10-K 1 jd4-28_10k.txt ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended January 31, 2003 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. [X] Yes [ ] 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. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). [X] Yes [ ] No The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the closing price as of the last business day of the registrant's most recently completed second fiscal quarter, July 31, 2002, was approximately $1,486,963,000. There were 188,190,822 shares of the registrant's common stock outstanding on April 25, 2003. 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 2003 Annual Meeting of Shareholders of the registrant or in an amendment to this report on Form 10K/A. ----------------------------------- Comverse, Comverse Technology and Comverse's logos are trademarks of the Company. LORONIX(R) 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(R) and Ulticom(R) 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 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 government, 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 and traffic generating services accessible to large numbers of simultaneous users. These services include a broad range of messaging, information distribution and personal communications services, such as call answering with one-touch call return, voicemail, unified messaging (voice, fax, text, multimedia content 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"), 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 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 400 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 (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), SBC Communications (USA), SFR (France), SingTel (Singapore), Sprint PCS (USA), Telecom Italia (Italy), Telmex (Mexico), Telstra (Australia), Verizon (USA) and Vodafone (multiple countries). Through its subsidiary Verint Systems Inc. ("Verint"), the Company provides analytic software-based 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 and other government 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 1 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, 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, British Telecom, Nortel and Siemens. Verint also has technological alliances with leading software and hardware companies including Genesys, Indentix, and Siebel, which enables Verint to offer complementary solutions to their products. Verint's products are used by over 1000 organizations in over 50 countries worldwide. Customers for digital security and surveillance products include the Mall of America, the U.S. Capitol, the U.S. Department of Defense, the U.S. Department of Justice, Vancouver International Airport, 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. Verint had an initial public offering of its common stock in May, 2002, and its common stock is listed on the NASDAQ National Market System under the symbol "VRNT." CTI held approximately 78.6% of Verint's outstanding common stock as of January 31, 2003. 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-IP ("VoIP") 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 held approximately 71.6% of Ulticom's outstanding common stock as of January 31, 2003. 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 Internet Protocol ("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. 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. 2 The Company's Internet address is www.cmvt.com. The information contained on the Company's website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. The Company makes available, free of charge, on its Internet website, its annual report on Form 10-K, its quarterly reports on Form 10-Q, its current reports on Form 8-K and amendments to such reports filed or furnished pursuant to Section 13(a) or 15 (d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after the Company has electronically filed such material with, or furnished it to, the United States Securities and Exchange Commission. THE COMPANY'S PRODUCTS ENHANCED SERVICES SOLUTIONS (ESS) Comverse is a leading provider of Enhanced Services Solutions that enable TSPs to offer a variety of revenue and traffic generating services accessible to large numbers of simultaneous users. These services include a broad range of messaging, information distribution and personal communications services, such as call answering with one-touch call return, voicemail, unified messaging (voice, fax, text, multimedia content 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, wireless instant messaging, IVR and voice services, which are part of a voice-controlled portfolio of services such as voice dialing, 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 are available with redundancy of critical components, so that no single failure will interrupt the service. Comverse's products are available in both centralized and distributed configurations. Comverse's systems also incorporate components that are compatible with the Intelligent Network ("IN") and Advanced Intelligent Network ("AIN") 3 protocols for Service Control Points and Intelligent Peripherals, permitting Comverse's network operator customers to develop and deploy services based on the overall IN architecture. Comverse's products incorporate both Comverse-developed and third-party-developed software, and Comverse-designed and third-party hardware, in an open, IP-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 software-based 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 and other government 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 other 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 traditional analog tape storage. The technology interfaces with access control, motion detection and analysis, 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 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, traffic patterns 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 family of products are used by equipment manufacturers, application developers and communication service providers to deploy revenue generating infrastructure, enhanced and mandated services such as mobility, messaging, payment 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 Internet offload and VoIP. Signalware provides signaling system #7 ("SS7"), the globally accepted signaling standard protocol, which interconnects the complex switching, database and messaging systems, and manages vital number, routing and billing information that form the backbone of today's telecommunications networks. 5 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 such as 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 generation ("3G") infrastructures, including an intermediate generation called "2.5G". Signalware 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 more efficient packet infrastructure, and deliver VoIP services for local and long distance carriers. 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 SIGTRAN Gateway for circuit-packet network interoperability, and protocols to transport SS7 traffic 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 customers include equipment manufacturers, such as Alcatel, Ericsson and Siemens; application developers, such as Comverse, LogicaCMG and Sonus; and service providers, such as 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. 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 a leader in providing large capacity enhanced services software and systems for wireless and wireline telecommunications network operators around the world. More than 400 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 (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), SBC Communications (USA), SFR (France), SingTel (Singapore), Sprint PCS (USA), Telecom Italia (Italy), Telmex (Mexico), Telstra (Australia), Verizon (USA) and Vodafone (multiple countries). 6 Comverse provides its customers with marketing consultation, seminars and materials designed to assist them in marketing enhanced telecommunications services, and also undertakes to play an ongoing supporting role in their business and market planning processes. Verint's products are marketed primarily through a combination of its direct sales force and 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, British Telecom, Nortel and Siemens, among others. In addition, Verint established technological alliances with leading software and hardware companies including Genesys, Identix and Siebel, which enables Verint to offer complementary solutions to their products. Verint's products are used by over 1000 organizations and are deployed in over 50 countries, across many industries and markets. Many users of the products are large corporations or government agencies that operate from multiple locations and facilities across large geographic areas and sometimes across several countries. These organizations typically implement Verint's solutions in stages, with implementation in one or more sites and then gradually expanding to a full enterprise, networked-based solution. Customers for digital security and surveillance products include the Mall of America, the U.S. Capitol, the U.S. Department of Defense, the U.S. Department of Justice, Vancouver International Airport, 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. 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, enhanced services application enablers such as Comverse and LogicaCMG, softswitching vendors such as Sonus, and service providers such as 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, IN, AIN and signaling, development of various network and OMAP interfaces, and the development of applications and analytic solutions. 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's products are based upon flexible system architectures specifically designed to handle high capacity multiple session multimodal user 7 experiences, and 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. Product design is intended to be readily adaptable to the usage and capacity requirements of the individual end-user. The product architectures are intended to 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 interception of communication 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. 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 1,900 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 agencies to promote research and development activities performed in Israel. The cost of such operations is and will continue to be affected by the continued availability of financial incentives under such programs. During the past fiscal year, the Company's research and development activities included projects submitted for partial funding under a program administered by the Office of the Chief Scientist of the Ministry of Industry and Trade of the State of Israel ("OCS"), under which reimbursement of a portion of the Company's research and development expenditures will be made subject to final approval of project budgets. Verint 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, 8 Comverse began to receive lower amounts from the OCS than it had historically received, but is not required to pay royalty amounts on such 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. 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. 9 BACKLOG At January 31, 2003, the backlog of the Company amounted to approximately $293.9 million. We believe that substantially all of the backlog will be delivered within the next 12 months. SERVICE AND SUPPORT The Company has a strong commitment to provide product service and support to its customers and emphasizes such commitment in its marketing. Because of the intensity of use of systems by telecommunications network operators and other customers of the Company's products, and their low tolerance for down-time, the Company is required to make a greater commitment to service and support of systems used by these customers, and such commitment increases operating costs. The Company's general warranty policy is to replace or repair any component that fails during a specified warranty period. Broader warranty and service coverage is provided in many cases, and is sometimes made available to customers on a contractual basis for an additional charge. The Company provides technical assistance from several locations around the world. Technical support is available for the Company's customers 24 hours-a-day, seven days-a-week. COMPETITION The Company faces strong competition in the markets for all of its products. The market for 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 products. Direct and/or indirect competitors include, among others, Boston Communications, Cap Gemini, Ericsson, Glenayre, IBM, InterVoice, LogicaCMG, 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 10 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 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, ETI, JSI Telecom, NICE Systems, Pelco, Raytheon, 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 Hughes Software Systems and SS8 Networks, to vendors of communication and network infrastructure equipment, such as Continuous Computing (formerly Trillium Digital Systems) 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 11 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. The Company maintains organization-wide quality assurance procedures, coordinating the quality control activities of the Company's research and development, manufacturing and service departments. CAPITAL MARKET ACTIVITIES The Company seeks to identify and implement suitable investments, and engages in portfolio investment and capital market activities, including venture capital investments directly and indirectly through private equity funds. Both directly and through a joint venture formed by the Company in partnership with Quantum Industrial Holdings Ltd., an investment company managed by Soros Fund Management LLC, the Company invests in venture capital in high technology firms, and engages in other investment activities. The Company has significantly reduced its new venture capital investments in recent periods. OPERATIONS IN ISRAEL A substantial portion of the Company's research and development, manufacturing and other operations are located in Israel and, accordingly, may be affected by economic, political and military conditions in that country. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors, and the continued state of hostility, varying in degree and intensity, has led to security and economic problems for Israel. Since October 2000, there has been a significant increase in violence, primarily in the West Bank and Gaza Strip, and more recently Israel has experienced terrorist incidents within its borders. During this period, peace negotiations between Israel and representatives of the Palestinian Authority have been sporadic and currently are suspended. The Company could be 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 violence in Israel or the outbreak of violent conflicts involving Israel may impede the Company's ability to sell its products or otherwise adversely affect the Company. In addition, many of the Company's Israeli employees are required to perform annual compulsory military reserve duty in Israel, and are subject to being called to active duty at any time under emergency circumstances. The absence of these employees may have an adverse effect upon the Company's operations. Israel is a member of the United Nations, the International Monetary Fund, the International Bank for Reconstruction and Development, and the International Finance Corporation, and is a signatory to the General Agreement on Tariffs and Trade, which provides for reciprocal lowering of trade barriers among its members. In addition, Israel has been granted preferences under the 12 Generalized System of Preferences from the United States, Australia, Canada, and Japan. These preferences allow Israel to export the products covered by such programs either duty-free or at reduced tariffs. Israel has entered into free trade agreements with its major trading partners. Israel and the European Union are parties to a Free Trade Agreement pursuant to which, subject to rules of origin, Israel's industrial exports to the European Union are exempt from customs duties and other non-tariff barriers and import restrictions. Israel also has an agreement with the United States 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 established a free-trade zone between Israel and EFTA nations exempting manufactured goods and some agricultural goods and processed foods from customs duties, while reducing duties on other goods. Israel also has free trade agreements with a number of other countries, such as Canada, Mexico and various European countries. The end of the Cold War has also enabled Israel to establish commercial and trade relations with a number of nations, including Russia, 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. 