-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FXVPFILn6Alk6RSpt4jo642ED0A3lZBY3p16DyeFH8yzOohw9SbkoYG898KEAFVQ 6U84n9q04QYAu7B8J7ASPg== 0000909518-02-000458.txt : 20020612 0000909518-02-000458.hdr.sgml : 20020612 20020612085333 ACCESSION NUMBER: 0000909518-02-000458 CONFORMED SUBMISSION TYPE: SC TO-I/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 20020612 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: COMVERSE TECHNOLOGY INC/NY/ CENTRAL INDEX KEY: 0000803014 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 133238402 STATE OF INCORPORATION: NY FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: SC TO-I/A SEC ACT: 1934 Act SEC FILE NUMBER: 005-39315 FILM NUMBER: 02676852 BUSINESS ADDRESS: STREET 1: 170 CROSSWAYS PARK DR CITY: WOODBURY STATE: NY ZIP: 11797 BUSINESS PHONE: 5166777200 MAIL ADDRESS: STREET 1: 170 CROSSWAYS PARK DRIVE CITY: WOODBURY STATE: NY ZIP: 11797 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: COMVERSE TECHNOLOGY INC/NY/ CENTRAL INDEX KEY: 0000803014 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 133238402 STATE OF INCORPORATION: NY FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: SC TO-I/A BUSINESS ADDRESS: STREET 1: 170 CROSSWAYS PARK DR CITY: WOODBURY STATE: NY ZIP: 11797 BUSINESS PHONE: 5166777200 MAIL ADDRESS: STREET 1: 170 CROSSWAYS PARK DRIVE CITY: WOODBURY STATE: NY ZIP: 11797 SC TO-I/A 1 a6-11comvsctoia.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 SCHEDULE TO AMENDMENT NO. 1 (Rule 13e-4) Tender Offer Statement under Section 14(d)(1) or 13(e)(1) of the Securities Exchange Act of 1934 COMVERSE TECHNOLOGY, INC. (Name of Subject Company (Issuer) and Filing Person (Offeror)) Options to Purchase Common Stock, Par Value $0.10 Per Share (Title of Class of Securities) 20586240 (CUSIP Number of Class of Securities) 170 Crossways Park Drive Woodbury, New York 11797 (516) 677-7200 (Name, Address, and Telephone Numbers of Person Authorized to Receive Notices and Communications on Behalf of Filing Persons) Copy to: William F. Sorin, Esq. Jeffrey Nadler, Esq. General Counsel and Secretary Weil, Gotshal & Manges LLP Comverse Technology, Inc. 767 Fifth Avenue 170 Crossways Park Drive New York, New York 10153 Woodbury, New York 11797 (212) 310-8000 (516) 677-7200 ================================================================================ Transaction valuation* Amount of Filing Fee - -------------------------------------------------------------------------------- $96,776,507 $19,356 ================================================================================ * Calculated solely for purposes of determining the filing fee. This amount assumes that options to purchase 23,731,947 shares of common stock of Comverse Technology, Inc. having an aggregate value of $96,776,507 as of May 21, 2002 will be exchanged pursuant to this offer. The aggregate value of such options was calculated based on the Black-Scholes option pricing model. The amount of the filing fee, calculated in accordance with Rule 0-11(b) of the Securities Exchange Act of 1934, as amended, equals 1/50th of one percent of the value of the transaction. [X] Check the box if any part of the fee is offset as provided by Rule 0-11(a)(2) and identify the filing with which the offsetting fee was previously paid. Identify the previous filing by registration statement, or the Form or Schedule and the date of its filing. Amount Previously Paid: $19,356 Filing Party: Comverse Technology, Inc. ------- ------------------------- Form or Registration No.: 5-39315 Date Filed: May 22, 2001 ------- ------------ [ ] Check the box if the filing relates solely to preliminary communications made before the commencement of a tender offer. Check the appropriate boxes below to designate any transactions to which the statement relates: [ ] third-party tender offer subject to Rule 14d-1. [X] issuer tender offer subject to Rule 13e-4. [ ] going-private transaction subject to Rule 13e-3. [ ] amendment to Schedule 13D under Rule 13d-2. Check the following box if the filing is a final amendment reporting the results of the tender offer: [ ] INTRODUCTORY STATEMENT This Amendment No. 1 amends and supplements the Tender Offer Statement on Schedule TO filed by Comverse Technology, Inc. (the "Company") with the Securities and Exchange Commission on May 22, 2002 (the "Schedule TO"), relating to an offer by the Company to exchange certain options to purchase shares of the Company's common stock, par value $0.10 per share ("Common Stock"), on the terms and subject to the conditions described in the Offer to Exchange Options to Purchase Common Stock, dated May 22, 2002 (the "Offer to Exchange"), filed as Exhibit (a)(i) to the Schedule TO, and the related attachments thereto. This Amendment No. 1 amends and supplements the Schedule TO, the Offer to Exchange and the Form of Election Confirmation (Exhibit (a)(vii) to the Schedule TO) in order to: 1. amend and restate the Offer to Exchange to revise Section 7 ("Conditions to the Offer"), Section 17 ("Additional Information") and Section 18 ("Forward Looking Statements; Miscellaneous"), as set forth in Exhibit (a)(i) to this Amendment No. 1; 2. amended and restate the Form of Election Confirmation as set forth in Exhibit (a)(vii) to this Amendment No. 1; 3. file as Exhibit (a)(viii) to the Schedule TO the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2002, filed with the Commission on April 30, 2002; 4. file as Exhibit (a)(ix) to the Schedule TO the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2002, filed with the Commission on June 12, 2002; 5. file as Exhibit (a)(x) to the Schedule TO the e-mail communication to the Company's employees, dated June 12, 2002; and 6. file as Exhibit (a)(xi) to the Schedule TO the press release of the Company, dated May 22, 2002 (incorporated by reference to the Company's Current Report on Form 8-K, filed with the Commission on May 22, 2002). ITEM 10. FINANCIAL STATEMENTS. (a) The information set forth (i) in the Offer to Exchange under Section 17 ("Additional Information"), (ii) on pages F-1 through F-28 of the Company's Annual Report on Form 10-K for its fiscal year ended January 31, 2002, attached hereto as Exhibit (a)(ix), and (iii) on pages 3 through 11 of the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2002, attached hereto as Exhibit (a)(x), is incorporated herein by reference. The book value per share of Common Stock as of January 31, 2002 was $8.68. ITEM 12. EXHIBITS. (a)(i) Offer to Exchange, dated May 22, 2002, as amended on June 12, 2002. (a)(ii) E-mail communication to Comverse Technology, Inc. employees, dated May 22, 2002.* (a)(iii) Materials used in PowerPoint Presentation to Comverse Technology, Inc. employees.* (a)(iv) Website Login Page.* (a)(v) Election Form.* (a)(vi) Form of Receipt of Election.* (a)(vii) Form of Election Confirmation. (a)(viii) Comverse Technology, Inc. Annual Report on Form 10-K for the fiscal year ended January 31, 2002, filed with the Securities and Exchange Commission on April 30, 2002. (a)(ix) Comverse Technology, Inc. Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2002, filed with the Securities and Exchange Commission on June 12, 2002. (a)(x) E-mail communication to Comverse Technology, Inc. employees, dated June 12, 2002. (a)(xi) Press Release, dated May 22, 2002 (incorporated by reference to our Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 22, 2002). (b) Not applicable. (d)(i) Comverse Technology, Inc. 1987 Stock Option Plan (incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 1987). (d)(ii) Comverse Technology, Inc. 1994 Stock Option Plan (incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 1994). (d)(iii) Comverse Technology, Inc. 1995 Stock Option Plan (incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 1995). 2 (d)(iv) Comverse Technology, Inc. 1996 Stock Option Plan (incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 1996). (d)(v) Comverse Technology, Inc. 1997 Stock Incentive Compensation Plan (incorporated by reference to the Definitive Proxy Materials for our Annual Meeting of Stockholders held January 13, 1998). (d)(vi) Comverse Technology, Inc. 1999 Stock Incentive Compensation Plan (incorporated by reference to the Definitive Proxy Materials for our Annual Meeting of Stockholders held October 8, 1999). (d)(vii) Comverse Technology, Inc. 2000 Stock Incentive Compensation Plan (incorporated by reference to the Definitive Proxy Materials for our Annual Meeting of Stockholders held September 15, 2000). (d)(viii) Comverse Technology, Inc. 2001 Stock Incentive Compensation Plan (incorporated by reference to the Definitive Proxy Materials for our Annual Meeting of Stockholders held June 15, 2001). (d)(ix) Amarex Technology, Inc. 1996 Stock Option Plan (incorporated by reference to our Registration Statement on Form S-8 filed with the Securities and Exchange Commission on April 28, 1999). (d)(x) Boston Technology, Inc. 1989 Stock Option Plan (incorporated by reference to our Registration Statement on Form S-8 filed with the Securities and Exchange Commission on January 16, 1998). (d)(xi) Boston Technology, Inc. 1994 Stock Incentive Plan (incorporated by reference to our Registration Statement on Form S-8 filed with the Securities and Exchange Commission on January 16, 1998). (d)(xii) Boston Technology, Inc. 1996 Amended and Restated Stock Incentive Plan (incorporated by reference to our Registration Statement on Form S-8 filed with the Securities and Exchange Commission on January 16, 1998). (d)(xiii) Exalink Ltd. Israeli Employee Stock Option Plan (incorporated by reference to our Registration Statement on Form S-8 filed with the Securities and Exchange Commission on October 26, 2000). (d)(xiv) Exalink Ltd. 2000 U.S. Stock Option Plan (incorporated by reference to our Registration Statement on Form S-8 filed with the Securities and Exchange Commission on October 26, 2000). 3 (d)(xv) Gaya Software Industries Ltd. Share Option Plan (incorporated by reference to our Registration Statement on Form S-8 filed with the Securities and Exchange Commission on October 26, 2000). (d)(xvi) InTouch Systems, Inc. Second Amended and Restated 1996 Stock Option Plan (incorporated by reference to our Registration Statement on Form S-8 filed with the Securities and Exchange Commission on August 19, 1999). (d)(xvii) Loronix Information Systems, Inc. 1992 Stock Plan (incorporated by reference to our Registration Statement on Form S-8 filed with the Securities and Exchange Commission on August 11, 2000). (d)(xviii) Loronix Information Systems, Inc 1995 Director Option Plan (incorporated by reference to our Registration Statement on Form S-8 filed with the Securities and Exchange Commission on August 11, 2000). (d)(xix) Loronix Information Systems, Inc. 1999 Nonstatutory Stock Option Plan (incorporated by reference to our Registration Statement on Form S-8 filed with the Securities and Exchange Commission on August 11, 2000). (d)(xx) Form of Stock Option Agreement.* (g) None. (h) None. ITEM 13. INFORMATION REQUIRED BY SCHEDULE 13E-3. Not applicable. - -------- * Previously filed. 4 SIGNATURE After due inquiry and to the best of my knowledge and belief, I certify that the information set forth in this Amendment No. 1 to Schedule TO is true, complete and correct. COMVERSE TECHNOLOGY, INC. By: /s/ William F. Sorin ------------------------------------ Name: William F. Sorin Title: General Counsel and Secretary June 12, 2002 5 EXHIBIT INDEX Exhibit Number Description - ------ ----------- (a)(i) Offer to Exchange, dated May 22, 2002, as amended on June 12, 2002. (a)(ii) E-mail communication to Comverse Technology, Inc. employees, dated May 22, 2002.* (a)(iii) Materials used in PowerPoint Presentation to Comverse Technology, Inc. employees.* (a)(iv) Website Login Page.* (a)(v) Election Form.* (a)(vi) Form of Receipt of Election.* (a)(vii) Form of Election Confirmation. (a)(viii) Comverse Technology, Inc. Annual Report on Form 10-K for the fiscal year ended January 31, 2002, filed with the Securities and Exchange Commission on April 30, 2002. (a)(ix) Comverse Technology, Inc. Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2002, filed with the Securities and Exchange Commission on June 12, 2002. (a)(x) E-mail communication to Comverse Technology, Inc. employees, dated June 12, 2002. (a)(xi) Press Release, dated May 22, 2002 (incorporated by reference to our Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 22, 2002). (b) Not applicable. (d)(i) Comverse Technology, Inc. 1987 Stock Option Plan (incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 1987). (d)(ii) Comverse Technology, Inc. 1994 Stock Option Plan (incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 1994). 6 (d)(iii) Comverse Technology, Inc. 1995 Stock Option Plan (incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 1995). (d)(iv) Comverse Technology, Inc. 1996 Stock Option Plan (incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 1996). (d)(v) Comverse Technology, Inc. 1997 Stock Incentive Compensation Plan (incorporated by reference to the Definitive Proxy Materials for our Annual Meeting of Stockholders held January 13, 1998). (d)(vi) Comverse Technology, Inc. 1999 Stock Incentive Compensation Plan (incorporated by reference to the Definitive Proxy Materials for our Annual Meeting of Stockholders held October 8, 1999). (d)(vii) Comverse Technology, Inc. 2000 Stock Incentive Compensation Plan (incorporated by reference to the Definitive Proxy Materials for our Annual Meeting of Stockholders held September 15, 2000). (d)(viii) Comverse Technology, Inc. 2001 Stock Incentive Compensation Plan (incorporated by reference to the Definitive Proxy Materials for our Annual Meeting of Stockholders held June 15, 2001). (d)(ix) Amarex Technology, Inc. 1996 Stock Option Plan (incorporated by reference to our Registration Statement on Form S-8 filed with the Securities and Exchange Commission on April 28, 1999). (d)(x) Boston Technology, Inc. 1989 Stock Option Plan (incorporated by reference to our Registration Statement on Form S-8 filed with the Securities and Exchange Commission on January 16, 1998). (d)(xi) Boston Technology, Inc. 1994 Stock Incentive Plan (incorporated by reference to our Registration Statement on Form S-8 filed with the Securities and Exchange Commission on January 16, 1998). (d)(xii) Boston Technology, Inc. 1996 Amended and Restated Stock Incentive Plan (incorporated by reference to our Registration Statement on Form S-8 filed with the Securities and Exchange Commission on January 16, 1998). (d)(xiii) Exalink Ltd. Israeli Employee Stock Option Plan (incorporated by reference to our Registration Statement on Form S-8 filed with the Securities and Exchange Commission on October 26, 2000). (d)(xiv) Exalink Ltd. 2000 U.S. Stock Option Plan (incorporated by reference to our Registration Statement on Form S-8 filed with the Securities and Exchange Commission on October 26, 2000). 7 (d)(xv) Gaya Software Industries Ltd. Share Option Plan (incorporated by reference to our Registration Statement on Form S-8 filed with the Securities and Exchange Commission on October 26, 2000). (d)(xvi) InTouch Systems, Inc. Second Amended and Restated 1996 Stock Option Plan (incorporated by reference to our Registration Statement on Form S-8 filed with the Securities and Exchange Commission on August 19, 1999). (d)(xvii) Loronix Information Systems, Inc. 1992 Stock Plan (incorporated by reference to our Registration Statement on Form S-8 filed with the Securities and Exchange Commission on August 11, 2000). (d)(xviii) Loronix Information Systems, Inc 1995 Director Option Plan (incorporated by reference to our Registration Statement on Form S-8 filed with the Securities and Exchange Commission on August 11, 2000). (d)(xix) Loronix Information Systems, Inc. 1999 Nonstatutory Stock Option Plan (incorporated by reference to our Registration Statement on Form S-8 filed with the Securities and Exchange Commission on August 11, 2000). (d)(xx) Form of Stock Option Agreement.* (g) None. (h) None. - -------- * Previously filed. 8 EX-99 3 a6-11exaviii.txt EXHIBIT (A)(I) EXHIBIT (a)(i) COMVERSE TECHNOLOGY, INC. 170 Crossways Park Drive Woodbury, New York 11797 (516) 677-7200 OFFER TO EXCHANGE OUTSTANDING OPTIONS TO PURCHASE COMMON STOCK May 22, 2002, as amended on June 12, 2002 COMVERSE TECHNOLOGY, INC. OFFER TO EXCHANGE OUTSTANDING OPTIONS TO PURCHASE COMMON STOCK - -------------------------------------------------------------------------------- THE OFFER AND WITHDRAWAL RIGHTS EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON JUNE 20, 2002, UNLESS WE EXTEND THE OFFER. - -------------------------------------------------------------------------------- Beginning on May 22, 2002, we are offering all of our employees (including those of our subsidiaries) resident in the United States, China, Finland, France, Germany, Hong Kong, India, Israel, Italy, Japan, Mexico, Spain and the United Kingdom the opportunity to exchange all outstanding options to purchase shares of our common stock, $0.10 par value per share ("Common Stock"), that were granted to them under our stock incentive plans (the "Option Plans") and that have an exercise price of not less than 110% (or in the case of options held by executive officers and employee directors, 120%) of the closing sale price on the trading day immediately preceding the Expiration Date (as defined below) ("Eligible Options") for a designated number of replacement options to purchase shares of Common Stock ("Replacement Options"). It is our intention to grant incentive stock options to all participants in the Offer to the extent permitted by the Internal Revenue Code of 1986, as amended (the "Code"). The exact number of shares of Common Stock underlying the Replacement Options to be granted to you will be 85% of the number of shares underlying the Eligible Options that you elect to exchange. If you wish to accept this offer with respect to any particular grant of Eligible Options, you must exchange all of your Eligible Options subject to that grant. The Replacement Options will be granted on December 23, 2002, or a later date to be determined by our Board of Directors if the Offer is extended by a postponement of the Expiration Date ("Replacement Option Grant Date"). Pursuant to the approval of our shareholders on February 25, 2002, we are making this offer upon the terms and subject to the conditions described in this Offer to Exchange Outstanding Options to Purchase Common Stock ("Offer to Exchange"). This Offer to Exchange, as may be amended from time to time, constitutes the Offer. This Offer is not conditioned upon a minimum number of Eligible Options being exchanged. This Offer is subject to conditions that we describe in Section 7 of this Offer to Exchange. This offer is being extended only to employees resident in the United States, China, Finland, France, Germany, Hong Kong, India, Israel, Italy, Japan, Mexico, Spain and the United Kingdom. We have excluded employees resident in other countries. In addition this Offer is not being extended to our directors who are not also our employees. i Although our Board of Directors has approved this offer, neither we nor our Board of Directors makes any recommendation as to whether or not you should elect to exchange your Eligible Options in the Offer. You must make your own decision whether to exchange your Eligible Options. The Common Stock is quoted on NASDAQ under the symbol "CMVT." On May 15, 2002, the closing price of the Common Stock as reported on NASDAQ was $12.28 per share. We recommend that you obtain current market quotations for the Common Stock before deciding whether to elect to exchange your Eligible Options. You should e-mail questions about this Offer or requests for assistance in completing the related documentation to stock_exchange_program@comverse.com (please be sure to include a phone number where you can be reached). This transaction has not been approved or disapproved by the SEC, nor has the SEC passed upon the fairness or merits of this transaction or upon the accuracy or adequacy of the information contained in this document. Any representation to the contrary is a criminal offense. May 22, 2002, as amended on June 12, 2002 ii IMPORTANT INFORMATION You will be receiving a separate personalized Election Form listing all unexercised options in the Company (both vested and unvested) that you currently hold issued to you under the plans. You will receive your Election Form via the Company's interoffice mail system. If you wish to accept this Offer, you must complete and sign your Election Form and submit it via sealed interoffice mail or fax to the contact person for your location listed in the following table so that it is received by us no later than 5:00 p.m., New York City time, on June 20, 2002, or a later date if we extend the Offer (the "Expiration Date"):
-------------------------------- ----------------------- ------------------------------------------ Location Contact Person Contact Information -------- -------------- ------------------- -------------------------------- ----------------------- ------------------------------------------ Israel-based Comverse employees Avital Pomerantz Location: Tel Aviv, Israel Building: Comverse 2, Room 207 Fax Number: 972-3-765-5269 -------------------------------- ----------------------- ------------------------------------------ US and Mexico -based Comverse Barbara Conley Location: Wakefield, MA employees Building: WK 100 Fax Number: 781-224-8135 -------------------------------- ----------------------- ------------------------------------------ Remaining eligible Fran Rail Location: Woodbury, NY participants, regardless of Building: 1 Crossways Pkwy location or company Fax Number: 516-677-7323 -------------------------------- ----------------------- ------------------------------------------
Additional specific instructions regarding where and to whom you should return your signed Election Form is included on your individual Election Form. If you wish to decline this Offer, we still request that you complete, sign and submit your Election Form, checking the box that states "I decline to participate in the Exchange program." If you do not submit an Election Form prior to the Expiration Date, or if you submit an incomplete or incorrectly completed form, you will be considered to have rejected the Offer. You do not need to return your stock option agreements for your Eligible Options to effectively elect to accept this Offer as they will be automatically cancelled if we accept your Eligible Options for exchange. However, you will be required to return your stock option agreements upon our request. The exercise price of the Replacement Options will be the closing price of our Common Stock as reported by NASDAQ on the Replacement Option Grant Date. We do not know what the exercise price of the Replacement Options will be, and therefore, we cannot guarantee that the Replacement Options will have a lower exercise price than the Eligible Options. The Board of Directors recognizes that the decision to accept the Offer is an individual one that should be based on a variety of factors. You should consult with your personal advisors to determine the specific financial and tax consequences relevant to your participation in iii the Offer. The information about this Offer is limited to this document and the attached Tender Offer Statement on Schedule TO. We have not authorized any person to make any recommendation on our behalf as to whether or not you should exchange your options in the Offer. You should rely only on the information contained in this document and the attached Tender Offer Statement on Schedule TO. We have not authorized anyone to give you any information or to make any representation in connection with this Offer other than the information and representations contained in this document and the Tender Offer Statement on Schedule TO. If anyone makes any recommendation or representation to you or gives you any information, you must not rely upon that recommendation, representation or information as having been authorized by us. iv TABLE OF CONTENTS Page GLOSSARY OF TERMS.......................................................................................1 SUMMARY OF TERMS........................................................................................2 THE OFFER..............................................................................................12 1. TERMS OF THE OFFER; NUMBER OF OPTIONS; EXPIRATION DATE........................................12 2. PURPOSE OF THE OFFER..........................................................................14 3. FUTURE PLANS..................................................................................14 4. PROCEDURES....................................................................................15 5. CHANGE IN ELECTION............................................................................16 6. ACCEPTANCE OF ELIGIBLE OPTIONS FOR EXCHANGE AND CANCELLATION AND ISSUANCE OF REPLACEMENT OPTIONS ..............................................................17 7. CONDITIONS OF THE OFFER.......................................................................17 8. PRICE RANGE OF COMMON STOCK...................................................................21 9. SOURCE AND AMOUNT OF CONSIDERATION; TERMS OF REPLACEMENT OPTIONS..............................21 10. INTERESTS OF DIRECTORS AND OFFICERS; TRANSACTIONS AND ARRANGEMENTS INVOLVING THE ELIGIBLE OPTIONS ..............................................24 11. STATUS OF ELIGIBLE OPTIONS ACQUIRED BY US IN THE OFFER........................................25 12. LEGAL MATTERS; REGULATORY APPROVALS...........................................................25 13. CERTAIN RISKS OF PARTICIPATING IN THE OFFER...................................................26 14. MATERIAL TAX CONSEQUENCES.....................................................................27 15. EXTENSION OF THE OFFER; TERMINATION; AMENDMENT................................................34 16. FEES AND EXPENSES.............................................................................35 17. ADDITIONAL INFORMATION........................................................................35 18. FORWARD LOOKING STATEMENTS; MISCELLANEOUS.....................................................37 SCHEDULE A-Information about our Directors and Executive Officers.....................................A-1
v GLOSSARY OF TERMS 1933 Act The Securities Act of 1933, as amended. Code The Internal Revenue Code of 1986, as amended. Common Stock Shares of our common stock, $0.10 par value per share. Company Comverse Technology, Inc. Election Form The form to be completed by all eligible employees identifying which option grants, if any, that the employee chooses to have participate in the Stock Option Exchange Program. Eligible Options Options to purchase Common Stock granted under Option Plans that have an exercise price of not less than 110% (or in the case of options held by executive officers and employee directors, 120%) of the closing sale price on the trading day immediately preceding the Expiration Date. Expiration Date June 20, 2002, or a later date if we extend the Offer. Offer to Exchange (also This voluntary program permitting eligible referred to as the Offer employees to cancel their Eligible Options and and the Stock Option exchange them for Replacement Options to Exchange Program) purchase a designated number of shares of our Common Stock. Option Plans Our existing stock incentive plans as set forth in Section 17 of this Offer to Exchange. Replacement Options Options to purchase shares of Common Stock to be granted by, and under the terms of, this Offer, in exchange for Eligible Options. Replacement Option Grant This is the date that is at least six months and Date one day after the Expiration Date, on which you will be granted Replacement Options for the Eligible Options you elected to exchange as of the Expiration Date. We expect this to be December 23, 2002, or a later date to be determined by our Board of Directors if we extend the Offer by postponing the Expiration Date. SEC The Securities And Exchange Commission. Securities Exchange Act Securities Exchange Act of 1934. 1 SUMMARY OF TERMS This summary highlights the most material information from this Offer to Exchange. To understand the Offer fully and for a more complete description of the terms of the offer, you should read carefully this entire Offer to Exchange. The references to Section numbers in these Questions and Answers are to Section numbers in the Offer to Exchange materials immediately following these Questions and Answers. The Questions and Answers are grouped under the following categories: o General Discussion of the Stock Option Exchange Program o The Basics of the Stock Option Exchange Program o Vesting, Exercise Price and Term of Replacement Options o How the Option Cancellation and Exchange Works o The Duration of this Offer o Tax Status of Replacement Options; Tax Considerations o How to Elect to Exchange Your Eligible Options o Miscellaneous and More Information GENERAL DISCUSSION OF THE STOCK OPTION EXCHANGE PROGRAM Q1 What is the Stock Option Exchange Program? A1 Our Stock Option Exchange Program is a voluntary program permitting eligible employees to cancel their Eligible Options and exchange them for Replacement Options. The exact number of Replacement Options to be granted will depend upon the number of your options that are Eligible Options and the number of those options that you elect to exchange. The Replacement Options will be granted on the Replacement Option Grant Date, and will have an exercise price to be determined when they are granted. 2 Q2 Why are we offering the Stock Option Exchange Program? A2 We are offering the Stock Option Exchange Program because of a decline in the price of our Common Stock. We recognize that the exercise prices of a significant portion of outstanding options to purchase our Common Stock are currently higher than the price of our Common Stock as reported on NASDAQ, which has reduced the potential value of your options and our stock option program to you (see Section 2). We designed our stock option program to be a valuable long-term incentive to you and to reward you for your contributions to our long-term business success. Our stock option program allows you to buy a specific number of shares of our Common Stock at a set exercise price on a future date. The exercise price is the price per share of Common Stock equal to the fair market value of our Common Stock on the date that your stock option was granted and is contained in your option agreement. If the current fair market value of our Common Stock is greater than the exercise price of the shares of Common Stock in your option, you would have the opportunity to purchase Common Stock with a built-in gain at the time you exercise your option. The built-in gain would be equal to the difference in the value of the Common Stock on the day you exercise all or part of your options and the exercise price. However, if the current fair market value of our Common Stock is less than the exercise price of the shares of Common Stock in your option, you will be unable to realize any built-in gain upon exercise of your option. This is why we are offering you the opportunity to participate in our Stock Option Exchange Program. Your participation in this Offer is voluntary, and we will allow you to either keep your current Eligible Options at their current exercise price or cancel those Eligible Options in exchange for Replacement Options, which will be granted on the Replacement Option Grant Date (see Section 1). Q3 What options may I exchange as part of this program? A3 We are offering to exchange Eligible Options that are currently outstanding under any of our Option Plans that are held by our employees, or by employees of one of our subsidiaries, subject to the eligibility requirement described below (see Section 1). Options granted under our Employee Stock Purchase Plan are not subject to this Offer. In addition, Common Stock, whether issued based upon the exercise of options or acquired through our Employee Stock Purchase Plan, is not eligible to participate in the Offer. Eligible Options are options that were granted to you under the Option Plans referred to above and that have an exercise price which is not less than 110% of the closing sale price of the Common Stock, as quoted on NASDAQ on the trading day immediately preceding the Expiration Date (as defined below), unless you are an executive officer or employee director, in which case the 3 exercise price of your options must be not less than 120% of the closing sale price on the trading day immediately preceding the Expiration Date. Example 1: If the closing sale price of the Common Stock as quoted on NASDAQ on the trading day immediately preceding the Expiration Date is $12.00, then options held by executive officers or employee directors must have an exercise price of at least $14.40 in order to be exchanged in the Offer, whereas options held by all other eligible employees must have an exercise price of at least $13.20 in order to be exchanged in the Offer. Q4 Are there conditions to the Offer? A4 The Offer is subject to a number of conditions, including the conditions described in Section 7. However, the Offer is not conditioned on a minimum number of optionholders accepting the Offer or a minimum number of options being exchanged. Q5 Are there any eligibility requirements that I must satisfy in order to receive the Replacement Options? A5 You must be one of our employees or an employee of one of our subsidiaries on the Expiration Date, and you must remain continuously employed through the Replacement Option Grant Date (employees on short-term paid leaves of absence, whether paid directly by the Company or by third-party insurers, will be considered employees for the purposes of this Offer) (see Section 6). If you are not an employee on the Expiration Date, or if you are a non-employee director, you will not be eligible to exchange any Eligible Options and any election you may have made will not be accepted by us. If you do not remain an employee through the Replacement Option Grant Date and your Eligible Options were cancelled under this Offer, you will not be granted Replacement Options and your cancelled options will not be reinstated. In addition if you are an employee, but do not reside in the United States, China, Finland, France, Germany, Hong Kong, India, Israel, Italy, Japan, Mexico, Spain or the United Kingdom, you will not be eligible to exchange any Eligible Options. Q6 If I am an employee based in a jurisdiction outside the United States, are there any special conditions or eligibility requirements that I must satisfy in order to participate in the Offer? Is it possible that the grant of Replacement Options may be delayed beyond the Replacement Option Grant Date due to local laws, such as securities laws? A6 Certain of the jurisdictions outside of the United States may require specific securities or other regulatory approvals. In addition, the tax consequences of the exchange of Eligible Options may differ from one jurisdiction to another. We refer you to Sections 7, 12 and 14 for a discussion of these matters. 4 THE BASICS OF THE STOCK OPTION EXCHANGE PROGRAM Q7 How does the Offer work? A7 From May 22, 2002 until 5:00 p.m., New York City time, on the Expiration Date, you may decide to exchange any or all of your Eligible Options on a grant by grant basis for Replacement Options, which will be granted on the Replacement Option Grant Date. If you wish to accept this Offer, you must exchange all of your Eligible Options on a grant by grant basis. With respect to each grant, you cannot exchange part of any particular Eligible Option grant and keep the balance; you may either retain or exchange all unexercised options that are subject to each particular Eligible Option grant. The number of shares of our Common Stock underlying the Replacement Options will be less than the number of shares underlying your Eligible Options at a ratio of 0.85 to 1 (see Section 1). Q8 When will I be granted my Replacement Options? A8 You will be granted your Replacement Options on the Replacement Option Grant Date. We will distribute the Replacement Option agreements following the Replacement Option Grant Date (see Section 6). Q9 Why won't I be granted my Replacement Options immediately after the Expiration Date of the Offer? A9 In order to avoid negative accounting consequences to our financial statements that can result from stock option exchanges, we cannot grant Replacement Options for at least six months and one day after the Expiration Date. Furthermore, the approval we received from our shareholders for this Offer (on February 25, 2002) also requires us to wait six months and one day after the Expiration Date before granting Replacement Options. Therefore, you will not be granted your Replacement Options until the Replacement Option Grant Date. Similarly, if you participate in the Offer, you will not be eligible to be granted any new options until the Replacement Option Grant Date. (see Sections 6 and 7). VESTING, EXERCISE PRICE AND TERM OF REPLACEMENT OPTIONS Q10 What is the exercise price for the Replacement Options? A10 The exercise price of your Replacement Options will be the fair market value of our Common Stock on the Replacement Option Grant Date. The fair market value of our Common Stock on the Replacement Option Grant Date will be the closing price of our Common Stock as reported on NASDAQ on the Replacement Option Grant Date. We cannot guarantee that the Replacement Options 5 will have a lower exercise price than the Eligible Options you exchanged. Therefore, we recommend that you obtain current market quotations for our Common Stock before deciding whether to elect to participate in the Offer (see Section 9). Q11 How long is the option term of the Replacement Options? A11 All Replacement Options will have a term equal to the remaining term of the corresponding cancelled Eligible Option. However, if your employment with us is terminated, the option expiration term may be shortened in accordance with the terms of the Option Plans (see Section 9). Q12 How will my Replacement Options vest? A12 Each Replacement Option will have the same vesting schedule as the corresponding Eligible Option, except that all Replacement Options replacing cancelled Eligible Options that either (i) have vested or will become vested on or before 5:00 p.m., New York City time, on the Expiration Date or (ii) were scheduled to vest through the six-month anniversary of the Replacement Option Grant Date, will vest on the six-month anniversary of the Replacement Option Grant Date (subject to any announced policy of our Board of Directors relating to accelerated vesting). Consequently, all Eligible Options that have vested or would have vested prior to the six-month anniversary of the new Replacement Option Grant Date will vest under the Replacement Option on the six-month anniversary of the Replacement Option Grant Date. All Replacement Options will be exercisable upon vesting. Q13 What if my employment is terminated after I elect to exchange my Eligible Options in this program? A13 Your rights in the event that you are no longer employed by us at any time with respect to the Offer are as follows: o If your employment terminates for any reason prior to the Expiration Date, then your Eligible Options that you elect to exchange in the Offer will not be exchanged or cancelled in the Offer, and your rights with respect to these and any other of your other options will continue to be governed by the provisions of the Option Plans under which they were granted; o If your employment terminates for any reason after the Expiration Date, but before your Replacement Options are granted to you on the Replacement Option Grant Date, then your Eligible Options that you elect to exchange will have been cancelled and you will not receive them back nor will you receive anything in exchange for them. 6 o If your employment terminates after the Replacement Option Grant Date, you will already have been granted your Replacement Options and your rights with respect to those options will be governed by the provisions of the Option Plans under which the options they replace were granted. However, regardless of the provisions of those Option Plans (but subject to any announced policy of our Board of Directors relating to accelerated vesting), no Replacement Options will vest during the first six months after the Replacement Option Grant Date, and therefore if your employment terminates before the six month anniversary of the Replacement Option Grant Date, then your Replacement Options will terminate. o For further information on the effects of any termination of your employment, see Sections 1, 9 and 13. HOW THE OPTION CANCELLATION AND EXCHANGE WORKS Q14 If I exchange my Eligible Options, how many shares of Common Stock will I be able to purchase under my Replacement Options? A14 In order to determine the number of shares of Common Stock that will be subject to a Replacement Option, you must multiply the number of shares subject to your Eligible Option by 0.85 with the result being rounded up to the next whole share. Example 2: Employee exchanges Eligible Options to purchase 113 shares. The product of 0.85 and 113 is 96.05 (0.85 x 113 = 96.05). Since the product is always rounded up to the nearest whole share, the employee's Replacement Option will be exercisable for 97 shares. Q15 If I elect to exchange my Eligible Options, do I have to exchange all of my Eligible Options or can I just exchange some of them? A15 If you have more than one Eligible Option grant, then you may exchange any or all of them on a grant by grant basis. You cannot, however, exchange only some Eligible Options from any particular grant of Eligible Options. If you elect to exchange any particular grant of Eligible Options, you must exchange all unexercised options that are subject to that grant of Eligible Options. An election to exchange less than all of your options from any individual grant of Eligible Options will not be accepted. (see Section 1). Example 3: Employee has two Eligible Option grants of 1,000 shares each. The employee could elect to participate in the program with respect to one or both of those 1,000 share grants, but could not elect to participate with respect to a fraction of a grant. 7 Q16 What if my Eligible Options are not currently vested? Can I exchange them? A16 Yes. Your Eligible Options do not need to be vested in order for you to participate in the Offer. You may exchange vested, unvested or partially vested options. Q17 Can I exchange the remaining portion of an Eligible Option grant that I have partially exercised? A17 Yes. However, only unexercised options underlying an Eligible Option grant may be exchanged and you must elect to exchange all remaining unexercised options that are subject to that Eligible Option grant (see Section 1). Q18 If I elect to exchange any Eligible Option grant as part of the Offer, are any of my other options affected? A18 No. THE DURATION OF THIS OFFER Q19 How long will this Offer remain open? A19 Presently, the Offer is scheduled to begin on May 22, 2002, and to remain open until 5:00 p.m., New York City time, on the Expiration Date. We have no plans to postpone the Expiration Date beyond June 20, 2002. However, if we do postpone the Expiration Date, you will be notified of the postponement. If we postpone the Expiration Date, we will announce the postponement no later than 5:00 p.m., New York City time, on June 20, 2002 (see Section 15). Q20 If the Expiration Date is postponed, how does the postponement impact the date on which my Replacement Options will be granted? A20 If we postpone the Expiration Date, the Replacement Option Grant Date will be postponed to a day that is at least six months and one day after the postponed Expiration Date. TAX STATUS OF REPLACEMENT OPTIONS; TAX CONSIDERATIONS Q21 Will My Replacement Options be incentive stock options or nonqualified stock options for United States federal income tax purposes? A21 It is our intention to grant incentive stock options to all participants in the Offer to the extent permitted by the Code. It is possible, however, that a portion of the Replacement Options granted to some or all of the participants in the Offer 8 will be required by the Code to be classified as nonqualified stock options. The extent to which any participant will not be granted Replacement Options which are classified for federal income tax purposes as incentive stock options will not be known until the Replacement Option Grant Date, as this determination is affected by the exercise price of the Replacement Options which will not be known until that date. Q22 In the U.S., what is the difference in tax treatment between nonqualified stock options and incentive stock options? A22 An employee generally will recognize ordinary income upon exercise of a nonqualified stock option in an amount equal to the excess of the fair market value of the Common Stock at the time of exercise over the exercise price. The ordinary income recognized with respect to the receipt of Common Stock upon exercise of a nonqualified stock option will be subject to both wage withholding and other employment taxes. When you sell shares that you have acquired by exercising a nonqualified stock option, any excess of the sale price over the fair market value of the Common Stock on the date of exercise will generally be treated as long term capital gain or short term capital gain taxable to you at the time of sale, depending on whether you held the shares for more than one year. The exercise of an incentive stock option generally does not give rise to federal income tax to the employee, provided that (i) the federal "alternative minimum tax," which depends on the employee's particular tax situation, does not apply and (ii) the employee is employed by us or one of our subsidiaries from the date of grant of the option until three months prior to the exercise thereof, except where such employment terminates by reason of disability (where the three month period is extended to one year) or death (where this requirement does not apply). If an employee exercises an incentive stock option after the requisite periods referred to in clause (ii) above, the incentive stock option will be treated as a nonqualified stock option. Further, if after exercising an incentive stock option, an employee disposes of the Common Stock so acquired more than two years from the date of grant (which, in the case of a Replacement Option, is the Replacement Option Grant Date and not the grant date of the Eligible Option which it replaced) and more than one year from the date of transfer of the Common Stock pursuant to the exercise of such incentive stock option (the "applicable holding period"), the employee will generally recognize long term capital gain or loss equal to the difference, if any, between the sale price and the exercise price. If, however, an employee does not hold the shares so acquired for the applicable holding period--thereby making a "disqualifying disposition"--the employee would recognize ordinary income equal to the excess of the fair market value of the shares at the time the incentive stock option was exercised over the exercise price and the balance, if any, would generally be treated as capital gain. If the disqualifying disposition is 9 a sale or exchange that would permit a loss to be recognized under the Code (were a loss in fact to be realized), and the sales proceeds are less than the fair market value of the shares on the date of exercise, the employee's ordinary income therefrom would be limited to the gain (if any) realized on the sale. Q23 Will I have to pay taxes if I exchange my Eligible Options in the Offer? A23 You should read Section 14 for discussions of some of potential tax consequences of participating in the Offer in each jurisdiction in which we are making the Offer. You should consult with your own tax advisor to determine the specific tax consequences and social insurance contribution considerations relevant to your participation in the Offer (see GENERAL DISCUSSION OF THE STOCK OPTION EXCHANGE PROGRAM and Section 14). HOW TO ELECT TO EXCHANGE YOUR ELIGIBLE OPTIONS Q24 What do I need to do to exchange my Eligible Options? A24 Beginning on May 22, 2002, you may complete the Election Form and submit it via sealed interoffice mail or fax to the contact person for your location listed in the following table so that it is received by us no later than 5:00 p.m., New York City time, on the Expiration Date:
