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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 December 31, 1997
Commission File Number 0-15502
COMVERSE TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
New York 13-3238402
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
170 Crossways Park Drive
Woodbury, New York 11797
(Address of principal executive offices)
Registrant's telephone number, including area code: 516-677-7200
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.
Yes:[X] 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]
The aggregate market value of the voting stock held by non-affiliates of
the registrant on March 24 , 1998 was approximately $1,975,000,000. The closing
price of the registrant's common stock on the NASDAQ National Market System on
March 24, 1998 was $47.25 per share.
There were 43,461,824 shares of the registrant's common stock outstanding
on March 24, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant hereby incorporates by reference in this report the
information required by Part III appearing in the registrant's proxy statement
or information statement distributed in connection with the 1998 Annual Meeting
of Shareholders of the registrant or in an amendment to this report on Form
10K/A.
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TRILOGUE and Access NP are registered trademarks and
TRILOGUE INfinity, AUDIODISK, ULTRA, and SignalWare are
trademarks of the Company.
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PART I
ITEM 1. BUSINESS.
INTRODUCTION
Comverse Technology, Inc., a New York corporation ("Comverse" and,
together with its subsidiaries, the "Company"), designs, develops, manufactures,
markets and supports computer and telecommunications systems and software for
multimedia communications and information processing applications. The Company's
products are used in a broad range of applications by fixed and wireless
telephone network operators, government agencies, call centers, financial
institutions and other public and commercial organizations worldwide.
The Company's line of enhanced services platform products enable
telecommunications network operators to offer a variety of revenue-generating
services that are accessible to large numbers of simultaneous users, including a
broad range of integrated messaging, information distribution and personal
assistant services, such as call answering, voice mail, fax mail, unified
messaging, pre-paid services, short text messaging and audiotext. The Company's
Comverse Network Systems ("CNS") Division's principal market consists of
organizations that use the systems to provide services to the public, usually on
a subscription or pay-per-usage basis, and includes both fixed and wireless
telephone network operators and other telecommunications services organizations.
In January 1998, Boston Technology, Inc., a Delaware corporation
("Boston"), merged with and into Comverse in a transaction in which former
shareholders of Boston received an aggregate of 18,141,185, shares of Comverse's
Common Stock, par value $0.10 per share ("Common Stock"). Boston, like the
Company's CNS Division, manufactures multimedia enhanced services platforms for
service provider organizations, including both fixed and wireless telephone
network operators. Boston's enhanced services platforms are similar in features
to those of the Company, but have traditionally been sold to different market
segments, which include, among others, several of the Regional Bell Operating
Companies in the United States and NTT in Japan. Prior to its merger with
Boston, Comverse's marketing efforts were focused primarily on international
network operators, as well as wireless personal communications network operators
in the United States. The business and assets of Boston have been combined with
the CNS Division following the merger of Boston with Comverse (the "Merger").
Except for financial information and as otherwise indicated, discussion of the
business of the Company in this report includes the business of Boston.
The Company markets its enhanced services platforms throughout the world,
with its own direct sales force and in cooperation with a number of leading
international vendors of telecommunications infrastructure equipment. The
Company is the market-share leader in providing large capacity enhanced services
platforms for wireless and wireline telecommunications network operators. More
than 250 fixed and wireless telephone network operators in more than 65
countries, including 13 of the 20 largest telephone companies in the world, have
selected the Company's platforms to provide enhanced telecommunications services
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to their public customers. CNS customers include, among others, AT&T (USA), Bell
Atlantic (USA), BellSouth (USA), Deutsche Telekom (Germany), Hongkong Telecom
(Hong Kong), NTT (Japan), SBC Communications (USA), SFR (France), Sprint PCS
(USA), Telebras (Brazil), Telecom Italia (Italy), Telmex (Mexico) and Telstra
(Australia).
The Company's Comverse Information Systems ("CIS") Division
manufactures multiple channel, multimedia digital monitoring systems, which
support the monitoring, recording, surveillance, and information gathering and
analysis activities of law enforcement and intelligence agencies, and digital
recording systems which support the voice, fax and data recording and analysis
activities of a variety of governmental and commercial organizations. The
Company's monitoring systems enable many simultaneous users to monitor, record
and process voice, image (facsimile) and data communications from multiple
channels in a variety of analog and digital formats, provide facilities for
archiving large volumes of recorded information and allow the use of computer
database processing techniques for analysis, management and retrieval
operations. The systems have been sold to law enforcement, military and
intelligence agencies that monitor and record communication channels for a
variety of purposes, such as surveillance in support of police actions and the
collection and processing of information for intelligence analysis. Customers
such as inbound and outbound call centers, commercial organizations, emergency
service (e.g., "911") providers, correctional facilities, public health and
safety organizations and financial institutions, use the Company's call
recording systems to record and process large volumes of audio, image and data
communications. Traditionally, analog tape recorders, alone or coupled with a
variety of special purpose devices, have been used for these applications. The
worldwide growth in telecommunications traffic in general and digital
communications in particular, and the increasing use of a variety of digital
transmission formats in telecommunications networks, have created a need for
user organizations to modernize their monitoring, recording and processing
capabilities. The Company's systems provide a number of advantages over analog,
tape recorder-based equipment, including improvements in capacity, reliability,
accuracy, processing efficiency and archiving and retrieval capabilities. Most
importantly, the systems enable users to adapt efficiently to the emergence of
new telecommunications technologies, such as digital transmission, Integrated
Services Digital Network ("ISDN") and enhanced signaling systems, for which
analog, tape recorder-based equipment was not designed. CIS Division products
have been sold to end-users in more than 30 countries.
The Company's DGM&S Telecom ("DGM&S") Division provides Signaling
System Number Seven ("SS7") telecommunications software and hardware. DGM&S's
products provide Intelligent Network ("IN") and Advanced Intelligent Network
("AIN") applications for voice, data and mobility communications services such
as 800 number translation, voice mail, Internet routing, short text messaging,
local number portability, cellular roaming and emergency "911" services. DGM&S's
products are marketed to wireline and wireless equipment providers and network
operators to enable global connectivity, inter-platform portability,
client/server flexibility and clustering reliability. The products provide the
global standards and national variants needed to communicate between the
disparate signaling protocols worldwide, and enable operators to use either a
UNIX or Windows NT platform. The products, which offer
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mediated access to the telecommunications signaling network, operate in a
client/server configuration.
DGM&S's customers include, among others, Amdahl, Compaq, DSC
Communications, Ericsson, MCI, Nokia, PTT Telecom (Netherlands), Qualcomm,
Siemens, Sprint and Sun Microsystems.
Through subsidiaries and affiliates, the Company is also involved in
the development of technologies and products incorporating video compression and
networking, the design and development of systems for telephone answering
service bureaus, the operation of telemessaging service bureaus 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, system configurations and
Company operating Divisions.
The Company was incorporated in the State of New York in October 1984.
Its principal executive offices are located at 170 Crossways Park Drive,
Woodbury, New York 11797, where its telephone number is (516) 677-7200.
THE COMPANY'S PRODUCTS
Comverse Network Systems Division: Enhanced Services Platform Product Family
The market for network-based enhanced services platforms has grown
rapidly over the past several years. The Company believes that a number of
factors have contributed to this growth, including the heightened emphasis among
wireless and wireline telecommunications network operators on offering new
services for revenue-generation and competitive differentiation, the increasing
public awareness and acceptance of multimedia messaging services resulting from
the growing installed base of messaging systems in the business community, the
expanding availability from the major telephone companies of call answering
services, and the growing use of wireless telephone services, which almost
universally offer a mailbox-based call answering service.
The CNS Division's primary focus has been on supplying large-capacity
enhanced services platforms, which are marketed under the names Access NP and
TRILOGUE INfinity, to fixed and wireless telecommunications network operators.
These organizations benefit from the ability to offer their customers a variety
of revenue-generating services provided by the Company's systems, such as
automated call answering, voice and fax messaging, unified messaging, pre-paid
services, short text messaging, audiotext, voice activated dialing, call
screening, one-touch call return, automated personal assistant services and
"virtual telephone" service, usually on a subscription or pay-per-call basis.
With call answering and voice and fax
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messaging, telephone operating companies benefit not only from service
subscription fees, but also from traffic revenue generated by the increase in
billable completed calls. In addition, these services improve overall network
efficiency by reducing congestion from repeated unbillable busy/no-answer calls.
Wireless telephone service operators are almost universally adding voice
mailboxes to their service offerings, and often as part of their basic service
package, not only because of these benefits, but also because wireless messaging
services directly increase billable airtime by stimulating outbound calls.
The Company's enhanced services platforms have been designed and
packaged to meet the capacity, reliability, scalability, maintainability and
physical requirements of large telephone network operators. The systems are
offered in a variety of sizes and configurations, extending to a capacity of up
to 6,000 ports, 45,000 voice storage hours and 1,000,000 mailboxes. The systems
also offer redundancy of critical components, so that no single failure will
interrupt the service. The Company's platforms are available in both centralized
and widely distributed configurations, and maintain their integrity as a single
system in distributed configurations.
The Company's systems also incorporate components that are compatible
with the IN and AIN protocols for Intelligent Peripherals ("IP"), permitting the
Company's network operator customers to develop and deploy services based on the
overall IN/AIN architecture. In addition, when the system is configured as a
Service Node ("SN"), it enables customers to offer next-generation IN/AIN-based
services such as personal number, call screening/caller introduction, one-touch
call return and pre-paid. The incorporation of IN and AIN-related software also
allows a customer, which has not yet implemented intelligent network
infrastructure, to purchase an enhanced services platform from the Company with
the confidence that it contains a built-in migration path to IN/AIN standards,
should the network operator decide to implement IN/AIN infrastructure in the
future.
The Company's platforms incorporate proprietary and third-party
software, and industry standard and proprietary hardware, in an open system
architecture. Most hardware is based on Industry Standard Architecture ("ISA"),
which facilitates the integration of commercially available ISA technologies
with the Company's core technologies. The systems support a wide variety of
analog and digital telephony interfaces and signaling systems, enabling them to
adapt to a variety of different telephony environments and IN/AIN applications,
and provide a "universal port" -- a single port that supports any combination of
voice and fax services at any time during a single call. The Company has also
introduced Internet messaging capabilities, enabling end-users to access their
voice, fax and e-mail text messages from anywhere in the world via the World
Wide Web.
Comverse Information Systems Division: Monitoring and Recording Systems
Comverse's Information Systems Division develops, manufactures and
markets monitoring and recording systems primarily for law enforcement,
intelligence agencies, call centers and financial institutions.
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The Company's AUDIODISK systems are multiple channel, multimedia
digital monitoring systems, sold primarily to law enforcement and intelligence
agencies, which enable multiple users simultaneously to monitor, record and
process audio, image (facsimile) and data communications over multiple channels
in a variety of analog and digital formats, and provide facilities for archiving
large volumes of recorded information. The systems automatically decode and
record a variety of signals without operator intervention and store the recorded
information on magnetic and optical disks to permit quick and easy random access
and the use of computer database techniques for analysis, archival and retrieval
operations. AUDIODISK also enables multiple users to access the same recorded
information simultaneously for processing and analysis.
The Company's ULTRA line of multiple channel, multimedia digital
recording systems are marketed primarily to call centers, financial
institutions, emergency "911" service providers, correctional institutions, and
other organizations that record large volumes of communications, and require
fast and easy retrieval of recorded information.
Traditionally, analog tape recorders, alone or coupled with a variety
of other special purpose devices, have been utilized for communications
monitoring, recording and related applications. The limited capacity and
processing capability inherent in these systems have imposed constraints on
organizations that process large amounts of multimedia information from multiple
channels and that need to store the processed information for long periods while
keeping it available for rapid retrieval. The Company's systems interface with a
variety of analog and digital communications protocols and automatically
recognize and adapt to voice, fax or modem content on each recorded channel.
Most importantly, they also enable users to adapt efficiently to the emergence
of new telecommunications technologies, such as digital transmission and
enhanced signaling systems, for which analog, tape recorder-based equipment was
not designed. The systems provide a number of advantages over analog, tape
recorder-based systems, including improvements in capacity, reliability,
accuracy, processing efficiency and archiving and retrieval capabilities.
The AUDIODISK product design is based on open system architecture and
client/server concepts, and supports a broad range of multimedia monitoring
capabilities, such as the recording, processing and retrieval of analog audio
signals, such as telephone and radio channels; analog facsimile and modem
communications; digital audio and data signals, including ISDN, T1, E1 and X.25;
and telephony signaling, including Pulse Dialing, DTMF, Calling Line
Identification and Call Progress Tones (such as busy, no-answer and ringback).
AUDIODISK systems simultaneously process incoming signals over multiple
channels, apply digital signal processing technologies and use magnetic and
optical disks for temporary and long-term digital storage. Digital signal
processing technologies that are employed by AUDIODISK to enhance monitoring
applications include, among others, signal compression, automatic signal
identification, automatic signal interpretation and noise cancellation. Magnetic
and optical disks permit virtually instantaneous retrieval and sharing of stored
information among many users. The systems also enable users to transmit
multimedia information among multiple sites over
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communication links. AUDIODISK is designed to support various communications
links, including T1, E1, ISDN, Dial-up telephone lines (over secure modems),
satellite links, TCP/IP over Ethernet (with routers) and X.25. AUDIODISK systems
also provide a facility for archiving large volumes of recorded information on
rewritable optical disks. This archive function allows a single recording
session, groups of sessions, a single recording channel, selected channels or
all channels to be stored on the same disk. The archive disk records all the
signals on a particular channel and automatically associates the signal-related
information ("SRI") as well as the date and time with the recorded information.
