-----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, MagumppVgSTkbPXLjD7faZvCiJUqN8grWYe/+j7OQEBeqI1ztJwtJwDNVGh5a3Eo JSQryeG7l0XZLIqu1J10Wg== 0000950130-97-004904.txt : 19971114 0000950130-97-004904.hdr.sgml : 19971114 ACCESSION NUMBER: 0000950130-97-004904 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971112 SROS: NASD 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: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15502 FILM NUMBER: 97712907 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 STREET 2: 170 CROSSWAYS PARK DRIVE CITY: WOODBURY STATE: NY ZIP: 11797 10-Q 1 QUARTERLY REPORT 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 September 30, 1997 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 0-15502 COMVERSE TECHNOLOGY, INC. (Exact name of registrant as specified in its charter) NEW YORK 13-3238402 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 170 CROSSWAYS PARK DRIVE, WOODBURY, NY 11797 (Address of principal executive offices) (Zip Code) (516) 677-7200 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No APPLICABLE ONLY TO CORPORATE ISSUERS: The number of shares of Common Stock, par value $0.10 per share, outstanding as of November 6, 1997 was 25,200,257 Page 1 of 18 Total Pages (Exhibit Index Appears on Page 15) PART I FINANCIAL INFORMATION Page ---- ITEM 1. Financial Statements 1. Condensed Consolidated Balance Sheets as of December 31, 1996 and September 30, 1997 3 2. Condensed Consolidated Statements of Income for the Three Month and Nine Month Periods Ended September 30, 1996 and September 30, 1997 4 3. Condensed Consolidated Statements of Cash Flows for the Nine Month Periods Ended September 30, 1996 and September 30, 1997 5 4. Notes to Condensed Consolidated Financial Statements 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Page 2 of 18 COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) ASSETS DECEMBER 31, SEPTEMBER 30, 1996* 1997 (Unaudited) Current assets: Cash and cash equivalents $ 196,724 $ 149,074 Bank time deposits and short-term investments 49,464 113,600 Accounts receivable, net 63,540 79,233 Inventories 31,494 35,030 Prepaid expenses and other current assets 9,755 20,265 ----------- ---------- Total current assets 350,977 397,202 Long-term receivables, net 1,033 860 Property and equipment 32,463 41,626 Less: accumulated depreci- ation and amortization (14,422) (18,910) ----------- ---------- 18,041 22,716 Investments 5,788 6,473 Goodwill, net 308 262 Software development costs, net 10,143 12,028 Other intangible assets, net 1,330 1,105 Deferred costs and other assets, net 3,281 5,252 ----------- ---------- $ 390,901 $ 445,898 =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY DECEMBER 31, SEPTEMBER 30, 1996* 1997 (Unaudited) Current liabilities: Accounts payable and accrued expenses $ 40,531 $ 48,586 Bank loans 11,195 16,916 Advance payments from customers 6,400 9,247 Due to related parties 502 812 Other current liabilities 100 103 ----------- ---------- Total current liabilities 58,728 75,664 Convertible Subordinated Debentures 115,000 115,000 Liability for severance pay 2,708 3,526 Other liabilities 2,407 3,353 ----------- ---------- Total liabilities 178,843 197,543 Stockholders' equity: Common Stock, $.10 par value authorized 100,000,000 shares; issued and outstanding 24,741,228 and 25,152,303 2,474 2,515 Additional paid-in-capital 136,737 139,806 Cumulative translation adjustment (56) (43) Unrealized gain on available for sale securities, net of tax 1,547 3,026 Retained earnings 71,356 103,051 ----------- ---------- Total stockholders' equity 212,058 248,355 ----------- ---------- $ 390,901 $ 445,898 =========== ========== *The Condensed Consolidated Balance Sheet as of December 31, 1996 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. Page 3 of 18 COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1996 1997 1996 1997 Revenues: Sales $ 138,931 $ 202,681 $ 51,892 $ 72,193 Interest and other income 6,080 11,973 2,216 3,751 ----------- ----------- ----------- ----------- Total revenues 145,011 214,654 54,108 75,944 Costs and expenses: Research and development 25,911 39,121 9,537 14,174 Less reimbursement ( 6,339) (11,344) ( 2,414) ( 4,159) ----------- ----------- ----------- ----------- Net research and development 19,572 27,777 7,123 10,015 Cost of sales 59,476 85,953 22,110 30,581 Selling, general and administrative 37,612 53,756 13,998 19,007 Royalties and license fees 2,948 4,981 1,188 1,768 Minority interest and equity in loss of affiliates ( 232) ( 30) ( 82) 98 Interest expense and other 4,289 6,997 1,668 1,890 ----------- ----------- ----------- ----------- Total costs and expenses 123,665 179,434 46,005 63,359 ----------- ----------- ----------- ----------- Income before gain on issuance of subsidiary shares and income tax provision 21,346 35,220 8,103 12,585 Gain on issuance of subsidiary shares 535 - - - ----------- ----------- ----------- ----------- Income before income tax provision 21,881 35,220 8,103 12,585 ----------- ----------- ----------- ----------- Income tax provision 2,288 3,525 868 1,247 ----------- ----------- ----------- ----------- Net income $ 19,593 $ 31,695 $ 7,235 $ 11,338 =========== ========== ========== =========== Earnings per share: Primary $ 0.84 $ 1.17 $ 0.31 $ 0.42 =========== ========== ========= =========== Fully diluted $ 0.82 $ 1.17 $ 0.30 $ 0.42 =========== ========== ========= ===========
