149,731 shares of Verint common stock,
valued at approximately $3.1 million, or $20.46 per share.
In February 2002, Verint acquired the digital video recording
business of Lanex, LLC ("Lanex"). The Lanex business provides digital video
recording solutions for security and surveillance applications primarily to
North American banks. The purchase price consisted of approximately $9.5 million
in cash and a $2.2 million non-interest bearing note, guaranteed by CTI, and
convertible in whole or in part, into shares of Verint's common stock at a
conversion price of $16.06 per share. The note matured and was converted into
shares of Verint common stock on February 1, 2004.
In June 2002, the Company acquired Odigo, Inc. ("Odigo"), a
privately-held provider of instant messaging and presence management solutions
to service providers. The purchase price was approximately $20.1 million in
cash. Prior to the acquisition, the Company was a strategic partner with Odigo,
holding an equity position which it previously acquired for approximately $3
million.
The ability of CTI's Israeli subsidiaries to pay dividends is
governed by Israeli law, which provides that dividends may be paid by an Israeli
corporation only out of its earnings as defined in accordance with the Israeli
Companies Law of 1999, provided that there is no reasonable concern that such
payment will cause such subsidiary to fail to meet its current and expected
liabilities as they come due. In the event of a devaluation of the Israeli
currency against the dollar, the amount in dollars available for payment of cash
dividends out of prior years' earnings will decrease accordingly. Cash dividends
paid by an Israeli corporation to United States resident corporate parents are
subject to the Convention for the Avoidance of Double Taxation between Israel
and the United States. Under the terms of the Convention, such dividends are
subject to taxation by both Israel and the United States and, in the case of
Israel, such dividends out of income derived in respect of a period for which an
Israeli company is entitled to the reduced tax rate applicable to an Approved
28
Enterprise are generally subject to withholding of Israeli income tax at source
at a rate of 15%. The Israeli company is also subject to additional Israeli
taxes in respect of such dividends, generally equal to the tax benefits
previously granted in respect of the underlying income by virtue of the Approved
Enterprise status.
The Company's liquidity and capital resources have not been, and are
currently 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, on both a consolidated and individual
business segment basis.
CERTAIN TRENDS AND UNCERTAINTIES
The Company derives the majority of its revenue from the
telecommunications industry, which has experienced a challenging capital
spending environment. Although the capital spending environment has improved
recently and the Company's revenues have increased in recent quarters, the
Company has experienced significant revenue declines from historical peak
revenue levels, and if capital spending and technology purchasing by
telecommunications service providers ("TSP") does not continue to improve or
declines, revenue may stagnate or decrease, and the Company's operating results
may be adversely affected. Although the Company currently has good near term
visibility, 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.
Certain TSPs also 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.
29
Recently, there have been announcements of several mergers in the
telecommunications industry. To the extent that the Company's customer base
consolidates, the Company may have an increased dependence on a smaller number
of customers who may be able to exert increased pressure on the Company's prices
and contractual terms in general. Consolidation also may result in the loss of
both existing and potential customers of the Company.
The Company has experienced declines in revenue from some of its
traditional products sold to TSPs compared with prior years. The Company is
executing a strategy to capitalize on growth opportunities in new and emerging
products to offset such declines. While certain of these new products have met
with initial success, it is unclear whether they will be widely adopted by the
Company's customers and TSPs in general. Increases in revenue from these new
products also may not exceed declines the Company may experience in revenue from
the sale of its traditional products. If revenue from sales of its traditional
products declines faster than revenue from new products increases, the Company's
revenue and operating results will be adversely affected.
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, reductions in its workforce.
The Company intends to continue to make significant investments in
its business, and to examine opportunities for growth. 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 examines opportunities for growth through merger and
acquisitions. If the Company does make acquisitions, it may not discover all
potential risks and liabilities of the newly acquired business through the due
diligence process, will inherit the acquired companies' past financial
statements with their associated risks and may enter an industry in which it has
limited or no experience. Also, the Company may not be able to successfully
incorporate the personnel, operations and customers of these companies into the
Company's business. In addition, the Company may fail to achieve the anticipated
synergies from the combined businesses, including marketing, product
integration, distribution, product development and other synergies. The
integration process may further strain the Company's existing financial and
managerial controls and reporting systems and procedures. This may result in the
diversion of management and financial resources from the Company's core business
objectives. In addition, an acquisition or merger may require the Company to
utilize cash reserves, incur debt or issue equity securities, which may result
in a dilution of existing stockholders, and the Company may be negatively
impacted by the assumption of liabilities of the merged or acquired company. Due
to rapidly changing market conditions, the Company may find the value of its
acquired technologies and related intangible assets, such as goodwill as
recorded in the Company's financial statements, to be impaired, resulting in
charges to operations. The Company may also fail to retain the acquired or
merged companies' key employees and customers. The Company 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.
30
The Company has made, and in the future, may continue to make
strategic investments in other companies. These investments have been made in,
and future investments will likely be made in, immature businesses with unproven
track records and technologies. Such investments have a high degree of risk,
with the possibility that the Company may lose the total amount of its
investments. The Company may not be able to identify suitable investment
candidates, and, even if it does, the Company may not be able to make those
investments on acceptable terms, or at all. In addition, even if the Company
makes investments, it may not gain strategic benefits from those investments.
Currently, the Company accounts for employee stock options in
accordance with Accounting Principles Board ("APB") Opinion No. 25 and related
Interpretations, which provide that any compensation expense relative to
employee stock options be measured based on intrinsic value of the stock
options. As a result, when options are priced at or above fair market value of
the underlying stock on the date of the grant, as currently is the Company's
practice, the Company incurs no compensation expense. In December 2004, the
Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (revised
2004), "Share-Based Payment" ("SFAS No. 123(R)") which revises SFAS No. 123 and
supersedes APB Opinion No. 25. SFAS No. 123(R) requires all share-based payments
to employees, including grants of employee stock options, to be valued at fair
value on the date of grant, and to be expensed over the applicable vesting
period. Pro forma disclosure of the income statement effects of share-based
payments is no longer an alternative. SFAS No. 123(R) is effective for reporting
periods beginning after June 15, 2005, which for the Company is August 1, 2005
(the "Effective Date"). Beginning on the Effective Date, the Company must (i)
expense all options granted after the Effective Date over the applicable vesting
period, and (ii) expense the non-vested portions of existing option grants going
forward over their remaining vesting period. Compensation expense for the
non-vested portions of existing option grants as of the Effective Date will be
recorded based on the fair value of the awards previously calculated in
developing the pro forma disclosures in accordance with the provisions of SFAS
No. 123. Under SFAS No. 123(R), the Company is required to adopt a fair
value-based method for measuring the compensation expense related to employee
stock and stock options awards; this will lead to substantial additional
compensation expense. Any such expense, although it would not affect the
Company's cash flows, will have a material negative impact on the Company's
future reported results of operations beginning on the Effective Date. The
Company currently anticipates such expense may be up to $12 million per quarter
for each of the quarters ending October 31, 2005 and January 31, 2006.
In May 2003, the Company issued $420,000,000 aggregate principal
amount of Zero Yield Puttable Securities ("ZYPS") (the "Existing ZYPS"). On
January 26, 2005, the Company completed an offer to the holders of the
outstanding Existing ZYPS to exchange the Existing ZYPS for new ZYPS (the "New
ZYPS"). Of the $420,000,000 worth of Existing ZYPS outstanding prior to the
exchange offer, approximately $417,700,000 aggregate principal amount
representing approximately 99.5% of the original issue of Existing ZYPS were
validly tendered in exchange for an equal principal amount of New ZYPS.
Both the Existing ZYPS and the New ZYPS have a conversion price of
$17.97 per share. The ability of the holders to convert either the Existing ZYPS
or New 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 twenty days in the 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
Existing ZYPS or New ZYPS for that ten trading-day period was less than 105% of
the average conversion value for the Existing ZYPS or New ZYPS during that
period; (iii) during any period, if following the date on which the credit
rating assigned to the Existing ZYPS or New ZYPS by Standard & Poor's Rating
Services is lower than "B-" or upon the withdrawal or suspension of the Existing
ZYPS or New ZYPS rating at the Company's request; (iv) if the Company calls the
Existing ZYPS or New ZYPS for redemption; or (v) upon other specified corporate
transactions. Both the Existing ZYPS and the New ZYPS mature on May 15, 2023.
31
In addition, the Company has the right to redeem the Existing 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, at par, all or a portion of the Existing ZYPS on each of
May 15 of 2008, 2013, and 2018 and upon the occurrence of certain events. The
Existing ZYPS holders may require the Company to repurchase the Existing 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 cannot
ensure, however, that sufficient funds will be available at the time of payment
required on the Existing ZYPS or that the Company will be able to arrange
financing to make any such required cash payments.
The New ZYPS have substantially similar terms as the Existing ZYPS,
except that the New ZYPS (i) have a net share settlement feature, (ii) allow the
Company to redeem some or all of the New ZYPS at any time on or after May 15,
2009 (rather than May 15, 2008 as provided for in the Existing ZYPS) and (iii)
allow the holders of the New ZYPS to require the Company to repurchase their New
ZYPS for cash on each of May 15, 2008, 2009, 2013 and 2018. The Company cannot
ensure, however, that sufficient funds will be available at the time of payment
required on the New ZYPS or that the Company will be able to arrange financing
to make any such required cash payments.
The net share settlement feature of the New ZYPS provides that, upon
conversion, the Company would pay to the holder cash equal to the lesser of the
conversion value and the principal amount of the New ZYPS being converted, which
is currently $417,700,000, and would issue to the holder the remainder of the
conversion value in excess of the principal amount, if any, in shares of the
Company's common stock (the "New Conversion Method"). The offer followed the
September 30, 2004 conclusion by the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board's ("FASB") on EITF Issue No. 04-8, "The
Effect of Contingently Convertible Debt on Diluted Earnings Per Share" ("EITF
04-8") requiring contingently convertible debt to be included in diluted
earnings per share computations (if dilutive) as if the notes were converted
into common shares at the time of issuance (the "if converted" method)
regardless of whether market price triggers or other contingent features have
been met. EITF 04-8 was effective for reporting periods ending after December
15, 2004. Because these recent accounting changes would have required the
Company to include the shares of common stock underlying the Existing ZYPS in
its diluted earnings per share computations, pursuant to the exchange offer, the
Company offered to the Existing ZYPS holders, New ZYPS convertible under the New
Conversion Method.
Under EITF 04-8, the Company is not required to include any shares
issuable upon conversion of the New ZYPS issued in the exchange offer in its
diluted shares outstanding unless the market price of the Company's common stock
exceeds the conversion price, and would then only have to include that number of
shares as would then be issuable based upon the in-the-money value of the
conversion rights under the New ZYPS. Therefore, the New ZYPS are dilutive in
calculating diluted earnings per share if the Company's common stock is trading
above $17.97 to the extent of the number of shares the Company would be required
to issue to satisfy a conversion right of the New ZYPS over and above
$417,700,000. For the year ended January 31, 2005 this resulted in approximately
1,610,000 of additional share dilution in calculating diluted earnings per
share. The Existing ZYPS are immediately dilutive in calculating diluted
earnings per share to the extent of the full number of shares underlying the
Existing ZYPS, which as of January 31, 2005 is 128,516 shares. These shares are
deemed to be outstanding for the purpose of calculating diluted earnings per
share, whether or not the Existing ZYPS may be converted pursuant to their
terms, and therefore decreases the Company's diluted earnings per share. The
adoption of EITF 04-8 did not have an effect on reported diluted earnings (loss)
per share for any periods presented.
32
During the fourth quarter of fiscal year 2004, the closing price per
share on at least 20 trading days in the 30 consecutive trading-day period
ending on January 31, 2005 was more than 120% of the conversion price per share
for both the Existing ZYPS and New ZYPS. As such, a conversion privilege for
both the Existing ZYPS and the New ZYPS was triggered and both the Existing ZYPS
and New ZYPS were convertible into cash and/or the Company's common stock at the
option of the holders for the first fiscal quarter of 2005.
The Company's products involve sophisticated hardware and software
technology that performs critical functions to highly demanding standards. If
the Company's current or future products develop operational problems, the
Company may incur fees and penalties in connection with such 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.
The telecommunications industry is subject to rapid technological
change. The introduction of new technologies in the telecommunications market,
including the delay in the adoption of such new technologies, and new
alternatives for the delivery of services are having, and can be expected to
continue to have, a profound effect on competitive conditions in the market and
the success of market participants, including the Company. 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.
33
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. 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. 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 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 Company's recent growth has strained its managerial and
operational resources. The Company's continued growth may further strain its
resources, which could hurt its business and results of operations. There can be
no assurance that the Company's managers will be able to manage growth
effectively. To manage future growth, the Company's management must continue to
improve the Company's operational and financial systems, procedures and controls
and expand, train, retain and manage its employee base. If the Company's
systems, procedures and controls are inadequate to support its operations, the
Company's expansion could slow or come to a halt, and it could lose its
opportunity to gain significant market share. Any inability to manage growth
effectively could materially harm the Company's business, results of operations
and financial condition.
The Company's business is subject to evolving corporate governance
and public disclosure regulations that have increased both costs and the risk of
noncompliance, which could have an adverse effect on the Company's stock price.
Because the Company's common stock is publicly traded on the Nasdaq stock
market, the Company is subject to rules and regulations promulgated by a number
of governmental and self-regulated organizations, including the SEC, Nasdaq and
the Public Company Accounting Oversight Board, which monitors the accounting
practices of public companies. Many of these regulations have only recently been
enacted, and continue to evolve, making compliance more difficult and uncertain.
In addition, the Company's efforts to comply with these new regulations have
resulted in, and are likely to continue to result in, increased general and
administrative expenses and a diversion of management time and attention from
revenue-generating activities to compliance activities. In particular, Section
404 of Sarbanes-Oxley Act of 2002 and related regulations require the Company to
include a management assessment of its internal controls over financial
reporting and auditor attestation of that assessment in its annual report for
the Company's fiscal year ending January 31, 2005. While the Company is able to
assert, in the management certifications filed with this Annual Report on Form
10-K, that the Company's internal control over financial reporting is effective
as of January 31, 2005 and that no material weaknesses have been identified, the
34
Company must continue to monitor and assess the internal control over financial
reporting. The Company cannot provide any assurances that material weaknesses
will not be discovered in the future. If, in the future, the Company's
management identifies one or more material weaknesses in the internal control
over financial reporting that remain unremediated, the Company will be unable to
assert such internal control over financial reporting is effective. If the
Company is unable to assert that the internal control over financial reporting
is effective for any given reporting period (or if the Company's auditors are
unable to attest that the management's report is fairly stated or are unable to
express an opinion on the effectiveness of the internal controls), the Company
could lose investor confidence in the accuracy and completeness of the Company's
financial reports, which would have an adverse effect on the Company's stock
price. The effort regarding Section 404 has required, and continues to require,
the commitment of significant financial and managerial resources.
Changes in existing accounting or taxation rules or practices, new
accounting pronouncements or taxation rules or new interpretations of existing
accounting principles could have a significant adverse effect on the Company's
results of operations and may affect the Company's reported financial results.