For larger AUDIODISK systems, automatic disk library systems, referred to as
"jukeboxes", provide very large amounts of on-line storage. The product employs
a database management system to provide a central facility for access to all
stored information. This feature allows any operator to use computer database
query techniques to retrieve the audio and SRI data quickly and efficiently.
The Company offers AUDIODISK systems in a range of configurations,
which share substantially the same hardware, software and user interface. The
AUDIODISK systems' multimedia server can be configured in a variety of models to
support a range of applications, including large, fixed-site audio monitoring
platforms with up to 350 channels. Moreover, several AUDIODISK multimedia
servers may be networked for increased capacity or to satisfy redundancy
requirements. Storage configurations include magnetic disks, optical drives and
optical jukebox devices. Up to 50 four-gigabyte magnetic disks can be configured
in a disk array to provide a recording buffer. Removable optical cartridges are
used for archiving, with each cartridge capable of storing up to 180 compressed
audio hours. Multiple jukebox configurations provide automated management of
optical media, storing up to 30,000 hours of audio or 4,500,000 pages of fax for
rapid automated retrieval.
ULTRA systems provide Computer-Telephony Integration ("CTI") enabled
recording, including integration with major PBX/ACDs, Predictive Dialers and
middleware products. The CTI connection allows the customer to easily search
calls through database queries. In addition, selective recording is possible
through time-driven schedules or event triggers. ULTRA systems support high
volume of simultaneous playbacks over the telephone or through LANs, WANs, and
the Internet. Immediate access to recordings is possible through advanced
optical disk technology and jukeboxes. The ULTRA Series comprises six products,
tailored to customer-specific requirements for capacity, storage and special
features.
DGM&S Telecom Division: Telecommunications Signaling Products
The DGM&S Telecom Division provides SS7 telecommunications software and
hardware, marketed under the name SignalWare. DGM&S's SignalWare products
provide IN/AIN applications for voice, data and mobility communications services
such as 800 number translation, voice mail, Internet routing, short text
messaging, local number portability, cellular roaming and emergency "911"
services. DGM&S's products are marketed to wireline and wireless equipment
providers and network operators to enable global connectivity, inter-platform
portability, client/server flexibility and clustering reliability. The products
provide the global
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standards and national variants needed to communicate between the disparate
signaling protocols worldwide, and enable operators to use either a UNIX or
Windows NT platform. SignalWare products, which offers mediated access to the
telecommunications signaling network, operates in a client/server configuration.
DGM&S's customers include, among others, Amdahl, Compaq, DSC
Communications, Ericsson, MCI, Nokia, PTT Telecom (Netherlands), Qualcomm,
Siemens, Sprint and Sun Microsystems.
MARKETS, SALES AND MARKETING
The Company's CNS Division markets enhanced services platforms
throughout the world, with its own direct sales force and in cooperation with a
number of leading international vendors of telecommunications infrastructure
equipment. The Company is a market share leader in providing large capacity
messaging systems for telephone network operators around the world.
More than 250 fixed and wireless telephone network operators in more
than 65 countries, including 13 of the 20 largest telephone companies in the
world, have selected the Company's platforms for messaging and other enhanced
services. The Company's network operator customers include, among others, AT&T
(USA), Bell Atlantic (USA), BellSouth (USA), Deutsche Telekom (Germany),
Hongkong Telecom (Hong Kong), NTT (Japan), SBC Commmunications (USA), SFR
(France), Sprint PCS (USA), Telebras (Brazil), Telecom Italia (Italy), Telmex
(Mexico) and Telstra (Australia).
The Company provides its customers with programs of 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.
The Company's CIS Division markets AUDIODISK and ULTRA systems
worldwide through its direct sales force and, where appropriate, through agents,
distributors and system integrators. The Company sells AUDIODISK directly to the
law enforcement, military and intelligence markets. Primary target markets for
the ULTRA Series include call centers, public safety and emergency services
organizations and financial institutions.
TECHNOLOGIES
The Company's research and development efforts focus particularly on
the design of very large, high throughput systems and digital signal processing
technologies for voice, image and data communications. The Company's products
use advanced technologies in the areas of digital signal processing, facsimile
protocols, telephony interfaces, mass storage, digital networking,
multi-processor computer architecture and real-time software design. The Company
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also possesses considerable technology and expertise in the development of
software products, solutions and applications within the IN and AIN environment.
The Company's products are based upon flexible system architectures
specifically designed to handle multiple channel, multimedia communication and
processing applications. Multimedia processing computers require a much higher
throughput than conventional data processing systems, especially when a large
number of channels have to be processed simultaneously. The Company's products
employ open system, modular architectures, which use distributed processors,
rather than one large central processor, as well as multiple storage devices and
digital networking. The product design is intended to be readily adaptable to
the usage and capacity requirements of the individual end-user. The product
architectures also allow the Company to add enhancements and new technologies to
its systems without rendering existing products obsolete.
A primary focus of the Company's research and development efforts has
been digital signal processing technologies required for voice, image and data
communications. Computer systems designed for signal processing applications,
such as processing of voice and image communications, handle information
differently from conventional data processing systems and require greater
processing and storage resources. For example, a digitized voice message, even
when subjected to data compression techniques, may require as much as 150 times
the storage capacity as the same message processed in textual form. The computer
must be designed to function at a fast and efficient rate to produce a form of
speech acceptable to the human ear. The Company has developed a number of speech
compression algorithms, which provide the Company's products with optimal
compression taking into account the level of speech quality required for each
application. The Company also has developed a special signal detector, which
identifies signals as voice, fax or modem. Voice processing algorithms currently
available with the Company's products include speech enhancement (noise
reduction) and variable playback speed with pitch compensation. Fax and modem
processing algorithms offered by the Company enable communication and
interception of a large number of standard and non-standard communications
protocols.
The Company has developed interfaces for its products to most telephony
environments used around the world, including digital interfaces, such as T1, E1
and ISDN, and SS7 interfaces designed to encompass both basic network
connectivity and the IN/AIN capabilities of Intelligent Peripherals and Service
Nodes. The Company has implemented facsimile communication and intercept
protocols for Group 3 facsimile. Certain of the Company's products incorporate
local area network and wide area network technologies used for the transfer of
digitized voice, fax and modem information, as well as for the transfer of data
among various network elements.
The Company utilizes state-of-the-art mass storage technologies in many of
its products. Proprietary algorithms developed by the Company are utilized for
storage of multimedia information to facilitate real-time processing of large
amounts of information and optimal use of media. A variable number of disks may
be configured in a disk array to serve large numbers of users and to provide
full or partial disk redundancy for critical applications. Special algorithms
utilized by the Company to handle optical disks within a number of jukebox
devices include automatic channel-to-disk allocation, automatic retrieval of
multimedia information from any disk located in the jukeboxes and redundant
archiving on two or more cartridges simultaneously.
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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 is engaged in ongoing research and development efforts
intended to expand and enhance the technical capabilities, features and range of
uses of its products, and to design and develop new generations of its product
offerings. The Company currently employs more than 1,200 scientists, engineers
and technicians with broad experience in the areas of digital signal processing,
computer architecture, facsimile protocols, telephony, digital networking,
multi-processing, mass storage, and real-time software design.
A substantial portion of the Company's research and development
operations benefit from financial incentives provided by government
instrumentalities to promote research and development activities, including its
research and development activities situated in Israel. The cost of such efforts
is affected by the continued availability of funding under such programs. The
percentage of the Company's total research and development expenditures
reimbursed under these programs has declined in recent years, and will continue
to decline with the growth in the Company's overall operations and the
increasing amount of research and development conducted by the Company at
locations other than those in which reimbursement programs are available to it.
The Company pays royalties on its sales 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,
or to transfer outside of Israel related technology rights, and in order to
obtain such permission the Company may be required to increase the royalties to
the applicable funding agencies and/or repay certain amounts received as
reimbursement of research and development costs. The Company expects to incur
additional royalty expenses and/or repayment obligations as a result of the
Merger and the location of certain manufacturing and research and development
operations pertaining to its TRILOGUE product line at its Boston facilities. See
"Business--Licenses and Royalties," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 3 to the financial
statements.
PATENTS AND INTELLECTUAL PROPERTY RIGHTS
The Company currently holds a total of 17 United States patents and a
number of 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.
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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.
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 entered into in
connection with research and development financing. 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. The Company currently pays royalties on substantially
all sales of enhanced services platforms and on certain sales of AUDIODISK,
ULTRA and derivative products. The royalties vary in amount based upon the
revenues attributable to the various components of such products. During 1995,
1996 and 1997, aggregate license and royalty payments by the Company amounted to
approximately $2,419,000, $4,365,000 and $6,865,000, respectively.
INTERNATIONAL SALES
Sales of the Company's products outside of North America have increased
from approximately $92,046,000 in 1995 to approximately $136,236,000 in 1996 and
$205,988,000 in 1997. International sales and marketing efforts may be adversely
affected by a number of factors, including the need for system customization and
special integrations, government approvals and export licenses, instability in
international trading relations, currency fluctuations and additional costs of
marketing, service and support due to lack of proximity with the end-users. In
certain cases, the Company's contracts are denominated in local currencies, and
as such, the Company may be adversely affected by fluctuations in those
currencies. International sales of certain systems manufactured by the Company
also are subject to a variety of legal restrictions governing the export of such
products.
10
While the Company believes that prevailing economic conditions in the
Far East and Southeast Asia have reduced the demand for its systems in certain
countries, overall sales in the region have increased over the past 12 months.
The Company cannot currently predict the effect on its business should regional
economic conditions fail to improve.
For additional information regarding foreign operations, see Notes 16
and 18 of Notes to Consolidated Financial Statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Certain Trends and Uncertainties" appearing elsewhere in this report.
BACKLOG
At December 31, 1997, the backlog of the Company amounted to
approximately $87,644,000, compared with approximately $70,339,000 at December
31, 1996, an increase of approximately $17,305,000. Substantially all of the
current backlog is expected to 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 telephone 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 certain instances, and is usually made available
to customers on a contractual basis for an additional charge.
The Company provides centralized 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 enhanced services platform industry is highly competitive, and
includes numerous products offering a broad range of features and capacities.
The primary direct competitors of the CNS Division are manufacturers of
stand-alone voice mail systems, including, among others, Brite Voice Systems,
Inc., Centigram Communications Corporation, Glenayre Electronics, Inc., Octel
Communications Corporation (acquired in 1997 by Lucent Technologies, Inc.),
Tecnomen Oy, Unisys Corporation, and manufacturers of central office
telecommunications equipment, including Northern Telecom Limited and
Telefonaktiebolaget LM Ericsson. Competitors of the Company that manufacture
other telecommunications equipment may derive a competitive advantage in selling
voice processing and message management systems to customers that are purchasing
or have previously purchased other compatible equipment from such manufacturers.
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Indirect competition is provided by voice and fax messaging products
employed at end-user sites as an alternative to the use of services available
through telephone network operators. This "customer premises equipment" includes
a broad range of products, such as stand-alone voice mail systems, products
offering "call processing" services that are supplied with voice mail features
or integrated with other voice mail systems, as well as personal computer modems
and add-on cards and software designed to furnish voice processing and message
management features.
The Company believes that competition in the sale of enhanced services
platforms is based on a number of factors, the most important of which are
product features and functionality, system performance and reliability,
marketing and distribution capability and price. Other important competitive
factors include service and support and the capability to integrate systems with
a variety of central office and cellular switches and other communications
systems. The Company believes that the range of features provided by, and the
ease of use of, its enhanced services platforms are competitive with other
platforms currently being marketed, and that its products are among the leading
systems designed specifically for telephone network operators.
Neither the Company nor any of the Company's competitors is a dominant
vendor of enhanced services platforms in any market segment or product line. The
Company anticipates that a number of its direct and indirect competitors will be
introducing new or improved enhanced services platforms during the next several
years.
The Company is aware of a relatively small number of manufacturers of
products that compete with the AUDIODISK product line at the present time.
Manufacturers of products that have been offered in competition with the
AUDIODISK system include Applied Signal Technology, Inc., the E-Systems division
of Raytheon Corporation, GTE Government Systems Division, Harris Corporation,
JSI Corporation and Nice Systems, Ltd. Competition also has been provided by
manufacturers and integrators of custom designed computer and telecommunications
systems in response to particular government procurements in specific markets
where they have entrenched customer relationships. The Company believes that it
derives a competitive advantage over many potential competitors of its AUDIODISK
product line by reason of its ability to offer prospective customers a family of
products that can provide a solution to most customer requirements without
extensive special development effort. The government market in general is highly
competitive and difficult to penetrate, and the Company may be at a competitive
disadvantage in respect of certain customers and market segments as a result of
its small size in relation to other potential vendors and the existence of
entrenched customer relationships with other vendors. The market in which ULTRA
products are sold is also highly competitive. Primary competitors include Atis
Assmann GmbH, Dictaphone Corporation, Kreutler GmbH, Nice Systems, Ltd., Racal
Recorders Ltd., Seltronics Corp., TEAC America, Inc., Teknekron Infoswitch
Corporation and Witness Systems, Inc.