13 EMPLOYEES At January 31, 2003, the Company employed approximately 4,789 individuals, of whom approximately 80% are scientists, engineers and technicians engaged in research and development, marketing and support activities. The Company considers its relationship with its employees to be good. The Company is not a party to any collective bargaining or other agreement with any labor organization; however, certain provisions of the collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordinating Bureau of Economic Organizations (including the Industrialists' Association) are applicable to the Company's Israeli employees by order of the Israeli Ministry of Labor. Israeli law generally requires the payment by employers of severance pay upon the death of an employee, his or her retirement or upon termination of his or her employment, and the Company provides for such payment obligations through monthly contributions to an insurance fund. Israeli employees 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, 2003, the Company leased an aggregate of approximately 2,478,000 square feet of office space and manufacturing and related facilities for its operations worldwide, including approximately 1,540,000 square feet in Tel Aviv, Israel, approximately 367,000 square feet in Wakefield, Massachusetts, approximately 60,000 square feet in Woodbury, New York, approximately 85,000 square feet in Mt. Laurel, New Jersey, an aggregate of approximately 186,000 square feet at various other locations in the United States and an aggregate of approximately 240,000 square feet at various locations in Europe, Asia-Pacific, South America, Africa and Canada. The aggregate base monthly rent for the facilities under lease as of January 31, 2003 was approximately $3,070,000, and all of such leases are subject to various pass-throughs and escalation adjustments. 14 In addition, the Company owns office space and manufacturing and related facilities of approximately 40,000 square feet in Durango, Colorado, approximately 27,000 square feet in Bexbach, Germany, and approximately 423,000 square feet of unimproved land in Ra'anana, Israel. The Company believes that its facilities currently under lease are more than adequate for its current operations, and may endeavor selectively to reduce its existing facilities commitments as circumstances may warrant. ITEM 3. LEGAL PROCEEDINGS. On 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 ("the Court"). An amended consolidated complaint was filed on March 4, 2002. The amended consolidated complaint generally alleged violations of federal securities laws on behalf of individuals who alleged that they purchased CTI's common stock during a purported class period between April 30, 2001 and July 10, 2001. The amended consolidated complaint sought an unspecified amount in damages on behalf of persons who purchased CTI stock during the purported class period. On April 22, 2002, CTI filed a Motion to Dismiss the amended consolidated complaint in its entirety. On September 30, 2002, the Court granted CTI's Motion to Dismiss the amended consolidated complaint. On November 8, 2002, the Court entered a final judgment dismissing the amended consolidated complaint with prejudice. On November 26, 2002, plaintiffs agreed to waive their right to appeal the judgment in exchange for CTI's agreement that each side bear its own costs and legal fees. Plaintiffs' time to appeal has expired and no appeal was filed, and the case is now closed. From time to time, the Company is subject to claims in legal proceedings arising in the normal course of its business. The Company does not believe that it is currently party to any pending legal action that could reasonably be expected to have a material adverse effect on its business, financial condition and results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. At the Company's annual meeting of shareholders held on December 3, 2002, for which proxies were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, the following matters were voted upon by shareholders: 1. The Company's 2002 Employee Stock Purchase Plan was approved, under which up to 1,500,000 shares of Common Stock may be made available for purchase by eligible employees. A total of 168,316,299 votes were cast for approval, a total of 2,783,133 votes were cast against approval and a total of 963,754 votes were abstentions. 2. Ratification of Deloitte & Touche LLP as independent auditors of the Company for the year ending January 31, 2003. A total of 168,052,290 votes were cast for approval, a total of 3,188,405 votes were cast against approval and a total of 822,491 votes were abstentions. 15 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Common Stock of CTI trades on the NASDAQ National Market System under the symbol CMVT. The following table sets forth the range of closing prices of the Common Stock as reported on NASDAQ for the past two fiscal years: YEAR FISCAL QUARTER LOW HIGH 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 2002 2/1/02 - 4/30/02 11.68 20.74 5/1/02 - 7/31/02 7.60 12.93 8/1/02 - 10/31/02 6.82 9.26 11/1/02 - 1/31/03 7.87 12.33 There were 1,803 holders of record of Common Stock at April 25, 2003. 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 near future, but rather intends to retain its earnings to finance the development of the Company's business. Any future determination as to the declaration and payment of dividends will be made by the Board of Directors in its discretion, and will depend upon the Company's earnings, financial condition, capital requirements and other relevant factors. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 16 ITEM 6. SELECTED FINANCIAL DATA. The following tables present selected consolidated financial data for the Company for the years ended January 31, 1999, 2000, 2001, 2002 and 2003. 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 July 2000 acquisition of Loronix Information Systems, Inc. ("Loronix") to account for the transaction as a 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 ENDED JANUARY 31, --------------------------------------------------------------------------------- 1999(1) 2000(1) 2001 2002 2003 (IN THOUSANDS, EXCEPT PER SHARE DATA) Statement of Operations Data: Sales $708,805 $909,667 $1,225,058 $1,270,218 $735,889 Cost of Sales 304,665 371,589 482,658 525,480 338,121 Research and development, net 134,201 169,816 232,198 293,296 232,593 Selling, general and administrative 157,106 193,996 259,607 323,036 281,202 Acquisition expenses - 2,016 15,971 - - Workforce reduction, restructuring and impairment charges - - - 63,562 66,714 -------- --------- --------- -------- --------- Income (loss) from operations 112,833 172,250 234,624 64,844 (182,741) Interest and other income (expense), net 8,315 16,595 33,339 (5,789) 56,557 -------- --------- --------- -------- --------- Income (loss) before income tax provision 121,148 188,845 267,963 59,055 (126,184) Income tax provision 11,783 15,698 18,827 4,436 3,294 -------- --------- --------- -------- --------- Net income (loss) $109,365 $173,147 $249,136 $54,619 $(129,478) ======== ========= ========= ======== ========= Earnings (loss) per share - diluted $0.75 $1.08 $1.39 $0.29 $(0.69) ======== ========= ========= ======== ========= Weighted avg number of common and common equivalent shares outstanding - diluted 145,439 178,986 189,964 186,434 187,212 JANUARY 31, -------------------------------------------------------------------------------- 1999(2) 2000(2) 2001 2002 2003 (IN THOUSANDS) Balance Sheet Data: Working capital $712,165 $858,304 $1,860,379 $2,030,250 $1,766,507 Total assets 1,042,959 1,372,847 2,625,264 2,704,163 2,403,659 Long-term debt, including current portion 416,327 308,082 906,723 648,611 397,628 Stockholders' equity 390,855 724,839 1,236,165 1,616,408 1,549,692
(1) Includes the results of Loronix for its fiscal year ended December 31. (2) Includes amounts for Loronix as of its fiscal year ended December 31. 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. CRITICAL ACCOUNTING POLICIES Critical accounting policies are those that are both most important to the portrayal of a company's financial position and results of operations, and require management's most difficult, subjective or complex judgments. Although not all of the Company's critical accounting policies require management to make difficult, subjective or complex judgments or estimates, the following policies and estimates are those that the Company deems most critical. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company recognizes revenues in accordance with the provisions of Statement of Position 97-2, "Software Revenue Recognition", and related Interpretations. The Company's systems are generally a bundled hardware and software solution that are shipped together. Revenue is generally recognized at the time of shipment for sales of systems which do not require significant customization to be performed by the Company when the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) the fee is fixed or determinable and (4) collectibility is probable. Post-contract customer support ("PCS") services are sold separately or as part of a multiple element arrangement, in which case the related PCS element is determined based upon vendor-specific objective evidence of fair value, such that the portion of the total fee allocated to PCS services is generally recognized as revenue ratably over the term of the PCS arrangement. Revenues from certain development contracts are recognized under the percentage-of-completion method on the basis of physical completion to date or using actual costs incurred to total expected costs under the contract. Revisions in estimates of costs and profits are reflected in the accounting period in which the facts that require the revision become known. At the time a loss on a contract is known, the entire amount of the estimated loss is accrued. Amounts received from customers in excess of revenues earned under the percentage-of-completion method are recorded as advance payments from customers. Cost of sales include material costs, subcontractor costs, 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 development 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. 18 Accounts receivable are generally diversified due to the large number of commercial and government entities comprising the Company's customer base and their dispersion across many geographical regions. 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. 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. 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 year over year revenue declines. In contrast, Verint, which services the security and enterprise business intelligence markets, achieved revenue growth based, in part, on heightened awareness surrounding homeland defense and security related initiatives in the U.S. and worldwide. Overall, however, with a substantial majority of sales for the year ended January 31, 2003 generated from activities serving the telecommunications industry, the Company experienced a year over year sales decline of approximately 42%, resulting in an operating loss for the period. YEAR ENDED JANUARY 31, 2003 COMPARED TO YEAR ENDED JANUARY 31, 2002 Sales. Sales for the fiscal year ended January 31, 2003 ("fiscal 2002") decreased by approximately $534.3 million, or 42%, compared to the fiscal year ended January 31, 2002 ("fiscal 2001"). The decrease in sales is primarily attributable to a decrease in sales of ESS products of approximately $537.3 million. Such decrease in ESS sales is attributable to all geographic regions, with sales by region as a percentage of total sales remaining fairly consistent between periods. In addition, sales of security and business intelligence recording products and service enabling signaling software products increased (decreased) by approximately $26.5 million and $(23.3) million, respectively. On a consolidated basis, sales to international customers represented approximately 65% of sales for fiscal 2002 compared to approximately 70% of sales for fiscal 2001. Cost of Sales. Cost of sales for fiscal 2002 decreased by approximately $187.4 million, or 36%, compared to fiscal 2001. The decrease in cost of sales is primarily attributable to decreased materials and overhead costs of approximately $146.6 million, due primarily to the decrease in sales, decreased royalty expense of approximately $20.5 million, decreased personnel-related costs of approximately $8.0 million and decreased travel costs of approximately $7.0 million, partially offset by a charge of approximately $5.9 million pertaining to the write-down of the value of certain inventory and the write-off of certain prepaid licenses for which there is no estimable future use. Gross margins decreased from approximately 58.6% in fiscal 2001 to approximately 54.1% in fiscal 2002. Research and Development, Net. Net research and development expenses 19 for fiscal 2002 decreased by approximately $60.7 million, or 21%, compared to fiscal 2001, primarily due to the reductions in workforce and a reduction of research and development projects. Selling, General and Administrative. Selling, general and administrative expenses for fiscal 2002 decreased by approximately $41.8 million, or 13%, compared to fiscal 2001, and as a percentage of sales increased from approximately 25.4% in fiscal 2001 to approximately 38.2% in fiscal 2002. The decrease in the dollar amount of the expense was primarily due to the reductions in workforce. Workforce Reduction, Restructuring and Impairment Charges. In order to better align its cost structure with the business environment and improve the efficiency of its operations, the Company took steps to reduce its workforce, restructure its operations and write-off impaired assets during fiscal 2001 and fiscal 2002. In connection with these steps, the Company incurred charges of approximately $63.6 million and $66.7 million in fiscal 2001 and fiscal 2002, respectively, primarily pertaining to severance and other related costs, the elimination of excess facilities and related leasehold improvements and the write-off of certain property and equipment. The Company expects to pay out approximately $9.4 million for severance and related obligations during the year ended January 31, 2004 and approximately $40.5 million for facilities and related obligations at various dates through January 2011. Interest and Other Income (Expense), Net. Interest and other income (expense), net for fiscal 2002 increased by approximately $62.3 million compared to fiscal 2001. The principal reasons for the increase are (i) decreased interest expense of approximately $6.8 million due to the redemption of the Company's $300.0 million 4.5% convertible debentures in June 2001, as well as the Company's repurchase of approximately $209.2 million face value of its 1.5% convertible debentures during fiscal 2002; (ii) a gain of approximately $39.4 million recorded as a result of the Company's repurchase of approximately $209.2 million face value of its 1.5% convertible debentures during fiscal 2002; (iii) change in foreign currency gains/losses of approximately $48.5 million due primarily to the strengthening of the euro during fiscal 2002; and (iv) other changes of approximately $1.3 million, net. Such items were offset by (i) decreased interest and dividend income of approximately $26.0 million due primarily to the decline in interest rates during fiscal 2002; (ii) an increase in net losses from the sale and write-down of investments of approximately $4.6 million; (iii) change in the equity of affiliates of approximately $2.2 million; and (iv) an increase of approximately $0.9 million in the minority interest. Income Tax Provision. Provision for income taxes decreased from fiscal 2001 to fiscal 2002 by approximately $1.1 million, or 26%, due primarily to the overall decrease in pre-tax income coupled with shifts in the underlying mix by tax jurisdiction. The Company's overall rate of tax is reduced significantly by the existence of net operating loss carryforwards for Federal income tax purposes in the United States, as well as the tax benefits associated with qualified activities of certain of its Israeli subsidiaries, which are entitled to favorable income tax rates under a program of the Israeli Government for "Approved Enterprise" investments in that country. Net Income (Loss). Net income (loss) decreased by approximately $184.1 million in fiscal 2002 compared to fiscal 2001, while as a percentage of sales decreased from approximately 4.3% in fiscal 2001 to approximately (17.6)% 20 in fiscal 2002. The decrease resulted primarily from the factors described above. YEAR ENDED JANUARY 31, 2002 COMPARED TO YEAR ENDED JANUARY 31, 2001 Sales. Sales for fiscal 2001 increased by approximately $45.2 million, or 4%, compared to the 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%, compared to fiscal 2000. The increase in cost of sales is primarily attributable to increased materials and overhead costs of approximately $21.8 million, due primarily to the increase in sales, and increased personnel-related costs of approximately $23.2 million, due to the 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. Research and Development, Net. 