The market for Verint's digital 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 materially and 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,
Verint's markets include an increasing number of competitors, including
companies that are significantly larger and have more resources than Verint. 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 market for actionable intelligence solutions, such as Verint's
security and business intelligence products is 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 business intelligence products are sold primarily to contact centers,
slower than anticipated growth or a contraction in the number of contact centers
will have a material adverse effect on 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.
35
A subsidiary of Verint, Verint Technology Inc. ("Verint Technology"),
which markets, 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, and 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
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.
36
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 the solutions that
Verint offers. 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,
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 distribution channels 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 diseases, such as severe acute
respiratory syndrome ("SARS"), have curtailed and may in the future curtail
travel to and from certain countries. Restrictions on travel to and from these
and other regions on account of additional incidents of diseases, such as SARS,
could have a material adverse effect on the Company's business, results of
37
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 in Iraq and other armed conflicts
throughout the world, could have a material adverse effect on the Company's
business, results of operations, and financial condition.
The Company is a highly automated business and a disruption or
failure of its systems in the event of a catastrophic event, such as a major
earthquake, tsunami or other natural disaster, cyber-attack or terrorist attack
could cause delays in completing sales and providing services. A catastrophic
event that results in the destruction or disruption of any of the Company's
critical business systems could severely affect its ability to conduct normal
business operations and, as a result, the financial condition and operating
results could be adversely affected. "Hackers" and others have in the past
created a number of computer viruses or otherwise initiated "denial of service"
attacks on computer networks and systems. The Company's information technology
infrastructure is regularly subject to various attacks and intrusion efforts of
differing seriousness and sophistication. If such "hackers" are 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 and could harm the Company's business, financial condition
and operating results. While the Company diligently maintains its information
technology infrastructure and continuously implements protections against such
viruses, electronic break-ins, disruptions or intrusions, if the defensive
measures fail or should similar defensive measures by the Company's customers
fail, the Company's business could be materially and adversely affected.
Since the establishment of the State of Israel in 1948, a number of
armed conflicts have taken place between Israel and its Arab neighbors, which in
the past and may in the future, lead to security and economic problems for
Israel. Current and future conflicts and political, economic and/or military
conditions in Israel and the Middle East region can directly affect the
Company's operations in Israel. From October 2000, until recently, terrorist
violence in Israel increased significantly, primarily in the West Bank and Gaza
Strip, and Israel has experienced terrorist incidents within its borders. There
can be no assurance that the recent relative calm and renewed discussions with
Palestinian representatives will continue. 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. Recently, the
weakening of the dollar relative to the shekel has increased the costs of the
Company's Israeli operations, stated in United States dollars. The Company's
operations have at times also been affected by difficulties in attracting and
retaining qualified scientific, engineering and technical personnel in Israel,
where the availability of such personnel has at times been severely limited.
Changes in these 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.
38
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. The availability of such benefits to
the Company may be negatively 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 Office of the Chief Scientist of the Ministry of Industry
and Trade of the State of Israel ("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 in consideration 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 January 31, 2005, such subsidiaries of the Company received
approximately $57.7 million in cumulative grants from the OCS and recorded
approximately $26.7 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. In order to obtain such permission, the Company will 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
transfer outside of Israel of any intellectual property rights resulting from
research and development activities funded under OCS programs is not permitted.
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, the full
utilization of net operating loss carry-forwards and by the relative ages of the
Company's eligible investments in Israel. The tax moratorium on income from the
Company's Approved Enterprise investments made prior to 1997 is four years,
whereas subsequent Approved Enterprise projects are eligible for a moratorium of
only two years. Reduced tax rates apply in each case for certain periods
thereafter. To be eligible for these tax benefits, the Company must continue to
meet conditions, including making specified investments in fixed assets and
financing a percentage of investments with share capital. If the Company fails
to meet such conditions in the future, the tax benefits would be canceled and
the Company could be required to refund the tax benefits already received.
Israeli authorities have indicated that additional limitations on the tax
benefits associated with Approved Enterprise projects may be imposed for certain
categories of taxpayers, which would include the Company. If further changes in
the law or government policies regarding those programs were to result in their
termination or adverse modification, or if the Company were to become unable to
participate in, or take advantage of, those programs, the cost of the Company's
operations in Israel would increase and there could be a material adverse effect
on the Company's results of operations and financial condition.
39
The ability of the Company's Israeli subsidiaries to pay dividends is
governed by Israeli law, which provides that dividends may be paid by an Israeli
corporation only out of its earnings as defined in accordance with the Israeli
Companies Law of 1999, provided that there is no reasonable concern that such
payment will cause such subsidiary to fail to meet its current and expected
liabilities as they come due. In the event of a devaluation of the Israeli
currency against the dollar, the amount in dollars available for payment of cash
dividends out of prior years' earnings will decrease accordingly. Cash dividends
paid by an Israeli corporation to United States resident corporate parents are
subject to the Convention for the Avoidance of Double Taxation between Israel
and the United States. Under the terms of the Convention, such dividends are
subject to taxation by both Israel and the United States and, in the case of
Israel, such dividends out of income derived in respect of a period for which an
Israeli company is entitled to the reduced tax rate applicable to an Approved
Enterprise are generally subject to withholding of Israeli income tax at source
at a rate of 15%. The Israeli company is also subject to additional Israeli
taxes in respect of such dividends, generally equal to the tax benefits
previously granted in respect of the underlying income by virtue of the Approved
Enterprise status.
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. The
Company's ability to attract and retain employees also may be affected by cost
control actions, which in the past and may again in the future, include
reductions in the Company's workforce and the associated reorganization of
operations.
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, local taxes, 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. Also, the Company's foreign subsidiaries hold a significant amount of
cash. The repatriation of such cash to the United States is subject to
withholding tax, which would reduce the total amount of cash the Company would
receive if such cash is repatriated into the United States.
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
purchase orders and the payments under such contracts and other factors, it is
often not practicable for the Company to effectively hedge the entire risk of
significant changes in currency rates during the contract period. Although
recently the Company has significantly increased the amount of its foreign
currency exposure that it has hedged, the Company may experience adverse
consequences from not hedging all of its exchange rate risks associated with
contracts denominated in foreign currencies. The Company's operating results
have been negatively impacted for certain periods and positively impacted for
other 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
hedging activities that the Company does undertake.
40
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, however, regularly conduct comprehensive patent
searches to determine whether the technology used in its products infringes
patents held by third parties. 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 published or
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
continue offering these products without obtaining licenses for those products
or without substantial reengineering of the products. Any reengineering effort
may not be successful and the Company cannot be certain as to whether such
licenses would be available. Even if such licenses were available, the Company
cannot be certain that any licenses would be offered to the Company 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
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
41
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. The
severe decline in the public trading prices of equity securities in the past,
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. In addition, although interest rates have risen
recently, low interest rates have in the past and may in the future have an
adverse impact on the Company's results of operations.
The Company issues stock options as a key component of its overall
compensation. There is growing pressure on public companies from shareholders
generally and various organizations to reduce the rate at which companies,
including the Company, issue stock options to employees, which may make it more
difficult to obtain stockholder approval of equity compensation plans when
required. In addition, FASB has adopted changes to generally accepted accounting
principles (GAAP) that will require the Company to adopt a different method of
determining the compensation expense for its employee stock options and employee
stock purchase plans beginning in the third quarter of fiscal 2005. As a result,
CTI and certain of its subsidiaries have terminated their employee stock
purchase plans. In addition, the Company believes expensing stock options will
increase shareholder pressure to limit future option grants and could make it
more difficult for the Company to grant stock options to employees in the
future. As a result, the Company may lose top employees to non-public, start-up
companies or may generally find it more difficult to attract, retain and
motivate employees, either of which could materially and adversely affect the
Company's business, results of operations and financial condition.
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 has not declared or paid any cash dividends on its common
stock and currently does not expect to pay cash dividends in the near future.
Consequently, any economic return to a shareholder may be derived, if at all,
from appreciation in the price of the Company's stock, and not as a result of
dividend payments.
The Company may issue additional equity securities, which would lead
to dilution of its issued and outstanding common stock. The Company has used and
may continue to use its common stock or securities convertible into common stock
to acquire technology, products, product rights and businesses, or reduce or
retire existing indebtedness, among other purposes. The issuance of additional
equity securities or securities convertible into equity securities for these or
other purposes would result in dilution of existing shareholders' equity
interests in the Company.
42
In addition, the Company's board of directors has the authority to
cause the Company to issue, without vote or action of the Company's
shareholders, up to 2,500,000 shares of preferred stock in one or more series,
and has the ability to fix the rights, preferences, privileges and restrictions
of any such series. Any such series of preferred stock could contain dividend
rights, conversion rights, voting rights, terms of redemption, redemption
prices, liquidation preferences or other rights superior to the rights of
holders of its common stock. The Company's board of directors has no present
intention of issuing any such preferred series, but reserves the right to do so
in the future. The Company is also authorized to issue, without shareholder
approval, common stock under certain circumstances. The issuance of either
preferred or common stock 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.
OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS
As part of our ongoing business, we do not participate in
transactions that generate relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as structured finance
or special purpose entities ("SPEs"), which would have been established for the
purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes. As of January 31, 2005, we were not involved in any
unconsolidated SPE transactions.
The Company has obtained bank guaranties primarily for the
performance of certain obligations under contracts with customers as well as for
the guarantee of certain payment obligations. These guaranties, which aggregated
approximately $33.9 million at January 31, 2005, are generally to be released by
the Company's performance of specified contract milestones, which are scheduled
to be completed at various dates primarily through 2008.
The Company is exposed to market risk from changes in foreign
currency exchange rates and may, from time to time, use foreign currency
exchange contracts and other derivative instruments to reduce its exposure to
the risk that the eventual net cash inflows and outflows resulting from the sale
of its products in foreign currency, primarily the Euro, will be adversely
affected by changes in exchange rates. The objective of these contracts is to
neutralize the impact of foreign currency exchange rate movements on the
Company's operating results. These instruments are not designated as hedges and
the change in fair value is included in income currently. As of January 31,
2005, the Company had approximately $32.6 million of notional amount of foreign
exchange forward contracts to sell Euros with an original maturity of up to six
months. The fair value of these contracts as of January 31, 2005 of
approximately $(66,000) is included in `Interest and other income, net' in the
Consolidated Statements of Operations.
43
The impact that our aggregate contractual obligations as of January
31, 2005 are expected to have on our liquidity and cash flow in future periods
is as follows:
PAYMENTS DUE BY PERIOD
---------------------------------------------------------------------
LESS THAN MORE THAN
TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
----- ------ --------- --------- -------
(IN THOUSANDS)
Long-term debt obligations,
including current portion (1) $ 518,254 $ 87,913 $ 9,259 $ 501 $ 420,581
Operating lease obligations 118,023 28,616 45,587 21,431 22,389
Purchase obligations (2) 59,727 54,672 4,322 733 -
Other long-term liabilities 4,976 - 4,976 - -
---------------------------------------------------------------------
Total $ 700,980 $171,201 $ 64,144 $ 22,665 $ 442,970
---------------------------------------------------------------------
(1) Includes (as > 5 Years) approximately $417.7 million and
approximately $2.3 million, respectively, aggregate principal amount of the New
ZYPS and Existing ZYPS, which mature on May 15, 2023. See "Liquidity and Capital
Resources" for a description of the New ZYPS and Existing ZYPS including the
series of put options giving the holders the right to require the Company to
repurchase all or a portion of the New ZYPS and Existing ZYPS prior to May 2023
and the Company the right to redeem the New ZYPS and Existing ZYPS prior to May
2023. The New ZYPS have a net share settlement feature that provides that, upon
conversion, the Company would pay to the holder cash equal to the lesser of the
conversion value and the principal amount of the New ZYPS being converted, which
is currently $417.7 million, and would issue to the holder the remainder of the
conversion value in excess of the principal amount, if any, in shares of the
Company's common stock.
(2) Purchase obligations include agreements to purchase goods or
services that are enforceable and legally binding on the Company and that
specify all significant terms, including: fixed or minimum quantities to be
purchased; fixed, minimum or variable price provisions; and the approximate
timing of the transaction. Purchase obligations exclude agreements that are
cancelable without penalty.
In 1997, a subsidiary of CTI and Quantum Industrial Holdings Ltd.
organized two new companies to make investments, including investments in high
technology ventures. Each participant committed a total of $37.5 million to the
capital of the new companies, for use as suitable investment opportunities are
identified. Quantum Industrial Holdings Ltd. is a member of the Quantum Group of
Funds managed by Soros Fund Management LLC and affiliated management companies.
As of January 31, 2005, the Company had invested approximately $26.5 million
related to these ventures. In addition, the Company has committed approximately
$9.8 million to various funds, ventures and companies which may be called at the
option of the investee.
The Company licenses certain technology, "know-how" and related
rights for use in the manufacture and marketing of its products, and pays
royalties to third parties, typically ranging up to 6% of net sales of the
related products, under such licenses and under other agreements entered into in
connection with research and development financing, including projects partially
funded by 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 in
varying amounts based upon the revenues attributed to the various components of
such products. Royalties due to the OCS in respect of research and development
projects are required to be paid until the OCS has received total royalties up
to the amounts received by the Company under the approved project budgets, plus
interest in certain circumstances. As of January 31, 2005, such subsidiaries had
received approximately $57.7 million in cumulative grants from the OCS, and have
recorded approximately $26.7 million in cumulative royalties to the OCS.
44
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
Refer to "Liquidity and Capital Resources" for a description of EITF
04-8 and its impact on the Company's diluted earnings per share calculation for
the New ZYPS and the Existing ZYPS. For the year ended January 31, 2005, the
adoption of EITF 04-8 resulted in approximately 1,739,000 (comprised of
approximately 1,610,000 for New ZYPS and approximately 129,000 for Existing
ZYPS) of additional share dilution in calculating diluted earnings per share.
The adoption of EITF 04-8 did not have an effect on reported diluted earnings
(loss) per share for any periods presented.
In December 2004, the FASB issued Statement of Financial Accounting
Standard ("SFAS") No. 123 (revised 2004), "Share-Based Payment", ("SFAS
No.123(R)") which revises SFAS No. 123 and supersedes APB No. 25. SFAS No.
123(R) requires all share-based payments to employees, including grants of
employee stock options, to be valued at fair value on the date of grant, and to
be expensed over the applicable vesting period. Pro forma disclosure of the
income statement effects of share-based payments is no longer an alternative.
SFAS No. 123(R) is effective for reporting periods beginning after June 15,
2005, which for the Company is August 1, 2005 (the "Effective Date"). Beginning
on the Effective Date, the Company must (i) expense all options granted after
the Effective Date over the applicable vesting period, and (ii) expense the
non-vested portions of existing option grants going forward over their remaining
vesting period. Compensation expense for the non-vested portions of existing
option grants as of the Effective Date will be recorded based on the fair value
of the awards previously calculated in developing the pro forma disclosures in
accordance with the provisions of SFAS No. 123. Under SFAS No. 123(R), the
Company is required to adopt a fair value-based method for measuring the
compensation expense related to employee stock and stock options awards; this
will lead to substantial additional compensation expense. Any such expense,
although it will not affect the Company's cash flows, will have a material
negative impact on the Company's reported results of operations.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
amendment of ARB No. 43, Chapter 4." SFAS No. 151 clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage) by requiring that such items be recognized as current-period
charges regardless of whether they meet the ARB No. 43, Chapter 4 criterion of
"so abnormal." In addition, SFAS No. 151 requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. SFAS No. 151 is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS
No. 151 is not expected to have a material effect on the Company's consolidated
financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets - an amendment of APB Opinion No. 29." SFAS No. 153 amends
APB No. 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary exchange
has commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS No. 153 is effective for
reporting periods beginning after June 15, 2005. The adoption of SFAS No. 153 is
not expected to have a material effect on the Company's consolidated financial
statements.