-------------------------------- ----------------------- ------------------------------------------ Location Contact Person Contact Information -------- -------------- ------------------- -------------------------------- ----------------------- ------------------------------------------ Israel-based Comverse employees Avital Pomerantz Location: Tel Aviv, Israel Building: Comverse 2, Room 207 Fax Number: 972-3-765-5269 -------------------------------- ----------------------- ------------------------------------------ US and Mexico -based Comverse Barbara Conley Location: Wakefield, MA employees Building: WK 100 Fax Number: 781-224-8135 -------------------------------- ----------------------- ------------------------------------------ Remaining eligible Fran Rail Location: Woodbury, NY participants, regardless of Building: 1 Crossways Pkwy location or company Fax Number: 516-677-7323 -------------------------------- ----------------------- ------------------------------------------
Additional specific instructions regarding where and to whom you should return your signed Election Form is included on your individual Election Form. Your signed Election Form must be received by the contact person for your location listed above no later than 5:00 p.m., New York City time, on the Expiration Date. If you wish to decline this Offer, we still request that you complete, sign and submit your 10 Election Form, checking the box that states "I decline to participate in the Exchange program." Q25 What is the deadline to elect to participate in the Offer? A25 You must submit your Election Form by 5:00 p.m., New York City time, on the Expiration Date. (see Section 4). Q26 Can I change my election? A26 Yes. You may change your election at any time before 5:00 p.m., New York City time, on the Expiration Date. You may revise your Election Form by submitting a revised Election Form to the contact person for your location listed in the answer to question 24 above. Your signed Election Form must be received by the contact person for your location no later than 5:00 p.m., New York City time, on the Expiration Date. There is no limit to the number of times you can change your election prior to the deadline. However, the last Election Form you submit prior to the deadline will be the one that governs your election. Q27 What will happen if I don't turn in my form by the Expiration Date of June 20, 2002? A27 If you miss this deadline, you cannot participate in the Offer. Q28 What if I don't accept this Offer? A28 This Offer is completely voluntary. You do not have to participate and there are no penalties for electing not to participate in this Offer. MISCELLANEOUS AND MORE INFORMATION Q29 Where do I go if I have additional questions about this Offer? A29 You should e-mail questions about this Offer or requests for assistance in completing the related documentation to stock_exchange_program@comverse.com (please be sure to include a phone number where you can be reached). 11 THE OFFER 1. TERMS OF THE OFFER; NUMBER OF OPTIONS; EXPIRATION DATE. We are offering to grant Replacement Options in exchange for Eligible Options held by our employees (including those of our subsidiaries) resident in the United States, China, Finland, France, Germany, Hong Kong, India, Israel, Italy, Japan, Mexico, Spain and the United Kingdom. Employees on short-term paid leaves of absence, whether paid directly by the Company or by a third-party insurer, will be considered employees for the purposes of this Offer. We have excluded employees resident in other countries. In addition, our directors who are not also our employees (or employees of our subsidiaries) will not be eligible to participate in the Offer. Participation in the Offer is voluntary. Please refer to your personal Election Form, which you will be receiving shortly via the Company's interoffice mail system, for a listing of all of your options granted to you under the Company's Option Plans. Eligible Options are all the outstanding options that were granted under the Option Plans that have an exercise price which is not less than 110% (or in the case of options held by executive officers and employee directors, 120%) of the closing sale price of the Common Stock, as quoted on NASDAQ on the trading day immediately preceding the Expiration Date. To illustrate which options would be Eligible Options, if the closing sale price of our Common Stock as quoted on NASDAQ on the trading day immediately preceding the Expiration Date is $12.00, for example, then options held by executive officers or employee directors must have an exercise price of at least $14.40 in order to be Eligible Options, whereas options held by all other eligible employees must have an exercise price of at least $13.20 in order to be Eligible Options. It is our intention to grant incentive stock options to all participants in the Offer to the extent permitted by the Code. It is possible, however, that a portion of the Replacement Options granted to some or all of the participants in the Offer will be required by the Code to be classified as nonqualified stock options. The extent to which any participant will not be granted Replacement Options which are classified for federal income tax purposes as incentive stock options will not be known until the Replacement Option Grant Date, as this determination is affected by the exercise price which will not be known until that date. For a detailed discussion on the consequences of these designations, see Section 14. As of April 30, 2002, there were options to purchase an aggregate of 31,291,024 shares of our Common Stock outstanding under the Option Plans. You may exchange one or more of your Eligible Options grants; but if you elect to exchange any Eligible Option grant, you must exchange all Eligible Options that were part of that same grant. Our Offer is subject to the terms and conditions described in this Offer. We will only accept Eligible Options that are properly exchanged and not validly withdrawn in accordance with Section 6 of this Offer before the Offer expires on the Expiration Date. 12 The Replacement Options will be granted on the Replacement Option Grant Date. As explained in detail below, the number of shares underlying the Replacement Options will be less than the number of shares underlying your Eligible Options. The exercise price of the Replacement Options will be the closing price of our Common Stock as reported by NASDAQ on the Replacement Option Grant Date. We do not know what the exercise price of the Replacement Options will be, and therefore, we cannot guarantee that the Replacement Options will have a lower exercise price than the Eligible Options. The Board of Directors recognizes that the decision to accept the Offer is an individual one that should be based on a variety of factors. You should consult with your personal advisors to determine the specific financial and tax consequences relevant to your participation in the Offer. The exchange ratio is 0.85 shares of Common Stock underlying each Replacement Option for each share of Common Stock underlying the corresponding cancelled Eligible Option. In order to determine the number of shares that will be subject to a Replacement Option, you must multiply the number of shares subject to your corresponding Eligible Option by 0.85, and if this product results in a fractional share, round up the result to the next whole share. The number of shares to be represented by the Replacement Options will be adjusted for any stock splits, stock dividends, recapitalizations or similar transactions that may occur between the Expiration Date and the Replacement Option Grant Date. If your employment with us or one of our subsidiaries terminates after you elect to exchange your options but prior to the Expiration Date, you are not eligible to participate in the Offer. If, for any reason, you are not employed by us or one of our subsidiaries from the Expiration Date through the Replacement Option Grant Date, you will not be granted any Replacement Options or any other consideration in exchange for your Eligible Options that have been exchanged. In addition, since your Replacement Options will not vest before the six month anniversary of the Replacement Option Grant Date, if your employment with us or one of our subsidiaries terminates after the Replacement Option Grant Date but prior to the six month anniversary of the Replacement Option Grant Date, then your Replacement Options will terminate (subject to any announced policy of our Board of Directors relating to accelerated vesting). Participation in this Offer does not confer upon you the right to remain employed by us or any of our subsidiaries. Generally, all Replacement Options will be issued under the same Option Plan as the corresponding Eligible Option pursuant to the terms of that Option Plan except as otherwise provided herein. If you are an employee resident outside of the United States, additional terms and conditions may be applicable to your Replacement Options. 13 See Section 15 for a description of our rights to extend, delay, terminate and amend the Offer. We will publish a notice if we decide to amend, extend or terminate the Offer. 2. PURPOSE OF THE OFFER. Many of our outstanding options, whether or not they are currently exercisable, have exercise prices that are significantly higher than the current market price of our Common Stock. By making this Offer, we intend to maximize stockholder value by creating better performance incentives for, and thus increasing retention of, our employees. Our Board of Directors and our shareholders have approved this Offer. We do not know if the Replacement Options will have a lower exercise price than the Eligible Options. We recognize that the decision to accept or reject the Offer is an individual one that should be based on a variety of factors, and you should consult with your personal advisors if you have questions about your financial and/or tax situation. 3. FUTURE PLANS. We consistently evaluate strategic opportunities that may arise, including additional capital infusions, joint ventures and the purchase or sale of assets. Subject to the foregoing, and except as otherwise disclosed in this Offer or in our filings with the SEC, we presently have no plans or proposals that relate to or would result in: (a) any extraordinary corporate transaction, such as a merger, reorganization or liquidation, involving us or any of our subsidiaries; (b) any sale or transfer of a material amount of our assets or the assets of any of our subsidiaries; (c) any material change in our present dividend policy, or our indebtedness or capitalization; (d) any change in our management, including a change to the material terms of employment of any executive officer; (e) any change in our present Board of Directors, including a change in the number or term of directors or to fill any existing Board of Directors vacancies; (f) any other material change in our corporate structure or business; (g) our Common Stock not being authorized for quotation in an automated quotation system operated by a national securities association; 14 (h) our Common Stock becoming eligible for termination of registration pursuant to Section 12(g)(4) of the Securities Exchange Act; (i) the acquisition by any person of any material amount of our securities or the disposition of any material amount of securities; or (j) any change in our certificate of incorporation or bylaws, or any actions which may impede the acquisition of control of us by any person. Neither we nor our Board of Directors makes any recommendation as to whether you should exchange your Eligible Options, nor have we authorized any person to make any such recommendation. You are urged to evaluate carefully all of the information in this Offer and to consult your own legal, investment and/or tax advisors. You must make your own decision whether to exchange your Eligible Options. 4. PROCEDURES. Making Your Election. You will receive your Election Form via the Company's interoffice mail system. Beginning on May 22, 2002, you may submit your signed completed Election Form via sealed interoffice mail or fax to the contact person for your location listed in the following table so that it is received by us no later than 5:00 p.m., New York City time, on the Expiration Date:
------------------------------- ----------------------- ------------------------------------------ Location Contact Person Contact Information -------- -------------- ------------------- ------------------------------- ----------------------- ------------------------------------------ Israel-based Comverse Avital Pomerantz Location: Tel Aviv, Israel employees Building: Comverse 2, Room 207 Fax Number: 972-3-765-5269 ------------------------------- ----------------------- ------------------------------------------ US and Mexico -based Comverse Barbara Conley Location: Wakefield, MA employees Building: WK 100 Fax Number: 781-224-8135 ------------------------------- ----------------------- ------------------------------------------ Remaining eligible Fran Rail Location: Woodbury, NY participants, regardless of Building: 1 Crossways Pkwy location or company Fax Number: 516-677-7323 ------------------------------- ----------------------- ------------------------------------------
Your signed Election Form must be received by the contact person for your location no later than 5:00 p.m., New York City time, on the Expiration Date. If you wish to decline this Offer, we still request that you complete, sign and submit your Election Form, checking the box that states "I decline to participate in the Exchange program." If you do not submit an Election Form prior to the Expiration Date, or if you submit an incomplete or incorrectly completed form, you will be considered to have rejected the Offer. 15 You do not need to return your stock option agreements for your Eligible Options to effectively elect to accept the Offer as they will be automatically cancelled if we accept your Eligible Options for exchange. You will be required to return your stock option agreements upon our request. The delivery of the Election Forms and any other required documents are at the sole risk of the optionholder. Delivery will be deemed made only when actually received by us. Determination of Validity; Rejection of Eligible Options; Waiver of Defects; No Obligation to Give Notice of Defects. We will determine, in our discretion, all questions as to the number of shares subject to Eligible Options and the validity, form, eligibility (including time of receipt) and acceptance of Election Forms. Neither we nor any other person is obligated to give notice of any defects or irregularities in any Election Form and no one will be liable for failing to give such notice. Our determination of these matters will be final and binding on all parties. We may reject any or all Election Forms or Eligible Options that are exchanged to the extent that we determine they were not properly executed or delivered or to the extent that we determine it is unlawful to accept the Eligible Options that are exchanged. We may waive any of the conditions of the Offer or any defect or irregularity in any Election Form with respect to any particular Eligible Options or any particular optionholder. No Eligible Options will be accepted for exchange until all defects or irregularities have been cured by the optionholder exchanging the Eligible Options or waived by us. Neither we nor any other person is obligated to give notice of any defects or irregularities involved in the exchange of any Eligible Options, and no one will be liable for failing to give notice of any defects or irregularities. Our Acceptance Constitutes an Agreement. If you elect to exchange your Eligible Options and you exchange your Eligible Options according to the procedures described above, you will have accepted the Offer. Upon our acceptance of your properly exchanged Eligible Options (and not before then), a binding agreement between us and you will be formed on the terms and subject to the conditions of this Offer. 5. CHANGE IN ELECTION. You may change your election at any time before 5:00 p.m., New York City time, on the Expiration Date. You may only change your election by following the procedures described in this Section 5. You may revise your Election Form by submitting a signed revised Election Form to the contact person for your location listed in Section 4 above. Your signed Election Form must be received by the contact person for your location no later than 5:00 p.m., New York City time, on the Expiration Date. 16 The delivery of the revised Election Form and any other required documents are at the sole risk of the optionholder. Delivery will be deemed made only when actually received by us. 6. ACCEPTANCE OF ELIGIBLE OPTIONS FOR EXCHANGE AND CANCELLATION AND ISSUANCE OF REPLACEMENT OPTIONS. On the terms and subject to the conditions of this Offer and as promptly as practicable following the Expiration Date, we will notify you of all Eligible Options properly exchanged. The Replacement Options will be granted on the Replacement Option Grant Date. The number of shares underlying the Replacement Options will be determined in accordance with the method set forth in Section 1 above. In addition, the number of shares underlying the Replacement Options will be adjusted for any stock splits, stock dividends, recapitalizations or similar transactions that may occur between the Expiration Date and the Replacement Option Grant Date. If you are not employed by us or one of our subsidiaries on the Expiration Date, then you are not eligible to participate in this Offer. If you are an employee of ours or one of our subsidiaries as of the Expiration Date but are not employed continuously by us or one of our subsidiaries through the Replacement Option Grant Date, you will not be eligible to be granted Replacement Options (employees on short-term paid leaves of absence, whether paid directly by the Company or by third-party insurers, will be considered employees for the purposes of this Offer). We will notify you if we reject your election to exchange your Eligible Options. If we do not notify you of a rejection, you may assume that on the Expiration Date your properly executed and delivered Election Form has been accepted. After the Expiration Date, we will provide you with a letter confirming our acceptance of your Eligible Options, stating the number of Replacement Options that we will grant to you. 7. CONDITIONS OF THE OFFER. If at any time on or before the Expiration Date we determine that any event has occurred that, in our reasonable judgment, will likely have a material adverse effect on us or our ability to proceed with the Offer or to accept and cancel Eligible Options that you elect to exchange, we will not be required to accept any Eligible Options that you elect to exchange and we may terminate or amend the Offer, or postpone our acceptance and cancellation of any Eligible Options that you elect to exchange, in each case, including for, but not limited to, the following reasons: o there has been instituted or is pending any action or proceeding by any government or governmental, regulatory or administrative agency, authority or tribunal or any other person, domestic or foreign, before any court, authority, agency or tribunal that challenges the making of this Offer, the acquisition of some or all of the options elected for exchange pursuant to this Offer, the issuance of new options, 17 or otherwise relates in any manner to this Offer or that, in our reasonable judgment, could materially and adversely affect our or any of our subsidiaries' business, condition (financial or other), income, operations or prospects, or otherwise materially impair in any way the contemplated future conduct of our business or the business of any of our subsidiaries or materially impair the contemplated benefits of this Offer to us; o there has been any action, pending or taken, or approval withheld, or any statute, rule, regulation, judgment, order or injunction, proposed, sought, promulgated, enacted, entered, amended, enforced or deemed to be applicable to this Offer or us or any of our subsidiaries, by any court or any authority, agency or tribunal that, in our reasonable judgment, will likely: (a) make it illegal for us to accept some or all of the Eligible Options or to issue some or all of the Replacement Options or otherwise restrict or prohibit consummation of the Offer or otherwise relates to the Offer; (b) delay or restrict our ability, or render us unable, to accept the Eligible Options for exchange and cancellation or to issue Replacement Options for some or all of the exchanged Eligible Options; (c) materially impair the benefits we believe we will receive from the Offer; or (d) materially and adversely affect our business, condition (financial or other), income, operations or prospects; o there is: (a) any general suspension of trading in, or limitation on prices for, securities on any national securities exchange or in the over-the-counter market; (b) the declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, whether or not mandatory; (c) the commencement of a war, armed hostilities or other international or national crisis directly or indirectly involving the United States; (d) any limitation, whether or not mandatory, by any governmental, regulatory or administrative agency or authority on, or any event that in our reasonable judgment will likely affect, the extension of credit by banks or other lending institutions in the United States; 18 (e) any significant decrease in the market price of the shares of our Common Stock or any change in the general political, market, economic or financial conditions in the United States or abroad, including without limitation, as a result of terrorist activities after the date hereof, that could, in our reasonable judgment, have a material adverse effect on our or any of our subsidiaries' business, condition (financial or other), operations or prospects or on the trading in our Common Stock; (f) in the case of any of the foregoing existing at the time of the commencement of this Offer, a material acceleration or worsening thereof; or (g) any decline in either the Dow Jones Industrial Average or the Standard and Poor's Index of 500 Companies by an amount in excess of 10% measured during any time period after the close of business on May 22, 2002; o there has occurred any change in generally accepted accounting principles that will likely require us for financial reporting purposes to record compensation expense against our earnings in connection with this Offer; o a tender or exchange offer with respect to some or all of our Common Stock, or a merger or acquisition proposal for us, shall have been proposed, announced or made by another person or entity or shall have been publicly disclosed, or we shall have learned that: (a) any person, entity or "group," within the meaning of Section 13(d)(3) of the Securities Exchange Act, shall have acquired or proposed to acquire beneficial ownership of more than 5% of the outstanding shares of our Common Stock, or any new group shall have been formed that beneficially owns more than 5% of the outstanding shares of our Common Stock, other than any such person, entity or group that has filed a Schedule 13D or Schedule 13G with the SEC on or before May 22, 2002; (b) any such person, entity or group that has filed a Schedule 13D or Schedule 13G with the SEC on or before May 22, 2002 shall have acquired or proposed to acquire beneficial ownership of an additional 2% or more of the outstanding shares of our Common Stock; or (c) any person, entity or group shall have filed a Notification and Report Form under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or made a public announcement reflecting an intent to acquire us or any of our subsidiaries or any of the assets or securities of us or any of our subsidiaries; or 19 o any change or changes occur in our business, condition (financial or other), assets, income, operations, prospects or stock ownership that, in our reasonable judgment, is or may be materially adverse to us. If you are an employee resident in the United Kingdom, we and our subsidiaries will require that you enter into a joint election which will provide that you will pay the Company's portion of any National Insurance Contribution ("NIC") liability arising on the exercise of any Replacement Options which may be granted to you. You may wish to take this into consideration when deciding whether to exchange your Eligible Options. You will ordinarily be entitled to deduct the NIC payments you make under such joint election for the purposes of calculating the amount of the gain subject to United Kingdom income tax on the exercise of the Replacement Options. As a condition of participating in the Offer, you consent to the collection, use, processing and transfer of personal data as described in this paragraph. You understand that the Company and its subsidiaries (including your employer) hold certain personal information about you, including your name, home address and telephone number, date of birth, national identity number or other employee identification number, salary, nationality, job title, any shares of stock or directorships held in the Company, details of all stock options or any other entitlement to shares of stock awarded, cancelled, exercised, vested, unvested or outstanding in your favor, for the purpose of managing and administering the Offer ("Data"). You further understand that the Company and/or its subsidiaries will transfer Data amongst themselves as necessary for the purpose of implementation, administration and management of your participation in the Offer, and that the Company and/or any of its subsidiaries may each further transfer Data to any third parties assisting the Company in the implementation, administration and management of the Offer. You understand that these recipients may be located within and outside your country of residence. You authorize them to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing your participation in the Offer, including any requisite transfer of such Data as may be required for the administration of the Offer and/or the subsequent holding of shares of stock on your behalf, to a broker or other third party with whom you may elect to deposit any options that you are granted as a result of the Offer, or any shares of stock purchased upon the exercise of those options. You understand that you may, at any time, review Data, require any necessary amendments to it or withdraw the consent herein in writing by contacting the appropriate contact person for your location as listed in Section 4 above. You understand that withdrawal of consent will, however, affect your ability to exercise the options or realize benefits from participating in the Offer. If you participate in the Offer, you will not be eligible to be granted any new options until the Replacement Option Grant Date. The conditions to the Offer are for our benefit. We may assert them in our reasonable discretion before the Expiration Date and we may waive them at any time and from time to time, whether or not we waive any other condition to the Offer. 20 Our failure to exercise any of these rights is not a waiver of any of these rights. The waiver of any of these rights with respect to particular facts and circumstances is not a waiver with respect to any other facts and circumstances. Any determination we make concerning the events described in this Section 7 will be final and binding upon everyone. 8. PRICE RANGE OF COMMON STOCK. The Eligible Options to be exchanged pursuant to this Offer are not publicly traded. However, upon exercise of an option that we granted, the optionholder becomes an owner of our Common Stock. Our Common Stock is quoted on NASDAQ under the symbol "CMVT." The following table shows, for the periods indicated, the high and low closing prices per share of our Common Stock, as reported on NASDAQ, for the past two years. All prices have been adjusted to reflect the three-for-two stock split, effected in the form of a stock dividend, distributed on April 15, 1999, and the two-for-one stock split, effected in the form of a stock dividend, distributed on April 3, 2000.
Quarter ended High Low - ---------------------------------------------------------------------------------------------- Fiscal year 2002 April 30, 2002 $ 20.74 $ 11.68 Fiscal year 2001 January 31, 2002 26.93 19.14 October 31, 2001 29.87 15.90 July 31, 2001 74.11 24.78 April 30, 2001 113.13 45.82 Fiscal year 2000 January 31, 2001 121.63 86.19 October 31, 2000 114.81 76.06 July 31, 2000 102.75 65.25
As of May 15, 2002, the last reported sale price of our Common Stock, as reported by NASDAQ, was $12.28 per share. We do not know whether the Replacement Options will have a lower exercise price than the Eligible Options. We recommend that you obtain current market quotations for our Common Stock before deciding whether to elect to exchange your Eligible Options. 9. SOURCE AND AMOUNT OF CONSIDERATION; TERMS OF REPLACEMENT OPTIONS. Consideration. The sole consideration that you will receive for the exchange of your Eligible Options will be the grant of the Replacement Options as provided in this Offer. Your Replacement Options will be exercisable for the number of shares of Common Stock determined in accordance with the method summarized in Section 1. The number of shares of Common Stock to be represented by the Replacement Options will be adjusted for any stock splits, stock 21 dividends, recapitalizations or similar transactions that may occur between the Expiration Date and the Replacement Option Grant Date. The exercise price of the Replacement Options will be the closing price of our Common Stock as reported by NASDAQ on the Replacement Option Grant Date. We do not know what the exercise price of the Replacement Options will be, and therefore, we cannot guarantee that the Replacement Options will have a lower exercise price than the Eligible Options. The Board of Directors recognizes that the decision to accept the Offer is an individual one that should be based on a variety of factors. You should consult with your personal advisors to determine the specific financial and tax consequences relevant to your participation in the Offer. As of April 30, 2002, the closing sale price of our Common Stock as quoted on NASDAQ was $12.03 per share, and options to purchase an aggregate of 31,291,024 shares of our Common Stock were outstanding under our Option Plans. Of these, options to purchase an aggregate of 24,094,138 shares had exercise prices in excess of 110% of $12.03 ($13.23). If we were to receive and accept the exchange of all of these options, we would grant Replacement Options to purchase a total of approximately 20,480,017 shares of our Common Stock. Vesting. Each Replacement Option will have a term equal to the remaining term of the corresponding Eligible Option, subject to earlier termination in accordance with the Option Plans in the event of termination of employment. Each Replacement Option will have the same vesting schedule as the corresponding Eligible Option, except that all Replacement Options replacing Eligible Options that either (i) have vested or will become vested on or before the Expiration Date or (ii) were scheduled to vest through the six-month anniversary of the Replacement Option Grant Date, will vest on the six-month anniversary of the Replacement Option Grant Date (subject to any announced policy of our Board of Directors relating to accelerated vesting). Consequently, all Eligible Options that are exchanged in the Offer that have vested or would have vested through the six-month anniversary of the Replacement Option Grant Date will vest under the Replacement Option on the six-month anniversary of the Replacement Option Grant Date. All Replacement Options will be exercisable upon vesting. Merger or Acquisition. If we merge with or are acquired by another entity between the Expiration Date and the Replacement Option Grant Date, then the resulting entity will be bound to grant the Replacement Options under the same terms as provided herein. However, the type of security and the number of shares underlying each Replacement Option would be determined by the acquisition agreement between us and the acquiror based on the same principles applied to the handling of the options to acquire our Common Stock that are outstanding at the time of the acquisition. As a result of the ratio in which our Common Stock may convert into an acquiror's securities in an acquisition transaction, you may be granted options for more or fewer of the acquiror's securities than the number of shares of Common Stock subject to the Eligible Options that you exchange. 22 Generally, all Replacement Options will be issued under the same Option Plan as the corresponding Eligible Option pursuant to the terms of that Option Plan. If you are an employee resident outside of the United States, additional terms and conditions may be applicable to your Replacement Options. The issuance of Replacement Options under this Offer will not create any contractual or other right of the recipients to be granted any future grants of options or benefits in lieu of options. Termination of Employment. Participation in this Offer does not confer upon you the right to remain employed by us or any of our subsidiaries. Your rights in the event that you are no longer employed by us or any of our subsidiaries at any time with respect to the Offer are as follows: o On or Prior to the Expiration Date - If, for any reason, your employment with us or one of our subsidiaries terminates after you elect to exchange your options but prior to the Expiration Date, you are not eligible to participate in the Offer. Therefore, any options that you elected to exchange will not be exchanged or cancelled in the Offer, and your rights with respect to all of your options will continue to be governed by the provisions of the Option Plans under which they were granted. o From the day after the Expiration Date through the Replacement Option Grant Date - If, for any reason, your employment with us or one of our subsidiaries terminates from the day after the Expiration Date through the Replacement Option Grant Date, your Eligible Options that you elect to exchange will have been cancelled and will not be returned to you, and you will not be granted any replacement options or any other consideration in exchange for them. This means that if you die, become disabled, retire or resign, with or without good reason, or we terminate your employment, with or without cause, prior to the Replacement Option Grant Date and after the Expiration Date, you will not receive anything for the Eligible Options that you exchanged and we cancelled. o After the Replacement Option Grant Date - If your employment with us or one of our subsidiaries terminates after the Replacement Option Grant Date, you will already have been granted your Replacement Options and your rights with respect to those options will be governed by the provisions of the Option Plans under which the options they replace were granted. However, regardless of the provisions of those Option Plans (but subject to any announced policy of our Board of Directors relating to accelerated vesting), no Replacement Options will vest during the first six months after the Replacement Option Grant Date, and therefore if your employment terminates before the six month anniversary of the Replacement Option Grant Date, then your Replacement Options will terminate. 23 Registration of Option Shares. All shares of Common Stock issuable upon exercise of Replacement Options, have been registered under the 1933 Act on a Registration Statement on Form S-8 filed with the SEC. Unless you are restricted by our insider trading policy or considered an "affiliate" of ours under the 1933 act, you will be able to sell your Replacement Option shares free of any transfer restrictions under applicable securities laws. Our statements in this Offer concerning the Replacement Options are merely summaries and do not purport to be complete. These statements are subject to, and are qualified in their entirety by reference to, all provisions of the respective Option Plans, each of which is incorporated by reference as an exhibit to the Tender Offer Statement on Schedule TO, of which this Offer to Exchange is a part. 10. INTERESTS OF DIRECTORS AND OFFICERS; TRANSACTIONS AND ARRANGEMENTS INVOLVING THE ELIGIBLE OPTIONS. A list of our directors and executive officers is attached to this Offer to Exchange as Schedule A. As of April 30, 2002, our executive officers and directors (12 persons), as a group, held outstanding option awards to purchase a total of 8,544,144 shares of our Common Stock. Of these options, all that are held by executive officers and employee directors (6 persons) and have an exercise price of not less than 120% of the closing sale on the trading day immediately preceding the Expiration Date may be exchanged in this Offer. The following table sets forth the ownership of each of our executive officers and directors of options outstanding as of April 30, 2002.
