-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BRbLljlVW5Pm/vzJPQZkeX0i0COGii0X6nADZMk3NaWTr9yKZ8sSD7WaGd4m1zh5 3MCXrtCOHn/XsfospfV9yQ== 0000909518-04-000765.txt : 20040909 0000909518-04-000765.hdr.sgml : 20040909 20040909160427 ACCESSION NUMBER: 0000909518-04-000765 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040731 FILED AS OF DATE: 20040909 DATE AS OF CHANGE: 20040909 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMVERSE TECHNOLOGY INC/NY/ CENTRAL INDEX KEY: 0000803014 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 133238402 STATE OF INCORPORATION: NY FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15502 FILM NUMBER: 041023047 BUSINESS ADDRESS: STREET 1: 170 CROSSWAYS PARK DR CITY: WOODBURY STATE: NY ZIP: 11797 BUSINESS PHONE: 5166777200 MAIL ADDRESS: STREET 1: 170 CROSSWAYS PARK DRIVE CITY: WOODBURY STATE: NY ZIP: 11797 10-Q 1 jd9-7_10q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 2004 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 0-15502 COMVERSE TECHNOLOGY, INC. (Exact name of registrant as specified in its charter) NEW YORK 13-3238402 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 170 CROSSWAYS PARK DRIVE, WOODBURY, NY 11797 (Address of principal executive offices) (Zip Code) (516) 677-7200 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). [X] Yes [ ] No The number of shares outstanding of the registrant's common stock, par value $0.10 per share, as of September 2, 2004 was 196,007,395. TABLE OF CONTENTS ----------------- Page PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. 1. Condensed Consolidated Balance Sheets as of January 31, 2004 and July 31, 2004 2 2. Condensed Consolidated Statements of Operations for the Three and Six Month Periods Ended July 31, 2003 and July 31, 2004 3 3. Condensed Consolidated Statements of Cash Flows for the Six Month Periods Ended July 31, 2003 and July 31, 2004 4 4. Notes to Condensed Consolidated Financial Statements 5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 14 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 34 ITEM 4. CONTROLS AND PROCEDURES. 34 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. 34 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 35 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 36 SIGNATURES 37 ii FORWARD-LOOKING STATEMENTS From time to time, the Company makes forward-looking statements. Forward-looking statements include financial projections, statements of plans and objectives for future operations, statements of future economic performance, and statements of assumptions relating thereto. Forward-looking statements are often identified by future or conditional words such as "will," "plans," "expects," "intends," "believes," "seeks," "estimates," or "anticipates" or by variations of such words or by similar expressions. The Company may include forward-looking statements in its periodic reports to the Securities and Exchange Commission on Forms 10-K, 10-Q, and 8-K, in its annual report to shareholders, in its proxy statements, in its press releases, in other written materials, and in statements made by employees to analysts, investors, representatives of the media, and others. By their very nature, forward-looking statements are subject to uncertainties, both general and specific, and risks exist that predictions, forecasts, projections and other forward-looking statements will not be achieved. Actual results may differ materially due to a variety of factors, including without limitation those discussed under "Certain Trends and Uncertainties" and elsewhere in this report. Investors and others should carefully consider these and other uncertainties and events, whether or not the statements are described as forward-looking. Forward-looking statements made by the Company are intended to apply only at the time they are made, unless explicitly stated to the contrary. Moreover, whether or not stated in connection with a forward-looking statement, the Company makes no commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date any such statement is made. If the Company were in any particular instance to update or correct a forward-looking statement, investors and others should not conclude that the Company will make additional updates or corrections thereafter. 1 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
JANUARY 31, JULY 31, 2004* 2004 (Unaudited) ASSETS - ------ CURRENT ASSETS: Cash and cash equivalents $ 1,530,995 $ 1,808,641 Bank time deposits and short-term investments 667,504 378,120 Accounts receivable, net 158,236 197,830 Inventories 54,751 66,691 Prepaid expenses and other current assets 50,798 54,898 ------------ ------------ TOTAL CURRENT ASSETS 2,462,284 2,506,180 PROPERTY AND EQUIPMENT, net 125,023 124,222 OTHER ASSETS 140,735 171,137 ------------ ------------ TOTAL ASSETS $ 2,728,042 $ 2,801,539 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Accounts payable and accrued expenses $ 229,296 $ 269,304 Bank loans and other debt 2,649 8,827 Advance payments from customers 89,062 99,576 ------------ ------------ TOTAL CURRENT LIABILITIES 321,007 377,707 CONVERTIBLE DEBT 544,723 507,253 OTHER LIABILITIES 28,288 19,261 ------------ ------------ TOTAL LIABILITIES 894,018 904,221 ------------ ------------ MINORITY INTEREST 161,478 178,180 ------------ ------------ STOCKHOLDERS' EQUITY: Common stock, $0.10 par value - authorized, 600,000,000 shares; issued and outstanding, 194,549,886 and 195,985,395 shares 19,454 19,598 Additional paid-in capital 1,210,547 1,240,728 Unearned stock compensation (6,707) (5,843) Retained earnings 439,899 460,227 Accumulated other comprehensive income 9,353 4,428 ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 1,672,546 1,719,138 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,728,042 $ 2,801,539 ============ ============
*The Condensed Consolidated Balance Sheet as of January 31, 2004 has been summarized from the Company's audited Consolidated Balance Sheet as of that date. The accompanying notes are an integral part of these financial statements. 2 COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED THREE MONTHS ENDED JULY 31, JULY 31, JULY 31, JULY 31, 2003 2004 2003 2004 Sales $ 369,020 $ 454,822 $ 188,468 $ 233,427 Cost of sales 161,697 182,716 81,324 93,124 ---------- ---------- ---------- ---------- Gross margin 207,323 272,106 107,144 140,303 Operating expenses: Research and development, net 108,292 112,069 53,804 56,527 Selling, general and administrative 125,065 140,002 62,993 71,507 In-process research and development and other acquisition-related charges - 4,635 - - Workforce reduction, restructuring and impairment charges (credits) (233) ` 164 (233) (534) ---------- ---------- ---------- ---------- Income (loss) from operations (25,801) 15,236 (9,420) 12,803 Interest and other income, net 25,054 15,429 11,718 7,784 ---------- ---------- ---------- ---------- Income (loss) before income tax provision, minority interest and equity in the earnings (losses) of affiliates (747) 30,665 2,298 20,587 Income tax provision 4,206 5,160 2,226 3,668 Minority interest and equity in the earnings (losses) of affiliates (1,924) (5,177) (1,130) (3,592) ---------- ---------- ---------- ---------- Net income (loss) $ (6,877) $ 20,328 $ (1,058) $ 13,327 ========== ========== ========== ========== Earnings (loss) per share: Basic $ (0.04) $ 0.10 $ (0.01) $ 0.07 ========== ========== ========== ========== Diluted $ (0.04) $ 0.10 $ (0.01) $ 0.06 ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements. 3 COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
SIX MONTHS ENDED JULY 31, JULY 31, 2003 2004 Cash flows from operating activities: Net cash from operations after adjustment for non-cash items $ 35,607 $ 64,837 Changes in operating assets and liabilities: Accounts receivable, net 35,609 (39,594) Inventories 225 (11,940) Prepaid expenses and other current assets 8,422 (2,518) Accounts payable and accrued expenses (17,519) 37,525 Advance payments from customers (11,827) 10,514 Other, net (5,518) (5,115) ------------ ------------ Net cash provided by operating activities 44,999 53,709 ------------ ------------ Cash flows from investing activities: Maturities and sales (purchases) of bank time deposits and investments, net (326,949) 283,748 Purchase of property and equipment (19,403) (23,326) Capitalization of software development costs (4,894) (2,041) Net assets acquired (5,910) (36,107) ------------ ------------ Net cash provided by (used in) investing activities (357,156) 222,274 ------------ ------------ Cash flows from financing activities: Net proceeds from issuance of convertible debt 412,974 - Repurchase of convertible debt (221,446) (36,873) Repayment of bank loan (42,000) - Net proceeds from issuance of stock 147,391 38,813 Other, net (4,205) (277) ------------ ------------ Net cash provided by financing activities 292,714 1,663 ------------ ------------ Net increase (decrease) in cash and cash equivalents (19,443) 277,646 Cash and cash equivalents, beginning of period 1,402,783 1,530,995 ------------ ------------ Cash and cash equivalents, end of period $ 1,383,340 $ 1,808,641 ============ ============
The accompanying notes are an integral part of these financial statements. 4 COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) BASIS OF PRESENTATION. Comverse Technology, Inc. ("CTI" and, together with its subsidiaries, the "Company") is engaged in the design, development, manufacture, marketing and support of computer and telecommunications systems and software for multimedia communications and information processing applications. The accompanying financial information should be read in conjunction with the financial statements, including the notes thereto, for the annual period ended January 31, 2004. The financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for a fair statement of results for the interim periods. The results of operations for the three and six month periods ended July 31, 2004 are not necessarily indicative of the results to be expected for the full year. RECLASSIFICATIONS. Certain prior year amounts have been reclassified to conform to the presentation in the current year. STOCK-BASED COMPENSATION. The Company accounts for stock options under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, no stock-based employee compensation cost for stock options is reflected in net income (loss) for any periods, as all options granted had an exercise price at least equal to the market value of the underlying common stock on the date of grant. During the year ended January 31, 2004, the Company and one of its subsidiaries granted shares of restricted stock to certain key employees. Stock-based employee compensation expense relating to restricted stock for the three month periods ended July 31, 2003 and 2004, of approximately $0 and $433,000, respectively, and for the six month periods ended July 31, 2003 and 2004, of approximately $0 and $864,000, respectively, is included in 'Selling, general and administrative' expenses in the Condensed Consolidated Statements of Operations. The Company estimated the fair value of employee stock options utilizing the Black-Scholes option valuation model, using appropriate assumptions, as required under accounting principles generally accepted in the United States of America. The Black-Scholes model was developed for use in estimating the fair value of traded options and does not consider the non-traded nature of employee stock options, vesting and trading restrictions, lack of transferability or the ability of employees to forfeit the options prior to expiry. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company's employee stock options. 5 The following table illustrates the effect on net income (loss) and earnings (loss) per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation", to stock-based employee compensation for all periods:
THREE MONTHS ENDED SIX MONTHS ENDED JULY 31, JULY 31, ----------------------------------------------------------------------- 2003 2004 2003 2004 ---- ---- ---- ---- (In thousands) (In thousands) Net income (loss), as reported $ (1,058) $ 13,327 $ (6,877) $ 20,328 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (39,914) (31,602) (77,049) (70,654) --------- --------- --------- --------- Pro forma net loss $(40,972) $(18,275) $(83,926) $(50,326) ========= ========= ========= ========= Earnings (loss) per share: Basic - as reported $ (0.01) $ 0.07 $ (0.04) $ 0.10 Basic - pro forma $ (0.22) $ (0.09) $ (0.45) $ (0.26) Diluted - as reported $ (0.01) $ 0.06 $ (0.04) $ 0.10 Diluted - pro forma $ (0.22) $ (0.09) $ (0.45) $ (0.26)
INVENTORIES. The composition of inventories at January 31, 2004 and July 31, 2004 is as follows: JANUARY 31, JULY 31, 2004 2004 (In thousands) Raw materials $ 23,157 $ 21,139 Work in process 12,802 15,118 Finished goods 18,792 30,434 -------- -------- $ 54,751 $ 66,691 ======== ======== 6 RESEARCH AND DEVELOPMENT EXPENSES. A significant portion of the Company's research and development operations are located in Israel where the Company derives benefits from participation in programs sponsored by the Government of Israel for the support of research and development activities conducted in that country. Certain of the Company's research and development activities include projects partially funded by the Office of the Chief Scientist of the Ministry of Industry and Trade of the State of Israel (the "OCS") under which the funding organization reimburses a portion of the Company's research and development expenditures under approved project budgets. Certain of the Company's subsidiaries accrue royalties to the OCS for the sale of products incorporating technology developed in these projects. Under the terms of the applicable funding agreements, products resulting from projects funded by the OCS may not be manufactured outside of Israel without government approval. The amounts reimbursed by the OCS for the three month periods ended July 31, 2003 and 2004 were approximately $3,781,000 and $2,373,000, respectively, and for the six month periods ended July 31, 2003 and 2004 were approximately $4,989,000 and $4,824,000, respectively. EARNINGS (LOSS) PER SHARE. The computation of basic earnings (loss) per share is based on the weighted average number of outstanding common shares. Diluted earnings per share further assumes the issuance of common shares for all dilutive potential common shares outstanding. The calculation of earnings (loss) per share for the three and six month periods ended July 31, 2003 and 2004 is as follows:
THREE MONTHS ENDED THREE MONTHS ENDED JULY 31, 2003 JULY 31, 2004 ------------- ------------- Net Per Share Net Per Share Loss Shares Amount Income Shares Amount (In thousands, except per share data) BASIC EPS - --------- Net income (loss) $ (1,058) 188,844 $ (0.01) $ 13,327 195,467 $ 0.07 ========= ========= EFFECT OF DILUTIVE SECURITIES - ----------------------------- Options 6,350 Subsidiary options (243) ----------------------------------------- ---------------------------------------- DILUTED EPS $ (1,058) 188,844 $ (0.01) $ 13,084 201,817 $ 0.06 ========= ========= ========= ========= ========= =========
7
SIX MONTHS ENDED SIX MONTHS ENDED JULY 31, 2003 JULY 31, 2004 ------------- ------------- Net Per Share Net Per Share Loss Shares Amount Income Shares Amount (In thousands, except per share data) BASIC EPS - --------- Net income (loss) $ (6,877) 188,531 $ (0.04) $ 20,328 195,136 $ 0.10 ========= ========= EFFECT OF DILUTIVE SECURITIES - ----------------------------- Options 6,637 Subsidiary options (394) ----------------------------------------- ------------------------------------------- DILUTED EPS $ (6,877) 188,531 $ (0.04) $ 19,934 201,773 $ 0.10 ========= ========= ========= ========= ========= =========