In March 2004, the EITF of the FASB reached a consensus on EITF Issue
No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments", which provides additional guidance for assessing
impairment losses on investments. Additionally, EITF 03-1 includes new
disclosure requirements for investments that are deemed to be temporarily
impaired. In September 2004, the FASB delayed the accounting provisions of EITF
03-1; however the disclosure requirements remain effective for annual periods
ending after June 15, 2004. The Company will evaluate the impact of EITF 03-1
once final guidance is issued, however the adoption of EITF 03-1 in its current
form is not expected to have a material effect on the Company's consolidated
financial statements.
45
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risk from changes in foreign
currency exchange rates, interest rates and equity trading prices, which could
impact its results of operations and financial condition. The Company manages
its exposure to these market risks through its regular operating and financing
activities and, when deemed appropriate, through the use of derivative financial
instruments.
The Company operates internationally and is therefore exposed to
potentially adverse movements in foreign currency exchange rates. The primary
currencies that the Company is exposed to are the Euro and the Israeli Shekel.
The Company may, from time to time, use foreign currency exchange contracts and
other derivative instruments to reduce its exposure to the risk that the
eventual net cash inflows and outflows resulting from the sale of its products
in foreign currency, primarily the Euro, will be adversely affected by changes
in exchange rates. The objective of these contracts is to neutralize the impact
of foreign currency exchange rate movements on the Company's operating results.
As of January 31, 2005, the Company had approximately $32.6 million of notional
amount of foreign exchange forward contracts to sell Euros with a fair value of
approximately $(66,000) with an original maturity of up to six months. Neither a
10% increase nor decrease from current exchange rates would have a material
effect on the Company's consolidated financial statements.
Various financial instruments held by the Company are sensitive to
changes in interest rates. Interest rate changes would result in gains or losses
in the market value of the Company's investments in debt securities due to
differences between the market interest rates and rates at the date of purchase
of these financial instruments. Neither a 10% increase nor decrease from current
interest rates would have a material effect on the Company's consolidated
financial statements.
46
Equity investments held by the Company are subject to equity price
risks. Neither a 10% increase nor decrease in equity prices would have a
material effect on the Company's consolidated financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial information required by Item 8 is included elsewhere in
this report.
See Part IV, Item 15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. 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 January 31, 2005. 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 January 31, 2005.
(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 January
31, 2005, that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
See the Management Report on Internal Control Over Financial
Reporting, which appears on page F-2 of this report. The Company's management,
including the Chief Executive Officer and Chief Financial Officer, does not
expect the Company's disclosure controls and procedures or its internal
controls, to prevent all error and fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, with the Company have been detected.
ITEM 9B. OTHER INFORMATION.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required by this item is incorporated herein by reference
to the information in the Company's Notice of Annual Meeting of Shareholders and
Proxy Statement relating to the Annual Meeting of Shareholders to be held on
June 14, 2005 (the "Proxy Statement") under the captions "Codes of Business
Conduct and Ethics", "Background of Directors and Executive Officers", "Audit
Committee", and "Section 16(a) Beneficial Ownership Reporting Compliance".
47
ITEM 11. EXECUTIVE COMPENSATION.
Information required by this Item is incorporated by reference to
"Executive Compensation" and "Compensation of Directors" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
Information required by this Item is incorporated by reference to
"Security Ownership of Management and Principal Shareholders" and "Equity
Compensation Plan Information" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required by this Item is incorporated by reference to
"Certain Relationships and Related Transactions" in the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Information required by this Item is incorporated by reference to
"Independent Accounting Firm Fees" and "Policy for Audit, Audit Related and
Non-Audit Services" in the Proxy Statement.
48
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Page
----
(a) Documents filed as part of this report.
--------------------------------------
(1) Financial Statements.
--------------------
Index to Consolidated Financial Statements F-1
Management Report on Internal Control Over Financial Reporting F-2
Report of Independent Registered Public Accounting Firm on
Internal Control over Financial Reporting F-3
Report of Independent Registered Public Accouting Firm on
the Consolidated Financial Statements F-4
Consolidated Balance Sheets as of
January 31, 2004 and 2005 F-5
Consolidated Statements of Operations for the
Years Ended January 31, 2003, 2004 and 2005 F-6
Consolidated Statements of Stockholders' Equity for the
Years Ended January 31, 2003, 2004 and 2005 F-7
Consolidated Statements of Cash Flows for the
Years Ended January 31, 2003, 2004 and 2005 F-8
Notes to Consolidated Financial Statements F-9
(2) Financial Statement Schedules.
-----------------------------
None.
(3) Exhibits.
--------
The Index of Exhibits commences on the following page. Exhibits
numbered 10.1 through 10.4, 10.6 through 10.12 and 10.19 through
10.21 comprise material compensatory plans and arrangements of
the registrant.
(c) Index of Exhibits
-----------------
No. Exhibit Description
- --- -------------------
3 Articles of Incorporation and By-Laws:
3.1* Certificate of Incorporation. (Incorporated by reference to
the Registrant's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December
31, 1987.)
49
3.2* Certificate of Amendment of Certificate of Incorporation
effective February 26, 1993. (Incorporated by reference to
the Registrant's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December
31, 1992.)
3.3* Certificate of Amendment of Certificate of Incorporation
effective January 12, 1995. (Incorporated by reference to
the Registrant's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December
31, 1994.)
3.4* Certificate of Amendment of Certificate of Incorporation
dated October 18, 1999. (Incorporated by reference to the
Registrant's Annual Report on Form 10-K under the Securities
Exchange Act of 1934 for the year ended January 31, 2000.)
3.5* Certificate of Amendment of Certificate of Incorporation
dated September 19, 2000. (Incorporated by reference to the
Registrant's Annual Report on Form 10-K under the Securities
Exchange Act of 1934 for the year ended January 31, 2001.)
3.6* By-Laws, as amended. (Incorporated by reference to the
Registrant's Annual Report on Form 10-K under the Securities
Exchange Act of 1934 for the year ended January 31, 2003.)
4 Instruments defining the rights of security holders including indentures:
4.1* Specimen stock certificate. (Incorporated by reference to
the Registrant's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December
31, 1992.)
4.2* Indenture dated as of November 22, 2000 from Comverse
Technology, Inc. to The Chase Manhattan Bank, Trustee.
(Incorporated by reference to the Registrant's Registration
Statement on Form S-3 under the Securities Act of 1933,
Registration No. 333-55526.)
4.3* Specimen 1 1/2% Convertible Senior Debenture Due 2005.
(Incorporated by reference to the Registrant's Registration
Statement on Form S-3 under the Securities Act of 1933,
Registration No. 333-55526.)
4.4* Indenture dated as of May 7, 2003 from Comverse Technology,
Inc., to JPMorgan Chase Bank, Trustee. (Incorporated by
reference to the Registrant's Registration Statement on Form
S-3 under the Securities Act of 1933, Registration No.
333-106391.)
4.5* Specimen Zero Yield Puttable Securities Due May 15, 2023.
(Incorporated by reference to the Registrant's Registration
Statement on Form S-3 under the Securities Act of 1933,
Registration No. 333-106391.)
4.6* Specimen for New Zero Yield Puttable Securities Due May 15,
2023. (Incorporated by reference to the Registrant's Current
Report on Form 8-K under the Securities Exchange Act of 1934
filed on January 26, 2005.)
4.7* Indenture, dated as of January 26, 2005, between Comverse
Technology, Inc., and JPMorgan Chase Bank, N.A. as Trustee.
(Incorporated by reference to the Registrant's Current
Report on Form 8-K under the Securities Exchange Act of 1934
filed on January 26, 2005.)
50
10 Material contracts:
10.1* Form of Stock Option Agreement pertaining to shares of
certain subsidiaries of Comverse Technology, Inc.
(Incorporated by reference to the Registrant's Annual Report
on Form 10-K under the Securities Exchange Act of 1934 for
the year ended December 31, 1993.)
10.2* Form of Incentive Stock Option Agreement. (Incorporated by
reference to the Registrant's Registration Statement on Form
S-1 under the Securities Act of 1933, Registration No.
33-9147.)
10.3* Form of Stock Option Agreement for options other than
Incentive Stock Options. (Incorporated by reference to the
Registrant's Annual Report on Form 10-K under the Securities
Exchange Act of 1934 for the year ended December 31, 1987.)
10.4* Form of Restricted Stock Agreement. (Incorporated by
reference to the Registrant's Annual Report on Form 10-K
under the Securities Exchange Act of 1934 for the year ended
January 31, 2004.)
10.5* Form of Indemnity Agreement between Comverse Technology,
Inc. and its Officers and Directors. (Incorporated by
reference to the Registrant's Annual Report on Form 10-K
under the Securities Exchange Act of 1934 for the year ended
January 31, 2003.)
10.6* 1997 Employee Stock Purchase Plan, as amended. (Incorporated
by reference to the Definitive Proxy Materials for the
Registrant's Annual meeting of Shareholders held June 15,
2001.)
10.7* 2004 Management Incentive Plan. (Incorporated by reference
to the Definitive Proxy Materials for the Registrant's
Annual Meeting of Shareholders held December 16, 2003.)
10.8* 2002 Employee Stock Purchase Plan, as amended. (Incorporated
by reference to the Definitive Proxy Materials for the
Registrant's Annual Meeting of Shareholders held December
16, 2003.)
10.9* 1997 Stock Incentive Compensation Plan. (Incorporated by
reference to the Definitive Proxy Materials for the
Registrant's Annual Meeting of Shareholders held January 13,
1998.)
10.10* 1999 Stock Incentive Compensation Plan. (Incorporated by
reference to the Definitive Proxy Materials for the
Registrant's Annual Meeting of Shareholders held October 8,
1999.)
10.11* 2000 Stock Incentive Compensation Plan. (Incorporated by
reference to the Definitive Proxy Materials for the
Registrant's Annual Meeting of Shareholders held September
15, 2000.)
10.12* 2001 Stock Incentive Compensation Plan. (Incorporated by
reference to the Definitive Proxy Materials for the
Registrant's Annual Meeting of Shareholders held June 15,
2001.)
51
10.13* Lease dated November 5, 1990 between Boston Technology, Inc.
and Wakefield Park Limited Partnership ("Lease").
(Incorporated by reference to the Annual Report of Boston
Technology, Inc. on Form 10-K under the Securities Exchange
Act of 1934 for the year ended January 31, 1991.)
10.14* First Amendment to Lease dated as of March 31, 1993 between
Boston Technology, Inc. and WBAM Limited Partnership.
(Incorporated by reference to the Quarterly Report of Boston
Technology, Inc. on Form 10-Q under the Securities Exchange
Act of 1934 for the quarter ended October 31, 1993.)
10.15* Second Amendment to Lease dated as of August 31, 1994
between Boston Technology, Inc. and WBAM Limited
Partnership. (Incorporated by reference to the Annual Report
of Boston Technology, Inc. on Form 10-K under the Securities
Exchange Act of 1934 for the year ended January 31, 1995.)
10.16* Third Amendment to Lease dated as of June 7, 1996 between
Boston Technology, Inc. and WBAM Limited Partnership.
(Incorporated by reference to the Annual Report of Boston
Technology, Inc. on Form 10-K under the Securities Exchange
Act of 1934 for the year ended January 31, 1997.)
10.17* Fourth Amendment to Lease dated as of December 21, 1998
between Wakefield 100 LLC and Comverse Technology, Inc.
(Incorporated by reference to the Registrant's Annual Report
on Form 10-K under the Securities Exchange Act of 1934 for
the year ended January 31, 2003.)
10.18* Fifth Amendment to Lease dated as of September 5, 2002
between SC Wakefield 200, Inc. and Comverse Technology, Inc.
(Incorporated by reference to the Registrant's Annual Report
on Form 10-K under the Securities Exchange Act of 1934 for
the year ended January 31, 2003.)
10.19* Employment, Non-Disclosure and Non-Competition Agreement,
dated as of August 19, 2004 between Comverse Technology,
Inc. and David Kreinberg. (Incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q under the
Securities Exchange Act of 1934 for the quarter ended July
31, 2004.)
10.20* 2004 Stock Incentive Compensation Plan (Incorporated by
reference to the Definitive Proxy Materials for the
Registrant's Annual meeting of Shareholders held June 15,
2004.)
10.21* Form of Agreement evidencing a grant of Stock Options under
the Comverse Technology, Inc. Stock Incentive Compensation
Plans. (Incorporated by reference to the Registrant's
Current Report on Form 8-K under the Securities Exchange Act
of 1934 filed on December 7, 2004.)
10.22* Form of Agreement evidencing a grant of Stock Options under
the Comverse Technology, Inc. Stock Incentive Compensation
Plans to its directors. (Incorporated by reference to the
Registrant's Current Report on Form 8-K under the Securities
Exchange Act of 1934 on February 3, 2005.)
21.1** Subsidiaries of Registrant.
52
23.1** Consent of Deloitte & Touche LLP.
24.1 Powers of Attorney (see signature page to this report.)
31.1** Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2** Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32*** Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
- -----------------
* Incorporated by reference.
** Filed herewith.
*** This exhibit is being "furnished" pursuant to Item 601(b)(32) of SEC
Regulation S-K and are not deemed "filed" with the Securities and Exchange
Commission and are not incorporated by reference in any filing of the
Company under the Securities Act of 1933 or the Securities Exchange Act of
1934.
53
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) 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.
(Registrant)
April 4, 2005 By: /s/ Kobi Alexander
---------------------------
Kobi Alexander
Chairman of the Board
and Chief Executive Officer
April 4, 2005 By: /s/ David Kreinberg
---------------------------
David Kreinberg
Executive Vice President
and Chief Financial Officer
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Kobi Alexander and David Kreinberg and
each of them, jointly and severally, his attorneys-in-fact, each with full power
of substitution, for him in any and all capacities, to sign any and all
amendments to this Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each said attorneys-in-fact
or his substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
/s/ Kobi Alexander April 4, 2005
- ---------------------------------
Kobi Alexander,
Chairman and CEO, Director
/s/ David Kreinberg April 4, 2005
- ---------------------------------
David Kreinberg,
Executive Vice President and CFO
/s/ Raz Alon April 4, 2005
- ---------------------------------
Raz Alon, Director
/s/ Itsik Danziger April 4, 2005
- ---------------------------------
Itsik Danziger, Director
/s/ John H. Friedman April 4, 2005
- ---------------------------------
John H. Friedman, Director
/s/ Ron Hiram April 4, 2005
- ---------------------------------
Ron Hiram, Director
/s/ Sam Oolie April 4, 2005
- ---------------------------------
Sam Oolie, Director
/s/ William F. Sorin April 4, 2005
- ---------------------------------
William F. Sorin, Director
54
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
PAGE
Management Report on Internal Control Over Financial Reporting F-2
Report of Independent Registered Public Accounting Firm on
Internal Control over Financial Reporting F-3
Report of Independent Registered Public Accouting Firm on
the Consolidated Financial Statements F-4
Consolidated Balance Sheets as of January 31, 2004 and 2005 F-5
Consolidated Statements of Operations for the
Years Ended January 31, 2003, 2004 and 2005 F-6
Consolidated Statements of Stockholders' Equity for the
Years Ended January 31, 2003, 2004 and 2005 F-7
Consolidated Statements of Cash Flows for the
Years Ended January 31, 2003, 2004 and 2005 F-8
Notes to Consolidated Financial Statements F-9
F-1
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting as defined in
Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934. Those
rules define internal control over financial reporting as a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles and includes those policies and
procedures that:
o Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the
assets of the Company;
o Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and
o Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
The Company's management assessed the effectiveness of the Company's
internal control over financial reporting as of January 31, 2005. In making this
assessment, the Company's management used the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission.