12
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 uses third parties to perform printed circuit board assembly and sheet
metal fabrication. Although the Company generally uses standard parts and
components in its products, certain components are presently available only from
a limited number of sources. To date, the Company has been able to obtain
adequate supplies of all components in a timely manner from existing sources or,
when necessary, from alternative sources. 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.
The Company maintains organization-wide quality assurance
procedures, coordinating the quality control activities of the Company's
research and development, manufacturing and service departments. The Company's
primary manufacturing and research and development facilities have received
certification to Quality Standard ISO 9001.
CAPITAL MARKET ACTIVITIES
The Company has organized a wholly-owned subsidiary, CTI Capital
Corp. ("CTI Capital"), in support of its exploration of strategic acquisition
and investment opportunities. CTI Capital, directly and through a wholly-owned
subsidiary in Israel, Comverse Investments Ltd., seeks to identify and implement
suitable strategic investments for the Company, and engages in portfolio
investment and capital market activities, primarily in Israel. Such activities
include, in addition to direct investment in public and private companies,
investment and merchant banking activities and short-term trading of debt and
equity securities. Through ComSor Investment Fund N.V., formed by CTI Capital in
partnership with a subsidiary of Soros Fund Management LLC., the Company seeks
to invest venture capital in high technology firms, primarily those located in
Israel, and engages in other investment activities. The ComSor fund has a $25
million dollar capital commitment each from CTI Capital and a subsidiary of
Soros Fund Management. Comverse also engages in direct strategic and capital
management investment activities for its own account.
13
OPERATIONS IN ISRAEL
A substantial portion of the Company's research and development and
manufacturing operations are conducted at its wholly-owned subsidiary, Efrat
Future Technology Ltd. ("Efrat"), which is located in Israel and, accordingly,
may be affected by economic, political and military conditions in that country.
The Company's business is also 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 major
hostilities involving Israel should occur or if trade between Israel and its
current trading partners were interrupted or curtailed. The Company benefits
from various policies of the Government of Israel, including reduced taxation
and special subsidy programs, designed to stimulate economic activity,
particularly high technology 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, the Company has agreed that
products resulting from these projects may not be manufactured, nor may the
technology developed in the projects be transferred, outside of Israel without
government consent.
Since the establishment of Israel in 1948, a state of hostility has
existed, varying in degree and intensity, between Israel and the Arab countries,
and Israel and countries doing business with Israel have been the subject of an
economic boycott by the Arab countries. Following the Six-Day War in 1967,
Israel commenced administering the territories of the West Bank and the Gaza
Strip and, since December 1987, increased civil unrest has existed in these
territories and resulted in acts of violence in other parts of Israel. Although
Israel has entered into various agreements with Arab countries and the Palestine
Liberation Organization ("PLO"), and various declarations have been signed in
connection with efforts to resolve some of the regional problems, no prediction
can be made as to whether a full resolution of these problems can be achieved or
as to the nature of any such resolution. To date, these problems have not had a
material adverse impact on the financial condition or operations of the Company,
although there can be no assurance that continuation of these problems will not
have such an impact in the future.
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 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 to
establish a Free Trade Area ("FTA") which is intended ultimately to eliminate
all tariff and certain non-tariff barriers on most trade between the two
countries. Under the FTA agreement, most products received immediate duty-free
status in 1985, and all tariffs have since been eliminated. In 1993, Israel
14
entered into an agreement with the European Free Trade Association ("EFTA"),
which includes Austria, Norway, Finland, Switzerland, Iceland and Liechtenstein,
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 is the only country which
has free-trade area agreements with the United States as well as with the
European Union and EFTA states. The end of the Cold War has also enabled Israel
to establish commercial and trade relations with a number of nations, including
Russia, China and the nations of Eastern Europe, with whom Israel had not
previously had such relations.
Israel's economy has from time to time been subject to various
destabilizing factors, including a period of rampant inflation in the early to
mid-1980s, low foreign exchange reserves, fluctuations in world commodity
prices, military conflicts and civil unrest. For these and other reasons, the
Israeli Government has intervened in all sectors of the economy, employing,
among other means, fiscal and monetary policies, import duties, foreign currency
restrictions and controls of wages, prices and exchange rates. The Israeli
Government has frequently changed its policies in all these areas. For the
calendar years 1993 through 1997, the annual rates of inflation were
approximately 11%, 14%, 8%, 11% and 7%, respectively. This inflation, and the
associated increases in salaries that are linked by Israeli law to increases in
the consumer price index, have increased the cost of the Company's operations in
Israel, and salary costs have further increased as a result of the growing
competition for qualified scientific, engineering and technical personnel in
Israel. The increase in costs in recent periods has not been offset by
proportional devaluation of the Israeli shekel against the U.S. dollar, and
accordingly has had a negative impact on the Company's overall results of
operations.
The results of operations of the Company have been favorably affected
by Efrat's participation in Israeli Government programs related to research and
development, as well as its 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 as its internal
financial and operational resources increase relative to other applicants. 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 Efrat's ability to participate in these programs were to be
reduced significantly.
EMPLOYEES
At December 31, 1997, the Company employed 2,827 individuals,
approximately 76% of whom are scientists, engineers and technicians engaged in
research and development, marketing and support activities.
15
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 retirement or upon termination of his employment, and the
Company provides for such payment obligations through monthly contributions to
an insurance fund. Israeli employees and employers are required to pay
pre-determined sums to the National Insurance Institute, which payment covers
medical and other benefits similar to the benefits provided by the United States
Social Security Administration.
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
personnel is intense, particularly in the computer and telecommunications
industries. 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, in the
case of certain key management level personnel, options to purchase shares in
certain of the Company's subsidiaries, and cash bonuses based on several
parameters, including the profitability of their respective business units.
ITEM 2. PROPERTIES.
As of December 31, 1997, the Company, excluding Boston, leased an
aggregate of approximately 548,000 square feet of space for its operations
worldwide, including approximately 414,000 square feet in Tel Aviv, Israel,
approximately 46,000 square feet in Woodbury, New York, approximately 31,000
square feet in Mt. Laurel, New Jersey, approximately 22,000 square feet in
Irvine, California, and an aggregate of approximately 35,000 square feet at
various other locations in the United States, Israel, Western Europe, the Far
East and Australia. The aggregate base monthly rent for the facilities under
lease at December 31, 1997 was approximately $604,000, and all of such leases
are subject to various pass-throughs and escalation adjustments.
In March 1998, the Company entered into a lease for approximately
93,500 square feet in Tel Aviv, Israel to increase the capacity of its Israeli
operations. The monthly base rent for the new premises starts at approximately
$103,000.
The Company believes that its facilities currently under lease are
adequate for its current operations, and that additional facilities are
available on competitive market terms to provide for such future expansion of
the Company's operations as may be warranted.
16
ITEM 3. LEGAL PROCEEDINGS.
On November 16, 1995, a purported class action was filed in the United
States District Court for the Eastern District of Pennsylvania against Boston
and certain of its officers. Two similar complaints were filed on November 20,
1995 and November 21, 1995. The plaintiffs alleged violations of the Securities
Exchange Act of 1934. On February 15, 1996, the Court consolidated the three
cases into one captioned In re Boston Technology, Inc., Securities Litigation.
On November 13, 1996, Boston was allowed to transfer the consolidated action to
the United States District Court for the District of Massachusetts. On February
5, 1998, the Court issued an order granting the defendants' motion to dismiss
the Amended Complaint. No final judgment has been entered in the case. The
Company has received no information regarding any plans the plaintiffs may have
to ask the Court to reconsider its order, attempt to re-plead their claims, or
appeal from any judgment that might be entered. However, if any of these actions
are taken by the plaintiffs, the Company and the other defendants intend to
contest these actions vigorously.
On or about March 11, 1997, a complaint was filed in the Fourteenth
Judicial District Court of Dallas County, Case No. 9702187, by Syntellect
Technology Corporation ("Syntellect"). The complaint alleges, among other
things, breach of contract by Boston in failing or refusing to pay certain
royalties allegedly due under the Patent License Agreement between Boston and
Syntellect's predecessor, Dytel Corporation (the "License Agreement").
Syntellect claims that the License Agreement required Boston to pay royalties on
sales of its software and hardware products. On February 10, 1998, the Court
granted the Company partial summary judgment, holding that the License Agreement
requires payment of royalties on software products only, and not on hardware
sales. Discovery on the remaining claims continues, and a trial is scheduled for
the summer of 1998. The Company is currently engaged in negotiations with
Syntellect for the settlement of the litigation and the license by the Company
of a number of patents for which Syntellect holds licensing rights. Should such
negotiations not result in the settlement of the action, the Company intends to
contest Syntellect's claims vigorously.
On February 2, 1998, Computel Computadores e Telecommunicacoes S.A.
("Computel") filed a Request for Arbitration with the International Chamber of
Commerce ("ICC") in Paris, France, claiming breaches by Boston and its
wholly-owned subsidiary, Boston Technology Investments, Inc., in respect of
agreements with Computel and its affiliates for the distribution of Boston's
systems in Brazil. Computel claims, among other things, that the defendants have
breached their obligations to Computel by engaging in the Merger and thereby
competing with the joint venture established by the parties in connection with
such distribution activities, by delivering equipment that did not conform to
specification, by failing to support this equipment and by "fraudulently
inducing" Computel to terminate the agreement that established the joint venture
without advising it of the possibility of the Merger. In its prayer for relief,
Computel alleges damages in excess of US $50 million as a result of lost
business opportunities, injury to its business reputation, investment losses and
losses due to currency devaluation. On March 10, 1998, the Company commenced an
action against Computel and an affiliate in the Middlesex Superior Court of
Massachusetts (Civil Action No. 98-1155) seeking declaratory judgments as to
17
arbitrability and the continuing validity of the Purchase and Sale Agreement
between the parties, Computel's specific performance of such agreement and
injunctions to prevent Computel from proceeding with the ICC arbitration. The
Company also seeks damages in excess of $3,767,500 as a result of Computel's
failure to pay monies owed under the Purchase and Sale Agreement, as well as
costs and attorneys' fees. The Company has also filed a Demand for Arbitration
with the American Arbitration Association in Boston, Massachusetts, against
Computel and certain of its affiliates claiming breach of a Distribution
Agreement between the parties and unfair and deceptive trade practices. The
Company seeks to recover damages in excess of $12,000,000, plus interest, for
systems shipped to respondents, and additional damages for respondents'
repudiation and anticipatory breach of contract and unfair and deceptive trade
practices. The Company intends to vigorously contest Computel's claims and
assert its claims against Computel and its affiliates.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 1997 Annual Meeting of Shareholders of Comverse, held on January 13,
1998, the following matters, in addition to the reelection of the incumbent
Board of Directors, were approved by the shareholders with the votes indicated:
Number of Shares
Abstentions and
Voted For Voted Against Broker Non-Votes
1. Adoption of the Agreement and Plan
of Merger providing for the Merger
and related actions. 19,518,465 55,052 4,023,159
2. Ratification of the appointment of
Deloitte & Touche LLP as Comverse's
independent auditors for the fiscal year
ending December 31, 1997. 23,419,355 17,998 75,567
3. Approval of Comverse's 1997 Stock
Incentive Compensation Plan under
which up to 2.5 million shares of
Common Stock may be issued as
equity-based compensation to Company
employees and directors. 11,585,060 7,902,484 4,025,376
4. Approval of Comverse's 1997 Employee
Stock Purchase Plan under which up to
250,000 shares of Common Stock may be
issued for purchase by employees of the
Company. 19,391,347 175,745 3,945,828
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
The Common Stock 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 three calendar years and for
the first calendar quarter of 1998, through March 24, 1998.
YEAR CALENDAR QUARTER LOW HIGH
1995 First Quarter $ 11 $ 14-5/8
Second Quarter $ 13-1/4 $ 18-1/4
Third Quarter $ 17-9/64 $ 23-3/8
Fourth Quarter $ 19-15/16 $ 25-11/16
1996 First Quarter $ 16-5/8 $ 25-1/8
Second Quarter $ 23-3/8 $ 30-1/2
Third Quarter $ 23-3/4 $ 41-3/8
Fourth Quarter $ 32-9/16 $ 38-1/8
1997 First Quarter $ 36-7/8 $ 46-3/8
Second Quarter $ 36-1/2 $ 52
Third Quarter $ 45-15/16 $ 53-1/16
Fourth Quarter $ 32-5/16 $ 54-3/16
1998 First Quarter
(through March 24, 1998) $ 30-5/8 $ 47-3/4
There were 3,005 holders of record of Common Stock at March 24, 1998.
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 does not expect to pay any cash dividends in the foreseeable
future, but rather intends to retain its earnings to finance the development and
growth 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."
19
ITEM 6. SELECTED FINANCIAL DATA.