The diluted loss per share computation for the three and six month periods ended July 31, 2003 excludes incremental shares of approximately 5,639,000 and 3,935,000, respectively, related to employee stock options. These shares are excluded due to their antidilutive effect as a result of the Company's loss during these periods. The shares issuable upon the conversion of the Company's 1.50% Convertible Senior Debentures due December 2005 (the "Debentures") were not included in the computation of diluted earnings (loss) per share for all periods because the effect of including them would be antidilutive. In addition, the shares issuable upon the conversion of the Company's Zero Yield Puttable Securities due 2023 ("ZYPS") were not included in the computation of diluted earnings (loss) per share for all periods. The ZYPS are convertible into shares of the Company's common stock contingent upon the occurrence of certain events that have not yet occurred. As such, the contingent conversion feature has not been satisfied and the ZYPS are not currently considered to be dilutive in accordance with the provisions of SFAS No. 128, "Earnings per Share." However, refer to footnote "Proposed Accounting Pronouncement" for a description of a proposed change to this treatment. A full conversion of the ZYPS would result in the issuance of approximately 23,367,000 additional shares of common stock. COMPREHENSIVE INCOME (LOSS). Total comprehensive income (loss) was approximately $(7,748,000) and $12,466,000 for the three month periods ended July 31, 2003 and 2004, respectively, and $(14,570,000) and $15,403,000 for the six month periods ended July 31, 2003 and 2004, respectively. The elements of comprehensive income (loss) include net income (loss), unrealized gains/losses on available for sale securities and foreign currency translation adjustments. 8 CONVERTIBLE DEBT. In May 2003, the Company issued $420,000,000 aggregate principal amount of its ZYPS, for net proceeds of approximately $412.8 million. The ZYPS are unsecured senior obligations of the Company ranking equally with all of the Company's existing and future unsecured senior indebtedness and are senior in right of payment to any of the Company's existing and future subordinated indebtedness. The ZYPS are convertible, contingent upon the occurrence of certain events, into shares of the Company's common stock at a conversion price of $17.97 per share. The ability of the holders to convert the ZYPS into common stock is subject to certain conditions including: (i) during any fiscal quarter, if the closing price per share for a period of at least a thirty consecutive trading-day period ending on the last trading day of the preceding fiscal quarter is more than 120% of the conversion price per share in effect on that thirtieth day; (ii) on or before May 15, 2018, if during the five business-day period following any ten consecutive trading-day period in which the daily average trading price for the ZYPS for that ten trading-day period was less than 105% of the average conversion value for the ZYPS during that period; (iii) during any period, if following the date on which the credit rating assigned to the ZYPS by Standard & Poor's Rating Services is lower than "B-" or upon the withdrawal or suspension of the ZYPS rating at the Company's request; (iv) if the Company calls the ZYPS for redemption; or (v) upon other specified corporate transactions. The ZYPS mature on May 15, 2023. The Company has the right to redeem the ZYPS for cash at any time on or after May 15, 2008, at their principal amount. The holders have a series of put options, pursuant to which they may require the Company to repurchase, at par, all or a portion of the ZYPS on each of May 15 of 2008, 2013, and 2018 and upon the occurrence of certain events. The ZYPS holders may require the Company to repurchase the ZYPS at par in the event that the common stock ceases to be publicly traded and, in certain instances, upon a change in control of the Company. Upon the occurrence of a change in control, instead of paying the repurchase price in cash, the Company may, under certain circumstances, pay the repurchase price in common stock. In November and December 2000, the Company issued $600,000,000 aggregate principal amount of its Debentures. The Debentures are unsecured senior obligations of the Company ranking equally with all of the Company's existing and future unsecured senior indebtedness and are senior in right of payment to any of the Company's existing and future subordinated indebtedness. The Debentures are convertible, at the option of the holders, into shares of the Company's common stock at a conversion price of $116.325 per share, subject to adjustment in certain events; and are subject to redemption at any time on or after December 1, 2003, in whole or in part, at the option of the Company, at redemption prices (expressed as percentages of the principal amount) of 100.375% if redeemed during the twelve-month period beginning December 1, 2003, and 100% of the principal amount if redeemed thereafter. The Debenture holders may require the Company to repurchase the Debentures at par in the event that the common stock ceases to be publicly traded and, in certain instances, upon a change in control of the Company. Upon the occurrence of a change in control, instead of paying the repurchase price in cash, the Company may, under certain circumstances, pay the repurchase price in common stock. During the three month periods ended July 31, 2003 and 2004, the Company acquired, in open market purchases, $188,458,000 and $6,975,000 of face amount of the Debentures, respectively, resulting in a pre-tax gain, net of debt issuance costs, of approximately $6,405,000 and $97,000, respectively, and during the six month periods ended July 31, 2003 and 2004, the Company acquired, in open market purchases, $233,008,000 and $37,470,000 of face amount of the Debentures, respectively, resulting in a pre-tax gain, net of debt issuance costs, of approximately $9,214,000 and $341,000, respectively. These gains are included in 'Interest and other income, net' in the Condensed Consolidated Statements of Operations. As of July 31, 2004, the Company had outstanding Debentures of $87,253,000. 9 ISSUANCE OF SUBSIDIARY STOCK. In February 2004, Starhome B.V. ("Starhome"), a subsidiary of CTI, received equity financing from an unaffiliated investor group of approximately $14,481,000, net of expenses. The Company recorded a gain of approximately $11,767,000, which was recorded as an increase in stockholders' equity as a result of the issuance of subsidiary stock. Upon the completion of this transaction, the Company's ownership interest in Starhome was approximately 69.5%. In addition, Starhome received a commitment for an additional $5,000,000 in equity financing from the unaffiliated investor group, which funds are currently being held in escrow. ACQUISITION. On March 31, 2004, Verint Systems Inc. ("Verint") acquired certain assets and assumed certain liabilities of the government surveillance business of ECtel Ltd. ("ECtel"), which provided Verint with additional communications interception capabilities for the mass collection and analysis of voice and data communications. The purchase price was approximately $35,000,000 in cash. Verint incurred transaction costs, consisting primarily of professional fees, amounting to approximately $1,107,000 in connection with this acquisition. The acquisition was accounted for using the purchase method. The purchase price was allocated to the assets and liabilities of ECtel based on the estimated fair value of those assets and liabilities as of March 31, 2004. The results of operations of ECtel have been included in the Company's results of operations since March 31, 2004. Identifiable intangible assets consist of sales backlog, acquired technology, customer relationships and non-competition agreements and have estimated useful lives of up to ten years. Purchased in-process research and development represents the value assigned to research and development projects of the acquired business that were commenced but not completed at the date of acquisition, for which technological feasibility had not been established and which have no alternative future use in research and development activities or otherwise. In accordance with SFAS No. 2, "Accounting for Research and Development Costs," as interpreted by Financial Accounting Standards Board ("FASB") Interpretation No. 4, amounts assigned to purchased in-process research and development meeting the above criteria must be charged to expense at the acquisition date. At the acquisition date, it was estimated that the purchased in-process research and development was approximately 40% complete and it was expected that the remaining 60% would be completed during the ensuing year. The fair value of the purchased in-process research and development was determined by an independent valuation using the income approach, which reflects the projected free cash flows that will be generated by the purchased in-process research and development projects and discounting the projected net cash flows back to their present value using a discount rate of 21%. As a result of the acquisition of the government surveillance business of ECtel, Verint had certain capitalized software development costs that became impaired due to the existence of duplicative technology and, accordingly, were written-down to their net realizable value at the date of acquisition. Such impairment charge amounted to approximately $1,481,000 and is included in 'In-process research and development and other acquisition-related charges' in the Condensed Consolidated Statements of Operations. 10 The following is a summary of the allocation of the purchase price for this acquisition: (IN THOUSANDS) Purchase price $ 35,000 Acquisition costs 1,107 ---------- Total purchase price $ 36,107 ========== Fair value of assets acquired $ 1,417 Fair value of liabilities assumed (3,282) In-process research and development 3,154 Sales backlog 854 Acquired technology 5,307 Customer relationships 1,382 Non-competition agreements 2,221 Goodwill 25,054 ---------- Total purchase price $ 36,107 ========== A summary of pro forma results of operations has not been presented as the effect of this acquisition was not deemed material. WORKFORCE REDUCTION, RESTRUCTURING AND IMPAIRMENT CHARGES (CREDITS). During the year ended January 31, 2002, the Company committed to and began implementing a restructuring program, including changes to its organizational structure and product offerings, to better align its cost structure with the business environment and to improve the efficiency of its operations via reductions in workforce, restructuring of operations and the write-off of impaired assets. In connection with these actions, during the three year period ended January 31, 2004, the Company incurred net charges to operations primarily pertaining to severance and other related costs, the elimination of excess facilities and related leasehold improvements and the write-off of certain property and equipment and other impaired assets. During the three and six month periods ended July 31, 2004, the Company incurred net charges (credits) to operations of approximately $(534,000) and $164,000, respectively. As of July 31, 2004, the Company had an accrual of approximately $24,711,000 relating to workforce reduction and restructuring. A roll-forward of the workforce reduction and restructuring accrual from February 1, 2004 is as follows:
WORKFORCE ACCRUAL REDUCTION, ACCRUAL BALANCE AT RESTRUCTURING BALANCE AT FEBRUARY 1, & IMPAIRMENT CASH NON-CASH JULY 31, 2004 CHARGES (CREDITS) PAYMENTS CHARGES 2004 ---- ----------------- -------- ------- ---- (IN THOUSANDS) Severance and related $ 3,068 $ 698 $ 2,247 $ - $ 1,519 Facilities and related 26,427 (743) 2,492 - 23,192 Property and equipment - 209 - 209 - --------- --------- --------- --------- --------- Total $ 29,495 $ 164 $ 4,739 $ 209 $ 24,711 ========= ========= ========= ========= =========
11 Severance and related costs consist primarily of severance payments to terminated employees, fringe related costs associated with severance payments, other termination costs and legal and consulting costs. The balance of these severance and related costs is expected to be paid during the year ended January 31, 2005. Facilities and related costs consist primarily of contractually obligated lease liabilities and operating expenses related to facilities that were vacated primarily in the United States and Israel as a result of the restructuring. The balance of these facilities and related costs is expected to be paid at various dates through January 2011. Property and equipment costs consist primarily of the write-down of various assets to their current estimable fair value. BUSINESS SEGMENT INFORMATION. The Company's reporting segments are as follows: Comverse Network Systems ("CNS") - Enable telecommunications service providers ("TSP") to offer products to enhance the communication experience and generate TSP traffic and revenue. These services comprise four primary categories: call completion and call management solutions; advanced messaging solutions for groups, communities and person-to-person communication; solutions and enablers for the management and delivery of data and content-based services; and real-time billing and account management solutions for dynamic service environments and other components and applications. Service Enabling Signaling Software - Enable equipment manufacturers, application developers, and service providers to deploy revenue generating infrastructure and enhanced services for wireline, wireless and Internet communications. These services include global roaming, voice and text messaging, prepaid calling and emergency-911. These products are also embedded in a range of packet softswitching products to interoperate or converge voice and data networks and facilitate services such as VoIP, hosted IP telephony, and virtual private networks. This segment represents the Company's Ulticom subsidiary. Security and Business Intelligence Recording - Provides analytic software-based solutions for communications interception, networked video and contact centers. The software generates actionable intelligence through the collection, retention and analysis of voice, fax, video, email, Internet and data transmissions from multiple types of communications networks. This segment represents the Company's Verint subsidiary. 12 All Other - Includes other miscellaneous operations. Reconciling items - consists of the following: Sales - elimination of intersegment revenues. Income (Loss) from Operations - elimination of intersegment income (loss) from operations and corporate operations. Total Assets - elimination of intersegment receivables and unallocated corporate assets. The table below presents information about sales, income (loss) from operations and segment assets as of and for the three and six month periods ended July 31, 2003 and 2004:
Service Security and Comverse Enabling Business Network Signaling Intelligence Reconciling Consolidated Systems Software Recording All Other Items Totals ------- -------- --------- --------- ----- ------ THREE MONTHS ENDED JULY 31, 2003: Sales $ 130,401 $ 9,434 $ 46,892 $ 2,673 $ (932) $ 188,468 Income (loss) from operations $ (12,506) $ 855 $ 4,133 $ (200) $ (1,702) $ (9,420) THREE MONTHS ENDED JULY 31, 2004: Sales $ 156,293 $ 16,087 $ 60,167 $ 2,551 $ (1,671) $ 233,427 Income (loss) from operations $ 4,725 $ 5,312 $ 5,352 $ (125) $ (2,461) $ 12,803 SIX MONTHS ENDED JULY 31, 2003: Sales $ 256,277 $ 18,563 $ 91,307 $ 4,917 $ (2,044) $ 369,020 Income (loss) from operations $ (30,818) $ 1,232 $ 7,632 $ (452) $ (3,395) $ (25,801) SIX MONTHS ENDED JULY 31, 2004: Sales $ 306,374 $ 29,276 $ 116,805 $ 5,145 $ (2,778) $ 454,822 Income (loss) from operations $ 6,566 $ 7,952 $ 6,213 $ (397) $ (5,098) $ 15,236 TOTAL ASSETS: July 31, 2003 $ 927,718 $ 238,983 $ 309,072 $ 35,045 $ 1,149,799 $ 2,660,617 July 31, 2004 $ 891,524 $ 254,312 $ 361,774 $ 38,665 $ 1,255,264 $ 2,801,539
PROPOSED ACCOUNTING PRONOUNCEMENT. In July 2004, the Emerging Issues Task Force ("EITF") of the FASB issued a draft abstract for EITF Issue No. 04-8, "The Effect of Contingently Convertible Debt on Diluted Earnings per Share" ("EITF 04-8"). EITF 04-8 reflects the Task Force's tentative conclusion, to be discussed further at the next EITF meeting scheduled for September 2004, that 13 contingently convertible debt should be included in diluted earnings per share computations (if dilutive) regardless of whether the common stock price has exceeded a predetermined threshold for a specified time period, or other market price triggers or contingent features have been met. If adopted in its current form, this consensus would be effective for reporting periods ending after December 15, 2004. Prior period earnings per share amounts presented for comparative purposes would also be required to be restated. The Company would be required to include the shares issuable upon the conversion of the Company's ZYPS in diluted earnings per share computations for all periods that the ZYPS are outstanding, which would result in the inclusion of approximately 23,367,000 additional shares, using the "if-converted" method. LITIGATION. On March 16, 2004, BellSouth Intellectual Property Corp. ("BellSouth") filed a complaint in the United States District Court for the Northern District of Georgia against Comverse Technology, Inc. alleging infringement of Patent Nos. 5,857,013 and 5,764,747, and, on March 17, 2004, BellSouth amended the complaint, removing any and all references to Comverse Technology, Inc., and naming Comverse, Inc., in an action captioned: BellSouth Intellectual Property Corp. v. Comverse, Inc., Civil Action No. 1:04-CV-0739. BellSouth alleges that Patent Nos. 5,857,013 and 5,764,747 cover certain aspects of some of Comverse Inc.'s systems, and it seeks, among other relief, monetary damages and injunctive relief. On May 5, 2004, Comverse, Inc. filed an answer and counterclaims which, among other things, denies any infringement and seeks a declaratory judgment that the patents at issue are invalid and unenforceable. The Company believes all claims are without merit and Comverse, Inc. will vigorously defend against BellSouth's claims. From time to time, the Company is subject to claims in legal proceedings arising in the normal course of its business. The Company does not believe that it is currently party to any other pending legal action that could reasonably be expected to have a material adverse effect on its business, financial condition and results of operations. SUBSEQUENT EVENT. On September 2, 2004, Verint, through a subsidiary, acquired all of the outstanding stock of RP Sicherheitssysteme GmbH ("RP"), a company in the business of developing and selling mobile digital video security solutions for transportation applications. Verint paid approximately $9,028,000 in cash and 90,144 shares of Verint common stock for RP. In addition, the shareholders of RP will be entitled to receive earn-out payments over three years based on Verint's worldwide sales, profitability and backlog of mobile video products in the transportation market during that period. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. CRITICAL ACCOUNTING POLICIES 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 critical accounting policies described in Item 7 in the Company's Annual Report on Form 10-K are those that are both most important to the portrayal of the Company's financial position and results of operations, and require management's most difficult, subjective or complex judgments. As of July 31, 2004, there have been no material changes to any of the critical accounting policies contained therein. 14 RESULTS OF OPERATIONS SUMMARY OF RESULTS Consolidated results of operations in dollars and as a percentage of sales for each of the six month periods ended July 31, 2003 and 2004 were as follows:
Six months Six months ended ended July 31, 2003 % of sales July 31, 2004 % of sales ------------------------------------------------------------------- (In thousands) Sales $ 369,020 100.0% $ 454,822 100.0% Cost of sales 161,697 43.8% 182,716 40.2% ------------ ------------ Gross margin 207,323 56.2% 272,106 59.8% Operating expenses: Research and development, net 108,292 29.3% 112,069 24.6% Selling, general and administrative 125,065 33.9% 140,002 30.8% In-process research and development and other acquisition-related charges - - 4,635 1.0% Workforce reduction, restructuring and impairment charges (credits) (233) (0.1)% 164 0.0% ------------ ------------ Income (loss) from operations (25,801) (7.0)% 15,236 3.3% Interest and other income, net 25,054 6.8% 15,429 3.4% ------------ ------------ Income (loss) before income tax provision, minority interest and equity in the earnings (losses) of affiliates (747) (0.2)% 30,665 6.7% Income tax provision 4,206 1.1% 5,160 1.1% Minority interest and equity in the earnings (losses) of affiliates (1,924) (0.5)% (5,177) (1.1)% ------------ ------------ Net income (loss) $ (6,877) (1.9)% $ 20,328 4.5% ============ ============