Based on our assessment and those criteria, the Company's management
believes that, as of January 31, 2005, the Company's internal control over
financial reporting is effective.
The Company's independent registered public accounting firm, Deloitte & Touche
LLP, has issued an attestation report on management's assessment of the
Company's internal control over financial reporting, which appears on pages F-3
and F-4.
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
To the Board of Directors and Stockholders of Comverse Technology, Inc.
New York, New York
We have audited management's assessment, included in the accompanying
Management Report On Internal Control Over Financial Reporting, that Comverse
Technology, Inc. and subsidiaries (the "Company") maintained effective internal
control over financial reporting as of January 31, 2005, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company's internal control over financial reporting is a process
designed by, or under the supervision of, the company's principal executive and
principal financial officers, or persons performing similar functions, and
effected by the company's board of directors, management, and other personnel to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud
may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of January 31, 2005, is
fairly stated, in all material respects, based on the criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of January 31, 2005, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended January 31, 2005 of the Company and our
report dated April 1, 2005 expressed an unqualified opinion on those financial
statements.
/s/ Deloitte & Touche LLP
Jericho, New York
April 1, 2005
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON THE CONSOLIDATED
FINANCIAL STATEMENTS
To the Board of Directors and Stockholders of Comverse Technology, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of
Comverse Technology, Inc. and subsidiaries (the "Company") as of January 31,
2005 and 2004, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended January 31, 2005. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of Comverse Technology,
Inc. and subsidiaries as of January 31, 2005 and 2004, and the results of their
operations and their cash flows for each of the three years in the period ended
January 31, 2005, in conformity with accounting principles generally accepted in
the United States of America.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of January 31, 2005,
based on the criteria established in Internal Control--Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated April 1, 2005 expressed an unqualified opinion on
management's assessment of the effectiveness of the Company's internal control
over financial reporting and an unqualified opinion on the effectiveness of the
Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP
Jericho, New York
April 1, 2005
F-4
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2004 AND 2005
(IN THOUSANDS, EXCEPT SHARE DATA)
- ------------------------------------------------------------------------------------------------------------------------------------
2004 2005
---- ----
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 623,063 $ 721,350
Bank time deposits 888 2,317
Short-term investments 1,574,548 1,525,963
Accounts receivable, net 158,236 199,571
Inventories 54,751 107,552
Prepaid expenses and other current assets 50,798 70,335
------------ ------------
TOTAL CURRENT ASSETS 2,462,284 2,627,088
PROPERTY AND EQUIPMENT, net 125,023 122,174
OTHER ASSETS 140,735 176,024
------------ ------------
TOTAL ASSETS $ 2,728,042 $ 2,925,286
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 229,296 $ 291,005
Convertible debt - 87,253
Bank loans and other debt 2,649 660
Advance payments from customers 89,062 108,381
------------ ------------
TOTAL CURRENT LIABILITIES 321,007 487,299
CONVERTIBLE DEBT 544,723 420,000
LIABILITY FOR SEVERANCE PAY 12,324 15,803
OTHER LIABILITIES 15,964 12,330
------------ ------------
TOTAL LIABILITIES 894,018 935,432
------------ ------------
MINORITY INTEREST 161,478 195,825
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 20)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value - authorized, 2,500,000
shares; issued, none
Common stock, $0.10 par value -
authorized, 600,000,000 shares;
issued and outstanding 194,549,886 and 198,878,553 shares 19,454 19,887
Additional paid-in capital 1,210,547 1,284,298
Unearned stock compensation (6,707) (14,432)
Retained earnings 439,899 497,229
Accumulated other comprehensive income 9,353 7,047
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 1,672,546 1,794,029
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,728,042 $ 2,925,286
============ ============
See notes to consolidated financial statements.
F-5
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JANUARY 31, 2003, 2004 AND 2005
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- ------------------------------------------------------------------------------------------------------------------------------------
JANUARY 31, JANUARY 31, JANUARY 31,
2003 2004 2005
---- ---- ----
Sales:
Product revenues $ 547,141 $ 534,585 $ 700,970
Service revenues 188,748 231,307 258,472
----------- ----------- -----------
735,889 765,892 959,442
----------- ----------- -----------
Cost of sales:
Product costs 184,413 181,059 215,023
Service costs 153,708 146,501 165,687
----------- ----------- -----------
338,121 327,560 380,710
----------- ----------- -----------
Gross margin 397,768 438,332 578,732
Operating expenses:
Research and development, net 232,593 216,457 236,657
Selling, general and administrative 281,202 254,376 290,445
In-process research and development
and other acquisition-related charges - - 4,635
Workforce reduction, restructuring
and impairment charges (credits) 66,714 (2,123) 62
----------- ----------- -----------
Income (loss) from operations (182,741) (30,378) 46,933
Interest and other income, net 58,902 38,958 36,223
----------- ----------- -----------
Income (loss) before income tax provision, minority
interest and equity in the earnings (losses) of affiliates (123,839) 8,580 83,156
Income tax provision 3,294 8,206 13,214
Minority interest and equity in the earnings (losses)
of affiliates (2,345) (5,760) (12,612)
----------- ----------- -----------
Net income (loss) $ (129,478) $ (5,386) $ 57,330
=========== =========== ===========
Earnings (loss) per share:
Basic $ (0.69) $ (0.03) $ 0.29
=========== =========== ===========
Diluted $ (0.69) $ (0.03) $ 0.28
=========== =========== ===========
See notes to consolidated financial statements.
F-6
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 2003, 2004 AND 2005
(IN THOUSANDS, EXCEPT SHARE DATA)
Accumulated Other
Comprehensive Income
Common Stock --------------------
------------ Additional Unearned Unrealized Cumulative Total
Number of Par Paid-in Stock Retained Gains Translation Stockholders'
Shares Value Capital Compensation Earnings (Losses) Adjustment Equity
------ ----- ------- ------------ -------- -------- ---------- ------
BALANCE, FEBRUARY 1, 2002 186,248,350 $ 18,625 $ 1,018,232 $ - $ 574,763 $ 4,299 $ 489 $ 1,616,408
Comprehensive loss:
Net loss (129,478)
Unrealized gain on
available-for-sale securities 827
Translation adjustment 1,297
Total comprehensive loss (127,354)
Common stock issued for employee
stock purchase plan 975,396 97 8,097 8,194
Exercise of stock options 530,661 53 4,121 4,174
Issuance of subsidiary shares 47,996 47,996
Tax benefit of dispositions of
stock options 274 274
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 31, 2003 187,754,407 18,775 1,078,720 - 445,285 5,126 1,786 1,549,692
Comprehensive loss:
Net loss (5,386)
Unrealized loss on
available-for-sale securities (53)
Translation adjustment 2,494
Total comprehensive loss (2,945)
Common stock issued for employee
stock purchase plan 711,138 71 6,012 6,083
Common stock issued for restricted
stock grant 314,300 31 5,218 (5,249) -
Exercise of stock options 5,770,041 577 54,610 55,187
Issuance of subsidiary shares 64,616 (1,672) 62,944
Tax benefit of dispositions of
stock options 1,371 1,371
Amortization of unearned
stock compensation 214 214
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 31, 2004 194,549,886 19,454 1,210,547 (6,707) 439,899 5,073 4,280 1,672,546
Comprehensive income:
Net income 57,330
Unrealized loss on
available-for-sale securities (3,588)
Translation adjustment 1,282
Total comprehensive income 55,024
Common stock issued for employee
stock purchase plan 554,586 55 7,718 7,773
Common stock issued for restricted
stock grant 327,100 33 7,508 (7,541) -
Exercise of stock options 3,446,981 345 37,415 37,760
Issuance of subsidiary shares 19,193 (2,281) 16,912
Tax benefit of dispositions of
stock options 1,917 1,917
Amortization of unearned stock
compensation 2,097 2,097
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 31, 2005 198,878,553 $ 19,887 $ 1,284,298 $ (14,432) $ 497,229 $ 1,485 $ 5,562 $ 1,794,029
=========== ======== =========== ========== ========= ======= ======= ===========
See notes to consolidated financial statements.
F-7
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED JANUARY 31, 2003, 2004 AND 2005
(IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------------------
JANUARY 31, JANUARY 31, JANUARY 31,
2003 2004 2005
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (129,478) $ (5,386) $ 57,330
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 67,355 71,771 66,692
Minority interest 1,570 7,246 12,861
Operating asset write-downs and impairments 26,445 6,684 13,681
Changes in operating assets and liabilities:
Accounts receivable, net 161,737 56,395 (40,545)
Inventories 13,446 (14,071) (52,696)
Prepaid expenses and other current assets 19,728 11,123 (13,262)
Accounts payable and accrued expenses (74,856) (33,302) 57,146
Advance payments from customers 13,822 35,565 19,319
Liability for severance pay (426) 2,407 3,380
Other, net (2,497) (9,812) (6,878)
------------ ------------ -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 96,846 128,620 117,028
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities and sales (purchases) of bank time deposits
and investments, net (358,007) (451,826) 38,119
Purchase of property and equipment (34,092) (35,352) (46,151)
Capitalization of software development costs (13,391) (7,759) (4,198)
Net assets acquired (31,130) (5,910) (45,634)
------------ ------------ -----------
NET CASH USED IN INVESTING ACTIVITIES (436,620) (500,847) (57,864)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of convertible debt - 412,766 -
Repurchase of convertible debt (169,788) (253,254) (36,873)
Proceeds from issuance of common stock in connection
with exercise of stock options and employee stock purchase plan 12,368 61,270 45,533
Net proceeds from issuance of common stock of subsidiaries 68,695 129,032 32,161
Repayment of bank loan - (42,000) -
Other, net (3,058) 2,381 (1,698)
------------ ------------ -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (91,783) 310,195 39,123
------------ ------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (431,557) (62,032) 98,287
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,116,652 685,095 623,063
------------ ------------ -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 685,095 $ 623,063 $ 721,350
============ ============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 10,458 $ 4,512 $ 1,975
============ ============ ===========
Cash paid during the year for income taxes $ 11,682 $ 10,503 $ 8,015
============ ============ ===========
See notes to consolidated financial statements.
F-8
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2003, 2004 AND 2005
- --------------------------------------------------------------------------------
1. ORGANIZATION AND BUSINESS
Comverse Technology, Inc. ("CTI" and, together with its subsidiaries, the
"Company") was organized as a New York corporation in October 1984. The
Company is engaged in the design, development, manufacture, marketing and
support of special purpose computer and telecommunications systems and
software for multimedia communications and information processing
applications.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of CTI and its wholly-owned and majority-owned subsidiaries.
All material intercompany balances and transactions have been eliminated.
MINORITY INTEREST - The interest of minority stockholders in the net assets
of consolidated subsidiaries, relating primarily to CTI's Verint Systems
Inc. ("Verint") and Ulticom, Inc. ("Ulticom") majority-owned subsidiaries,
are presented in the Consolidated Balance Sheets separately from
liabilities and stockholders' equity. The minority interest included in the
Consolidated Statements of Operations represents the interest of minority
stockholders in the net income of such consolidated subsidiaries.
CASH, CASH EQUIVALENTS AND BANK TIME DEPOSITS - The Company considers all
highly liquid investments purchased with original maturities of three
months or less to be cash equivalents. Bank deposits with maturities in
excess of three months are classified as bank time deposits.
SHORT-TERM INVESTMENTS - The Company classifies all of its short-term
investments as available-for-sale, accounted for at fair value, with
resulting unrealized gains or losses reported as a separate component of
stockholders' equity.
In connection with the preparation of this report, the Company concluded
that it was appropriate to classify investments in Auction Rate Securities
("ARS") as short-term investments. ARS generally have long-term stated
maturities; however, these investments have characteristics similar to
short-term investments because at pre-determined intervals, generally every
7 to 90 days, there is a new auction process at which these securities are
reset to current interest rates. Previously, such investments had been
classified as cash and cash equivalents due to their liquidity and pricing
reset feature. Accordingly, the Company has revised the classification to
report these securities as short-term investments in the Consolidated
Balance Sheets. As of January 31, 2005, the Company held approximately
$1,061,121,000 of investments in ARS that are classified as short-term
investments. The Company reclassified approximately $907,932,000,
$717,688,000 and $245,210,000 of investments in ARS as of January 31, 2004,
2003 and 2002, respectively, that were previously included in cash and cash
equivalents to short-term investments.
The Company has also revised the presentation of the Consolidated
Statements of Cash Flows for the years ended January 31, 2004 and 2003 to
reflect the purchases and sales of ARS as investing activities rather than
as a component of cash and cash equivalents, which is consistent with the
presentation for the year ended January 31, 2005. In the previously
reported Consolidated Statements of Cash Flows for the years ended January
31, 2004 and 2003, net cash used in investing activities related to these
short-term investments of approximately $190,244,000 and $472,478,000,
respectively, were included in cash and cash equivalents.
F-9
This change in classification does not affect previously reported cash
flows from operations or from financing activities in the Consolidated
Statements of Cash Flows or previously reported Consolidated Statements of
Operations for any period.
INVENTORIES - Inventories are stated at the lower of cost or market. Cost
is determined by the first-in, first-out method.
PROPERTY AND EQUIPMENT, NET - Property and equipment are carried at cost
less accumulated depreciation and amortization. The Company depreciates its
property and equipment primarily on a straight-line basis over periods
generally ranging from three to seven years. Leasehold improvements are
amortized over the shorter of their estimated useful lives or the related
lease term. The cost of maintenance and repairs is charged to operations as
incurred. Significant renewals and improvements are capitalized.
INCOME TAXES - The Company accounts for income taxes using the asset and
liability method. Under this method, deferred tax assets and liabilities
are determined based on differences between financial reporting and tax
bases of assets and liabilities, and are measured using the enacted tax
rates and laws that are expected to be in effect when the differences are
expected to reverse.
REVENUE AND EXPENSE RECOGNITION - The Company recognizes revenues in
accordance with the provisions of Statement of Position 97-2, "Software
Revenue Recognition", and related Interpretations. The Company's systems
are generally a bundled hardware and software solution that are shipped
together. Revenue is generally recognized at the time of shipment for sales
of systems which do not require significant customization to be performed
by the Company when the following criteria are met: (1) persuasive evidence
of an arrangement exists, (2) delivery has occurred and acceptance is
determinable, (3) the fee is fixed or determinable and (4) collectibility
is probable.
Amounts received from customers pursuant to the terms specified in
contracts but for which revenue has not yet been recognized are recorded as
advance payments from customers.
