UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
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COMVERSE TECHNOLOGY, INC. | ||||
(Name of Registrant as Specified In Its Charter) | ||||
(Name of Person(s) Filing Proxy Statement, if other than the Registrant) | ||||
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EXPLANATORY NOTE
The following is a letter that was sent by Comverse Technology, Inc. (CTI) to Institutional Shareholder Services, Inc. on September 28, 2012. For additional information, please see the Definitive Additional Materials on Schedule 14A filed on September 21, 2012.
About Comverse Technology, Inc.
CTI, through its whollyowned subsidiary Comverse, Inc. (CNS), is the worlds leading provider of software and systems enabling converged billing and active customer management and valueadded voice, messaging and mobile Internet services. CNSs extensive customer base spans more than 125 countries and covers over 450 communication service providers serving more than two billion subscribers. CTI also holds a majority ownership position in Verint Systems Inc. (Nasdaq: VRNT).
Other Important Information
This filing does not constitute an offer of any securities for sale. In connection with the proposed spinoff by CTI of CNS, a definitive proxy statement for CTIs shareholders has been filed with the Securities and Exchange Commission (SEC) and CTI has also mailed the final proxy statement to its shareholders. BEFORE MAKING ANY VOTING DECISION WITH RESPECT TO SUCH SPINOFF, CTIs SHAREHOLDERS AND INVESTORS ARE URGED TO READ THE PROXY STATEMENT AND OTHER DOCUMENTS FILED WITH THE SEC CAREFULLY AND IN THEIR ENTIRETY, BECAUSE THEY CONTAIN IMPORTANT INFORMATION ABOUT THE SPINOFF. Investors and security holders can obtain, without charge, a copy of the proxy statement relating to the proposed spinoff, as well as other relevant documents containing important information about CTI, at the SECs website (http://www.sec.gov). You may also read and copy any reports, statements and other information filed by CTI at the SEC public reference room at 100 F. Street, N.E. Washington D.C 20549. Please call the SEC at 1800SEC0330 for further information. CTI and its directors, executive officers and other members of its management and employees may be deemed to be participants in the solicitation of proxies from its shareholders in connection with the proposed spinoff. Information concerning the interests of CTIs participants in the solicitation for the proposed spinoff is set forth in CTIs Annual Reports on Form 10K and in the definitive proxy statement relating to the spinoff.
Dear ISS |
September 28, 2012 |
As discussed on our recent call, Comverse Technology, Inc (CTI) is required to submit the spin-off of Comverse, Inc (CNS) to a shareholder vote under New York law. As part of the spin-off, all CTI options held by CNS employees will be converted into options in CNS, in a manner consistent with the adjustment provisions in CTIs existing equity plans. Separately, as you know, CTI is seeking shareholder approval of a new CNS equity incentive plan for awards to be made to employees following the spin-off (Proposal 2) and approval of a reverse stock split at CTI (Proposal 4). We are disappointed in your recommendation to vote against the equity plan and reverse stock split. We would like to clarify several matters with respect to these proposals which we believe, based on your report, may not have been fully understood. We have attached several slides clarifying the points raised and correcting in some instances, some errors in the calculation and numbers used.
Equity Plan Option Replacement
In connection with the spin-off, all out of the money CTI options held by employees who will become or remain CNS employees will be converted into options to purchase CNS common stock, using a Black Scholes valuation model that will preserve the value of the options (the Replacement Options). Please note that this adjustment has been made by the CTI Board pursuant to the anti-dilution provisions under CTIs existing equity plans. The Replacement Options will comply with applicable tax law and NASDAQ listing requirements and will not result in an additional compensation expense under GAAP rules. The shareholders of CTI are not required to approve the Replacement Options (under Proposal 2), and are not being asked to approve the Replacement Options (the new CNS equity plan is merely the vehicle under which the options, upon conversion, will be governed for corporate and securities law purposes).
In terms of the method of the adjustment for the Replacement Options, the CTI Board determined that it was in the best interests of shareholders to develop a formula that minimized the potential share dilution represented by the options while maintaining economic value for employees. The result was a reduction in the number of underlying shares that would have been subject to the Replacement Options in a straight pro-rata conversion. To account for the loss in value of the reduced number of underlying shares, certain adjustments were made, such as a 10 year term for the near the money options and an exercise price that is 200% of fair market value for deeply underwater options (see first slide attached).
810 Seventh Avenue, 32nd Floor, New York, NY 10019 Telephone (212) 739-1000 Facsimile (212) 739-1001
www.cmvt.com
Equity Plan- Shareholder Value Transfer
We have a complicated capital structure which includes a valuable holding in Verint in the form of common and convertible preferred shares, with a value of approximately $734m. The second slide will show the existing value today of CTI of $1.350B based on a share price of $6.15 and shares outstanding of 219m and backing out the publically traded value of Verint, a derived value for CNS Spin Co of approximately $600m. We will be issuing a dividend of CNS Spin Co shares at a 1-10 exchange rate which will result in 21.9m. The $600m would be more appropriate as the denominator in your share value transfer equation.
In terms of the numerator, as explained on our call, at the current share price and implied value of CNS we realize that the five million shares originally reserved for Replacement Options is far more than necessary. We currently estimate that less than two million shares will be needed and as discussed and provided for in the CNS equity plan, all excess shares will be canceled and cannot be used for new grants under the plan.