The following tables present selected consolidated financial data for
the Company for each of the years in the five years ended December 31, 1997.
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 financial information
presented herein for periods prior to the 1995 acquisition of DGM&S has been
retroactively adjusted to account for that transaction as a pooling of
interests.
Year Ended December 31,
----------------------------------------------------------------
1993(1) 1994(1) 1995 1996 1997
(In thousands, except per share data)
Statement of Operations Data:
Revenues:
Sales $ 81,388 $ 108,150 $ 137,149 $ 197,181 $ 280,281
Interest and other income 3,203 6,162 8,747 10,130 16,209
---------- ---------- ---------- ---------- ---------
Total revenues 84,591 114,312 145,896 207,311 296,490
Costs and Expenses:
Cost of sales 35,125 47,715 59,297 84,319 118,857
Selling, general and administrative 23,468 33,681 41,388 53,347 74,064
Research and development, net 8,161 12,640 19,426 27,441 38,659
Interest expense and other 1,057 3,947 4,406 7,063 9,769
Royalties and license fees 1,911 2,186 2,419 4,365 6,865
Total costs and expenses 70,105 100,431 126,789 176,500 248,175
Income before income tax provision and
extraordinary item 14,486 13,881 19,107 31,346 48,315
Income tax provision 1,021 1,783 2,057 3,358 4,815
---------- ---------- ---------- ---------- ---------
Net income $ 13,465 $ 12,098 $ 17,050 $ 27,988 $ 43,500
========== ========== ========== ========== =========
Earnings per share -diluted $ 0.65 $ 0.55 $ 0.75 $ 1.16 $ 1.61
========== ========== ========== ========== =========
Weighted average number of common
and common equivalent shares outstanding 20,756 21,868 22,602 26,447 27,099
December 31,
----------------------------------------------------------------
1993(2) 1994 1995 1996 1997
(In thousands)
Balance Sheet Data:
Working capital $ 138,149 $ 141,344 $ 155,064 $ 292,249 $ 330,303
Total assets 174,468 192,502 221,454 390,901 457,563
Long-term debt, including current portion 63,232 62,810 61,086 115,605 115,630
Stockholders' equity 91,608 101,613 121,766 212,058 261,482
(1) Includes results for DGM&S for its fiscal year ended September 30.
(2) Includes amounts for DGM&S as of its fiscal year ended September 30.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that involve a
number of risks and uncertainties, including without limitation information
regarding competition and future trends in the industries in which the Company
competes, the Company's future revenues and expenses, and the Company's plans,
strategies and expectations for its business. There are a number of factors that
could cause the Company's actual results and business plans to differ materially
from those forecasted or projected in such forward-looking statements. These
factors include, without limitation, those set forth below under the caption
"Certain Trends and Uncertainties". Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. The Company undertakes no obligations to publicly release any revisions
to these forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
The following discussion and analysis of the Company's results of
operations covers the operating results of Comverse and its consolidated
subsidiaries for the fiscal years included in the foregoing selected financial
data. The operating results of Boston are not included. In connection with the
Merger, the fiscal year of the Company has been changed from the calendar year
to the fiscal year ending January 31, corresponding to Boston's fiscal year. The
Company is recognizing substantial charges relating to the Merger and the
resulting combination of the two companies, effective upon the consummation of
the Merger in January 1998. Sales in the January, 1998 one-month transition
period (including Boston) were approximately $14,401,000, with a net loss of
approximately $115,207,000.
Comparison of 1996 and 1997 Operations
Total Revenues. Total revenues increased from 1996 to 1997 by
approximately $89,179,000 (43%). The increase is attributable primarily to a
higher volume of sales of systems and parts. Sales increased from 1996 to 1997
by approximately $83,100,000 (42%), primarily resulting from increased sales in
the TRILOGUE product line. Interest and other income increased from 1996 to 1997
by approximately $6,079,000 (60%), resulting primarily from increased interest
and dividend income, the investment of funds generated through the issuance of
convertible subordinated debentures in October 1996, and realized gains on sales
of investments.
Cost of Sales. Cost of sales increased by approximately $34,538,000
(41%) from 1996 to 1997 primarily as a result of the increase in sales. Gross
margins increased from approximately 57.2% in 1996 to approximately 57.6% in
1997.
21
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from 1996 to 1997 by approximately $20,717,000
(39%) and as a percentage of total revenues decreased from approximately 26% in
1996 to approximately 25% in 1997. The increased amount was a result of
increased sales, marketing and administrative activities associated with the
overall growth of the Company's operations, and particularly with the expansion
of direct sales and marketing activities.
Research and Development Expenses. Net research and development
expenses during 1997 increased by approximately $11,218,000 (41%) over 1996 due
to overall growth of research and development operations, the initiation of
significant new research and development projects and increases in salaries and
other costs associated with research and development operations in Israel.
Royalties and License Fees. Royalties and license fees increased from
1996 to 1997 by approximately $2,500,000 (57%) due primarily to growth in sales
of royalty-bearing products. Royalties and license fees as a percentage of total
sales increased from approximately 2.2% in 1996 to approximately 2.4% in 1997,
reflecting an increase in the royalty rate payable to a funding agency that
became effective in 1996.
Income Tax Provision. Provision for income taxes increased from 1996 to
1997 by approximately $1,457,000 (43%), while the Company's overall effective
tax rate decreased from approximately 10.7% during 1996 to approximately 10.0%
in 1997. The Company's overall rate of tax is reduced significantly by the tax
benefits associated with qualified activities of one of its Israeli
subsidiaries, which is entitled to favorable income tax rates under a program of
the Israeli Government for "Approved Enterprise" investments in that country.
Net Income. Net income after taxes increased from approximately
$27,988,000 in 1996 to approximately $43,500,000 in 1997, an increase of
approximately $15,512,000 (55%), while net income after taxes as a percentage of
total revenues increased from approximately 13.5% in 1996 to approximately 14.7%
in 1997. The increases resulted primarily from the factors described above.
Comparison of 1995 and 1996 Operations
Total Revenues. Total revenues increased from 1995 to 1996 by
approximately $61,415,000 (42%). The increase is attributable primarily to a
higher volume of sales of systems and parts. Sales increased from 1995 to 1996
by approximately $60,032,000 (44%), primarily resulting from increased sales in
the TRILOGUE product line. Interest and other income increased from 1995 to 1996
by approximately $1,383,000 (16%), resulting primarily from increased interest
and dividend income, the investment of funds generated through the issuance of
convertible subordinated debentures in October 1996, and realized gains on sales
of short-term investments.
22
Cost of Sales. Cost of sales increased by approximately $25,022,000
(42%) from 1995 to 1996 primarily as a result of the increase in sales. Gross
margins increased from approximately 56.8% in 1995 to approximately 57.2% in
1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from 1995 to 1996 by approximately $11,959,000
(29%) and as a percentage of total revenues decreased from approximately 28% in
1995 to approximately 26% in 1996. The increased amount was a result of
increased sales, marketing and administrative activities associated with the
overall growth of the Company's operations, and particularly with the expansion
of direct sales and marketing activities.
Research and Development Expenses. Net research and development
expenses during 1996 increased by approximately $8,015,000 (41%) over 1995 due
to overall growth of research and development operations, the initiation of
significant new research and development projects and increases in salaries and
other costs associated with research and development operations in Israel.
Royalties and License Fees. Royalties and license fees increased from
1995 to 1996 by approximately $1,946,000 (80%) due primarily to growth in sales
of royalty-bearing products. Royalties and license fees as a percentage of total
sales increased from approximately 1.8% in 1995 to approximately 2.2% in 1996,
reflecting an increase in the royalty rate payable to a funding agency that
became effective in 1996.
Income Tax Provision. Provision for income taxes increased from 1995 to
1996 by approximately $1,301,000 (63%), while the Company's overall effective
tax rate decreased from approximately 10.8% during 1995 to approximately 10.7%
in 1996. The Company's overall rate of tax is reduced significantly by the tax
benefits associated with qualified activities of one of its Israeli
subsidiaries, which is entitled to favorable income tax rates under a program of
the Israeli Government for "Approved Enterprise" investments in that country.
Net Income. Net income after taxes increased from approximately
$17,050,000 in 1995 to approximately $27,988,000 in 1996, an increase of
approximately $10,938,000 (64%), while net income after taxes as a percentage of
total revenues increased from approximately 11.7% in 1995 to approximately 13.5%
in 1996. The increases resulted primarily from the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had cash and cash equivalents of
approximately $173,531,000, bank time deposits of approximately $40,700,000,
short-term investments of approximately $60,787,000 and working capital of
approximately $330,303,000. The Company believes that its existing working
capital, together with funds generated from operations, will be sufficient to
provide for its planned operations at least through December 31, 1998.
23
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 can 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 acquisition cost.
The Company's liquidity and capital resources have not been, and
are not anticipated to be, materially affected by restrictions pertaining to the
ability of its subsidiaries in Israel to pay dividends or by withholding taxes
associated with any such dividend payments. Cash dividends paid by an Israeli
corporation to United States residents are subject to withholding of Israeli
income tax at source at rates of up to 25%, depending on the particular
facilities that have generated the earnings that are the source of the
dividends.
YEAR 2000
The Company has taken actions to understand the nature and extent of
the work required to make its systems, products and infrastructure Year 2000
compliant and has begun work to prepare its products and its financial,
information and other computer-based systems for the Year 2000, including
replacing and/or updating existing legacy systems. The Company continues to
evaluate the estimated costs associated with these efforts. While these efforts
will involve additional costs, the Company believes, based on available
information, that it will be able to manage its total Year 2000 transition
without any material adverse effect on its business operations, products or
financial prospects.
CERTAIN TRENDS AND UNCERTAINTIES
The Company has benefited from the growth in its business and capital
base over the past three years to make significant new investment in its
operations and infrastructure intended to enhance its opportunities for future
growth and profitability. The Company's results of operations reflect the
significant increase in its investment in operations over the past three years.
The Company intends to continue during 1998 to make significant investments in
the growth of its business, and to examine opportunities for additional growth
through acquisitions and strategic investments. The impact of these decisions on
future profitability cannot be predicted with assurance, and the Company's
commitment to growth may increase its vulnerability to unforeseen downturns in
its markets, technology changes and shifts in competitive conditions. However,
the Company believes that significant opportunities exist in the markets for
each of its main product lines, and that continued strong investment in its
technical, product development, marketing and sales capabilities will enhance
its opportunities for long term growth and profitability.
24
The Merger involves the integration of two companies that have
previously operated independently. The combination of two sizable
technology-based companies involves significant complexities, and no assurance
can be given that the combined Company will be able to integrate the operations
of Boston into the Company without encountering difficulties or experiencing the
loss of key Comverse or Boston personnel or that the benefits expected from such
integration will be realized. The integration of two companies across
geographically dispersed operations can create the risk of disruption in
operations of the combined company, and neither company's management has
substantial experience in managing such integration or the operations of an
entity the size of the combined Company. The Company does not expect to realize
cost savings in the near future as a result of the Merger, and no assurance can
be given that any savings can be achieved in future periods. Furthermore, there
can be no certainty that the Merger will not adversely affect the relationships
with key customers or key vendors of either company. As a result of its
significantly greater concentration on a small number of large telephone company
customers, Boston's business has historically been considerably more volatile
than that of Comverse, and the operations of the combined Company are likely to
be less predictable and subject to greater risks from actions of individual
customers than the operations of Comverse in recent years.
The telecommunications industry is subject to rapid technological
change. The Company's revenue stream will depend on its ability to enhance its
existing products and to introduce new products on a timely and cost-effective
basis. This includes any customer-requested custom software enhancements
required in the normal course of product delivery and customer demands for the
technological convergence of the Company's products. The Company's products
involve sophisticated hardware and software technology that performs critical
functions to highly demanding standards. There can be no assurance the Company's
current or future products will not develop operational problems, which could
have a material adverse effect on the Company. In addition, if the Company were
to delay the introduction of new products, or to delay the delivery of specific
custom software enhancements, the Company's operating results could be adversely
affected. The Company sells a majority of its products to companies in the
telecommunications industry. This industry is undergoing significant change as a
result of deregulation and privatization worldwide, reducing restrictions on
competition in the industry. Unforeseen changes in the regulatory environment
may have an impact on the Company's revenues and/or costs in any given part of
the world. The worldwide enhanced services systems 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
systems markets. The 1997 acquisition of Octel Communications Corporation, a
significant competitor of the Company, by Lucent Technologies, Inc. may
intensify the competitive environment in the industry, and there can be no
assurance that similar business combinations or industry consolidation will not
occur in the future.
25
The enhanced services platforms industry has experienced a continuing
evolution of product offerings and alternatives for delivery of services. These
trends have affected and may be expected to have a significant continuing
influence on conditions in the industry, although the impact on the industry
generally and on the Company's position in the industry cannot be predicted with
assurance. Significant changes in the industry make planning decisions more
difficult and increase the risk inherent in the planning process.