Post-contract customer support ("PCS") services are sold separately or as
part of a multiple element arrangement, in which case the related PCS
element is determined based upon vendor-specific objective evidence of fair
value, such that the portion of the total fee allocated to PCS services is
generally recognized as revenue ratably over the term of the PCS
arrangement.
Revenues from certain development contracts are recognized under the
percentage-of-completion method on the basis of physical completion to date
or using actual costs incurred to total expected costs under the contract.
Revisions in estimates of costs and profits are reflected in the accounting
period in which the facts that require the revision become known. At the
time a loss on a contract is known, the entire amount of the estimated loss
is accrued. Amounts received from customers in excess of revenues earned
under the percentage-of-completion method are recorded as advance payments
from customers. Related contract costs include all direct material and
labor costs and those indirect costs related to contract performance, and
are included in `Cost of sales' in the Consolidated Statements of
Operations.
Expenses incurred in connection with research and development activities,
other than certain software development costs that are capitalized, and
selling, general and administrative expenses are charged to operations as
incurred.
SOFTWARE DEVELOPMENT COSTS - Software development costs are capitalized
upon the establishment of technological feasibility and are amortized over
the estimated useful life of the software, which to date has been four
years or less. The amounts capitalized for the years ended January 31,
2003, 2004 and 2005 were approximately $13,391,000, $7,759,000 and
$4,198,000, respectively. Amortization begins in the period in which the
related product is available for general release to customers. Amortization
expense amounted to approximately $12,594,000, $15,149,000 and $14,311,000
F-10
for the years ended January 31, 2003, 2004 and 2005, respectively. In
addition, during the year ended January 31, 2005, the Company recorded
write-downs of approximately $5,049,000 of capitalized software development
costs to its estimated net realizable value, primarily as a result of the
Company's transition to its newer product line as well as duplicative
technology that arose as a result of Verint's acquisitions during the
period.
FUNCTIONAL CURRENCY AND FOREIGN CURRENCY TRANSACTION GAINS AND LOSSES - The
United States dollar (the "dollar") is the functional currency of the major
portion of the Company's foreign operations. Most of the Company's sales,
and materials purchased for manufacturing, are denominated in or linked to
the dollar. Certain operating costs, principally salaries, of foreign
operations are denominated in local currencies. In those instances where a
foreign subsidiary has a functional currency other than the dollar, the
Company records any necessary foreign currency translation adjustment,
reflected in stockholders' equity, at the end of each reporting period.
DERIVATIVE FINANCIAL INSTRUMENTS - The Company is exposed to market risk
from changes in foreign currency exchange rates and may, from time to time,
use foreign currency exchange contracts and other derivative instruments to
reduce its exposure to the risk that the eventual net cash inflows and
outflows resulting from the sale of its products in foreign currency,
primarily the Euro, will be adversely affected by changes in exchange
rates. The objective of these contracts is to neutralize the impact of
foreign currency exchange rate movements on the Company's operating
results. These instruments are not designated as hedges and the change in
fair value is included in income currently. As of January 31, 2004 and
2005, the Company had approximately $31,668,000 and $32,583,000,
respectively, of notional amount of foreign exchange forward contracts to
sell Euros with an original maturity of up to six months. The fair value of
these contracts as of January 31, 2004 and 2005 of approximately $(183,000)
and $(66,000), respectively, is included in `Interest and other income,
net' in the Consolidated Statements of Operations.
GOODWILL AND OTHER INTANGIBLE ASSETS - Goodwill represents the excess of
the purchase price over the fair value of net assets acquired. Other
intangible assets include identifiable acquired software and technology,
trade name, customer relationships, sales backlog and non-compete
agreements. In accordance with the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets", goodwill and certain intangible assets are no longer amortized,
but rather are reviewed for impairment on at least an annual basis. The
Company has performed these reviews and deemed there to be no such
impairment as of January 31, 2004 and 2005. Other intangible assets with
finite lives are amortized using the straight-line method over their
estimated useful lives of up to ten years.
OTHER ASSETS - Licenses of patent rights and acquired "know-how" are
recorded at cost and amortized using the straight-line method over the
estimated useful lives of the related technology, generally not exceeding
four years. Debt issue costs are amortized using the effective interest
method over the term of the related debt.
LONG-LIVED ASSETS - The Company reviews for the impairment of long-lived
assets whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An impairment loss
would be recognized when estimated future undiscounted cash flows expected
to result from the use of the asset and proceeds from its eventual
disposition are less than its carrying amount. Impairment is measured at
fair value. In connection with its restructuring plan, during the years
ended January 31, 2003, 2004 and 2005, the Company identified certain
impairment losses that are included in `Workforce reduction, restructuring
and impairment charges (credits)' in the Consolidated Statements of
Operations. Refer to Note 9 for details. In addition, during the year ended
January 31, 2005, the Company recorded write-downs of approximately
$3,849,000 of fixed assets to its estimated net realizable value, primarily
as a result of the obsolescence of such fixed assets.
F-11
CONCENTRATION OF CREDIT RISK - Financial instruments which potentially
expose the Company to concentration of credit risk, consist primarily of
cash investments and accounts receivable. The Company places its cash
investments with high-credit quality financial institutions and currently
invests primarily in money market funds placed with major banks and
financial institutions, bank time deposits, corporate commercial paper,
ARS, corporate and municipal short and medium term notes, mortgage and
asset backed securities, U.S. government and U.S. government corporation
and agency obligations, mutual funds, trusts and closed-end funds investing
in the like and common and preferred stock. The Company believes no
significant concentration of credit risk exists with respect to these cash
investments.
Accounts receivable are generally diversified due to the large number of
commercial and government entities comprising the Company's customer base
and their dispersion across many geographical regions. As of January 31,
2004 and 2005, there was no single customer balance that comprised 10% of
the overall accounts receivable balance. The Company believes no
significant concentration of credit risk exists with respect to these
accounts receivable.
The Company is required to estimate the collectibility of its accounts
receivable each accounting period and record a reserve for bad debts. A
considerable amount of judgment is required in assessing the realization of
these receivables, including the current creditworthiness of each customer,
current and historical collection history and the related aging of past due
balances. The Company evaluates specific accounts when it becomes aware of
information indicating that a customer may not be able to meet its
financial obligations due to deterioration of its financial condition,
lower credit ratings, bankruptcy or other factors affecting the ability to
render payment. Reserve requirements are based on the facts available and
are re-evaluated and adjusted as additional information is received. The
Company's policy is to account for recoveries of previously reserved for
doubtful accounts upon the receipt of cash where there is no evidence of
recoverability for items specifically reserved for prior to the receipt of
cash.
F-12
The roll forward of the allowance for doubtful accounts is as follows:
YEARS ENDED JANUARY 31,
------------------------------------
2003 2004 2005
---------- ---------- ----------
(IN THOUSANDS)
Balance at beginning of period $ 41,955 $ 56,759 $ 49,958
Charges to costs and expenses 45,300 12,014 7,063
Recoveries - (12,200) (19,425)
Deductions (30,559) (9,072) (7,151)
Other 63 2,457 (503)
---------- ---------- ----------
Balance at end of period $ 56,759 $ 49,958 $ 29,942
========== ========== ==========
The recoveries of approximately $12,200,000 and $19,425,000 for the years
ended January 31, 2004 and 2005, respectively, were recorded as a result of
cash being collected from customers for items that had previously been
reserved for as doubtful of collection, in the period that the cash was
received.
BANK LOANS - In January 2002, Verint took a bank loan in the amount of
$42,000,000. The loan, which matured in February 2003, bore interest at
LIBOR plus 0.55% and was guaranteed by CTI. During February 2003, Verint
repaid the bank loan.
ISSUANCE OF SUBSIDIARY STOCK - Sales of stock by subsidiaries are accounted
for as capital transactions with the adjustment to additional paid-in
capital. No gain or loss is recognized on these transactions.
STOCK-BASED COMPENSATION - At January 31, 2005, the Company had in place
the Comverse Stock Incentive Plans, as fully described in Note 14. 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" ("APB No. 25") 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. Refer to Note 22 for a description of
pending changes to this accounting treatment.
During the years ended January 31, 2004 and 2005, the Company and one of
its subsidiaries granted shares of restricted stock to certain key
employees. For the years ended January 31, 2003, 2004 and 2005,
respectively, stock-based employee compensation expense relating to
restricted stock of approximately $0, $214,000 and $2,097,000 is included
in `Selling, general and administrative' expenses in the Consolidated
Statements of Operations.
The Company estimated the fair value of employee stock options utilizing
the Black-Scholes option valuation model, using the assumptions as
described in Note 14, 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.
F-13
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 SFAS No. 123, "Accounting for Stock-Based
Compensation", to stock-based employee compensation for all periods:
YEAR ENDED JANUARY 31,
----------------------
2003 2004 2005
---- ---- ----
(IN THOUSANDS)
Net income (loss), as reported $ (129,478) $ (5,386) $ 57,330
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (149,782) (122,537) (104,477)
----------- ----------- -----------
Pro forma net loss $ (279,260) $ (127,923) $ (47,147)
=========== =========== ===========
Earnings (loss) per share:
Basic - as reported $ (0.69) $ (0.03) $ 0.29
Basic - pro forma $ (1.49) $ (0.67) $ (0.24)
Diluted - as reported $ (0.69) $ (0.03) $ 0.28
Diluted - pro forma $ (1.49) $ (0.67) $ (0.24)
PERVASIVENESS OF ESTIMATES - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS - Certain prior year amounts have been reclassified to
conform to the manner of presentation in the current year. Refer to the
description under Short-Term Investments found earlier in this Note 2
regarding revisions to the presentation of certain investments in the
consolidated financial statements.
3. RESEARCH AND DEVELOPMENT
A significant portion of the Company's research and development operations
are located in Israel where the Company derives benefits from participation
in conditional 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.
During the year ended January 31, 2003, one of the Company's subsidiaries
finalized an agreement with the OCS whereby the subsidiary agreed to pay a
lump sum royalty of approximately $26 million for all past amounts received
from the OCS. The amount and timing of the payments to the OCS under this
agreement were approximately $3 million in March 2002 and approximately $23
million in June 2002. In addition, this subsidiary began to receive lower
amounts from the OCS than it had historically received, but is not required
to pay royalties on such future grants. Under the terms of the applicable
F-14
funding agreements, 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. In order
to obtain such permission, the Company would 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 transfer
outside of Israel of any intellectual property rights resulting from
research and development activities funded under OCS programs is not
permitted. The amounts reimbursed by the OCS for the years ended January
31, 2003, 2004 and 2005 were approximately $10,540,000, $10,013,000 and
$9,444,000, respectively.
4. SHORT-TERM INVESTMENTS
As previously noted under Short-Term Investments in Note 2, the Company
concluded that it was appropriate to classify investments in ARS as
short-term investments. ARS generally have long-term stated maturities;
however, these investments have characteristics similar to short-term
investments because at pre-determined intervals, generally every 7 to 90
days, there is a new auction process at which these securities are reset to
current interest rates. Previously, such investments had been classified as
cash and cash equivalents due to their liquidity and pricing reset feature.
Accordingly, the Company has revised the classification to report these
securities as short-term investments in the Consolidated Balance Sheets.
The Company classifies all of its short-term investments as
available-for-sale securities. The following is a summary of
available-for-sale securities as of January 31, 2005:
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-----------------------------------------------------------------------
(IN THOUSANDS)
Corporate debt securities $ 6,748 $ 548 $ 8 $ 7,288
U.S. municipal debt securities 10,134 - 45 10,089
U.S. Government corporation
and agency bonds 428,645 - 4,507 424,138
Auction rate securities 1,061,121 - - 1,061,121
-------------- -------------- --------------- ---------------
Total debt securities 1,506,648 548 4,560 1,502,636
-------------- -------------- --------------- ---------------
Common stock and
closed-end funds 12,587 5,242 5 17,824
Mutual funds (1) 1,863 139 - 2,002
Preferred stock 3,468 109 76 3,501
-------------- -------------- --------------- ---------------
Total equity securities 17,918 5,490 81 23,327
-------------- -------------- --------------- ---------------
$ 1,524,566 $ 6,038 $ 4,641 $ 1,525,963
============== ============== =============== ===============
(1) Investing in U.S. Government and U.S. Government corporation and agency
obligations, corporate debt securities, commercial paper and/or
asset-backed securities.
F-15
The following is a summary of available-for-sale securities as of January 31,
2004:
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------------------------------------------------------------------
(IN THOUSANDS)
Corporate debt securities $ 35,573 $ 1,054 $ - $ 36,627
U.S. Government corporation
and agency bonds 309,531 - 1,649 307,882
Auction rate securities 907,932 - - 907,932
-------------- -------------- -------------- --------------
Total debt securities 1,253,036 1,054 1,649 1,252,441
-------------- -------------- -------------- --------------
Common stock and
closed-end funds 27,038 4,951 - 31,989
Mutual funds and trust (1) 286,057 196 - 286,253
Preferred stock 3,518 347 - 3,865
-------------- -------------- -------------- --------------
Total equity securities 316,613 5,494 - 322,107
-------------- -------------- -------------- --------------
$ 1,569,649 $ 6,548 $ 1,649 $ 1,574,548
============== ============== ============== ==============
(1) Investing in U.S. Government and U.S. Government corporation and agency
obligations, corporate debt securities, commercial paper and/or
asset-backed securities.
As of January 31, 2005, the Company held certain investments in U.S.
Government corporation and agency bonds that had been in a continuous
unrealized loss position for 12 months or greater, aggregating to a total
estimated fair value of approximately $196,470,000 and with total gross
unrealized losses of approximately $3,528,000; the Company held no other
significant investments that had been in a continuous unrealized loss
position for 12 months or greater as of January 31, 2005. The Company held
no significant investments that had been in a continuous unrealized loss
position for 12 months or greater as of January 31, 2004. The Company
evaluates investments with unrealized losses to determine if the losses are
other-than-temporary. The gross unrealized losses as of January 31, 2005
are due primarily to changes in interest rates and the Company has
determined that such diminution in value is temporary. In making this
determination, the Company considered its ability to hold the investments
to maturity, the financial condition and near-term prospects of the
issuers, the magnitude of the losses compared to the investments' cost and
the length of time the investments have been in an unrealized loss
position.
During the year ended January 31, 2005, the gross realized gains on sales
of securities totaled approximately $4,163,000, and the gross realized
losses totaled approximately $3,265,000. During the year ended January 31,
2004, the gross realized gains on sales of securities totaled approximately
$5,439,000, and the gross realized losses totaled approximately $1,558,000.
During the year ended January 31, 2003, the gross realized gains on sales
of securities totaled approximately $3,588,000, and the gross realized
losses totaled approximately $13,644,000. The basis on which cost is
generally determined in computing realized gain or loss is by the first-in,
first-out method.