15 Consolidated results of operations in dollars and as a percentage of sales for each of the three month periods ended July 31, 2003 and 2004 were as follows:
Three months Three months ended ended July 31, 2003 % of sales July 31, 2004 % of sales -------------------------------------------------------------------- (In thousands) Sales $ 188,468 100.0% $ 233,427 100.0% Cost of sales 81,324 43.2% 93,124 39.9% ------------ ------------ Gross margin 107,144 56.8% 140,303 60.1% Operating expenses: Research and development, net 53,804 28.5% 56,527 24.2% Selling, general and administrative 62,993 33.4% 71,507 30.6% Workforce reduction, restructuring and impairment charges (credits) (233) (0.1)% (534) (0.2)% ------------ ------------ Income (loss) from operations (9,420) (5.0)% 12,803 5.5% Interest and other income, net 11,718 6.2% 7,784 3.3% ------------ ------------ Income before income tax provision, minority interest and equity in the earnings (losses) of affiliates 2,298 1.2% 20,587 8.8% Income tax provision 2,226 1.2% 3,668 1.6% Minority interest and equity in the earnings (losses) of affiliates (1,130) (0.6)% (3,592) (1.5)% ------------ ------------ Net income (loss) $ (1,058) (0.6)% $ 13,327 5.7% ============ ============
INTRODUCTION As explained in greater detail in "Certain Trends and Uncertainties", the Company's two business units serving telecommunications markets are operating within an industry that has been experiencing a challenging capital spending environment, although there is some evidence of recent improvement. Both business units achieved year over year revenue growth, operating income and net income during the six and three month periods ended July 31, 2004 as well as sequential revenue growth during the three month period ended July 31, 2004. Verint, which services the security and business intelligence markets, achieved record revenue during the six and three month periods ended July 31, 2004 based, in part, on increased sales due to heightened awareness surrounding homeland defense and security related initiatives in the United States and abroad as well as increased business intelligence sales. Overall, for the six and three month periods ended July 31, 2004, the Company experienced year over year sales growth of 23.3% and 23.9%, respectively, and sequential sales growth of 5.4% for the three month period ended July 31, 2004, with a substantial majority of sales for all periods generated from activities serving the telecommunications industry. The Company generated operating and net income for the six and three month periods ended July 31, 2004. 16 SIX MONTH AND THREE MONTH PERIODS ENDED JULY 31, 2004 COMPARED TO SIX MONTH AND THREE MONTH PERIODS ENDED JULY 31, 2003 Sales. Sales for the six and three month periods ended July 31, 2004 increased by approximately $85.8 million, or 23%, and $45.0 million, or 24%, respectively, compared to the six and three month periods ended July 31, 2003. These increases are attributable to an increase in sales in the Company's three primary business units. CNS sales increased by approximately $50.1 million during the six month period ended July 31, 2004, due primarily to increased business in Europe and Asia Pacific, and increased by approximately $25.9 million during the three month period ended July 31, 2004, due primarily to increased business in Europe and the Americas. Security and business intelligence recording sales increased by approximately $25.5 million and $13.3 million, respectively, and service enabling signaling software sales increased by approximately $10.7 million and $6.7 million, respectively, during the six and three month periods ended July 31, 2004. On a consolidated basis, sales to customers in North America represented approximately 34% and 36% of total sales for the six month periods ended July 31, 2004 and 2003, respectively, and 28% of total sales for each of the three month periods ended July 31, 2004 and 2003. Cost of Sales. Cost of sales for the six and three month periods ended July 31, 2004 increased by approximately $21.0 million, or 13%, and $11.8 million, or 15%, respectively, compared to the six and three month periods ended July 31, 2003. The increase in cost of sales is primarily attributable to increased materials and overhead net of overhead absorption of approximately $13.2 million and $8.3 million, respectively, increased personnel-related costs of approximately $6.5 million and $3.0 million, respectively, and net increase in various other costs of approximately $1.3 million and $0.5 million, respectively, for the six and three month periods ended July 31, 2004. Gross margins for the six and three month periods ended July 31, 2004 increased to approximately 59.8% and 60.1% from approximately 56.2% and 56.8% in the corresponding 2003 periods. Research and Development, Net. Net research and development expenses for the six and three month periods ended July 31, 2004 increased by approximately $3.8 million, or 3%, and $2.7 million, or 5%, respectively, compared to the six and three month periods ended July 31, 2003. The increase in net research and development expenses is primarily attributable to increased personnel-related costs of approximately $3.6 million and $2.6 million for the six and three month periods, respectively. Selling, General and Administrative. Selling, general and administrative expenses for the six and three month periods ended July 31, 2004 increased by approximately $14.9 million, or 12%, and $8.5 million, or 14%, respectively, compared to the six and three month periods ended July 31, 2003. However, selling, general and administrative expenses as a percentage of sales for the six and three month periods ended July 31, 2004 decreased to approximately 30.8% and 30.6% from approximately 33.9% and 33.4% in the corresponding 2003 periods. The increase in the dollar amount of selling, general and administrative expenses for the six month period is primarily due to increased employee and agent sales commissions, personnel-related costs, travel costs, professional fees and contractors and other temporary workers costs of approximately $5.2 million, $4.2 million, $1.9 million, $1.8 million and $1.0 million, respectively, and net increase in various other costs of approximately $3.8 million due primarily to decreased SG&A allocations to other expense categories, partially offset by lower bad debt expense of approximately $3.0 million. The increase in the dollar amount of selling, general and administrative expenses for the three month period is primarily due to increased employee and agent sales commissions and personnel-related costs of approximately $2.7 million and $1.9 million, respectively, and net increase in various other costs of approximately $3.9 million due primarily to decreased SG&A allocations to other expense categories. 17 In-process Research and Development and Other Acquisition-related Charges. During the six month period ended July 31, 2004, the Company incurred approximately $4.6 million for in-process research and development and other acquisition-related charges resulting from Verint's purchase of ECtel's government surveillance business, as follows: (i) approximately $3.1 million of purchased in-process research and development, which was charged to expense at the acquisition, and (ii) approximately $1.5 million for the write-down of certain capitalized software development costs to their net realizable value at the date of acquisition, due to impairment caused by the existence of duplicative technology. Workforce reduction, restructuring and impairment charges (credits). During the year ended January 31, 2002, the Company committed to and began implementing a restructuring program to better align its cost structure with the business environment and to improve the efficiency of its operations via reductions in workforce, restructuring of operations and the write-off of impaired assets. In connection with the restructuring, the Company changed its organizational structure and product offerings, resulting in the impairment of certain assets. In connection with these actions, during the six and three month periods ended July 31, 2004, the Company incurred net charges (credits) to operations of approximately $0.2 million and $(0.5) million, respectively, and during the six and three month periods ended July 31, 2003, the Company recorded a credit to operations of approximately $0.2 million. The Company expects to pay out approximately $1.5 million for severance and related obligations during the year ended January 31, 2005 and approximately $23.2 million for facilities and related obligations at various dates through January 2011. Interest and Other Income, Net. Interest and other income, net, for the six and three month periods ended July 31, 2004 decreased by approximately $9.6 million and $3.9 million, respectively, compared to the six and three month periods ended July 31, 2003. The principal reasons for the decrease are (i) a decrease in the gain recorded as a result of the Company's repurchases of its Debentures of approximately $8.9 million and $6.3 million, respectively; (ii) a decrease in foreign currency gains of approximately $3.2 million for the six months ended July 31, 2004; and (iii) other decreases of approximately $0.1 million, net, for the six months ended July 31, 2004. Such items were offset by (i) decreased interest expense of approximately $1.6 million and $0.3 million, respectively, due primarily to the Company's repurchases of its Debentures and other debt reduction; (ii) a change in foreign currency gains/losses of approximately $1.6 million for the three months ended July 31, 2004; (iii) a change in the net gains/losses from the sale and write-down of investments of approximately $0.5 million and $0.2 million, respectively; and (iv) increased interest and dividend income of approximately $0.5 million and $0.3 million, respectively. Income Tax Provision. Provision for income taxes for the six and three month periods ended July 31, 2004 increased by approximately $1.0 million, or 23%, and $1.4 million, or 65%, respectively, compared to the six and three month periods ended July 31, 2003, due primarily to shifts in the underlying mix of pre-tax income by entity and tax jurisdiction. The Company's overall rate of tax is reduced significantly by the existence of net operating loss carryforwards for Federal income tax purposes in the United States, as well as the tax benefits associated with qualified activities of certain of its Israeli subsidiaries, which are entitled to favorable income tax rates under a program of the Israeli Government for "Approved Enterprise" investments in that country. 18 Minority Interest and Equity in the Earnings (Losses) of Affiliates. Minority interest and equity in the earnings (losses) of affiliates for the six and three month periods ended July 31, 2004 increased by approximately $3.3 million and $2.5 million, respectively, as a result of increased minority interest expense of approximately $2.3 million and $2.0 million, respectively, primarily attributable to overall increased earnings at majority-owned subsidiaries, and a change in equity in the earnings (losses) of affiliates of approximately $1.0 million and $0.5 million, respectively. Net Income (Loss). Net income (loss) for the six and three month periods ended July 31, 2004 increased by approximately $27.2 million and $14.4 million, respectively, compared to the six and three month periods ended July 31, 2003, while as a percentage of sales was approximately 4.5% and 5.7%, respectively, in the six and three month periods ended July 31, 2004 compared to (1.9)% and (0.6)%, respectively, in the corresponding 2003 periods. These variances resulted primarily from the factors described above. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital at July 31, 2004 and January 31, 2004 was approximately $2,128.5 million and $2,141.3 million, respectively. At July 31, 2004 and January 31, 2004, the Company had total cash and cash equivalents, bank time deposits and short-term investments of approximately $2,186.8 million and $2,198.5 million, respectively. Operations for the six month periods ended July 31, 2004 and 2003, after adjustment for non-cash items, provided cash of approximately $64.8 million and $35.6 million, respectively. During such periods, other changes in operating assets and liabilities provided (used) cash of approximately $(11.1) million and $9.4 million, respectively. This resulted in net cash provided by operating activities of approximately $53.7 million and $45.0 million, respectively. Investing activities for the six month periods ended July 31, 2004 and 2003 provided (used) cash of approximately $222.3 million and $(357.2) million, respectively. These amounts include (i) net maturities and sales (purchases) of bank time deposits and investments of approximately $283.7 million and $(326.9) million, respectively; (ii) purchases of property and equipment of approximately $(23.3) million and $(19.4) million, respectively; (iii) capitalization of software development costs of approximately $(2.0) million and $(4.9) million, respectively; and (iv) net assets acquired as a result of acquisitions of approximately $(36.1) million and $(5.9) million, respectively. Financing activities for the six month periods ended July 31, 2004 and 2003 provided cash of approximately $1.7 million and $292.7 million, respectively. These amounts include (i) net proceeds from the issuance of ZYPS of approximately $413.0 million for the six months ended July 31, 2003; (ii) repurchases of Debentures of approximately $(36.9) million and $(221.4) million, respectively; (iii) repayment of bank loan of $(42.0) million for the six months ended July 31, 2003; (iv) net proceeds from the issuance of stock in connection with the exercise of stock options and employee stock purchase plans and the sale of stock by Company subsidiaries of approximately $38.8 million and $147.4 million, respectively, and (v) other, net of approximately $(0.2) million and $(4.2) million, respectively. 19 During the six month periods ended July 31, 2004 and 2003, the Company acquired, in open market purchases, approximately $37.5 million and $233.0 million of face amount of the Debentures, respectively, resulting in a pre-tax gain, net of debt issuance costs, of approximately $0.3 million and $9.2 million, respectively, included in 'Interest and other income, net' in the Condensed Consolidated Statements of Operations. As of July 31, 2004, the Company had outstanding Debentures of approximately $87.3 million. In February 2004, Starhome received equity financing from an unaffiliated investor group of approximately $14.5 million, net of expenses. The Company recorded a gain of approximately $11.8 million, which was recorded as an increase in stockholders' equity as a result of the issuance of subsidiary stock. Upon the completion of this transaction, the Company's ownership interest in Starhome was approximately 69.5%. In addition, Starhome received a commitment for an additional $5.0 million in equity financing from the unaffiliated investor group, which funds are currently being held in escrow. On March 31, 2004, Verint acquired certain assets and assumed certain liabilities of the government surveillance business of ECtel. The purchase price was approximately $35.0 million in cash. Verint incurred transaction costs, consisting primarily of professional fees, amounting to approximately $1.1 million in connection with this acquisition. On September 2, 2004, Verint, through a subsidiary, acquired all of the outstanding stock of RP Sicherheitssysteme GmbH ("RP"), a company in the business of developing and selling mobile digital video security solutions for transportation applications. Verint paid approximately $9.0 million in cash and 90,144 shares of Verint common stock for RP. In addition, the shareholders of RP will be entitled to receive earn-out payments over three years based on Verint's worldwide sales, profitability and backlog of mobile video products in the transportation market during that period. 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. 20 CERTAIN TRENDS AND UNCERTAINTIES The Company derives the majority of its revenue from the telecommunications industry, which is experiencing a challenging capital spending environment. Although the capital spending environment has improved recently and the Company's revenues have increased in recent quarters, the Company experienced significant revenue declines from historical peak revenue levels, and if capital spending and technology purchasing by TSPs does not continue to improve or declines, revenue may stagnate or decrease, and the Company's operating results may be adversely affected. For these reasons and the risk factors outlined below, it has been and continues to be very difficult for the Company to accurately forecast future revenues and operating results. The Company's business is particularly dependent on the strength of the telecommunications industry. The telecommunications industry, including the Company, have been negatively affected by, among other factors, the high costs and large debt positions incurred by some TSPs to expand capacity and enable the provision of future services (and the corresponding risks associated with the development, marketing and adoption of these services as discussed below), including the cost of acquisitions of licenses to provide broadband services and reductions in TSPs' actual and projected revenues and deterioration in their actual and projected operating results. Accordingly, TSPs, including the Company's customers, have significantly reduced their actual and planned expenditures to expand or replace equipment and delayed and reduced the deployment of services. A number of TSPs, including certain customers of the Company, also have indicated the existence of conditions of excess capacity in certain markets. 