The market for telecommunications monitoring systems is also in a
period of significant transition. Budgetary constraints, uncertainties resulting
from the introduction of new technologies in the telecommunications environment
and shifts in the pattern of government expenditures resulting from geopolitical
events have increased uncertainties in the market, resulting in certain
instances in the attenuation of government procurement programs beyond their
originally expected performance periods and an increased incidence of delay,
cancellation or reduction of planned projects. The continuing delay and
uncertainties surrounding the Communications Assistance for Law Enforcement Act
("CALEA") have had a significant impact on acquisition plans of law enforcement
agencies in North America engaged in monitoring activities, and no assurances
can be given as to the timing or ultimate content of the proposed legislation.
Competitive conditions in this sector have also been affected by the increasing
use by certain potential government customers of their own internal development
resources rather than outside vendors to provide certain technical solutions. In
addition, a number of established government contractors, particularly
developers and integrators of technology products, have taken steps to redirect
their marketing strategies and product plans in reaction to cut-backs in their
traditional areas of focus, resulting in an increase in the number of
competitors and the range of products offered in response to particular requests
for proposals. The lack of predictability in the timing and scope of government
procurements have similarly made planning decisions more difficult and have
increased the associated risks.
The Company has historically derived a significant portion of its sales
and operating profit from a relatively small number of contracts for large
system installations with major customers. Boston's operating results, in
particular, have often been characterized by volatility and lack of
predictability, reflecting its traditional customer concentration among major
telecommunications services providers such as the Regional Bell Operating
Companies. The Company continues to emphasize large capacity systems in its
product development and marketing strategies. Contracts for large installations
typically involve a lengthy and complex bidding and selection process, and the
ability of the Company to obtain particular contracts is inherently difficult to
predict. The Company believes that opportunities for large installations will
continue to grow in both its commercial and government markets, and intends to
continue to expand its research and development, manufacturing, sales and
marketing and product support capabilities in anticipation of such growth.
However, the timing and scope of these opportunities and the pricing and margins
associated with any eventual contract award are difficult to forecast, and may
vary substantially from transaction to transaction. The Company's future
operating results may accordingly exhibit a higher degree of volatility than the
operating results of other companies in its industries that have adopted
different strategies, and than the Company has experienced in prior periods.
Although the Company is actively pursuing a number of significant procurement
opportunities in the United States and internationally, both the timing of any
eventual procurements and the probability of the Company's receipt of
significant contract awards are uncertain. The degree of dependence by the
Company on large 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.
26
The Company has significantly increased its expenditures in all areas
of its operations during recent periods, including the areas of research and
development and marketing and sales, and the Company plans to further increase
these expenditures in the foreseeable future. The increase in research and
development expenditures reflects the Company's concentration on enhancing the
range of features and capabilities of its existing product lines and developing
new generations of its products. The Company believes that these efforts are
essential for the continuing competitiveness of its product offerings and for
positioning itself to participate in future growth opportunities in both the
commercial and government sectors. The increase in sales and marketing
expenditures primarily results from the Company's decision to expand its
activities and direct presence in a growing number of world markets. The
Company's costs of operations have also been affected by increases in the cost
of its operations in Israel, resulting both from general inflation and increases
in the cost of attracting and retaining qualified scientific, engineering and
technical personnel in Israel, where the demand for such personnel is growing
rapidly with the expansion of technology-based industries in that country. The
increase in these costs in recent periods has not been offset by proportional
devaluation of the Israeli shekel against the United States dollar, and
accordingly has had a negative impact on the Company's overall results of
operations. Continuation of such trends may have a material adverse effect on
the Company's future results of operations.
A significant portion of the Company's research and development and
manufacturing operations are located in Israel and may be affected by
regulatory, political, military and economic conditions in that country. The
Company's historical operating results reflect substantial benefits from
programs sponsored by the Israeli government for the support of research and
development, as well as favorable tax rates available to "Approved Enterprises"
in Israel. The Israeli government has indicated its intention to reexamine
certain of its policies in these areas. Recently, the government acted to
increase, from between 2% and 3% of associated product sales to 3% of associated
product revenues (including service and other related revenues), the annual rate
of royalties to be applied to repayment of benefits under the conditional grant
program administered by the Office of the Chief Scientist of the Ministry of
Industry and Trade, a program in which the Company has regularly participated
and under which it continues to receive significant benefits through
reimbursement of qualified research and development expenditures. The Company's
repayment of amounts received under the program will be accelerated through
these higher royalty rates until repayment is completed. 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 such programs, or to transfer outside of Israel related technology rights,
and in order to obtain such permission the Company may be required to increase
the royalties to the applicable funding agencies
27
and/or repay certain amounts received as reimbursement of research and
development costs. The Company expects to incur additional royalty expenses
and/or repayment obligations as a result of the Merger and the location of
certain manufacturing and research and development operations pertaining to its
TRILOGUE product line at its Boston facilities. The Israeli authorities have
also indicated that this funding program will be further reduced in the future,
particularly for larger entities such as the Company. The Israeli government has
also shortened the period of the tax moratorium applicable to "Approved
Enterprises" from four years to two years. Although this change has not affected
the tax status of most of the Company's current projects, it will apply to any
future "Approved Enterprises" of 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 to the Company of its
operations in Israel would materially increase and there would be an adverse
effect on the results of the Company's operations as a whole. To the extent the
Company increases its activities outside Israel, which will result from the
Merger and possible future acquisitions, such increased activities will not be
eligible for programs sponsored by Israel. The Company's research and
development and manufacturing operations attributable to Boston are expected to
continue to be located in the United States and thus will not be eligible for
the benefits of those programs. Accordingly, the effective cost to the Company
of its future research and development activities in particular, and its
operations in general, could significantly increase relative to that of
Comverse, historically.
The Company currently derives a significant portion of its total sales
from customers outside of the United States. International transactions involve
particular risks, including political decisions affecting tariffs and trade
conditions, rapid and unforeseen changes in economic conditions in individual
countries, turbulence in foreign currency and credit markets, and increased
costs resulting from lack of proximity to the customer. Volatility in
international currency exchange rates may have a significant impact on the
Company's operating results. The Company has, and anticipates that it will
continue to receive, significant contracts denominated in foreign (primarily
Western European and Japanese) currencies. As a result of the unpredictable
timing of purchase orders and payments under such contracts and other factors,
it is often not practicable for the Company to effectively hedge the risk of
significant changes in currency rates during the contract period. Since the
Company will hedge the exchange rate risks associated with long-term contracts
denominated in foreign currencies only to a limited extent, operating results
can be affected by the impact of currency fluctuations as well as the cost of
such hedging.
While the Company believes that prevailing economic conditions in
the Far East and Southeast Asia have reduced the demand for its systems in
certain countries, overall sales in the region have increased over the past 12
months. The Company cannot currently predict the effect on its business should
regional economic conditions fail to improve.
The trading price of the Company's shares may be affected by the
factors noted above as well as prevailing economic and financial trends and
conditions in the public securities markets. Share prices of companies in
technology and government contracting businesses, and particularly smaller and
medium-sized publicly traded companies such as the Company, tend to
28
exhibit a high degree of volatility. The Company's revenues and earnings may be
more volatile than that of Comverse historically as a result of the greater
concentration of Boston's business on a limited number of large customers.
Shortfalls in revenues or earnings from the levels anticipated by the public
markets could have an immediate and significant effect on the trading price of
the Company's shares in any given period. Such shortfalls may result from events
that are beyond the Company's immediate control, can be unpredictable and, since
a significant proportion of the Company's sales during each fiscal quarter tend
to occur in the latter stages of the quarter, may not be discernible until the
end of a financial reporting period. These factors 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 voice processing
industry, which may not have any direct relationship with the Company's business
or prospects.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial information required by Item 8 is included elsewhere in
this report.
See Part IV, Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
The information required by Part III is omitted pursuant to instruction
G(3).
29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K.
Page(s)
-------
(a) Documents filed as part of this report.
--- ---------------------------------------
(1) Financial Statements.
--- ---------------------
Index to Consolidated Financial Statements F-1
Independent Auditors' Report F-2
Consolidated Balance Sheets -
December 31, 1996 and 1997 F-3
Consolidated Statements of Income -
Years ended December 31,
1995, 1996 and 1997 F-4
Consolidated Statements of Stockholders' Equity -
Years ended December 31,
1995, 1996 and 1997 F-5
Consolidated Statements of Cash Flows -
Years ended December 31,
1994, 1995 and 1996 F-7
Notes to Consolidated Financial Statements F-8
(2) Financial Statement Schedules.
--- ------------------------------
None
(3) Exhibits.
--- ---------
The Index of Exhibits commences on the following
page. Exhibits numbered 10.3 through 10.8, 10.13
through 10.16 and 10.24 through 10.30 comprise
material compensatory plans and arrangements of the
registrant.
- 30 -
EXHIBITS
No. Description
2.1* Agreement and Plan of Merger dated as of August 20, 1997, between
Registrant and Boston Technology, Inc. (Incorporated by reference to
the Definitive Proxy Materials for the Registrant's Annual Meeting of
Stockholders held January 13, 1998.)
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.)
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* 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 December 31, 1987.)
4 Instruments defining the rights of security holders including indentures:
4.1* Excerpts from Certificate of Incorporation. (Incorporated by
reference to the Registrant's Registration Statement on Form
S-1 under the Securities Exchange Act of 1933, Registration
No. 33-9147.)
4.2* Excerpt from 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.)
4.3* Excerpt from 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.)
4.4* Excerpts from 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
December 31, 1992.)
4.5* 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.)
- 31 -
4.6* Indenture dated as of October 4, 1996 from Comverse
Technology, Inc. to The Chase Manhattan Bank, N.A., Trustee.
(Incorporated by reference to the Registrant's Current
Report on Form 8-K under the Securities Exchange Act of 1934
filed October 10, 1996.)
4.7* Specimen 5 3/4% Convertible Subordinated Debenture due 2006.
(Incorporated by reference to the Registrant's Current
Report on Form 8-K under the Securities Exchange Act of 1934
filed October 10, 1996.)
10 Material contracts:
10.1* Proxy Agreement dated as of September 5, 1991 by and among
Comverse Government Systems Corporation, James R. Allen,
Robert W. Bazley, Robert T. Marsh 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 December 31, 1991.)
10.2* Visitation Approval Procedure Agreement dated as of
September 5, 1991 by and among Comverse Government Systems
Corporation, James R. Allen, Robert W. Bazley, Robert T.
Marsh 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
December 31, 1991.)
10.3* 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.)
10.4* Employment Agreement effective as of July 1, 1994 by and
between Comverse Technology, Inc. and Kobi Alexander.
(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.)
10.5* 1994 Stock Option Plan. (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.)
10.6* 1995 Stock Option Plan. (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, 1995.)
- 32 -
10.7* 1996 Stock Option Plan. (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, 1996.)
10.8* 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.)
10.9* Deed of Guarantee from Comverse Technology, Inc. to Bank
Hapoalim B.M. dated July 30, 1986. (Incorporated by
reference to the Registrant's Registration Statement on Form
S-1 under the Securities Act of 1933, Registration No.
33-9147.)
10.10* Continuing Guarantee from Comverse Technology, Inc. to Bank
Leumi le-Israel B.M. (Incorporated by reference to the
Registrant's Registration Statement on Form S-1 under the
Securities Act of 1933, Registration No. 33-9147.)
10.11* Patent License Agreement by and between Efrat Future
Technology Ltd. and VMX, Inc. (Incorporated by reference to
the Registrant's Registration Statement on Form S-1 under
the Securities Act of 1933, Registration No. 33-9147.)
10.12* 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
December 31, 1987.)
10.13* 1987 Stock Option Plan, 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
December 31, 1987.)
10.14* 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.)
10.15* 1997 Employee Stock Purchase Plan. (Incorporated by
reference to the Definitive Proxy Materials for the
Registrant's Annual Meeting of Stockholders held January 13,
1998.)
10.16* 1997 Stock Incentive Compensation Plan. (Incorporated by
reference to the Definitive Proxy Materials for the
Registrant's Annual Meeting of Stockholders held January 13,
1998.)
10.17* Memorandum of Agreement dated November 22, 1995 between
Boston Technology, Inc. and AT&T. (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, 1996, confidential treatment requested as to
certain portions.)
- 33 -
10.18* Lease dated November 5, 1990 between Boston Technology, Inc.
and Wakefield Park 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, 1991.)
10.19* First Amendment dated as of March 31, 1993 to Lease dated
November 5, 1990 between Boston Technology, Inc. and
Wakefield Park 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.)
10.20* Second Amendment dated as of August 31, 1994 to Lease dated
November 5, 1990 between Boston Technology, Inc. and
Wakefield Park 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.)
10.21* License Agreement dated November 15, 1988 between Boston
Technology, Inc. and VMX, Inc. (Incorporated by reference to
the Registration Statement of Boston Technology, Inc. on
Form S-1 under the Securities Act of 1933, Registration No.
33-32134.)
10.22* License Agreement dated January 22, 1990 between Boston
Technology, Inc. and Dytel Corporation. (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, 1990.)
10.23* Settlement Agreement dated December 28, 1993 between the
Boston Technology, Inc. and Theis Research, Inc. and Peter
F. Theis. (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, 1994.)
10.24* Boston Technology, Inc. 1995 Director Stock Option Plan.
(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 July 31, 1995.)
10.25* Boston Technology, Inc. 1992 Directors' Stock Option Plan,
as amended. (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, 1994.)