F-16
The cost and estimated fair value of debt securities at January 31, 2005,
by contractual maturity, are as follows; substantially all securities
with maturities after three years are ARS:
ESTIMATED
COST FAIR VALUE
---- ----------
(IN THOUSANDS)
Due in one year or less $ 196,953 $ 196,192
Due after one year through three years 299,095 295,342
Due after three years through five years 23,200 23,200
Due after five years through ten years 30,694 31,196
Due after ten years through twenty years 68,265 68,265
Due after twenty years 888,441 888,441
------------ ------------
$ 1,506,648 $ 1,502,636
============ ============
5. INVENTORIES
Inventories consist of:
JANUARY 31,
-----------
2004 2005
---- ----
(IN THOUSANDS)
Raw materials $ 23,157 $ 34,364
Work in process 12,802 23,640
Finished goods 18,792 49,548
------------ ------------
$ 54,751 $ 107,552
============ ============
6. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of:
JANUARY 31,
-----------
2004 2005
---- ----
(IN THOUSANDS)
Fixtures and equipment $ 300,946 $ 294,867
Land and buildings 22,765 21,942
Software 33,670 35,855
Transportation vehicles 1,293 1,790
Leasehold improvements 14,604 15,553
------------ ------------
373,278 370,007
Less accumulated depreciation
and amortization (248,255) (247,833)
------------ ------------
$ 125,023 $ 122,174
============ ============
F-17
7. OTHER ASSETS
Other assets consist of:
JANUARY 31,
-----------
2004 2005
---- ----
(IN THOUSANDS)
Software development costs, net of
accumulated amortization
of $52,731 and $53,798 $ 32,824 $ 17,662
Investments 35,262 38,672
Other assets 72,649 119,690
------------ ------------
$ 140,735 $ 176,024
============ ============
8. BUSINESS COMBINATIONS
On March 31, 2004, Verint acquired certain assets and assumed certain
liabilities of the government surveillance business of ECtel Ltd.
("ECtel"), which provided Verint with additional communications
interception capabilities for the mass collection and analysis of voice and
data communications. The purchase price was approximately $35,000,000 in
cash. Verint incurred transaction costs, consisting primarily of
professional fees, amounting to approximately $1,107,000 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 Financial Accounting Standards Board ("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 with the assistance of an
independent appraisal specialist 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 Consolidated Statements of Operations.
F-18
The following is a summary of the allocation of the purchase price for this
acquisition:
(IN THOUSANDS)
Purchase price $ 35,000
Acquisition costs 1,107
------------
Total purchase price $ 36,107
============
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 25,054
------------
Total purchase price $ 36,107
============
The value allocated to goodwill in ECtel will be deducted for income tax
purposes. A summary of pro forma results of operations has not been
presented as the effect of this acquisition was not deemed material.
In September 2004, Verint, through a subsidiary, acquired all of the
outstanding stock of RP Sicherheitssysteme GmbH ("RP Security"), a company
in the business of developing and selling mobile digital video security
solutions for transportation applications. The purchase price consisted of
approximately $9,028,000 in cash and 90,144 shares of Verint's common
stock. In addition, the shareholders of RP Security will be entitled to
receive earn-out payments over three years based on Verint's worldwide
sales, profitability and backlog of mobile video products in the
transportation market during that period. Shares issued as part of the
purchase price were accounted for with a value of approximately $2,977,000,
or $33.03 per share. In connection with this acquisition, Verint incurred
transaction costs, consisting primarily of professional fees, amounting to
approximately $520,000.
In May 2003, Verint acquired all of the issued and outstanding shares of
Smartsight Networks Inc. ("Smartsight"), a Canadian corporation that
develops IP-based video edge devices and software for wireless video
transmission. The purchase price consisted of approximately $7,144,000 in
cash and 149,731 shares of Verint common stock, valued at approximately
$3,063,000, or $20.46 per share.
In February 2002, Verint acquired the digital video recording business of
Lanex, LLC ("Lanex"). The Lanex business provides digital video recording
solutions for security and surveillance applications primarily to North
American banks. The purchase price consisted of $9,510,000 in cash and a
$2,200,000 non-interest bearing note, guaranteed by CTI, and convertible in
whole or in part, into shares of Verint's common stock at a conversion
price of $16.06 per share. The note matured and was converted into shares
of Verint common stock on February 1, 2004.
In June 2002, the Company acquired Odigo, Inc. ("Odigo"), a privately-held
provider of instant messaging and presence management solutions to service
providers. The purchase price was approximately $20,100,000 in cash. Prior
to the acquisition, the Company was a strategic partner with Odigo, holding
an equity position which it previously acquired for approximately
$3,000,000.
The RP Security, Smartsight, Lanex and Odigo acquisitions were accounted
for using the purchase method and, accordingly, the Consolidated Statements
of Operations include the results of operations from the date of
acquisition. Assets acquired and liabilities assumed were recorded at
estimated fair values as determined by the Company's management based on
F-19
information then available and through the assistance of independent
appraisal specialists, where applicable. After allocating the purchase
price, including the direct costs of the acquisition, to net tangible and
identifiable intangible assets, any excess of cost over fair value of net
assets acquired was recorded as goodwill, included in `Other assets' in the
Consolidated Balance Sheets. A summary of the assets acquired and
liabilities assumed in these acquisitions as well as pro forma results of
operations have not been presented because the effects of these
acquisitions were not deemed material.
9. WORKFORCE REDUCTION, RESTRUCTURING AND IMPAIRMENT CHARGES (CREDITS)
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 years ended January 31, 2003, 2004 and 2005, the Company incurred net
charges (credits) to operations of approximately $66,714,000, $(2,123,000)
and $62,000, respectively, 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.
An analysis of the total charges of approximately $66,714,000 incurred
during the year ended January 31, 2003 as well as a rollforward of the
workforce reduction and restructuring accrual for that period is as
follows:
WORKFORCE
REDUCTION, ACCRUAL
ACCRUAL BALANCE RESTRUCTURING & BALANCE AT
AT FEBRUARY 1, IMPAIRMENT CASH NON-CASH JANUARY 31,
2002 CHARGES PAYMENTS CHARGES 2003
---- ------- -------- ------- ----
(IN THOUSANDS)
Severance and related $ 11,862 $ 26,857 $ 29,352 $ - $ 9,367
Facilities and related 24,347 19,360 3,253 - 40,454
Property and equipment - 20,497 - 20,497 -
------------- ----------- ----------- ----------- -------------
Total $ 36,209 $ 66,714 $ 32,605 $ 20,497 $ 49,821
============= =========== =========== =========== =============
An analysis of the net credit of approximately $2,123,000 incurred during
the year ended January 31, 2004 as well as a rollforward of the workforce
reduction and restructuring accrual for that period is as follows:
WORKFORCE
REDUCTION,
RESTRUCTURING & ACCRUAL
ACCRUAL BALANCE IMPAIRMENT BALANCE AT
AT FEBRUARY 1, CHARGES CASH NON-CASH JANUARY 31,
2003 (CREDITS) PAYMENTS CHARGES 2004
---- --------- -------- ------- ----
(IN THOUSANDS)
Severance and related $ 9,367 $ 4,494 $ 10,793 $ - $ 3,068
Facilities and related 40,454 (8,051) 5,976 - 26,427
Property and equipment - 1,434 - 1,434 -
------------- ----------- ----------- ----------- -------------
Total $ 49,821 $ (2,123) $ 16,769 $ 1,434 $ 29,495
============= =========== =========== =========== =============
F-20
An analysis of the net charge of approximately $62,000 incurred during the
year ended January 31, 2005 as well as a rollforward of the workforce
reduction and restructuring accrual for that period is as follows:
WORKFORCE
REDUCTION,
RESTRUCTURING & ACCRUAL
ACCRUAL BALANCE IMPAIRMENT BALANCE AT
AT FEBRUARY 1, CHARGES CASH NON-CASH JANUARY 31,
2004 (CREDITS) PAYMENTS CHARGES 2005
---- --------- -------- ------- ----
(IN THOUSANDS)
Severance and related $ 3,068 $ 596 $ 3,543 $ - $ 121
Facilities and related 26,427 (743) 4,202 - 21,482
Property and equipment - 209 - 209 -
------------- ----------- ----------- ----------- -------------
Total $ 29,495 $ 62 $ 7,745 $ 209 $ 21,603
============= =========== =========== =========== =============
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 through
July 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. During the years ended January 31, 2004 and 2005, the
Company reversed approximately $8,051,000 and $743,000, respectively, in
previously taken restructuring charges for facilities and related costs,
primarily as a result of the sublet of a portion of the excess facilities.
The balance of these facilities and related costs is expected to be paid at
various dates through January 2011.
Property and equipment costs consist primarily of the write-down of various
assets to their current estimable fair value, including the value of
certain unimproved land in Israel, written down during the year ended
January 31, 2003, that the Company had acquired with a view to the future
construction of facilities for its Israeli operations.
10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of:
JANUARY 31,
-----------
2004 2005
---- ----
(IN THOUSANDS)
Accounts payable $ 67,110 $ 84,875
Accrued compensation 37,088 55,951
Accrued vacation 21,704 24,352
Accrued royalties 7,704 9,976
Accrued workforce reduction and restructuring 29,495 21,603
Accrued warranty 8,333 10,185
Other accrued expenses 57,862 84,063
------------ ------------
$ 229,296 $ 291,005
============ ============
F-21
11. CONVERTIBLE DEBT
In May 2003, the Company issued $420,000,000 aggregate principal amount of
Zero Yield Puttable Securities ("ZYPS") (the "Existing ZYPS"). On January
26, 2005, the Company completed an offer to the holders of the outstanding
Existing ZYPS to exchange the Existing ZYPS for new ZYPS (the "New ZYPS").
Of the $420,000,000 worth of Existing ZYPS outstanding prior to the
exchange offer, approximately $417,700,000 aggregate principal amount
representing approximately 99.5% of the original issue of Existing ZYPS
were validly tendered in exchange for an equal principal amount of New
ZYPS. In connection with this offer, the Company incurred transaction
costs, consisting primarily of professional fees, amounting to
approximately $903,000 included in `Selling, general and administrative'
expenses in the Consolidated Statements of Operations.
Both the Existing ZYPS and the New ZYPS have a conversion price of $17.97
per share. The ability of the holders to convert either the Existing ZYPS
or New 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 twenty days in the 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 Existing ZYPS or New ZYPS for that ten trading-day period was
less than 105% of the average conversion value for the Existing ZYPS or New
ZYPS during that period; (iii) during any period, if following the date on
which the credit rating assigned to the Existing ZYPS or New ZYPS by
Standard & Poor's Rating Services is lower than "B-" or upon the withdrawal
or suspension of the Existing ZYPS or New ZYPS rating at the Company's
request; (iv) if the Company calls the Existing ZYPS or New ZYPS for
redemption; or (v) upon other specified corporate transactions. Both the
Existing ZYPS and the New ZYPS mature on May 15, 2023. In addition, the
Company has the right to redeem the Existing 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, at par, all or a portion of the Existing ZYPS on each of May 15
of 2008, 2013, and 2018 and upon the occurrence of certain events. The
Existing ZYPS holders may require the Company to repurchase the Existing
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 New ZYPS have substantially similar terms as the Existing ZYPS, except
that the New ZYPS (i) have a net share settlement feature, (ii) allow the
Company to redeem some or all of the New ZYPS at any time on or after May
15, 2009 (rather than May 15, 2008 as provided for in the Existing ZYPS)
and (iii) allow the holders of the New ZYPS to require the Company to
repurchase their New ZYPS for cash on each of May 15, 2008, 2009, 2013 and
2018. The net share settlement feature of the New ZYPS provides that, upon
conversion, the Company would pay to the holder cash equal to the lesser of
the conversion value and the principal amount of the New ZYPS being
converted, which is currently $417,700,000, and would issue to the holder
the remainder of the conversion value in excess of the principal amount, if
any, in shares of the Company's common stock (the "New Conversion Method").
The offer followed the September 30, 2004 conclusion by the Emerging Issues
Task Force ("EITF") of the FASB on EITF Issue No. 04-8, "The Effect of
Contingently Convertible Debt on Diluted Earnings Per Share" ("EITF 04-8")
requiring contingently convertible debt to be included in diluted earnings
per share computations (if dilutive) as if the notes were converted into
common shares at the time of issuance (the "if converted" method)
regardless of whether market price triggers or other contingent features
have been met. EITF 04-8 was effective for reporting periods ending after
December 15, 2004. Because these recent accounting changes would have
required the Company to include the shares of common stock underlying the
Existing ZYPS in its diluted earnings per share computations, pursuant to
the exchange offer, the Company offered to the Existing ZYPS holders, New
ZYPS convertible under the New Conversion Method.
F-22
Under EITF 04-8, the Company is not required to include any shares issuable
upon conversion of the New ZYPS issued in the exchange offer in its diluted
shares outstanding unless the market price of the Company's common stock
exceeds the conversion price, and would then only have to include that
number of shares as would then be issuable based upon the in-the-money
value of the conversion rights under the New ZYPS. Therefore, the New ZYPS
are dilutive in calculating diluted earnings per share if the Company's
common stock is trading above $17.97 to the extent of the number of shares
the Company would be required to issue to satisfy a conversion right of the
New ZYPS over and above $417,700,000. For the year ended January 31, 2005,
this resulted in approximately 1,610,000 of additional share dilution in
calculating diluted earnings per share. The Existing ZYPS are immediately
dilutive in calculating diluted earnings per share to the extent of the
full number of shares underlying the Existing ZYPS, which as of January 31,
2005 is 128,516 shares. These shares are deemed to be outstanding for the
purpose of calculating diluted earnings per share, whether or not the
Existing ZYPS may be converted pursuant to their terms, and therefore
decreases the Company's diluted earnings per share. The adoption of EITF
04-8 did not have an effect on reported diluted earnings (loss) per share
for any periods presented.
During the fourth quarter of fiscal year 2004, the closing price per share
on at least 20 trading days in the 30 consecutive trading-day period ending
on January 31, 2005 was more than 120% of the conversion price per share
for both the Existing ZYPS and New ZYPS. As such, a conversion privilege
for both the Existing ZYPS and the New ZYPS was triggered and both the
Existing ZYPS and New ZYPS were convertible into cash and/or the Company's
common stock at the option of the holders for the first fiscal quarter of
2005.
In November and December 2000, the Company issued $600,000,000 aggregate
principal amount of its 1.50% convertible senior debentures due December
2005 (the "Debentures"). The Debentures are unsecured senior obligations of
the Company ranking equally with all of the Company's 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 years ended January 31, 2003, 2004 and 2005, the Company
acquired, in open market purchases, $209,162,000, $266,115,000 and
$37,470,000 of face amount of the Debentures, respectively, resulting in
pre-tax gains, net of debt issuance costs, of approximately $39,374,000,
$10,224,000 and $341,000, respectively, included in `Interest and other
income, net' in the Consolidated Statements of Operations. As of January
31, 2005, the Company had outstanding Debentures of $87,253,000, included
in the current liabilities section of the Consolidated Balance Sheets.
12. LIABILITY FOR SEVERANCE PAY
Liability for severance pay consists primarily of the Company's unfunded
liability for severance pay to employees of certain foreign subsidiaries
and accrued severance to the Company's chief executive officer.
Under Israeli law, the Company is obligated to make severance payments to
employees of its Israeli subsidiaries on the basis of each individual's
current salary and length of employment. These liabilities are currently
provided primarily by premiums paid by the Company to insurance providers.
F-23
The Company is obligated under agreements with its chief executive officer
("CEO") and chief financial officer ("CFO") to provide a severance payment
upon the termination of their employment with the Company. Approximately
$3,480,000 and $220,000 has been accrued as of January 31, 2004,
respectively, and approximately $4,010,000 and $266,000 has been accrued as
of January 31, 2005, respectively, relating to these agreements with the
CEO and CFO.