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. The Company has experienced declines in revenue from some of its traditional products sold to TSPs compared with prior years. The Company is executing a strategy to capitalize on growth opportunities in new and emerging products to offset such declines. While certain of these new products have met with initial success, it is unclear whether they will be widely adopted by the Company's customers and TSPs in general. Increases in revenue from these new products also may not exceed declines the Company may experience in revenue from the sale of its traditional products. If revenue from sales of its traditional products declines faster than revenue from the new products increases, the Company's revenue and operating results may be adversely affected. In addition to loss of revenue, weakness in the telecommunications industry has affected and will continue to affect the Company's business by increasing the risks of credit or business failures of suppliers, customers or distributors, by customer requirements for vendor financing and longer payment terms, by delays and defaults in customer or distributor payments, and by price reductions instituted by competitors or by the Company to retain or acquire market share. The Company's current plan of operations is predicated, in part, on a recovery in capital expenditures by its customers. In the absence of such improvement, the Company would experience deterioration in its operating results, and may determine to modify its plan for future operations accordingly, which may include, among other things, additional reductions in its workforce. 21 The Company intends to continue to make significant investments in its business, and to examine opportunities for growth through acquisitions and strategic investments. These activities may involve significant expenditures and obligations that cannot readily be curtailed or reduced if anticipated demand for the associated products does not materialize or is delayed. The impact of these decisions on future financial results cannot be predicted with assurance, and the Company's commitment to growth may increase its vulnerability to downturns in its markets, technology changes and shifts in competitive conditions. The Company also may not be able to identify future suitable merger or acquisition candidates, and even if the Company does identify suitable candidates, it may not be able to make these transactions on commercially acceptable terms, or at all. If the Company does make acquisitions, it may not be able to successfully incorporate the personnel, operations and customers of these companies into the Company's business. In addition, the Company may fail to achieve the anticipated synergies from the combined businesses, including marketing, product integration, distribution, product development and other synergies. The integration process may further strain the Company's existing financial and managerial controls and reporting systems and procedures. This may result in the diversion of management and financial resources from the Company's core business objectives. In addition, an acquisition or merger may require the Company to utilize cash reserves, incur debt or issue equity securities, which may result in a dilution of existing stockholders, and the Company may be negatively impacted by the assumption of liabilities of the merged or acquired company. Due to rapidly changing market conditions, the Company may find the value of its acquired technologies and related intangible assets, such as goodwill as recorded in the Company's financial statements, to be impaired, resulting in charges to operations. The Company may also fail to retain the acquired or merged companies' key employees and customers. The Company accounts for employee stock options in accordance with Accounting Principles Board Opinion No. 25 and related Interpretations, which provide that any compensation expense relative to employee stock options be measured based on the intrinsic value of the stock options. As a result, when options are priced at or above the fair market value of the underlying stock on the date of grant, as is the Company's practice, the Company incurs no compensation expense. However, the Financial Accounting Standards Board has proposed in its exposure draft entitled "Share-Based Payment, an amendment of FASB Statements No 123 and 95" new accounting requirements that, if adopted, would cause the Company to record compensation expense for all employee stock option grants. Any such expense, although it would not affect the Company's cash flows, will have a material impact on the Company's results of operations. In May 2003, the Company issued $420,000,000 aggregate principal amount of its ZYPS. The ZYPS are convertible into shares of the Company's common stock at a conversion price of $17.97 per share, which would result in the issuance of an aggregate of approximately 23.4 million shares, subject to adjustment upon the occurrence of specified events. The ability of the holders to convert the ZYPS into common stock is subject to certain conditions including: (i) during any fiscal quarter, if the closing price per share for a period of at least a thirty consecutive trading-day period ending on the last trading day of the preceding fiscal quarter is more than 120% of the conversion price per share in effect on that thirtieth day; (ii) on or before May 15, 2018, if during the five 22 business-day period following any ten consecutive trading-day period in which the daily average trading price for the ZYPS for that ten trading-day period was less than 105% of the average conversion value for the ZYPS during that period; (iii) during any period, if following the date on which the credit rating assigned to the ZYPS by Standard & Poor's Rating Services is lower than "B-" or upon the withdrawal or suspension of the ZYPS rating at the Company's request; (iv) if the Company calls the ZYPS for redemption; or (v) upon other specified corporate transactions. The ZYPS mature on May 15, 2023. The Company has the right to redeem the ZYPS for cash at any time on or after May 15, 2008, at their principal amount. The holders have a series of put options, pursuant to which they may require the Company to repurchase, at par, all or a portion of the ZYPS on each of May 15 of 2008, 2013, and 2018 and upon the occurrence of certain events. The ZYPS holders may require the Company to repurchase the ZYPS at par in the event that the common stock ceases to be publicly traded and, in certain instances, upon a change in control of the Company. The Company may not have enough cash or have the ability to access enough cash to pay the ZYPS. If any of the conditions for conversion of the ZYPS is achieved it will result in dilution of the Company's earnings per share by adding approximately 23.4 million shares to the share count in calculating the Company's earnings per share. If the ZYPS are converted into the Company's shares it will result in dilution of existing stockholders. In July 2004, the EITF of the FASB issued a draft abstract for EITF Issue No. 04-8, "The Effect of Contingently Convertible Debt on Diluted Earnings per Share". EITF 04-8 reflects the Task Force's tentative conclusion, to be discussed further at the next EITF meeting scheduled for September 2004, that contingently convertible debt should be included in diluted earnings per share computations (if dilutive) regardless of whether the common stock price has exceeded a predetermined threshold for a specified time period, or other market price triggers or contingent features have been met. If adopted in its current form, this consensus would be effective for reporting periods ending after December 15, 2004. Prior period earnings per share amounts presented for comparative purposes also would be required to be restated. The Company would be required to include the approximately 23.4 million shares issuable upon the conversion of the Company's ZYPS in diluted earnings per share computations for all periods that the ZYPS are outstanding, using the "if-converted" method. In the event the EITF implements Issue No. 04-8 as currently proposed, it will negatively impact the Company's diluted earnings per share for the restated and prospective periods. The Company has made, and in the future, may continue to make strategic and other investments in companies. These investments have been made in, and future investments will likely be made in, immature businesses with unproven track records and technologies. Such investments have a high degree of risk, with the possibility that the Company may lose the total amount of its investments. The Company may not be able to identify suitable investment candidates, and, even if it does, the Company may not be able to make those investments on acceptable terms, or at all. In addition, even if the Company makes investments, it may not gain strategic or other benefits from those investments. The Company's products involve sophisticated hardware and software technology that performs critical functions to highly demanding standards. There can be no assurance that the Company's current or future products will not develop operational problems, which could have a material adverse effect on the Company. The Company offers complex products that may contain undetected defects or errors, particularly when first introduced or as new versions are released. 23 The Company may not discover such defects or errors until after a product has been released and used by the customer. Significant costs may be incurred to correct undetected defects or errors in the Company's products and these defects or errors could result in future lost sales. Defects or errors in the Company's products also may result in product liability claims, which could cause adverse publicity and impair their market acceptance. In addition, the Company may incur fees or penalties in connection with problems associated with its products and services. The telecommunications industry is subject to rapid technological change. The introduction of new technologies in the telecommunications market, including the delay in the adoption of such new technologies, and new alternatives for the delivery of services are having, and can be expected to continue to have, a profound effect on competitive conditions in the market and the success of market participants, including the Company. In addition, some of the Company's products, such as call answering, have experienced declines in usage resulting from, among other factors, the introduction of new technologies and the adoption and increased use of existing technologies, which may include enhanced areas of coverage for mobile telephones and Caller ID type services. The Company's continued success will depend on its ability to correctly anticipate technological trends in its industries, to react quickly and effectively to such trends and to enhance its existing products and to introduce new products on a timely and cost-effective basis. As a result, the life cycle of the Company's products is difficult to estimate. The Company's new product offerings may not enter the market in a timely manner for their acceptance. New product offerings may not properly integrate into existing platforms, and the failure of these offerings to be accepted by the market could have a material adverse effect on the Company's business, results of operations, and financial condition. The Company's sales and operating results may be adversely affected in the event customers delay purchases of existing products as they await the Company's new product offerings. Changing industry and market conditions may dictate strategic decisions to restructure some business units and discontinue others. Discontinuing a business unit or product line may result in the Company recording accrued liabilities for special charges, such as costs associated with a reduction in workforce. These strategic decisions could result in changes to determinations regarding a product's useful life and the recoverability of the carrying basis of certain assets. The Company has made and continues to make significant investments in the areas of sales and marketing, and research and development. The Company's research and development activities, which may be delayed and behind schedule, include ongoing significant investment in the development of additional features and functionality for its existing and new product offerings. The success of these initiatives will be dependent upon, among other things, the emergence of a market for these types of products and their acceptance by existing and new customers. The Company's business may be adversely affected by its failure to correctly anticipate the emergence of a market demand for certain products or services, and changes in the evolution of market opportunities. If a sufficient market does not emerge for new or enhanced product offerings developed by the Company, if the Company is late in introducing new product offerings, or if the Company is not successful in marketing such products, the Company's continued growth could be adversely affected and its investment in those products may be lost. 24 The Company relies on a limited number of suppliers and manufacturers for specific components and may not be able to find alternate manufacturers that meet its requirements and existing or alternative sources may not be available on favorable terms and conditions. Thus, if there is a shortage of supply for these components, the Company may experience an interruption in its product supply. In addition, loss of third party software licensing could materially and adversely affect the Company's business, financial condition and results of operations. The telecommunications industry continues to undergo significant change as a result of deregulation and privatization worldwide, reducing restrictions on competition in the industry. Unforeseen changes in the regulatory environment also may have an impact on the Company's revenues and/or costs in any given part of the world. The worldwide enhanced services industry is already highly competitive and the Company expects competition to intensify. The Company believes that existing competitors will continue to present substantial competition, and that other companies, many with considerably greater financial, marketing and sales resources than the Company, may enter the enhanced services markets. Moreover, as the Company enters into new markets as a result of its own research and development efforts or acquisitions, it is likely to encounter new competitors. The Company's competitors may be able to develop more quickly or adapt faster to new or emerging technologies and changes in customer requirements, or devote greater resources to the development, promotion and sale of their products. Some of the Company's competitors have, in relation to it, longer operating histories, larger customer bases, longer standing relationships with customers, greater name recognition and significantly greater financial, technical, marketing, customer service, public relations, distribution and other resources. New competitors continue to emerge and there continues to be consolidation among existing competitors, which may reduce the Company's market share. In addition, some of the Company's customers may in the future decide to develop internally their own solutions instead of purchasing them from the Company. Increased competition could force the Company to lower its prices or take other actions to differentiate its products. The market for Verint's security and business intelligence products in the past has been affected by weakness in general economic conditions, delays or reductions in customers' information technology spending and uncertainties relating to government expenditure programs. Verint's business generated from government contracts may be adversely affected if: (i) Verint's reputation or relationship with government agencies is impaired, (ii) Verint is suspended or otherwise prohibited from contracting with a domestic or foreign government or any significant law enforcement agency, (iii) levels of government expenditures and authorizations for law enforcement and security related programs decrease, remain constant or shift to programs in areas where Verint does not provide products and services, (iv) Verint is prevented from entering into new government contracts or extending existing government contracts based on violations or suspected violations of laws or regulations, including those related to procurement, (v) Verint is not granted security clearances required to sell products to domestic or foreign governments or such security clearances are revoked, (vi) there is a change in government procurement procedures, or (vii) there is a change in political climate that adversely affects Verint's existing or prospective relationships. Competitive conditions in this sector also have been affected by the increasing use by certain potential customers of their own internal development resources rather than outside vendors to provide certain technical solutions. In addition, a number of established government contractors, particularly developers and integrators of technology products, have taken steps to redirect their marketing strategies and product plans in reaction to cut-backs in their traditional areas of focus, resulting in an increase in the number of competitors and the range of products offered in response to particular requests for proposals. 