- ------------------------------------- ----------------------------------- ----------------------------------- Number of Options to Percentage of Total Name of Beneficial Owner Purchase Common Stock Options Outstanding ------------------------ --------------------- ------------------- Kobi Alexander* 5,354,736 17.11% Itsik Danziger* 770,000 2.46 Zeev Bregman* 782,500 2.50 Dan Bodner* 67,500 0.22 David Kreinberg* 346,560 1.11 William F. Sorin* 175,752 0.56 Zvi Alexander 88,000 0.28 John H. Friedman 113,000 0.36 Francis E. Girard 610,896 1.95 Ron Hiram 54,000 0.17 Sam Oolie 92,000 0.29 Shaula A. Yemini 89,200 0.29 - ------------------------------------- ----------------------------------- -----------------------------------
* Eligible to participate in the offer as an executive officer or employee director. 24 Except for the foregoing, we have not and, to the best of our knowledge, none of our directors or executive officers or any affiliates of ours, has engaged in transactions involving options to purchase our Common Stock or in transactions involving our Common Stock during the past 60 days. In addition, except as otherwise described above, we are not and, to our knowledge, none of our executive officers or directors is, a party to any agreement, arrangement or understanding with respect to any of our securities (including but not limited to, any agreement, arrangement or understanding concerning the transfer or the voting of any of our securities, joint ventures, loan or option arrangements, puts or calls, guarantees of loans, guarantees against loss or the giving or withholding of proxies, consents or authorizations). During the past 60 days, (i) we have not granted any options to purchase shares of our Common Stock and (ii) our executive officers or employee directors have not exercised any options to acquire shares of Common Stock. 11. STATUS OF ELIGIBLE OPTIONS ACQUIRED BY US IN THE OFFER. Many of our optionholders hold options with exercise prices significantly higher than the current market price of our Common Stock. We believe it is in our best interest to offer optionholders an opportunity to more effectively participate in the potential growth in our stock price. However, if we immediately exchange existing options for options with lower exercise prices, the repriced options would be subject to variable accounting, which would require us to record additional compensation expense each quarter until the repriced options were exercised, cancelled or expired. Furthermore, the approval we received from our shareholders for this Offer (on February 25, 2002) also requires us to wait at least six months and one day after the Expiration Date before granting Replacement Options. Eligible Options that have been granted under the Option Plans and that we acquire in connection with the Offer will be cancelled and the shares of Common Stock that may be purchased under those Eligible Options will be returned to the pool of shares available for grants of new awards or options under various option plans without further stockholder action, except as required by applicable law or NASDAQ rules or any other securities quotation system or any stock exchange on which our Common Stock is then quoted or listed. 12. LEGAL MATTERS; REGULATORY APPROVALS. We are not aware of any license or regulatory permit that appears to be material to our business that might be adversely affected by the Offer, or of any approval or other action by any government or regulatory authority or agency that is required for the acquisition or ownership of the Eligible Options or Replacement Options as described in the Offer. If any other approval or action should be required, we presently intend to seek the approval or take the action. This could require us to delay the acceptance of any Eligible Options that you elect to exchange. We cannot assure you that we would be able to obtain any required approval or take any other required action. Our failure to obtain any 25 required approval or take any required action might result in harm to our business. Our obligation under the Offer to accept exchanged Eligible Options and to issue Replacement Options is subject to conditions, including the conditions described in Section 7. In addition, with respect to our employees resident in Israel, we have obtained an exemption, under Section 15D of the Israeli Securities Law of 1968, from the requirement to publish a prospectus in connection with the Offer. 13. CERTAIN RISKS OF PARTICIPATING IN THE OFFER. Participation in the Offer involves a number of potential risks, including those described below. This list and the risk factors under the heading entitled "Certain Trends and Uncertainties" in the Company's annual report on Form 10-K filed April 30, 2002 highlight the material risks of participating in this Offer. Eligible participants should carefully consider these risks and are encouraged to speak with an investment and tax advisor as necessary before deciding to participate in the Offer. In addition, we strongly urge you to read the sections in this Offer to Exchange discussing tax consequences in various countries, as well as the rest of this Offer to Exchange, along with the accompanying Election Form for a fuller discussion of the risks that may apply to you before deciding to participate in the Offer. o Participation in the Offer will make you ineligible to be granted any new option grants until December 23, 2002 at the earliest. Employees are generally eligible to be granted options at any time that our Board of Directors or Stock Option Remuneration Committee chooses to make them. However, if you participate in the Offer, you will not be eligible to be granted any new options until the Replacement Option Grant Date. Not participating in the Offer, however, is still no guarantee that you will be granted any new options in that period. o If the stock price increases after the date your options that you elect to exchange are cancelled, your cancelled options could be worth more than the Replacement Options that you were granted in exchange for them. For example, if you cancel Eligible Options with a $20 exercise price, and our Common Stock appreciates to $30 when the grants of Replacement Options are made, your Replacement Options will have higher exercise prices than the cancelled Eligible Options. o If you elect to exchange any Eligible Options, you will receive less shares under the Replacement Options than you had under the cancelled Eligible Options. Under the terms of the Offer, for each share of Common Stock underlying the Eligible Options you elect to cancel, you will receive 0.85 shares under the Replacement Option, rounded up to the nearest whole share. 26 o If your employment terminates for any reason (including, without limitation, death, termination with cause, termination without cause, resignation, and reduction in workforce) after the Expiration Date but prior to the grant of the Replacement Options, you will not be granted Replacement Options nor will your cancelled Eligible Options be returned to you. Once your Eligible Options are cancelled, they will have been eliminated completely. Accordingly, if your employment terminates for any reason after the Expiration Date but prior to the grant of the Replacement Options, you will have the benefit of neither the cancelled Eligible Options nor any Replacement Options. o If your employment terminates for any reason (including, without limitation, death, termination with cause, termination without cause, resignation, and reduction in workforce, but subject to any announced policy of our Board of Directors relating to accelerated vesting) after the Replacement Option Grant Date but before the six month anniversary of the Replacement Option Grant Date, your Replacement Options will terminate. If your employment terminates after the Replacement Option Grant Date, you will already have been granted your Replacement Options and your rights with respect to those options will be governed by the provisions of the Option Plans under which the options they replace were granted. However, regardless of the provisions of those Option Plans (but subject to any announced policy of our Board of Directors relating to accelerated vesting), Replacement Options will not vest during the first six months after the Replacement Option Grant Date. Therefore, if your employment terminates before the six month anniversary of the Replacement Option Grant Date, then your Replacement Options will terminate (whereas the Eligible Options you exchanged for them might already have vested and been exercisable by then). 14. MATERIAL TAX CONSEQUENCES. The following is a general summary of the likely material tax consequences of the exchange of Eligible Options under the Offer. It does not address all tax consequences associated with your ownership of any of our options in general. Furthermore, it does not discuss all of the tax consequences that may be relevant to you in your particular circumstances, but is merely intended to alert you to some of the potential tax consequences you may want to consider in making your decision. Please note that tax laws change frequently, and sometimes retroactively, and vary with your individual circumstances. It is strongly recommended that you consult with a tax advisor to determine the specific tax considerations and tax consequences relevant to your participation in the Offer. This summary is provided for your use without liability or responsibility on the part of the Company. 27 U.S. Federal Income Tax Consequences and Considerations The following is a general summary of the material U.S. federal income tax consequences of the exchange of Eligible Options under the Offer. This discussion is based on the U.S. Internal Revenue Code of 1986, as amended, its legislative history, Treasury Regulations and administrative and judicial interpretations as of the date of the Offer, all of which may change, possibly on a retroactive basis. Please note that this section does not address any state or local tax consequences. We do not believe that you should be required to recognize income for federal income tax purposes as a result of your participation in the Offer. It is our intention to grant incentive stock options to all participants in the Offer to the extent permitted by the Code. It is possible, however, that a portion of the Replacement Options granted to some or all of the participants in the Offer will be required by the Code to be classified as nonqualified stock options. The extent to which any participant will not receive Replacement Options which are classified for federal income tax purposes as incentive stock options will not be known until the Replacement Option Grant Date, as this determination is affected by the exercise price which will not be known until that date. Incentive Stock Options. Incentive stock options granted under the Option Plans are intended to meet the definitional requirements of Section 422(b) of the Code, for "incentive stock options." An employee who receives an incentive stock option does not recognize any taxable income upon the grant of such incentive stock option. Similarly, the exercise of an incentive stock option generally does not give rise to federal income tax to the employee, provided that (i) the federal "alternative minimum tax," which depends on the employee's particular tax situation, does not apply and (ii) the employee is employed by us or one of our subsidiaries from the date of grant of the option until three months prior to the exercise thereof, except where such employment terminates by reason of disability (where the three month period is extended to one year) or death (where this requirement does not apply). If an employee exercises an incentive stock option after the requisite periods referred to in clause (ii) above, the incentive stock option will be treated as a nonqualified stock option and will be subject to the rules set forth below under the caption "Nonqualified Stock Options." Further, if after exercising an incentive stock option, an employee disposes of the Common Stock so acquired more than two years from the date of grant (which, in the case of a Replacement Option, is the Replacement Option Grant Date and not the grant date of the Eligible Option which it replaced) and more than one year from the date of transfer of the Common Stock pursuant to the exercise of such incentive stock option (the "applicable holding period"), the employee will generally recognize long term capital gain or loss equal to the difference, if any, between the amount received for the shares and the exercise price. If, however, an employee does not hold the shares so acquired for the applicable holding period--thereby making a "disqualifying disposition"--the employee would recognize ordinary income equal to the excess of the fair market value of the shares at the time the incentive stock option was exercised over the exercise price and the balance, if any, would generally be treated as capital gain. If the 28 disqualifying disposition is a sale or exchange that would permit a loss to be recognized under the Code (were a loss in fact to be realized), and the sales proceeds are less than the fair market value of the shares on the date of exercise, the employee's ordinary income therefrom would be limited to the gain (if any) realized on the sale. Nonqualified Stock Options. Non-qualified stock options granted under the Option Plans are options that do not qualify as incentive stock options. An employee who receives a nonqualified stock option will not recognize any taxable income upon the grant of such nonqualified stock option. However, the employee generally will recognize ordinary income upon exercise of a nonqualified stock option in an amount equal to the excess of the fair market value of the shares of Common Stock at the time of exercise over the exercise price. The Ordinary income recognized with respect to the exercise of a nonqualified stock option will be subject to both wage withholding and other employment taxes. Income Tax Consequences and Considerations in China You will not be subject to tax when the Eligible Options are cancelled or when the Replacement Options are granted. Further, you will not be subject to tax when the Replacement Options vest (you may elect to pay any notional amount if you leave China). You are responsible for paying over to your local State Tax Bureau any tax when due. You will not be subject to tax when the Eligible Options are canceled or when the Replacement Options are granted. Further, you will not be subject to tax when the Replacement Options vest. When you exercise the Replacement Options, you will be subject to China income tax on the difference between the fair market value of the shares of Common Stock on the date of exercise and the option exercise price. You will be liable for taxes on such income as salary and wages during the relevant tax-filing period. When you sell the shares, you should declare the difference between the selling price and the fair market value of the shares of Common Stock on the date of exercise as income from the transfer of securities, if you remain a China domiciliary for tax purposes at the time. Income Tax Consequences and Considerations in Finland According to Section 66.3 of the Finnish Income Tax Act, the taxable moment in stock options is the time of exercise of the stock option. The exchange of Eligible Options for Replacement Options under the Offer may be considered an exercise. However, the exchange will not create any taxable income to employees in Finland, since the Replacement Options do not have any market value at the date of grant because they are not transferable and the exercise period will not have started at that stage. Thus, no taxable income will be received when the Eligible Options are exchanged for Replacement Options. Since employees will not be considered to have paid for the Eligible Options, no 29 deductible loss is created either. Therefore, taxation of the stock option benefits will be postponed until the date of exercise of Replacement Options. Income Tax Consequences and Considerations in France The French tax authorities will consider the exchange of outstanding options as a new grant of options. The French tax and social security rules in force on the Replacement Option Grant Date will apply to the Replacement Options. We remind you that in order to benefit from favorable French tax and social security regimes, beneficiaries must comply with four year holding requirements. The four year holding period is calculated from the Replacement Option Grant Date to the date when shares acquired under the Replacement Option are sold. In the case where the minimum four year holding period is not met, any increase in the value between fair market value at the date of exercise and the option price is taxed as salary and subject to income tax at marginal rates, social security and CSG and CRDS taxes. Income Tax Consequences and Considerations in Germany According to the current case-law of the Federal Finance Court of Germany, neither the granting of stock options itself nor the first possible date to exercise a stock option is subject to German income tax, provided such options are not publicly traded. The exchange of an Eligible Option by a Replacement Option as such is not subject to German income tax, since neither the Eligible Options nor the Replacement Options are publicly traded. The difference between the exercise price and the fair market value of the Common Stock is subject to income tax as ordinary income when employees exercise their options. The applicable income tax may have to be withheld by the employer (not the entity that grants the option). When the stock is sold the additional capital gain will be the difference between the stock exchange value on the day the option was exercised and the sales price. Such gain is subject to a 50% tax break and remains completely tax free after a year has elapsed since the option was exercised (provided the seller holds no more than 1% of the equity). Income Tax Consequences and Considerations in Hong Kong Employees who are subject to Hong Kong taxes will not be subject to tax when the Eligible Options are cancelled or when the Replacement Options are granted. Further, you will not be subject to tax when the Replacement Options vest. When you exercise the Replacement Options, you will be subject to salaries tax on the difference between the fair market value of the shares of Common Stock on the date of exercise and the option exercise price. If you leave Hong Kong before you exercise the Replacement Options, you may elect to be taxed at the time of your departure on the notional gain as at that time. You are responsible for paying over to the Inland Revenue Department any tax due. Hong Kong does not tax capital gains, so you will therefore not be subject to Hong Kong tax when you sell your shares underlying your options. 30 Income Tax Consequences and Considerations in India Under the Indian Income Tax Act, any benefit availed by an employee under any employee stock option plan is taxed under (a) Salary, as perquisites, and (b) Capital Gains. (a) Salary The conditions under which a benefit under an employee stock option plan will not be taxed under salary are discussed below: As per the Indian Income Tax Act, perquisites will not include "any value of the benefit provided by a company free of cost or at concessional rate to its employees by way of allotment of shares, debentures or warrants directly or indirectly under any employee stock option scheme or plan of the company offered to such employees provided it is in accordance with the guidelines issued in this behalf by the government." The employee stock option plan is required to be approved by the Income Tax Department if such exemption is to be availed. For this purpose, guidelines dated October 11, 2001 have been issued that need to be complied with. We intend to apply for such approval from the Income Tax Department. However, there is no guarantee that we will in fact complete such an application, and even a completed application may not be approved by the Income Tax department, in which case the difference between the purchase value and the market value at the time of issuance of shares will be considered as a perquisite and taxed as such. (b) Capital Gains Capital gains will arise when an employee sells the shares issued to him on exercise of the option. The difference between the purchase value at the time of exercise and the sale value will be treated as a capital gain and would be taxed accordingly. In case of an unapproved plan or scheme, such capital gains will arise on the difference between the perquisite value taxed as aforesaid and the sale price on disposal. Please note that the incidence of income tax in India depends upon your residence. Income Tax Consequences and Considerations in Israel This discussion is based on the Israeli Income Tax Ordinance [New Version], 1961 (the "Israeli Income Tax Ordinance"), and the rules, regulations and orders promulgated under it, as well as on administrative and judicial interpretations. The grant of the Replacement Options will be subject to a tax ruling received from the Israeli tax authorities with regard to our existing options, which will apply also to the Replacement Options. Under the tax ruling, the grant of the Replacement Options is not considered a taxable event and the option holder will not be liable for tax at the time of the grant. At the time of exercise of the options, the option holder will be subject to capital gains 31 tax at his or her marginal tax rate. Under the tax ruling, the option holder may elect to have his or her marginal tax rate capped at 42.5%, which is a lower rate than the maximum marginal tax rate in Israel. The amount of capital gains recognized by the option holder, on which the capital gains tax will be imposed, is equal to the excess, if any, of the fair market value of the shares at the time of exercise, over the exercise price of such shares. The tax will be withheld and paid to the Israeli income tax authorities by a trustee. An option holder will have a tax basis in the shares purchased upon exercise of Replacement Options, which is equal to the exercise price plus any income recognized upon the exercise of the option. Upon selling the shares issued upon the exercise of Replacement Options, the option holder generally will recognize capital gain in an amount equal to the difference between the sale proceeds and the option holder's tax basis in the shares. Under the Israeli Income Tax Order (Tax Rate on Capital Gain from Sale of Foreign Security), 1992, promulgated under the Israeli Income Tax Ordinance, these capital gains will be generally taxed at a rate of 35%. Income Tax Consequences and Considerations in Italy The exchange of Eligible Options in the Offer is not relevant for tax purposes in Italy, since the Eligible Options are going to be exchanged for options that cannot be transferred or assigned by the Italian employees (so called "non-transferable stock options"). As a consequence, since Italian employees will not be in the position to derive any income from the grant of Replacement Options on the Replacement Option Grant Date, this grant (even if made by means of an exchange) will not trigger any taxation in Italy. When the employees resident in Italy exercise options the difference between the actual purchase price and the fair market value of the shares issued upon the exercise thereof is considered compensation in kind. Such compensation is therefore qualified as employment income and subject to withholding tax and social security contributions. However, the difference between the fair market value of the shares and the purchase price will be exempt from taxation and social security contributions if the purchase price paid by the employee is not lower than the fair market value of the shares at the time of the grant of the option rights. Please note, according to guidelines issued by Italian Ministry of Finance, the "fair market value of a share traded on a stock exchange on the grant date of the option" is deemed to be the average of the stock exchange official prices of the latest month preceding the day of such grant, i.e., an amount equal to the average of the prices of the share on the stock market during the period between the grant date and the same day of the previous month. When the employees resident in Italy sell the shares, the gain (i.e., the net profit) realized will be subject to a 12.5% capital gains tax. The capital gains tax is assessed on the difference between the purchase price paid by the employee for the shares and the sale price received by the employee when the shares are sold. In the event the difference between the purchase price and the fair market value of the shares at the purchase date (i.e., the average of 32 the prices of the latest month preceding the purchase date converted into Euros) has already been taxed as employment income, the capital gain will be calculated on the difference between the fair market value of the shares at acquisition and the selling price. Income Tax Consequences and Considerations in Japan Grants of equivalent status such as those under this Offer are not recognized as taxable income in Japan and you should not be required to recognize income for Japanese income tax purposes. Tax liabilities with regard to stock options in Japan only occur when options are exercised and/or when stock underlying options is sold. Therefore, the exchange of the Eligible Options for Replacement Options will have no tax effect. Income Tax Consequences and Considerations in Mexico Pursuant to Mexican Income Tax Law ("Ley del Impuesto Sobre la Renta"), you will not be subject to tax when Eligible Options are cancelled or when Replacement Options are granted. However, pursuant to Chapter V of the Mexican Income Tax Law (Ley del Impuesto Sobre la Renta, De los Ingresos por Adquisicion de Bienes), within 15 days from the date of the exercise of the Replacement Options, you will be required to make a provisional tax payment equivalent to 20% of the value of the Common Stock issued, and when filing your annual tax return, you will have to accrue this income with your other income and account for the authorized deductions. This provisional payment will be deducted of your annual tax return. Additionally, upon exercise of the Replacement Option you may receive income, which you agree is not part of your salary for any effect and, in particular, for the effects of Article 84 of the Mexican Federal Labor Law (Ley Federal del Trabajo), because it is not a compensation for the work you perform, but an incentive for your contribution to our worldwide growth. Income Tax Consequences and Considerations in Spain This analysis is based on the Spanish Personal Income Tax Law 40/1998, dated December 9, as amended and its regulations. The exchange of Eligible Options to purchase Common Stock for Replacement Options does not give rise to a taxable income at the time of the exchange because the options previously granted were not transferable. The taxable income will arise when the Replacement Options are exercised. Income Tax Consequences and Considerations in United Kingdom The receipt of the Replacement Options will not give rise to any liability for United Kingdom income taxes because the only consideration for the exchange is the Replacement Options. The receipt of Replacement Options will not be regarded as consideration paid for the exchange of the Eligible Options and consequently no liability for capital gains tax will arise from the exchange. When the Replacement Options are exercised, you will be liable for United 33 Kingdom income taxes by reference to the open market value of the shares obtained upon exercise of the Replacement Options without regard to the value of the Eligible Options that were released. If you are an employee resident in the United Kingdom, we and our subsidiaries will require that you enter into a joint election which will provide that you will pay the Company's portion of any NIC liability arising on the exercise of any Replacement Options which may be granted to you. You will ordinarily be entitled to deduct the NIC payments you make under such joint election for the purposes of calculating the amount of the gain subject to United Kingdom income tax on the exercise of the Replacement Options. 15. EXTENSION OF THE OFFER; TERMINATION; AMENDMENT. We may at any time, and from time to time, extend the period of time during which the Offer is open and delay accepting any Eligible Options that are elected to be exchanged by announcing the extension and giving oral or written notice of the extension to the optionholders. Prior to the Expiration Date, we may postpone or terminate accepting and canceling any Eligible Options if any of the conditions specified in Section 7 occur. If we do so, we will announce the postponement and give oral or written notice of the postponement to the employees eligible to participate in the Offer. Our rights under this paragraph may be limited by Rule 13e-4(f)(5) under the Securities Exchange Act, which requires that we either pay the consideration offered or return the surrendered Eligible Options promptly after we terminate or withdraw the Offer. We may amend the Offer at any time by announcing the amendment. If we extend the length of time during which the Offer is open, the amendment must be issued no later than 5:00 p.m., New York City time, on the last previously scheduled or announced Expiration Date. Any announcement relating to the Offer will be sent promptly to optionholders in a manner reasonably designed to inform optionholders of the change. If we materially change the terms of the Offer or the information about the Offer, or if we waive a material condition of the Offer, we may extend the Offer to the extent required by Rules 13e-4(d)(2) and 13e-4(e)(3) under the Securities Exchange Act. Under these rules, the minimum period an Offer must remain open following material changes in the terms of the Offer or information about the Offer, other than a change in price or a change in percentage of securities sought, will depend on the facts and circumstances. We will publish a notice if we decide to take any of the following actions: o decrease what we will give you in exchange for your Eligible Options; or o decrease the number of Eligible Options to be exchanged in the Offer. 34 If the Offer is scheduled to expire within ten (10) business days from the date we notify you of such a decrease, we also intend to extend the Offer for a period of ten (10) business days after the date the notice is published. A business day means any day other than a Saturday, Sunday or United States federal holiday and consists of the time period from 12:01 a.m. through 12:00 midnight, New York City Time. 16. FEES AND EXPENSES. We will not pay any fees or commissions to any broker, dealer or other person, to solicit holders of Eligible Options to participate in this Offer. 17. ADDITIONAL INFORMATION. With respect to the Offer, we have filed a Tender Offer Statement on Schedule TO with the SEC, of which this Offer to Exchange is a part. This Offer to Exchange does not contain all of the information contained in the Schedule TO and the exhibits to the Schedule TO. We recommend that you review the Schedule TO, including its exhibits, before making a decision on whether to exchange your options. We recommend that you review the following materials that we have filed with the SEC before making a decision on whether to exchange your options: (a) our Annual Report on Form 10-K for the year ended January 31, 2002, filed with the SEC on April 30, 2002, attached as Exhibit (a)(viii) to the Schedule TO and provided to you herewith; (b) our Quarterly Report on Form 10-Q for the quarter ended April 30, 2002, filed with the SEC on June 12, 2002, attached as Exhibit (a)(ix) to the Schedule TO and provided to you herewith; (c) our 1987 Stock Option Plan (SEC file number 333-44429 (7/17/98, S-8 POS)); (d) our 1994 Stock Option Plan (SEC file number 333-44429 (7/17/98, S-8 POS)); (e) our 1995 Stock Option Plan (SEC file number 333-44429 (7/17/98, S-8 POS)); (f) our 1996 Stock Option Plan (SEC file number 333-44429 (7/17/98, S-8 POS)); (g) our 1997 Stock Incentive Compensation Plan (SEC file number 333-44429 (7/17/98, S-8 POS)); (h) our 1999 Stock Incentive Compensation Plan (SEC file number 333-64182 (6/29/01, S-8)); 35 (i) our 2000 Stock Incentive Compensation Plan (SEC file number 333-64182 (6/29/01, S-8)); (j) our 2001 Stock Incentive Compensation Plan (SEC file number 333-64182 (6/29/01, S-8)); (k) Amarex Technology, Inc. 1996 Stock Option Plan (SEC file number 333-77201 (4/28/99, S-8)) (l) Boston Technology, Inc. 1989 Stock Option Plan (SEC file number 333-44429 (7/17/98, S-8 POS)); (m) Boston Technology, Inc. 1994 Stock Incentive Plan (SEC file number 333-44429 (7/17/98, S-8 POS)); (n) Boston Technology, Inc. 1996 Amended and Restated Stock Incentive Plan (SEC file number 333-44429 (7/17/98, S-8 POS)); (o) Exalink Ltd. Israeli Employee Stock Option Plan (SEC file number 333-48640 (10/26/00, S-8)); (p) Exalink Ltd. 2000 U.S. Stock Option Plan (SEC file number 333-48640 (10/26/00, S-8)). (q) Gaya Software Industries Ltd. Share Option Plan (SEC file number 333-47502 (10/6/00, S-8)); (r) InTouch Systems, Inc. Second Amended and Restated 1996 Stock Option Plan (SEC file number 333-85565 (8/19/99, S-8)); (s) Loronix Information Systems, Inc. 1992 Stock Plan (SEC file number 333-43542 (8/11/00, S-8)); (t) Loronix Information Systems, Inc 1995 Director Option Plan (SEC file number 333-43542 (8/11/00, S-8)); and (u) Loronix Information Systems, Inc. 1999 Nonstatutory Stock Option Plan (SEC file number 333-43542 (8/11/00, S-8)); The SEC file number for these filings is 0-15502. These filings, our other annual, quarterly and current reports, our proxy statements and our other SEC filings may be examined, and copies may be obtained, at the following SEC public reference rooms: 450 Fifth Street, N.W Suite 1400 Washington, D.C. 20549 You may obtain information on the operation of the public reference rooms by calling the SEC at 1-800-SEC-0330. Our SEC filings are also available to the public on the SEC's Internet site at http://www.sec.gov. 36 Our Common Stock is quoted on the Nasdaq National Market under the symbol "CMVT," and our SEC filings can be read at the following Nasdaq address: Nasdaq Operations 1735 K Street, N.W. Washington, D.C. 20006 We will also provide without charge to each employee upon their written or oral request, a copy of this Offer to Exchange or any or all of the documents to which we have referred you, other than exhibits to these documents (unless the exhibits are specifically incorporated by reference into the documents). Requests should be e-mailed to stock_exchange_program@comverse.com. As you read the documents listed in this Section 17, you may find some inconsistencies in information from one document to another. Should you find inconsistencies between the documents, or between a document and this Offer, you should rely on the statements made in the most recent document. The information contained in this Offer about us should be read together with the information contained in the documents to which we have referred you. 18. FORWARD LOOKING STATEMENTS; MISCELLANEOUS. This Offer to Exchange and our SEC reports referred to above include forward-looking statements which involve risks and uncertainties that include, among others, those set forth in Section 17 of this document. More information about factors that potentially could affect our financial results is included in our filings with the SEC, including, but not limited to our Annual Report on Form 10-K for the year ended January 31, 2001, our Quarterly Report on Form 10-Q for the quarter ended April 30, 2001, and our proxy materials for the 2001 Annual Meeting of Stockholders. If at any time we become aware of any jurisdiction where the making of this Offer violates the law, we will make a good faith effort to comply with the law. If, we cannot comply with the law, the Offer will not be made to, nor will exchanges be accepted from or on behalf of, the optionholders residing in that jurisdiction. Our Board of Directors recognizes that the decision to accept or reject this Offer is an individual one that should be based on a variety of factors and you should consult your personal advisors if you have questions about your financial or tax situation. The information about this Offer from us is limited to this document and the Tender Offer Statement on Schedule TO. We have not authorized any person to make any recommendation on our behalf as to whether or not you should exchange your options pursuant to the Offer. We have not authorized anyone to give you any information or to make any representations in connection with the Offer other than the information and representations contained in this document and the Tender Offer Statement on 37 Schedule TO. If anyone makes any recommendation or representation to you or gives you any information, you must not rely upon that recommendation, representation or information as having been authorized by us. Comverse Technology, Inc. May 22, 2002, as amended on June 12, 2002 38 SCHEDULE A INFORMATION ABOUT OUR DIRECTORS AND EXECUTIVE OFFICERS Our directors and executive officers and their positions and offices as of May 15, 2002, are set forth in the following table: Name Age Position and Offices Held - ------------------------------------------------------------------------------- Kobi Alexander 50 Chief Executive Officer and Chairman of the Board of Directors and Director Itsik Danziger 53 President and Director Zeev Bregman 40 Chief Executive Officer of Comverse, Inc. Dan Bodner 43 President and Chief Executive Officer of Verint Systems Inc. David Kreinberg 37 Vice President of Finance and Chief Financial Officer Zvi Alexander 79 Director John H. Friedman 49 Director Francis E. Girard 63 Director Ron Hiram 49 Director Sam Oolie 65 Director William F. Sorin 53 Secretary and Director Shaula A. Yemini, Ph.D. 54 Director The address of each director and executive officer is: c\o Comverse Technology, Inc., 170 Crossways Park Drive, Woodbury, New York, 11797. A-1 EX-99 4 a6-11exavii.txt EXHIBIT (A)(VII) Exhibit (a)(vii) Example Confirmation Letter Name: Date: Listed below is the original grant detail for those options that you have successfully elected to participate in the Stock Option Exchange Program. These options have been cancelled as of June 20, 2002. You should be aware that the cutoff price for determining which options were eligible to participate in this program was $xx.xx. If you selected any options to participate in the program with an exercise price lower that this price, such options are ineligible to participate and are, therefore, excluded from the list below. This letter also evidences your right to receive on December 23, 2002, Replacement Options to purchase such number of shares of our Common Stock as set forth below under "Replacement Options," subject to the terms and conditions set forth in the Offer to Exchange, dated May 22, 2002, as amended and supplemented. Grant Grant Grant Outstanding Replacement Date Type Price Shares Options EX-99 5 a6-11exaix.txt EXHIBIT (A)(VIII) Exhibit (a)(viii) ================================================================================ 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 Year ended January 31, 2002 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: [ ] ================================================================================ 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 April 23, 2002 was approximately $2,260,000,000. The closing price of the registrant's common stock on the NASDAQ National Market System on April 23, 2002 was $12.11 per share. There were 186,833,952 shares of the registrant's common stock outstanding on April 23, 2002. 