10.26* Boston Technology, Inc. 1994 Stock Incentive Plan.
(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, 1994.)
- 34 -
10.27* Boston Technology, Inc. 1989 Incentive Stock Option Plan, as
amended. (Incorporated by reference to the Definitive Proxy
Materials for Boston Technology, Inc.'s Annual Meeting of
Stockholders held July 14, 1992.)
10.28* Boston Technology, Inc. Employee Savings and Profit Sharing
Plan. (Incorporated by reference to Registration Statement
of Boston Technology, Inc. on Form S-1 under the Securities
Act of 1933, Registration No. 33-32134.)
10.29* Boston Technology, Inc. Employee Severance Benefit Plan.
(Incorporated by reference to the Current Report of Boston
Technology, Inc. on Form 8-K under the Securities Exchange
Act of 1934 dated May 9, 1991.)
10.30* Boston Technology, Inc. 1996 Stock Incentive Plan.
(Incorporated by reference to the Definitive Proxy Materials
for Boston Technology, Inc.'s Annual Meeting of Stockholders
held June 25, 1996.)
10.31* Lease dated 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.)
21 Subsidiaries of Registrant.
27 Financial Data Schedule
- - ----------------
* Incorporated by reference.
- 35 -
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Page
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 F-3
Consolidated Statements of Income for the Years Ended December 31,
1995, 1996 and 1997 F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1995, 1996 and 1997 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997 F-7
Notes to Consolidated Financial Statements F-8
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Comverse Technology, Inc.
Woodbury, New York
We have audited the accompanying consolidated balance sheets of Comverse
Technology, Inc. and subsidiaries (the "Company") as of December 31, 1996 and
1997, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1997. 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 generally accepted auditing
standards. 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 December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
New York, New York
February 12, 1998
F-2
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
(In thousands, except share data)
ASSETS 1996 1997
- ------ ---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 196,724 $ 173,531
Bank time deposits 10,000 40,700
Short-term investments 39,464 60,787
Accounts receivable, net of allowance for doubtful accounts
of $3,984 and $3,524 63,540 79,783
Inventories 31,494 35,220
Prepaid expenses and other current assets 9,034 13,315
Deferred income tax benefits 721 2,163
---------- ----------
TOTAL CURRENT ASSETS 350,977 405,499
---------- ----------
PROPERTY AND EQUIPMENT, net 18,041 25,105
INVESTMENTS 5,788 6,859
OTHER ASSETS 16,095 20,100
---------- ----------
TOTAL ASSETS $ 390,901 $ 457,563
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1997
- ------------------------------------ ---- ----
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 40,531 $ 48,732
Bank loans 11,195 16,970
Advance payments from customers 6,400 9,292
Other current liabilities 602 202
---------- ----------
TOTAL CURRENT LIABILITIES 58,728 75,196
---------- ----------
CONVERTIBLE SUBORDINATED DEBENTURES 115,000 115,000
LIABILITY FOR SEVERANCE PAY 2,708 3,515
OTHER LIABILITIES 2,407 2,370
---------- ----------
TOTAL LIABILITIES 178,843 196,081
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value--authorized, 2,500,000 shares;
issued, none - -
Common stock, $0.10 par value -- authorized, 100,000,000 shares;
issued and outstanding, 24,741,228 and 25,199,176 shares 2,474 2,519
Additional paid-in capital 136,737 142,998
Cumulative translation adjustment (56) (8)
Unrealized gain on available-for-sale securities, net of tax 1,547 1,117
Retained earnings 71,356 114,856
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 212,058 261,482
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 390,901 $ 457,563
========== ==========
See notes to consolidated financial statements.
F-3
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(In thousands, except per share data)
1995 1996 1997
---- ---- ----
REVENUES:
Sales $ 137,149 $ 197,181 $ 280,281
Interest and other income 8,747 10,130 16,209
----------- ----------- -----------
TOTAL REVENUES 145,896 207,311 296,490
----------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales 59,297 84,319 118,857
Selling, general and administrative 41,388 53,347 74,064
Research and development, net 19,426 27,441 38,659
Interest expense and other 4,406 7,063 9,769
Royalties and license fees 2,419 4,365 6,865
Minority interest (207) (260) 29
Equity in loss (gain) of affiliates 60 225 (68)
----------- ----------- -----------
TOTAL COSTS AND EXPENSES 126,789 176,500 248,175
----------- ----------- -----------
INCOME BEFORE GAIN ON ISSUANCE OF
SUBSIDIARY SHARES AND INCOME TAX PROVISION 19,107 30,811 48,315
GAIN ON ISSUANCE OF SUBSIDIARY SHARES - 535 -
----------- ----------- -----------
INCOME BEFORE INCOME TAX 19,107 31,346 48,315
INCOME TAX PROVISION 2,057 3,358 4,815
----------- ----------- -----------
NET INCOME $ 17,050 $ 27,988 $ 43,500
=========== =========== ============
EARNINGS PER SHARE:
Basic $ 0.81 $ 1.28 $ 1.74
=========== =========== ===========
Diluted $ 0.75 $ 1.16 $ 1.61
=========== =========== ===========
See notes to consolidated financial statements.
F-4
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(In thousands, except share data)
Common Stock Additional Cumulative Unrealized
-----------------------
Number of Par Paid-in Translation Gains
Shares Value Capital Adjustment (Losses)
------ ----- ------- ---------- --------
BALANCE, JANUARY 1, 1995 $ 20,981,456 $ 2,098 $ 73,300 $ (118) $ 15
Unrealized gain on available-for-sale
securities, net of tax - - - - 631
Common stock issued in connection with
exercise of stock options 370,446 37 2,040 - -
Common stock issued in connection with acquisition
of additional interest in majority-owned subsidiary 10,696 1 154 - -
Tax benefit of disqualifying dispositions of
incentive stock options - - 258 - -
Translation adjustment - - - (18) -
Net income, year ended December 31, 1995 - - - -
------------ --------- ----------- ---------- ----------
BALANCE, DECEMBER 31, 1995 21,362,598 2,136 75,752 (136) 646
Unrealized gain on available-for-sale securities,
net of tax - - - - 901
Common stock issued in connection with
exercise of stock options 276,362 27 1,490 - -
Conversion of convertible subordinated
debentures 3,096,768 310 58,335 - -
Common stock issued in connection with acquisition
of additional interest in majority-owned subsidiary 5,500 1 148 - -
Tax benefit of disqualifying dispositions of
incentive stock options - - 1,012 - -
Translation adjustment - - - 80 -
Net income, year ended December 31, 1996 - - - - -
------------ --------- ----------- ---------- ----------
BALANCE, DECEMBER 31, 1996 24,741,228 2,474 136,737 (56) 1,547
Unrealized gain on available-for-sale securities,
net of tax - - - - (430)
Common stock issued in connection with
exercise of stock options 457,948 45 3,331 - -
Tax benefit of disqualifying dispositions of
incentive stock options - - 2,930 - -
Translation adjustment - - - 48 -
Net income, year ended December 31, 1997 - - - - -
------------ --------- ----------- ---------- ----------
BALANCE, DECEMBER 31, 1997 25,199,176 $ 2,519 $ 142,998 $ (8) $ 1,117
============ ========= =========== =========== ==========
See notes to consolidated financial statements.
F-5
Retained
Earnings Total
-------- -----
BALANCE, JANUARY 1, 1995 $ 26,318 $ 101,613
Unrealized gain on available-for-sale
securities, net of tax - 631
Common stock issued in connection with
exercise of stock options - 2,077
Common stock issued in connection with acquisition
of additional interest in majority-owned subsidiary - 155
Tax benefit of disqualifying dispositions of
incentive stock options - 258
Translation adjustment - (18)
Net income, year ended December 31, 1995 17,050 17,050
----------- ----------
BALANCE, DECEMBER 31, 1995 43,368 121,766
Unrealized gain on available-for-sale securities,
net of tax - 901
Common stock issued in connection with
exercise of stock options - 1,517
Conversion of convertible subordinated
debentures - 58,645
Common stock issued in connection with acquisition
of additional interest in majority-owned subsidiary - 149
Tax benefit of disqualifying dispositions of
incentive stock options - 1,012
Translation adjustment - 80
Net income, year ended December 31, 1996 27,988 27,988
----------- ----------
BALANCE, DECEMBER 31, 1996 71,356 212,058
Unrealized gain on available-for-sale securities,
net of tax - (430)
Common stock issued in connection with
exercise of stock options - 3,376
Tax benefit of disqualifying dispositions of
incentive stock options - 2,930
Translation adjustment - 48
Net income, year ended December 31, 1997 43,500 43,500
----------- ----------
BALANCE, DECEMBER 31, 1997 $ 114,856 $ 261.482
=========== ==========
F-6
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(In thousands)
1995 1996 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 17,050 $ 27,988 $ 43,500
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 5,874 7,132 9,700
Equity in loss (gain) of affiliates 60 225 (68)
Minority interest (207) (260) 29
Changes in assets and liabilities:
Accounts receivable (18,828) (20,531) (16,243)
Inventories (3,346) (15,721) (3,726)
Prepaid expenses and other current assets (3,811) (862) (4,337)
Accounts payable and accrued expenses 8,038 13,287 8,201
Advance payments from customers (399) 1,412 2,892
Liability for severance pay 947 409 807
Other 1,322 (563) (1,009)
----------- ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,700 12,516 39,746
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities and sales (purchases) of bank time deposits
and investments, net 63,606 (25,792) (53,524)
Purchase of property and equipment (5,556) (9,745) (12,580)
Capitalization of software development costs (4,697) (4,466) (6,008)
------------ ------------ -----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 53,353 (40,003) (72,112)
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of debentures $ - $ 111,899 $ -
Proceeds from issuance of common stock in connection with
exercise of stock options and warrants 2,077 1,665 3,376
Net proceeds from bank loans and other debt - 10,785 5,797
Other (1,493) - -
------------ ---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 584 124,349 9,173
----------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 60,637 96,862 (23,193)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 39,225 99,862 196,724
----------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 99,862 $ 196,724 $ 173,531
=========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the year for interest $ 3,492 $ 3,138 $ 7,397
=========== ========== ==========
Cash paid during the year for income taxes $ 850 $ 2,882 $ 2,646
=========== ========== ==========
See notes to consolidated financial statements.
F-7
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION AND BUSINESS
Comverse Technology, Inc. ("Comverse" and, together with its
subsidiaries, "CTI" or 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 Comverse and its wholly-owned and majority-owned
subsidiaries. All material intercompany balances and transactions have
been eliminated.
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 (including U.S. treasury bills) as available-for-sale,
accounted for at fair value, with resulting unrealized gains or losses
reported as a separate component of stockholders' equity, on a
net-of-tax basis.
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 bank time deposits, money market funds
placed with major banks and financial institutions, corporate commercial
paper, corporate medium-term notes, and U.S. government obligations that
have maturities of one year or less. Accounts receivable are generally
diversified due to the number of commercial and government entities
comprising the Company's customer base and their dispersion across many
geographical regions. The Company believes no significant concentration
of credit risk exists with respect to these cash investments and
accounts receivable.
Inventories - Inventories are stated at the lower of cost or market.
Cost is determined by the first-in, first-out method.
Property and Equipment - Property and equipment are carried at cost less
accumulated depreciation and amortization. The Company depreciates its
property and equipment on a straight-line basis over periods ranging
from three to seven years. The cost of maintenance and repairs is
charged to operations as incurred. Significant renewals and betterments
are capitalized.
Income Taxes - The Company accounts for its income 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.
F-8
Revenue and Expense Recognition - Revenues from product sales are
generally recognized upon shipment. Products shipped for customer trials
are carried in finished goods inventory until customer acceptance is
obtained, at which time revenue is recognized.
Revenues from certain 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. 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 income.
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. Amortization begins in the period in which the
related product is available for general release to customers.
Amortization expenses amounted to $2,453,000, $3,079,000 and $3,546,000
in 1995, 1996 and 1997, respectively.
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.
Net losses from foreign currency transactions, included in the
consolidated statements of income, approximated $249,000, $731,000 and
$1,555,000 in 1995, 1996 and 1997, respectively.
The Company occasionally enters into foreign exchange forward contracts
and options on foreign currencies. The purpose of the Company's foreign
currency hedging activities is to protect the Company from the risk that
the eventual dollar cash flows resulting from the sale of products to
international customers will be adversely affected by changes in
exchange rates. Any gain or loss on a foreign exchange contract which
hedges a firm commitment is deferred until the underlying transaction is
realized, at which time it is included in the consolidated statement of
income. At December 31, 1997, there were outstanding forward contracts
to purchase approximately $3,500,000 in Western European currencies. The
Company also purchases foreign exchange options which permit, but do not
require, the Company to exchange foreign currencies at a future date
with another party at a contracted exchange rate. To finance premiums
paid on such options, from time to time the Company may also write
offsetting options at exercises prices which limit, but do not
eliminate, the effect of purchased options as a hedge. As of December
31, 1997, the Company had purchased foreign exchange options of
$8,000,000 and written foreign exchange options of $8,000,000 in Western
European currencies.