25 The markets for Verint's security and business intelligence products are still emerging. Verint's growth is dependent on, among other things, the size and pace at which the markets for its products develop. If the markets for its products decrease, remain constant or grow slower than Verint anticipates, Verint will not be able to maintain its growth. Continued growth in the demand for Verint's products is uncertain as, among other reasons, its existing customers and potential customers may: (i) not achieve a return on their investment in its products; (ii) experience technical difficulty in utilizing its products; or (iii) use alternative solutions to achieve their security, intelligence or business objectives. In addition, as Verint's enterprise business intelligence products are sold primarily to contact centers, slower than anticipated growth or a contraction in the number of contact centers will have a material adverse effect on the Verint's ability to maintain its growth. The global market for analytical solutions for security and business applications is intensely competitive, both in the number and breadth of competing companies and products and the manner in which products are sold. For example, Verint often competes for customer contracts through a competitive bidding process that subjects it to risks associated with: (i) the frequent need to bid on programs in advance of the completion of their design, which may result in unforeseen technological difficulties and cost overruns; and (ii) the substantial time and effort, including design, development and marketing activities, required to prepare bids and proposals for contracts that may not be awarded to Verint. A subsidiary of Verint, Verint Technology Inc. ("Verint Technology"), which sells and supports its communications interception solutions to various U.S. government agencies, is required by the National Industrial Security Program to maintain facility security clearances and to be insulated from foreign ownership, control or influence. The Company, Verint, Verint Technology and the Department of Defense entered into a proxy agreement, under which Verint, among other requirements, appointed three U.S. citizens holding the requisite security clearances to exercise all prerogatives of ownership of Verint Technology (including, without limitation, oversight of Verint Technology's security arrangements) as holders of proxies to vote Verint Technology stock. The proxy agreement may be terminated and Verint Technology's facility security clearances may be revoked in the event of a breach of the proxy agreement, or if it is determined by the Department of Defense that termination is in the national interest. If Verint Technology's facility security clearance is revoked, sales to U.S. government agencies will be adversely affected and may adversely affect sales to other international government agencies. In addition, concerns about the security of Verint, its personnel or its products may have a material adverse affect on Verint's business, financial condition and results of operations, including a negative impact on sales to U.S. and international government agencies. Many of Verint's government contracts contain provisions that give the governments party to those contracts rights and remedies not typically found in private commercial contracts, including provisions enabling the governments to: (i) terminate or cancel existing contracts for convenience; (ii) in the case of the U.S. government, suspend Verint from doing business with a foreign government or prevent Verint from selling its products in certain countries; (iii) audit and object to Verint's contract-related costs and expenses, including allocated indirect costs; and (iv) change specific terms and conditions in Verint's contracts, including changes that would reduce the value 26 of its contracts. In addition, many jurisdictions have laws and regulations that deem government contracts in those jurisdictions to include these types of provisions, even if the contract itself does not contain them. If a government terminates a contract with Verint for convenience, Verint may not recover its incurred or committed costs, any settlement expenses or profit on work completed prior to the termination. If a government terminates a contract for default, Verint may not recover those amounts, and, in addition, it may be liable for any costs incurred by a government in procuring undelivered items and services from another source. Further, an agency within a government may share information regarding Verint's termination with other government agencies. As a result, Verint's on-going or prospective relationships with such other government agencies could be impaired. Verint must comply with domestic and foreign laws and regulations relating to the formation, administration and performance of government contracts. These laws and regulations affect how Verint does business with government agencies in various countries and may impose added costs on its business. For example, in the United States, Verint is subject to the Federal Acquisition Regulations, which comprehensively regulate the formation, administration and performance of federal government contracts, and to the Truth in Negotiations Act, which requires certification and disclosure of cost and pricing data in connection with contract negotiations. Verint is subject to similar regulations in foreign countries as well. If a government review or investigation uncovers improper or illegal activities, Verint may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or debarment from doing business with government agencies, which could materially and adversely affect its business, financial condition and results of operations. In addition, a government may reform its procurement practices or adopt new contracting rules and regulations that could be costly to satisfy or that could impair Verint's ability to obtain new contracts. Verint's products are often used by customers to compile and analyze highly sensitive or confidential information and data, including information or data used in intelligence gathering or law enforcement activities. Verint may come into contact with such information or data when it performs support or maintenance functions for its customers. While Verint has internal policies, procedures and training for employees in connection with performing these functions, even the perception that such potential contact may pose a security risk or that any of Verint's employees has improperly handled sensitive or confidential information and data of a customer could harm its reputation and could inhibit market acceptance of its products. As the communications industry continues to evolve, governments may increasingly regulate products that monitor and record voice, video and data transmissions over public communications networks, such as Verint's solutions. For example, products which Verint sells in the United States to law enforcement agencies and which interface with a variety of wireline, wireless and Internet protocol networks, must comply with the technical standards established by the Federal Communications Commission pursuant to the Communications Assistance for Law Enforcement Act and products that it sells in Europe must comply with the technical standards established by the European Telecommunications Standard Institute. The adoption of new laws governing the use of Verint's products or changes made to existing laws could cause a decline in the use of its products and could result in increased expenses for Verint, particularly if it is required to modify or redesign its products to accommodate these new or changing laws. 27 The Company has historically derived a significant portion of its sales and operating profit from contracts for large system installations with major customers. The Company continues to emphasize large capacity systems in its product development and marketing strategies. Contracts for large installations typically involve a lengthy and complex bidding and selection process, and the ability of the Company to obtain particular contracts is inherently difficult to predict. The timing and scope of these opportunities and the pricing and margins associated with any eventual contract award are difficult to forecast, and may vary substantially from transaction to transaction. The Company's future operating results may accordingly exhibit a higher degree of volatility than the operating results of other companies in its industries that have adopted different strategies, and also may be more volatile than the Company has experienced in prior periods. The degree of dependence by the Company on large system orders, and the investment required to enable the Company to perform such orders, without assurance of continuing order flow from the same customers and predictability of gross margins on any future orders, increase the risk associated with its business. Because a significant proportion of the Company's sales of these large system installations occur in the late stages of a quarter, a delay, cancellation or other factor resulting in the postponement or cancellation of such sales may cause the Company to miss its financial projections, which may not be discernible until the end of a financial reporting period. The Company's gross margins also may be adversely affected by increases in material or labor costs, obsolescence charges, price competition and changes in channels of distribution or in the mix of products sold. During the period between the evaluation and purchase of a system, customers may defer or scale down proposed orders of the Company's products for, among other reasons: (i) changes in budgets and purchasing priorities; (ii) reduced need to upgrade existing systems; (iii) deferrals in anticipation of enhancements or new products; (iv) introduction of products by the Company's competitors; and (v) lower prices offered by the Company's competitors. Geopolitical, economic and military conditions could directly affect the Company's operations. The outbreak of severe acute respiratory syndrome ("SARS") curtailed travel to and from certain countries (primarily in the Asia-Pacific region). Restrictions on travel to and from these and other regions on account of additional incidents of SARS could have a material adverse effect on the Company's business, results of operations, and financial condition. The continued threat of terrorism and heightened security and military action in response to this threat, or any future acts of terrorism, may cause disruptions to the Company's business. To the extent that such disruptions result in delays or cancellations of customer orders, or the manufacture or shipment of the Company's products, the Company's business, operating results and financial condition could be materially and adversely affected. The U.S. military involvement in overseas operations including, for example, the war with Iraq, could have a material adverse effect on the Company's business, results of operations, and financial condition. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors, and the continued state of hostility, varying in degree and intensity, has led to security and economic problems for Israel. Since October 2000, there has been a significant increase in violence, primarily in the West Bank and Gaza Strip, and more recently Israel has experienced terrorist incidents within its borders. During this period, peace negotiations between Israel and representatives of the Palestinian Authority have been sporadic and currently are suspended. The Company could be materially adversely affected by hostilities involving Israel, 28 the interruption or curtailment of trade between Israel and its trading partners, or a significant downturn in the economic or financial condition of Israel. In addition, the sale of products manufactured in Israel may be materially adversely affected in certain countries by restrictive laws, policies or practices directed toward Israel or companies having operations in Israel. The continuation or exacerbation of violence in Israel or the outbreak of violent conflicts involving Israel may impede the Company's ability to sell its products or otherwise adversely affect the Company. In addition, many of the Company's Israeli employees in Israel are required to perform annual compulsory military service in Israel and are subject to being called to active duty at any time under emergency circumstances. The absence of these employees may have an adverse effect upon the Company's operations. The Company's costs of operations have at times been affected by changes in the cost of its operations in Israel, resulting from changes in the value of the Israeli shekel relative to the United States dollar, which for certain periods had a negative impact, and from difficulties in attracting and 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 negatively affected by a number of factors, including budgetary constraints resulting from adverse economic conditions, government policies and the Company's ability to satisfy eligibility criteria. The Israeli government has reduced the benefits available under some of these programs in recent years, and Israeli government authorities have indicated that the government may further reduce or eliminate some of these benefits in the future. The Company has regularly participated in a conditional grant program administered by the OCS under which it has received significant benefits through reimbursement of up to 50% of qualified research and development expenditures. Certain of the Company's subsidiaries currently pay royalties, of between 3% and 5% (or 6% under certain circumstances) of associated product revenues (including service and other related revenues) to the Government of Israel for repayment of benefits received under this program. Such royalty payments are currently required to be made until the government has been reimbursed the amounts received by the Company, which is linked to the U.S. dollar, plus, for amounts received under projects approved by the OCS after January 1, 1999, interest on such amount at a rate equal to the 12-month LIBOR rate in effect on January 1 of the year in which approval is obtained. As of July 31, 2004, such subsidiaries of the Company received approximately $55.5 million in cumulative grants from the OCS and recorded approximately $24.3 million in cumulative royalties to the OCS. During the year ended January 31, 2003, one of the Company's subsidiaries finalized an arrangement with the OCS whereby the subsidiary agreed to pay a lump sum royalty amount for all past amounts received from the OCS. In addition, this subsidiary began to receive lower amounts from the OCS than it had historically received, but will not have to pay royalty amounts on such grants. The amount of reimbursement received by the Company under this program has been reduced significantly, and the Company does not expect to receive significant reimbursement under this program in the 29 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. 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. 30 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 may continue to be affected to a material extent by the impact of currency fluctuations. Operating results may also be affected by the cost of such hedging activities that the Company does undertake. While the Company generally requires employees, independent contractors and consultants to execute non-competition and confidentiality agreements, the Company's intellectual property or proprietary rights could be infringed or misappropriated, which could result in expensive and protracted litigation. The Company relies on a combination of patent, copyright, trade secret and trademark law to protect its technology. Despite the Company's efforts to protect its intellectual property and proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use its products or technology. Effectively policing the unauthorized use of the Company's products is time-consuming and costly, and there can be no assurance that the steps taken by the Company will prevent misappropriation of its technology, particularly in foreign countries where in many instances the local laws or legal systems do not offer the same level of protection as in the United States. If others claim that the Company's products infringe their intellectual property rights, the Company may be forced to seek expensive licenses, reengineer its products, engage in expensive and time-consuming litigation or stop marketing its products. The Company attempts to avoid infringing known proprietary rights of third parties in its product development efforts. The Company does not regularly conduct comprehensive patent searches to determine whether the technology used in its products infringes patents held by third parties, however. There are many issued patents as well as patent applications in the fields in which the Company is engaged. Because patent applications in the United States are not publicly disclosed until the patent is issued, applications may have been filed which relate to the Company's software and products. If the Company were to discover that its products violated or potentially violated third-party proprietary rights, it might not be able to obtain licenses to continue offering those products without substantial reengineering. Any reengineering effort may not be successful, nor can the Company be certain that any licenses would be available on commercially reasonable terms. 31 While the Company occasionally files patent applications, it cannot be assured that patents will be issued on the basis of such applications or that, if such patents are issued, they will be sufficiently broad to protect its technology. In addition, the Company cannot be assured that any patents issued to it will not be challenged, invalidated or circumvented. Substantial litigation regarding intellectual property rights exists in technology related industries, and the Company expects that its products may be increasingly subject to third-party infringement claims as the number of competitors in its industry segments grows and the functionality of software products in different industry segments overlaps. In addition, the Company has agreed to indemnify certain customers in certain situations should it be determined that its products infringe on the proprietary rights of third parties. Any third-party infringement claims could be time consuming to defend, result in costly litigation, divert management's attention and resources, cause product and service delays or require the Company to enter into royalty or licensing agreements. Any royalty or licensing arrangements, if required, may not be available on terms acceptable to the Company, if at all. A successful claim of infringement against the Company and its failure or inability to license the infringed or similar technology could have a material adverse effect on its business, financial condition and results of operations. The Company holds a large proportion of its net assets in cash equivalents and short-term investments, including a variety of public and private debt and equity instruments, and has made significant venture capital and public equity 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, the prevailing interest rates or a reduction therein due to economic conditions or government policies has had and may continue to have an adverse impact on the Company's results of operations. The severe decline in the public trading prices of equity securities, particularly in the technology and telecommunications sectors, and corresponding decline in values of privately-held companies and venture capital funds in which the Company has invested, have, and may continue to have, an adverse impact on the Company's financial results. The Company has in the past benefited from the long-term rise in the public trading price of its shares in various ways, including its ability to use equity incentive arrangements as a means of attracting and retaining the highly qualified employees necessary for the growth of its business and its ability to raise capital on relatively attractive conditions. The decline in the price of the Company's shares, and the overall decline in equity prices generally, and in the shares of technology companies in particular, can be expected to make it more difficult for the Company to significantly rely on equity incentive arrangements as a means to recruit and retain talented employees. 