The accompanying notes are an integral part of these financial statements. Page 4 of 18 COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 1996 1997 Cash flows from operating activities: Net cash from operations after adjustments for non-cash items $ 21,293 $ 38,320 Changes in assets and liabilities: Accounts receivable and long-term receivables ( 14,224) ( 15,520) Inventories ( 13,792) ( 3,536) Prepaid expenses and other receivables ( 2,898) ( 10,629) Accounts payable and accrued expenses 12,806 8,055 Advance payments from customers ( 1,620) 2,847 Due to related parties 51 310 Liability for severance pay 821 818 ---------- ---------- Net cash provided by operating activities 2,437 20,665 Cash flows from investing activities: Maturities and sales (purchases) of bank time deposits and investments, net ( 12,784) ( 63,342) Purchases of property and equipment ( 5,842) ( 9,163) Increase in software development costs ( 3,443) ( 4,574) Other 4 - ---------- ---------- Net cash used in investing activities ( 22,065) ( 77,079) Cash flows from financing activities: (Decrease) increase in short- and long-term debt, net ( 276) 5,654 Proceeds from issuance of common stock 1,572 3,110 ---------- ---------- Net cash provided by financing activities 1,296 8,764 Net (decrease) in cash and cash equivalents ( 18,332) ( 47,650) Cash and cash equivalents, beginning of period 99,862 196,724 ---------- ---------- Cash and cash equivalents, end of period $ 81,530 $ 149,074 =========== ===========
The accompanying notes are an integral part of these financial statements. Page 5 of 18 COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) BASIS OF PRESENTATION. The accompanying financial information should be read in conjunction with the financial statements, including the notes thereto, for the year ended December 31, 1996. The financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods. The results of operations for the three month and nine month periods ended September 30, 1997 are not necessarily indicative of the results to be expected for the full year. INVENTORIES. The composition of inventories at December 31, 1996 and September 30, 1997 is as follows: DECEMBER 31, SEPTEMBER 30, 1996 1997 (In thousands) Raw materials $ 17,681 $ 16,823 Work in process 7,853 8,331 Finished goods 5,960 9,876 ----------- ----------- $ 31,494 $ 35,030 =========== =========== RESEARCH AND DEVELOPMENT EXPENSES. The Company has historically supported a substantial portion of its research and development activities through participation in government sponsored funding programs, which in general provide reimbursement for a portion of research and development expenditures incurred under project budgets that must be submitted for approval on an annual basis to the applicable funding agencies. During the nine month and three month periods ended September 30, 1997, gross research and development expenses amounted to approximately $39,121,000 and $14,174,000, respectively, of which approximately $11,344,000 and $4,159,000, respectively, was reimbursed. See "Management's Discussion and Analysis of Financial Condition and Results of Operations Certain Trends and Uncertainties." EARNINGS PER SHARE. For the nine month and three month periods ended September 30, 1996 and 1997, the computation of earnings per share is based on the weighted average number of outstanding common shares and additional shares assuming the exercise of stock options. The assumed conversion of the convertible subordinated debentures was antidilutive for the nine and three month periods ended September 30, 1997. The shares used in the computations are as follows: NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1996 1997 1996 1997 (In thousands) Primary 23,243 27,081 23,615 27,207 Fully diluted 26,486 27,188 26,864 27,315 Page 6 of 18 Total Pages In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share," ("FAS 128") which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. FAS 128 requires the disclosure of "basic" and "diluted" earnings per share (as those terms are defined in FAS 128), replacing "primary" and "fully diluted" earnings per share (as currently reported). Basic earnings per share, determined in accordance with FAS 128, would have been $0.91 and $0.34 for the nine and three month periods ended September 30, 1996, respectively, and $1.27 and $0.45 for the nine and three month periods ended September 30, 1997, respectively. Diluted earnings per share, determined in accordance with FAS 128, would have been $0.82 and $0.30 for the nine month and three month periods ended September 30, 1996, respectively, and $1.17 and $0.42 for the nine and three month periods ended September 30, 1997, respectively. MERGER WITH BOSTON TECHNOLOGY, INC. On August 21, 1997, the Company announced that it had agreed to merge with Boston Technology, Inc. ("Boston") in a stock merger in which the Company would issue .65 share of its common stock for each outstanding share of common stock of Boston. The merger, which is subject to various conditions, including approval by the shareholders of the Company and Boston, is expected to be completed toward the end of 1997 or the beginning of 1998. The merger of the companies will result in duplicate facilities, distribution channels and