13. ISSUANCE OF SUBSIDIARY STOCK
In April and October 2000, Ulticom issued shares of its common stock in
public offerings. As of January 31, 2005, the Company's ownership interest
in Ulticom was approximately 68.6%.
In May 2002, Verint issued 4,500,000 shares of its common stock in an
initial public offering. Proceeds from the offering, based on the offering
price of $16.00 per share, totaled approximately $65.4 million, net of
offering expenses. The Company recorded a gain of approximately $48.1
million during the year ended January 31, 2003, which was recorded as an
increase in stockholders' equity as a result of the issuance.
In June 2003, Verint completed a public offering of 5,750,000 shares of its
common stock at a price of $23.00 per share. The shares offered included
149,731 shares issued to Smartsight's former shareholders in connection
with its acquisition. The proceeds of the offering were approximately
$122.2 million, net of offering expenses. The Company recorded a gain of
approximately $62.9 million, which was recorded as an increase in
stockholders' equity as a result of the issuance. As of January 31, 2005,
the Company's ownership interest in Verint was approximately 58.9%.
In February 2004, Starhome B.V. ("Starhome"), a subsidiary of CTI, received
equity financing from an unaffiliated investor group of approximately
$14,481,000, net of expenses. The Company recorded a gain of approximately
$11,767,000, which was recorded as an increase in stockholders' equity as a
result of the issuance. Upon the completion of this transaction, the
Company's ownership interest in Starhome was approximately 69.5%; this
interest was unchanged as of January 31, 2005. In addition, during the year
ended January 31, 2005, Starhome received a commitment for an additional
$5,000,000 in equity financing from the unaffiliated investor group, which
funds are currently being held in escrow.
14. STOCK-BASED COMPENSATION
OPTION EXCHANGE PROGRAM - In May 2002, the Company announced the
commencement of a voluntary stock option exchange program for its eligible
employees. Under the program, which was approved by the Company's
shareholders, participating employees were given the opportunity to have
unexercised stock options previously granted to them cancelled, in exchange
for replacement options that were granted at a future date. Replacement
options were granted at a ratio of 0.85 new options for each existing
option cancelled, at an exercise price equal to the fair market value of
the Company's stock on the date of the re-grant. The exchange program was
designed in accordance with FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation (an interpretation of APB
Opinion No. 25)", under which, the grant of replacement options not less
than six months and one day after cancellation will not result in any
variable compensation charges relating to these options.
On the date of re-grant, December 23, 2002, replacement options to acquire
14,208,987 shares of the Company's common stock were granted at an exercise
price of $10.52 per share, the closing fair market value of the Company's
stock on that date.
STOCK OPTIONS - At January 31, 2005, 22,603,387 shares of common stock were
reserved for issuance upon the exercise of stock options then outstanding
and 4,333,276 shares were available for future grant under Comverse's Stock
Incentive Plans, under which options and restricted stock may be granted to
key employees, directors, and other persons rendering services to the
Company. Options which are designated as "incentive stock options" under
F-24
the plans may be granted with an exercise price not less than the fair
market value of the underlying shares at the date of grant and are subject
to certain quantity and other limitations specified in Section 422 of the
Internal Revenue Code. Options which are not intended to qualify as
incentive stock options may be granted at a price below fair market value.
The options and the underlying shares are subject to adjustment in
accordance with the terms of the plans in the event of stock dividends,
recapitalizations and similar transactions. The right to exercise the
options generally vests in increments over periods of up to four years from
the date of grant or the date of commencement of the grantee's employment
with the Company, up to a maximum term of ten years for all options
granted.
The changes in the number of options were as follows:
YEAR ENDED JANUARY 31,
-------------------------------------------------------
2003 2004 2005
---- ---- ----
Outstanding at beginning of period 33,089,823 25,079,827 23,287,332
Granted during the period 15,851,028 5,297,836 3,764,790
Exercised during the period (530,661) (5,770,041) (3,446,981)
Canceled, terminated and expired (23,330,363) (1,320,290) (1,001,754)
---------------- --------------- ----------------
Outstanding at end of period 25,079,827 23,287,332 22,603,387
================ =============== ================
At January 31, 2005, options to purchase an aggregate of 13,936,807
shares were vested and currently exercisable under the plans and options
to purchase an additional 8,666,580 shares vest at various dates
extending through the year 2008.
Weighted average option exercise price information was as follows:
YEAR ENDED JANUARY 31,
---------------------------------------------------
2003 2004 2005
---- ---- ----
Outstanding at beginning of period $38.24 $12.73 $14.09
Granted during the period 10.30 16.56 22.17
Exercised during the period 7.87 9.56 10.95
Canceled, terminated and expired 47.42 18.08 25.20
Outstanding at end of period 12.73 14.09 15.42
Exercisable at end of period 15.24 13.84 13.81
F-25
Significant option groups outstanding at January 31, 2005 and related
weighted average price and life information were as follows:
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
---------------------- --------------- -------------- -------------- --------------- -------------
$0.01 - 10.42 3,967,964 3.80 $9.58 3,623,404 $9.82
$10.52 8,113,518 5.78 10.52 7,250,345 10.52
$10.95 - 16.05 1,640,881 5.92 15.04 1,258,041 14.92
$16.70 4,468,968 8.87 16.70 1,104,511 16.70
$17.60 - 25.00 3,867,864 9.63 22.12 156,611 20.00
$25.49 - 119.69 544,192 4.47 73.96 543,895 73.97
--------------- -------------- -------------- --------------- -------------
22,603,387 6.68 $15.42 13,936,807 $13.81
=============== ===============
The weighted average fair value of the options granted for the years ended
January 31, 2003, 2004 and 2005, respectively, is estimated at $4.66, $9.88
and $12.98 on the date of grant (using the Black-Scholes option pricing
model) with the following weighted average assumptions for the years ended
January 31, 2003, 2004 and 2005, respectively: volatility of 75%, 73% and
70%; risk-free interest rate of 1.8%, 3.2% and 3.6%; and an expected life
of 2.6, 4.6 and 4.6 years.
OPTIONS ON SUBSIDIARY SHARES - The Company has granted options to certain
employees to acquire shares of certain subsidiaries, other than Comverse,
Inc. Such option issuances are not tied to the performance of the
subsidiaries, but are intended to incentivize employees in the units for
which they have direct responsibility. Options outstanding for each
subsidiary do not exceed 20% of the shares outstanding of such subsidiary
assuming exercise in full. The options have terms of up to 15 years and
become exercisable and vest over various periods ranging up to seven years
from the date of initial grant. The exercise price of each option is equal
to the higher of the book value of the underlying shares at the date of
grant or the fair market value of such shares at that date determined on
the basis of an arms'-length transaction with a third party or, if no such
transactions have occurred, on a reasonable basis as determined by a
committee of the Board of Directors.
RESTRICTED STOCK - In December 2003 and 2004, CTI granted 314,300 and
327,100 shares of restricted stock, respectively, to certain key employees
of the Company. Unearned stock compensation of approximately $5,249,000 and
$7,541,000, respectively, was recorded based on the fair market value of
the Company's common stock at the date of grant. Unearned stock
compensation is shown as a separate component of stockholders' equity and
is being amortized to expense pro-rata over the four year vesting period of
the restricted stock. Amortization of unearned stock compensation for the
years ended January 31, 2004 and 2005 was approximately $157,000 and
$1,596,000, respectively, and was included in `Selling, general and
administrative' expenses in the Consolidated Statements of Operations. The
restricted stock has all the rights and privileges of the Company's common
stock, subject to certain restrictions and forfeiture provisions. At
January 31, 2005, a total of 641,400 shares of restricted stock had been
granted and all were subject to restriction.
In December 2003 and 2004, Verint granted shares of its common stock as
restricted stock to certain of its key employees. Unearned stock
compensation of approximately $1,672,000 and $2,281,000, respectively, was
recorded based on the fair market value of its common stock at the date of
grant and is being amortized to expense pro-rata over the four year vesting
period of the restricted stock. Amortization of unearned stock compensation
for the years ended January 31, 2004 and 2005 was approximately $57,000 and
$501,000, respectively, and was included in `Selling, general and
administrative' expenses in the Consolidated Statements of Operations.
F-26
15. EMPLOYEE STOCK PURCHASE PLANS
Under Comverse's Employee Stock Purchase Plans (the "Plans"), all employees
who have completed three months of employment are entitled, through payroll
deductions of amounts up to 10% of their base salary, to purchase shares of
the Company's common stock at 85% of the lesser of the market price at the
offering commencement date or the offering termination date. The total
number of shares available under Comverse's Employee Stock Purchase Plans
is 5,000,000, of which approximately 3,456,000 had been issued as of
January 31, 2005. CTI has terminated the Plans effective April 1, 2005.
16. EARNINGS PER SHARE ("EPS")
Basic earnings (loss) per share is determined by using the weighted average
number of shares of common stock outstanding during each period. 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 years ended January 31, 2003, 2004 and 2005 was as
follows:
JANUARY 31, 2003 JANUARY 31, 2004 JANUARY 31, 2005
---------------- ---------------- ----------------
Per Per Per
Share Net Share Net Share
Net Loss Shares Amount Loss Shares Amount Income Shares Amount
-------- ------ ------ ---- ------ ------ ------ ------ ------
(In thousands, except per share data)
BASIC EPS
- ---------
Net Income (loss) $(129,478) 187,212 $(0.69) $(5,386) 190,351 $(0.03) $57,330 196,033 $0.29
======= ======= ======
EFFECT OF DILUTIVE
SECURITIES
- ----------
New and Existing ZYPS 1,739
Options 6,668
Restricted Stock 364
Subsidiary options (953)
------------------------------- ------------------------------- -------------------------------
DILUTED EPS $(129,478) 187,212 $(0.69) $(5,386) 190,351 $(0.03) $56,377 204,804 $0.28
========== ======= ======= ======== ======== ======= ======== ======== ======
The diluted loss per share computation for the years ended January 31, 2003
and 2004 excludes incremental shares of approximately 632,000 and
5,466,000, respectively, primarily related to employee stock options. These
shares are excluded due to their antidilutive effect as a result of the
Company's loss during these periods. The shares issuable upon the
conversion of 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. Refer to Note 11 for a description of
EITF 04-8 and the impact of adoption on the Company's diluted earnings per
share calculation for the New ZYPS and the Existing ZYPS. For the year
ended January 31, 2005, the adoption of EITF 04-8 resulted in approximately
1,739,000 (comprised of approximately 1,610,000 for New ZYPS and
approximately 129,000 for Existing ZYPS) of additional share dilution in
calculating diluted earnings per share. The adoption of EITF 04-8 did not
have an effect on reported diluted earnings (loss) per share for any
periods presented.
F-27
17. INTEREST AND OTHER INCOME, NET
Interest and other income, net, consists of the following:
YEAR ENDED JANUARY 31,
----------------------
2003 2004 2005
---- ---- ----
(IN THOUSANDS)
Interest and dividend income $ 45,171 $ 32,441 $ 38,941
Interest expense (11,552) (6,980) (4,030)
Investment gains (losses), net (41,666) (1,240) 615
Foreign currency gains, net 27,752 4,938 2,757
Gain on repurchase of Debentures 39,374 10,224 341
Other, net (177) (425) (2,401)
----------- ----------- -----------
$ 58,902 $ 38,958 $ 36,223
=========== =========== ===========
18. INCOME TAXES
The provision for income taxes consists of the following:
YEAR ENDED JANUARY 31,
----------------------
2003 2004 2005
---- ---- ----
(IN THOUSANDS)
Current provision:
Federal $ - $ 1,782 $ 6,470
State 886 1,662 2,482
Foreign 2,257 3,744 3,497
----------- ----------- -----------
3,143 7,188 12,449
----------- ----------- -----------
Deferred provision:
Federal (956) - 143
State (20) - 54
Foreign 1,127 1,018 568
----------- ----------- -----------
151 1,018 765
----------- ----------- -----------
$ 3,294 $ 8,206 $ 13,214
=========== =========== ===========
F-28
The reconciliation of the U.S. Federal statutory tax rate to the Company's
effective tax rate is as follows:
YEAR ENDED JANUARY 31,
----------------------
2003 2004 2005
---- ---- ----
U.S. Federal statutory rate 35% 35% 35%
Consolidated worldwide income
(in excess of) less than U.S. income (38) 46 (23)
Foreign income taxes (benefit) 2 (7) 2
Permanent differences (2) 22 2
------------- ------------- -------------
Company's effective tax rate (3)% 96% 16%
============= ============= =============
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes
and (b) operating loss carryforwards. The tax effects of significant items
comprising the Company's deferred tax asset and liability at January 31,
2004 and 2005 is as follows:
JANUARY 31,
2004 2005
---- ----
(IN THOUSANDS)
Deferred tax liability:
Expenses deductible for tax purposes and
not for financial reporting purposes $ 4,169 $ 1,289
============ ===========
Deferred tax asset:
Reserves not currently deductible $ 28,230 $ 26,641
Tax loss carryforwards 280,247 277,624
Inventory capitalization 57 60
------------ -----------
308,534 304,325
Less: valuation allowance (297,740) (288,897)
------------ -----------
Total deferred tax asset $ 10,794 $ 15,428
============ ===========
At January 31, 2005, the Company had net operating loss carryforwards for
Federal income tax purposes of approximately $731.0 million which will
begin to expire in 2019.
Income tax has not been provided on unrepatriated earnings of foreign
subsidiaries as currently it is the intention of the Company to reinvest
such foreign earnings in their operations.
F-29
19. 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
security and business intelligence. The software generates actionable
intelligence through the collection, retention and analysis of unstructured
information contained in voice, fax, video, email, Internet and data
transmissions from voice, video and IP 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.
Depreciation and Amortization - corporate operations.
Total Assets - elimination of intersegment receivables and unallocated
corporate assets.
F-30
The table below presents information about sales, income (loss) from
operations, depreciation and amortization, significant non-cash items
consisting of operating asset write-downs and impairments, and total assets
as of and for the years ended January 31, 2003, 2004 and 2005:
Service Security and
Comverse Enabling Business
Network Signaling Intelligence Reconciling Consolidated
Systems Software Recording All Other Items Totals
----------------------------------------------------------------------------------------------------------
(In thousands)
YEAR ENDED
JANUARY 31, 2003
- ----------------
Sales $542,984 $29,231 $157,775 $9,602 $ (3,703) $735,889
Income (Loss) from
Operations (179,492) (8,362) 10,051 (615) (4,323) (182,741)
Depreciation and
Amortization 53,166 2,502 9,407 506 1,774 67,355
Significant Non-Cash
Items 26,315 130 - - - 26,445
Total Assets 989,357 237,102 207,050 32,706 937,444 2,403,659
YEAR ENDED
JANUARY 31, 2004
- ----------------
Sales 529,597 38,378 192,744 9,983 (4,810) 765,892
Income (Loss) from
Operations (40,913) 2,824 17,189 (1,152) (8,326) (30,378)
Depreciation and
Amortization 57,619 1,933 10,069 511 1,639 71,771
Significant Non-Cash
Items 6,170 - 514 - - 6,684
Total Assets 843,340 242,817 328,706 34,265 1,278,914 2,728,042
YEAR ENDED
JANUARY 31, 2005
- ----------------
Sales 642,692 63,436 249,824 10,132 (6,642) 959,442
Income (Loss) from
Operations 20,550 20,566 17,384 (788) (10,779) 46,933
Depreciation and
Amortization 50,341 1,322 12,903 351 1,775 66,692
Significant Non-Cash
Items 7,507 - 6,174 - - 13,681
Total Assets 1,011,272 271,992 398,978 39,219 1,203,825 2,925,286
F-31
Sales by country, based on end-user location, as a percentage of total
sales, for the years ended January 31, 2003, 2004 and 2005 were as follows:
JANUARY 31,
-----------
2003 2004 2005
---- ---- ----
United States 35% 34% 31%
Foreign 65 66 69
------- ------- -------
Total 100% 100% 100%
======= ======= =======
No customer accounted for 10% or more of sales for the years ended January
31, 2003, 2004 or 2005.