32 The Company's operating results have fluctuated in the past and may do so in the future. The trading price of the Company's shares has been affected by the factors disclosed herein as well as prevailing economic and financial trends and conditions in the public securities markets. Share prices of companies in technology-related industries, such as the Company, tend to exhibit a high degree of volatility, which at times is unrelated to the operating performance of a company. The announcement of financial results that fall short of the results anticipated by the public markets could have an immediate and significant negative effect on the trading price of the Company's shares in any given period. Such shortfalls may result from events that are beyond the Company's immediate control, can be unpredictable and, since a significant proportion of the Company's sales during each fiscal quarter tend to occur in the latter stages of the quarter, may not be discernible until the end of a financial reporting period. These factors may contribute to the volatility of the trading value of its shares regardless of the Company's long-term prospects. The trading price of the Company's shares may also be affected by developments, including reported financial results and fluctuations in trading prices of the shares of other publicly-held companies in the telecommunications equipment industry in general, and the Company's business segments in particular, which may not have any direct relationship with the Company's business or prospects. The Company's board of directors' ability to designate and issue up to 2,500,000 shares of preferred stock and to issue additional shares of common stock could adversely affect the voting power of the holders of common stock, and could have the effect of making it more difficult for a person to acquire, or could discourage a person from seeking to acquire, control of the Company. If this occurs, investors could lose the opportunity to receive a premium on the sale of their shares in a change of control transaction. 33 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Refer to Item 7A in the Company's Annual Report on Form 10-K for a discussion about the Company's exposure to market risks. ITEM 4. CONTROLS AND PROCEDURES. (a) The Company's management evaluated, with the participation of the Company's principal executive and principal financial officers, the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), as of July 31, 2004. Based on their evaluation, the Company's principal executive and principal financial officers concluded that the Company's disclosure controls and procedures were effective as of July 31, 2004. (b) There has been no change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the Company's fiscal quarter ended July 31, 2004, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. On March 16, 2004, BellSouth Intellectual Property Corp. ("BellSouth") filed a complaint in the United States District Court for the Northern District of Georgia against Comverse Technology, Inc. alleging infringement of Patent Nos. 5,857,013 and 5,764,747, and, on March 17, 2004, BellSouth amended the complaint, removing any and all references to Comverse Technology, Inc., and naming Comverse, Inc., in an action captioned: BellSouth Intellectual Property Corp. v. Comverse, Inc., Civil Action No. 1:04-CV-0739. BellSouth alleges that Patent Nos. 5,857,013 and 5,764,747 cover certain aspects of some of Comverse Inc.'s systems, and it seeks, among other relief, monetary damages and injunctive relief. On May 5, 2004, Comverse, Inc. filed an answer and counterclaims which, among other things, denies any infringement and seeks a declaratory judgment that the patents at issue are invalid and unenforceable. The Company believes all claims are without merit and Comverse, Inc. will vigorously defend against BellSouth's claims. From time to time, the Company is subject to claims in legal proceedings arising in the normal course of its business. The Company does not believe that it is currently party to any other pending legal action that could reasonably be expected to have a material adverse effect on its business, financial condition and results of operations. 34 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. At the Company's annual meeting of shareholders held on June 15, 2004, 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 election of seven directors to serve as the Board of Directors of the Company until the next annual meeting of shareholders and the election of their qualified successors. 2. A proposal to adopt the Company's 2004 Stock Incentive Compensation Plan, under which up to 2,500,000 shares of the Company's common stock, par value $.10 per share, may be issued as equity-based compensation to employees, directors and consultants of the Company and its subsidiaries and affiliates. 3. A proposal to ratify the engagement of Deloitte & Touche LLP as independent auditors of the Company for the year ending January 31, 2005. The nominees for directors were elected based upon the following votes: Nominee Votes For Votes Withheld Kobi Alexander 168,835,776 8,693,901 Raz Alon 179,325,989 3,203,688 Itsik Danziger 166,897,210 10,632,167 John H. Friedman 158,441,423 19,088,254 Ron Hiram 156,345,262 21,184,415 Sam Oolie 154,349,757 23,179,920 William F. Sorin 163,022,354 14,507,323 The adoption of the Company's 2004 Stock Incentive Compensation Plan was approved as follows: 112,260,613 Votes for Approval 36,952,151 Votes Against 936,459 Abstentions The ratification of the engagement of Deloitte & Touche LLP as independent auditors of the Company for the year ending January 31, 2005 was approved as follows: 174,701,362 Votes for Approval 2,073,776 Votes Against 754,538 Abstentions 35 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibit Index. ------------- 10.1 Employment Agreement, dated as of August 19, 2004, between the Company and David Kreinberg. 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K. ------------------- During the second quarter of 2004, the Company furnished a report on Form 8-K dated June 2, 2004, reporting under Items 7 and 12 that on June 2, 2004, the Company issued a press release announcing its financial results for the first quarter ended April 30, 2004. 36 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMVERSE TECHNOLOGY, INC. Dated: September 9, 2004 /s/ Kobi Alexander ------------------------------ Kobi Alexander Chairman of the Board and Chief Executive Officer Dated: September 9, 2004 /s/ David Kreinberg ------------------------------ David Kreinberg Executive Vice President and Chief Financial Officer 37 EX-10 2 jd9-8ex10_1.txt 10.1 EXHIBIT 10.1 EMPLOYMENT, NON-DISCLOSURE AND NON-COMPETITION AGREEMENT AGREEMENT entered into this 19th day of August, 2004 (the "Execution Date") by and between Comverse Technology, Inc., a New York corporation (the "Company") and David Kreinberg ("Executive"). WHEREAS, Executive is employed by the Company and the parties desire to continue Executive's employment upon the terms set forth in this Agreement. NOW, THEREFORE, in consideration of Executive's employment by the Company, the compensation received by Executive from time to time hereunder, and the mutual promises and covenants contained herein, the parties agree as follows: 1. Duties and Term. (a) Subject to the terms of this Agreement, the Company hereby agrees to continue to employ Executive, and Executive agrees to continue to be employed, in the position of Executive Vice President and Chief Financial Officer of the Company (the Executive Vice President title is not a condition of employment and its change or removal by the Company shall not constitute a breach of this Agreement). Executive shall, to the best of his ability, devote his full time and best efforts to the performance of his duties hereunder and the business and affairs of the Company in accordance with the instructions and directions of the Board of Directors of the Company (the "Board") and the Chief Executive Officer of the Company in all matters and, in doing so, shall duly and faithfully perform and observe any and all rules and policies which the Company may now or shall hereafter establish governing the conduct of its business; provided, however, that Executive may (i) serve on civic or charitable boards or committees; and (ii) with the approval of the Chief Executive Officer of the Company, serve on corporate boards or committees. (b) Subject to the terms of this Agreement, the term of this Agreement shall be for the period set forth in Section 1 of Exhibit A, attached hereto and incorporated herein. The initial term (and any subsequent term) shall automatically extend for an additional one (1) year term, unless notice of termination as of the end of the then-current term is provided by either Executive or the Company, in either case at least one hundred eighty (180) days prior to the end of the then-current term (the initial and any subsequent term is referred to herein as the "Employment Term"). Notwithstanding the foregoing, Executive or the Company may terminate Executive's employment at any time with or without Cause (as defined in Section 3(d) of the Agreement), subject to the severance obligations described in Sections 3 and 4 of the Agreement. The Company or the Executive (as the case may be) must provide the other with at least one-hundred and eighty (180) days advance written notice of termination; provided that, such notice is not required from the Company if it is terminating Executive's employment for Cause; and further provided that, if Executive's employment is terminated by the Company without Cause, the Company shall have a discretionary right, but not an obligation, to waive all or any part of its notice obligation by paying Executive his Base Salary and pro-rated Annual Bonus (as defined in Section 2 of Exhibit A) for the notice period waived. 2. Compensation. In consideration of the services to be performed under this Agreement, Executive shall receive Base Salary and bonus payments, as specifically set forth in Section 2 of Exhibit A, all of which are subject to withholding and other applicable taxes and paid in accordance with the Company's standard payroll practices. In addition, Executive is eligible to receive various other compensation payments, as well as participation in the Company's employee benefit plans, as specifically set forth in Section 2 of Exhibit A. 3. Payments and Benefits Upon Termination. (a) Payment of Accrued Obligations. Except as specifically set forth herein, upon termination of Executive's employment for any reason, Executive shall receive (i) payment of Executive's Base Salary, as then in effect, through the date of termination of employment (the "Termination Date"), and (ii) all accrued but unpaid vacation time and expense reimbursements properly incurred and submitted for reimbursement not later than the 30th day following the Termination Date. Except in the event of termination for Cause as specifically set forth herein in Section 3(d)(iii) and 3(d)(iv), Executive shall receive a payment equal to $22,000 times the number of years from and including 1994 (the first year of Executive's employment with the Company), the amount of which increases at the rate of 10% per annum compounded for each completed year of employment following January 31, 2004 (the "Deferred Amount"). Said amount shall be paid no later than fifteen (15) days following the Termination Date and shall be pro-rated as to the final year of employment if termination occurs prior to year end. For example, if Executive's employment were to have terminated effective: (a) January 31, 2004, the payment would be $220,000; (b) July 31, 2004, the payment would be $231,000; and January 31, 2005 the payment would be $266,200. (subsections (i), (ii) and (iii) collectively, the "Accrued Obligations"). Executive shall not be entitled to any other compensation or benefits from the Company, except to the extent provided under any applicable stock option, restricted stock or other similar agreement(s), or as may be required by law (for example, under COBRA (as defined below)). (b) Termination by Company other than for Cause or by Executive for Good Reason. If Executive's employment with the Company is terminated by the Company for any reason other than Cause or by Executive for Good Reason, and other than due to Executive's death or Disability, Executive shall be entitled to payment of the Accrued Obligations, and, in exchange for a release of all claims executed by Executive in a form provided by the Company, Executive shall receive: (i) a lump-sum payment equal to the amount set forth in Section 3 of Exhibit A; (ii) coverage under the Company's Director & Officer liability insurance policy to the same extent as the higher of the coverage maintained: (a) for its then current Directors and Officers, (b) as of the date of termination, or (c) as of the date of a Change in Control prior to termination, for a period of five (5) years following the Termination Date (the "Extended D&O Coverage"); (iii) continued entitlement to, and payment of, his Executive Allowances (as defined in Exhibit A hereto) for a period of eighteen (18) months following the Termination Date; and (iv) payment by the Company of the group medical, dental and vision continuation coverage premiums under the Company's group health plans, for Executive and Executive's eligible dependents, under Title X of the Consolidated Budget Reconciliation Act of 1985, as amended ("COBRA") until the earlier of (A) the date Executive first becomes eligible for coverage under a subsequent employer's group health plan, (B) the date such coverage terminates under applicable law or (C) eighteen (18) months after the Termination Date (the "COBRA Benefit"). 2 (c) Termination due to Death or Disability. If Executive's employment with the Company is terminated due to Executive's death or Disability, then Executive (or his estate) will be entitled to: (i) the Accrued Obligations; (ii) the prorated amount of the Annual Bonus through the date of termination for the then current fiscal year; (iii) the Extended D&O Coverage; (iv) continued entitlement to, and payment of, his Executive Allowances for a period of eighteen (18) months following the Termination Date; (iv) all of Executive's stock options, restricted stock and other similar rights in the Company shall become fully vested on the Termination Date; and (v) the COBRA Benefit. (d) Cause. For purposes of this Agreement, "Cause" shall mean that Executive shall (i) chronically or willfully refuse to carry out his duties and responsibilities as provided for in this Agreement, for more than 10 days after a written demand that Executive carry out said duties and responsibilities is delivered to Executive by the Board of Directors, (ii) willfully refuse to implement any lawful direction of the Company's Chief Executive Officer or Board of Directors for more than 10 days after a written demand that Executive implement said direction is delivered to Executive by the Board of Directors, (iii) commit a fraudulent, dishonest or grossly negligent act resulting in material harm to the Company as determined by a civil judgment with respect to which all appeals have been exhausted and/or the time for appeal has lapsed or (iv) conviction of any act that constitutes a felony under applicable law. Any determination of Cause with regard to 3(d)(i) and 3(d)(ii) will be made by the Board, in its sole discretion, voting on such determination. (e) Disability. For purposes of this Agreement, "Disability" means the inability of Executive, with or without reasonable accommodation, to properly perform his duties under this Agreement by reason of any physical or mental incapacity, in either case for a period of more than one hundred eighty (180) consecutive days, or two hundred ten (210) days in the aggregate in any twelve (12) month period. Any dispute between Executive and the Company as to the existence of a Disability shall be resolved by a qualified independent physician selected by the Company and approved by the Executive, such approval not to be unreasonably withheld. (f) Good Reason. For purposes of this Agreement, "Good Reason" means: (i) a change in the principal location at which Executive primarily performs his services to the Company to a new location that is more than fifty (50) miles from the location at which Executive primarily performed his services to the Company immediately prior to such change, without Executive's prior written consent; (ii) without Executive's consent, a significant reduction of Executive's duties, position, reporting status, or responsibilities relative to Executive's duties, position, reporting status, or responsibilities as Chief Financial Officer in effect immediately prior to such reduction, or the removal of Executive from such position, duties and responsibilities or reporting status as Chief Financial Officer, unless Executive is provided with comparable duties, position, responsibilities and reporting status, and, in the event of a Change in Control, Executive is not the Chief Financial Officer of the acquiring company; (iii) a reduction in Executive's compensation or other benefits provided herein (not including reductions resulting from declines in the dollar amount of bonus received, or the amount or valuation of equity interests or stock options granted, or company-wide reductions in any company-wide benefit); (iv) a material breach of the Agreement by the Company that has not been cured within 30 days after written notice thereof by Executive to the Company; or (v) failure by the Company to obtain the assumption of the Agreement by any successor to the Company. 