other relationships and the incurring of certain liabilities, which will result in adjustments and write-offs to the carrying value of certain assets and the accrual of certain liabilities upon the completion of the merger. The amount of these restructuring charges is not expected to exceed $70,000,000. In addition, approximately $10,000,000 of direct merger costs will be expensed upon the completion of the merger. Page 7 of 18 Total Pages ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS. Total Revenues. Total revenues for the nine month and three month periods -------------- ended September 30, 1997 increased by approximately $69,643,000 (48%) and approximately $21,836,000 (40%), respectively, from the corresponding periods in 1996. The increase is attributable primarily to a higher volume of sales of systems and parts. Sales for the nine month and three month periods ended September 30, 1997 increased by approximately $63,750,000 (46%) and approximately $20,301,000 (39%), respectively, from the 1996 periods. The growth in sales occurred primarily in the TRILOGUE product line. Interest and other income for the nine month and three month periods ended September 30, 1997 increased by approximately $5,893,000 (97%) and $1,535,000 (69%), respectively, from the corresponding periods in 1996, resulting from increased interest and dividend income, the investment of funds generated through the issuance of convertible subordinated debentures in October 1996, and realized gains on sales of investments. Cost of Sales. Cost of sales for the nine month and three month periods ------------- ended September 30, 1997 increased by approximately $26,477,000 (45%) and approximately $8,471,000 (38%), respectively, from the corresponding periods in 1996. The increase is attributable primarily to the increase in sales. Gross margin (expressed as a percentage of sales) for the nine month and three month periods ended September 30, 1997 increased to approximately 57.6% from approximately 57.2% and 57.4%, respectively, from the corresponding 1996 periods. Research and Development Expenses. Gross research and development expenses --------------------------------- for the nine month and three month periods ended September 30, 1997 increased by approximately $13,210,000 (51%) and approximately $4,637,000 (49%), respectively, from the corresponding periods in 1996. Net research and development expenses, after reimbursement under government funding programs, for the nine month and three month periods ended September 30, 1997 increased by approximately $8,205,000 (42%) and approximately $2,892,000 (41%), respectively, from the corresponding periods in 1996. Such increases are due to the overall growth of research and development operations, the initiation of significant new research and development projects, and increases in salaries and other costs associated with research and development operations, primarily in Israel. Selling, General and Administrative Expenses. Selling, general and -------------------------------------------- administrative expenses for the nine month and three month periods ended September 30, 1997 increased by approximately $16,144,000 (43%) and approximately $5,009,000 (36%), respectively, from the corresponding periods in 1996. Such increase was the result of increased sales, marketing and administrative activities associated with the overall growth of the Company's operations, and particularly with the expansion of direct sales and marketing activities. Page 8 of 18 Royalties and License Fees. Royalties and license fees for the nine month -------------------------- and three month periods ended September 30, 1997 increased by approximately $2,033,000 (69%) and approximately $580,000 (49%), respectively, from the corresponding periods in 1996. Royalties and license fees, for the nine month and three month periods ended September 30, 1997, as a percentage of sales increased from approximately 2.1% and 2.3%, respectively, in the 1996 periods to approximately 2.5% and 2.4%, respectively, in the 1997 periods, reflecting an increase in the royalty rate payable to a funding agency. Income Tax Provision. Provision for income taxes for the nine month and -------------------- three month periods ended September 30, 1997 increased by approximately $1,237,000 (54%) and approximately $379,000 (44%), respectively, from the corresponding periods in 1996. The Company's overall effective tax rate was approximately 10.5% and 10.7% in the nine and three month periods ended September 30, 1996, respectively, and 10.0% and 9.9% in the nine and three month periods ended September 30, 1997, respectively. The Company's overall rate of tax is reduced significantly by the tax benefits associated with qualified activities of one of its subsidiaries in Israel. Net Income. Net income after taxes for the nine month and three month ---------- periods ended September 30, 1997 increased by approximately $12,102,000 (62%) and approximately $4,103,000 (57%), respectively, from the corresponding periods in 1996, primarily as a result of the factors described above. Net income after taxes as a percentage of total revenues increased to approximately 14.8% and 14.9%, respectively, in the nine month and three month periods ended September 30, 1997 from approximately 13.5% and 13.4%, respectively, in the corresponding