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, 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. Selling, General and Administrative. 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 the 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. Acquisition Expenses. In July 2000, the Company acquired all of the outstanding stock of Loronix Information Systems, Inc., 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 21 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. Workforce Reduction, Restructuring and Impairment Charges. During fiscal 2001, the Company took steps to better align its cost structure with the business environment and to improve the efficiency of its operations. These steps included a reduction in workforce announced in April 2001 and a restructuring plan 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. Interest and Other Income (Expense), Net. Interest and other income (expense), net for fiscal 2001 decreased by approximately $39.1 million compared to fiscal 2000. The principal reasons for the decrease are increased 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 $600.0 million 1.5% 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 primarily 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 (Loss). 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% 22 in fiscal 2001. The decrease resulted primarily from the factors described above. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital at January 31, 2003 and 2002 was approximately $1,766.5 million and $2,030.3 million, respectively. At January 31, 2003 and 2002, the Company had total cash and cash equivalents, bank time deposits and short-term investments of approximately $1,808.9 million and $1,892.5 million, respectively. Operations for fiscal 2002, fiscal 2001 and fiscal 2000, after adjustment for non-cash items, provided (used) cash of approximately $(35.7) million, $130.0 million and $309.7 million, respectively. During such years, other changes in operating assets and liabilities provided (used) cash of approximately $132.5 million, $12.2 million and $(65.2) million, respectively. This resulted in net cash provided by operating activities of approximately $96.8 million, $142.2 million and $244.5 million during fiscal 2002, fiscal 2001 and fiscal 2000, respectively. Investing activities for fiscal 2002, fiscal 2001 and fiscal 2000 provided (used) cash of approximately $35.9 million, $(122.4) million and $(207.3) million, respectively. These amounts include (i) net maturities and sales (purchases) of bank time deposits and investments of approximately $114.5 million, $(44.8) million and $(94.5) million, respectively; (ii) additions to property and equipment of approximately $(34.1) million, $(54.6) million and $(97.3) million, respectively; (iii) capitalization of software development costs of approximately $(13.4) million, $(23.0) million and $(15.5) million, respectively; and (iv) net assets acquired as a result of acquisitions of approximately $(31.1) million in fiscal 2002. Financing activities for fiscal 2002, fiscal 2001 and fiscal 2000 provided (used) cash of approximately $(91.8) million, $67.0 million and $894.1 million, respectively. These amounts include (i) net proceeds from the issuance of the Company's 1.5% convertible senior debentures due December 2005 (the "Debentures") in fiscal 2000 of approximately $588.4 million and net repayments from the repurchase of Debentures in fiscal 2002 of approximately $(169.8) million; (ii) proceeds from the issuance of common stock in connection with the exercise of stock options and employee stock purchase plan of approximately $12.4 million, $28.8 million and $111.4 million, respectively; (iii) net proceeds from the issuance of common stock of subsidiaries in connection with public offerings in fiscal 2002 and fiscal 2000 of approximately $68.7 million and $195.2 million, respectively; and (iv) net proceeds (repayments) of bank loans and other debt of approximately $(3.1) million, $38.2 million and $(0.9) million, respectively. In November and December 2000, the Company issued $600.0 million aggregate principal amount of the Debentures for net proceeds of approximately $588.4 million. During fiscal 2002, the Company acquired, in open market purchases, approximately $209.2 million of face amount of the Debentures for approximately $169.8 million in cash, resulting in a pre-tax gain of approximately $39.4 million included in `Interest and other income (expense), net' in the Consolidated Statements of Operations. As of January 31, 2003, the Company had outstanding Debentures of approximately $390.8 million. During March and April 2003, the Company acquired, in open market purchases, approximately $44.6 million of face amount of the Debentures for approximately $41.3 million in cash, resulting in a pre-tax gain of approximately $2.8 million. 23 In January 2002, Verint took a bank loan in the amount of $42.0 million. This loan, which matured in February 2003, bore interest at LIBOR plus 0.55% and was guaranteed by CTI. During February 2003, Verint repaid the bank loan. In April and October 2000, Ulticom completed initial and secondary public offerings of its common stock. Proceeds to Ulticom from the offerings totaled approximately $195.2 million, net of offering expenses. As of January 31, 2003, the Company's ownership interest in Ulticom was approximately 71.6%. In May 2002, Verint completed an initial public offering of its common stock. Proceeds from the offering totaled approximately $65.4 million, net of offering expenses. As of January 31, 2003, the Company's ownership interest in Verint was approximately 78.6%. In February 2002, Verint acquired the digital video recording business of Lanex, LLC ("Lanex"). The Lanex business provides digital video recording solutions for security and surveillance applications primarily to North American banks. The purchase price consisted of $9.5 million in cash and a $2.2 million convertible note. The note is non-interest bearing and matures on February 1, 2004. The holder of the note may elect to convert the note, in whole or in part, into shares of Verint's common stock at a conversion price of $16.06 per share. The note is guaranteed by CTI. In June 2002, the Company acquired Odigo, Inc. ("Odigo"), a privately-held provider of instant messaging and presence management solutions to service providers. The purchase price was approximately $20.1 million in cash. Prior to the acquisition, the Company was a strategic partner with Odigo, holding an equity position which it previously acquired for approximately $3 million. The Company has obtained bank guaranties primarily for performance of certain obligations under contracts with customers. These guaranties, which aggregated approximately $29.5 million at January 31, 2003, are to be released by the Company's performance of specified contract milestones, which are scheduled to be completed primarily during 2003. In 1997, a subsidiary of CTI and Quantum Industrial Holdings Ltd. organized two new companies to make investments, including investments in high technology ventures. Each participant committed a total of $37.5 million to the capital of the new companies, for use as suitable investment opportunities are identified. Quantum Industrial Holdings Ltd. is a member of the Quantum Group of Funds managed by Soros Fund Management LLC and affiliated management companies. As of January 31, 2003, the Company has invested approximately $25.3 million related to these ventures. In addition, the Company has committed approximately $21.6 million to various companies, ventures and funds which may be called at the option of the investee. The Company leases office, manufacturing, and warehouse space under non-cancelable operating leases. As of January 31, 2003, the minimum annual rent obligations of the Company were approximately $31.6 million, $30.5 million, $29.3 million, $9.6 million and $29.3 million, respectively, for the twelve months ended January 31, 2004, 2005, 2006, 2007, and 2008 and thereafter, for a total obligation of approximately $130.3 million. 24 The ability of CTI'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. The Company's liquidity and capital resources have not been, and are not anticipated to be, materially affected by restrictions pertaining to the ability of its foreign subsidiaries to pay dividends or by withholding taxes associated with any such dividend payments. The Company regularly examines opportunities for strategic acquisitions of other companies or lines of business and anticipates that it may from time to time issue additional debt and/or equity securities either as direct consideration for such acquisitions or to raise additional funds to be used (in whole or in part) in payment for acquired securities or assets. The issuance of such securities could be expected to have a dilutive impact on the Company's shareholders, and there can be no assurance as to whether or when any acquired business would contribute positive operating results commensurate with the associated investment. The Company believes that its existing working capital, together with funds generated from operations, will be sufficient to provide for its planned operations for the foreseeable future. CERTAIN TRENDS AND UNCERTAINTIES The Company derives the majority of its revenue from the telecommunications industry, which continues to face an unprecedented recession. This has resulted in a significant reduction of capital expenditures made by telecommunications service providers ("TSP"). The Company's operating results and financial condition have been, and will continue to be, adversely affected by the severe decline in technology purchases and capital expenditures by TSPs worldwide. Consequently, the Company's operating results have deteriorated significantly in recent periods and 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, including the Company, have been negatively affected by, among other factors, the high costs and large debt positions incurred by some TSPs to expand capacity and enable the provision of future services (and the corresponding risks associated with the development, marketing and adoption of these services as discussed below), including the cost of acquisitions of licenses to provide broadband services and reductions in TSPs' actual and projected revenues and deterioration in their actual and projected operating results. Accordingly, TSPs, including the Company's customers, have significantly reduced their actual and planned expenditures to expand or replace equipment and delayed and reduced the deployment of services. A number of TSPs, including certain customers of the 25 Company, also have indicated the existence of conditions of excess capacity in certain markets. In addition, certain TSPs have delayed the planned introduction of new services, such as broadband mobile telephone services, that would be supported by certain of the Company's products. Certain of the Company's customers also have implemented changes in procurement practices and procedures, including limitations on purchases in anticipation of estimated future capacity requirements, and in the management and use of their networks, that have reduced the Company's sales, which also has made it very difficult for the Company to project future sales. The continuation and/or exacerbation of these negative trends will have an adverse effect on the Company's future results. In addition to loss of revenue, weakness in the telecommunications industry has affected and will continue to affect the Company's business by increasing the risks of credit or business failures of suppliers, customers or distributors, by customer requirements for vendor financing and longer payment terms, by delays and defaults in customer or distributor payments, and by price reductions instituted by competitors to retain or acquire market share. The Company's current plan of operations is predicated in part on a recovery in capital expenditures by its customers. In the absence of such improvement, the Company would experience further deterioration in its operating results, and may determine to modify its plan for future operations accordingly, which may include, among other things, additional reductions in its workforce. The Company intends to continue to make significant investments in its business, and to examine opportunities for growth through acquisitions and strategic investments. These activities may involve significant expenditures and obligations that cannot readily be curtailed or reduced if anticipated demand for the associated products does not materialize or is delayed. The impact of these decisions on future financial results cannot be predicated with assurance, and the Company's commitment to growth may increase its vulnerability to downturns in its markets, technology changes and shifts in competitive conditions. The Company also may not be able to identify future suitable merger or acquisition candidates, and even if the Company does identify suitable candidates, it may not be able to make these transactions on commercially acceptable terms, or at all. If the Company does make acquisitions, it may not be able to successfully incorporate the personnel, operations and customers of these companies into the Company's business. In addition, the Company may fail to achieve the anticipated synergies from the combined businesses, including marketing, product integration, distribution, product development and other synergies. The integration process may further strain the Company's existing financial and managerial controls and reporting systems and procedures. This may result in the diversion of management and financial resources from the Company's core business objectives. In addition, an acquisition or merger may require the Company to utilize cash reserves, incur debt or issue equity securities, which may result in a dilution of existing stockholders, and the Company may be negatively impacted by the assumption of liabilities of the merged or acquired company. Due to rapidly changing market conditions, the Company may find the value of its acquired technologies and related intangible assets, such as goodwill as recorded in the Company's financial statements, to be impaired, resulting in charges to operations. The Company may also fail to retain the acquired or merged companies' key employees and customers. The Company has made, and in the future, may continue to make strategic investments in other companies. These investments have been made in, 26 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 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 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. The Company's new product offerings may not properly integrate into existing platforms and the failure of new product offerings to be accepted by the market could have a material adverse effect on our business, results of operations, and financial condition. 