3 4. Change in Control. Notwithstanding any provision to the contrary under the Agreement, in the event of a Change in Control, the following provisions shall apply: (a) Termination by Company other than for Cause or by Executive for Good Reason On or Before the Second Anniversary of a Change in Control. If Executive's employment with the Company is terminated by the Company for any reason other than Cause or by Executive for Good Reason (with Paragraph 3(f)(ii) effective as Good Reason only after the First Anniversary of a Change in Control), and other than due to Executive's death or Disability, within three months before or at any time after the closing date but on or before the second anniversary of a Change in Control, then, in lieu of any payments that may be due to Executive under Section 3(b) of this Agreement (to the extent applicable), Executive will be entitled to: (i) the Accrued Obligations; (ii) a lump-sum payment equal to the amounts set forth in Section 4 of Exhibit A; (iii) the Extended D&O Coverage; (iv) continued entitlement to, and payment of, his Executive Allowances for a period of eighteen (18) months following the Termination Date; (v) the COBRA Benefit, and (vi) immediate full vesting on the Termination Date of all of Executive's stock options, restricted stock and other similar rights in the Company. (b) Gross Up Payment. (i) Notwithstanding any provision to the contrary under the Agreement, in the event that it shall be determined that any payment or distribution by the Company to or for the benefit of Executive, whether paid or payable or distributed or distributable, pursuant to the terms of this Agreement or otherwise, would constitute an "excess parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), Executive shall be paid an additional amount (the "Gross-Up Payment") to cover any excise tax imposed under Section 4999 of the Code, and any federal, state and local income and employment tax and excise tax imposed upon the Gross-Up Payment. For purposes of determining the amount of the Gross-Up Payment, Executive shall be deemed to pay federal income tax and employment taxes at the highest marginal rate of federal income and employment taxation in the calendar year in which the Gross-Up Payment is to be made, and state and local income taxes at the highest marginal rate of taxation in the state and locality of Executive's residence (or if greater, the highest rate for any U.S. state and locality in which Executive is required to file a nonresident income tax return with respect to the payments contemplated hereunder) on the Termination Date, net of the maximum reduction in federal income taxes that may be obtained from the deduction of such state and local taxes. (ii) All determinations to be made under this Section 4(b) shall be made by the Company's independent public accountant (the "Accounting Firm"), which firm shall provide its determination and any supporting calculations both to the Company and to Executive within thirty (30) days of the Termination Date. Any such determination by the Accounting Firm shall be binding upon the Company and Executive. Within five (5) days after the Accounting Firm's determination, the Company shall pay (or cause to be paid) or distribute (or cause to be distributed) to or for the benefit of Executive such amounts as are then due to Executive under this Agreement. 4 (iii) Executive shall notify the Company in writing of any claim by the Internal Revenue Service that would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable, but no later than thirty (30) business days after Executive knows of such claim, and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. Executive shall not pay such claim prior to the expiration of the thirty (30) day period following the date on which he gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company does not notify the Executive in writing prior to the expiration of such period that it desires to contest such claim, then the Company shall make the Gross-Up Payment together with any excise tax, income tax or employment tax, including interest and penalties with respect thereto, and Gross-Up thereon. If the Company notifies Executive in writing prior the expiration of such period that it desires to contest such claim, Executive shall: (A) give the Company any information reasonably requested by the Company relating to such claim; (B) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company; (C) cooperate with the Company in good faith in order to effectively contest such claim; and (D) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Executive harmless, on an after-tax basis, for any excise tax, income tax or employment tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 4(b), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided further, however, that if the Company directs Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to Executive, on an interest-free basis, and shall indemnify and hold Executive harmless, 5 on an after-tax basis, from any excise tax, income tax or employment tax, including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided further that any extension of the statute of limitations relating to payment of taxes for the taxable year of Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (iv) If, after the receipt by Executive of an amount advanced by the Company pursuant to this Section 4(b), Executive becomes entitled to receive any refund with respect to such claim, Executive shall (subject to the Company's complying with the requirements of this Section 4(b)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by Executive of an amount advanced by the Company pursuant to this Section 4(b), a determination is made that Executive shall not be entitled to any refund with respect to such claim and the Company does not notify Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. (v) All of the fees and expenses of the Accounting Firm in performing the determinations referred to in this Section 4(b) shall be borne solely by the Company. (c) Change in Control Definition. For purposes of this Agreement, a "Change in Control" shall occur upon: (i) any person, entity or affiliated group becoming the beneficial owner or owners of more than 50% of the outstanding equity securities of the Company, or otherwise becoming entitled to vote more than 50% of the voting power of the Company; (ii) a consolidation or merger (in one transaction or a series of related transactions) of the Company pursuant to which the holders of the Company's equity securities immediately prior to such transaction or series of related transactions would not be the holders immediately after such transaction or series of related transactions of more than 50% of the voting power of the entity surviving such transaction or series of related transactions; (iii) the sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company; or (iv) a change in the composition of the Board occurring within a two (2) year period, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" will mean directors who either (A) are members of the Board as of the date of this Agreement, or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Board at the time of such election or nomination. 5. Confidential Information. (a) Executive expressly acknowledges that he has received and will continue to receive Confidential Information pertaining to the products, services, operations and/or business affairs of the Company. For the purposes of this Agreement, "Confidential Information" shall include, but not be limited to, 6 information concerning or related to the Company's financial matters, business methods and practices, the Company's proprietary computer software, firmware, hardware, documentation, scientific, technical, economic, or engineering information including patterns, plans, compilations, program devices, formulae, designs, prototypes, methods, techniques, processes, procedures, programs or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically or photographically (including, without limiting the generality of the foregoing, any such items created, developed, produced or made known to Executive during the period of or arising out of Executive's employment with the Company), the Company's suppliers, customers and potential customers, confidential information disclosed to the Company by a third party on a confidential basis, and the Company's sales and marketing plans, as well as any information in addition to the foregoing which is not generally known to the public. Confidential Information shall also mean any and all information received by the Company from customers of the Company or other third parties subject to an expectation of confidentiality. In the event that Executive is requested or required (by oral question or request for information or documents in any legal proceeding, interrogatory, subpoena, civil investigative demand, or similar process) to disclose any Confidential Information, then such Executive will notify the Company promptly (and in writing, as prescribed in Section 5(f) below) of the request or requirement so that Company may take appropriate action. If, in the absence of a protective order or the receipt of a waiver from the Company hereunder, Executive is, on the advice of counsel, compelled to disclose any Confidential Information to any tribunal or else stand liable for contempt, Executive may disclose such Confidential Information to the tribunal; provided, however, that Executive shall use his reasonable best efforts to obtain an order or other assurance that confidential treatment will be accorded to such Confidential Information. (b) In recognition of the fact that such Confidential Information contains valuable trade secrets of the Company, Executive agrees that he shall not, during the term of Executive's employment with the Company, or at any time thereafter, use or disclose to any third party any such Confidential Information for any reason or purpose whatsoever without the express written consent of the Company. Executive understands that, pursuant to the Economic Espionage Act and other applicable law, violation of this Section 5(b) could result in a fine, imprisonment, financial liability and other sanctions. (c) Executive hereby assigns to the Company any and all rights, title and interest that Executive now has in the Company's Confidential Information and agrees to assign to the Company any and all rights, title and interest that Executive may hereafter acquire in the Company's Confidential Information. Executive hereby acknowledges and agrees that all personal property, including, without limitation, all books, manuals, records, reports, notes, contact lists, contracts, lists, blueprints, and other documents, or materials, or copies thereof, Confidential Information, and equipment furnished to, or prepared, edited, or augmented by, Executive in the course of or incident to his employment with the Company, including, without limitation, records and any other materials pertaining to Inventions, belong to the Company and shall be promptly returned to the Company upon termination of employment. Following termination, Executive will not retain any written or other tangible or electronic material containing any Confidential Information. 7 (d) Upon termination of his employment with the Company for whatever reason, Executive will promptly surrender to the Company all copies, in whatever form, of the Company's Confidential Information in Executive's possession or control, and Executive will not remove or transmit by any means from the Company or take with him any of the Company's Confidential Information that is embodied in any tangible medium of expression. (e) If Executive commits a breach, or threatens to commit a breach, of any of the provisions of Section 5 of this Agreement, the Company shall have the right and remedy to have the provisions of this Agreement specifically enforced by any court of competent jurisdiction, it being acknowledged and agreed that any such breach or threatened breach will cause irreparable injury to the Company and that money damages will not provide an adequate remedy to the Company. Such right and remedy shall be in addition to, and not in lieu of, any other rights and remedies available to the Company under law or in equity. (f) Executive agrees, with respect to the terms and conditions set forth in this Agreement, not to disclose or cause to be disclosed, directly or indirectly, to any person the existence of or terms of this Agreement. As an exception to this provision, it is understood that Executive may disclose information as required by the United States Securities and Exchange Commission or other regulatory agency, and to his legal counsel, tax preparer and members of his immediate family, providing those persons are instructed to comply with non-disclosure terms of this Agreement. Additionally, should Executive be required by law, legal process or subpoena to provide information related either to his or anyone else's employment at the Company related to this Agreement, Executive shall, in advance of providing any response to such law, legal process or subpoena, and to the extent reasonably practicable, provide written notice by certified mail to Paul L. Robinson, Esq., General Counsel and Assistant Secretary of the Company, at the Company address set forth in Section 13 of this Agreement, of such law, legal process or subpoena, such that the Company may seek to assert its rights and interests in connection therewith. 6. Confidentiality of Previous Employers/Clients. Executive represents that his performance hereunder does not and will not breach any agreement to keep in confidence any proprietary information acquired by Executive in confidence or in trust of a present or former employer or client. Executive also understands that at no time during his employment with the Company is Executive to breach any obligation of confidentiality that Executive has to present or former employers or clients, and Executive agrees to fulfill all such obligations during his employment with the Company. Executive agrees that he shall not disclose to the Company any proprietary information of a third party without written permission from the third party. Executive understands that, pursuant to the Economic Espionage Act and other applicable law, violation of this section could result in a fine, imprisonment, financial liability and other sanctions. 7. Disclosure of Inventions. (a) For the purposes of this Agreement, "Inventions" shall have the same meaning as set forth in 35 U.S.C. Sections 100 and 101, and may include without limitation, any of the following as applicable: all discoveries, developments, designs, improvements, inventions, formulae, processes, techniques, computer programs, strategies, specific computer-related or telecommunications-related know-how and data. 8 (b) During Executive's employment by the Company and for a period of twenty-four (24) months thereafter, Executive will promptly and fully disclose to the Company (and to any persons designated by it) any and all Inventions generated or conceived or reduced to practice or learned by Executive, either alone or jointly with others, which result from or relate to tasks assigned by the Company to Executive, or which result from or relate to tasks, projects or products being conducted or made within the Company about which Executive has obtained substantial knowledge during his employment with the Company. 8. Ownership Rights and Assignment of Inventions. (a) Executive and the Company hereby agree that, to the extent the United States copyright laws or the laws of any jurisdiction bound to recognize rights of copyright, author's rights or any similar other rights so permit, all services rendered by Executive hereunder, and the work product resulting from same, are and shall be deemed to be performed by Executive as work for hire or works made for hire for the Company, and are and shall be the sole and exclusive property of the Company. To the extent such laws or any rule of law does not so permit, then Executive expressly agrees to assign to the Company any and all rights, title and interest which Executive has or hereafter acquires in such services and work product, including without limitation, any and all rights to copyrights, trademarks and trade secrets thereto. (b) Executive agrees that all Inventions generated or conceived or reduced to practice or learned by Executive, either alone or jointly with others, during the following time periods: (i) during Executive's employment by the Company; and (ii) for a period of twenty-four (24) months thereafter, shall be the sole property of the Company and its assigns, and the Company and its assigns shall be the sole owner of all patent applications and all patents issued in connection therewith, provided however, that such Inventions in any way result from or relate to tasks assigned to the Executive during his employment at the Company, or which result from or relate to tasks, projects or products being conducted or made within the Company about which Executive obtained substantial knowledge during his employment at the Company. Executive hereby assigns to the Company any and all rights, title and interest that Executive has in such Inventions, and agrees to assign to the Company any and all rights, title and interest which Executive may hereafter acquire in such Inventions. (c) With respect to all such Inventions described in Section 7(b) and Section 8(b) of this Agreement, Executive further agrees to assist the Company in every proper way (but at the Company's expense) to apply for, prosecute, obtain, defend and enforce patents, and other proprietary rights and protections relating to said Inventions in any and all countries, including but not limited to, as the Company may elect: (i) taking all lawful oaths and doing all lawful acts, including giving testimony; and (ii) executing all documents, including, but not limited to, all applications, powers, assignments and other papers deemed by the Company or persons designated by it to be necessary or advisable. (d) Executive's obligations as set forth in Section 7(b) and Section 8(c) of this Agreement shall continue beyond the termination of his employment by the Company, but the Company shall compensate Executive at a reasonable rate after Executive's termination for time actually spent by Executive on such assistance. In the event the Company is unable, after reasonable effort, to 9 secure Executive's signature on any document or documents needed to apply for, prosecute, obtain, defend or enforce any patent, copyright, trademark, trade secret, or other proprietary right or protection relating to an Invention described in Sections 7 and 8 of this Agreement, whether because of Executive's physical or mental incapacity or for any other reason whatsoever, Executive hereby irrevocably designates and appoints the Company and its duly authorized officers and agents as Executive's agent coupled with an interest and attorney-in-fact, to act for and in Executive's behalf and stead to execute and file any such documents and to do all other lawfully permitted acts to further the Company's rights hereunder with the same legal force and effect as if executed by Executive. 