periods in 1996. LIQUIDITY AND CAPITAL RESOURCES. At September 30, 1997, the Company had cash and cash equivalents of approximately $149,074,000, bank time deposits and short-term investments of approximately $113,600,000 and working capital of approximately $321,538,000. The Company believes that its existing working capital, together with funds generated from operations, will be sufficient to provide for its planned operations for the foreseeable future. The Company regularly examines opportunities for strategic acquisitions of other companies or lines of business and anticipates that it may from time to time issue additional debt and/or equity securities either as direct consideration for such acquisitions or to raise additional funds to be used (in whole or in part) in payment for acquired securities or assets. See "Notes to Condensed Consolidated Financial Statements - Merger with Boston Technology, Inc." The issuance of such securities could be expected to have a dilutive impact on the Company's shareholders, and there can be no assurance as to whether or when any acquired business would contribute positive operating results commensurate with the associated investment. The Company's liquidity and capital resources have not been, and are not anticipated to be, materially affected by restrictions pertaining to the ability of its foreign Page 9 of 18 subsidiaries to pay dividends or by withholding taxes associated with any such dividend payments. CERTAIN TRENDS AND UNCERTAINTIES. The Company has experienced rapid growth in recent periods, and intends to continue to grow, both through internal expansion and acquisitions. The Company regularly examines opportunities to acquire additional companies, businesses, technologies or product lines. See "Notes to Condensed Consolidated Financial Statements - Merger with Boston Technology, Inc." Although the Company's management believes that acquisitions present potentially cost-effective opportunities for growth, they also present significant financial, operational and legal risks to the Company. In order to maintain and improve operating results, the Company's management will be required to manage growth and expansion effectively. The Company's failure to effectively manage growth, including growth resulting from acquisitions, could have a material adverse effect on the Company's results of operations and financial condition. The Company maintains a portion of its assets in a variety of financial instruments, including government and corporate debt obligations, commercial paper, bank time deposits, money-market accounts, common and preferred stocks and mutual funds, both for purposes of cash management and, to some extent, as strategic and portfolio investments. Such activities subject the Company to the risks inherent in the capital markets generally, and to the performance of other businesses over which its has no direct control. The Company has made several investments in early-stage technology ventures and expects to make additional similar investments, primarily in Israel and in the United States. Such investments entail substantial risks due to factors such as the limited operating histories of such ventures and the typical illiquidity of their securities. While the Company does not regard its portfolio and strategic investment activities as a primary element of its overall business plan, it expects to continue to allocate some of its liquid assets, comprising a portion of funds not required for working capital or acquisition plans, for these purposes. Given the magnitude of the Company's liquid assets relative to its overall size, the results of its operations in the future may, to a greater degree than in the past, be affected by the results of the Company's capital management and investment activities and the risks associated with those activities. The Company encounters strong competition in all of its markets, and such competition may be expected to continue to intensify in the foreseeable future. Such competition affects both the prices that the Company is able to obtain for its products and the associated payment terms. Rapid growth and increased competition throughout the telecommunications industry, and particularly the increase in the number of new telecommunications services operators that have been organized in recent periods to take advantage of emerging opportunities, such as personal communication services licensees, have increased the competitive pressure on equipment vendors, such as the Company, to provide financing for customers and to extend the payment terms that it offers to customers. This trend is likely to continue for the foreseeable future, and may draw increasingly on the Company's financial resources and liquidity and increase its exposure to uncollectable accounts. Page 10 of 18 The industries in which the Company is principally involved are highly competitive and characterized by frequent technological and market changes. The voice processing and enhanced services platform industry has experienced a continuing evolution of product offerings and alternatives for delivery of services. These trends have affected and may be expected to have a significant continuing influence on conditions in the industry, although the impact on the industry generally and on the Company's position in the