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 2002 Annual Meeting of Shareholders of the registrant or in an amendment to this report on Form 10K/A. ----------------------------------- Medalist is a registered trademark, and Comverse, Comverse Technology and Trilogue are trademarks, of the Company. LORONIX is a registered trademark, and Intelligent Recording, OpenStorage Portal, RELIANT, STAR-GATE, ULTRA, Universal Database and Verint Systems are trademarks, of Verint Systems Inc., a subsidiary of the Company. Signalware and Ulticom are registered trademarks of Ulticom, Inc., a subsidiary of the Company. - ii - PART I ITEM 1. BUSINESS. The Company Comverse Technology, Inc. ("CTI" 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 wireless and wireline telecommunications network operators and service providers, call centers, and other public and commercial organizations worldwide. Through its subsidiary Comverse, Inc. ("Comverse"), the Company provides enhanced services products that enable telecommunications service providers ("TSPs") to offer a variety of revenue-generating services accessible to large numbers of simultaneous users. These services include a broad range of integrated multimodal messaging, information distribution and personal communications services, such as call answering with one-touch call return, voicemail, IP-based unified messaging (voice, fax and email in a single mailbox, media conversion such as email to voice and visual mailbox presentation), prepaid wireless calling services, wireless data and Internet-based services such as short messaging services ("SMS"), wireless information and entertainment services, multimedia messaging services ("MMS"), and wireless instant messaging, interactive voice response ("IVR"), and voice portal services, which are part of a voice-controlled portfolio of services such as voice dialing, voice-controlled Web browsing and voice-controlled messaging, and other applications. Comverse's principal market for its systems consists of organizations that use the systems to provide services to the public, often on a subscription or pay-per-usage basis, and includes both wireless and wireline telecommunications network operators and other TSP organizations. Comverse markets its systems throughout the world, with its own direct sales force and in cooperation with a number of leading international vendors of telecommunications infrastructure equipment. More than 390 wireless and wireline TSPs in more than 100 countries, including the majority of the 20 largest telecom companies in the world, have selected Comverse's products to provide enhanced telecommunications services to their consumers. Major network operators and service providers using Comverse's systems include, among others, AT&T Wireless (USA), BellSouth (USA), Deutsche Telekom (Germany and other European countries), KDDI (Japan), MCI Worldcom (USA), mmO2 (several European countries), NTT (Japan), Orange (several European countries), Pacific Century CyberWorks (Hong Kong), SBC Communications (USA), SFR (France), SingTel (Singapore), Sprint PCS (USA), Telecom Italia (Italy), Telmex (Mexico), Telstra (Australia), Verizon (USA) and Vodafone (multiple European countries). Through its subsidiary Verint Systems Inc. ("Verint"), formerly known as Comverse Infosys, Inc., the Company provides analytic solutions for communications interception, digital video security and surveillance, and enterprise business intelligence. Verint's software generates actionable intelligence through the collection, retention and analysis of voice, fax, video, email, Internet and data transmissions from multiple types of communications networks. The digital security and surveillance market consists primarily of communications interception by law enforcement agencies and digital video security utilized by government agencies and public and private organizations. The enterprise business intelligence market consists primarily of solutions targeting enterprises that rely on contact centers for voice, email and Internet interactions with their customers. Additionally, an emerging segment of enterprise business intelligence utilizes digital video information to allow enterprises and institutions to enhance their operations, processes and performance. Verint sells its enterprise business intelligence solutions to contact center service bureaus, financial institutions, casinos, retailers, utilities, communications service providers, manufacturers and other enterprises. Verint has established marketing relationships with a variety of global value added resellers and a network of systems integrators including ADT, Avaya, Nortel and Siemens. Verint also has technological alliances with leading software and hardware companies including Genesys, Siebel and Visionics, which enables Verint to offer complementary solutions to their products. Verint's products are used by over 800 organizations in over 50 countries worldwide. Customers for digital security and surveillance products include the U.S. Capitol, the U.S. Department of Defense, the U.S. Department of Justice, Washington Dulles International Airport, the Toronto Police Service, the Dutch National Police Agency, and other domestic and foreign law enforcement and intelligence agencies, as well as communications service and equipment providers, such as Cingular, Ericsson and Nortel. Customers for enterprise business intelligence products include Con Edison, FedEx, HSBC, JCPenney, Sprint, Target and Tiffany & Co. Through its subsidiary Ulticom, Inc. ("Ulticom"), the Company provides service enabling signaling software for wireline, wireless and Internet communications. Ulticom's Signalware call control products interconnect the complex circuit switching, database and messaging systems and manage vital number, routing and billing information that form the backbone of today's public telecommunications networks. Ulticom's products are used by equipment manufacturers, application developers and communications service providers to deploy revenue generating infrastructure, enhanced and mandated services such as global roaming, voice and text messaging, prepaid calling and location-based services. Signalware products also are embedded in a range of packet softswitching products to interoperate or converge voice and data networks and facilitate services such as voice over the Internet and Internet offload. Ulticom had an initial public offering of its common stock in April, 2000, and its common stock is listed on the NASDAQ National Market System under the symbol "ULCM". CTI holds approximately 72% of Ulticom's outstanding common stock. The Company markets other telecommunications products and services, including products that are integrated with its systems and products that work in combination with other systems to provide advanced telecommunications services, such as automatic call distribution and messaging systems for telephone answering service bureaus, and intelligent IP gateways for wireless roaming. The Company also engages in venture capital investment and capital market activities for its own account. Throughout this document references are made to technologies, features, capabilities, capacities and specifications in conjunction with the Company's products and technological resources. Such references do not necessarily apply to all product lines, models and system configurations. -2- The Company was incorporated in the State of New York in October 1984. Its headquarters are located at 170 Crossways Park Drive, Woodbury, New York 11797, where its telephone number is (516) 677-7200. THE COMPANY'S PRODUCTS Enhanced Services Solutions (ESS) Comverse provides enhanced services products that enable TSPs to offer a variety of revenue-generating services accessible to large numbers of simultaneous users. These services include a broad range of integrated multimodal messaging, information distribution and personal communications services, such as call answering with one-touch call return, voicemail, IP-based unified messaging (voice, fax and email in a single mailbox, media conversion such as email to voice and visual mailbox presentation), prepaid wireless calling services, wireless data and Internet-based services such as SMS, wireless information and entertainment services, MMS, and wireless instant messaging, IVR and voice portal services, which are part of a voice-controlled portfolio of services such as voice dialing, voice-controlled Web browsing and voice-controlled messaging, and other applications. Comverse's principal market for its systems consists of organizations that use the systems to provide services to the public, often on a subscription or pay-per-usage basis, and includes both wireless and wireline telecommunications network operators and other TSP organizations. With call answering and voice messaging, TSPs benefit primarily from traffic revenue generated by the increase in billable completed calls. In addition, these services foster customer loyalty that results in an overall reduction in churn. Wireless TSPs are almost universally adding voicemail and SMS to their service offerings, and often as part of their basic service package, not only because of these benefits, but also because wireless voicemail messaging services directly increase billable airtime by stimulating outbound calls, and wireless SMS increases billable transactions by stimulating person-to-person messaging and information retrieval. Comverse's carrier grade ESS systems and software have been designed and packaged to meet the capacity, reliability, availability, scalability, maintainability, network and OMAP (Operations, Maintenance, Administration, and Provisioning) interfaces and physical requirements of large telecommunications network operators. The systems are offered in a variety of sizes and configurations and can be clustered for larger capacity installations. The systems also offer redundancy of critical components, so that no single failure will interrupt the service. Comverse's products are available in both centralized and widely distributed configurations. Comverse's systems also incorporate components that are compatible with the Intelligent Network ("IN") and Advanced Intelligent Network ("AIN") protocols for Service Control Points and Intelligent Peripherals, permitting Comverse's network operator customers to develop and deploy services based on the overall IN/AIN architecture. In addition, when the system is configured as a Service Node ("SN"), it enables customers to offer IN/AIN-based services such as voice activated dialing. -3- Comverse's products incorporate both Comverse-developed and third-party-developed software, and Comverse-designed and third-party hardware, in an open, standards-based system architecture. The systems support a wide variety of digital telephony and IP interfaces and signaling systems, enabling them to adapt to a variety of different network environments and IN/AIN applications, and provide a "universal port" -- a single port that supports multiple applications and services at any time during a single call. Digital Security and Surveillance and Enterprise Business Intelligence Verint is a leading provider of analytic solutions for communications interception, digital video security and surveillance, and enterprise business intelligence. Verint's software generates actionable intelligence through the collection, retention and analysis of voice, fax, video, email, Internet and data transmissions from multiple types of communications networks. The digital security and surveillance market consists primarily of communications interception by law enforcement agencies and digital video security utilized by government agencies and public and private organizations for use in airports, public buildings, correctional facilities and corporate sites. Verint's STAR-GATE product line enables communications carriers, Internet service providers, and communications equipment manufacturers to overcome the complexities posed by global digital communications and comply with governmental requirements. STAR-GATE enables communications service providers to intercept simultaneous communications over a variety of wireline, wireless and IP networks for delivery to law enforcement and other government agencies. STAR-GATE's flexibility supports multi-network, multi-vendor switch environments for a common interface across communications networks and supports switches from communications equipment manufacturers, such as Alcatel, Ericsson, Lucent, Nokia, Nortel and Siemens. STAR-GATE also supports interfaces to packet data networks, such as the Internet and general packet radio services. Verint's RELIANT product line provides intelligent recording and analysis solutions for communications interception activities to law enforcement organizations and government agencies. The RELIANT software equips law enforcement agencies with an end-to-end solution for live monitoring of intercepted target communications and evidence collection management, regardless of the type of communication or network used. Applications can scale from a small center for a local police force, to a country-wide center for national law enforcement agencies. RELIANT products are designed to comply with legal regulations and can be integrated with communications networks in the country where the system is utilized. RELIANT collects intercepted communications from multiple channels and stores them for immediate access, further analysis and later use as evidence. Verint's LORONIX digital video security product line provides intelligent recording and analysis of video for security and surveillance applications to government agencies and public organizations. The LORONIX software digitizes, compresses, stores and retrieves video imaging. In addition, -4- LORONIX products provide live video streaming and camera control over local and wide area computer networks and the Internet. The LORONIX product line may be configured to allow customers to perform complete monitoring for security and management of local and remote sites from a central investigative unit. The use of digital storage and compression technology makes the LORONIX product line a more efficient alternative to analog tape storage. The technology interfaces with access control, facial recognition, activity and intrusion detection and other technologies for enhanced security and surveillance. The enterprise business intelligence market consists primarily of solutions targeting enterprises that rely on contact centers for voice, email and Internet interactions with their customers. Verint's ULTRA products record and analyze customer interactions to provide enterprises with business intelligence about their customers and help monitor and improve the performance of their contact centers. ULTRA products capture customer interactions from multiple sources, including telephone, email, Internet or voice-over-IP ("VoIP"). Utilizing ULTRA's OpenStorage Portal and Universal Database, customers can leverage their existing storage infrastructure to store and access recorded customer interactions using standard file formats. ULTRA products integrate with leading customer relationship management ("CRM") applications allowing the delivery of information directly to the user's desktop within Siebel, PeopleSoft and other CRM solutions. ULTRA also interfaces with popular desktop software tools, including Microsoft Outlook, Lotus Notes and web browsers, to enable the user to easily access the data in a familiar computing environment. Verint's LORONIX video business intelligence products enable enterprise customers to monitor and improve their operations through the analysis of live and recorded digital video. Like the LORONIX digital video security product, the LORONIX video business intelligence product digitizes, compresses, stores and retrieves video imaging. While leveraging the technology of the LORONIX digital security product, the LORONIX enterprise product line also contains unique software focused on maximizing operational effectiveness through video analysis. By interfacing with customer databases and software systems, LORONIX facilitates the user's review of video imaging based on specific criteria such as employee ID, product barcodes and point of sale transaction history. Service Enabling Signaling Software The Company's Ulticom subsidiary provides service enabling signaling software for wireline, wireless and Internet communications. Ulticom's Signalware call control products interconnect the complex circuit switching, database and messaging systems and manage vital number, routing and billing information that form the backbone of today's public telecommunications networks. Signalware provides signaling system #7 ("SS7"), the globally accepted signaling standard protocol, which has become the critical element needed to connect and interoperate packet networks with the existing circuit network -5- infrastucture. Signalware provides the SS7 connectivity required to offer value added services. Signalware call control products work within wireline, wireless and Internet networks to interconnect and interoperate voice and data communication systems. In addition, Signalware plays a key role in the convergence of disparate networks by providing a means to bridge circuit and packet technology. Signalware offers many of the features that are crucial to the connectivity of communication networks and the rapid delivery of revenue generating services. Signalware supports a range of applications in wireline, wireless and Internet networks. In circuit networks, Signalware has been deployed as part of wireline services such as voice messaging, 800 number service and caller ID. Signalware enables wireless services that include infrastructure applications such as global roaming, as well as enhanced services like voice and text messaging and prepaid calling. Signalware enables deployment of high capacity wireless data services made possible by the evolution from second generation ("2G") to third generarion ("3G") infrastructures, including an intermediate generation called "2.5G". Signalware also is used to deploy mandated, location based wireless services, such as emergency-911. Signalware also is used to enable solutions that ease congestion on existing networks by routing Internet dial-up traffic to packet infrastructure, and deliver VoIP services such as click-to-dial and advanced call forwarding. Signalware works with multiple SS7 networks, supports a wide variety of SS7 protocol elements and enables analog or digital wireline and wireless transmissions. It provides the functionality needed for call set-up/termination and call routing/billing. Signalware products also include features that enable the transition from SS7 signaling to emerging packet signaling standards, such as Sigtran. New features include a Signalware Sigtran Gateway for circuit-packet network interoperability, and protocols to carry SS7 signals over IP networks. Signalware packages run on a range of hardware platforms and operating systems, including Sun Solaris, IBM AIX and Red Hat Linux. These packages can be used in single or multiple computing configurations for fault resiliency and reliability. Signalware also provides a means to separate the signaling function from the application development environment, which provides greater flexibility in service configurations. Signalware customers include equipment manufacturers, such as Alcatel, Ericsson and Siemens, application developers such as Logica and Sonus and service providers such as Level (3), MCI Worldcom and Telefonica. Other Telecommunications Products and Services The Company's other telecommunications products and services are developed and marketed through subsidiaries in the United States and internationally. These include automatic call distribution and messaging systems for telephone answering service bureaus and other organizations, and intelligent IP gateways for wireless roaming and VoIP applications. -6- MARKETS, SALES AND MARKETING Comverse's ESS systems and software are marketed by Comverse throughout the world, with its own direct sales force as well as local distributors, and in cooperation with a number of leading international vendors of telecommunications infrastructure equipment. Comverse is the market share leader in providing large capacity voice messaging systems for wireless and wireline telecommunications network operators around the world. More than 390 wireless and wireline telecommunications network operators in more than 100 countries, including the majority of the 20 largest telephone companies in the world, have selected Comverse's platforms to provide enhanced telecommunications services to their consumers. Major network operators using Comverse's ESS systems include, among others, AT&T Wireless (USA), BellSouth (USA), Deutsche Telekom (Germany and other European countries), KDDI (Japan), MCI Worldcom (USA), mmO2 (several European countries), NTT (Japan), Orange (several European countries), Pacific Century CyberWorks (Hong Kong), SBC Communications (USA), SFR (France), SingTel (Singapore), Sprint PCS (USA), Telecom Italia (Italy), Telmex (Mexico), Telstra (Australia), Verizon (USA) and Vodafone (multiple European countries). Comverse provides its customers, through its Medalist plan, 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. Verint's products are marketed primarily through a combination of its direct sales force and agents, distributors, value added resellers and systems integrators. Verint develops strategic marketing alliances with leading companies in the industry to expand the coverage and support of its direct sales force. Verint currently has such relationships with ADT, Avaya, Nortel and Siemens. In addition, Verint established technological alliances with leading software and hardware companies including Genesys, Siebel and Visionics, which enables Verint to offer complementary solutions to their products. Verint's products are used by over 800 organizations and are deployed in over 50 countries, across many industries and markets. Many users of the products are large corporations or government agencies that operate from multiple locations and facilities across large geographic areas and sometimes across several countries. These organizations typically implement Verint's solutions in stages, with implementation in one or more sites and then gradually expanding to a full enterprise, networked-based solution. Customers for digital security and surveillance products include the U.S. Capitol, the U.S. Department of Defense, the U.S. Department of Justice, Washington Dulles International Airport, the Toronto Police Service, the Dutch National Police Agency, and other domestic and foreign law enforcement and intelligence agencies, as well as communications service and equipment providers, such as Cingular, Ericsson and Nortel. Customers for enterprise business intelligence products include Con Edison, FedEx, HSBC, JCPenney, Sprint, Target and Tiffany & Co. -7- Ulticom's products are used by over 55 customers and are deployed by more than 260 service providers in more than 100 countries. Ulticom markets its products and services primarily through a direct sales organization and through key relationships with customers. Customers include network equipment manufacturers, such as Alcatel, Ericsson and Siemens, application developers such as Logica and Sonus and service providers such as Level (3), MCI Worldcom and Telefonica. TECHNOLOGIES The Company's research and development efforts focus particularly on the design of very large, high throughput systems, digital signal processing technologies for voice, image, video, and data communications, IP and messaging protocols, multimodal user interfaces, development of various network and OMAP interfaces, and application development. The Company's products use advanced technologies in the areas of digital signal processing, VoIP, facsimile protocols, networking interfaces, databases, data networking, multi-processor computer architecture and real-time software design. The Company uses its proprietary 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 high capacity multiple session multimodal user experience, multimedia communication and processing applications. 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 data 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. The Company has developed or integrated third-party interfaces for its products to most circuit-switched and IP networks used around the world, including digital interfaces, such as IP, SIP, SS7, T1, E1 and ISDN and VoIP, designed to encompass both basic network connectivity and the IN/AIN capabilities of Intelligent Peripherals and SNs. The Company has also developed Internet Protocols, including cHTML, HTML, HTTP, IMAP4, LDAP, POP3, VPIM, VXML and WAP. The Company has implemented facsimile communication and intercept protocols for Group 3 facsimile. Certain of its products incorporate LAN and WAN technologies used for the transfer of digitized voice, fax, video, 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. 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. -8- RESEARCH AND DEVELOPMENT Because of the continuing technological changes that characterize the telecommunications and computer industries, the Company's success will depend, to a considerable extent, upon its ability to continue to develop competitive products through its research and development efforts. The Company currently employs more than 2,200 scientists, engineers and technicians in its research and development efforts, located predominantly in the United States and Israel with additional offices in France, Germany and Malaysia, with broad experience in the areas of digital signal processing, computer architecture, telephony, IP, data networking, multi-processing, databases, real-time software design and application software design, among others. A portion of the Company's research and development operations benefit from financial incentives provided by government instrumentalities to promote research and development activities performed in Israel. The cost of such efforts is and will continue to be affected by the continued availability of funding under such programs. During the past fiscal year, the Company's research and development activities included projects submitted for partial funding under a program administered by the Office of the Chief Scientist of the Ministry of Industry and Trade of the State of Israel ("OCS"), under which reimbursement of a portion of the Company's research and development expenditures will be made subject to final approval of project budgets. 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. The Company pays royalties on its sales of certain products developed in part with funding supplied under such programs. During the year ended January 31, 2002, Comverse entered into an arrangement with the OCS whereby Comverse agreed to pay a lump sum royalty amount for all past amounts received from the OCS. In addition, Comverse will receive lower amounts from the OCS than it has historically received, but will not have to pay royalty amounts on future grants. 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. See "Licenses and Royalties" and "Operations in Israel" in Item 1 and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7. PATENTS AND INTELLECTUAL PROPERTY RIGHTS The Company holds a number of United States and foreign patents. While the Company files patent applications periodically, no assurance can be given that patents will be issued on the basis of such applications or that, if patents are issued, the claims allowed will be sufficiently broad to protect the Company's technology. In addition, no assurance can be given that any patents issued to the Company will not be challenged, invalidated or circumvented or that the rights granted under the patents will provide significant benefits to the Company. -9- 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. In January 2000, the Company and Lucent Technologies GRL Corp. ("Lucent") entered into a non-exclusive cross-licensing arrangement covering current and certain future patents issued to the Company and its affiliates and a portfolio of current and certain future patents in the area of telecommunications technology issued to Lucent and its affiliates. LICENSES AND ROYALTIES The Company licenses certain technology, know-how and related rights for use in the manufacture and marketing of its products, and pays royalties to third-parties under such licenses and under other agreements. The Company believes that its rights under such licenses and other agreements are sufficient for the manufacturing and marketing of its products and, in the case of licenses, extend for periods at least equal to the estimated useful lives of the related technology and know-how. BACKLOG At January 31, 2002, the backlog of the Company amounted to approximately $220.7 million. Substantially all of the 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 telecommunications network operators and other customers of the Company's products, and their low tolerance for down-time, the Company is required to make a greater commitment to service and support of systems used by these customers, and such commitment increases operating costs. -10- The Company's general warranty policy is to replace or repair any component that fails during a specified warranty period. Broader warranty and service coverage is provided in many cases, and is sometimes made available to customers on a contractual basis for an additional charge. The Company provides technical assistance from several locations around the world. Technical support is available for the Company's customers 24 hours-a-day, seven days-a-week. COMPETITION The Company faces strong competition in the markets for all of its products. The market for ESS systems is highly competitive, and includes numerous products offering a broad range of features and capacities. The primary competitors are suppliers of turnkey ESS systems and software, and indirect competitors that supply certain components to systems integrators. Many of Comverse's competitors specialize in a subset of Comverse's portfolio of services. Direct and/or indirect competitors include, among others, Boston Communications, Cap Gemini, CMG, Ericsson, Glenayre, IBM, InterVoice-Brite, Logica, Lucent, Motorola, Nokia, Openwave, SS8 Networks, Tecnomen, Telcordia, and Unisys. Competitors of Comverse that manufacture other telecommunications equipment may derive a competitive advantage in selling ESS systems to customers that are purchasing or have previously purchased other compatible equipment from such manufacturers. Indirect competition is provided by messaging and other enhanced communications products employed at end-user sites as an alternative to the use of services available through telecommunications network operators. This "enterprise based equipment" includes a broad range of products, such as stand-alone voicemail systems, answering machines, telephone handsets with voice-activated dialing and other enhanced services capabilities, products offering "call processing" services that are supplied with voicemail features or integrated with other voicemail systems, as well as personal computer modems and add-on cards and software designed to furnish enhanced communications capabilities. Comverse believes that competition in the sale of ESS systems is based on a number of factors, the most important of which are product features and functionality, system capacity and reliability, marketing and distribution capability and price. Other important competitive factors include service and support and the capability to integrate systems with a variety of telecom networks, IP networks and Operation and Support Systems (OSS). Comverse believes that the range of capabilities provided by, and the ease of use of, its systems compare favorably with other products currently marketed. Comverse anticipates that a number of its direct and indirect competitors will introduce new or improved ESS systems during the next several years. Verint faces strong competition in the markets for its products, both in the United States and internationally. Verint expects competition to persist and intensify in the digital security and surveillance market, primarily due to increased demand for homeland defense and security solutions following the September 11, 2001 terrorist attacks. Verint's primary competitors are suppliers -11- of security and recording systems and software, and indirect competitors that supply certain components to systems integrators. In the enterprise business intelligence market, Verint faces competition from organizations emerging from the traditional call logging or call recording market as well as software companies that develop and sell products that perform specific functions for this market. Additionally, many of Verint's competitors specialize in a subset of Verint's portfolio of products and services. Primary competitors include, among others, ECtel, e-talk, Eyretel, JSI Telecom, NICE Systems, Sensormatic, SS8 Networks and Witness Systems. Verint believes it competes principally on the basis of product performance and functionality, knowledge and experience in the industry, product quality and reliability, customer service and support, and price. Verint believes that its success depends primarily on its ability to provide technologically advanced and cost effective solutions and to continue to provide its customers with prompt and responsive customer support. Competitors that manufacture other security-related systems or other recording systems may derive a competitive advantage in selling to customers that are purchasing or have previously purchased other compatible equipment from such manufacturers. Further, Verint expects that competition will increase as other established and emerging companies enter its markets and as new products, services and technologies are introduced. Competitors of Ulticom include a number of companies ranging from SS7 software solution providers, such as SS8 Networks and Trillium Digital Systems, an Intel company, to vendors of communication and network infrastructure equipment, such as Compaq and Hewlett Packard. Ulticom believes it competes principally on the basis of product performance and functionality, product quality and reliability, customer service and support, and price. Many of the Company's present and potential competitors are considerably larger than the Company, are more established, have a larger installed base of customers and have greater financial, technical, marketing and other resources. MANUFACTURING AND SOURCES OF SUPPLIES The Company's manufacturing operations consist primarily of final assembly and testing, involving the application of extensive testing and quality control procedures to materials, components, subassemblies and systems. The Company primarily uses third-parties to perform modules and subsystem assembly, component testing and sheet metal fabrication. Although the Company generally uses standard parts and components in its products, certain components and subassemblies are presently available only from a limited number of sources. To date, the Company has been able to obtain adequate supplies of all components and subassemblies in a timely manner from existing sources or, when necessary, from alternative sources or redesign the system to incorporate new modules, when applicable. However, the inability to obtain sufficient quantities of components or to locate alternative sources of supply if and as required in the future, would adversely affect the Company's operations. -12- The Company maintains organization-wide quality assurance procedures, coordinating the quality control activities of the Company's research and development, manufacturing and service departments. CAPITAL MARKET ACTIVITIES The Company seeks to identify and implement suitable investments, and engages in portfolio investment and capital market activities, including venture capital investments directly and indirectly through private equity funds. Through a joint venture formed by the Company in partnership with Quantum Industrial Holdings Ltd., an investment company managed by Soros Fund Management LLC, the Company invests in venture capital in high technology firms, and engages in other investment activities. The Company has significantly reduced its new venture capital investments in recent periods. OPERATIONS IN ISRAEL A substantial portion of the Company's research and development, manufacturing and other operations are located in Israel and, accordingly, may be affected by economic, political and military conditions in that country. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors, and the continued state of hostility, varying in degree and intensity, has led to security and economic problems for Israel. Since October 2000, there has been a significant increase in violence, primarily in the West Bank and Gaza Strip, and more recently Israel has experienced terrorist incidents within its borders. As a result, negotiations between Israel and representatives of the Palestinian Authority have been sporadic and have failed to result in peace. The Company could be adversely affected by hostilities involving Israel, the interruption or curtailment of trade between Israel and its trading partners, or a significant downturn in the economic or financial condition of Israel. In addition, some of the Company's employees in Israel are subject to being called upon to perform military service in Israel, and their absence may have an adverse effect upon the Company's operations. Israel is a member of the United Nations, the International Monetary Fund, the International Bank for Reconstruction and Development, and the International Finance Corporation, and is a signatory to the General Agreement on Tariffs and Trade, which provides for reciprocal lowering of trade barriers among its members. In addition, Israel has been granted preferences under the Generalized System of Preferences from the United States, Australia, Canada, and Japan. These preferences allow Israel to export the products covered by such programs either duty-free or at reduced tariffs. Israel 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 that has eliminated all tariff and certain non-tariff barriers on most trade between the two countries. Israel has also entered into an agreement with the European Free Trade Association ("EFTA"), which currently includes Iceland, Liechtenstein, Norway and Switzerland, that -13- 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. The end of the Cold War has also enabled Israel to establish commercial and trade relations with a number of nations, including Russia, China, India, Turkey and the nations of Eastern Europe, with whom Israel had not previously had such relations. The Company's business is dependent to some extent on trading relationships between Israel and other countries. Certain of the Company's products incorporate components imported into Israel from the United States and other countries and most of the Company's products are sold outside of Israel. Accordingly, the Company's operations would be adversely affected if trade between Israel and its current trading partners were interrupted or curtailed. The sale of products manufactured in Israel has been adversely affected in certain markets by restrictive laws, policies or practices directed toward Israel or companies having operations in Israel. The continuation or exacerbation of conflicts involving Israel and other nations may impede the Company's ability to sell its products in certain markets. The Company benefits from various policies of the Government of Israel, including reduced taxation and special subsidy programs, designed to stimulate economic activity, particularly 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. The results of operations of the Company have been favorably affected by participation in Israeli government programs related to research and development, as well as utilization of certain tax incentives and other incentives available under applicable Israeli laws and regulations, some of which have been reduced, discontinued or otherwise modified in recent years. In addition, the Company's ability to obtain benefits under various discretionary funding programs has declined and may continue to decline. The results of operations of the Company could be adversely affected if these programs were further reduced or eliminated and not replaced with equivalent programs or if its ability to participate in these programs were to be reduced significantly. EMPLOYEES At January 31, 2002, the Company employed approximately 5,650 individuals, of whom approximately 77% are scientists, engineers and technicians engaged in research and development, marketing and support activities. 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 -14- generally requires the payment by employers of severance pay upon the death of an employee, his or her retirement or upon termination of his or her employment, and the Company provides for such payment obligations through monthly contributions to an insurance fund. Israeli employees 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. In order to attract and retain talented personnel, and to provide incentives for their performance, the Company has emphasized the award of stock options as an important element of its compensation program, including options to purchase shares in certain of the Company's subsidiaries, and provides cash bonuses based on several parameters, including the profitability of the recipients' respective business units. ITEM 2. PROPERTIES. As of January 31, 2002, the Company leased an aggregate of approximately 2,455,000 square feet of office space and manufacturing and related facilities for its operations worldwide, including approximately 1,486,000 square feet in Tel Aviv, Israel, approximately 367,000 square feet in Wakefield, Massachusetts, approximately 77,000 square feet in Andover, Massachusetts, approximately 60,000 square feet in Woodbury, New York, approximately 85,000 square feet in Mt. Laurel, New Jersey, and an aggregate of approximately 380,000 square feet at various other locations in the United States, Europe, the Far East, Australia, Latin America and Africa. The aggregate base monthly rent for the facilities under lease as of January 31, 2002 was approximately $3,119,000, and all of such leases are subject to various pass-throughs and escalation adjustments. In addition, the Company owns office space and manufacturing and related facilities of approximately 40,000 square feet in Durango, Colorado and approximately 25,000 square feet in Bexbach, Germany. In September, 1999, the Company acquired approximately 423,000 square feet of unimproved land in Ra'anana, Israel, with a view to the potential future consolidation and construction of facilities for its Israeli operations. The Company believes that its facilities currently under lease are more than adequate for its current operations, and may endeavor selectively to reduce its existing facilities commitments as circumstances may warrant. -15- ITEM 3. LEGAL PROCEEDINGS. On or about October 19, 2001, Kevin Beier v. Comverse Technology, Inc., et al., CV 016972, the first of four virtually identical purported securities class action complaints was filed against CTI and certain of its executive officers in the United States District Court for the Eastern District of New York. The four actions were consolidated into the Beier action on January 15, 2002 and an amended consolidated complaint was filed on March 4, 2002. The consolidated complaint generally alleges violations of federal securities laws on behalf of individuals who allege that they purchased CTI's common stock during a purported class period between April 30, 2001 and July 10, 2001. The consolidated complaint seeks an unspecified amount in damages on behalf of persons who purchased CTI stock during the purported class period. The Company believes all claims in the complaints to be without merit and will vigorously defend against these claims. From time to time, the Company is subject to claims in legal proceedings arising in the normal course of its business. The Company does not believe that it is currently party to any pending legal action that could reasonably be expected to have a material adverse effect on its business or operating results. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. At a Special Meeting of Shareholders held on February 25, 2002, the shareholders of CTI authorized CTI to make an offer to holders of certain CTI stock options granted under its stock incentive compensation plans entitling such holders to surrender such options for cancellation in exchange for the grant of replacement options to purchase 0.85 shares of Common Stock for each share that was issuable under such cancelled options, with the replacement options to be granted no earlier than six months and one day following the cancellation date of the cancelled options at a price equal to the fair market value of the Common Stock on the new grant date. This proposal was approved with a vote of 74,549,571 shares in favor, 58,162,258 shares against and 1,206,026 abstentions. -16- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Common Stock of CTI trades on the NASDAQ National Market System under the symbol CMVT. The following table sets forth the range of closing prices of the Common Stock as reported on NASDAQ for the past two fiscal years. All prices have been adjusted to reflect the three-for-two stock split, effected in the form of a stock dividend, distributed on April 15, 1999, and the two-for-one stock split, effected in the form of a stock dividend, distributed on April 3, 2000. Year Fiscal Quarter Low High 2000 2/1/00 - 4/30/00 68.06 119.69 5/1/00 - 7/31/00 65.25 102.75 8/1/00 - 10/31/00 76.06 114.81 11/1/00 - 1/31/01 86.19 121.63 2001 2/1/01 - 4/30/01 45.82 113.13 5/1/01 - 7/31/01 24.78 74.11 8/1/01 - 10/31/01 15.90 29.87 11/1/01 - 1/31/02 19.14 26.93 There were 1,829 holders of record of Common Stock at April 23, 2002. 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 30,000. 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 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." -17- ITEM 6. SELECTED FINANCIAL DATA. The following tables present selected consolidated financial data for the Company for the year ended December 31, 1997, the one month period ended January 31, 1998, and the years ended January 31, 1999, 2000, 2001 and 2002. 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 has been retroactively adjusted for the January 1998 merger with Boston Technology, Inc. ("Boston") and the July 2000 acquisition of Loronix Information Systems, Inc. ("Loronix") to account for those transactions as pooling of interests. All per share data has been restated to reflect a three-for-two stock split effected as a 50% stock dividend to shareholders of record on March 31, 1999, distributed on April 15, 1999, and a two-for-one stock split effected as a 100% stock dividend to shareholders of record on March 27, 2000, distributed on April 3, 2000.