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 relies on a limited number of suppliers and manufacturers for specific components and may not be able to find alternate manufacturers that meet its requirements and existing or alternative sources may not be available on favorable terms and conditions. Thus, if there is a shortage of supply for these components, the Company may experience an interruption in its product supply. In addition, loss of third party software licensing could materially and adversely affect the Company's business, financial condition and results of operations. The telecommunications industry continues to undergo significant change as a result of deregulation and privatization worldwide, reducing restrictions on competition in the industry. Unforeseen changes in the regulatory environment also may have an impact on the Company's revenues and/or costs in any given part of the world. The worldwide 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. 27 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) the Company's reputation or relationship with government agencies is impaired, (ii) the Company is suspended or otherwise prohibited from contracting with a domestic or foreign government or any significant law enforcement agency, (iii) levels of government expenditures and authorizations for law enforcement and security related programs decrease, remain constant or shift to programs in areas where the Company does not provide products and services, (iv) 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, (v) the Company is not granted security clearances required to sell products to domestic or foreign governments or such security clearances are revoked, or (vi) there is a change in government procurement procedures. 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. Geopolitical, economic and military conditions could directly affect the Company's operations. The recent outbreak of severe acute respiratory syndrome ("SARS") has curtailed travel to and from certain countries (primarily in the Asia-Pacific region). Continued or additional restrictions on travel to and from these and other regions on account of SARS could have a material adverse effect on the Company's business, results of operations, and financial condition. The continued threat of terrorism and heightened security and military action in response to this threat, or any future acts of terrorism, may cause disruptions to the Company's business. To the extent that such disruptions result in delays or cancellations of customer orders, or the manufacture or shipment of the Company's products, our business, operating results and 28 financial condition could be materially and adversely affected. More recently, the U.S. military involvement in overseas operations including, for example, the war with Iraq, could have a material adverse effect on the Company's business, results of operations, and financial condition. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors, and the continued state of hostility, varying in degree and intensity, has led to security and economic problems for Israel. Since October 2000, there has been a significant increase in violence, primarily in the West Bank and Gaza Strip, and more recently Israel has experienced terrorist incidents within its borders. During this period, peace negotiations between Israel and representatives of the Palestinian Authority have been sporadic and currently are suspended. The Company could be 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 violence in Israel or the outbreak of violent conflicts involving Israel may impede the Company's ability to sell its products or otherwise adversely affect the Company. In addition, many of the Company's Israeli employees in Israel are required to perform annual compulsory military service in Israel and are subject to being called to active duty at any time under emergency circumstances. The absence of these employees may have an adverse effect upon the Company's operations. The Company's costs of operations have at times been affected by changes in the cost of its operations in Israel, resulting from changes in the value of the Israeli shekel relative to the United States dollar, which for certain periods had a negative impact, and from difficulties in attracting and retaining qualified scientific, engineering and technical personnel in Israel, where the availability of such personnel has at times been severely limited. Changes in these cost factors have from time to time been significant and difficult to predict, and could in the future have a material adverse effect on the Company's results of operations. The Company's historical operating results reflect substantial benefits received from programs sponsored by the Israeli government for the support of research and development, as well as tax moratoriums and favorable tax rates associated with investments in approved projects ("Approved Enterprises") in Israel. Some of these programs and tax benefits have ceased and others may not be continued in the future and the availability of such benefits to the Company may be affected by a number of factors, including budgetary constraints resulting from adverse economic conditions, government policies and the Company's ability to satisfy eligibility criteria. The Israeli government has reduced the benefits available under some of these programs in recent years, and Israeli government authorities have indicated that the government may further reduce or eliminate some of these benefits in the future. The Company has regularly participated in a conditional grant program administered by the Office of the Chief Scientist of the Ministry of Industry and Trade of the State of Israel ("OCS") under which it has received significant benefits through reimbursement of up to 50% of qualified research and development expenditures. 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 29 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 began to receive lower amounts from the OCS than it had historically received, but will not have to pay royalty amounts on such grants. The amount of reimbursement received by the Company under this program has been reduced significantly, and the Company does not expect to receive significant reimbursement under this program in the future. In addition, permission from the Government of Israel is required for the Company to manufacture outside of Israel products resulting from research and development activities funded under these programs, or to transfer outside of Israel related technology rights. In order to obtain such permission, the Company may be required to increase the royalties to the applicable funding agencies and/or repay certain amounts received as reimbursement of research and development costs. The continued reduction in the benefits received by the Company under the program, or the termination of its eligibility to receive these benefits at all in the future, could adversely affect the Company's operating results. The Company's overall effective tax rate benefits from the tax moratorium provided by the Government of Israel for Approved Enterprises undertaken in that country. The Company's effective tax rate may increase in the future due to, among other factors, the increased proportion of its taxable income associated with activities in higher tax jurisdictions, and by the relative ages of the Company's eligible investments in Israel. The tax moratorium on income from the Company's Approved Enterprise investments made prior to 1997 is four years, whereas subsequent Approved Enterprise projects are eligible for a moratorium of only two years. Reduced tax rates apply in each case for certain periods thereafter. To be eligible for these tax benefits, the Company must continue to meet conditions, including making specified investments in fixed assets and financing a percentage of investments with share capital. If the Company fails to meet such conditions in the future, the tax benefits would be canceled and the Company could be required to refund the tax benefits already received. Israeli authorities have indicated that additional limitations on the tax benefits associated with Approved Enterprise projects may be imposed for certain categories of taxpayers, which would include the Company. If further changes in the law or government policies regarding those programs were to result in their termination or adverse modification, or if the Company were to become unable to participate in, or take advantage of, those programs, the cost of the Company's operations in Israel would increase and there could be a material adverse effect on the Company's results of operations and financial condition. The Company's success is dependent on recruiting and retaining key management and highly skilled technical, managerial, sales, and marketing personnel. The market for highly skilled personnel remains very competitive despite the current economic conditions. The Company's ability to attract and retain employees also may be affected by recent cost control actions, including reductions in the Company's workforce and the associated reorganization of operations. The occurrence or perception of security breaches within the Company could harm the Company's business, financial condition and operating results. 30 While the Company implements sophisticated security measures, third parties may attempt to breach the Company's security through computer viruses, electronic break-ins and other disruptions. If successful, confidential information, including passwords, financial information, or other personal information may be improperly obtained and the Company may be subject to lawsuits and other liability. Even if the Company is not held liable, a security breach could harm the Company's reputation, and even the perception of security risks, whether or not valid, could inhibit market acceptance of the Company's products. The Company currently derives a significant portion of its total sales from customers outside of the United States. International transactions involve particular risks, including political decisions affecting tariffs and trade conditions, rapid and unforeseen changes in economic conditions in individual countries, turbulence in foreign currency and credit markets, and increased costs resulting from lack of proximity to the customer. The Company is required to obtain export licenses and other authorizations from applicable governmental authorities for certain countries within which it conducts business. The failure to receive any required license or authorization would hinder the Company's ability to sell its products and could adversely affect the Company's business, results of operations and financial condition. In addition, legal uncertainties regarding liability, compliance with local laws and regulations, labor laws, employee benefits, currency restrictions, difficulty in accounts receivable collection, longer collection periods and other requirements may have a negative impact on the Company's operating results. Volatility in international currency exchange rates may have a significant impact on the Company's operating results. The Company has, and anticipates that it will continue to receive, contracts denominated in foreign currencies, particularly the euro. As a result of the unpredictable timing of 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 31 litigation or stop marketing its products. The Company attempts to avoid infringing known proprietary rights of third parties in its product development efforts. The Company does not regularly conduct comprehensive patent searches to determine whether the technology used in its products infringes patents held by third parties, however. There are many issued patents as well as patent applications in the fields in which the Company is engaged. Because patent applications in the United States are not publicly disclosed until the patent is issued, applications may have been filed which relate to the Company's software and products. If the Company were to discover that its products violated or potentially violated third-party proprietary rights, it might not be able to obtain licenses to continue offering those products without substantial reengineering. Any reengineering effort may not be successful, nor can the Company be certain that any licenses would be available on commercially reasonable terms. Substantial litigation regarding intellectual property rights exists in technology related industries, and the Company expects that its products may be increasingly subject to third-party infringement claims as the number of competitors in its industry segments grows and the functionality of software products in different industry segments overlaps. In addition, the Company has agreed to indemnify certain customers in certain situations should it be determined that its products infringe on the proprietary rights of third parties. Any third-party infringement claims could be time consuming to defend, result in costly litigation, divert management's attention and resources, cause product and service delays or require the Company to enter into royalty or licensing agreements. Any royalty or licensing arrangements, if required, may not be available on terms acceptable to the Company, if at all. A successful claim of infringement against the Company and its failure or inability to license the infringed or similar technology could have a material adverse effect on its business, financial condition and results of operations. The Company holds a large proportion of its net assets in cash equivalents and short-term investments, including a variety of public and private debt and equity instruments, and has made significant venture capital investments, both directly and through private investment funds. Such investments subject the Company to the risks inherent in the capital markets generally, and to the performance of other businesses over which it has no direct control. Given the relatively high proportion of the Company's liquid assets relative to its overall size, the results of its operations are materially affected by the results of the Company's capital management and investment activities and the risks associated with those activities. Declines in the public equity markets have caused, and may be expected to continue to cause, the Company to experience realized and unrealized investment losses. In addition, reduction in prevailing interest rates due to economic conditions or government policies has had and may continue to have an adverse impact on the Company's results of operations. The severe decline in the public trading prices of equity securities, particularly in the technology and telecommunications sectors, and corresponding decline in values of privately-held companies and venture capital funds in which the Company has invested, have, and may continue to have, an adverse impact on the Company's financial results. The Company has in the past benefited from the long-term rise in the public trading price of its shares in various ways, including its ability to use equity incentive arrangements as a means of attracting and retaining the highly qualified employees necessary for the growth of its business and its ability to raise capital on relatively attractive conditions. The decline in the price of the Company's shares, and the overall decline in equity prices generally, and in the shares of technology companies in particular, can be expected to make it more difficult for the Company to 32 significantly rely on equity incentive arrangements as a means to recruit and retain talented employees. 