9. Previous Inventions. Executive has identified in Schedule A attached hereto all Inventions generated or conceived or reduced to practice or learned by Executive, either alone or jointly with others, prior to his employment by the Company, which Executive desires to remove from the operation of this Agreement. Executive represents and warrants that such list is complete. If there is no such information listed, Executive represents that he made no such Inventions at the time of signing this Agreement. 10. Restrictive Covenant. (a) For and in consideration of the compensation to be paid by the Company pursuant to the terms hereof, and in recognition of the fact that Executive performs integral and essential services to the Company, and that Executive will receive and have access to Confidential Information and other valuable rights and assets of the Company, Executive covenants and agrees that he will not, at any time during his employment with the Company, and for a period of eighteen (18) months thereafter (which will be extended by the duration of any period of time which a court of competent jurisdiction determines, whether on a preliminary or final basis, that a breach has actually or likely occurred), directly or indirectly, as an employee, employer, consultant, agent, principal, partner, manager, stockholder, officer, director, or in any other individual or representative capacity engage or participate in any business or in any activity related to the development, sale, production, manufacturing, marketing or distribution of products or services which are in competition with products or services which the Company or any of its subsidiaries produces, sells, manufactures, markets, distributes or has interest in, in any state or foreign country in which the Company or any of its subsidiaries then conducts business or reasonably has plans to conduct business. Executive agrees to place all subsequent employers on notice of the terms and conditions stated in this Section 10. Executive further agrees that during his employment by the Company and for a period of twenty-four (24) months thereafter (which will be extended by the duration of any period of time which a court of competent jurisdiction determines, whether on a preliminary or final basis, that a breach has actually or likely occurred), Executive shall not, directly or indirectly, induce, attempt to induce, or aid others in inducing, any then-current employee of the Company or anyone who was employed or otherwise engaged by the Company at any time during the twelve (12) months preceding such inducement to accept employment or affiliation with another person or entity engaging in such business or activity of which Executive is an employee, owner, partner or consultant. Executive shall not for a period of twenty-four (24) months after the termination of Executive's employment with the Company (which will be extended by the duration of any period of time which a court of competent jurisdiction determines, whether on a preliminary or final basis, that a breach has actually or likely occurred) solicit any Customer to do business 10 with any person or entity (other than the Company) that is competing with the Company's products or to reduce or end its relationship with the Company. For purposes of this paragraph, Customer shall mean any person or entity that provided consideration to the Company in exchange for products or services, and any person or entity to which the Company has met with regarding a business relationship, in the twelve (12) month period immediately preceding the termination of Executive's employment with the Company. (b) The Company and Executive agree that the duration and geographic scope of the restrictions set forth in this Section 10 are reasonable. In the event that any court of competent jurisdiction determines that the duration or the geographic scope, or both, are unreasonable and that such provision is to that extent unenforceable, the Company and Executive hereto agree that the provision shall remain in full force and effect for the greatest time period and in the greatest area that would not render it unenforceable. The Company and Executive intend that this provision shall be deemed to be a series of separate covenants, one for each and every county of each and every state of the United States of America and each and every political subdivision of each and every country outside the United States of America where this provision is intended to be effective. (c) Notwithstanding the foregoing, nothing contained in this Agreement shall prevent Executive from being an investor in securities of a competitor listed on a national securities exchange or actively traded over-the-counter so long as such investments are in amounts not significant as compared to his total investments and not more than one percent (1%) of the outstanding securities of the issuer of the same class or issue of the specific securities involved. 11. Damages - Injunctive Relief. Executive acknowledges that his services to the Company are of a unique character, which gives them a special value to the Company. In the event of a breach or threatened breach by Executive of any of the provisions of this Agreement, in addition to any other remedy which the Company may have at law or in equity, including the right to withhold any payment of compensation under Section 2 of this Agreement, the Company shall be entitled to temporary and/or permanent injunctions, without posting bond, in order to prevent or restrain any such breach by Executive or by Executive's partners, agents, representatives, servants, employers and employees. Said remedies shall be in addition to, and not in limitation of, any other rights or remedies to which the Company is or may be entitled at law, in equity, or under this Agreement. 12. Assignment. Executive acknowledges that the services to be rendered by him are unique and personal. Accordingly, Executive may not assign any of his rights or delegate any of his duties or obligations under this Agreement. In the event that the Company shall be merged with, or consolidated into, any other corporation or entity, or in the event that the Company shall sell or transfer substantially all of its assets to another corporation or entity, the terms of this Agreement shall inure to the benefit of, and be assumed by, such corporation or entity. 11 13. Notices. All notices, requests, demands and other communications called for hereunder will be in writing and will be deemed given (a) on the date of delivery if delivered personally, (b) one (1) day after being sent by a well established commercial overnight service, or (c) four (4) days after being mailed by registered or certified mail, return receipt requested, prepaid and addressed to the parties or their successors at the following addresses, or at such other addresses as the parties may later designate in writing: IF TO THE COMPANY: Comverse Technology, Inc. 170 Crossways Park Drive Woodbury, New York 11797 Attn: Kobi Alexander, Chief Executive Officer WITH A COPY TO: Comverse Technology, Inc. 170 Crossways Park Drive Woodbury, New York 11797 Attn: Paul L. Robinson, Esq., General Counsel and Assistant Secretary IF TO EXECUTIVE: To his home address, as may be listed in his personnel file with the Company from time to time. 14. Applicable Law; Jurisdiction and Venue. This Agreement has been made in and shall be governed by the laws of the State of New York, and the validity, interpretation and performance of this Agreement shall be governed by, and construed in accordance with, the internal law of New York, without giving effect to conflict of law principles. Both parties agree that any action, demand, claim or counterclaim relating to the terms and conditions of this Agreement, or to its breach, shall be commenced in New York in a court of competent jurisdiction. Both parties further acknowledge that venue shall exclusively lie in New York and that material witnesses and documents would be located in New York. Both parties further agree that any action, demand, claim or counterclaim shall be resolved by a judge alone, and both parties hereby waive and forever renounce the right to a trial before a civil jury. 15. Severability. If any provision of this Agreement shall be held invalid or unenforceable, the remainder of this Agreement shall nevertheless remain in full force and effect. If any provision is held invalid or unenforceable with respect to particular circumstances, it shall nevertheless remain in full force and effect in all other circumstances. 16. Waiver. The failure of either party at any time or times to require performance of any provision hereof shall in no manner affect the right at a later time to enforce the same. No waiver by either party of the breach of any term or covenant contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement. 12 17. Headings. The headings contained in this Agreement are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 18. Survival. The provisions of Sections 5, 7, 8, 10 and 11 herein shall survive the termination of this Agreement. 19. Amendments and Prior Agreements. This Agreement supercedes and extinguishes, in full, any prior written, oral or other agreement between the Company and Executive regarding the subject matter hereof. This Agreement may not be amended, nor shall any waiver, change, modification, consent or discharge hereof be affected except by an instrument in writing executed by or on behalf of the party against whom enforcement of any such amendment, waiver, change, modification, consent or discharge is sought. 20. Right to Counsel. Executive acknowledges (a) that he has consulted with or has had the opportunity to consult with independent counsel of his own choice concerning this Agreement and has been advised to do so by the Company and (b) that he has read and understands the Agreement, is fully aware of its legal effect, and has entered into it freely based on his own judgment. 21. Construction. This Agreement shall be construed in accordance with its plain meaning, without regard to any inference or rule of construction arising from the fact that it may have been drafted by or on behalf of not all the parties hereto. 13 IN WITNESS WHEREOF, the parties have signed this Agreement as of the day and year first above written. EXECUTIVE COMVERSE TECHNOLOGY, INC. /s/ David Kreinberg By: /s/ Kobi Alexander --------------------------- --------------------------------- David Kreinberg Name: Kobi Alexander Title: Chief Executive Officer Agreed and approved by the Comverse Technology, Inc. Compensation Committee: By: /s/ Sam Oolie ------------------------ Sam Oolie By: /s/ John Friedman ------------------------ John Friedman By: /s/ Ron Hiram ------------------------ Ron Hiram 14 EXHIBIT A ADDITIONAL EMPLOYMENT TERMS FOR DAVID KREINBERG ----------------------------------------------- 1. Employment Term --------------- Commencing on February 1, 2004 and continuing through January 31, 2007. 2. Compensation ------------ (a) Base Salary. The Company will pay Executive as compensation for Executive's services hereunder a base salary at the annualized rate of $325,000 through January 31, 2005, such amount to be reviewed thereafter annually at the start of each Fiscal Year by the Board in its sole discretion (annual compensation, as it may be adjusted, is referred to herein as "Base Salary"). (b) Annual Bonus. For each fiscal year of the Company ("Fiscal Year") during the Employment Term, Executive will be eligible to receive an on-target annual bonus of seventy-seven percent (77%) of Executive's then current Base Salary (the "Annual Bonus"). The bonus payment shall be determined in accordance with a formula to be established by the Compensation Committee in its sole discretion within 90 days of the commencement of each applicable Fiscal Year. The extent to which a bonus payment shall be due to Executive shall be determined, upon fulfillment of the formula criteria established by the Compensation Committee for such Fiscal Year, at the close of each applicable Fiscal Year. The Annual Bonus shall be paid to Executive within two (2) weeks of the filing of the Company's annual financial statements on Form 10-K for each Fiscal Year. (c) Long-Term Incentive Payment. Executive shall be eligible to receive annual grants of stock options and/or restricted stock in amounts commensurate with his position at the Company, with the amount and the terms and conditions of any such grant(s) to be determined by the Company's Compensation Committee in its sole discretion. (d) Vacation; Employee Benefits. During the Employment Term, Executive shall be entitled to thirty (30) vacation days per year, with unused vacation days carried forward to the next year. Executive will be entitled to participate in the Company's employee benefit plans or programs currently and/or hereafter maintained by the Company that may become available generally to other senior executives of the Company, as such plans or programs may be in effect from time to time, including, but not limited to, the Company's Employee Stock Purchase Plans, life insurance policy arrangements, group health, dental and vision plans, and Director & Officer liability insurance. The Company shall reimburse Executive for health club enrollment and monthly fees, if any. Notwithstanding any provision in this Agreement to the contrary, except for Director & Officer liability insurance which the Company shall, as provided herein, maintain at least through the period of Executive's Extended D&O Coverage (to the extent applicable hereunder), the Company shall not be required to offer or maintain any other employee benefit plans or programs. In addition to the Company's standard life insurance policy arrangements, the Company shall provide Executive life insurance coverage under (i) the two million dollar AICPA Policy Group Variable Universal Life Insurance Policy, (ii) the ten million dollar Split Dollar Agreement dated October 21, 2000, between the Kreinberg 2000 Family Trust and the Company (the "Split Dollar Agreement"), and (iii) a five million dollar term and/or universal life insurance policy. 15 (e) Reimbursement of Expenses. The Company will reimburse Executive for all ordinary and reasonable out-of-pocket business expenses that are incurred by Executive in furtherance of the Company's business and timely submitted in accordance with the Company's policies with respect thereto as in effect from time to time. (f) Automobile, Legal, Tax and Financial Allowances. During the Employment Term, Executive shall be entitled to reimbursement against invoices submitted to the Company relating to (i) an automobile allowance of up to $1,000 per month plus the cost of automobile insurance, gas, tolls, parking and other miscellaneous automotive expenses (the "Automobile Allowance"), and (ii) expenses paid against invoices for of up to $20,000 per Fiscal Year for legal, tax and financial assistance and advice for Executive's benefit (the "LT&F Allowance," and together with the Automobile Allowance, the "Executive Allowances"). Executive shall not be entitled to carry over any unused portion of his Executive Allowances from one Fiscal Year to the next Fiscal Year. 3. Payments and Benefits Upon Termination. -------------------------------------- The payment described in Section 3(b)(i) of the Agreement equals (i) Executive's Base Salary, as then in effect, plus (ii) the Annual Bonus for the then-current Fiscal Year, plus (iii) the Annual Bonus for the then current Fiscal Year, prorated for the number of days of the then current Fiscal Year that Executive worked prior to the Termination Date. 4. Change in Control. ----------------- The payment described in Section 4(a)(ii) of the Agreement equals (i) three (3) times Executive's Base Salary, as then in effect, plus (ii) three (3) times the Annual Bonus for the then-current Fiscal Year, plus (iii) the Annual Bonus for the then current Fiscal Year, prorated for the number of days of the then current Fiscal Year that Executive worked prior to the Termination Date. 16 SCHEDULE A ---------- PRIOR INVENTIONS 17 EX-31 3 jd9-7ex31_1.txt 31.1 EXHIBIT 31.1 CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Kobi Alexander, Chairman of the Board and Chief Executive Officer of Comverse Technology, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Comverse Technology, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 9, 2004 /s/ Kobi Alexander ----------------------------- Kobi Alexander Chairman and CEO Principal Executive Officer EX-31 4 jd9-7ex31_2.txt 31.2 EXHIBIT 31.2 CERTIFICATION BY THE CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, David Kreinberg, Executive Vice President and Chief Financial Officer of Comverse Technology, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Comverse Technology, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 9, 2004 /s/ David Kreinberg -------------------------------- David Kreinberg Executive Vice President and CFO Principal Financial Officer EX-32 5 jd9-7ex32_1.txt 32.1 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Comverse Technology, Inc. (the "Company") on Form 10-Q for the period ended July 31, 2004 (the "Report"), I, Kobi Alexander, Chairman of the Board and Chief Executive Officer of the Company and I, David Kreinberg, Executive Vice President and Chief Financial Officer of the Company, each certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to our knowledge: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Kobi Alexander -------------------------------- Kobi Alexander Chairman and CEO Principal Executive Officer September 9, 2004 /s/ David Kreinberg -------------------------------- David Kreinberg Executive Vice President and CFO Principal Financial Officer September 9, 2004 This certification accompanies this Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference. -----END PRIVACY-ENHANCED MESSAGE-----