Year Transition Ended Period Ended Year Ended December 31, January 31, January 31, ------------ ----------- ------------------------------------------------- 1997(1)(3) 1998 1999 (3) 2000 (3) 2001 2002 (In thousands, except per share data) Statement of Operations Data: Sales $ 498,343 $ 14,401 $ 708,805 $ 909,667 $ 1,225,058 $ 1,270,218 Cost of sales 221,650 21,666(2) 304,665 371,589 482,658 525,480 Research and development, net 98,152 13,481 134,201 169,816 232,198 293,296 Selling, general and administrative 142,055 51,892(2) 157,106 193,996 259,607 323,036 Merger and acquisition expenses - 41,877 - 2,016 15,971 - Workforce reduction and restructuring charges - - - - - 63,562 Interest and other income (expense), net 4,957 175 8,315 16,595 33,339 (5,789) Income (loss) before income tax provision 41,443 (114,340) 121,148 188,845 267,963 59,055 Income tax provision 9,430 867 11,783 15,698 18,827 4,436 ---------- ---------- ---------- --------- ------------ ----------- Net income (loss) $ 32,013 $ (115,207) $ 109,365 $ 173,147 $ 249,136 $ 54,619 ========== =========== ========== ========= ============ =========== Earnings (loss) per share - diluted $ 0.23 $ (0.89) $ 0.75 $ 1.08 $ 1.39 $ 0.29 ========== ========== ========== ========= ============ =========== Weighted average number of common and common equivalent shares outstanding - diluted 139,702 130,060 145,439 178,986 189,964 186,434 December 31, January 31, ------------ ------------------------------------------------------------------- 1997 (4)(5) 1998 1999(4) 2000(4) 2001 2002 (In thousands) Balance Sheet Data: Working capital $ 402,901 $ 280,793 $ 712,165 $ 858,304 $ 1,860,379 $ 2,030,250 Total assets 636,342 527,652 1,042,959 1,372,847 2,625,264 2,704,163 Long-term debt, including current portion 142,790 124,257 416,327 308,082 906,723 648,611 Stockholders' equity 357,514 231,390 390,855 724,839 1,236,165 1,616,408
(1) Includes results for Boston for the 11 months ended December 31, 1997. (2) Includes approximately $7.8 million in cost of sales and $36.1 million in selling, general and administrative expenses relating to charges as a result of the merger with Boston. (3) Includes the results of Loronix for its fiscal year ended December 31. (4) Includes amounts for Loronix as of its fiscal year ended December 31. (5) Includes amounts for Boston as of December 31, 1997. -18- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. SIGNIFICANT ACCOUNTING POLICIES 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. Revenue is generally recognized at the time of shipment for sales of systems which do not require significant customization to be performed by the Company and collection of the resulting receivable is deemed probable by the Company. The Company's systems are generally a bundled hardware and software solution that are shipped together. The Company generally has no obligations to customers after the date products are shipped, except for product warranties. The Company generally warranties its products for one year after sale. A provision for estimated warranty costs is recorded at the time of sale. Customers may also purchase separate maintenance contracts, which generally consist of bug-fixing and telephone access to Company technical personnel, but in certain circumstances may also include the right to receive unspecified product updates, upgrades and enhancements. Revenue from these services is recognized ratably over the contract period. Revenues from certain development contracts are recognized under the percentage-of-completion method on the basis of physical completion to date or using actual costs incurred to total expected costs under the contract. Revisions in estimates of costs and profits are reflected in the accounting period in which the facts that require the revision become known. At the time a loss on a contract is known, the entire amount of the estimated loss is accrued. Amounts received from customers in excess of revenues earned under the percentage-of-completion method are recorded as advance payments from customers. 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. At the end of each accounting period, the Company records a reserve for bad debts included in accounts receivable based upon its current and historical collection history. Cost of sales include material costs, subcontractor costs, salary and related benefits for the operations and service departments, depreciation and amortization of equipment used in the operations and service departments, amortization of capitalized software costs, royalties and license fee costs, travel costs and an overhead allocation. Research and development costs include salary and related benefits as well as travel, depreciation and amortization of research and development equipment, an overhead allocation, as well as other costs associated with research and development activities. Selling, general and administrative costs include salary and related benefits, travel, depreciation and amortization, marketing and promotional materials, recruiting expenses, professional fees, facility costs, as well as other costs associated with sales, marketing, finance and administrative departments. -19- 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. 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 undiscounted cash flows expected to result from the use of the asset and proceeds from its eventual disposition are less than its carrying amount. Impairment is measured at fair value. In July 2000, CTI acquired all of the outstanding stock of Loronix in a transaction accounted for as a pooling of interests. The Company's financial statements for the year ended January 31, 2000 include the operations of Loronix for the year ended December 31, 1999. RESULTS OF OPERATIONS Year Ended January 31, 2002 Compared to Year Ended January 31, 2001 Sales. Sales for the fiscal year ended January 31, 2002 ("fiscal 2001") increased by approximately $45.2 million, or 4%, compared to fiscal year ended January 31, 2001 ("fiscal 2000"). This increase is primarily attributable to an increase in sales of ESS products of approximately $48.7 million. Such increase was principally due to increased sales to American customers. In addition, sales of security and business intelligence recording products and service enabling signaling software products increased (decreased) by approximately ($8.0) million and $9.3 million, respectively. Cost of Sales. Cost of sales for fiscal 2001 increased by approximately $42.8 million, or 9%, as compared to fiscal 2000. The increase in cost of sales is primarily attributable to increased materials and production costs of approximately $21.8 million due to the increase in sales and increased personnel-related costs of approximately $23.2 million due to hiring of additional personnel and increased compensation and benefits for existing personnel. Gross margins decreased from approximately 60.6% in fiscal 2000 to approximately 58.6% in fiscal 2001. Selling, General and Administrative Expenses. Selling, general and administrative expenses for fiscal 2001 increased by approximately $63.4 million, or 24%, compared to fiscal 2000, and as a percentage of sales increased from approximately 21.2% in fiscal 2000 to approximately 25.4% in fiscal 2001. The increase was primarily due to hiring of additional personnel and increased compensation and benefits for existing personnel to support the increased level of sales during the first half of fiscal 2001. Research and Development. Net research and development expenses for fiscal 2001 increased by approximately $61.1 million, or 26%, compared to fiscal 2000 due to overall growth of research and development operations and the initiation of significant new research and development projects. The increase was primarily due to the hiring of additional personnel and increased compensation and benefits for existing personnel of approximately $32.9 million, -20- lower reimbursements for research and development projects submitted for funding to the OCS of approximately $11.5 million, an increase in depreciation and amortization costs of approximately $6.3 million and an increase in the overhead allocation of approximately $3.6 million. Acquisition Expenses and Workforce Reduction and Restructuring Charges. During the 2001 fiscal year, the Company took steps to better align its cost structure with the current business environment, to improve the efficiency of its operations and to better position the Company to realize emerging opportunities. These steps included a reduction in workforce announced in April 2001 and a restructuring plan announced in December 2001. In connection with the implementation of these actions the Company incurred charges of approximately $63.6 million to cover the costs of severance, elimination of excess facilities and related leasehold improvements, write-off of certain inventory, property and equipment and capitalized software and other restructuring related charges, such as professional fees. The Company expects to pay approximately $11.9 million for severance and related charges during the year ended January 31, 2003 and approximately $24.3 million for lease related obligations at various dates through January 2011. In July 2000, the Company acquired all of the outstanding stock of Loronix, a company that develops software-based digital video recording and management systems, and all of the outstanding stock of Syborg Informationsysteme GmbH, a company that develops software-based digital voice and internet recording and workforce management systems. In August 2000, the Company acquired all of the outstanding stock of Gaya Software Industries Ltd., a company specializing in software-based intelligent IP gateways and VoIP technology, and all of the outstanding stock of Exalink Ltd., a company specializing in protocol gateways and applications software for the delivery of Internet-based services to all types of wireless devices. These business combinations were accounted for as pooling of interests. In connection with the above acquisitions, the Company charged to operations approximately $16.0 million in fiscal 2000 for merger related charges. Such charges relate to the following: Asset write-downs and impairments --------------------------------- In connection with the acquisitions in fiscal 2000, certain assets became impaired due to the existence of duplicative technology, property and equipment and inventory of the merged companies. Accordingly, these assets were written down to their net realizable value at the time of the mergers and a charge of approximately $7.4 million was charged to operations. Professional fees and other direct merger expenses -------------------------------------------------- In connection with the acquisitions in fiscal 2000, the Company recorded a charge of approximately $8.6 million for professional fees to lawyers, investment bankers and accountants, as well as other direct merger costs in connection with the mergers, such as printing costs and filing fees. Interest and Other Income (Expense), Net. Interest and other income (expense), net, for fiscal 2001 decreased by approximately $39.1 million as compared to fiscal 2000. The principal reasons for the decrease are increased -21- net realized losses and write-downs of the Company's investments and decreased equity in the earnings of affiliates of approximately $22.1 million, increased interest expense of approximately $0.3 million and a change in foreign currency gains/losses of approximately $20.1 million. These decreases were partially offset by increased interest and dividend income of approximately $7.6 million. The increase in interest and dividend income is primarily a result of the inclusion of the proceeds for a full year in fiscal 2001 of the Company's $600 million 1.50% convertible debentures issued in November and December 2000, partially offset by the decrease in interest rates during fiscal 2001. Income Tax Provision. Provision for income taxes decreased from fiscal 2000 to fiscal 2001 by approximately $14.4 million, or 76%, due to decreased pre-tax income. The Company's overall effective tax rate increased from approximately 7.0% during fiscal 2000 to approximately 7.5% in fiscal 2001. The Company's overall rate of tax is reduced significantly by the tax benefits associated with qualified activities of certain of its Israeli subsidiaries, which are entitled to favorable income tax rates under a program of the Israeli Government for "Approved Enterprise" investments in that country. Net Income. Net income decreased by approximately $194.5 million, or 78%, in fiscal 2001 compared to fiscal 2000, while as a percentage of sales decreased from approximately 20.3% in fiscal 2000 to approximately 4.3% in fiscal 2001. The decrease resulted primarily from the factors described above. Year Ended January 31, 2001 Compared to Year Ended January 31, 2000 Sales. Sales for fiscal 2000 increased by approximately $315.4 million, or 35%, compared to the year ended January 31, 2000 ("fiscal 1999"). This increase is primarily attributable to an increase in sales of ESS products of approximately $277.2 million. Such increase was principally due to increased sales to European and American customers. In addition, sales of security and business intelligence recording products and service enabling signaling software products increased by approximately $23.8 million and $18.7 million, respectively. Cost of Sales. Cost of sales for fiscal 2000 increased by approximately $111.1 million, or 30%, as compared to fiscal 1999. The increase in cost of sales is primarily attributable to (i) increased materials and production costs of approximately $62.3 million due to the increase in sales, (ii) increased personnel-related costs of approximately $30.3 million due to hiring of additional personnel and increased compensation and benefits for existing personnel, (iii) increased travel-related costs of approximately $7.1 million and (iv) an increase in depreciation and amortization costs of approximately $4.3 million. Gross margins increased from approximately 59.2% in fiscal 1999 to approximately 60.6% in fiscal 2000. Selling, General and Administrative Expenses. Selling, general and administrative expenses for fiscal 2000 increased by approximately $65.6 million, or 34%, compared to fiscal 1999, and as a percentage of sales was approximately 21% in both fiscal 1999 and fiscal 2000. The increase was primarily due to hiring of additional personnel and increased compensation and benefits for existing personnel to support the increased level of sales during fiscal 2000. -22- Research and Development. Net research and development expenses for fiscal 2000 increased by approximately $62.4 million, or 37%, compared to fiscal 1999 due to overall growth of research and development operations and the initiation of significant new research and development projects. The increase was primarily due to hiring of additional personnel and increased compensation and benefits for existing personnel to support the higher volume of research and development activities. Acquisition Expenses. In February 1999, the Company acquired all of the outstanding stock of Amarex Technology, Inc., a company that develops software-based applications for the telephone network operator and call center markets. In August 1999, the Company acquired all of the outstanding stock of InTouch Systems, Inc., a company that develops and markets a suite of intelligent voice-controlled software applications. In July 2000, the Company acquired all of the outstanding stock of Loronix, a company that develops software-based digital video recording and management systems, and all of the outstanding stock of Syborg Informationsysteme GmbH, a company that develops software-based digital voice and internet recording and workforce management systems. In August 2000, the Company acquired all of the outstanding stock of Gaya Software Industries Ltd., a company specializing in software-based intelligent IP gateways and voice-over-IP technology, and all of the outstanding stock of Exalink Ltd., a company specializing in protocol gateways and applications software for the delivery of Internet-based services to all types of wireless devices. These business combinations were accounted for as pooling of interests. In connection with the above acquisitions, the Company has charged to operations approximately $2.0 million and $16.0 million in fiscal 1999 and fiscal 2000, respectively, for merger related charges. Such charges relate to the following: Asset write-downs and impairments --------------------------------- In connection with the acquisitions in fiscal 2000, certain assets became impaired due to the existence of duplicative technology, property and equipment and inventory of the merged companies. Accordingly, these assets were written down to their net realizable value at the time of the mergers and a charge of approximately $7.4 million was charged to operations. Professional fees and other direct merger expenses -------------------------------------------------- In connection with the acquisitions in fiscal 1999 and fiscal 2000, the Company recorded a charge of approximately $2.0 million and $8.6 million, respectively, for professional fees to lawyers, investment bankers and accountants, as well as other direct merger costs in connection with the mergers, such as printing costs and filing fees. Interest and Other Income, Net. Interest and other income, net, for fiscal 2000 increased by approximately $16.7 million as compared to fiscal 1999. The principal reasons for the increase are increased interest and dividend income of approximately $26.7 million, a change in foreign currency gains/losses of approximately $8.8 million and a decrease in interest expense of approximately $1.4 million. These increases were partially offset by an increase in net realized losses and write-downs on the Company's investments and the equity in the earnings of affiliates of approximately $20.7 million. In November -23- and December 2000 the Company issued $600 million convertible senior debentures with the interest income earned on the proceeds of such debentures adding to the increase in interest and dividend income in fiscal 2000. The decrease in interest expense is primarily a result of the inclusion in fiscal 1999 of the Company's 5-3/4% convertible subordinated debentures redeemed in October 1999. Income Tax Provision. Provision for income taxes increased from fiscal 1999 to fiscal 2000 by approximately $3.1 million, or 20%, due to increased pre-tax income. The Company's overall effective tax rate decreased from approximately 8% during fiscal 1999 to approximately 7% in fiscal 2000. The Company's overall rate of tax is reduced significantly by the tax benefits associated with qualified activities of certain of its Israeli subsidiaries, which are entitled to favorable income tax rates under a program of the Israeli Government for "Approved Enterprise" investments in that country. Net Income. Net income increased by approximately $76.0 million, or 44%, in fiscal 2000 compared to fiscal 1999, while as a percentage of sales increased from approximately 19% in fiscal 1999 to approximately 20% in fiscal 2000. The increase resulted primarily from the factors described above. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital at January 31, 2002 and 2001 was approximately $2,030.3 million and $1,860.4 million, respectively. Operations for fiscal 2001, fiscal 2000 and fiscal 1999, after adding back non-cash items, provided cash of approximately $130.0 million, $309.7 million and $208.1 million, respectively. During such years, other changes in working capital provided (used) cash of approximately $12.2 million, ($65.2) million and ($30.8) million, respectively, resulting in cash being provided by operating activities of approximately $142.2 million, $244.5 million and $177.4 million, respectively. Investment activities for fiscal 2001, fiscal 2000 and fiscal 1999 used cash of approximately $122.4 million, $207.3 million and $475.7 million, respectively. These amounts include (i) additions to property, plant and equipment in fiscal 2001, fiscal 2000 and fiscal 1999 of approximately $54.6 million, $97.3 million and $85.6 million, respectively; (ii) maturities and sales (purchases) of bank time deposits and investments, net, of approximately ($44.8) million, ($94.5) million and ($377.6) million, respectively; and (iii) capitalization of software development costs of approximately $23.0 million, $15.5 million and $12.5 million, respectively. The property additions in each of fiscal 2001, 2000 and 1999 include the increase of the Company's fixtures and equipment and in fiscal 1999 the purchase of land by the Company of approximately $25.8 million for potential future construction purposes. In addition, in each of fiscal 2001, 2000 and 1999 the Company increased the amount of its bank time deposits and investments to better utilize the net proceeds of the 2000 and 1998 issuances of convertible debentures. Financing activities for fiscal 2001, fiscal 2000 and fiscal 1999 provided cash of approximately $67.0 million, $894.1 million and $53.6 million, respectively. These amounts include (i) the net proceeds from the issuance of convertible debentures in fiscal 2000 of approximately $588.4 million; (ii) -24- proceeds from the issuance of common stock in connection with the exercise of stock options, warrants and employee stock purchase plan of approximately $28.8 million, $111.4 million and $50.6 million, respectively; (iii) net proceeds (repayments) of bank loans and other debt of approximately $38.2 million, ($0.9) million and $3.1 million, respectively; and (iv) net proceeds from the issuance of common stock of a subsidiary in connection with public offerings in fiscal 2000 of approximately $195.2 million. In November 2000, the Company issued $500 million aggregate principal amount of its 1.50% convertible senior debentures due December 2005. In December 2000, the Company issued an additional $100 million aggregate principal amount of its 1.50% convertible senior debentures due December 2005 as a result of the initial purchaser exercising in full their over-allotment option. As of January 31, 2002, the Company had outstanding convertible debentures of $600 million. In January 2002, Verint took a long-term bank loan in the amount of $42 million. This loan, which matures in February 2003, bears interest at LIBOR plus 0.55% and may be prepaid without penalty. The loan is guaranteed by CTI. The Company has obtained bank guaranties primarily for performance of certain obligations under contracts with customers. These guaranties, which aggregated approximately $23.4 million at January 31, 2002, are to be released by the Company's performance of specified contract milestones, which are scheduled to be completed primarily during 2002. The Company leases office, manufacturing, and warehouse space under non-cancelable operating leases. As of January 31, 2002, the minimum annual rent obligations of the Company were approximately as follows: Twelve Months Ended January 31, Amount ------------------- ------ (In thousands) 2003 $ 34,007 2004 30,234 2005 20,253 2006 18,981 2007 and thereafter 33,666 ----------- $ 137,141 =========== -25- On February 1, 2002, Verint acquired the digital video recording business of Lanex, LLC. The Lanex business provides digital video recording solutions for security and surveillance applications primarily to North American banks. The purchase price consisted of $9.5 million in cash and a $2.2 million convertible note. The note is non-interest bearing and matures on February 1, 2004. The holder of the note may elect to convert the note, in whole or in part, into shares of Verint's common stock at a conversion price of $16.06 per share at any time on or after the completion of an initial public offering by Verint. The note is guaranteed by CTI. Pro forma results of operations have not been presented because the effects of this acquisition are not material. The Company believes that its existing working capital, together with funds generated from operations, will be sufficient to provide for its planned operations for the foreseeable future. The Company regularly examines opportunities for strategic acquisitions of other companies or lines of business and anticipates that it may from time to time issue additional debt and/or equity securities either as direct consideration for such acquisitions or to raise additional funds to be used (in whole or in part) in payment for acquired securities or assets. The issuance of such securities could be expected to have a dilutive impact on the Company's shareholders, and there can be no assurance as to whether or when any acquired business would contribute positive operating results commensurate with the associated investment. The Company's liquidity and capital resources have not been, and are not anticipated to be, materially affected by restrictions pertaining to the ability of its foreign subsidiaries to pay dividends or by withholding taxes associated with any such dividend payments. CERTAIN TRENDS AND UNCERTAINTIES The Company derives the majority of its revenue from the telecommunications industry, which is facing an unprecedented recession. This has resulted in a significant reduction of capital expenditures made by TSPs. The Company's operating results and financial condition have been, and will continue to be, adversely affected by the severe decline in technology purchases and capital expenditures by TSPs worldwide and by unfavorable global economic conditions. Consequently, the Company's operating results have deteriorated significantly in recent periods and may continue to deteriorate in future periods if such conditions remain in effect. For these reasons and the risk factors outlined below, it has been and continues to be very difficult for the Company to accurately forecast future revenues and operating results. The Company's business is particularly dependent on the strength of the telecommunications industry. The telecommunications industry, in general, and the Company, in particular, have been negatively affected by, among other factors, the high costs and large debt positions incurred by some TSPs to expand capacity and enable the provision of future services (and the corresponding risks associated with the development, marketing and adoption of these services as discussed below), including the cost of acquisitions of licenses to provide future broadband services and reductions in TSPs' actual and projected revenues and deterioration in their actual and projected operating results. Accordingly, TSPs have significantly reduced their actual and planned expenditures to expand or replace equipment and delayed and reduced the deployment of services. A -26- number of TSPs, including certain customers of the Company, have indicated the existence of conditions of excess capacity in certain markets. In addition, TSPs have delayed the planned introduction of new services, such as broadband mobile telephone services, that would be supported by certain of the Company's products. Certain of the Company's customers also have implemented changes in procurement practices and procedures, including limitations on purchases in anticipation of estimated future capacity requirements, and in the management and use of their networks, that have had an adverse affect on the Company's sales and order backlog, which also has made it very difficult for the Company to project future sales. The continuation and/or exacerbation of these trends will have an adverse effect on the Company's future results. In addition to loss of revenue, weakness in the telecommunications industry has affected and will continue to affect the Company's business by increasing the risks of credit or business failures of suppliers, customers or distributors, by customer requirements for vendor financing, by delays and defaults in customer or distributor payments, and by price reductions instituted by competitors to retain or acquire market share. The Company's current plan of operations is predicated in part on a recovery in capital expenditures by its customers. In the absence of such improvement, the Company would experience further deterioration in its operating results, and may determine to modify its plan for future operations accordingly, which may include, among other things, additional reductions in its workforce. The Company intends to continue to make significant investments in its business, and to examine opportunities for growth through acquisitions and strategic investments. These activities may involve significant expenditures and obligations that cannot readily be curtailed or reduced if anticipated demand for the associated products does not materialize or is delayed. The impact of these decisions on future financial results cannot be predicated with assurance, and the Company's commitment to growth may increase its vulnerability to downturns in its markets, technology changes and shifts in competitive conditions. The Company also may not be able to identify future suitable merger or acquisition candidates, and even if the Company does identify suitable candidates, it may not be able to make these transactions on commercially acceptable terms, or at all. If the Company does make acquisitions, it may not be able to successfully incorporate the personnel, operations and customers of these companies into the Company's business. In addition, the Company may fail to achieve the anticipated synergies from the combined businesses, including marketing, product integration, distribution, product development and other synergies. The integration process may further strain the Company's existing financial and managerial controls and reporting systems and procedures. This may result in the diversion of management and financial resources from the Company's core business objectives. In addition, an acquisition or merger may require the Company to utilize cash reserves, incur debt or issue equity securities, which may result in a dilution of existing stockholders, and the Company may be negatively impacted by the assumption of liabilities of the merged or acquired company. Due to rapidly changing market conditions, the Company may find the value of its acquired technologies and related intangible assets, such as goodwill as recorded in the Company's financial statements, to be impaired, resulting in charges to operations. The Company may also fail to retain the acquired or merged companies' key employees and customers. -27- The Company has made, and in the future, may continue to make strategic investments in other companies. These investments have been made in, and future investments will likely be made in, immature businesses with unproven track records and technologies. Such investments have a high degree of risk, with the possibility that the Company may lose the total amount of its investments. The Company may not be able to identify suitable investment candidates, and, even if it does, the Company may not be able to make those investments on acceptable terms, or at all. In addition, even if the Company makes investments, it may not gain strategic benefits from those investments. The telecommunications industry is subject to rapid technological change. The introduction of new technologies in the telecommunications market and new alternatives for the delivery of services are having, and can be expected to continue to have, a profound effect on competitive conditions in the market and the success of market participants, including the Company. The Company's continued success will depend on its ability to correctly anticipate technological trends in its industries, to react quickly and effectively to such trends and to enhance its existing products and to introduce new products on a timely and cost-effective basis. As a result, the life cycle of the Company's products is difficult to estimate. In addition, changing industry and market conditions may dictate strategic decisions to restructure some business units and discontinue others. Discontinuing a business unit or product line may result in the Company recording accrued liabilities for special charges, such as costs associated with a reduction in work force. These strategic decisions could result in changes to determinations regarding a product's useful life and the recoverability of the carrying basis of certain assets. The Company's products involve sophisticated hardware and software technology that performs critical functions to highly demanding standards. There can be no assurance that the Company's current or future products will not develop operational problems, which could have a material adverse effect on the Company. The Company relies on a limited number of suppliers and manufacturers for specific components and may not be able to find alternate manufacturers that meet its requirements and existing or alternative sources may not be available on favorable terms and conditions. Thus, if there is a shortage of supply for these components, the Company may experience an interruption in its product supply. In addition, loss of third party software licensing would materially and adversely affect the Company's business, financial condition and results of operations. The telecommunications industry continues to undergo significant change as a result of deregulation and privatization worldwide, reducing restrictions on competition in the industry. Unforeseen changes in the regulatory environment also may have an impact on the Company's revenues and/or costs in any given part of the world. The worldwide ESS system industry is already highly competitive and the Company expects competition to intensify. The Company believes that existing competitors will continue to present substantial competition, and that other companies, many with considerably greater financial, marketing and sales resources than the Company, may enter the ESS system markets. Moreover, as the Company enters into new markets as a result of its own research and development efforts or acquisitions, it is likely to encounter new competitors. The market for the Company's digital security and surveillance and enterprise business intelligence products has also been affected by weakness in general economic conditions, delays or reductions in customers' purchases of capital equipment and uncertainties relating to government expenditure programs. -28- Budgetary constraints, uncertainties resulting from the introduction of new technologies and shifts in the pattern of government expenditures resulting from increased uncertainties in the market for monitoring systems, 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. 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 contracts for large system installations with major customers. The Company continues to emphasize large capacity systems in its product development and marketing strategies. Contracts for large installations typically involve a lengthy and complex bidding and selection process, and the ability of the Company to obtain particular contracts is inherently difficult to predict. The timing and scope of these opportunities and the pricing and margins associated with any eventual contract award are difficult to forecast, and may vary substantially from transaction to transaction. The Company's future operating results may accordingly exhibit a higher degree of volatility than the operating results of other companies in its industries that have adopted different strategies, and also may be more volatile than the Company has experienced in prior periods. The degree of dependence by the Company on large system orders, and the investment required to enable the Company to perform such orders, without assurance of continuing order flow from the same customers and predictability of gross margins on any future orders, increase the risk associated with its business. The Company's gross margins also may be adversely affected by increases in material or labor costs, obsolescence charges, price competition and changes in channels of distribution or in the mix of products sold. Political, economic and military conditions in Israel directly affect the Company's operations. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors, and the continued state of hostility, varying in degree and intensity, has led to security and economic problems for Israel. Since October 2000, there has been a significant increase in violence, primarily in the West Bank and Gaza Strip, and more recently Israel has experienced terrorist incidents within its borders. As a result, negotiations between Israel and representatives of the Palestinian Authority have been sporadic and have failed to result in peace. The Company could be adversely affected by hostilities involving Israel, the interruption or curtailment of trade between Israel and its trading partners, or a significant downturn in the economic or financial condition of Israel. In addition, the sale of products manufactured in Israel may be adversely affected in certain countries by restrictive laws, policies or practices directed toward Israel or companies having operations in Israel. The continuation or exacerbation of violent conflicts involving Israel and other nations may impede the Company's ability to sell its products in certain countries. In addition, some of the Company's employees in Israel are subject to being called upon to perform military service in Israel, and their absence may have an adverse effect upon the Company's operations. Generally, unless exempt, -29- male adult citizens and permanent residents of Israel under the age of 54 are obligated to perform up to 36 days of military reserve duty annually. Additionally, all such residents are subject to being called to active duty at any time under emergency circumstances. These conditions could disrupt the Company's operations in Israel and its business, financial condition and results of operations could be adversely affected. The Company's costs of operations have at times been affected by changes in the cost of its operations in Israel, resulting from changes in the value of the Israeli shekel relative to the United States dollar, and from difficulties in attracting and retaining qualified scientific, engineering and technical personnel in Israel, where the availability of such personnel has at times been severely limited. Changes in these cost factors have from time to time been significant and difficult to predict, and could in the future have a material adverse effect on the Company's results of operations. The Company's historical operating results reflect substantial benefits it has received from programs sponsored by the Israeli government for the support of research and development, as well as tax moratoriums and favorable tax rates associated with investments in approved projects ("Approved Enterprises") in Israel. Some of these programs and tax benefits have ceased and others may not be continued in the future and the availability of such benefits to the Company may be affected by a number of factors, including budgetary constraints resulting from adverse economic conditions, government policies and the Company's ability to satisfy eligibility criteria. The Israeli government has reduced the benefits available under some of these programs in recent years, and Israeli government authorities have indicated that the government may further reduce or eliminate some of these benefits in the future. The Company has regularly participated in a conditional grant program administered by the OCS under which it has received significant benefits through reimbursement of up to 50% of qualified research and development expenditures. Verint currently pays royalties, of between 3% and 5% (or 6% under certain circumstances) of associated product revenues (including service and other related revenues) to the Government of Israel for repayment of benefits received under this program. Such royalty payments by Verint are currently required to be made until the government has been reimbursed the amounts received by the Company plus, for amounts received under projects approved by the OCS after January 1, 1999, interest on such amount at a rate equal to the 12-month LIBOR rate in effect on January 1 of the year in which approval is obtained. During fiscal 2001, Comverse entered into an arrangement with the OCS whereby Comverse agreed to pay a lump sum royalty amount for all past amounts received from the OCS. In addition, Comverse will receive lower amounts from the OCS than it has historically received, but will not have to pay royalty amounts on future grants. The amount of reimbursement received by the Company under this program has been reduced significantly, and the Company does not expect to receive significant reimbursement under this program in the future. In addition, permission from the Government of Israel is required for the Company to manufacture outside of Israel products resulting from research and development activities funded under these programs, or to transfer outside of Israel related technology rights. In order to obtain such permission, the Company may be required to increase the royalties to the applicable funding agencies and/or repay certain amounts received as reimbursement of research and development costs. The continued reduction in the benefits received by the Company under the program, or the termination of its eligibility to receive these benefits at all in the future, could adversely affect the Company's operating results. -30- The Company's overall effective tax rate benefits from the tax moratorium provided by the Government of Israel for Approved Enterprises undertaken in that country. The Company's effective tax rate may increase due to, among other factors, the increased proportion of its taxable income associated with activities in higher tax jurisdictions, and by the relative ages of the Company's eligible investments in Israel. The tax moratorium on income from the Company's Approved Enterprise investments made prior to 1997 is four years, whereas subsequent Approved Enterprise projects are eligible for a moratorium of only two years. Reduced tax rates apply in each case for certain periods thereafter. To be eligible for these tax benefits, the Company must continue to meet conditions, including making specified investments in fixed assets and financing a percentage of investments with share capital. If the Company fails to meet such conditions in the future, the tax benefits would be canceled and the Company could be required to refund the tax benefits already received. Israeli authorities have indicated that additional limitations on the tax benefits associated with Approved Enterprise projects may be imposed for certain categories of taxpayers, which would include the Company. If further changes in the law or government policies regarding those programs were to result in their termination or adverse modification, or if the Company were to become unable to participate in, or take advantage of, those programs, the cost of the Company's operations in Israel would increase and there could be a material adverse effect on the Company's operations and financial results. The Company's success is dependent on recruiting and retaining key management and highly skilled technical, managerial, sales, and marketing personnel. The competition for highly skilled personnel remains very competitive despite the current economic conditions. The Company's ability to attract and retain employees also may be affected by recent cost control actions, including reductions in the Company's workforce and the associated reorganization of operations. The occurrence or perception of security breaches within the Company could harm the Company's business, financial condition and operating results. While the Company implements sophisticated security measures, third parties may attempt to breach the Company's security through computer viruses, electronic break-ins and other disruptions. If successful, confidential information, including passwords, financial information, or other personal information may be improperly obtained and the Company may be subject to lawsuits and other liability. Even if the Company is not held liable, a security breach could harm the Company's reputation, and even the perception of security risks, whether or not valid, could inhibit market acceptance of the Company's products. The Company currently derives a significant portion of its total sales from customers outside of the United States. International transactions involve particular risks, including political decisions affecting tariffs and trade conditions, rapid and unforeseen changes in economic conditions in individual countries, turbulence in foreign currency and credit markets, and increased costs resulting from lack of proximity to the customer. The Company is required to obtain export licenses and other authorizations from applicable governmental authorities for certain countries within which it conducts business. The failure to receive any required license or authorization would hinder the Company's ability to sell its products and could adversely affect the Company's business, financial condition and results of operations. In addition, legal uncertainties regarding liability, compliance with local laws and regulations, labor laws, -31- employee benefits, currency restrictions, difficulty in accounts receivable collection, longer collection periods and other requirements may have a negative impact on the Company's operating results. Volatility in international currency exchange rates may have a significant impact on the Company's operating results. The risk of currency instability is increased by prevailing conditions of economic weakness in a number of world markets, and the potential for recession. The Company has, and anticipates that it will continue to receive, significant contracts denominated in foreign currencies, particularly the euro. As a result of the unpredictable timing of purchase orders and payments under such contracts and other factors, it is often not practicable for the Company to effectively hedge the risk of significant changes in currency rates during the contract period. The Company may experience risk associated with the failure to hedge the exchange rate risks associated with contracts denominated in foreign currencies and its operating results have been and may continue to be negatively affected to a material extent by the impact of currency fluctuations. Operating results may also be affected by the cost of such hedging activities that the Company does undertake. While the Company generally requires employees, independent contractors and consultants to execute non-competition and confidentiality agreements, the Company's intellectual property or proprietary rights could be infringed or misappropriated, which could result in expensive and protracted litigation. The Company relies on a combination of patent, copyright, trade secret and trademark law to protect its technology. Despite the Company's efforts to protect its intellectual property and proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use its products or technology. Effectively policing the unauthorized use of the Company's products is time-consuming and costly, and there can be no assurance that the steps taken by the Company will prevent misappropriation of its technology, particularly in foreign countries where in many instances the local laws or legal systems do not offer the same level of protection as in the United States. If others claim that the Company's products infringe their intellectual property rights, the Company may be forced to seek expensive licenses, reengineer its products, engage in expensive and time-consuming litigation or stop marketing its products. The Company attempts to avoid infringing known proprietary rights of third parties in its product development efforts. The Company does not regularly conduct comprehensive patent searches to determine whether the technology used in its products infringes patents held by third parties, however. There are many issued patents as well as patent applications in the fields in which the Company is engaged. Because patent applications in the United States are not publicly disclosed until the patent is issued, applications may have been filed which relate to the Company's software and products. If the Company were to discover that its products violated or potentially violated third-party proprietary rights, it might not be able to obtain licenses to continue offering those products without substantial reengineering. Any reengineering effort may not be successful, nor can the Company be certain that any licenses would be available on commercially reasonable terms. Substantial litigation regarding intellectual property rights exists in the telecommunications industry, and the Company expects that its products may be increasingly subject to third-party infringement claims as the number of competitors in its industry segments grows and the functionality of software products in different industry segments overlaps. In addition, the Company has agreed to indemnify customers in certain situations should it be determined that -32- its products infringe on the proprietary rights of third parties. Any third-party infringement claims could be time consuming to defend, result in costly litigation, divert management's attention and resources, cause product and service delays or require the Company to enter into royalty or licensing agreements. Any royalty or licensing arrangements, if required, may not be available on terms acceptable to the Company, if at all. A successful claim of infringement against the Company and its failure or inability to license the infringed or similar technology could have a material adverse effect on its business, financial condition and results of operations. The Company holds a large proportion of its net assets in cash equivalents and short-term investments, including a variety of public and private debt and equity instruments, and has made significant venture capital investments, both directly and through private investment funds. Such investments subject the Company to the risks inherent in the capital markets generally, and to the performance of other businesses over which it has no direct control. Given the relatively high proportion of the Company's liquid assets relative to its overall size, the results of its operations are materially affected by the results of the Company's capital management and investment activities and the risks associated with those activities. Declines in the public equity markets have caused, and may be expected to continue to cause, the Company to experience realized and unrealized investment losses. In addition, while the Company's interest and other income has benefited from the positive spread between the fixed interest it pays on its outstanding indebtedness and interest earned on the investment of its cash balances, reduction in prevailing interest rates due to economic conditions or government policies has had and may continue to have an adverse impact on the Company's results of operations. The severe decline in the public trading prices of equity securities, particularly in the technology and telecommunications sectors, and corresponding decline in values of privately-held companies and venture capital funds in which the Company has invested, have, and may continue to have, an adverse impact on the Company's financial results and costs of operations. The Company has in the past benefited from the long-term rise in the public trading price of its shares in various ways, including its ability to use equity incentive arrangements as a means of attracting and retaining the highly qualified employees necessary for the growth of its business and its ability to raise capital on relatively attractive conditions. The decline in the price of the Company's shares, and the overall decline in equity prices generally, and in the shares of technology companies in particular, can be expected to make it more difficult for the Company to rely on equity incentive arrangements as a means to recruit and retain talented employees, and negatively has impacted the ability of the Company to raise capital on terms as advantageous to the Company as in the past. The trading price of the Company's shares has been affected by the factors disclosed herein as well as prevailing economic and financial trends and conditions in the public securities markets. Share prices of companies in technology-related industries, such as the Company, tend to exhibit a high degree of volatility. The announcement of financial results that fall short of the results anticipated by the public markets could have an immediate and significant negative effect on the trading price of the Company's shares in any given period. Such shortfalls may result from events that are beyond the Company's immediate control, can be unpredictable and, since a significant proportion of the Company's sales during each fiscal quarter tend to occur in the latter stages of the quarter, may not be discernible until the end of a financial reporting period. These factors may contribute to the volatility of the trading value of its shares regardless of the Company's long-term prospects. -33- The trading price of the Company's shares may also be affected by developments, including reported financial results and fluctuations in trading prices of the shares of other publicly-held companies in the telecommunications equipment industry in general, and the Company's business segments in particular, which may not have any direct relationship with the Company's business or prospects. EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS In 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities" which was subsequently amended by SFAS Nos. 137 and 138 (collectively "SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivatives embedded in other contracts, and hedging activities and requires that an entity recognize all derivatives as either assets or liabilities and measure those instruments at fair value. Under SFAS 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company adopted SFAS 133 effective February 1, 2001. The adoption of SFAS 133 did not have a material effect on the Company's consolidated financial statements. In June 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS No. 141 applies prospectively to all business combinations initiated after June 30, 2001 and to all business combinations accounted using the purchase method for which the date of acquisition is July 1, 2001, or later. The Statement requires all business combinations to be accounted for using one method, the purchase method. Under previously existing accounting rules, business combinations were accounted for using one of two methods, the pooling-of-interests method or the purchase method. The adoption of SFAS No. 141 is not expected to have a material effect on the Company's consolidated financial statements. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. Under SFAS No. 142, goodwill and some intangible assets will no longer be amortized, but rather reviewed for impairment on a periodic basis. The provisions of this Statement are required to be applied starting with fiscal years beginning after December 15, 2001. This Statement is required to be applied at the beginning of the Company's fiscal year and is to be applied to all goodwill and other intangible assets recognized in its financial statements at that date. Impairment losses for goodwill and certain intangible assets that arise due to the initial application of this Statement are to be reported as resulting from a change in accounting principle. Goodwill and intangible assets acquired after June 30, 2001 will be subject immediately to the provisions of this Statement. The adoption of SFAS No. 142 is not expected to have a material effect on the Company's consolidated financial statements. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement cost. SFAS No. 143 applies to legal obligations associated with the retirement of a tangible long-lived asset that -34- result from the acquisition, construction, development and/or normal operation of a long-lived asset. This Statement is effective for fiscal years beginning after June 15, 2002; however, early adoption is encouraged. The adoption of SFAS No. 143 is not expected to have a material effect on the Company's consolidated financial statements. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supercedes certain provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of" and Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years; however, early adoption is encouraged. The Company is currently evaluating the impact, if any, that SFAS No. 144 will have on its consolidated financial statements. FORWARD-LOOKING STATEMENTS From time to time, the Company makes forward-looking statements. Forward-looking statements include financial projections, statements of plans and objectives for future operations, statements of future economic performance, and statements of assumptions relating thereto. The Company may include forward-looking statements in its periodic reports to the Securities and Exchange Commission on Forms 10-K, 10-Q, and 8-K, in its annual report to shareholders, in its proxy statements, in its press releases, in other written materials, and in statements made by employees to analysts, investors, representatives of the media, and others. By their very nature, forward-looking statements are subject to uncertainties, both general and specific, and risks exist that predictions, forecasts, projections and other forward-looking statements will not be achieved. Actual results may differ materially due to a variety of factors, including without limitation those discussed under "Certain Trends and Uncertainties" and elsewhere in this report. Investors and others should carefully consider these and other uncertainties and events, whether or not the statements are described as forward-looking. Forward-looking statements made by the Company are intended to apply only at the time they are made, unless explicitly stated to the contrary. Moreover, whether or not stated in connection with a forward-looking statement, the Company undertakes no obligation to correct or update a forward-looking statement should the Company later become aware that it is not likely to be achieved. If the Company were in any particular instance to update or correct a forward-looking statement, investors and others should not conclude that the Company will make additional updates or corrections thereafter. -35- ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company is exposed to market risk from changes in foreign currency exchange rates, interest rates and equity trading prices, which could impact its results of operations and financial condition. The Company manages its exposure to these market risks through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. The Company may, from time to time, use foreign currency exchange contracts and other derivative instruments to reduce its exposure to the risk that the eventual net cash inflows and outflows resulting from the sale of its products in foreign currency will be adversely affected by changes in exchange rates. In most instances, the Company elects not to hedge these transactions. Management does not expect any significant changes in the strategies it employs to manage such exposure in the near future. As of January 31, 2001, the Company had no material outstanding foreign currency exchange contracts. Various financial instruments held by the Company are sensitive to changes in interest rates. Interest rate changes would result in gains or losses in the market value of the Company's investments in debt securities due to differences between the market interest rates and rates at the date of purchase of these financial instruments. Neither a 100 basis point increase nor decrease from current interest rates would have a material effect on the Company's financial position, results of operations or cash flows. Equity investments held by the Company are subject to equity price risks. Neither a 10% increase nor decrease in equity prices would have a material effect on the Company's financial position, results of operations or cash flows. 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. -36- PART III The information required by Part III is omitted pursuant to instruction G(3). -37- 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 as of January 31, 2001 and 2002 F-3 Consolidated Statements of Income for the Years Ended January 31, 2000, 2001 and 2002 F-4 Consolidated Statements of Stockholders' Equity for the Years Ended January 31, 2000, 2001 and 2002 F-5 Consolidated Statements of Cash Flows for the Years Ended January 31, 2000, 2001 and 2002 F-6 Notes to Consolidated Financial Statements F-7