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. 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 are no longer amortized, but rather are reviewed for impairment on a periodic basis. The provisions of this Statement were required to be applied starting with fiscal years beginning after December 15, 2001, at the beginning of the Company's fiscal year, to all goodwill and other intangible assets in its financial statements at that date. Impairment losses for goodwill and certain intangible assets arising due to the initial application of this Statement were to be reported as resulting from a change in accounting principle. Goodwill and intangible assets acquired after June 30, 2001 were subject immediately to the provisions of this Statement. The adoption of SFAS No. 142 did not have a material effect on the Company's consolidated financial statements. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement cost. SFAS No. 143 applies to legal obligations associated with the retirement of a tangible long-lived asset that result from the acquisition, construction, development and/or normal operation of a long-lived asset. This Statement is effective for fiscal years beginning after June 15, 2002; however, early adoption is encouraged. The adoption of SFAS No. 143 is not expected to have a material effect on the Company's consolidated financial statements. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and certain provisions of 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 33 after December 15, 2001 and interim periods within those fiscal years; however, early adoption is encouraged. The adoption of SFAS No. 144 did not have a material effect on the Company's consolidated financial statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds SFAS No. 4, which required all gains and losses from the extinguishment of debt to be classified as an extraordinary item. SFAS No. 145 recognizes that the use of debt extinguishment has become part of the risk management strategy of many companies and therefore may be considered as part of a company's operating activities. The rescission of SFAS No. 4 is effective for fiscal years beginning after May 15, 2002 with earlier application encouraged. The Company adopted SFAS No. 145 in the quarter ended July 31, 2002. Accordingly, as the Company intends to periodically extinguish its debt as part of its risk management strategy, the gain of approximately $39.4 million on the extinguishment of debt relating to the Company's 1.5% convertible debentures was recorded through continuing operations in the Consolidated Statements of Operations for the year ended January 31, 2003. In addition, SFAS No. 145 also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers", and amends SFAS No. 13, "Accounting for Leases", to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. The statement is generally effective for transactions occurring after May 15, 2002 with earlier application encouraged for these items. In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities." This statement addresses the recognition, measurement and reporting of costs that are associated with exit and disposal activities. This statement includes the restructuring activities that are currently accounted for pursuant to the guidance set forth in Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)," costs related to terminating a contract that is not a capital lease and one-time benefit arrangements received by employees who are involuntarily terminated - nullifying the guidance under EITF Issue No. 94-3. Under SFAS No. 146 the cost associated with an exit or disposal activity is recognized in the periods in which it is incurred rather than at the date the company committed to the exit plan. This statement is effective for exit or disposal activities initiated after December 31, 2002 with earlier application encouraged. The adoption of SFAS No. 146 did not have a material effect on the Company's consolidated financial statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and does not permit the use of the original SFAS No. 123 prospective method of transition in fiscal years beginning after December 15, 2003. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results, regardless of whether, when, or how an entity adopts the preferable, fair value based method of accounting. SFAS No. 148 improves the prominence and clarity of the pro forma 34 disclosures required by SFAS No. 123 by prescribing a specific tabular format and by requiring disclosure in the "Summary of Significant Accounting Policies" or its equivalent and improves the timeliness of those disclosures by requiring their inclusion in financial reports for interim periods. The disclosure requirements of SFAS No. 148 are effective for financial statements for fiscal years ending after and for interim periods beginning after December 15, 2002. The adoption of SFAS No. 148 is not expected to have a material effect on the Company's consolidated financial statements. In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34" ("FIN 45"). FIN 45 clarifies the requirements of SFAS No. 5, "Accounting for Contingencies", relating to a guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. Specifically, FIN 45 requires a guarantor to recognize a liability for the non-contingent component of certain guarantees, representing the obligation to stand ready to perform in the event that specified triggering events or conditions occur. The provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002, irrespective of a guarantor's fiscal year-end. However, the disclosure provisions of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FIN 45 is not expected to have a material effect on the Company's 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. As of January 31, 2003, the Company had no 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 15. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 36 PART III The information required by Part III Items 10-13 are omitted pursuant to instruction G(3). ITEM 14. CONTROLS AND PROCEDURES. (a) The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's filings under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Company's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Company's management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Within the 90 day period prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on such evaluation, the Company's principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective. (b) There have been no significant changes in the Company's internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 37 PART IV ITEM 15. 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, 2002 and 2003 F-3 Consolidated Statements of Operations for the Years Ended January 31, 2001, 2002 and 2003 F-4 Consolidated Statements of Stockholders' Equity for the Years Ended January 31, 2001, 2002 and 2003 F-5 Consolidated Statements of Cash Flows for the Years Ended January 31, 2001, 2002 and 2003 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 10.10 comprise material compensatory plans and arrangements of the registrant. (b) Reports on Form 8-K During the fourth quarter of 2002, the Company filed one report on Form 8-K: 38 Report on Form 8-K dated December 13, 2002. Item 9. Regulation FD Disclosure: Certifications of the Principal Executive Officer and the Principal Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 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. 4 Instruments defining the rights of security holders including indentures: 4.1* Specimen stock certificate. (Incorporated by reference to the Registrant's Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1992.) 4.2* Indenture dated as of November 22, 2000 from Comverse Technology, Inc. to The Chase Manhattan Bank, Trustee. (Incorporated by reference to the Registrant's Registration Statement on Form S-3 under the Securities Act of 1933, Registration No. 333-55526.) 4.3* Specimen 1 1/2% Convertible Senior Debenture Due 2005. (Incorporated by reference to the Registrant's Registration Statement on Form S-3 under the Securities Act of 1933, Registration No. 333-55526.) 10 Material contracts: 10.1* Form of Stock Option Agreement pertaining to shares of 39 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. 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 June 15, 2001.) 10.6* 2002 Employee Stock Purchase Plan. (Incorporated by reference to the Definitive Proxy Materials for the Registrant's Annual Meeting of Stockholder held December 3, 2002.) 10.7* 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.) 10.8* 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.) 10.9* 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.) 10.10* 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.) 10.11* Lease dated November 5, 1990 between Boston Technology, Inc. and Wakefield Park Limited Partnership ("Lease"). (Incorporated by reference to the Annual Report of Boston Technology, Inc. on Form 10-K under the Securities Exchange Act of 1934 for the year ended January 31, 1991.) 10.12* First Amendment to Lease dated as of March 31, 1993 between Boston Technology, Inc. and WBAM Limited Partnership. (Incorporated by reference to the Quarterly Report of Boston Technology, Inc. on Form 10-Q under the Securities Exchange Act of 1934 for the quarter ended October 31, 1993.) 10.13* Second Amendment to Lease dated as of August 31, 1994 between Boston Technology, Inc. and WBAM Limited Partnership. (Incorporated by reference to the Annual Report of Boston Technology, Inc. on Form 10-K under the Securities Exchange Act of 1934 for the year ended January 31, 1995.) 10.14* Third Amendment to Lease dated as of June 7, 1996 between Boston Technology, Inc. and WBAM Limited 40 Partnership. (Incorporated by reference to the Annual Report of Boston Technology, Inc. on Form 10-K under the Securities Exchange Act of 1934 for the year ended January 31, 1997.) 10.15** Fourth Amendment to Lease dated as of December 21, 1998 between Wakefield 100 LLC and Comverse Technology, Inc. 10.16** Fifth Amendment to Lease dated as of September 5, 2002 between SC Wakefield 200, Inc. and Comverse Technology, Inc. 21.1** Subsidiaries of Registrant. 23.1** Consent of Deloitte & Touche LLP. 24.1 Powers of Attorney (see signature page to this report.) ----------------- * Incorporated by reference. ** Filed herewith. 41 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 28, 2003 By: /s/ Kobi Alexander ---------------------------------------- Kobi Alexander, Chief Executive Officer KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Kobi Alexander and David Kreinberg and each of them, jointly and severally, his attorneys-in-fact, each with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each said attorneys-in-fact or his substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Kobi Alexander April 28, 2003 ---------------------------------------------------- Kobi Alexander, Chairman of the Board and Chief Executive Officer; Director /s/ David Kreinberg April 28, 2003 ---------------------------------------------------- David Kreinberg, Executive Vice President and Chief Financial Officer /s/ Itsik Danziger April 28, 2003 ---------------------------------------------------- Itsik Danziger, Director /s/ John H. Friedman April 28, 2003 ---------------------------------------------------- John H. Friedman, Director /s/ Francis E. Girard April 28, 2003 ---------------------------------------------------- Francis E. Girard, Director /s/ Ron Hiram April 28, 2003 ---------------------------------------------------- Ron Hiram, Director /s/ Sam Oolie April 28, 2003 ---------------------------------------------------- Sam Oolie, Director /s/ William F. Sorin April 28, 2003 ---------------------------------------------------- William F. Sorin, Director 42 CERTIFICATIONS I, Kobi Alexander, Chairman of the Board of Directors and Chief Executive Officer, certify that: 1. I have reviewed this annual report on Form 10-K of Comverse Technology, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: April 28, 2003 /s / Kobi Alexander ------------------------------------------------ Name: Kobi Alexander Title: Chairman of the Board of Directors and Chief Executive Officer 43 I, David Kreinberg, the Executive Vice President and Chief Financial Officer of Comverse Technology, Inc., certify that: 1. I have reviewed this annual report on Form 10-K of Comverse Technology, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: April 28, 2003 /s/ David Kreinberg -------------------------------------- Name: David Kreinberg Title: Executive Vice President and Chief Financial Officer 44 COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- PAGE Independent Auditors' Report F-2 Consolidated Balance Sheets as of January 31, 2002 and 2003 F-3 Consolidated Statements of Operations for the Years Ended January 31, 2001, 2002 and 2003 F-4 Consolidated Statements of Stockholders' Equity for the Years Ended January 31, 2001, 2002 and 2003 F-5 Consolidated Statements of Cash Flows for the Years Ended January 31, 2001, 2002 and 2003 F-6 Notes to Consolidated Financial Statements F-7 F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Comverse Technology, Inc. Woodbury, New York We have audited the accompanying consolidated balance sheets of Comverse Technology, Inc. and subsidiaries (the "Company") as of January 31, 2002 and 2003, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended January 31, 2003. 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, 2002 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2003, in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP New York, New York March 11, 2003 (April 22, 2003 as to Note 24) F-2
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JANUARY 31, 2002 AND 2003 (IN THOUSANDS, EXCEPT SHARE DATA) ----------------------------------------------------------------------------------------------------------------------------------- ASSETS 2002 2003 ------ ---- ---- CURRENT ASSETS: Cash and cash equivalents $ 1,361,862 $ 1,402,783 Bank time deposits 21,431 20,000 Short-term investments 509,191 386,089 Accounts receivable, net 371,928 212,953 Inventories 56,024 40,015 Prepaid expenses and other current assets 76,667 65,018 ----------- ----------- TOTAL CURRENT ASSETS 2,397,103 2,126,858 PROPERTY AND EQUIPMENT, net 181,761 146,380 OTHER ASSETS 125,299 130,421 ----------- ----------- TOTAL ASSETS $ 2,704,163 $ 2,403,659 =========== =========== ------------------------------------------------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2003 ------------------------------------ ---- ---- CURRENT LIABILITIES: Accounts payable and accrued expenses $ 322,402 $ 260,810 Bank loans 4,696 46,041 Advance payments from customers 39,576 53,496 Other current liabilities 179 4 ----------- ----------- TOTAL CURRENT LIABILITIES 366,853 360,351 CONVERTIBLE DEBENTURES 600,000 390,838 LIABILITY FOR SEVERANCE PAY 9,772 9,778 OTHER LIABILITIES 49,827 9,452 ----------- ----------- TOTAL LIABILITIES 1,026,452 770,419 ----------- ----------- MINORITY INTEREST 61,303 83,548 ----------- ----------- COMMITMENTS AND CONTINGENCIES (Note 21) 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, 186,248,350 and 187,754,407 shares 18,625 18,775 Additional paid-in capital 1,018,232 1,078,720 Retained earnings 574,763 445,285 Accumulated other comprehensive income 4,788 6,912 ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 1,616,408 1,549,692 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,704,163 $ 2,403,659 =========== ===========
See notes to consolidated financial statements. F-3