F-9
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, not exceeding five
years. Goodwill and other intangible assets associated with acquired
subsidiaries are amortized over periods ranging from five to twelve
years. Debt issue costs are amortized over the ten-year term of the
related debt, on a straight-line basis.
Long-Lived Assets - The Company reviews for the impairment of long-lived
assets and certain identifiable intangibles 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 cash flows expected to result from the use of the asset and its
eventual disposition is less than its carrying amount. No such
impairment losses have been identified by the Company.
Pervasiveness of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles 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.
3. RESEARCH AND DEVELOPMENT
A significant portion of the Company's research and development
operations are located in Israel where the Company derives substantial
benefits from participation in programs sponsored by the Government of
Israel for the support of research and development activities conducted
in that country. For the years 1995, 1996 and 1997, the Company's
research and development activities included 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 reimbursed a portion of the Company's research and
development expenditures under approved project budgets. The Company is
currently involved in several ongoing research and development projects
supported by the OCS. The Company is required to pay royalties to the
OCS based on the sale of products incorporating technology developed in
these projects. In addition, under the terms of the applicable funding
agreements, products resulting from projects funded by the OCS may not
be manufactured outside of Israel without government approval. The
amounts reimbursed by the OCS for the years 1995, 1996 and 1997 were
$7,735,000, $9,172,000 and $16,276,000, respectively.
F-10
4. SHORT-TERM INVESTMENTS
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 December 31, 1997:
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------------------------
(In thousands)
U.S. treasury notes $ 248 $ 4 $ - $ 252
Corporate debt securities 35,685 50 - 35,735
U.S. Government
agency bonds 749 - - 749
--------- -------- ------- ----------
Total debt securities 36,682 54 - 36,736
--------- -------- ------- ----------
Common stock 14,359 2,787 1,687 15,459
Mutual funds investing in
U.S. government and
agencies obligations 1,929 35 - 1,964
Preferred stock 5,981 880 233 6,628
---------- -------- ------- ----------
Total equity securities 22,269 3,702 1,920 24,051
---------- -------- ------- ----------
$ 58,951 $ 3,756 $ 1,920 $ 60,787
========== ======== ======= ==========
The following is a summary of available-for-sale securities as of
December 31, 1996:
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------------------------
(In thousands)
U.S. treasury notes $ 347 $ 4 $ - $ 351
Corporate debt securities 12,493 5 - 12,498
U.S. government
agency bonds 746 2 - 748
--------- -------- ------- ----------
Total debt securities 13,586 11 - 13,597
--------- -------- ------- ----------
Common stock 15,300 2,878 986 17,192
Mutual funds investing in
U.S. government and
agencies obligations 1,929 10 - 1,939
Preferred stock 6,431 349 44 6,736
---------- -------- ------- ----------
Total equity securities 23,660 3,237 1,030 25,867
---------- -------- ------- ----------
$ 37,246 $ 3,248 $ 1,030 $ 39,464
========== ======== ======= ==========
During 1997, the gross realized gains on sales of securities totaled
approximately $4,037,000 and the gross realized losses totaled
approximately $2,503,000.
The amortized cost and estimated fair value of debt securities at
December 31, 1997, by contractual maturity, are as follows:
Estimated
Cost Fair Value
---- ----------
(In thousands)
Due in one year or less $ 15,041 $ 15,047
Due after one year through three years 21,591 21,638
Due after three years 50 51
--------- ---------
$ 36,682 $ 36,736
========= =========
F-11
5. INVENTORIES
Inventories consist of:
December 31,
-------------------------
1996 1997
---- ----
(In thousands)
Raw materials $ 17,681 $ 15,766
Work in process 7,853 10,098
Finished goods 5,960 9,356
-------- ---------
$ 31,494 $ 35,220
======== =========
6. PROPERTY AND EQUIPMENT
Property and equipment consists of:
December 31,
-------------------------
1996 1997
---- ----
(In thousands)
Fixtures and equipment $ 28,943 $ 41,826
Transportation vehicles 3,237 2,845
Leasehold improvements 283 372
-------- ---------
32,463 45,043
Less accumulated depreciation
and amortization (14,422) (19,938)
--------- ----------
$ 18,041 $ 25,105
======== =========
F-12
7. OTHER ASSETS
Other assets consist of:
December 31,
-------------------------
1996 1997
---- ----
(In thousands)
Software development costs, net of accumulated
amortization of $9,103 and $12,649 $ 10,143 $ 12,605
Other assets 5,952 7,495
-------- ---------
$ 16,095 $ 20,100
======== =========
8. ACQUISITIONS
On January 14, 1998, Boston Technology, Inc., a Delaware corporation,
("BTI") merged with and into Comverse in a transaction that will be
accounted for as a pooling of interests. BTI designs, develops,
manufactures, markets and supports standard and customized enhanced
services platforms and software applications for the telephone network
operator market. Pursuant to the merger, the issued and outstanding
shares of BTI at the effective date of the merger were converted into an
aggregate of approximately 18,141,185 shares of Comverse's common stock
and outstanding options and warrants to purchase BTI stock were
converted into options and warrants to purchase an aggregate of
3,458,265 Comverse shares.
Unaudited pro forma consolidated statement of income data for the years
ended December 31, 1995, 1996, and 1997 are as follows:
CTI BTI Adjustments Combined
--- --- ----------- --------
(In thousands, except per share amounts)
1995
Sales $ 137,149 $ 105,267 $ 242,416
Net income (loss) $ 17,050 $ (14,890) $ 2,160
Earnings per share - diluted $ 0.75 $ 0.06
1996
Sales $ 197,181 $ 192,458 $ 389,639
Net income $ 27,988 $ 14,149 $ 42,137
Earnings per share - diluted $ 1.16 $ 1.01
1997
Sales $ 280,281 $ 210,525 $ (1,866) $ 488,940
Net income (loss) $ 43,500 $ (7,503) $ (1,472) $ 34,525
Earnings per share - diluted $ 1.61 $ 0.75
F-13
The pro forma adjustments relate to the elimination of intercompany
transactions between CTI and BTI.
The unaudited pro forma consolidated statement of income data combine
the historical statement of income data of the Company for the years
ended December 31, 1995, 1996 and 1997 with the historical statement of
income data of BTI for the fiscal years ended January 31, 1996 and 1997
and the eleven months ended December 31, 1997, respectively.
On August 30, 1995, the Company acquired DGM&S, a corporation that
develops and markets telecommunications software products. To effect the
acquisition, the Company issued 1,078,944 shares of common stock for all
of the outstanding common stock of DGM&S. The acquisition has been
accounted for as a pooling of interests; therefore, prior financial
statements and information have been restated to include DGM&S, as if
the companies had been combined for all periods presented.
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of:
December 31,
-------------------------
1996 1997
---- ----
(In thousands)
Accounts payable $ 19,929 $ 23,387
Accrued salaries 4,737 7,491
Accrued vacation 2,951 4,286
Accrued royalties 3,426 5,052
Other accrued expenses 9,488 8,516
-------- ---------
$ 40,531 $ 48,732
======== =========
10. BANK LOANS
As of December 31, 1997, a subsidiary of Comverse has a bank loan of
$16,500,000. The loan has an interest rate of 6% and is repayable in July
1998. The loan is secured by a $16,500,000 deposit with the bank.
11. CONVERTIBLE SUBORDINATED DEBENTURES
In October 1996, the Company issued $115,000,000 of convertible
subordinated debentures bearing interest at 5-3/4% per annum, payable
semi-annually. The debentures mature on October 1, 2006. The debentures
are convertible into shares of the Company's common stock at a conversion
price of $45.75 per share, subject to adjustment in certain events. The
debentures are subordinated in right of payment to all existing and
future senior indebtedness of the Company. The debentures are redeemable
at the option of the Company, in whole or in part, at prices decreasing
from 102% of the face amount on October 12, 1999 to par on October 1,
2001. 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.
F-14
In November 1993, the Company issued $60,000,000 of convertible
subordinated debentures bearing interest at 5-1/4% per annum, payable
semi-annually. In November 1996, the Company called these debentures for
redemption. All of the debentures were converted into 3,096,768 shares
of common stock.
12. LIABILITY FOR SEVERANCE PAY
Liability for severance pay consists 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.
The Company's statutory obligation for severance pay to employees of its
Israeli subsidiaries is determined on the basis of each individual's
current salary and length of employment. Funding is currently provided
primarily by premiums paid by the Company to insurance providers.
The Company is obligated under an agreement with its chief executive
officer to provide a severance payment upon the termination of his
employment with the Company. Approximately $1,186,000 and $1,398,000 has
been accrued as of December 31, 1996 and 1997, respectively, relating to
this liability.
13. RELATED PARTIES
The Company paid or accrued legal fees to one of its directors in the
amounts of $298,000, $254,000, and $422,000 in 1995, 1996 and 1997,
respectively.
14. STOCK OPTIONS
Employee Stock Options - At December 31, 1997, 3,719,516 shares of common
stock were reserved for issuance upon the exercise of options then
outstanding and 239,763 options were available for future grant under
Comverse's Stock Option Plans, under which options may be granted to key
employees, directors, and other persons rendering services to the
Company. Options which are designated as "incentive stock options" under
the option 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 any price, but not
less than the par value of the underlying shares, and without restriction
as to amount. 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 annual 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.
The changes in the number of options were as follows:
F-15
Year Ended December 31,
-----------------------------------------------------
1995 1996 1997
---- ---- ----
Outstanding at beginning of year 2,455,755 2,677,333 3,392,847
Granted during the year 650,200 1,086,526 897,400
Exercised during the year (370,442) (276,362) (457,948)
Canceled, terminated and expired (58,180) (94,650) (112,783)
---------- ----------- --------
Outstanding at end of year 2,677,333 3,392,847 3,719,516
=========== ========== ============
At December 31, 1997, options to purchase an aggregate of 1,441,428
shares were vested and currently exercisable under the option plans and
options to purchase an additional 2,278,088 shares vest at various dates
extending through the year 2001.
Weighted average option exercise price information for the years 1995,
1996 and 1997 was as follows:
1995 1996 1997
---- ---- ----
Outstanding at beginning of year $ 6.77 $ 8.48 $ 13.86
Granted during the year 13.58 25.17 42.92
Exercised during the year 5.62 5.63 7.83
Canceled, terminated and expired 11.22 14.95 25.89
Exercisable at year end 5.19 6.46 8.01
Significant option groups outstanding at December 31, 1997 and related
weighted average price and life information were as follows:
Weighted Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
-------------- ----------- ---------------- -------------- ----------- --------------
$ 1.40 - $10.00 1,402,545 5.32 $ 7.22 1,258,045 $ 6.90
$ 10.20 - $23.75 1,139,571 7.87 18.68 180,983 15.29
$ 33.25 - $44.25 1,157,000 9.34 40.36 0 0
$ 45.25 - $45.25 20,400 5.49 45.25 2,400 $ 45.25
----------- ---- -------- --------- -------
3,719,516 7.35 $ 21.25 1,441,428 $ 8.01
=========== ==== ======== ========= =======
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations
in accounting for its option plans. Accordingly, as all options have been
granted at exercise prices equal to fair market value on the date of
grant, no compensation expense has been recognized by the Company in
connection with its stock-based compensation plans. Had compensation cost
for the Company's stock option plans been determined based upon the fair
value at the grant date for awards under these plans consistent with the
methodology prescribed under Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation", the
Company's net income and earnings per share would have been reduced by
approximately $1,067,000, $2,676,000 and $7,401,000 or $.04, $.09 and
$.28 per diluted share in 1995, 1996 and 1997, respectively. The weighted
average fair value of the options granted during 1995, 1996 and 1997 is
estimated at $8.40, $13.66 and $23.14 on the date of grant (using the
Black-Scholes option pricing model) with the following weighted average
assumptions for 1995, 1996 and 1997, respectively: volatility of 67%, 55%
and 54%, risk-free interest rate of 6.8%, 6.1% and 6.5%, and an expected
life of five years in 1995, 1996 and 1997.
F-16
Options on Subsidiary Shares - Comverse has granted to its chief
executive officer, under the terms of his employment agreement, options
to acquire 7.5% of the equity of Comverse's subsidiaries, other than
Efrat Future Technology, Ltd. ("Efrat"). In addition, Comverse has
granted to certain other key executives of the Company options to acquire
shares of certain subsidiaries, other than Efrat, as a means of providing
incentives directly tied to the performance of those subsidiaries for
which different executives have direct responsibility. Such options,
which upon exercise would represent in the aggregate up to 23.6% of the
outstanding shares of each subsidiary, have terms of ten years and become
exercisable and vest in equal ratable annual increments over periods
ranging from three to five years from the first anniversary of 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. Upon the exercise, in whole or in
part, of any option, Comverse will receive an irrevocable proxy to vote
the underlying shares and a right of first refusal to purchase the shares
upon any proposed sale, transfer or other disposition, until such time as
the shares shall have been sold in a bona fide open market transaction.