industry cannot be predicted with assurance. Significant changes in the industry make planning decisions more difficult and increase the risk inherent in the planning process. The market for telecommunications monitoring systems is also in a period of significant transition. Budgetary constraints, uncertainties resulting from the introduction of new technologies in the telecommunications environment and shifts in the pattern of government expenditures resulting from geopolitical events have increased uncertainties in the market, resulting in certain instances in the attenuation of government procurement programs beyond their originally expected performance periods and an increased incidence of delay, cancellation or reduction of planned projects. Competitive conditions in this sector have also been affected by the increasing use by certain potential government customers of their own internal development resources rather than outside vendors to provide certain technical solutions. In addition, a number of established government contractors, particularly developers and integrators of technology products, have taken steps to redirect their marketing strategies and product plans in reaction to cut-backs in their traditional areas of focus, resulting in an increase in the number of competitors and the range of products offered in response to particular requests for proposals. The lack of predictability in the timing and scope of government procurements have similarly made planning decisions more difficult and have increased the associated risks. The Company has historically derived a significant portion of its revenue and operating profit from a relatively small number of contracts for large system installations with customers in both the commercial and government sectors. While the growth of the Company's business has reduced its dependence on any specific customers, it continues to emphasize large capacity systems in its product development and marketing strategies. Boston's business is also heavily dependent on large system installations for major service providers, and it has historically derived a large portion of its revenues from a relatively small number of customers. See "Notes to Condensed Consolidated Financial Statements Merger with Boston Technology, Inc." Contracts for large installations typically involve a lengthy and complex bidding and selection process, and the ability of the Company to obtain particular contracts is inherently difficult to predict. The Company believes that opportunities for large installations will continue to grow in both its commercial and government markets, and intends to continue to expand its research and development, manufacturing, sales and marketing and product support capabilities in anticipation of such growth. However, the timing and scope of these opportunities and the pricing and margins associated with any eventual contract award are difficult to forecast, and may vary substantially from transaction to transaction. The Company's future operating results may accordingly exhibit a higher degree of volatility than the operating results of other companies in its industries that have adopted different strategies, and than the Company has experienced in prior periods. Although the Page 11 of 18 Company is actively pursuing a number of significant procurement opportunities in the United States and internationally, both the timing of any eventual procurements and the probability of the Company's receipt of significant contract awards are uncertain. The degree of dependence by the Company on large orders, and the investment required to enable the Company to perform such orders, without assurance of continuing order flow from the same customers and predictability of gross margins on any future orders, increase the risk associated with its business. The Company has significantly increased its expenditures in all areas of its operations during recent periods, including the areas of research and development and marketing and sales, and the Company plans to further increase these expenditures in the foreseeable future. The increase in research and development expenditures reflects the Company's concentration on enhancing the range of features and capabilities of its existing product lines and developing new generations of its products. The Company believes that these efforts are essential for the continuing competitiveness of its product offerings and for positioning itself to participate in future growth opportunities in both the commercial and government sectors. The increase in sales and marketing expenditures primarily results from the Company's decision to expand its activities and direct presence in a number of world markets. The cost to the Company of attracting and retaining qualified scientific, engineering and technical personnel is increasing and may be expected to continue to increase as the demand for such personnel is growing rapidly worldwide. In particular, the Company's costs of operations have been affected by significant increases in the cost of its operations in Israel, resulting both from general inflation and increases in personnel costs reflecting the rapid expansion of technology-based industries in that country. The increase in these costs in recent periods has not been offset by proportional devaluation of the Israeli