(2) Financial Statement Schedules. ----------------------------- None (3) Exhibits. -------- The Index of Exhibits commences on the following page. Exhibits numbered 10.1 through 10.3 and 10.5 through 10.9 comprise material compensatory plans and arrangements of the registrant. -38- Exhibits No. Description - --- ----------- 3 Articles of Incorporation and By-Laws: 3.1* Certificate of Incorporation. (Incorporated by reference to the Registrant's Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1987.) 3.2* Certificate of Amendment of Certificate of Incorporation effective February 26, 1993. (Incorporated by reference to the Registrant's Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1992.) 3.3* Certificate of Amendment of Certificate of Incorporation effective January 12, 1995. (Incorporated by reference to the Registrant's Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1994.) 3.4* Certificate of Amendment of Certificate of Incorporation dated October 18, 1999. (Incorporated by reference to the Registrant's Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended January 31, 2000.) 3.5* Certificate of Amendment of Certificate of Incorporation dated September 19, 2000. 3.6* By-Laws, as amended. (Incorporated by reference to the Registrant's Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended 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.) -39- 4.6* Indenture dated as of June 30, 1998 from Comverse Technology, Inc. to The Chase Manhattan Bank, Trustee. (Incorporated by reference to the Registrant's Current Report on Form 8-K under the Securities Exchange Act of 1934 filed July 2, 1998.) 4.7* Specimen 4 1/2% Convertible Subordinated Debenture due 2005. (Incorporated by reference to the Registrant's Current Report on Form 8-K under the Securities Exchange Act of 1934 filed July 2, 1998.) 4.8* Indenture dated as of November 22, 2000 from Comverse Technology, Inc. to The Chase Manhattan Bank, Trustee. (Incorporated by reference to the Registrant's Registration Statement on Form S-3 under the Securities Act of 1933, Registration No. 333-55526.) 4.9* Specimen 1 1/2% Convertible Senior Debenture Due 2005. (Incorporated by reference to the Registrant's Registration Statement on Form S-3 under the Securities Act of 1933, Registration No. 333-55526.) 10 Material contracts: 10.1* Form of Stock Option Agreement pertaining to shares of certain subsidiaries of Comverse Technology, Inc. (Incorporated by reference to the Registrant's Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1993.) 10.2* Form of Incentive Stock Option Agreement. (Incorporated by reference to the Registrant's Registration Statement on Form S-1 under the Securities Act of 1933, Registration No. 33-9147.) 10.3* Form of Stock Option Agreement for options other than Incentive Stock Options. (Incorporated by reference to the Registrant's Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1987.) 10.4* Form of 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.) 10.5* 1997 Employee Stock Purchase Plan, as amended. (Incorporated by reference to the Definitive Proxy Materials for the Registrant's Annual Meeting of Stockholders held October 8, 1999.) 10.6* 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.) 10.7* 1999 Stock Incentive Compensation Plan. (Incorporated by reference to the Definitive Proxy Materials for the Registrant's Annual Meeting of Stockholders held October 8, 1999.) 10.8* 2000 Stock Incentive Compensation Plan. (Incorporated by reference to the Definitive Proxy Materials for the Registrant's Annual Meeting of Stockholders held September 15, 2000.) -40- 10.9* 2001 Stock Incentive Compensation Plan. (Incorporated by reference to the Definitive Proxy Materials for the Registrant's Annual Meeting of Stockholders held June 15, 2001.) 10.10* 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.) 10.11* 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.) 10.12* 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.) 10.13* 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.) 10.14* 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.) 10.15* 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.) 10.16* 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. 23 Consent of Deloitte & Touche LLP - ---------------- * Incorporated by reference. -41- COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Page Independent Auditors' Report F-2 Consolidated Balance Sheets as of January 31, 2001 and 2002 F-3 Consolidated Statements of Income for the Years Ended January 31, 2000, 2001 and 2002 F-4 Consolidated Statements of Stockholders' Equity for the Years Ended January 31, 2000, 2001 and 2002 F-5 Consolidated Statements of Cash Flows for the Years Ended January 31, 2000, 2001 and 2002 F-6 Notes to Consolidated Financial Statements F-7 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 January 31, 2001 and 2002, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended January 31, 2002. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Comverse Technology, Inc. and subsidiaries as of January 31, 2001 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2002 in conformity with accounting principles generally accepted in the United States of America. /S/ Deloitte & Touche LLP New York, New York March 8, 2002 F-2
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JANUARY 31, 2001 AND 2002 (In thousands, except share data) - ---------------------------------------------------------------------------------------------------------------------- ASSETS 2001 2002 - ------ ---- ---- CURRENT ASSETS: Cash and cash equivalents $ 1,275,105 $ 1,361,862 Bank time deposits 3,000 21,431 Short-term investments 457,735 509,191 Accounts receivable, net 359,317 371,928 Inventories 115,799 56,024 Prepaid expenses and other current assets 64,729 76,667 ------------- -------------- TOTAL CURRENT ASSETS 2,275,685 2,397,103 PROPERTY AND EQUIPMENT, net 183,444 181,761 INVESTMENTS 96,870 68,518 OTHER ASSETS 69,265 56,781 ------------- -------------- TOTAL ASSETS $ 2,625,264 $ 2,704,163 ============= ============== - ---------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2002 - ------------------------------------ ---- ---- CURRENT LIABILITIES: Accounts payable and accrued expenses $ 288,921 $ 322,402 Bank loans 4,066 4,696 Advance payments from customers 122,175 39,576 Other current liabilities 144 179 ------------- -------------- TOTAL CURRENT LIABILITIES 415,306 366,853 CONVERTIBLE DEBENTURES 900,000 600,000 LIABILITY FOR SEVERANCE PAY 7,924 9,772 OTHER LIABILITIES 12,404 49,827 ------------- -------------- TOTAL LIABILITIES 1,335,634 1,026,452 ------------- -------------- MINORITY INTEREST 53,465 61,303 ------------- -------------- 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, 600,000,000 shares; issued and outstanding, 168,643,623 and 186,248,350 shares 16,864 18,625 Additional paid-in capital 692,014 1,018,232 Retained earnings 520,144 574,763 Accumulated other comprehensive income 7,143 4,788 ------------- -------------- TOTAL STOCKHOLDERS' EQUITY 1,236,165 1,616,408 ------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,625,264 $ 2,704,163 ============= ==============
See notes to consolidated financial statements. F-3
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED JANUARY 31, 2000, 2001 AND 2002 (In thousands, except per share data) - ---------------------------------------------------------------------------------------------------------------------- January 31, January 31, January 31, 2000 2001 2002 ---- ---- ---- Sales $ 909,667 $ 1,225,058 $ 1,270,218 Cost of sales 371,589 482,658 525,480 ------------ ------------ ------------ Gross margin 538,078 742,400 744,738 Operating expenses: Research and development, net 169,816 232,198 293,296 Selling, general and administrative 193,996 259,607 323,036 Acquisition expenses 2,016 15,971 - Workforce reduction and restructuring charges - - 63,562 ------------ ----------- ------------ Income from operations 172,250 234,624 64,844 Interest and other income (expense), net 16,595 33,339 (5,789) ------------ ----------- ------------- Income before income tax provision 188,845 267,963 59,055 Income tax provision 15,698 18,827 4,436 ------------ ----------- ------------ Net income $ 173,147 $ 249,136 $ 54,619 ============ =========== ============ Earnings per share: Basic $ 1.19 $ 1.54 $ 0.30 ============ =========== ============ Diluted $ 1.08 $ 1.39 $ 0.29 ============ =========== ============
See notes to consolidated financial statements. F-4
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITy YEARS ENDED JANUARY 31, 2000, 2001 AND 2002 (In thousands, except share data) - -------------------------------------------------------------------------------------------------------------------------------- Accumulated Other Comprehensive Income Common Stock -------------------- ------------ Additional Unrealized Cumulative Total Number of Par Paid-in Retained Gains Translation Stockholders' Shares Value Capital Earnings (Losses) Adjustment Equity ------ ----- ------- -------- -------- ---------- ------ BALANCE, JANUARY 31, 1999 139,262,904 $13,926 $261,218 $112,074 $3,515 $122 $390,855 Comprehensive income: Net income 173,147 Unrealized gain (loss) on available-for-sale securities (397) Translation adjustment (817) Total comprehensive income 171,933 Warrant exercises 1,746,635 175 (175) - Common stock issued for acquisitions 1,371,216 137 930 1,067 Retained earnings of acquired companies (2,457) (2,457) Common stock issued for employee stock purchase plan 377,016 38 5,514 5,552 Exercise of stock options 5,477,611 547 44,464 45,011 Conversion of debentures 7,540,916 754 112,079 112,833 Tax benefit of dispositions of stock options 45 45 - -------------------------------------------------------------------------------------------------------------------------------- BALANCE, JANUARY 31, 2000 155,776,298 15,577 424,075 282,764 3,118 (695) 724,839 Comprehensive income: Net income 249,136 Unrealized gain (loss) on available-for-sale securities 4,408 Translation adjustment 312 Total comprehensive income 253,856 Change in year-end of pooled company (705) (705) Common stock issued for acquisitions 5,746,220 575 10,498 11,073 Retained earnings of acquired companies (11,051) (11,051) Common stock issued for employee stock purchase plan 131,452 13 9,842 9,855 Exercise of stock options 6,989,653 699 100,840 101,539 Issuance of subsidiary shares 145,958 145,958 Tax benefit of dispositions of stock options 801 801 - -------------------------------------------------------------------------------------------------------------------------------- BALANCE, JANUARY 31, 2001 168,643,623 16,864 692,014 520,144 7,526 (383) 1,236,165 Comprehensive income: Net income 54,619 Unrealized gain (loss) on available-for-sale securities (3,227) Translation adjustment 872 Total comprehensive income 52,264 Warrant exercises 1,792,932 179 (179) - Common stock issued for employee stock purchase plan 394,866 39 12,401 12,440 Exercise of stock options 1,463,467 148 16,196 16,344 Conversion of debentures 13,953,462 1,395 294,801 296,196 Tax benefit of dispositions of stock options 2,999 2,999 - -------------------------------------------------------------------------------------------------------------------------------- BALANCE, JANUARY 31, 2002 186,248,350 $18,625 $1,018,232 $574,763 $4,299 $489 $1,616,408 =========== ======= ========== ======== ====== ==== ==========
See notes to consolidated financial statements. F-5
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JANUARY 31, 2000, 2001 AND 2002 (In thousands) - -------------------------------------------------------------------------------------------------------------------------------- January 31, January 31, January 31, 2000 2001 2002 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 173,147 $ 249,136 $ 54,619 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 34,969 53,196 63,824 Operating asset write-downs and impairments - 7,399 11,530 Changes in assets and liabilities: Accounts receivable (68,024) (92,039) (12,611) Inventories (53,085) (16,915) 55,775 Prepaid expenses and other current assets (3,055) (22,464) (2,172) Accounts payable and accrued expenses 49,117 52,165 33,481 Advance payments from customers 48,114 26,325 (82,599) Liability for severance pay 1,847 1,729 1,848 Other (5,680) (14,041) 18,490 ------------ ------------ ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 177,350 244,491 142,185 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Maturities and sales (purchases) of bank time deposits and investments, net (377,613) (94,452) (44,762) Purchase of property and equipment (85,638) (97,337) (54,634) Capitalization of software development costs (12,482) (15,489) (23,027) ------------ ------------ ----------- NET CASH USED IN INVESTING ACTIVITIES (475,733) (207,278) (122,423) ------------ ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of debentures - 588,429 - Proceeds from issuance of common stock in connection with exercise of stock options, warrants, and employee stock purchase plan 50,563 111,394 28,784 Proceeds from issuance of common stock of subsidiary - 195,231 - Net proceeds (repayments) of bank loans and other debt 3,064 (943) 38,211 ----------- ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 53,627 894,111 66,995 ----------- ---------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (244,756) 931,324 86,757 CASH ACQUIRED IN POOLING OF INTERESTS TRANSACTIONS 1,707 1,246 - CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 585,584 342,535 1,275,105 ----------- ---------- ----------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 342,535 $1,275,105 $ 1,361,862 =========== ========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for interest $ 20,329 $ 14,665 $ 16,240 =========== ========== ========== Cash paid during the year for income taxes $ 708 $ 4,393 $ 8,379 =========== ========== ==========
See notes to consolidated financial statements. F-6 COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANUARY 31, 2000, 2001 AND 2002 - -------------------------------------------------------------------------------- 1. ORGANIZATION AND BUSINESS Comverse Technology, Inc. ("CTI" and, together with its subsidiaries, the "Company") was organized as a New York corporation in October 1984. The Company is engaged in the design, development, manufacture, marketing and support of special purpose computer and telecommunications systems and software for multimedia communications and information processing applications. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation - The consolidated financial statements include the accounts of 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, mortgage and asset backed securities and U.S. government and agency obligations. 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. As of January 31, 2001 and 2002, the Company's allowance for doubtful accounts was approximately $23,755,000 and $41,955,000, respectively. 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. Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease term. The cost of maintenance and repairs is charged to operations as incurred. Significant renewals and betterments are capitalized. Income Taxes - The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. F-7 Revenue and Expense Recognition - Revenue is generally recognized at the time of shipment for sales of systems which do not require significant customization to be performed by the Company and collection of the resulting receivable is deemed probable by the Company. The Company's systems are generally a bundled hardware and software solution that are shipped together. The Company generally has no obligations to customers after the date products are shipped, except for product warranties. The Company generally warranties its products for one year after sale. A provision for estimated warranty costs is recorded at the time of sale. Customers may also purchase separate maintenance contracts, which generally consist of bug-fixing and telephone access to Company technical personnel, but in certain circumstances may also include the right to receive unspecified product updates, upgrades and enhancements. Revenue from these services is recognized ratably over the contract period. Revenues from certain development contracts are recognized under the percentage-of-completion method on the basis of physical completion to date or using actual costs incurred to total expected costs under the contract. Revisions in estimates of costs and profits are reflected in the accounting period in which the facts that require the revision become known. At the time a loss on a contract is known, the entire amount of the estimated loss is accrued. Amounts received from customers in excess of revenues earned under the percentage-of-completion method are recorded as advance payments from customers. Related contract costs include all direct material and labor costs and those indirect costs related to contract performance, and are included in cost of sales in the consolidated statements of 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 $6,304,000, $7,203,000 and $9,129,000 for the years ended January 31, 2000, 2001 and 2002, 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. As of January 31, 2001 and 2002, the Company had no material outstanding foreign exchange contracts. Net gains (losses) from foreign currency transactions, included in the consolidated statements of income, approximated $(9,422,000), $(646,000) and $(20,788,000) for the years ended January 31, 2000, 2001 and 2002, respectively. 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. Debt issue costs are amortized using the effective interest method over the term of the related debt. Other Liabilities - In January 2002, a subsidiary of CTI, Verint Systems Inc. ("Verint") took a long-term bank loan in the amount of $42,000,000. F-8 This loan, which matures in February 2003, bears interest at LIBOR plus 0.55% and may be prepaid without penalty. The loan is guaranteed by CTI. 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 undiscounted cash flows expected to result from the use of the asset and proceeds from its eventual disposition are less than its carrying amount. Impairment is measured at fair value. 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 benefits from participation in programs sponsored by the Government of Israel for the support of research and development activities conducted in that country. Certain of the Company's research and development activities include projects partially funded by the Office of the Chief Scientist of the Ministry of Industry and Trade of the State of Israel (the "OCS") under which the funding organization reimburses a portion of the Company's research and development expenditures under approved project budgets. The Company accrues royalties to the OCS for the sale of products incorporating technology developed in these projects. During the year ended January 31, 2002, one of the Company's subsidiaries entered into an agreement with the OCS whereby the subsidiary agreed to pay a lump sum royalty amount for all past amounts received from the OCS. In addition, the subsidiary will receive lower amounts from the OCS than it has historically received, but will not have to pay royalties on such future grants. 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 ended January 31, 2000, 2001 and 2002 were $16,797,000, $21,508,000 and $9,980,000, respectively. F-9 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 January 31, 2002:
Gross Gross Estimated Unrealized Unrealized Fair Cost Gains Losses Value -------------------------------------------------------------- (In thousands) Corporate debt securities $120,492 $ 1,481 $ 208 $121,765 U.S. Government bonds 86,128 346 - 86,474 U.S. Government agency bonds 270,520 1,147 - 271,667 -------- -------- -------- -------- Total debt securities 477,140 2,974 208 479,906 -------- -------- -------- -------- Common stock 20,466 3,037 2,180 21,323 Mutual funds investing in U.S. government and agencies obligations 5,763 97 - 5,860 Preferred stock 1,523 579 - 2,102 -------- -------- -------- -------- Total equity securities 27,752 3,713 2,180 29,285 -------- -------- -------- -------- $504,892 $ 6,687 $ 2,388 $509,191 ======== ======== ======== ======== The following is a summary of available-for-sale securities as of January 31, 2001: Gross Gross Estimated Unrealized Unrealized Fair Cost Gains Losses Value -------------------------------------------------------------- (In thousands) Corporate debt securities $339,182 $ 462 $ 4,360 $335,284 U.S. Government bonds 18,003 674 - 18,677 U.S. Government agency bonds 60,050 7 9 60,048 -------- -------- -------- -------- Total debt securities 417,235 1,143 4,369 414,009 -------- -------- -------- -------- Common stock 28,072 10,561 - 38,633 Mutual funds investing in U.S. government and agencies obligations 1,863 85 - 1,948 Preferred stock 2,863 282 - 3,145 -------- -------- -------- -------- Total equity securities 32,798 10,928 - 43,726 -------- -------- -------- -------- $450,033 $ 12,071 $ 4,369 $457,735 ======== ======== ======== ========
During the year ended January 31, 2002, the gross realized gains on sales of securities totaled approximately $25,252,000, and the gross realized losses totaled approximately $18,855,000. During the year ended January 31, 2001, the gross realized gains on sales of securities totaled approximately $9,905,000, and the gross realized losses totaled approximately $8,394,000. During the year ended January 31, 2000, the F-10 gross realized gains on sales of securities totaled approximately $11,652,000, and the gross realized losses totaled approximately $4,613,000. The basis on which cost was determined in computing realized gain or loss is by the first-in, first-out method. The amortized cost and estimated fair value of debt securities at January 31, 2002, by contractual maturity, are as follows:
Estimated Cost Fair Value ---- ---------- (In thousands) Due in one year or less $ 157,339 $ 158,093 Due after one year through three years 198,423 199,433 Due after three years 121,378 122,380 ---------- ---------- $ 477,140 $ 479,906 =========== =========== 5. INVENTORIES Inventories consist of: January 31, ----------- 2001 2002 ---- ---- (In thousands) Raw materials $ 49,014 $ 30,989 Work in process 27,423 12,049 Finished goods 39,362 12,986 ----------- ----------- $ 115,799 $ 56,024 =========== =========== 6. PROPERTY AND EQUIPMENT Property and equipment consists of: January 31, ----------- 2001 2002 ---- ---- (In thousands) Fixtures and equipment $ 242,922 $ 275,826 Land 27,569 29,061 Software 24,293 30,201 Transportation vehicles 1,263 1,387 Leasehold improvements 11,832 11,817 ----------- ----------- 307,879 348,292 Less accumulated depreciation and amortization (124,435) (166,531) ------------ ------------ $ 183,444 $ 181,761 =========== ===========
F-11
7. OTHER ASSETS Other assets consist of: January 31, ----------- 2001 2002 ---- ---- (In thousands) Software development costs, net of accumulated amortization of $25,959 and $28,338 $ 28,325 $ 39,313 Debt issue costs, net of accumulated amortization of $3,157 and $2,737 15,784 8,775 Other assets 25,156 8,693 ----------- ----------- $ 69,265 $ 56,781 =========== ===========
8. BUSINESS COMBINATIONS In July 2000, the Company acquired all of the outstanding stock of Loronix Information Systems, Inc. ("Loronix"), a company that develops software-based digital video recording and management systems for 1,994,806 shares of the Company's common stock and the assumption of options to purchase 370,101 shares of the Company's common stock. The combination was accounted for as a pooling of interests. For the six months ended June 30, 2000, Loronix had sales of approximately $18.1 million and a net loss, including merger related expenses, of approximately $2.3 million. The table below sets forth the separate and combined results of the Company and Loronix for the fiscal year ended January 31, 2000:
CTI Loronix Combined --- ------- -------- (In thousands, except per share data amounts) January 31, 2000 Sales $ 872,190 $ 37,477 $ 909,667 Net income $ 170,261 $ 2,886 $ 173,147 Earnings per share - diluted $ 1.07 $ 1.08
The consolidated statement of income data combines the historical statement of income data of the Company for the fiscal year ended January 31, 2000 with the historical statement of income data of Loronix for the fiscal year ended December 31, 1999. Loronix's net loss for the period from July 1, 2000 through July 31, 2000 of approximately $705,000 has been excluded from the Company's consolidated statement of income for the year ended January 31, 2001 as a result of conforming fiscal years and has been included as an adjustment to retained earnings. In July 2000, the Company acquired all of the outstanding stock of Syborg Informationsysteme GmbH, ("Syborg") a company that develops software-based digital voice and internet recording systems, for 201,251 shares of the Company's common stock. The combination was accounted for as a pooling of interests. The Company did not restate prior financial statements for this acquisition due to immateriality and recorded the book value of the net assets of Syborg of approximately $(475,000) in the statement of stockholders' equity. F-12 In August 2000, the Company acquired all of the outstanding stock of Exalink Ltd., ("Exalink") a company specializing in router-based protocol gateways and applications software for the delivery of Internet-based services to all types of wireless devices, for 5,261,211 shares of the Company's common stock and the assumption of options and warrants to purchase 810,377 shares of the Company's common stock. The combination was accounted for as a pooling of interests. The Company did not restate prior financial statements for this acquisition due to immateriality and recorded the book value of the net assets of Exalink of approximately $(973,000) in the statement of stockholders' equity. In August 2000, the Company acquired all of the outstanding stock of Gaya Software Industries Ltd., ("Gaya") a company specializing in software-based intelligent internet protocol ("IP") gateways and voice-over-IP technology, for 283,758 shares of the Company's common stock and the assumption of options and warrants to purchase 10,505 shares of the Company's common stock. The combination was accounted for as a pooling of interests. The Company did not restate prior financial statements for this acquisition due to immateriality and recorded the book value of the net assets of Gaya of approximately $1,470,000 in the statement of stockholders' equity. In August 1999, the Company acquired all of the outstanding stock of InTouch Systems, Inc., ("InTouch") a company that develops and markets a suite of intelligent voice-controlled software applications, for 679,202 shares of the Company's common stock and the assumption of options to purchase 79,122 shares of the Company's common stock. The combination was accounted for as a pooling of interests. The Company did not restate prior financial statements for this acquisition due to immateriality and recorded the book value of the net assets of InTouch of $(1,122,000) in the statement of stockholders' equity. In February 1999, the Company acquired all of the outstanding stock of Amarex Technology, Inc., ("Amarex"), a company that develops software-based applications for the telephone network operator and call center markets, for 692,014 shares of the Company's common stock and the assumption of options and warrants to purchase 239,286 shares of the Company's common stock. The combination was accounted for as a pooling of interests. The Company did not restate prior financial statements for this acquisition due to immateriality and recorded the book value of the net assets of Amarex of $(268,000) in the statement of stockholders' equity. In connection with the above acquisitions, the Company has charged $2,016,000 and $15,971,000, respectively, to operations in the years ended January 31, 2000 and 2001 for merger related charges. Such charges relate to the following:
Asset write-downs and impairments Year Ended January 31, 2001 ---------------- (In thousands) Inventory $ 3,685 Property and equipment 1,528 Capitalized software costs 2,186 ---------- Total asset write-downs and impairments $ 7,399 ==========
In connection with the acquisitions in the year ended January 31, 2001, certain assets became impaired due to the existence of duplicative technology, property and equipment and inventory of the merged companies. Accordingly, these assets were written down to their net realizable value at the time of the merger. F-13 Professional fees and other direct merger expenses -------------------------------------------------- In connection with the acquisitions in the years ended in January 31, 2000 and 2001, the Company recorded a charge of $2,016,000 and $8,572,000, respectively, for professional fees to lawyers, investment bankers and accountants, as well as other direct merger costs in connection with the mergers, such as printing costs and filing fees. 9. WORKFORCE REDUCTION AND RESTRUCTURING During the year ended January 31, 2002, the Company took steps to better align its cost structure with the current business environment, to improve the efficiency of its operations and to better position the Company to realize emerging opportunities. These steps included a reduction in workforce announced in April 2001 and a restructuring plan announced in December 2001. In connection with these actions, the Company has charged $63,562,000 to operations in the year ended January 31, 2002. Such charges relate to the following:
Accrual Restructuring Balance at And Other Cash Non-cash January 31, Charges Payments Charges 2002 ------- -------- ------- ---- (In thousands) Severance and related $27,685 $15,823 $ - $11,862 Facilities 24,347 - - 24,347 Inventory 4,000 - 4,000 - Property and equipment 4,620 - 4,620 - Capitalized software 2,910 - 2,910 - ------- ------- ------- ------- Total $63,562 $15,823 $11,530 $36,209 ======= ======= ======= =======
Severance and related costs consist primarily of severance payments to terminated employees, fringe related costs associated with severance payments, other termination costs and legal and consulting costs. The accrual balance of $11,862,000 is expected to be paid by October 31, 2002. Facilities costs consist primarily of contractually obligated lease liabilities and operating expenses related to facilities to be vacated primarily in the United States and Israel as a result of the restructuring plan. The accrual balance of $24,347,000 is expected to be paid at various dates through January 2011. In connection with the restructuring plan, the Company changed its organizational structure and product offerings. As a result, certain inventory, property and equipment and capitalized software became impaired and were written-off. F-14 10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of:
January 31, ----------- 2001 2002 ---- ---- (In thousands) Accounts payable $ 87,999 $ 113,566 Accrued salaries 37,479 48,074 Accrued vacation 18,940 21,092 Accrued royalties 40,670 41,105 Accrued restructuring - 36,209 Other accrued expenses 103,833 62,356 ----------- ----------- $ 288,921 $ 322,402 =========== ===========
11. CONVERTIBLE DEBENTURES In November 2000, the Company issued $500,000,000 aggregate principal amount of its 1.50% convertible senior debentures due December 2005 (the "Debentures"). In December 2000, the Company issued an additional $100,000,000 of the Debentures as a result of the initial purchaser exercising in full their over-allotment option. The Debentures are unsecured senior obligations of the Company ranking equally with all of the Company's existing and future unsecured senior indebtedness and are senior in right of payment to any of the Company's existing and future subordinated indebtedness. The Debentures are convertible, at the option of the holders, into shares of the Company's common stock at a conversion price of $116.325 per share, subject to adjustment in certain events; and are subject to redemption at any time on or after December 1, 2003, in whole or in part, at the option of the Company, at redemption prices (expressed as percentages of the principal amount) of 100.375% if redeemed during the twelve-month period beginning December 1, 2003, and 100% of the principal amount if redeemed thereafter. The Debenture holders may require the Company to repurchase the Debentures at par in the event that the common stock ceases to be publicly traded and, in certain instances, upon a change in control of the Company. Upon the occurrence of a change in control, instead of paying the repurchase price in cash, the Company may pay the repurchase price in common stock. In June 1998, the Company issued $300,000,000 of convertible subordinated debentures bearing interest at 4.50% per annum, payable semi-annually. In June 2001, the Company called these debentures for redemption. The debentures were converted into 13,953,462 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. Under Israeli law, the Company is obligated to make severance payments to employees of its Israeli subsidiaries on the basis of each individual's current salary and length of employment. These liabilities are currently provided primarily by premiums paid by the Company to insurance providers. F-15 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 $2,270,000 and $2,631,000 has been accrued as of January 31, 2001 and 2002, respectively, relating to this liability. 13. COMMON STOCK Stock Splits - On April 15, 1999, the Company effected a three-for-two stock split by paying a 50% stock dividend to stockholders of record on March 31, 1999. On April 3, 2000, the Company effected a two-for-one stock split by paying a 100% stock dividend to shareholders of record on March 27, 2000. All share and per share information has been retroactively restated in the consolidated financial statements to reflect these splits. Increase in Authorized Common Shares - At the Annual Meeting of Shareholders held on September 15, 2000, the Company's shareholders approved an amendment to the Company's Certificate of Incorporation to increase from 300,000,000 to 600,000,000 the aggregate number of authorized common shares of the Company. Issuance of Subsidiary Stock - In April 2000, a subsidiary of the Company, Ulticom, Inc. ("Ulticom"), issued 4,887,500 shares of its common stock in an initial public offering. Proceeds from the offering, based on the offering price of $13.00 per share, totaled approximately $58,062,000, net of offering expenses. In October 2000, Ulticom issued an additional 2,843,375 shares of its common stock in a public offering. Proceeds from the offering, based on the offering price of $50.00 per share, totaled approximately $137,169,000, net of offering expenses. The Company recorded a gain of approximately $145,854,000 which was recorded as an increase in stockholders' equity as a result of these issuances. As of January 31, 2002, the Company's ownership interest in Ulticom was approximately 72.4%. 14. STOCK OPTIONS Employee Stock Options - At January 31, 2002, 33,089,823 shares of common stock were reserved for issuance upon the exercise of options then outstanding and 1,834,615 shares 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 increments over periods of up to four years from the date of grant or the date of commencement of the grantee's employment with the Company, up to a maximum term of ten years for all options granted. The changes in the number of options were as follows:
Year Ended January 31, ----------------------------------------------- 2000 2001 2002 ---- ---- ---- Outstanding at beginning of year 21,243,496 23,810,758 26,163,560 Options from pooling F-16 of interests transactions 224,758 820,882 - Granted during the year 8,589,990 9,306,315 9,945,007 Exercised during the year (5,477,611) (6,989,653) (1,463,467) Canceled, terminated and expired (769,875) (784,742) (1,555,277) ------------- ------------- ------------- Outstanding at end of year 23,810,758 26,163,560 33,089,823 ============ ============ ============
At January 31, 2002, options to purchase an aggregate of 12,616,756 shares were vested and currently exercisable under the option plans and options to purchase an additional 20,473,067 shares vest at various dates extending through the year 2005. Weighted average option exercise price information was as follows:
Year Ended January 31, ----------------------------------------------- 2000 2001 2002 ---- ---- ---- Outstanding at beginning of year $ 9.59 $ 22.14 $ 45.66 Assumed from pooling of interests 3.16 3.21 - Granted during the year 43.98 84.83 18.03 Exercised during the year 8.23 14.45 11.43 Canceled, terminated and expired 11.96 31.01 56.73 Exercisable at year end 9.05 14.73 31.23
Significant option groups outstanding at January 31, 2002 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 -------------- ----------- ---------------- -------------- ----------- -------------- $ 0.01 - 10.42 6,837,711 5.74 $ 9.06 6,156,650 $ 9.26 $10.71 - 14.75 1,478,273 5.28 13.50 1,417,050 13.48 $14.82 - 16.05 9,355,953 9.69 16.04 52,629 15.23 $17.28 - 52.97 6,744,407 7.73 44.81 2,734,653 44.97 $56.49 - 119.69 8,673,479 8.70 84.56 2,255,774 86.08 ------------- ---- ----- --------- ----- 33,089,823 8.02 $38.31 12,616,756 $ 31.23 ============= ==== ====== ========== =======
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 $45,239,000, $87,112,000 and $181,837,000 or $0.27, $0.47 and $1.00 per diluted share for the years ended January 31, 2000, 2001 and 2002, respectively. The weighted average fair value of the options granted for the years ended January 31, 2000, 2001 and 2002, respectively, is estimated at $21.54, $50.38 and $10.85 on the date of grant (using the Black-Scholes option pricing model) with the following weighted average assumptions for the years ended January 31, 2000, 2001 and 2002, respectively: volatility of 56%, 65% and 76%; risk-free F-17 interest rate of 5.9%, 5.5% and 4.0%; and an expected life of 4.1, 4.9 and 4.3 years. Options on Subsidiary Shares - In accordance with the requirements of his employment agreement, the chief executive officer of the Company holds options to acquire up to 7.5% of the shares of certain subsidiaries, other than Comverse, Inc. In addition, the Company has granted options to certain other employees to acquire shares of certain subsidiaries, other than Comverse, Inc. Such option issuances are not tied to the performance of the subsidiaries, but are intended to incentivize employees in the units for which they have direct responsibility. The portion of the shares of the subsidiaries upon which such options have been granted varies among the subsidiaries affected, not exceeding in any instance 20% of the shares outstanding assuming exercise in full. The options have terms of up to 15 years and become exercisable and vest over various periods ranging up to seven years from the date of initial grant. The exercise price of each option is equal to the higher of the book value of the underlying shares at the date of grant or the fair market value of such shares at that date determined on the basis of an arms'-length transaction with a third party or, if no such transactions have occurred, on a reasonable basis as determined by a committee of the Board of Directors. 15. WARRANTS In November 1995, the Company entered into an agreement to supply its products to a customer. Pursuant to this agreement, the Company issued warrants to purchase shares of its common stock at an exercise price of $7.18 per share. As of January 31, 2002, all such warrants were exercised. 16. EMPLOYEE STOCK PURCHASE PLAN Under the 1997 Employee Stock Purchase Plan ("ESPP"), all employees who had completed three months of employment are entitled, through payroll deductions of amounts up to 10% of their base salary, to purchase shares of the Company's common stock at 85% of the lesser of the market price at the offering commencement date or the offering termination date. The number of shares available under the ESPP is 2,000,000, of which 1,114,000 had been issued as of January 31, 2002. F-18 17. EARNINGS PER SHARE ("EPS") 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 the years ended January 31, 2000, 2001 and 2002 was as follows:
January 31, 2000 January 31, 2001 January 31, 2002 ----------------------------- -------------------------- ---------------------- 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 $173,147 145,889 $ 1.19 $ 249,136 161,496 $ 1.54 $ 54,619 179,311 $0.30 ====== ====== ===== Effect of Dilutive Securities Options and warrants 13,905 14,514 7,123 Convertible debentures 19,399 19,192 14,552 13,954 ------ -------- ------ --------- -------- ------ -------- ------- ------- Diluted EPS $192,546 178,986 $ 1.08 $263,688 189,964 $ 1.39 $54,619 186,434 $0.29 ======== ======= ====== ======== ======= ====== ======= ========= =====
Debentures convertible into 1,059,855 weighted average shares and 11,291,352 weighted average shares as of January 31, 2001 and January 31, 2002, respectively, were not included in the computation of diluted EPS because the effect of including them would not be dilutive. 18. INTEREST AND OTHER INCOME (EXPENSE), NET Interest and other income (expense), net, consists of the following:
Year Ended January 31, 2000 2001 2002 ---- ---- ---- (In thousands) Interest and dividend income $ 36,872 $ 63,607 $ 71,210 Interest expense (19,423) (18,031) (18,344) Investment gains (losses), net 7,039 1,511 (37,079) Foreign currency gains (losses), net (9,422) (646) (20,788) Other, net 1,529 (13,102) (788) --------- ----------- ------------ $ 16,595 $ 33,339 $ (5,789) ========= ========== ============
F-19 19. INCOME TAXES The provision for income taxes consists of the following:
Year Ended January 31, 2000 2001 2002 ---- ---- ---- (In thousands) Current: Federal $ 171 $ 1,507 $ 6,288 State 769 844 779 Foreign 14,743 16,698 6,631 ---------- ---------- ---------- 15,683 19,049 13,698 ---------- ---------- ---------- Deferred (benefit): Federal (49) (37) (9,077) State 5 (88) (162) Foreign 59 (97) (23) ---------- ----------- ----------- 15 (222) (9,262) ---------- ----------- ----------- $ 15,698 $ 18,827 $ 4,436 ========== ========== ========== The reconciliation of the U.S. Federal statutory tax rate to the Company's effective tax rate is as follows: Year Ended January 31, 2000 2001 2002 ---- ---- ---- U.S. Federal statutory rate 35% 35% 35% Consolidated worldwide income in excess of U.S. income (36) (38) (47) Foreign income taxes 8 6 11 Other 1 4 9 -------- --------- --------- Company's effective tax rate 8% 7% 8% ======= ======== ========
Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and (b) operating loss carryforwards. The tax effects of significant items comprising the Company's deferred tax asset and liability at January 31, 2001 and 2002 is as follows: F-20
January 31, ----------- 2000 2002 ---- ---- (In thousands) Deferred tax liability: Expenses deductible for tax purposes and not for financial reporting purposes $ - $ - Unrealized gain on available-for-sale securities 2,785 1,080 ---------- --------- $ 2,785 $ 1,080 ========== ========= Deferred tax asset: Reserves not currently deductible $ 14,173 $ 43,532 Tax loss carryforwards 198,135 253,703 Inventory capitalization 512 118 ---------- --------- 212,820 297,353 Less: valuation allowance (209,452) (285,801) ----------- ---------- Total deferred tax asset $ 3,368 $ 11,552 ========== =========
At January 31, 2002, the Company had net operating loss carryforwards for Federal income tax purposes of approximately $686 million, which begin to expire in 2018. 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. 20. BUSINESS SEGMENT INFORMATION The Company's reporting segments are as follows: Enhanced Services Solutions Products - Enable telecommunications service providers to offer a variety of revenue-generating services accessible to large numbers of simultaneous users. These services include a broad range of integrated multimodal messaging, information distribution and personal communications services, such as call answering with one-touch call return, voicemail, IP-based unified messaging (voice, fax and email in a single mailbox, media conversion such as email to voice and visual mailbox presentation), prepaid wireless calling services, wireless data and Internet-based services such as short messaging services, wireless information and entertainment services, multimedia messaging services, and wireless instant messaging interactive voice response, voice portal services, which are part of a voice-controlled portfolio of services such as voice dialing, voice-controlled Web browsing and voice-controlled messaging, and other applications. Service Enabling Signaling Software Products - Interconnect the complex circuit switching, database and messaging systems and manage vital number, routing and billing information that form the backbone of today's public telecommunications networks. These products also are embedded in a range of packet softswitching products to interoperate or converge voice and data networks and facilitate services such as voice over the Internet and Internet offload. This segment represents the Company's Ulticom subsidiary. Security and Business Intelligence Recording Products - Provides analytic solutions for communications interception, digital video security and surveillance, and enterprise business intelligence. The software generates actionable intelligence through the collection, retention and analysis of voice, fax, video, email, Internet and data transmissions from multiple types of communications networks. This segment represents the Company's Verint subsidiary. F-21 All Other - Includes other miscellaneous operations. The table below presents information about operating income/loss and segment assets as of and for the years ended January 31, 2000, 2001 and 2002:
Service Security and Enhanced Enabling Business Services Signaling Intelligence Solutions Software Recording All Reconciling Consolidated Products Products Products Other Items Totals ------------------------------------------------------------------------------------------- (In thousands) Year Ended January 31, 2000 ---------------- Sales $ 755,597 $ 25,831 $ 115,551 $ 19,494 $ (6,806) $ 909,667 Operating Income (Loss) $ 191,086 $ 2,809 $ (9,530) $ (2,043) $ (10,072) $ 172,250 Total Assets $ 694,872 $ 17,794 $ 99,183 $ 39,512 $ 521,486 $ 1,372,847 Year Ended January 31, 2001 ---------------- Sales $ 1,032,860 $ 47,441 $ 139,252 $ 15,233 $ (9,728) $ 1,225,058 Operating Income (Loss) $ 251,748 $ 8,356 $ (5,963)(1)$ (1,955) $ (17,562)(2)$ 234,624 Total Assets $ 1,041,622 $ 232,187 $ 118,484 $ 80,571 $ 1,152,400 $ 2,625,264 Year Ended January 31, 2002 ---------------- Sales $ 1,080,694 $ 58,156 $ 131,235 $ 9,966 $ (9,833) $ 1,270,218 Operating Income (Loss) $ 66,105(3) $ 8,523 $ (2,533)(4)$ (984) $ (6,267) $ 64,844 Total Assets $ 1,168,075 $ 240,675 $ 116,726 $ 56,930 $ 1,121,757 $ 2,704,163 (1) Operating income, excluding acquisition expenses of $10,909,000, would have been $4,946,000. (2) Includes acquisition expenses of $5,062,000. (3) Operating income, excluding restructuring charges of $60,808,000, would have been $126,913,000. (4) Operating income, excluding restructuring charges of $2,754,000, would have been $221,000.