15. EARNINGS PER SHARE ("EPS")
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share". Basic
earnings 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 for earnings per
share for each of the three years ended December 31, 1997 was as
follows:
1995 1996 1997
----------------------------- -------------------------- --------------------------
Per-Share Per Share Per Share
Income Shares Amount Income Shares Amount Income Shares Amount
(In thousands, except per share data)
Basic EPS
Net Income $ 17,050 21,122 $ 0.81 $ 27,988 21,931 $ 1.28 $ 43,500 25,017 $ 1.74
====== ====== =======
Effect of Dilutive
Securities
Options 1,480 1,815 2,082
Convertible debentures 2,586 2,701
-------- ------- ------ -------- -------
Diluted EPS $ 17,050 22,602 $ 0.75 $ 30,574 26,447 $ 1.16 $ 43,500 27,099 $ 1.61
======== ======= ====== ======== ======= ====== ======== ====== =======
Debentures convertible into 3,096,768 shares, 2,513,661 shares and
2,513,661 shares were outstanding as of December 31, 1995, 1996 and
1997, respectively, but were not included in the computation of diluted
EPS because the effect of including them would be antidilutive.
F-17
16. FOREIGN OPERATIONS
Condensed net assets, exclusive of intercompany balances, applicable to
all foreign operations, principally located in Israel, included in the
consolidated balance sheets, are summarized as follows:
December 31,
----------------------------
1996 1997
---- ----
(In thousands)
Current assets $ 85,841 $ 131,262
Property and equipment, net 13,548 19,523
Software development costs, net 9,394 12,134
Other assets 80 1,757
----------- -----------
Total assets 108,863 164,676
----------- -----------
Current liabilities 32,323 43,942
Other liabilities 2,258 2,849
----------- -----------
Total liabilities 34,581 46,791
----------- -----------
Net assets $ 74,282 $ 117,885
=========== ===========
Condensed operating information, exclusive of intercompany transactions,
applicable to all foreign operations, principally located in Israel,
included in the consolidated statements of income, is summarized as
follows:
Year Ended December 31,
-----------------------------------------
1995 1996 1997
---- ---- ----
(In thousands)
Total revenues $ 72,843 $ 95,766 $ 156,337
Costs and expenses 71,430 112,056 166,726
--------- ---------- -----------
Operating income (loss) $ 1,413 $ (16,290) $ (10,389)
========= =========== ============
The operating results shown above reflect the inclusion in costs and
expenses of fixed charges incurred by Comverse's foreign subsidiaries
necessary to support a level of activity which is greater than that
shown in the table due to the exclusion of intercompany revenue. Foreign
operations in 1996 and 1997 were profitable when intercompany
transactions are included.
F-18
17. INCOME TAXES
The provision for income taxes consists of the following:
Year Ended December 31,
-----------------------------------
1995 1996 1997
---- ---- ----
(In thousands)
Current:
Federal $ 529 $ 1,544 $ 3,471
State 272 560 678
Foreign 1,022 1,950 1,941
--------- --------- ---------
1,823 4,054 6,090
--------- --------- ---------
Deferred (benefit):
Federal 25 (621) (1,151)
State (12) (97) (107)
Foreign 221 22 (17)
--------- --------- ----------
234 (696) (1,275)
--------- ---------- ----------
$ 2,057 $ 3,358 $ 4,815
========= ========= =========
The reconciliation of the U.S. Federal statutory tax rate to the
Company's effective tax rate is as follows:
Year Ended December 31,
-----------------------------------
1995 1996 1997
---- ---- ----
U.S. Federal statutory rate 35% 35% 35%
Consolidated worldwide income
in excess of U.S. income (31) (30) (28)
Foreign income taxes 7 6 4
Other - - (1)
------- --------- --------
Company's effective tax rate 11% 11% 10%
======= ========= ========
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 December 31, 1996 and 1997 are as follows:
F-19
1996 1997
---- ----
(In thousands)
Deferred tax liability:
Expenses deductible for tax purposes and
not for financial reporting purposes $ 890 $ 846
Unrealized gain on available-for-sale securities 674 679
-------- --------
$ 1,564 $ 1,525
======== ========
Deferred tax asset:
Reserves not currently deductible $ 3,024 $ 3,092
Tax loss carryforwards 1,091 482
Inventory capitalization 197 420
Other 223 853
-------- --------
4,535 4,847
Less: valuation allowance (3,814) (2,684)
--------- ---------
Total deferred tax asset $ 721 $ 2,163
======== ========
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.
18. BUSINESS SEGMENT INFORMATION
The Company is engaged in one business segment: the design, development,
manufacture, marketing and support of special purpose computer and
telecommunications systems and software for multimedia communications
and information processing applications.
Sales by geographic regions, as a percentage of total sales, for the
years ended December 31, 1995, 1996 and 1997 were as follows:
1995 1996 1997
---- ---- ----
United States 29% 28% 25%
Canada 4% 3% 2%
Europe 31% 39% 45%
Far East/Australia 24% 21% 17%
Latin America 2% 1% 4%
Other 10% 8% 7%
------ ------ -----
Total 100% 100% 100%
====== ====== =====
19. COMMITMENTS AND CONTINGENCIES
Leases - The Company leases office, manufacturing, and warehouse space
under non-cancelable operating leases. Rent expense for all leased
premises approximated $3,014,000, $3,511,000 and $6,287,000 in 1995,
1996, and 1997, respectively.
F-20
As of December 31, 1997, the minimum rent obligations of the Company
were approximately as follows:
Amount
------
(In thousands)
1998 $ 7,585
1999 4,047
2000 2,892
2001 2,639
2002 and thereafter 6,971
----------
$ 24,134
Employment Agreements - The Company is obligated under employment
contracts with its chief executive officer to provide salary, bonuses,
and fringe benefits through June 30, 2000. Minimum salary payments under
the contracts currently amount to $350,000 per year and aggregate
$875,000 through June 30, 2000. The executive is entitled to annual
bonuses equal to at least 3% of the Company's consolidated after-tax net
income during each year. Upon termination or expiration of the term of
employment, the executive is entitled to receive a severance payment
equal to $93,170 for each year of his previous and current employment
with the Company, which is increased by the rate of 10% per annum
compounded for each year of employment, plus continued
employment-related benefits for the period of 36 months thereafter. If
the termination of employment results from a unilateral termination or
fundamental breach of the agreement by the Company, or the resignation
of the executive within six months following a change in control of the
Company not approved by the executive in his capacity as a director of
Comverse, the executive is entitled to an additional payment equal to
299% of the average annual cash compensation, including salary and any
bonus payments, received by the executive from the Company during the
three immediately preceding fiscal years, plus an amount equal to the
income tax resulting from such payment. The agreements also provide for
the executive to receive options entitling him to purchase 7-1/2% of the
equity of Comverse's subsidiaries, other than Efrat, at prices equal to
the higher of book value of the underlying shares at the date of option
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
the Board of Directors.
Most other employment agreements of the Company are terminable with or
without cause with prior notice of 60 days or less.
Licenses and Royalties - The Company licenses certain technology,
"know-how," software 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 entered into in connection with
research and product development activities. The Company currently pays
royalties on the sale of substantially all of its TRILOGUE and AUDIODISK
product lines in varying amounts based upon the revenues attributed to
the various components of such products. Royalties typically range from
approximately 1.5% to 6% of net sales of the related products and, in
the case of royalties due to government funding sources in respect of
research and development projects, are required to be paid until the
funding organization has received total royalties ranging from 100% to
150% of the amounts received by the Company under the approved project
budgets.
F-21
Dividend Restrictions - The ability of Comverse's Israeli subsidiaries to
pay dividends is governed by Israeli law, which provides that cash
dividends may be paid by an Israeli corporation only out of retained
earnings as determined for statutory purposes in Israeli currency. 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 residents are subject to
withholding of Israeli income tax at source at a rate of up to 25%,
depending on the particular facilities which have generated the earnings
that are the source of the dividends.
Investments - In 1997, wholly-owned subsidiaries of Comverse and Quantum
Industrial Holdings Ltd. organized two new companies to make investments
primarily relating to Israel, including investments in high technology
ventures. Each participant committed a total of $25,000,000 to the
capital of the new companies, for use as suitable investment
opportunities are identified. Quantum Industrial Holdings Ltd. is the
principal direct investment vehicle of the Quantum Group, a group of
investment funds managed by Soros Fund Management LLC.
Guaranties - The Company has obtained bank guaranties primarily for
performance of certain obligations under contracts with customers. These
guaranties, which aggregated approximately $11,800,000 at December 31,
1997, are to be released by the Company's performance of specified
contract milestones, which are scheduled to be completed primarily
during 1998.
Litigation - The Company is subject to certain legal actions arising in
the normal course of business. After taking into consideration legal
counsel's evaluation of such actions, management is of the opinion that
their final resolution will not have any significant adverse effect upon
the Company's business or its consolidated financial statements.
20. 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.
December 31, 1996 December 31, 1997
--------------------------- ------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
(In thousands)
Liabilities:
Convertible subordinated
debentures $ 115,000 $ 119,456 $ 115,000 $ 122,188
Off-balance sheet financial instruments:
Foreign exchange forward contracts
used for hedging purposes $ - $ 64 $ - $ (157)
F-22
Cash and Cash Equivalents, Bank Time Deposits, Short-Term Investments,
Accounts Receivable, Long-Term Receivables, Investments, and Accounts
Payable The carrying amounts of these items are a reasonable estimate of
their fair value.
Convertible Subordinated Debentures and Foreign Exchange Forward
Contracts - The fair value of these securities is estimated based on
quoted market prices or recent sales for those or similar securities.
The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 1997. Although
management is not aware of any factors that would significantly affect
the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements
since that date, and current estimates of fair value may differ
significantly from the amounts presented herein.
21. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income". This Statement requires that
changes in comprehensive income be shown in a financial statement that
is displayed with the same prominence as other financial statements.
SFAS No. 130 is effective for periods beginning after December 15, 1997.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosure about Segments of an Enterprise and Related
Information". SFAS No. 131 specifies new guidelines for determining a
company's operating segments and related requirements for disclosure.
The Company is in the process of evaluating the impact of the new
standard on the presentation of its financial statements and the
disclosures therein. SFAS No. 131 is effective for periods beginning
after December 15, 1997.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 97-2, "Software Revenue
Recognition". This Statement specifies certain changes for determining
the recognition of software revenue. The Company is in the process of
evaluating the impact of the SOP on its revenue recognition policies.
SOP No. 97-2 is effective for periods beginning after December 15, 1997.
F-23
22. QUARTERLY INFORMATION (UNAUDITED)
The following table shows selected results of operations for each of the
quarters during 1996 and 1997.
Fiscal Quarter Ended
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
1996 1996 1996 1996 1997 1997 1997 1997
---- ---- ---- ---- ---- ---- ---- ----
(In thousands, except per share amounts)
Sales $ 40,410 $ 46,629 $ 51,892 $ 58,250 $ 63,473 $ 67,015 $ 72,193 $ 77,600
Interest and Other Income 1,786 2,078 2,216 4,050 4,045 4,176 3,751 4,236
--------- --------- --------- -------- -------- --------- --------- ---------
Total Revenues $ 42,196 $ 48,707 $ 54,108 $ 62,300 $ 67,518 $ 71,191 $ 75,944 $ 81,836
========= ========= ========= ======== ======== ========= ========= =========
Gross profit $ 23,058 $ 26,615 $ 29,782 $ 33,407 $ 36,540 $ 38,576 $ 41,612 $ 44,696
Net income $ 5,507 $ 6,851 $ 7,235 $ 8,395 $ 9,587 $ 10,770 $ 11,338 $ 11,805
========== ========== =========== ========= ============ =========== ======== =========
Earnings per share:
Basic $ 0.26 $ 0.32 $ 0.34 $ 0.36 $ 0.39 $ 0.43 $ 0.45 $ 0.47
======== ======== ========= ======= ======= ========= ========= =========
Diluted $ 0.24 $ 0.29 $ 0.30 $ 0.33 $ 0.36 $ 0.40 $ 0.42 $ 0.44
======== ======== ========= ======= ======= ========= ========= =========
The difference between income per share and the sum of the income per share for
the quarters comprising the year is due to differences in the calculation of the
weighted average number of shares outstanding over the respective periods and
rounding adjustments.
F-24
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)
By: S / Kobi Alexander
-------------------------
Kobi Alexander, President
Date: March 25, 1998
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 March 25, 1998
- --------------------------------------------
Kobi Alexander, President,
Chairman of the Board and
Chief Executive Officer; Director
/s/ Igal Nissim March 25, 1998
- --------------------------------------------
Igal Nissim, Chief Financial Officer
/s/ Zvi Alexander March 25, 1998
- --------------------------------------------
Zvi Alexander, Director
/s/ Gregory C. Carr March 25, 1998
- --------------------------------------------
Gregory Carr, Director
/s/ John H. Friedman March 25, 1998
- --------------------------------------------
John H. Friedman, Director
/s/ Francis E. Girard March 25, 1998
- --------------------------------------------
Francis Girard, Director
/s/ Sam Oolie March 25, 1998
- --------------------------------------------
Sam Oolie, Director
/s/ William F. Sorin March 25, 1998
- --------------------------------------------
William F. Sorin, Director
/s/ Carmel Vernia March 25, 1998
- --------------------------------------------
Carmel Vernia, Director
/s/ Shaula Yemini March 25, 1998
- --------------------------------------------
Shaula Yemini, Director