shekel against the U.S. dollar, and accordingly has had a negative impact on the Company's overall results of operations. A significant portion of the Company's research and development and manufacturing operations are located in Israel and may be affected by regulatory, political, military and economic conditions in that country. The Company's historical operating results reflect substantial benefits from programs sponsored by the Israeli government for the support of research and development, as well as favorable tax rates available to "Approved Enterprises" in Israel. The Israeli government has indicated its intention to reexamine certain of its policies in these areas. It recently acted to increase, from between 2% and 3% of associated product sales to between 3% and 5% of associated product revenues (including service and other related revenues), the annual rate of royalties to be applied to repayment of amounts received as reimbursement of qualified research and development expenditures under a program administered by the Office of the Chief Scientist of the Ministry of Industry and Trade, in which the Company has regularly participated and under which it continues to receive significant reimbursement. The Company's repayment of amounts received under the program will be accelerated through these higher royalty rates until repayment is completed. The Israeli authorities have also indicated that this funding program may be reduced generally, and that consideration is being given to limiting the funding available to larger entities, such as the Company. Accordingly, the Company anticipates that the percentage of its total research and development expenditures reimbursed under this program, which has Page 12 of 18 declined significantly in recent years, will continue to decline in the future. The Israeli government has also recently shortened the period of the tax moratorium applicable to "Approved Enterprises" from four years to two years. Although this change does not affect the tax status of any of the Company's significant current projects, it will apply to any future "Approved Enterprises" of the Company. If further changes in the law or government policies regarding those programs were to result in their termination or adverse modification, or if the Company were to become unable to participate in or take advantage of those programs, the cost to the Company of its operations in Israel would materially increase and there would be an adverse effect on the results of the Company's operations as a whole. The Company currently derives a majority of its sales from customers outside of the United States. International transactions involve particular risks, including political decisions affecting tariffs and trade conditions, rapid and unforeseen changes in economic conditions in individual countries, turbulence in foreign currency and credit markets, and increased costs resulting from lack of proximity to the customer. Volatility in international currency exchange rates may have a significant impact on the Company's operating results, either as a result of adverse changes in exchange rates or by the cost of hedging the risk of such changes. The Company is not always able to hedge the exchange rate risks associated with its contracts denominated in foreign currencies, and in certain instances elects not to hedge such risks as a result of cost and other factors. The failure to hedge in certain instances has had an adverse impact on the Company's operating results in recent periods. The trading price of the Company's shares may be affected by the factors noted above as well as prevailing economic and financial trends and conditions in the public securities markets. Share prices of companies in technology and government contracting businesses, and particularly smaller and medium-sized publicly traded companies such as the Company, tend to exhibit a high degree of volatility. Shortfalls in revenues or earnings from the levels anticipated by the public markets could have an immediate and significant effect on the trading price of the Company's shares in any given period. Such shortfalls may result from events that are beyond the Company's immediate control, can be unpredictable and, since a significant proportion of the Company's sales during each fiscal quarter tend to occur in the latter stages of the quarter, may not be discernible until the end of a financial reporting period, which 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 computer and telecommunications industries generally, and in the voice processing industry in particular, which may not have any direct relationship with the Company's business or prospects. Forward-Looking Statements. From time to time, the Company makes forward-looking statements. Forward-looking statements include financial projections, statements of plans and objectives for future operations, statements of future economic performance, and statements of assumptions relating thereto. Page 13 of 18 The Company may include forward-looking statements in its periodic reports to the Securities and Exchange Commission on Forms 10-K, 10-Q, and 8-K, in its annual report to shareholders, in its proxy statements, in its press releases, in other written materials, and in statements made by employees to analysts, investors, representatives of the