Reconciling items consist of the following: Sales - elimination of intersegment revenues. Operating Income (Loss) - elimination of intersegment operating income F-22 and corporate operations. Total Assets - elimination of intersegment receivables and unallocated corporate assets. Sales by country, based on end-user location, as a percentage of total sales, for the years ended January 31, 2000, 2001 and 2002 were as follows:
January 31, ----------- 2000 2001 2002 ---- ---- ---- United States 24% 25% 30% Germany 10 11 12 Other foreign 66 64 58 ------- ------- -------- Total 100% 100% 100% ======= ======= ======== No customer accounted for 10% or more of sales for the years ended January 31, 2000, January 31, 2001 or January 31, 2002. Long-lived assets by country of domicile consist of: January 31, 2001 2002 ---- ---- (In thousands) United States $ 182,473 $ 128,681 Israel 142,569 158,726 Other 8,625 10,850 ---------- ----------- $ 333,667 $ 298,257 ========== ===========
21. COMMITMENTS AND CONTINGENCIES Leases - The Company leases office, manufacturing, and warehouse space under non-cancelable operating leases. Rent expense for all leased premises approximated $22,500,000, $28,304,000 and $36,461,000 in the years ended January 31, 2000, 2001 and 2002, respectively. F-23 As of January 31, 2002, the minimum annual rent obligations of the Company were approximately as follows: Twelve Months Ended January 31, Amount ----------- ------ (In thousands) 2003 $ 34,007 2004 30,234 2005 20,253 2006 18,981 2007 and thereafter 33,666 ----------- $ 137,141 =========== Employment Agreements - The Company is obligated under employment contracts with Kobi Alexander, its Chairman and Chief Executive Officer, to provide salary, bonuses, insurance and fringe benefits through January 31, 2004. Minimum salary payments under the contracts currently amount to $672,000 per year. The executive is entitled to annual bonuses equal to at least 2.75% of the Company's consolidated after-tax net income during each year, determined without regard to acquisition-related expenses and charges. During the year ended January 31, 2002, Mr. Alexander was entitled to receive $672,000 in salary and a bonus of approximately $1,500,000. Mr. Alexander voluntarily forfeited ninety percent (90%) (approximately $1,955,000) of such amount, resulting in total cash compensation, excluding amounts paid for accrued vacation, of approximately $217,000. Following termination or expiration of the term of employment, the executive is entitled to receive a severance payment equal to $112,736 times the number of years from the beginning of his employment with the Company, the amount of which payment increases at the rate of 10% per annum compounded for each year of employment following December 31, 2000, plus continued fringe benefits for three years and insurance coverage for up to 10 years. If the executive's employment is terminated by the Company without "cause", or by the executive for "good reason" (as those terms are defined in the agreement), the executive is entitled to additional payments attributable to the salary, bonus and the monetary equivalence of other benefits which he otherwise would have expected to receive for a period of three years or the balance of the agreement term, whichever is longer. If such termination occurs following a change in control of the Company, the required additional payment is three times the executive's annual salary and bonus, and the executive is additionally entitled to the accelerated vesting of all retirement benefits and stock options, and payments sufficient to reimburse any associated excise tax liability and income tax resulting from such reimbursement. 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 Comverse, Inc., at prices equal to the higher of the 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. These options, as well as any options granted the executive under the Company's stock option or stock incentive plans, become fully vested, exercisable and nonforfeitable in the event of a change in control of the Company, the termination of the executive's employment by the Company without cause or by the executive for good reason, or the executive's death or disability. Insurance benefits include life insurance providing cumulative death benefits of approximately $40,000,000, including amounts provided under a split dollar arrangement through which the Company is to be reimbursed premiums from the benefit payments or cash surrender value. Most other employment agreements of the Company are terminable with or without cause with prior notice of 90 days or less. In certain instances, the termination of employment agreements without cause F-24 entitles the employees to certain benefits, including acceleration of the vesting of stock options and severance payments of as much as one year's compensation. Licenses and Royalties - The Company licenses certain technology, "know-how" and related rights for use in the manufacture and marketing of its products, and pays royalties to third parties under such licenses and under other agreements entered into in connection with research and development financing. The Company currently pays royalties on certain of its product sales in varying amounts based upon the revenues attributed to the various components of such products. Royalties typically range up 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 up to the amounts received by the Company under the approved project budgets. 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, a subsidiary of CTI and Quantum Industrial Holdings Ltd. organized two new companies to make investments, including investments in high technology ventures. Each participant committed a total of $37,500,000 to the capital of the new companies, for use as suitable investment opportunities are identified. Quantum Industrial Holdings Ltd. is a member of the Quantum Group of Funds managed by Soros Fund Management LLC. and affiliated management companies. As of January 31, 2001 and 2002, the Company has invested approximately $22,640,000 and $25,026,000 respectively, related to these ventures which are included in the caption "Investments" in the accompanying balance sheets. In addition, the Company has committed $27,726,000 to various companies, ventures and funds which may be called at the option of the investee. Guaranties - The Company has obtained bank guaranties primarily for performance of certain obligations under contracts with customers. These guaranties, which aggregated approximately $23,421,000 at January 31, 2002, are to be released by the Company's performance of specified contract milestones, which are scheduled to be completed primarily during 2002. Litigation - On or about October 19, 2001, Kevin Beier v. Comverse Technology, Inc., et al., CV 016972, the first of four virtually identical purported securities class action complaints was filed against CTI and certain of its executive officers in the United States District Court for the Eastern District of New York. The four actions were consolidated into the Beier action on January 15, 2002 and an amended consolidated complaint was filed on March 4, 2002. The consolidated complaint generally alleges violations of federal securities laws on behalf of individuals who allege that they purchased CTI's common stock during a purported class period between April 30, 2001 and July 10, 2001. The consolidated complaint seeks an unspecified amount in damages on behalf of persons who purchased CTI stock during the purported class period. The Company believes all claims in the complaints to be without merit and will vigorously defend against these claims. From time to time, the Company is subject to claims in legal proceedings arising in the normal course of its business. The Company does not believe that it is currently party to any pending legal action that could reasonably be expected to have a material adverse effect on its business or operating results. F-25 22. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value amounts have been determined by the Company, using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
January 31, --------------------------------------------------------------- 2001 2002 ---- ---- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ------ ---------- ------ ---------- (In thousands) Liabilities: Convertible debentures $ 900,000 $ 2,307,000 $ 600,000 $ 471,000
Cash and Cash Equivalents, Bank Time Deposits, Short-Term Investments, Accounts Receivable, Investments, and Accounts Payable - The carrying amounts of these items are a reasonable estimate of their fair value. Convertible Debentures - 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 January 31, 2002. Such amounts have not been comprehensively revalued for purposes of these financial statements since January 31, 2002, and current estimates of fair value may differ significantly from the amounts presented herein. 23. EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS In 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" which was subsequently amended by SFAS Nos. 137 and 138 (collectively "SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivatives embedded in other contracts, and hedging activities and requires that an entity recognize all derivatives as either assets or liabilities and measure those instruments at fair value. Under SFAS 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company adopted SFAS 133 effective February 1, 2001. The adoption of SFAS 133 did not have a material effect on the Company's consolidated financial statements. In June 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS No. 141 applies prospectively to all business combinations initiated after June 30, 2001 and to all business combinations accounted using the purchase method for which the date of acquisition is July 1, 2001, or later. The Statement requires all business combinations to be accounted for using one method, the purchase method. Under previously existing accounting rules, business combinations were accounted for using one of two methods, the pooling-of-interests method or the purchase method. The adoption of SFAS No. 141 is not expected to F-26 have a material effect on the Company's consolidated financial statements. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. Under SFAS No. 142, goodwill and some intangible assets will no longer be amortized, but rather reviewed for impairment on a periodic basis. The provisions of this Statement are required to be applied starting with fiscal years beginning after December 15, 2001. This Statement is required to be applied at the beginning of the Company's fiscal year and is to be applied to all goodwill and other intangible assets recognized in its financial statements at that date. Impairment losses for goodwill and certain intangible assets that arise due to the initial application of this Statement are to be reported as resulting from a change in accounting principle. Goodwill and intangible assets acquired after June 30, 2001 will be subject immediately to the provisions of this Statement. The adoption of SFAS No. 142 is not expected to have a material effect on the Company's consolidated financial statements. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement cost. SFAS No. 143 applies to legal obligations associated with the retirement of a tangible long-lived asset that result from the acquisition, construction, development and/or normal operation of a long-lived asset. This Statement is effective for fiscal years beginning after June 15, 2002; however, early adoption is encouraged. The adoption of SFAS No. 143 is not expected to have a material effect on the Company's consolidated financial statements. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supercedes certain provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of" and Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years; however, early adoption is encouraged. The Company is currently evaluating the impact, if any, that SFAS No. 144 will have on its consolidated financial statements. 24. SUBSEQUENT EVENT On February 1, 2002, Verint acquired the digital video recording business of Lanex, LLC. The Lanex business provides digital video recording solutions for security and surveillance applications primarily to North American banks. The purchase price consisted of $9.5 million in cash and a $2.2 million convertible note. The note is non-interest bearing and matures on February 1, 2004. The holder of the note may elect to convert the note, in whole or in part, into shares of Verint's common stock at a conversion price of $16.06 per share at any time on or after the completion of an initial public offering by Verint. The note is guaranteed by CTI. Pro forma results of operations have not been presented because the effects of this acquisition are not material. F-27 25. QUARTERLY INFORMATION (UNAUDITED) The following table shows selected results of operations for each of the quarters during the years ended January 31, 2001 and 2002:
Fiscal Quarter Ended April 30, July 31, Oct. 31, Jan. 31, April 30, July 31, Oct. 31, Jan. 31 2000 2000 2000 2001 2001 2001 2001 2002 ---- ---- ---- ---- ---- ---- ---- ---- Sales $ 268,469 $ 292,070 $ 317,966 $ 346,553 $365,037 $345,090 $295,032 $ 265,059 Gross profit 161,538 176,754 193,185 210,923 222,415 198,439 169,822 154,062 Net income (loss) 56,206 51,703 64,362 76,865 78,956 27,984 1,695 (54,016) Diluted earnings per share $ 0.32 $ 0.30 $ 0.35 $ 0.41 $ 0.43 $ 0.15 $ 0.01 $ (0.29) =========== =========== =========== ========== =========== =========== ======= ==========
F-28 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMVERSE TECHNOLOGY, INC. (Registrant) April 26, 2002 By: S/ Kobi Alexander --------------------------------------- Kobi Alexander, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. S / Kobi Alexander April 26, 2002 - -------------------------------------------- Kobi Alexander, Chairman of the Board and Chief Executive Officer; Director S / Itsik Danziger April 26, 2002 - -------------------------------------------- Itsik Danziger, President; Director S / David Kreinberg April 26, 2002 - -------------------------------------------- David Kreinberg, Chief Financial Officer S / Zvi Alexander April 26, 2002 - -------------------------------------------- Zvi Alexander, Director S / John H. Friedman April 26, 2002 - -------------------------------------------- John H. Friedman, Director S / Francis E. Girard April 26, 2002 - -------------------------------------------- Francis E. Girard, Director S / Ron Hiram April 26, 2002 - -------------------------------------------- Ron Hiram, Director S / Sam Oolie April 26, 2002 - -------------------------------------------- Sam Oolie, Director S / William F. Sorin April 26, 2002 - -------------------------------------------- William F. Sorin, Director S / Shaula A. Yemini April 26, 2002 - -------------------------------------------- Dr. Shaula A. Yemini, Director F-29 EX-99 6 a6-11exax.txt EXHIBIT (A)(IX) Exhibit (a)(ix) UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 30, 2002 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 0-15502 COMVERSE TECHNOLOGY, INC. (Exact name of registrant as specified in its charter) NEW YORK 13-3238402 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 170 CROSSWAYS PARK DRIVE, WOODBURY, NY 11797 (Address of principal executive offices) (Zip Code) (516) 677-7200 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No APPLICABLE ONLY TO CORPORATE ISSUERS: The number of shares of Common Stock, par value $0.10 per share, outstanding as of June 6, 2002 was 187,029,629. Page 1 of 26 Total Pages (Exhibit Index Appears on Page 25) PART I FINANCIAL INFORMATION ITEM 1. Financial Statements. Page ---- 1. Condensed Consolidated Balance Sheets as of January 31, 2002 and April 30, 2002 3 2. Condensed Consolidated Statements of Operations for the Three Month Periods Ended April 30, 2001 and April 30, 2002 4 3. Condensed Consolidated Statements of Cash Flows for the Three Month Periods Ended April 30, 2001 and April 30, 2002 5 4. Notes to Condensed Consolidated Financial Statements 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 12 2 COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS JANUARY 31, APRIL 30, 2002* 2002 (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 1,361,862 $ 1,294,323 Bank time deposits and short-term investments 530,622 583,364 Accounts receivable, net 371,928 348,106 Inventories 56,024 58,714 Prepaid expenses and other current assets 76,667 76,257 --------------- --------------- TOTAL CURRENT ASSETS 2,397,103 2,360,764 PROPERTY AND EQUIPMENT, net 181,761 178,062 OTHER ASSETS 125,299 132,283 --------------- --------------- TOTAL ASSETS $ 2,704,163 $ 2,671,109 =============== =============== - ---------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 322,402 $ 309,318 Advance payments from customers 39,576 37,380 Other current liabilities 4,875 46,688 --------------- --------------- TOTAL CURRENT LIABILITIES 366,853 393,386 CONVERTIBLE DEBENTURES 600,000 600,000 LIABILITY FOR SEVERANCE PAY 9,772 9,721 OTHER LIABILITIES 49,827 9,816 --------------- --------------- TOTAL LIABILITIES 1,026,452 1,012,923 --------------- --------------- MINORITY INTEREST 61,303 62,481 --------------- --------------- STOCKHOLDERS' EQUITY: Common stock, $0.10 par value - authorized, 600,000,000 shares; issued and outstanding, 186,248,350 and 186,820,747 shares 18,625 18,682 Additional paid-in capital 1,018,232 1,024,946 Retained earnings 574,763 551,187 Accumulated other comprehensive income 4,788 890 --------------- --------------- TOTAL STOCKHOLDERS' EQUITY 1,616,408 1,595,705 --------------- --------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,704,163 $ 2,671,109 =============== ===============
*The Condensed Consolidated Balance Sheet as of January 31, 2002 has been summarized from the Company's audited Consolidated Balance Sheet as of that date. The accompanying notes are an integral part of these financial statements. 3 COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED APRIL 30, APRIL 30, 2001 2002 Sales $ 365,037 $ 211,194 Cost of sales 142,622 91,777 ------------- ------------- Gross margin 222,415 119,417 Operating expenses: Research and development, net 70,198 62,923 Selling, general and administrative 78,189 73,513 ------------- ------------- Income (loss) from operations 74,028 (17,019) Interest and other income (expense), net 10,380 (5,244) ------------- ------------- Income (loss) before income tax provision 84,408 (22,263) Income tax provision 5,452 1,313 ------------- ------------- Net income (loss) $ 78,956 $ (23,576) ============= ============= Earnings (loss) per share: Basic $ 0.46 $ (0.13) ============= ============= Diluted $ 0.43 $ (0.13) ============= =============
The accompanying notes are an integral part of these financial statements. 4 COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
THREE MONTHS ENDED APRIL 30, APRIL 30, 2001 2002 Cash flows from operating activities: Net cash from operations after adjustment for non-cash items $ 93,405 $ (6,636) Changes in assets and liabilities: Accounts receivable (31,229) 26,448 Inventories 12,725 (1,319) Prepaid expenses and other current assets (2,458) 10,206 Accounts payable and accrued expenses (25,817) (22,401) Liability for severance pay 2,530 (413) Other (19,115) (15,104) ------------- ------------- Net cash provided by (used in) operating activities 30,041 (9,219) ------------- ------------- Cash flows from investing activities: Maturities and sales (purchases) of bank time deposits and investments, net 61,204 (44,647) Purchases of property and equipment (15,535) (6,545) Increase in software development costs (5,405) (3,660) Net assets acquired - (9,706) ------------- ------------- Net cash provided by (used in) investing activities 40,264 (64,558) ------------- ------------- Cash flows from financing activities: Net proceeds (repayments) of bank loans and other debt 100 (533) Proceeds from issuance of common stock 13,179 6,771 ------------- ------------- Net cash provided by financing activities 13,279 6,238 ------------- ------------- Net increase (decrease) in cash and cash equivalents 83,584 (67,539) Cash and cash equivalents, beginning of period 1,275,105 1,361,862 -------------- -------------- Cash and cash equivalents, end of period $ 1,358,689 $ 1,294,323 ============== ==============
The accompanying notes are an integral part of these financial statements. 5 COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) BASIS OF PRESENTATION. Comverse Technology, Inc. ("CTI" and, together with its subsidiaries, the "Company") is engaged in the design, development, manufacture, marketing and support of computer and telecommunications systems and software for multimedia communications and information processing applications. The accompanying financial information should be read in conjunction with the financial statements, including the notes thereto, for the annual period ended January 31, 2002. The financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods. The results of operations for the three month period ended April 30, 2002 are not necessarily indicative of the results to be expected for the full year. INVENTORIES. The composition of inventories at January 31, 2002 and April 30, 2002 is as follows: JANUARY 31, APRIL 30, 2002 2002 (In thousands) Raw materials $ 30,989 $ 27,539 Work in process 12,049 12,533 Finished goods 12,986 18,642 ------------- ------------- $ 56,024 $ 58,714 ============= ============= RESEARCH AND DEVELOPMENT EXPENSES. The Company has received periodic reimbursement from the Israeli Government of a portion of the costs of approved research and development projects conducted at its facilities in Israel. During the three month periods ended April 30, 2001 and 2002, respectively, such reimbursement amounted to $5,667,000 and $1,204,000. The amount of reimbursement received by the Company has declined significantly, and the terms upon which such benefits are available to it have been modified, in recent periods. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Certain Trends and Uncertainties." Under the terms of the applicable funding agreements, the Company is required to pay royalties on revenues associated with certain of its products resulting from projects that received government funding, and certain products may not be manufactured outside of Israel without government approval. EARNINGS (LOSS) PER SHARE. The computation of basic earnings (loss) per share is based on the weighted average number of outstanding common shares. Diluted earnings (loss) per share further assumes the issuance of common shares for all dilutive potential common shares outstanding. The calculation for earnings per share for the three month periods ended April 30, 2001 and 2002 was as follows: 6
APRIL 30, 2001 APRIL 30, 2002 --------------------------------- ----------------------------------- Per Share Income Per Share Income Shares Amount (Loss) Shares Amount (In thousands, except per share data) BASIC EPS Net Income (Loss) $ 78,956 170,747 $ 0.46 $ (23,756) 186,569 $ (0.13) ====== ======= EFFECT OF DILUTIVE SECURITIES ---------- Options and warrants 9,149 Convertible debentures 3,638 13,954 --------- ------- ------ --------- ------- ------- DILUTED EPS $ 82,594 193,850 $ 0.43 $ (23,756) 186,569 $ (0.13) ========= ======= ====== ========= ======= =======
The diluted earnings (loss) per share computation for the three months ended April 30, 2002 excludes incremental shares of 1,995,600 related to employee stock options. These shares are excluded due to their antidilutive effect as a result of the Company's loss during the period. In addition, debentures convertible into 5,157,963 weighted average shares as of April 30, 2001 and 2002 were not included in the computation of diluted earnings (loss) per share because the effect of including them would be antidilutive. COMPREHENSIVE INCOME (LOSS). For the three month periods ended April 30, 2001 and 2002, total comprehensive income (loss) was $66,041,000 and ($27,474,000), respectively. The elements of comprehensive income (loss) include net income (loss), unrealized gains/losses on available for sale securities and foreign currency translation adjustments. CONVERTIBLE DEBENTURES. In November and December 2000, the Company issued $600,000,000 aggregate principal amount of its 1.50% convertible senior debentures due December 2005 (the "Debentures"). The Debentures are unsecured senior obligations of the Company ranking equally with all of the Company's existing and future unsecured senior indebtedness and are senior in right of payment to any of the Company's existing and future subordinated indebtedness. The Debentures are convertible, at the option of the holders, into shares of the Company's common stock at a conversion price of $116.325 per share, subject to adjustment in certain events; and are subject to redemption at any time on or after December 1, 2003, in whole or in part, at the option of the Company, at redemption prices (expressed as percentages of the principal amount) of 100.375% if redeemed during the twelve-month period beginning December 1, 2003, and 100% of the principal amount if redeemed thereafter. The Debenture holders may require the Company to repurchase the Debentures at par in the event that the common stock ceases to be publicly traded and, in certain instances, upon a change in control of the Company. Upon the occurrence of a change in control, instead of paying the repurchase price in cash, the Company may pay the repurchase price in common stock. ACQUISTIONS. In February 2002, Verint Systems Inc. ("Verint"), a subsidiary of CTI, acquired the digital video recording business of Lanex, LLC. The Lanex business provides digital video recording solutions for security and surveillance applications primarily to North American banks. The purchase price consisted of $9.5 million in cash and a $2.2 million convertible note. The note is non-interest bearing and matures on February 1, 2004. The holder of the note may elect to convert the note, in whole or in part, into shares of Verint's common stock at a conversion price of $16.06 per share. The note is guaranteed 7 by CTI. Pro forma results of operations have not been presented because the effects of this acquisition are not material. In May 2002, the Company signed a definitive agreement to acquire Odigo, Inc. ("Odigo"), a privately-held leading provider of instant messaging and presence management solutions to service providers. The acquisition will cost the Company approximately $20 million in cash and is subject to closing conditions customary for a transaction of this type. Prior to the acquisition, the Company was a strategic partner with Odigo holding an equity position of approximately 12.4%, which it previously acquired for approximately $3 million. Pro forma results of operations will not be presented because the effects of this acquisition will not be material. WORKFORCE REDUCTION AND RESTRUCTURING. During the year ended January 31, 2002, the Company took steps to better align its cost structure with the current business environment, to improve the efficiency of its operations and to better position the Company to realize emerging opportunities. These steps included a reduction in workforce announced in April 2001 and a restructuring plan, which included an additional reduction in workforce, announced in December 2001. As of April 30, 2002 the Company had an accrual balance of approximately $28,116,000 related to the workforce reduction and restructuring plan. A roll forward of the workforce reduction and restructuring plan accrual from January 31, 2002 is as follows:
ACCRUAL ACCRUAL BALANCE AT BALANCE AT JANUARY 31, CASH APRIL 30, 2002 PAYMENTS 2002 ---- -------- ---- (IN THOUSANDS) Severance and related $11,862 $7,984 $ 3,878 Facilities 24,347 109 24,238 ------- ------ ----------- Total $36,209 $8,093 $ 28,116 ======= ====== ===========
Severance and related costs consist primarily of severance payments to terminated employees, fringe related costs associated with severance payments, other termination costs and legal and consulting costs. The balance of the severance and related costs is expected to be paid by October 31, 2002. Facilities costs consist primarily of contractually obligated lease liabilities and operating expenses related to facilities to be vacated primarily in the United States and Israel as a result of the restructuring plan. The balance of the facilities cost is expected to be paid at various dates through January 2011. 8 BUSINESS SEGMENT INFORMATION. The Company's reporting segments are as follows: Enhanced Services Solutions Products - Enable telecommunications service providers to offer a variety of revenue-generating services accessible to large numbers of simultaneous users. These services include a broad range of integrated multimodal messaging, information distribution and personal communications services, such as call answering with one-touch call return, voicemail, IP-based unified messaging (voice, fax and email in a single mailbox, media conversion such as email to voice and visual mailbox presentation), prepaid wireless calling services, wireless data and Internet-based services such as short messaging services, wireless information and entertainment services, multimedia messaging services, and wireless instant messaging interactive voice response, voice portal services, which are part of a voice-controlled portfolio of services such as voice dialing, voice-controlled Web browsing and voice-controlled messaging, and other applications. Service Enabling Signaling Software Products - Interconnect the complex circuit switching, database and messaging systems and manage vital number, routing and billing information that form the backbone of today's public telecommunications networks. These products also are embedded in a range of packet softswitching products to interoperate or converge voice and data networks and facilitate services such as voice over the Internet and Internet offload. This segment represents the Company's Ulticom, Inc. subsidiary. Security and Business Intelligence Recording Products - Provides analytic solutions for communications interception, digital video security and surveillance, and enterprise business intelligence. The software generates actionable intelligence through the collection, retention and analysis of voice, fax, video, email, Internet and data transmissions from multiple types of communications networks. This segment represents the Company's Verint subsidiary. All Other - Includes other miscellaneous operations. The table below presents information about operating income/loss and segment assets as of and for the three month periods ended April 30, 2001 and 2002: 9
Service Security and Enhanced Enabling Business Services Signaling Intelligence Solutions Software Recording All Reconciling Consolidated Products Products Products Other Items Totals ------------------------------------------------------------------------------------------------------- (In thousands) THREE MONTHS ENDED APRIL 30, 2001: Sales $ 313,346 $ 17,033 $ 34,558 $ 2,460 $ (2,360) $ 365,037 Operating Income (Loss) $ 71,585 $ 3,834 $ 85 $ (569) $ (907) $ 74,028 Total Assets $ 1,122,147 $ 238,412 $ 113,049 $ 83,253 $ 1,106,537 $ 2,663,398 THREE MONTHS ENDED APRIL 30, 2002: Sales $ 166,538 $ 7,097 $ 36,317 $ 2,293 $ (1,051) $ 211,194 Operating Income (Loss) $ (14,819) $ (2,903) $ 2,075 $ (265) $ (1,107) $ (17,019) Total Assets $ 1,134,707 $ 237,047 $ 119,729 $ 46,023 $ 1,133,603 $ 2,671,109
Reconciling items consist of the following: Sales - elimination of intersegment revenues. Operating Income (Loss) - elimination of intersegment operating income and corporate operations. Total Assets - elimination of intersegment receivables and unallocated corporate assets. EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. Under SFAS No. 142, goodwill and some intangible assets will no longer be amortized, but rather reviewed for impairment on a periodic basis. The provisions of this Statement are required to be applied starting with fiscal years beginning after December 15, 2001. This Statement is required to be applied at the beginning of the Company's fiscal year and is to be applied to all goodwill and other intangible assets recognized in its financial statements at that date. Impairment losses for goodwill and certain intangible assets that arise due to the initial application of this Statement are to be reported as resulting from a change in accounting principle. Goodwill and intangible assets acquired after June 30, 2001 will be subject immediately to the provisions of this Statement. The adoption of SFAS No. 142 did not have a material effect on the Company's consolidated financial statements. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement cost. SFAS No. 143 applies to legal obligations associated with the retirement of a tangible long-lived asset that 10 result from the acquisition, construction, development and/or normal operation of a long-lived asset. This Statement is effective for fiscal years beginning after June 15, 2002; however, early adoption is encouraged. The adoption of SFAS No. 143 is not expected to have a material effect on the Company's consolidated financial statements. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supercedes certain provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of" and Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years; however, early adoption is encouraged. The adoption of SFAS No. 144 did not have a material effect on the Company's consolidated financial statements. SUBSEQUENT EVENTS. In May 2002, the Company announced the commencement of a voluntary stock option exchange program for its eligible employees. Under the program, which was approved by the Company's shareholders, participating employees are being given the opportunity to have unexercised stock options previously granted to them cancelled, in exchange for replacement options that will be granted at a future date. Replacement options will be granted at a ratio of 0.85 new options for each existing option cancelled, at an exercise price equal to the fair market value of the Company's stock on the date of the re-grant, which currently is expected to be December 23, 2002. Participating employees are expected to have until June 20, 2002 to submit options for cancellation. The exchange program has been designed in accordance with FASB Interpretation No. 44. As per FASB No. 44, the grant of replacement options not less than six months and one day after cancellation will not result in any variable compensation charges relating to these options. In May 2002, Verint issued 4,500,000 shares of its common stock in an initial public offering. As a result of the initial public offering, the Company's ownership interest in Verint was reduced to approximately 79.5%. Proceeds from the offering, based on the offering price of $16.00 per share, totaled approximately $65 million, net of offering expenses. 11 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. INTRODUCTION As explained in greater detail in "Certain Trends and Uncertainties", the Company's two business units serving telecommunications markets are operating within an industry experiencing a deep capital spending contraction and, consequently, have experienced sequential and year over year revenue declines. In contrast, Verint, which services the security and enterprise business intelligence markets, achieved sequential revenue growth based, in part, on heightened awareness surrounding homeland defense and security related initiatives in the U.S. and worldwide. Overall, however, with over 80% of the quarter's sales generated from activities serving the telecommunications industry, during the quarter ended April 30, 2002 the Company experienced a sequential sales decline of approximately 20% and a year over year sales decline of approximately 42%, resulting in a net loss for the quarter. RESULTS OF OPERATIONS THREE MONTH PERIOD ENDED APRIL 30, 2002 COMPARED TO THREE MONTH PERIOD ENDED APRIL 30, 2001 Sales. Sales for the three month period ended April 30, 2002 decreased by approximately $153.8 million, or 42%, compared to the three month period ended April 30, 2001. This decrease is primarily attributable to a decrease in sales of ESS products of approximately $146.8 million. Such decrease was principally due to lower sales to European and American customers. In addition, sales of security and business intelligence recording products and service enabling signaling software products increased (decreased) by approximately $1.8 million and ($8.7) million, respectively. Cost of Sales. Cost of sales for the three month period ended April 30, 2002 decreased by approximately $50.8 million, or 36%, as compared to the three month period ended April 30, 2001. The decrease in cost of sales is primarily attributable to decreased materials and overhead costs of approximately $37.6 million due to the decrease in sales, decreased royalty costs of approximately $6.1 million, decreased personnel-related costs of approximately $4.3 million and decreased travel-related costs of approximately $2.2 million. Gross margins decreased from approximately 60.9% in the three month period ended April 30, 2001 to approximately 56.5% in the three month period ended April 30, 2002. Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three month period ended April 30, 2002 decreased by approximately $4.7 million, or 6%, compared to the three month period ended April 30, 2001, while as a percentage of sales increased from approximately 21.4% in the three month period ended April 30, 2001 to approximately 34.8% in the three month period ended April 30, 2002. The decrease is primarily attributable to decreased personnel-related costs of approximately $12.2 million as a result of the reduction in workforce announced in April 2001 12 and the restructuring plan announced in December 2001, decreased travel-related costs of approximately $2.7 million and decreased marketing costs of approximately $1.1 million. These decreases were partially offset by an increase in bad debt expense of approximately $10.6 million. Research and Development. Net research and development expenses for the three month period ended April 30, 2002 decreased by approximately $7.3 million, or 10%, compared to the three month period ended April 30, 2001. The decrease was primarily due to a decrease in personnel costs as a result of the reduction in workforce announced in April 2001 and the restructuring plan announced in December 2001. Interest and Other Income (Expense), Net. Interest and other income (expense), net, for the three month period ended April 30, 2002 decreased by approximately $15.6 million as compared to the three month period ended April 30, 2001. The principal reasons for the decrease are decreased interest and dividend income of approximately $11.2 million due to the decline in interest rates in the three months ended April 30, 2002 as compared to the three months ended April 30, 2001, decreased realized gains on the Company's investments of approximately $6.3 million and decreased equity in the earnings of affiliates of approximately $0.6 million. In addition, during the three month period ended April 30, 2002 the Company recorded a charge of approximately $15.4 million for the write-down of certain of its investments due to an other than temporary decline in their value. These decreases were partially offset by decreased interest expense of approximately $3.3 million due to the redemption of the Company's $300 million 4.50% convertible subordinated debentures in June 2001 and the change in foreign currency gains/losses of approximately $14.4 million. Income Tax Provision. Provision for income taxes for the three month period ended April 30, 2002 decreased by approximately $4.1 million, or 76%, compared to the three month period ended April 30, 2001 due to decreased pre-tax income. The overall effective tax rate was approximately (5.9)% in the three month period ended April 30, 2002 as compared to approximately 6.5% in the three month period ended April 30, 2001. The Company's overall rate of tax is reduced significantly by the tax benefits associated with qualified activities of certain of its Israeli subsidiaries, which are entitled to favorable income tax rates under a program of the Israeli Government for "Approved Enterprise" investments in that country. Net Income (Loss). Net loss was approximately $23.6 million for the three month period ended April 30, 2002 as compared to net income of approximately $79.0 million for the three month period ended April 30, 2001, a decrease of approximately $102.5 million or 130%, while as a percentage of sales net income (loss) was approximately (11.2)% in the three month period ended April 30, 2002 as compared to approximately 21.6% in the three month period ended April 30, 2001. The decrease resulted primarily from the factors described above. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital at April 30, 2002 and January 31, 2002 was approximately $1,967.4 million and $2,030.3 million, respectively. 13 Operations for the three month periods ended April 30, 2002 and 2001, after adding back non-cash items, provided (used) cash of approximately ($6.6) million and $93.4 million, respectively. During such periods, other changes in operating assets and liabilities used cash of approximately $2.6 million and $63.4 million, respectively. This resulted in cash provided by (used in) operating activities of approximately ($9.2) million and $30.0 million, respectively. Investment activities for the three month periods ended April 30, 2002 and 2001 provided (used) cash of approximately ($64.6) million and $40.3 million, respectively. These amounts include (i) additions to property and equipment in the three month periods ended April 30, 2002 and 2001 of approximately $6.5 million and $15.5 million, respectively; (ii) maturities and sales (purchases) of bank time deposits and investments, net, of approximately ($44.6) million and $61.2 million, respectively; (iii) capitalization of software development costs of approximately $3.7 million and $5.4 million, respectively and (iv) net assets acquired as a result of an acquisition in the 2002 period of approximately $9.7 million. Financing activities for the three month periods ended April 30, 2002 and 2001 provided cash of approximately $6.2 million and $13.3 million, respectively. These amounts include (i) proceeds from the issuance of common stock in connection with the exercise of stock options, warrants and employee stock purchase plan in the three month periods ended April 30, 2002 and 2001 of approximately $6.8 million and $13.2 million, respectively; and (ii) net proceeds (repayments) of bank loans and other debt of approximately ($0.5) million and $0.1 million, respectively. As of April 30, 2002, the Company had outstanding convertible debentures of $600 million. In January 2002, Verint took a long-term bank loan in the amount of $42 million. This loan, which matures in February 2003, bears interest at LIBOR plus 0.55% and may be prepaid without penalty. The loan is guaranteed by CTI. In February 2002, Verint acquired the digital video recording business of Lanex, LLC. The Lanex business provides digital video recording solutions for security and surveillance applications primarily to North American banks. The purchase price consisted of $9.5 million in cash and a $2.2 million convertible note. The note is non-interest bearing and matures on February 1, 2004. The holder of the note may elect to convert the note, in whole or in part, into shares of Verint's common stock at a conversion price of $16.06 per share. The note is guaranteed by CTI. In May 2002, the Company signed a definitive agreement to acquire Odigo, a privately-held leading provider of instant messaging and presence management solutions to service providers. The acquisition will cost the Company approximately $20 million in cash and is subject to closing conditions customary for a transaction of this type. Prior to the acquisition, the Company was a strategic partner with Odigo holding an equity position of approximately 12.4%, which it previously acquired for approximately $3 million. 14 The Company believes that its existing working capital, together with funds generated from operations, will be sufficient to provide for its planned operations for the foreseeable future. The Company regularly examines opportunities for strategic acquisitions of other companies or lines of business and anticipates that it may from time to time issue additional debt and/or equity securities either as direct consideration for such acquisitions or to raise additional funds to be used (in whole or in part) in payment for acquired securities or assets. The issuance of such securities could be expected to have a dilutive impact on the Company's shareholders, and there can be no assurance as to whether or when any acquired business would contribute positive operating results commensurate with the associated investment. The Company's liquidity and capital resources have not been, and are not anticipated to be, materially affected by restrictions pertaining to the ability of its foreign subsidiaries to pay dividends or by withholding taxes associated with any such dividend payments. CERTAIN TRENDS AND UNCERTAINTIES The Company derives the majority of its revenue from the telecommunications industry, which continues to face an unprecedented recession. This has resulted in a significant reduction of capital expenditures made by TSPs. The Company's operating results and financial condition have been, and will continue to be, adversely affected by the severe decline in technology purchases and capital expenditures by TSPs worldwide. Consequently, the Company's operating results have deteriorated significantly in recent periods and likely will continue to deteriorate in future periods if such conditions remain in effect. For these reasons and the risk factors outlined below, it has been and continues to be very difficult for the Company to accurately forecast future revenues and operating results. The Company's business is particularly dependent on the strength of the telecommunications industry. The telecommunications industry, in general, and the Company, in particular, have been negatively affected by, among other factors, the high costs and large debt positions incurred by some TSPs to expand capacity and enable the provision of future services (and the corresponding risks associated with the development, marketing and adoption of these services as discussed below), including the cost of acquisitions of licenses to provide future broadband services and reductions in TSPs' actual and projected revenues and deterioration in their actual and projected operating results. Accordingly, TSPs in general and the Company's customers in particular have significantly reduced their actual and planned expenditures to expand or replace equipment and delayed and reduced the deployment of services. A number of TSPs, including certain customers of the Company, also have indicated the existence of conditions of excess capacity in certain markets. In addition, TSPs have delayed the planned introduction of new services, such as broadband mobile telephone services, that would be supported by certain of the Company's products. Certain of the Company's customers also have implemented changes in procurement practices and procedures, including limitations on purchases in anticipation of estimated future capacity requirements, and in the management and use of their networks, that have reduced the Company's sales and order backlog, which also has made it very difficult for 15 the Company to project future sales. The continuation and/or exacerbation of these negative trends will have an adverse effect on the Company's future results. In addition to loss of revenue, weakness in the telecommunications industry has affected and will continue to affect the Company's business by increasing the risks of credit or business failures of suppliers, customers or distributors, by customer requirements for vendor financing and longer payment terms, by delays and defaults in customer or distributor payments, and by price reductions instituted by competitors to retain or acquire market share. The Company's current plan of operations is predicated in part on a recovery in capital expenditures by its customers. In the absence of such improvement, the Company would experience further deterioration in its operating results, and may determine to modify its plan for future operations accordingly, which likely may include, among other things, additional reductions in its workforce. The Company intends to continue to make significant investments in its business, and to examine opportunities for growth through acquisitions and strategic investments. These activities may involve significant expenditures and obligations that cannot readily be curtailed or reduced if anticipated demand for the associated products does not materialize or is delayed. The impact of these decisions on future financial results cannot be predicated with assurance, and the Company's commitment to growth may increase its vulnerability to downturns in its markets, technology changes and shifts in competitive conditions. The Company also may not be able to identify future suitable merger or acquisition candidates, and even if the Company does identify suitable candidates, it may not be able to make these transactions on commercially acceptable terms, or at all. If the Company does make acquisitions, it may not be able to successfully incorporate the personnel, operations and customers of these companies into the Company's business. In addition, the Company may fail to achieve the anticipated synergies from the combined businesses, including marketing, product integration, distribution, product development and other synergies. The integration process may further strain the Company's existing financial and managerial controls and reporting systems and procedures. This may result in the diversion of management and financial resources from the Company's core business objectives. In addition, an acquisition or merger may require the Company to utilize cash reserves, incur debt or issue equity securities, which may result in a dilution of existing stockholders, and the Company may be negatively impacted by the assumption of liabilities of the merged or acquired company. Due to rapidly changing market conditions, the Company may find the value of its acquired technologies and related intangible assets, such as goodwill as recorded in the Company's financial statements, to be impaired, resulting in charges to operations. The Company may also fail to retain the acquired or merged companies' key employees and customers. The Company has made, and in the future, may continue to make strategic investments in other companies. These investments have been made in, and future investments will likely be made in, immature businesses with unproven track records and technologies. Such investments have a high degree of risk, with the possibility that the Company may lose the total amount of its investments. The Company may not be able to identify suitable investment candidates, and, even if it does, the Company may not be able to make those 16 investments on acceptable terms, or at all. In addition, even if the Company makes investments, it may not gain strategic benefits from those investments. The telecommunications industry is subject to rapid technological change. The introduction of new technologies in the telecommunications market, including the delay in the adoption of such new technologies, and new alternatives for the delivery of services are having, and can be expected to continue to have, a profound effect on competitive conditions in the market and the success of market participants, including the Company. The Company's continued success will depend on its ability to correctly anticipate technological trends in its industries, to react quickly and effectively to such trends and to enhance its existing products and to introduce new products on a timely and cost-effective basis. As a result, the life cycle of the Company's products is difficult to estimate. In addition, changing industry and market conditions may dictate strategic decisions to restructure some business units and discontinue others. Discontinuing a business unit or product line may result in the Company recording accrued liabilities for special charges, such as costs associated with a reduction in workforce. These strategic decisions could result in changes to determinations regarding a product's useful life and the recoverability of the carrying basis of certain assets. The Company's products involve sophisticated hardware and software technology that performs critical functions to highly demanding standards. There can be no assurance that the Company's current or future products will not develop operational problems, which could have a material adverse effect on the Company. The Company relies on a limited number of suppliers and manufacturers for specific components and may not be able to find alternate manufacturers that meet its requirements and existing or alternative sources may not be available on favorable terms and conditions. Thus, if there is a shortage of supply for these components, the Company may experience an interruption in its product supply. In addition, loss of third party software licensing would materially and adversely affect the Company's business, financial condition and results of operations. The telecommunications industry continues to undergo significant change as a result of deregulation and privatization worldwide, reducing restrictions on competition in the industry. Unforeseen changes in the regulatory environment also may have an impact on the Company's revenues and/or costs in any given part of the world. The worldwide ESS system industry is already highly competitive and the Company expects competition to intensify. The Company believes that existing competitors will continue to present substantial competition, and that other companies, many with considerably greater financial, marketing and sales resources than the Company, may enter the ESS system markets. Moreover, as the Company enters into new markets as a result of its own research and development efforts or acquisitions, it is likely to encounter new competitors. The market for the Company's digital security and surveillance and enterprise business intelligence products in the past has been affected by weakness in general economic conditions, delays or reductions in customers' purchases of capital equipment and uncertainties relating to government expenditure programs. The Company's business generated from government contracts may be adversely affected if: (i) levels of government expenditures and authorizations for law enforcement and security related programs decrease, 17 remain constant or shift to programs in areas where the Company does not provide products and services, (ii) the Company is prevented from entering into new government contracts or extending existing government contracts based on violations or suspected violations of procurement laws or regulations, (iii) the Company is not granted security clearances required to sell products to domestic or foreign governments or such security clearances are revoked, (iv) the Company's reputation or relationship with government agencies is impaired, (v) there is a change in government procurement procedures, or (vi) the Company is suspended from contracting with a domestic or foreign government or any significant law enforcement agency. Competitive conditions in this sector also have been affected by the increasing use by certain potential customers of their own internal development resources rather than outside vendors to provide certain technical solutions. In addition, a number of established government contractors, particularly developers and integrators of technology products, have taken steps to redirect their marketing strategies and product plans in reaction to cut-backs in their traditional areas of focus, resulting in an increase in the number of competitors and the range of products offered in response to particular requests for proposals. The Company has historically derived a significant portion of its sales and operating profit from contracts for large system installations with major customers. The Company continues to emphasize large capacity systems in its product development and marketing strategies. Contracts for large installations typically involve a lengthy and complex bidding and selection process, and the ability of the Company to obtain particular contracts is inherently difficult to predict. The timing and scope of these opportunities and the pricing and margins associated with any eventual contract award are difficult to forecast, and may vary substantially from transaction to transaction. The Company's future operating results may accordingly exhibit a higher degree of volatility than the operating results of other companies in its industries that have adopted different strategies, and also may be more volatile than the Company has experienced in prior periods. The degree of dependence by the Company on large system orders, and the investment required to enable the Company to perform such orders, without assurance of continuing order flow from the same customers and predictability of gross margins on any future orders, increase the risk associated with its business. The Company's gross margins also may be adversely affected by increases in material or labor costs, obsolescence charges, price competition and changes in channels of distribution or in the mix of products sold. Political, economic and military conditions in Israel directly affect the Company's operations. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors, and the continued state of hostility, varying in degree and intensity, has led to security and economic problems for Israel. Since October 2000, there has been a significant increase in violence, primarily in the West Bank and Gaza Strip, and more recently Israel has experienced terrorist incidents within its borders. As a result, negotiations between Israel and representatives of the Palestinian Authority have been sporadic and have failed to result in peace. The Company could be adversely affected by hostilities involving Israel, the interruption or curtailment of trade between Israel and its trading partners, or a significant downturn in the economic or financial condition of Israel. In addition, the sale of products manufactured in Israel may be adversely affected in certain countries by restrictive laws, policies or 18 practices directed toward Israel or companies having operations in Israel. The continuation or exacerbation of violent conflicts involving Israel and other nations may impede the Company's ability to sell its products in certain countries. In addition, some of the Company's employees in Israel are subject to being called upon to perform military service in Israel, and their absence may have an adverse effect upon the Company's operations. Generally, unless exempt, male adult citizens and permanent residents of Israel under the age of 54 are obligated to perform up to 36 days of military reserve duty annually. Additionally, all such residents are subject to being called to active duty at any time under emergency circumstances. These conditions could disrupt the Company's operations in Israel and its business, financial condition and results of operations could be adversely affected. The Company's costs of operations have at times been affected by changes in the cost of its operations in Israel, resulting from changes in the value of the Israeli shekel relative to the United States dollar, which for certain periods had a negative impact and recently has had a positive impact, and from difficulties in attracting and retaining qualified scientific, engineering and technical personnel in Israel, where the availability of such personnel has at times been severely limited. Changes in these cost factors have from time to time been significant and difficult to predict, and could in the future have a material adverse effect on the Company's results of operations. The Company's historical operating results reflect substantial benefits it has received from programs sponsored by the Israeli government for the support of research and development, as well as tax moratoriums and favorable tax rates associated with investments in approved projects ("Approved Enterprises") in Israel. Some of these programs and tax benefits have ceased and others may not be continued in the future and the availability of such benefits to the Company may be affected by a number of factors, including budgetary constraints resulting from adverse economic conditions, government policies and the Company's ability to satisfy eligibility criteria. The Israeli government has reduced the benefits available under some of these programs in recent years, and Israeli government authorities have indicated that the government may further reduce or eliminate some of these benefits in the future. The Company has regularly participated in a conditional grant program administered by the OCS under which it has received significant benefits through reimbursement of up to 50% of qualified research and development expenditures. Verint currently pays royalties, of between 3% and 5% (or 6% under certain circumstances) of associated product revenues (including service and other related revenues) to the Government of Israel for repayment of benefits received under this program. Such royalty payments by Verint are currently required to be made until the government has been reimbursed the amounts received by the Company plus, for amounts received under projects approved by the OCS after January 1, 1999, interest on such amount at a rate equal to the 12-month LIBOR rate in effect on January 1 of the year in which approval is obtained. During fiscal 2001, Comverse entered into an arrangement with the OCS whereby Comverse agreed to pay a lump sum royalty amount for all past amounts received from the OCS. In addition, Comverse will receive lower amounts from the OCS than it has historically received, but will not have to pay royalty amounts on future grants. The amount of reimbursement received by the Company under this program has been reduced significantly, and the Company does 19 not expect to receive significant reimbursement under this program in the future. In addition, permission from the Government of Israel is required for the Company to manufacture outside of Israel products resulting from research and development activities funded under these programs, or to transfer outside of Israel related technology rights. In order to obtain such permission, the Company may be required to increase the royalties to the applicable funding agencies and/or repay certain amounts received as reimbursement of research and development costs. The continued reduction in the benefits received by the Company under the program, or the termination of its eligibility to receive these benefits at all in the future, could adversely affect the Company's operating results. The Company's overall effective tax rate benefits from the tax moratorium provided by the Government of Israel for Approved Enterprises undertaken in that country. The Company's effective tax rate may increase due to, among other factors, the increased proportion of its taxable income associated with activities in higher tax jurisdictions, and by the relative ages of the Company's eligible investments in Israel. The tax moratorium on income from the Company's Approved Enterprise investments made prior to 1997 is four years, whereas subsequent Approved Enterprise projects are eligible for a moratorium of only two years. Reduced tax rates apply in each case for certain periods thereafter. To be eligible for these tax benefits, the Company must continue to meet conditions, including making specified investments in fixed assets and financing a percentage of investments with share capital. If the Company fails to meet such conditions in the future, the tax benefits would be canceled and the Company could be required to refund the tax benefits already received. Israeli authorities have indicated that additional limitations on the tax benefits associated with Approved Enterprise projects may be imposed for certain categories of taxpayers, which would include the Company. If further changes in the law or government policies regarding those programs were to result in their termination or adverse modification, or if the Company were to become unable to participate in, or take advantage of, those programs, the cost of the Company's operations in Israel would increase and there could be a material adverse effect on the Company's operations and financial results. The Company's success is dependent on recruiting and retaining key management and highly skilled technical, managerial, sales, and marketing personnel. The competition for highly skilled personnel remains very competitive despite the current economic conditions. The Company's ability to attract and retain employees also may be affected by recent cost control actions, including reductions in the Company's workforce and the associated reorganization of operations. The occurrence or perception of security breaches within the Company could harm the Company's business, financial condition and operating results. While the Company implements sophisticated security measures, third parties may attempt to breach the Company's security through computer viruses, electronic break-ins and other disruptions. If successful, confidential information, including passwords, financial information, or other personal information may be improperly obtained and the Company may be subject to lawsuits and other liability. Even if the Company is not held liable, a security breach could harm 20 the Company's reputation, and even the perception of security risks, whether or not valid, could inhibit market acceptance of the Company's products. The Company currently derives a significant portion of its total sales from customers outside of the United States. International transactions involve particular risks, including political decisions affecting tariffs and trade conditions, rapid and unforeseen changes in economic conditions in individual countries, turbulence in foreign currency and credit markets, and increased costs resulting from lack of proximity to the customer. The Company is required to obtain export licenses and other authorizations from applicable governmental authorities for certain countries within which it conducts business. The failure to receive any required license or authorization would hinder the Company's ability to sell its products and could adversely affect the Company's business, financial condition and results of operations. In addition, legal uncertainties regarding liability, compliance with local laws and regulations, labor laws, employee benefits, currency restrictions, difficulty in accounts receivable collection, longer collection periods and other requirements may have a negative impact on the Company's operating results. Volatility in international currency exchange rates may have a significant impact on the Company's operating results. The Company has, and anticipates that it will continue to receive, significant contracts denominated in foreign currencies, particularly the euro. As a result of the unpredictable timing of purchase orders and payments under such contracts and other factors, it is often not practicable for the Company to effectively hedge the risk of significant changes in currency rates during the contract period. The Company may experience risk associated with the failure to hedge the exchange rate risks associated with contracts denominated in foreign currencies and its operating results have been negatively impacted for certain periods and recently have been positively impacted and may continue to be affected to a material extent by the impact of currency fluctuations. Operating results may also be affected by the cost of such hedging activities that the Company does undertake. While the Company generally requires employees, independent contractors and consultants to execute non-competition and confidentiality agreements, the Company's intellectual property or proprietary rights could be infringed or misappropriated, which could result in expensive and protracted litigation. The Company relies on a combination of patent, copyright, trade secret and trademark law to protect its technology. Despite the Company's efforts to protect its intellectual property and proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use its products or technology. Effectively policing the unauthorized use of the Company's products is time-consuming and costly, and there can be no assurance that the steps taken by the Company will prevent misappropriation of its technology, particularly in foreign countries where in many instances the local laws or legal systems do not offer the same level of protection as in the United States. If others claim that the Company's products infringe their intellectual property rights, the Company may be forced to seek expensive licenses, reengineer its products, engage in expensive and time-consuming litigation or stop marketing its products. The Company attempts to avoid infringing known proprietary rights of third parties in its product development efforts. The Company does not regularly conduct comprehensive patent searches to 21 determine whether the technology used in its products infringes patents held by third parties, however. There are many issued patents as well as patent applications in the fields in which the Company is engaged. Because patent applications in the United States are not publicly disclosed until the patent is issued, applications may have been filed which relate to the Company's software and products. If the Company were to discover that its products violated or potentially violated third-party proprietary rights, it might not be able to obtain licenses to continue offering those products without substantial reengineering. Any reengineering effort may not be successful, nor can the Company be certain that any licenses would be available on commercially reasonable terms. Substantial litigation regarding intellectual property rights exists in the telecommunications industry, and the Company expects that its products may be increasingly subject to third-party infringement claims as the number of competitors in its industry segments grows and the functionality of software products in different industry segments overlaps. In addition, the Company has agreed to indemnify customers in certain situations should it be determined that its products infringe on the proprietary rights of third parties. Any third-party infringement claims could be time consuming to defend, result in costly litigation, divert management's attention and resources, cause product and service delays or require the Company to enter into royalty or licensing agreements. Any royalty or licensing arrangements, if required, may not be available on terms acceptable to the Company, if at all. A successful claim of infringement against the Company and its failure or inability to license the infringed or similar technology could have a material adverse effect on its business, financial condition and results of operations. The Company holds a large proportion of its net assets in cash equivalents and short-term investments, including a variety of public and private debt and equity instruments, and has made significant venture capital investments, both directly and through private investment funds. Such investments subject the Company to the risks inherent in the capital markets generally, and to the performance of other businesses over which it has no direct control. Given the relatively high proportion of the Company's liquid assets relative to its overall size, the results of its operations are materially affected by the results of the Company's capital management and investment activities and the risks associated with those activities. Declines in the public equity markets have caused, and may be expected to continue to cause, the Company to experience realized and unrealized investment losses. In addition, while the Company's interest and other income has benefited from the positive spread between the fixed interest it pays on its outstanding indebtedness and interest earned on the investment of its cash balances, reduction in prevailing interest rates due to economic conditions or government policies has had and may continue to have an adverse impact on the Company's results of operations. The severe decline in the public trading prices of equity securities, particularly in the technology and telecommunications sectors, and corresponding decline in values of privately-held companies and venture capital funds in which the Company has invested, have, and may continue to have, an adverse impact on the Company's financial results and costs of operations. The Company has in the past benefited from the long-term rise in the public trading price of its shares in various ways, including its ability to use equity incentive arrangements as a means of attracting and retaining the highly qualified employees necessary for 22 the growth of its business and its ability to raise capital on relatively attractive conditions. The decline in the price of the Company's shares, and the overall decline in equity prices generally, and in the shares of technology companies in particular, can be expected to make it more difficult for the Company to rely on equity incentive arrangements as a means to recruit and retain talented employees, and negatively has impacted the ability of the Company to raise capital on terms as advantageous to the Company as in the past. The trading price of the Company's shares has been affected by the factors disclosed herein as well as prevailing economic and financial trends and conditions in the public securities markets. Share prices of companies in technology-related industries, such as the Company, tend to exhibit a high degree of volatility. The announcement of financial results that fall short of the results anticipated by the public markets could have an immediate and significant negative effect on the trading price of the Company's shares in any given period. Such shortfalls may result from events that are beyond the Company's immediate control, can be unpredictable and, since a significant proportion of the Company's sales during each fiscal quarter tend to occur in the latter stages of the quarter, may not be discernible until the end of a financial reporting period. These factors may contribute to the volatility of the trading value of its shares regardless of the Company's long-term prospects. The trading price of the Company's shares may also be affected by developments, including reported financial results and fluctuations in trading prices of the shares of other publicly-held companies in the telecommunications equipment industry in general, and the Company's business segments in particular, which may not have any direct relationship with the Company's business or prospects. FORWARD-LOOKING STATEMENTS From time to time, the Company makes forward-looking statements. Forward-looking statements include financial projections, statements of plans and objectives for future operations, statements of future economic performance, and statements of assumptions relating thereto. The Company may include forward-looking statements in its periodic reports to the Securities and Exchange Commission on Forms 10-K, 10-Q, and 8-K, in its annual report to shareholders, in its proxy statements, in its press releases, in other written materials, and in statements made by employees to analysts, investors, representatives of the media, and others. By their very nature, forward-looking statements are subject to uncertainties, both general and specific, and risks exist that predictions, forecasts, projections and other forward-looking statements will not be achieved. Actual results may differ materially due to a variety of factors, including without limitation those discussed under "Certain Trends and Uncertainties" and elsewhere in this report. Investors and others should carefully consider these and other uncertainties and events, whether or not the statements are described as forward-looking. Forward-looking statements made by the Company are intended to apply only at the time they are made, unless explicitly stated to the contrary. Moreover, whether or not stated in connection with a forward-looking statement, 23 the Company undertakes no obligation to correct or update a forward-looking statement should the Company later become aware that it is not likely to be achieved. If the Company were in any particular instance to update or correct a forward-looking statement, investors and others should not conclude that the Company will make additional updates or corrections thereafter. MARKET RISK DISCLOSURES Refer to Item 7A in the Company's Annual Report on Form 10-K for a discussion about the Company's exposure to market risks. 24 PART II Other Information ITEM 1. Legal Proceedings On or about October 19, 2001, a securities class action complaint entitled Kevin Beier v. Comverse Technology, Inc., et al., CV 016972, was filed against CTI and certain of its executive officers in the United States District Court for the Eastern District of New York. An amended consolidated complaint was filed on March 4, 2002. The consolidated complaint generally alleges violations of federal securities laws on behalf of individuals who allege that they purchased CTI's common stock during a purported class period between April 30, 2001 and July 10, 2001. The consolidated complaint seeks an unspecified amount in damages on behalf of persons who purchased CTI stock during the purported class period. The Company believes all claims in the consolidated complaint to be without merit and will vigorously defend against these claims. ITEM 6. Exhibits and Reports on Form 8-K. (a) Exhibit Index. None. (b) Reports on Form 8-K. None. 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMVERSE TECHNOLOGY, INC. Dated: June 10, 2002 /s/ Kobi Alexander ------------------------------------ Kobi Alexander Chairman of the Board and Chief Executive Officer Dated: June 10, 2002 /s/ David Kreinberg ------------------------------------ David Kreinberg Vice President of Finance and Chief Financial Officer 26 EX-99 7 a6-11exaxi.txt EXHIBIT (A)(X) Exhibit (a)(x) To: All Employees With Outstanding Stock Options in Eligible Countries (United States, China, Finland, France, Germany, Hong Kong, India, Israel, Italy, Japan, Mexico, Spain and the United Kingdom) From: David Kreinberg Date: June 12, 2002 Subject: Supplement to Offer to Cancel and Reissue Stock Options - ------------------------------------------------------------------------------- On May 22, 2002 we sent you an email regarding our offer to cancel and reissue certain of your outstanding stock options. As required by U.S. securities laws, all documents associated with this program were filed with the Securities and Exchange Commission (SEC). As is often the case with such filings, the SEC has exercised its right to review the documents and has requested certain modifications be made to the Offer to Exchange document. Although in our view the modifications do not materially change the terms of the stock exchange program, we are required to provide you with an updated version this document. Additionally, the SEC has requested that we provide you with current Comverse Technology, Inc. financial information. In response to the above, we are now notifying you of the following updates and supplements to the documents previously provided to you, all of which are available at our website at http://www.comverse.com/StockExchangeProgram/. Specifically, you should pay particular attention to the following links on this website: o Offer to Exchange - This document has been updated to incorporate the modifications requested by the SEC. The sections that have been amended are Section 7 ("Conditions Of The Offer"), Section 17 ("Additional Information") and Section 18 ("Forward Looking Statements; Miscellaneous"). o Annual Report on Form 10-K - This is a copy of our Annual Report filed with the SEC for the fiscal year ended January 31, 2002. o Quarterly Report on Form 10-Q - This is a copy of our Quarterly Report filed with the SEC for the first quarter of our 2002 fiscal year, which ended April 30, 2002. If you have any questions about the offer, please email your questions to Stock_Exchange_Program@comverse.com. We will respond to questions as soon as practical. -----END PRIVACY-ENHANCED MESSAGE-----