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JANUARY 31, 2001, 2002 AND 2003 (IN THOUSANDS, EXCEPT PER SHARE DATA) ------------------------------------------------------------------------------------------------------------------------------------ JANUARY 31, JANUARY 31, JANUARY 31, 2001 2002 2003 ---- ---- ---- Sales $ 1,225,058 $ 1,270,218 $ 735,889 Cost of sales 482,658 525,480 338,121 -------------- --------------- -------------- Gross margin 742,400 744,738 397,768 Operating expenses: Research and development, net 232,198 293,296 232,593 Selling, general and administrative 259,607 323,036 281,202 Acquisition expenses 15,971 - - Workforce reduction, restructuring and impairment charges - 63,562 66,714 -------------- ------------- -------------- Income (loss) from operations 234,624 64,844 (182,741) Interest and other income (expense), net 33,339 (5,789) 56,557 -------------- ------------- -------------- Income (loss) before income tax provision 267,963 59,055 (126,184) Income tax provision 18,827 4,436 3,294 -------------- ------------- -------------- Net income (loss) $ 249,136 $ 54,619 $ (129,478) ============== ============= ============== Earnings (loss) per share: Basic $ 1.54 $ 0.30 $ (0.69) ============== ============= ============== Diluted $ 1.39 $ 0.29 $ (0.69) ============== ============= ==============
See notes to consolidated financial statements. F-4
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JANUARY 31, 2001, 2002 AND 2003 (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, FEBRUARY 1, 2000 155,776,298 $15,577 $424,075 $282,764 $3,118 $(695) $724,839 Comprehensive income: Net income 249,136 Unrealized gain 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 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 Comprehensive loss: Net loss (129,478) Unrealized gain on available-for-sale securities 827 Translation adjustment 1,297 Total comprehensive loss (127,354) Common stock issued for employee stock purchase plan 975,396 97 8,097 8,194 Exercise of stock options 530,661 53 4,121 4,174 Issuance of subsidiary shares 47,996 47,996 Tax benefit of dispositions of stock options 274 274 ---------------------------------------------------------------------------------------------------------------------------------- BALANCE, JANUARY 31, 2003 187,754,407 $18,775 $1,078,720 $445,285 $5,126 $1,786 $1,549,692 =========== ======= ========== ======== ====== ====== ==========
See notes to consolidated financial statements. F-5
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JANUARY 31, 2001, 2002 AND 2003 (IN THOUSANDS) -------------------------------------------------------------------------------------------------------------------------------- JANUARY 31, JANUARY 31, JANUARY 31, 2001 2002 2003 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 249,136 $ 54,619 $ (129,478) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 53,196 63,824 67,355 Operating asset write-downs and impairments 7,399 11,530 26,445 Changes in assets and liabilities: Accounts receivable (92,039) (12,611) 161,737 Inventories (16,915) 55,775 13,446 Prepaid expenses and other current assets (22,464) (2,172) 19,728 Accounts payable and accrued expenses 52,165 33,481 (74,856) Advance payments from customers 26,325 (82,599) 13,822 Liability for severance pay 1,729 1,848 (426) Other (14,041) 18,490 (927) ------------- ------------- ------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 244,491 142,185 96,846 ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Maturities and sales (purchases) of bank time deposits and investments, net (94,452) (44,762) 114,471 Purchase of property and equipment (97,337) (54,634) (34,092) Capitalization of software development costs (15,489) (23,027) (13,391) Net assets acquired - - (31,130) ------------- ------------- ------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (207,278) (122,423) 35,858 ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds (repayments) from issuance (repurchase) of debentures 588,429 - (169,788) Proceeds from issuance of common stock in connection with exercise of stock options and employee stock purchase plan 111,394 28,784 12,368 Net proceeds from issuance of common stock of subsidiaries 195,231 - 68,695 Net proceeds (repayments) of bank loans and other debt (943) 38,211 (3,058) ------------- ------------- ------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 894,111 66,995 (91,783) ------------- ------------- ------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 931,324 86,757 40,921 CASH ACQUIRED IN POOLING OF INTERESTS TRANSACTIONS 1,246 - - CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 342,535 1,275,105 1,361,862 ------------- ------------- ------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,275,105 $ 1,361,862 $ 1,402,783 ============= ============= ============= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for interest $ 14,665 $ 16,240 $ 10,458 ============= ============= ============= Cash paid during the year for income taxes $ 4,393 $ 8,379 $ 11,682 ============= ============= =============
See notes to consolidated financial statements. F-6 COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANUARY 31, 2001, 2002 AND 2003 -------------------------------------------------------------------------------- 1. ORGANIZATION AND BUSINESS Comverse Technology, Inc. ("CTI" and, together with its subsidiaries, the "Company") was organized as a New York corporation in October 1984. The Company is engaged in the design, development, manufacture, marketing and support of special purpose computer and telecommunications systems and software for multimedia communications and information processing applications. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of CTI and its wholly-owned and majority-owned subsidiaries. All material intercompany balances and transactions have been eliminated. 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. CONCENTRATION OF CREDIT RISK - Financial instruments which potentially expose the Company to concentration of credit risk, consist primarily of cash investments and accounts receivable. The Company places its cash investments with high-credit quality financial institutions and currently invests primarily in money market funds placed with major banks and financial institutions, bank time deposits, corporate commercial paper, corporate and municipal short-term notes, corporate medium-term notes, mortgage and asset backed securities, U.S. government and U.S. government corporation and agency obligations, mutual funds investing in the like and common and preferred stock. 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, 2002 and 2003, the Company's allowance for doubtful accounts was approximately $41,955,000 and $56,759,000, 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 primarily over periods ranging from two to seven years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease term. The cost of maintenance and repairs is charged to operations as incurred. Significant renewals and improvements are capitalized. F-7 INCOME TAXES - The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. REVENUE AND EXPENSE RECOGNITION - The Company recognizes revenues in accordance with the provisions of Statement of Position 97-2, "Software Revenue Recognition", and related Interpretations. The Company's systems are generally a bundled hardware and software solution that are shipped together. Revenue is generally recognized at the time of shipment for sales of systems which do not require significant customization to be performed by the Company when the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) the fee is fixed or determinable and (4) collectibility is probable. Post-contract customer support ("PCS") services are sold separately or as part of a multiple element arrangement, in which case the related PCS element is determined based upon vendor-specific objective evidence of fair value, such that the portion of the total fee allocated to PCS services is generally recognized as revenue ratably over the term of the PCS arrangement. Revenues from certain development contracts are recognized under the percentage-of-completion method on the basis of physical completion to date or using actual costs incurred to total expected costs under the contract. Revisions in estimates of costs and profits are reflected in the accounting period in which the facts that require the revision become known. At the time a loss on a contract is known, the entire amount of the estimated loss is accrued. Amounts received from customers in excess of revenues earned under the percentage-of-completion method are recorded as advance payments from customers. Related contract costs include all direct material and labor costs and those indirect costs related to contract performance, and are included in cost of sales in the consolidated statements of operations. Expenses incurred in connection with research and development activities, other than certain software development costs that are capitalized, and selling, general and administrative expenses are charged to operations as incurred. SOFTWARE DEVELOPMENT COSTS - Software development costs are capitalized upon the establishment of technological feasibility and are amortized over the estimated useful life of the software, which to date has been four years or less. Amortization begins in the period in which the related product is available for general release to customers. Amortization expense amounted to approximately $7,203,000, $9,129,000 and $12,594,000 for the years ended January 31, 2001, 2002 and 2003, 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, 2002 and 2003, the Company had no outstanding foreign exchange contracts. GOODWILL AND OTHER INTANGIBLE ASSETS - Goodwill represents the excess of the purchase price over the fair value of net assets acquired. Other intangible assets include identifiable acquired software and technology, trade name and non-compete agreements. In accordance with the provisions of F-8 Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets", goodwill and certain intangible assets are no longer amortized, but rather are reviewed for impairment on at least an annual basis. Other intangible assets with finite lives are amortized using the straight-line method over their estimated useful lives, not exceeding six years. OTHER ASSETS - Licenses of patent rights and acquired "know-how" are recorded at cost and amortized using the straight-line method over the estimated useful lives of the related technology, not exceeding four years. Debt issue costs are amortized using the effective interest method over the term of the related debt. LONG-LIVED ASSETS - The Company reviews for the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimated future undiscounted cash flows expected to result from the use of the asset and proceeds from its eventual disposition are less than its carrying amount. Impairment is measured at fair value. In connection with its restructuring plan, during the years ended January 31, 2002 and 2003, the Company identified certain impairment losses that are included in `Workforce reduction, restructuring and impairment charges' in the Consolidated Statements of Operations. Refer to Note 9 for details. OTHER LIABILITIES - In January 2002, a majority-owned subsidiary of CTI, Verint Systems Inc. ("Verint") took a bank loan in the amount of $42,000,000. This loan, which matures in February 2003, bears interest at LIBOR plus 0.55%. The loan is guaranteed by CTI. Refer to Note 24, "Subsequent Events." STOCK-BASED COMPENSATION - At January 31, 2003, the Company had in place the Comverse Stock Option Plans, as fully described in Note 14. The Company accounts for its option plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, no stock-based employee compensation cost is reflected in net income for any periods, as all options granted under the plan had an exercise price at least equal to the market value of the underlying common stock on the date of grant. The Company estimated the fair value of employee stock options utilizing the Black-Scholes option valuation model, using the assumptions as described in Note 14, as required under accounting principles generally accepted in the United States of America. The Black-Scholes model was developed for use in estimating the fair value of traded options and does not consider the non-traded nature of employee stock options, vesting and trading restrictions, lack of transferability or the ability of employees to forfeit the options prior to expiry. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company's employee stock options. The following table illustrates the effect on net income (loss) and earnings (loss) per share if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", to stock-based employee compensation for all periods: F-9
YEAR ENDED JANUARY 31, ---------------------- 2001 2002 2003 ---- ---- ---- Net income (loss), as reported $ 249,136 $ 54,619 $ (129,478) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (87,112) (181,837) (149,782) --------- ---------- ---------- Pro forma net income (loss) $ 162,024 $ (127,218) $ (279,260) Earnings (loss) per share: Basic - as reported $ 1.54 $ 0.30 $ (0.69) Basic - pro forma $ 1.00 $ (0.71) $ (1.49) Diluted - as reported $ 1.39 $ 0.29 $ (0.69) Diluted - pro forma $ 0.93 $ (0.71) $ (1.49)
PERVASIVENESS OF ESTIMATES - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS - Certain prior year amounts have been reclassified to conform to the manner of presentation in the current year. 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. One of the Company's subsidiaries accrues royalties to the OCS for the sale of products incorporating technology developed in these projects. During the year ended January 31, 2002, another 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 began to receive lower amounts from the OCS than it had historically received, but is not required to pay royalties on such future grants. Under the terms of the applicable 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, 2001, 2002 and 2003 were $21,508,000, $9,980,000 and $10,540,000, respectively. F-10 4. SHORT-TERM INVESTMENTS The Company classifies all of its short-term investments as available-for-sale securities. The following is a summary of available-for-sale securities as of January 31, 2003:
GROSS GROSS ESTIMATED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ------------------------------------------------------------------------------------ (IN THOUSANDS) Corporate debt securities $ 35,508 $ 1,942 $ - $ 37,450 Mortgage and asset-backed securities 12,797 - 315 12,482 U.S. Government corporation and agency bonds 210,308 155 - 210,463 ----------- --------- --------- ---------- Total debt securities 258,613 2,097 315 260,395 ----------- --------- --------- ---------- Common stock 14,032 3,925 - 17,957 Mutual funds (1) 104,751 173 883 104,041 Preferred stock 3,567 191 62 3,696 ----------- --------- --------- ---------- Total equity securities 122,350 4,289 945 125,694 ----------- --------- --------- ---------- $ 380,963 $ 6,386 $ 1,260 $ 386,089 =========== ========= ========= ==========
(1) Investing in all or some of U.S. Government and U.S. Government corporation and agency obligations, corporate debt securities and commercial paper and asset-backed 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 corporation and 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 (1) 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 =========== ========= ========= ==========
(1) Investing in all or some of U.S. Government and U.S. Government corporation and agency obligations, corporate debt securities and commercial paper and asset-backed securities. During the year ended January 31, 2003, the gross realized gains on sales of securities totaled approximately $3,588,000, and the gross realized losses totaled approximately $13,644,000. F-11 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. 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, 2003, by contractual maturity, are as follows:
ESTIMATED COST FAIR VALUE ---- ---------- (IN THOUSANDS) Due in one year or less $ 81,095 $ 81,832 Due after one year through three years 161,087 161,950 Due after three years 16,431 16,613 ------------ ------------ $ 258,613 $ 260,395 ============= =============