media, and others. By their very nature, forward-looking statements are subject to uncertainties, both general and specific, and risks exist that predictions, forecasts, projections and other forward-looking statements will not be achieved. Actual results may differ materially due to a variety of factors, including without limitation those discussed under "Certain Trends and Uncertainties" and elsewhere in this report. Investors and others should carefully consider these and other uncertainties and events, whether or not the statements are described as forward-looking. Forward-looking statements made by the Company are intended to apply only at the time they are made, unless explicitly stated to the contrary. Moreover, whether or not stated in connection with a forward-looking statement, the Company undertakes no obligation to correct or update a forward-looking statement should the Company later become aware that it is not likely to be achieved. If the Company were in any particular instance to update or correct a forward-looking statement, investors and others should not conclude that the Company will make additional updates or corrections thereafter. Page 14 of 18 PART II Other Information ----------------- ITEM 6. Exhibits and Reports on Form 8-K. --------------------------------- (a) Exhibit Index. ------------- Item Number Exhibit Page ------ ------- ---- 11. Statement re computation of per share earnings. 17 and 18 27. Financial data schedule Filed electronically (b) Reports on Form 8-K. -------------------- On August 22, 1997, the Company filed a Current Report on Form 8-K reporting the execution of a definitive agreement providing for the merger of the Company with Boston Technology, Inc. See "Notes to Condensed Consolidated Financial Statements - Merger with Boston Technology, Inc." Page 15 of 18 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: November 10, 1997 S/ Kobi Alexander -------------------------------- Kobi Alexander President, Chairman of the Board and Chief Executive Officer Dated: November 10, 1997 S/ Igal Nissim -------------------------------- Igal Nissim Chief Financial Officer Page 16 or 18 EX-11 2 STATEMENT OF COMPUTATION OF EARNINGS PER SHARE Exhibit 11 COMVERSE TECHNOLOGY, INC. STATEMENT OF COMPUTATION OF EARNINGS PER SHARE (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) THREE MONTHS ENDED SEPTEMBER 30, 1996 1997 Primary earnings per share: Net income $ 7,235 $ 11,338 ========== ============ Weighted average number of outstanding common shares 21,596 25,069 Additional shares assuming exercise of stock options 2,019 2,138 ---------- ------------ Weighted average number of outstanding common and common equivalent shares 23,615 27,207 ========== ============ Primary earnings per share $ 0.31 $ 0.42 ========== ============ Fully diluted earnings per share: Net income $ 7,235 $ 11,338 Interest expense on Convertible Subordinated Debentures, net of tax (1) 709 - ---------- ----------- Fully diluted earnings $ 7,944 $ 11,338 ========== =========== Weighted average number of outstanding common shares 21,596 25,069 Additional shares assuming exercise of stock options 2,171 2,246 Additional shares assuming conversion of Convertible Subordinated Debentures 3,097 - ---------- ------------ Weighted average number of outstanding common shares assuming full dilution 26,864 27,315 ========== ============ Fully diluted earnings per share $ 0.30 $ 0.42 ========== ============ (1) The assumed conversion of the Convertible Subordinated Debentures for the three month period ended September 30, 1997 was antidilutive and is omitted. Page 17 or 18 EXHIBIT 11 (continued) COMVERSE TECHNOLOGY, INC. STATEMENT OF COMPUTATION OF EARNINGS PER SHARE (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) NINE MONTHS ENDED SEPTEMBER 30, 1996 1997 Primary earnings per share: Net income $ 19,593 $ 31,695 ========== ======== Weighted average number of outstanding common shares 21,503 24,927 Additional shares assuming exercise of stock options 1,740 2,154 ---------- -------- Weighted average number of outstanding common and common equivalent shares 23,243 27,081 ---------- -------- Primary earnings per share $ 0.84 $ 1.17 ========== ======== Fully diluted earnings per share: Net income $ 19,593 $ 31,695 Interest expense on Convertible Subordinated Debentures, net of tax (1) 2,126 - ---------- -------- Fully diluted earnings $ 21,719 $ 31,695 ========== ======== Weighted average number of outstanding common shares 21,503 24,927 Additional shares assuming exercise of stock options 1,886 2,261 Additional shares assuming conversion of Convertible Subordinated Debentures 3,097 - ---------- -------- Weighted average number of outstanding common shares assuming full dilution 26,486 27,188 ========== ======== Fully diluted earnings per share $ 0.82 $ 1.17 ========== ======== (1) The assumed conversion of the Convertible Subordinated Debentures for the three month period ended September 30, 1997 was antidilutive and is omitted. Page 18 of 18 EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-q FOR 9/30/97 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 149074 113600 79233 0 35030 397202 41626 18910 445898 75664 115000 0 0 2515 245840 445898 202681 214654 85953 179434 0 0 6997 35220 3525 31695 0 0 0 31695 1.17 1.17
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