Long-lived assets by country of domicile consist of:
JANUARY 31,
-----------
2004 2005
---- ----
(IN THOUSANDS)
United States $ 70,317 $ 69,006
Israel 123,454 113,337
Other 11,162 13,122
--------- ----------
$204,933 $ 195,465
========= ==========
20. COMMITMENTS AND CONTINGENCIES
LEASES - The Company leases office, manufacturing, and warehouse space
under non-cancelable operating leases. Rent expense for all leased premises
approximated $36,032,000, $31,616,000 and $33,279,000 in the years ended
January 31, 2003, 2004 and 2005, respectively.
As of January 31, 2005, the minimum annual rent obligations of the Company
were approximately as follows:
TWELVE MONTHS ENDED
JANUARY 31, AMOUNT
----------- ------
(IN THOUSANDS)
2006 $ 28,616
2007 24,366
2008 21,221
2009 11,053
2010 and thereafter 32,767
--------------
$ 118,023
==============
F-32
The Company has entered into various sub-lease agreements to rent out
excess space. As of January 31, 2005, the minimum annual sub-lease income
obligation to the Company under such agreements was approximately
$1,217,000, $1,008,000, $1,008,000, $960,000 and $252,000 for the twelve
months ending January 31, 2006, 2007, 2008, 2009 and 2010 and thereafter,
respectively, for a total of approximately $4,445,000.
EMPLOYMENT AGREEMENTS - The Company is obligated under employment contracts
with Kobi Alexander, its Chairman and Chief Executive Officer, to provide
compensation, severance, insurance and fringe benefits through February 1,
2007. Minimum salary payments under the contracts currently amount to
$672,000 per year. Mr. Alexander also is eligible to receive an annual cash
bonus determined by specific quantitative targets established in advance by
the Compensation Committee of the Board of Directors. Following termination
of his employment with the Company the executive is entitled to receive a
severance payment equal to $181,585 times the number of years from January
1983, the amount of which payment increases at the rate of 10% per annum
compounded for each year of employment following December 31, 2005, plus
continued fringe benefits for three years. In addition to the severance
payment, if the executive's employment is terminated by the Company without
"cause", or by the executive for "good reason", the executive is entitled
to his salary and pro-rata bonus through the date of termination plus three
times the executive's annual salary and three times his annual bonus. If
such termination occurs within three months before or within two years
following a change in control of the Company, the executive is additionally
entitled to the accelerated vesting of all stock options and restricted
stock, and payments sufficient to reimburse any associated excise tax
liability and income tax resulting from such reimbursement. Stock options
and restricted stock granted the executive become fully vested, exercisable
and nonforfeitable in the event of the executive's death or disability.
Insurance benefits include life insurance providing cumulative death
benefits of approximately $30,000,000, including amounts provided under an
arrangement through which the Company is to be reimbursed premiums from the
benefit payments or cash surrender value.
The Company is obligated under an employment contract with David Kreinberg,
its Executive Vice President and Chief Financial Officer, to provide
compensation, severance, insurance and fringe benefits through February 1,
2007. Minimum salary payments under the contract currently amount to
$325,000 per year. Mr. Kreinberg also is eligible to receive an annual cash
bonus determined by specific quantitative targets established in advance by
the Compensation Committee of the Board of Directors. Following termination
of his employment with the Company the executive is entitled to receive a
severance payment equal to $24,200 times the number of years from and
including 1994, the first year of his employment with the Company, the
amount of which payment increases at the rate of 10% per annum compounded
for each year of employment following January 31, 2005, plus continued
fringe benefits for eighteen months. In addition to the severance payment,
if the executive's employment is terminated by the Company without "cause",
or by the executive for "good reason", the executive is entitled to his
salary and pro-rata bonus through the date of termination plus one year of
additional annual salary and bonus. If such termination occurs within three
months before or within two years following a change in control of the
Company, the executive is entitled to his salary and pro-rata bonus through
the date of termination plus three times the executive's annual salary and
three times his annual bonus, the accelerated vesting of all stock options
and restricted stock, and payments sufficient to reimburse any associated
excise tax liability and income tax resulting from such reimbursement.
Stock options and restricted stock granted the executive become fully
vested, exercisable and nonforfeitable in the event of the executive's
death or disability. Insurance benefits include life insurance providing
cumulative death benefits of approximately $17,500,000, including amounts
provided under an arrangement through which the Company is to be reimbursed
premiums from the benefit payments or cash surrender value.
The Company is obligated under an agreement with Zeev Bregman, the Chief
Executive Officer of one of its subsidiaries, to provide compensation and
fringe benefits through February 1, 2007. Minimum salary payments under the
agreement amount to approximately $275,000 per year. Mr. Bregman also is
eligible to receive an annual cash bonus determined by specific
quantitative targets established in advance by the Compensation Committee
of the Board of Directors. Following termination of his employment with the
Company the executive is entitled to continued fringe benefits for eighteen
months. If the executive's employment is terminated by the Company without
"cause", or by the executive for "good reason", the executive is entitled
F-33
to his salary and pro-rata bonus through the date of termination plus one
year of additional annual salary and bonus. If such termination occurs
within three months before or within two years following a change in
control of the Company, the executive is entitled to his salary and
pro-rata bonus through the date of termination plus three times the
executive's annual salary and three times his annual bonus, the accelerated
vesting of all stock options and restricted stock. Stock options and
restricted stock granted the executive become fully vested, exercisable and
nonforfeitable in the event of the executive's death or disability.
Most other employment agreements of the Company are terminable with or
without cause with prior notice of 90 days or less. In certain instances,
the termination of employment agreements without cause entitles the
employees to certain benefits, including severance payments of as much as
one year's compensation.
LICENSES AND ROYALTIES - The Company licenses certain technology,
"know-how" and related rights for use in the manufacture and marketing of
its products, and pays royalties to third parties, typically ranging up to
6% of net sales of the related products, under such licenses and under
other agreements entered into in connection with research and development
financing, including projects partially funded by 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 in varying amounts
based upon the revenues attributed to the various components of such
products. Royalties due to the OCS in respect of research and development
projects are required to be paid until the OCS has received total royalties
up to the amounts received by the Company under the approved project
budgets, plus interest in certain circumstances. As of January 31, 2005,
such subsidiaries had received approximately $57,700,000 in cumulative
grants from the OCS, and have recorded approximately $26,700,000 in
cumulative royalties to the OCS.
DIVIDEND RESTRICTIONS - The ability of CTI's Israeli subsidiaries to pay
dividends is governed by Israeli law, which provides that dividends may be
paid by an Israeli corporation only out of its earnings as defined in
accordance with the Israeli Companies Law of 1999, provided that there is
no reasonable concern that such payment will cause such subsidiary to fail
to meet its current and expected liabilities as they come due. In the event
of a devaluation of the Israeli currency against the dollar, the amount in
dollars available for payment of cash dividends out of prior years'
earnings will decrease accordingly. Cash dividends paid by an Israeli
corporation to United States resident corporate parents are subject to the
Convention for the Avoidance of Double Taxation between Israel and the
United States. Under the terms of the Convention, such dividends are
subject to taxation by both Israel and the United States and, in the case
of Israel, such dividends out of income derived in respect of a period for
which an Israeli company is entitled to the reduced tax rate applicable to
an Approved Enterprise are generally subject to withholding of Israeli
income tax at source at a rate of 15%. The Israeli company is also subject
to additional Israeli taxes in respect of such dividends, generally equal
to the tax benefits previously granted in respect of the underlying income
by virtue of the Approved Enterprise status.
INVESTMENTS - In 1997, a subsidiary of CTI and Quantum Industrial Holdings
Ltd. organized two new companies to make investments, including investments
in high technology ventures. Each participant committed a total of
$37,500,000 to the capital of the new companies, for use as suitable
investment opportunities are identified. Quantum Industrial Holdings Ltd.
is a member of the Quantum Group of Funds managed by Soros Fund Management
LLC and affiliated management companies. As of January 31, 2004 and 2005,
the Company had invested approximately $26,420,000 and $26,451,000
respectively, related to these ventures, included in `Other assets' in the
Consolidated Balance Sheets. In addition, the Company has committed
approximately $9,807,000 to various funds, ventures and companies which may
be called at the option of the investee.
GUARANTIES - The Company has obtained bank guaranties primarily for the
performance of certain obligations under contracts with customers as well
as for the guarantee of certain payment obligations. These guaranties,
which aggregated approximately $33,884,000 at January 31, 2005 are
generally to be released by the Company's performance of specified contract
milestones, which are scheduled to be completed at various dates primarily
through 2008.
F-34
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 (the "Patents"), and it
subsequently amended the complaint to include Comverse Inc., in an action
captioned: BellSouth Intellectual Property Corp. v. Comverse Technology,
Inc. and Comverse, Inc., Civil Action No. 1:04-CV-0739. BellSouth alleged
that the Patents cover certain aspects of some of the Company's voicemail
systems. The Company retained outside legal counsel specializing in patent
litigation, and filed an Answer and Counterclaim denying all allegations.
On or about December 20, 2004, the Company executed a settlement agreement
with BellSouth and some of its related entities covering the Company and
the Company's customers.
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 pending legal action that could
reasonably be expected to have a material adverse effect on its business,
financial condition and results of operations.
21. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by the Company, using
available market information and appropriate valuation methodologies.
However, considerable judgment is necessarily required in interpreting
market data to develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts
that the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
JANUARY 31,
---------------------------------------------------------------------
2004 2005
---- ----
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------ ---------- ------ ----------
(IN THOUSANDS)
Liabilities:
Debentures $ 124,723 $ 122,229 $ 87,253 $ 85,944
Existing ZYPS $ 420,000 $ 489,300 $ 2,310 $ 3,116
New ZYPS $ - $ - $ 417,690 $ 563,359
CASH AND CASH EQUIVALENTS, BANK TIME DEPOSITS, SHORT-TERM INVESTMENTS,
ACCOUNTS RECEIVABLE, INVESTMENTS, AND ACCOUNTS PAYABLE - The carrying
amounts of these items are a reasonable estimate of their fair value.
CONVERTIBLE DEBT - The fair value of these securities is estimated based on
quoted market prices or recent sales for those securities.
The fair value estimates presented herein are based on pertinent
information available to management as of January 31, 2004 and 2005. Such
amounts have not been comprehensively revalued for purposes of these
financial statements since January 31, 2005, and current estimates of fair
value may differ significantly from the amounts presented herein.
F-35
22. EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
Refer to Note 11 for a description of EITF 04-8 and its impact on the
Company's diluted earnings per share calculation for the New ZYPS and the
Existing ZYPS. For the year ended January 31, 2005, the adoption of EITF
04-8 resulted in approximately 1,739,000 (comprised of approximately
1,610,000 for New ZYPS and approximately 129,000 for Existing ZYPS) of
additional share dilution in calculating diluted earnings per share. The
adoption of EITF 04-8 did not have an effect on reported diluted earnings
(loss) per share for any periods presented.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment", ("SFAS No.123(R)") which revises SFAS No. 123 and supersedes APB
No. 25. SFAS No. 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be valued at fair value on
the date of grant, and to be expensed over the applicable vesting period.
Pro forma disclosure of the income statement effects of share-based
payments is no longer an alternative. SFAS No. 123(R) is effective for
reporting periods beginning after June 15, 2005, which for the Company is
August 1, 2005 (the "Effective Date"). Beginning on the Effective Date, the
Company must (i) expense all options granted after the Effective Date over
the applicable vesting period, and (ii) expense the non-vested portions of
existing option grants going forward over their remaining vesting period.
Compensation expense for the non-vested portions of existing option grants
as of the Effective Date will be recorded based on the fair value of the
awards previously calculated in developing the pro forma disclosures in
accordance with the provisions of SFAS No. 123. Under SFAS No. 123(R), the
Company is required to adopt a fair value-based method for measuring the
compensation expense related to employee stock and stock options awards;
this will lead to substantial additional compensation expense. Any such
expense, although it will not affect the Company's cash flows, will have a
material negative impact on the Company's reported results of operations.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
amendment of ARB No. 43, Chapter 4." SFAS No. 151 clarifies the accounting
for abnormal amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage) by requiring that such items be recognized as
current-period charges regardless of whether they meet the ARB No. 43,
Chapter 4 criterion of "so abnormal." In addition, SFAS No. 151 requires
that allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities. SFAS No. 151 is
effective for inventory costs incurred during fiscal years beginning after
June 15, 2005. The adoption of SFAS No. 151 is not expected to have a
material effect on the Company's consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets - an amendment of APB Opinion No. 29." SFAS No. 153 amends APB No.
29 to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary
exchange has commercial substance if the future cash flows of the entity
are expected to change significantly as a result of the exchange. SFAS No.
153 is effective for reporting periods beginning after June 15, 2005. The
adoption of SFAS No. 153 is not expected to have a material effect on the
Company's consolidated financial statements.
In March 2004, the EITF of the FASB reached a consensus on EITF Issue No.
03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments", which provides additional guidance for assessing
impairment losses on investments. Additionally, EITF 03-1 includes new
disclosure requirements for investments that are deemed to be temporarily
impaired. In September 2004, the FASB delayed the accounting provisions of
EITF 03-1; however the disclosure requirements remain effective for annual
periods ending after June 15, 2004. The Company will evaluate the impact of
EITF 03-1 once final guidance is issued, however the adoption of EITF 03-1
in its current form is not expected to have a material effect on the
Company's consolidated financial statements.
F-36
23. QUARTERLY INFORMATION (UNAUDITED)
The following table shows selected results of operations for each of the
quarters during the years ended January 31, 2004 and 2005:
FISCAL QUARTER ENDED
APRIL 30, JULY 31, OCT. 31, JAN. 31, APRIL 30, JULY 31, OCT. 31, JAN. 31,
2003 2003 2003 2004 2004 2004 2004 2005
---- ---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Sales $ 180,552 $ 188,468 $ 193,843 $ 203,029 $ 221,395 $ 233,427 $ 245,479 $ 259,141
Gross margin 100,179 107,144 111,174 119,835 131,803 140,303 148,543 158,083
Net income (loss) (5,819) (1,058) (3,437) 4,928 7,001 13,327 15,959 21,043
Diluted earnings (loss)
per share $ (0.03) $ (0.01) $ (0.02) $ 0.02 $ 0.03 $ 0.06 $ 0.08 $ 0.10
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F-37