5. INVENTORIES Inventories consist of:
JANUARY 31, ----------- 2002 2003 ---- ---- (IN THOUSANDS) Raw materials $ 30,989 $ 17,111 Work in process 12,049 12,430 Finished goods 12,986 10,474 ------------- ------------- $ 56,024 $ 40,015 ============= =============
6. PROPERTY AND EQUIPMENT Property and equipment consist of:
JANUARY 31, ----------- 2002 2003 ---- ---- (IN THOUSANDS) Fixtures and equipment $ 271,935 $ 289,140 Land and buildings 32,952 22,105 Software 30,201 32,042 Transportation vehicles 1,387 1,300 Leasehold improvements 11,817 13,313 ------------- ------------- 348,292 357,900 Less accumulated depreciation and amortization (166,531) (211,520) ------------- ------------- $ 181,761 $ 146,380 ============= =============
F-12 7. OTHER ASSETS Other assets consist of:
JANUARY 31, ----------- 2002 2003 ---- ---- (IN THOUSANDS) Software development costs, net of accumulated amortization of $28,338 and $37,843 $ 39,313 $ 40,110 Investments 68,518 34,741 Other assets 17,468 55,570 ------------- ------------- $ 125,299 $ 130,421 ============= =============
8. BUSINESS COMBINATIONS In February 2002, Verint acquired the digital video recording business of Lanex, LLC ("Lanex"). The Lanex business provides digital video recording solutions for security and surveillance applications primarily to North American banks. The purchase price consisted of $9.5 million in cash and a $2.2 million convertible note. The note is non-interest bearing and matures on February 1, 2004. The holder of the note may elect to convert the note, in whole or in part, into shares of Verint's common stock at a conversion price of $16.06 per share. The note is guaranteed by CTI. In June 2002, the Company acquired Odigo, Inc. ("Odigo"), a privately-held provider of instant messaging and presence management solutions to service providers. The purchase price was approximately $20.1 million in cash. Prior to the acquisition, the Company was a strategic partner with Odigo, holding an equity position which it previously acquired for approximately $3 million. These acquisitions were accounted for under the purchase method and, accordingly, the Consolidated Statements of Operations include the results of operations from the date of acquisition. Assets acquired and liabilities assumed were recorded at estimated fair values as determined by the Company's management based on information currently available and through the assistance of independent appraisal specialists, where applicable. After allocating the purchase price, including the direct costs of the acquisition, to net tangible and identifiable intangible assets, any excess of cost over fair value of net assets acquired was recorded as goodwill, included in `Other assets' in the Consolidated Balance Sheets. A summary of the assets acquired and liabilities assumed in the acquisitions as well as pro forma results of operations have not been presented because the effects of these acquisitions are not deemed material. 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. 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 Operations for the F-13 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 Consolidated Statements of Stockholders' Equity. 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 Consolidated Statements 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 Consolidated Statements of Stockholders' Equity. In connection with the acquisitions of Loronix, Syborg, Exalink and Gaya the Company charged approximately $15,971,000 to operations in the year ended January 31, 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 these 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. Professional fees and other direct merger expenses -------------------------------------------------- In connection with these acquisitions in the year ended January 31, 2001, the Company recorded a charge of approximately $8,572,000 for professional fees to lawyers, investment bankers and F-14 accountants, as well as other direct merger costs in connection with the mergers, such as printing costs and filing fees. 9. WORKFORCE REDUCTION, RESTRUCTURING AND IMPAIRMENT CHARGES During the years ended January 31, 2002 and 2003, the Company took steps to better align its cost structure with the business environment and to improve the efficiency of its operations. These steps included a reduction in workforce announced in April 2001 and a restructuring plan, which included an additional reduction in workforce, announced in December 2001. During the course of the year ended January 31, 2003, the Company took additional steps to reduce its workforce, restructure its operations and write-off impaired assets. In connection with these actions, the Company charged approximately $63,562,000 and $66,714,000 to operations in the years ended January 31, 2002 and 2003, respectively, primarily pertaining to severance and other related costs, the elimination of excess facilities and related leasehold improvements and the write-off of certain property and equipment. An analysis of the total charges of approximately $63,562,000 incurred during the year ended January 31, 2002 as well as a rollforward of the workforce reduction and restructuring accrual for that period is as follows:
WORKFORCE REDUCTION, ACCRUAL RESTRUCTURING BALANCE AT & IMPAIRMENT CASH NON-CASH JANUARY 31, CHARGES PAYMENTS CHARGES 2002 ------- -------- ------- ---- (IN THOUSANDS) Severance and related $ 27,685 $ 15,823 $ - $ 11,862 Facilities and related 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 ======== ======== ======== ========
An analysis of the total charges of approximately $66,714,000 incurred during the year ended January 31, 2003 as well as a rollforward of the workforce reduction and restructuring accrual for that period is as follows:
WORKFORCE ACCRUAL REDUCTION, ACCRUAL BALANCE AT RESTRUCTURING BALANCE AT JANUARY 31, & IMPAIRMENT CASH NON-CASH JANUARY 31, 2002 CHARGES PAYMENTS CHARGES 2003 ---- ------- -------- ------- ---- (IN THOUSANDS) Severance and related $ 11,862 $ 26,857 $ 29,352 $ - $ 9,367 Facilities and related 24,347 19,360 3,253 - 40,454 Property and equipment - 20,497 - 20,497 - -------- -------- -------- --------- --------- Total $ 36,209 $ 66,714 $ 32,605 $ 20,497 $ 49,821 ======== ======== ======== ========= =========
F-15 Severance and related costs consist primarily of severance payments to terminated employees, fringe related costs associated with severance payments, other termination costs and legal and consulting costs. The balance of these severance and related costs is expected to be paid by January 2004. Facilities and related 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 these facilities and related costs is expected to be paid at various dates through January 2011. Property and equipment costs consist primarily of the write-down of various assets to their current estimable fair value, including the value of certain unimproved land in Israel, written down during the year ended January 31, 2003, that the Company had acquired with a view to the future construction of facilities for its Israeli operations. In connection with the restructuring plan, the Company changed its organizational structure and product offerings. As a result, certain inventory and capitalized software became impaired and were written-off during the year ended January 31, 2002. The Company expects to continue to reduce its workforce during the three months ending April 30, 2003 and incur additional restructuring related charges during such period. 10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of: JANUARY 31, ----------- 2002 2003 ---- ---- (IN THOUSANDS) Accounts payable $ 113,566 $ 88,649 Accrued compensation 48,074 37,054 Accrued vacation 21,092 20,761 Accrued royalties 41,105 6,596 Accrued workforce reduction and restructuring 36,209 49,821 Accrued warranty 9,742 12,269 Other accrued expenses 52,614 45,660 ------------- ------------- $ 322,402 $ 260,810 ============= ============= F-16 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. During the year ended January 31, 2003, the Company acquired, in open market purchases, $209,162,000 of face amount of the Debentures, resulting in a pre-tax gain, net of debt issuance costs, of approximately $39,374,000 included in `Interest and other income (expense), net' in the Consolidated Statements of Operations. Refer to Note 24, "Subsequent Events." 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 primarily of the Company's unfunded liability for severance pay to employees of certain foreign subsidiaries and accrued severance to the Company's chief executive officer. Under Israeli law, the Company is obligated to make severance payments to employees of its Israeli subsidiaries on the basis of each individual's current salary and length of employment. These liabilities are currently provided primarily by premiums paid by the Company to insurance providers. 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 $2,631,000 and $3,013,000 has been accrued as of January 31, 2002 and 2003, respectively, relating to this liability. F-17 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 majority-owned 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 to Ulticom 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 during the year ended January 31, 2001, which was recorded as an increase in stockholders' equity as a result of these issuances. As of January 31, 2003, the Company's ownership interest in Ulticom was approximately 71.6%. In May 2002, Verint issued 4,500,000 shares of its common stock in an initial public offering. Proceeds from the offering, based on the offering price of $16.00 per share, totaled approximately $65.4 million, net of offering expenses. The Company recorded a gain of approximately $48.1 million during the year ended January 31, 2003, which was recorded as an increase in stockholders' equity as a result of the issuance. As of January 31, 2003, the Company's ownership interest in Verint was approximately 78.6%. 14. STOCK OPTIONS OPTION EXCHANGE PROGRAM - In May 2002, the Company announced the commencement of a voluntary stock option exchange program for its eligible employees. Under the program, which was approved by the Company's shareholders, participating employees were given the opportunity to have unexercised stock options previously granted to them cancelled, in exchange for replacement options that were granted at a future date. Replacement options were granted at a ratio of 0.85 new options for each existing option cancelled, at an exercise price equal to the fair market value of the Company's stock on the date of the re-grant. The exchange program was designed in accordance with Financial Accounting Standards Board ("FASB") Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation (an interpretation of APB Opinion No. 25)", under which, the grant of replacement options not less than six months and one day after cancellation will not result in any variable compensation charges relating to these options. On the date of re-grant, December 23, 2002, replacement options to acquire 14,208,987 shares of the Company's common stock were granted at $10.52 per share, the closing fair market value of the Company's stock on that date. F-18 EMPLOYEE STOCK OPTIONS - At January 31, 2003, 25,079,827 shares of common stock were reserved for issuance upon the exercise of stock options then outstanding and 9,235,083 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, ---------------------- 2001 2002 2003 ---- ---- ---- Outstanding at beginning of period 23,810,758 26,163,560 33,089,823 Options from pooling of interests transactions 820,882 - - Granted during the period 9,306,315 9,945,007 15,851,028 Exercised during the period (6,989,653) (1,463,467) (530,661) Canceled, terminated and expired (784,742) (1,555,277) (23,330,363) -------------- -------------- --------------- Outstanding at end of period 26,163,560 33,089,823 25,079,827 ============== ============== ===============
At January 31, 2003, options to purchase an aggregate of 8,003,012 shares were vested and currently exercisable under the option plans and options to purchase an additional 17,076,815 shares vest at various dates extending through the year 2006. Weighted average option exercise price information was as follows:
YEAR ENDED JANUARY 31, ---------------------- 2001 2002 2003 ---- ---- ---- Outstanding at beginning of period $ 22.14 $ 45.66 $ 38.24 Assumed from pooling of interests 3.21 - - Granted during the period 84.83 18.03 10.30 Exercised during the period 14.45 11.43 7.87 Canceled, terminated and expired 31.01 56.73 47.42 Outstanding at end of period 45.66 38.24 12.73 Exercisable at end of period 14.73 31.23 15.24
Significant option groups outstanding at January 31, 2003 and related weighted average price and life information were as follows: F-19
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 7,116,561 5.48 $ 8.85 5,971,851 $ 9.26 $10.52 14,319,295 7.76 10.52 11,325 10.52 $10.71 - 46.50 2,991,013 7.10 17.12 1,545,946 17.53 $49.28 - 119.69 652,958 5.94 83.35 473,890 83.32 ---------- ---- ------ --------- ------ 25,079,827 6.99 $12.73 8,003,012 $15.24 ========== ==== ====== ========= ======
The weighted average fair value of the options granted for the years ended January 31, 2001, 2002 and 2003, respectively, is estimated at $50.38, $10.85 and $4.66 on the date of grant (using the Black-Scholes option pricing model) with the following weighted average assumptions for the years ended January 31, 2001, 2002 and 2003, respectively: volatility of 65%, 76% and 75%; risk-free interest rate of 5.5%, 4.0% and 1.8%; and an expected life of 4.9, 4.3 and 2.6 years. OPTIONS ON SUBSIDIARY SHARES - The Company has granted options to certain employees to acquire shares of certain subsidiaries, other than Comverse, Inc. Such option issuances are not tied to the performance of the subsidiaries, but are intended to incentivize employees in the units for which they have direct responsibility. 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 PLANS Under Comverse's Employee Stock Purchase Plans, all employees who have completed three months of employment are entitled, through payroll deductions of amounts up to 10% of their base salary, to purchase shares of the Company's common stock at 85% of the lesser of the market price at the offering commencement date or the offering termination date. The number of shares available under the 1997 Employee Stock Purchase Plan is 2,500,000, of which approximately 2,021,000 had been issued as of January 31, 2003. In December 2002 the Company adopted the 2002 Employee Stock Purchase Plan, under which 1,500,000 additional shares are available, none of which have been issued as of January 31, 2003. F-20 17. EARNINGS PER SHARE ("EPS") Basic earnings (loss) per share is determined by using the weighted average number of shares of common stock outstanding during each period. Diluted earnings (loss) per share further assumes the issuance of common shares for all dilutive potential common shares outstanding. The calculation for earnings (loss) per share for the years ended January 31, 2001, 2002 and 2003 was as follows:
JANUARY 31, 2001 JANUARY 31, 2002 JANUARY 31, 2003 -------------------------------- --------------------------------- -------------------------------- Per Share Per Share Per Share Income Shares Amount Income Shares Amount Loss Shares Amount (In thousands, except per share data) BASIC EPS --------- Net Income (loss) $ 249,136 161,496 $ 1.54 $ 54,619 179,311 $ 0.30 $(129,478) 187,212 $(0.69) ====== ====== ====== EFFECT OF DILUTIVE SECURITIES ------------------ Options and warrants 14,514 7,123 Convertible debentures 14,552 13,954 --------- ------- ------ -------- ------- ------ --------- ------- ------ DILUTED EPS $ 263,688 189,964 $ 1.39 $ 54,619 186,434 $ 0.29 $(129,478) 187,212 $(0.69) ========= ======= ====== ======== ======= ====== ========= ======= ======
The diluted earnings (loss) per share computation for the year ended January 31, 2003 excludes incremental shares of approximately 632,000 related to employee stock options. These shares are excluded due to their antidilutive effect as a result of the Company's loss during the period. In addition, the Company's Debentures were not included in the computation of diluted earnings (loss) per share for the years ended January 31, 2002 and 2003 because the effect of including them would be antidilutive. 18. INTEREST AND OTHER INCOME (EXPENSE), NET Interest and other income (expense), net, consists of the following:
YEAR ENDED JANUARY 31, 2001 2002 2003 ---- ---- ---- (IN THOUSANDS) Interest and dividend income $ 63,607 $ 71,210 $ 45,171 Interest expense (18,031) (18,344) (11,552) Investment gains (losses), net 1,511 (37,079) (41,666) Foreign currency gains (losses), net (646) (20,788) 27,752 Gain on repurchase of convertible debentures - - 39,374 Other, net (13,102) (788) (2,522) ------------ ------------ ------------- $ 33,339 $ (5,789) $ 56,557 ============ ============ =============
F-21 19. INCOME TAXES The provision for income taxes consists of the following:
YEAR ENDED JANUARY 31, 2001 2002 2003 ---- ---- ---- (IN THOUSANDS) Current provision: Federal $ 1,507 $ 6,288 $ - State 844 779 886 Foreign 16,698 6,631 2,257 ----------- ------------ ------------ 19,049 13,698 3,143 ----------- ------------ ------------ Deferred provision (benefit): Federal (37) (9,077) (956) State (88) (162) (20) Foreign (97) (23) 1,127 ----------- ------------ ------------ (222) (9,262) 151 ----------- ------------ ------------ $ 18,827 $ 4,436 $ 3,294 =========== ============ ============
The reconciliation of the U.S. Federal statutory tax rate to the Company's effective tax rate is as follows:
YEAR ENDED JANUARY 31, 2001 2002 2003 ---- ---- ---- U.S. Federal statutory rate 35% 35% 35% Consolidated worldwide income in excess of U.S. income (38) (47) (38) Foreign income taxes 6 11 2 Other 4 9 (2) --------- -------- --------- Company's effective tax rate 7% 8% (3)% ========= ======== =========
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, 2002 and 2003 is as follows: F-22 JANUARY 31, ----------- 2002 2003 ---- ---- (IN THOUSANDS) Deferred tax liability: Expenses deductible for tax purposes and not for financial reporting purposes $ 1,080 $ 2,666 =========== ============ Deferred tax asset: Reserves not currently deductible $ 43,532 $ 65,194 Tax loss carryforwards 253,703 278,364 Inventory capitalization 118 51 ----------- ------------ 297,353 343,609 Less: valuation allowance (285,801) (331,090) ----------- ------------ Total deferred tax asset $ 11,552 $ 12,519 =========== ============ At January 31, 2003, the Company had net operating loss carryforwards for Federal income tax purposes of approximately $711.6 million, of which approximately $24.9 million will expire in 2004 and the balance will begin to expire in 2019. Income tax has not been provided on unrepatriated earnings of foreign subsidiaries as currently it is the intention of the Company to reinvest such foreign earnings in their operations. 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 and traffic generating services accessible to large numbers of simultaneous users. These services include a broad range of messaging, information distribution and personal communications services, such as call answering with one-touch call return, voicemail, unified messaging (voice, fax, text, multimedia content and email in a single mailbox, media conversion such as email to voice and visual mailbox presentation), value-added services for roamers, prepaid wireless calling services, wireless data and Internet-based services such as short messaging services, wireless information and entertainment services, multimedia messaging services, wireless instant messaging, interactive voice response, and voice portal services, which are part of a voice-controlled portfolio of services such as voice dialing, 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, F-23 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 sales, operating income (loss) and total assets as of and for the years ended January 31, 2001, 2002 and 2003:
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, 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) $ (1,955) $ (17,562) $ 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 $ 8,523 $ (2,533) $ (984) $ (6,267) $ 64,844 Total Assets $ 1,168,075 $ 240,675 $ 116,726 $ 56,930 $ 1,121,757 $ 2,704,163 YEAR ENDED JANUARY 31, 2003 ---------------- Sales $ 542,984 $ 29,231 $ 157,775 $ 9,602 $ (3,703) $ 735,889 Operating Income (Loss) $ (179,492) $ (8,632) $ 10,051 $ (615) $ (4,323) $ (182,741) Total Assets $ 989,357 $ 237,102 $ 207,050 $ 32,706 $ 937,444 $ 2,403,659
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. F-24 Sales by country, based on end-user location, as a percentage of total sales, for the years ended January 31, 2001, 2002 and 2003 were as follows: JANUARY 31, ----------- 2001 2002 2003 ---- ---- ---- United States 25% 30% 35% Germany 11 12 5 Other foreign 64 58 60 ------ ----- ----- Total 100% 100% 100% ====== ===== ===== No customer accounted for 10% or more of sales for the years ended January 31, 2001, January 31, 2002 or January 31, 2003. Long-lived assets by country of domicile consist of: JANUARY 31, ----------- 2002 2003 ---- ---- (IN THOUSANDS) United States $ 128,681 $ 79,113 Israel 158,726 134,514 Other 10,850 12,899 ----------- ----------- $ 298,257 $ 226,526 =========== =========== 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 $28,304,000, $36,461,000 and $36,032,000 in the years ended January 31, 2001, 2002 and 2003, respectively. As of January 31, 2003, the minimum annual rent obligations of the Company were approximately as follows: TWELVE MONTHS ENDED JANUARY 31, AMOUNT ----------- ------ (IN THOUSANDS) 2004 $ 31,632 2005 30,437 2006 29,332 2007 9,584 2008 and thereafter 29,330 ------------- $ 130,315 ============= F-25 EMPLOYMENT AGREEMENTS - The Company is obligated under employment contracts with Kobi Alexander, its Chairman and Chief Executive Officer, to provide compensation, insurance and fringe benefits through January 31, 2004. Minimum salary payments under the contracts currently amount to $672,000 per year. Following termination or expiration of the term of employment, the executive is entitled to receive a severance payment equal to $136,411 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, 2002, 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 compensation and the monetary equivalence of other benefits which he otherwise would have expected to receive for a period of three years. 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. Stock options granted the executive 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 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 F-26 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, 2002 and 2003, the Company has invested approximately $25,026,000 and $25,259,000 respectively, related to these ventures, included in `Other assets' in the Consolidated Balance Sheets. In addition, the Company has committed $21,609,000 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 $29,463,000 at January 31, 2003, are to be released by the Company's performance of specified contract milestones, which are scheduled to be completed primarily during 2003. LITIGATION - 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 ("the Court"). An amended consolidated complaint was filed on March 4, 2002. The amended consolidated complaint generally alleged violations of federal securities laws on behalf of individuals who alleged that they purchased CTI's common stock during a purported class period between April 30, 2001 and July 10, 2001. The amended consolidated complaint sought an unspecified amount in damages on behalf of persons who purchased CTI stock during the purported class period. On April 22, 2002, CTI filed a Motion to Dismiss the amended consolidated complaint in its entirety. On September 30, 2002, the Court granted CTI's Motion to Dismiss the amended consolidated complaint. On November 8, 2002, the Court entered a final judgment dismissing the amended consolidated complaint with prejudice. On November 26, 2002, plaintiffs agreed to waive their right to appeal the judgment in exchange for CTI's agreement that each side bear its own costs and legal fees. Plaintiffs' time to appeal has expired and no appeal was filed, and the case is now closed. From time to time, the Company is subject to claims in legal proceedings arising in the normal course of its business. The Company does not believe that it is currently party to any pending legal action that could reasonably be expected to have a material adverse effect on its business, financial condition and results of operations. 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. F-27
JANUARY 31, ------------------------------------------------------------------------ 2002 2003 ---- ---- CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE ------ ---------- ------ ---------- (IN THOUSANDS) Liabilities: Convertible debentures $ 600,000 $ 471,000 $ 390,838 $ 340,029
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, 2003. Such amounts have not been comprehensively revalued for purposes of these financial statements since January 31, 2003, and current estimates of fair value may differ significantly from the amounts presented herein. 23. 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 are no longer amortized, but rather are reviewed for impairment on a periodic basis. The provisions of this Statement were required to be applied starting with fiscal years beginning after December 15, 2001, at the beginning of the Company's fiscal year, to all goodwill and other intangible assets in its financial statements at that date. Impairment losses for goodwill and certain intangible assets arising due to the initial application of this Statement were to be reported as resulting from a change in accounting principle. Goodwill and intangible assets acquired after June 30, 2001 were subject immediately to the provisions of this Statement. The adoption of SFAS No. 142 did not have a material effect on the Company's consolidated financial statements. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement cost. SFAS No. 143 applies to legal obligations associated with the retirement of a tangible long-lived asset that result from the acquisition, construction, development and/or normal operation of a long-lived asset. This Statement is effective for fiscal years beginning after June 15, 2002; however, early adoption is encouraged. The adoption of SFAS No. 143 is not expected to have a material effect on the Company's consolidated financial statements. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and certain provisions of Accounting Principles Board F-28 Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years; however, early adoption is encouraged. The adoption of SFAS No. 144 did not have a material effect on the Company's consolidated financial statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds SFAS No. 4, which required all gains and losses from the extinguishment of debt to be classified as an extraordinary item. SFAS No. 145 recognizes that the use of debt extinguishment has become part of the risk management strategy of many companies and therefore may be considered as part of a company's operating activities. The rescission of SFAS No. 4 is effective for fiscal years beginning after May 15, 2002 with earlier application encouraged. The Company adopted SFAS No. 145 in the quarter ended July 31, 2002. Accordingly, as the Company intends to periodically extinguish its debt as part of its risk management strategy, the gain of approximately $39.4 million on the extinguishment of debt relating to the Company's 1.50% convertible debentures was recorded through continuing operations in the Consolidated Statements of Operations for the year ended January 31, 2003. In addition, SFAS No. 145 also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers", and amends SFAS No. 13, "Accounting for Leases", to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. The statement is generally effective for transactions occurring after May 15, 2002 with earlier application encouraged for these items. In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities." This statement addresses the recognition, measurement and reporting of costs that are associated with exit and disposal activities. This statement includes the restructuring activities that are currently accounted for pursuant to the guidance set forth in Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)," costs related to terminating a contract that is not a capital lease and one-time benefit arrangements received by employees who are involuntarily terminated - nullifying the guidance under EITF Issue No. 94-3. Under SFAS No. 146 the cost associated with an exit or disposal activity is recognized in the periods in which it is incurred rather than at the date the company committed to the exit plan. This statement is effective for exit or disposal activities initiated after December 31, 2002 with earlier application encouraged. The adoption of SFAS No. 146 did not have a material effect on the Company's consolidated financial statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and does not permit the use of the original SFAS No. 123 prospective method of transition in fiscal years beginning after December 15, 2003. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results, regardless of whether, when, or how an entity adopts the preferable, fair value based method of accounting. SFAS No. 148 improves the prominence and clarity of the pro forma disclosures required by SFAS No. 123 by prescribing a specific tabular format and by requiring disclosure in the "Summary of Significant Accounting Policies" or its equivalent and improves the timeliness of those disclosures by requiring their inclusion in financial reports for interim periods. F-29 The disclosure requirements of SFAS No. 148 are effective for financial statements for fiscal years ending after and for interim periods beginning after December 15, 2002. The adoption of SFAS No. 148 is not expected to have a material effect on the Company's consolidated financial statements. In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34" ("FIN 45"). FIN 45 clarifies the requirements of SFAS No. 5, "Accounting for Contingencies", relating to a guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. Specifically, FIN 45 requires a guarantor to recognize a liability for the non-contingent component of certain guarantees, representing the obligation to stand ready to perform in the event that specified triggering events or conditions occur. The provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002, irrespective of a guarantor's fiscal year-end. However, the disclosure provisions of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FIN 45 is not expected to have a material effect on the Company's consolidated financial statements. 24. SUBSEQUENT EVENTS During February 2003, Verint repaid its bank loan in the amount of $42,000,000. During March and April 2003, the Company acquired, in open market purchases, approximately $44,550,000 of face amount of the Debentures, resulting in a pre-tax gain, net of debt issuance costs, of approximately $2,809,000. F-30 25. QUARTERLY INFORMATION (UNAUDITED) The following table shows selected results of operations for each of the quarters during the years ended January 31, 2002 and 2003:
FISCAL QUARTER ENDED -------------------------------------------------------------------------------------------------------- APRIL 30, JULY 31, OCT. 31, JAN. 31, APRIL 30, JULY 31, OCT. 31, JAN. 31, 2001 2001 2001 2002 2002 2002 2002 2003 ---- ---- ---- ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Sales $365,037 $345,090 $295,032 $265,059 $211,194 $181,210 $167,469 $176,016 Gross margin 222,415 198,439 169,822 154,062 119,417 101,865 82,957 93,529 Net income (loss) 78,956 27,984 1,695 (54,016) (23,576) 3,923 (79,683) (30,142) Diluted earnings (loss) per share $ 0.43 $ 0.15 $ 0.01 $ (0.29) $ (0.13) $ 0.02 $ (0.43) $ (0.16) ======== ======== ======== ======== ======== ======== ======== ========
F-31