We would expect that you would find with the new denominator and numerator, a value transfer below the 12% threshold. Also as previously discussed, the 2.5 million new shares authorization request is an 11.4% potential dilution to cover the next three-four years of equity grants well within peer group ranges of yearly burn rates.
The Reverse Stock Split
The reverse stock split only applies to CTI after the spin and if the contemplated merger occurs CTI will cease to be a public company and will be a subsidiary of Verint. For this interim period, CTI will be a holding company with five employees, and will not be making grants after November 1st. The number of authorized but unissued shares following the reverse stock split should not be considered material to a decision on the whether the reverse stock split should be permitted.
We are in very unique circumstances at Comverse in terms of our history, the upcoming Spin of CNS and the CTI merger with Verint, its subsidiary, and with it our equity grants at a range of prices and instruments and it does not fit into any standard precedents.
We would ask you to consider the attached clarifications and advise if there are any questions.
810 Seventh Avenue, 32nd Floor, New York, NY 10019 Telephone 212 739-1000 Facsimile 212 739-1001
www.cmvt.com
Sincerely
Charles J Burdick
Chairman and Chief Executive Officer
Comverse Technology, Inc
810 Seventh Avenue, 32nd Floor, New York, NY 10019 Telephone 212 739-1000 Facsimile 212 739-1001
www.cmvt.com
![]() Option
Replacement UNDERWATER OPTIONS
We
will
be
replacing
existing
CTI
options
with
equivalent
Black-Scholes
valued
CNS
Options
At-the-Money
with
a
ten
year
life.
We
will
determine Black-Scholes volatility at the distribution date based on a 10 day
moving average and use the same volatility for the calculation of the new
CNS options. Example:
Exercise Price
Todays Price
YTM**
Black-Scholes Value
Value
CTI Options
10,000
$8.00
$6.15
8 $1.50
$15,000
New CNS Options
1500*
$25.00
$25.00
10 $10.00
$15,000
*10,000
CTI
Old
Options
will
be
replaced
with1500
New
CNS
grant
options
At
the
Money
with
a
ten
year
life
to
provide
equivalent
value
to
the equity holder. Again consistent Black-Scholes volatility and methodology in
both calculations. DEEPLY UNDERWATER OPTIONS
We are required to provide a replacement mechanism even when there is little
value in existing deeply underwater options. Setting the strike price
at 2x exercise price still provides a meaningful amount of options to existing holders. Using the same mechanism as the previous
example would result in fractional shares in most instances.
Example:
Exercise Price
Todays Price
YTM**
Black-Scholes Value
Value
CTI Options
10,000
$15.00
$6.15
3 $.03
$300
New CNS Options
750
$50.00
$25.00
3 $.40
$300
* *Years to Maturity
1 |
![]() CNS Value
Post Spin The
best
estimate
for
the
value
of
CNS
Spinco
at
distribution
date
is
the
implied
value
today
in
a
sum
of
the
parts
analysis
Shares Outstanding
Price
Market Value
CTI
219m
$6.15
$1,346m
Verint Ownership
27.2m*
$27.00
$ 734m
Implied
CNS
Value
$612m
[$1,346
734]
Implied Value Per Share ** $ 26
* Verint ownership is calculated as the amount of shares of Verint to
be received for CTIs common and convertible preferred holdings in
Verint at the merger expected to close at 2/1/2013
** $612 million / 23.3 million shares [21.9 million shares + 1.4 million
options/RSUs] 2 |
![]() Reverse
Stock Spilt CNS shares
will
be
distributed
in
a
dividend
to
CTI
shareholders
at
a
1-10
exchange
rate.
The
reverse
stock
split
request
for
shareholder
approval (1-10) applies only to CTI Holdco which will hold only Verint
stock at the spin of CNS and cease to exist at the merger. Pre Reverse
Split
CTI
Holdco
will
trade
at
approximately:
$
3.35
per
share
$734
million
/
219
million
shares
=
$3.35
per
share
To ensure compliance with NASDAQ listing rules we are requesting a 1-10
reverse stock split for an implied trading value of $33.50. 3
CTI Holdco will have no activities leading up to the merger with Verint and
will have only five employees, no equity grants, and will dissolve at the
merger 2/1/2013 |
![]() Illustrative Equity Stock Plan Dilution
4
(1)
Assumed Equity Value
$
350 $ 400
$ 450
$ 500
$ 550
$ 600
$ 650
$ 700
$ 750
Implied Basic Shares Outstanding
At 0.10x Exchange
21.923
21.923
21.923
21.923
21.923
21.923
21.923
21.923
21.923
Implied Diluted Shares Outstanding
Common Shares Outstanding
21.923
21.923
21.923
21.923
21.923
21.923
21.923
21.923
21.923
Options
0.706
0.619
0.550
0.495
0.450
0.412
0.380
0.353
0.330
(2)
Unvested RSUs & DSUs
1.798
1.573
1.398
1.258
1.144
1.049
0.968
0.899
0.839
Total Diluted Shares Outstanding
24.427
24.115
23.871
23.677
23.517
23.385
23.272
23.176
23.093
Implied Fully Diluted Share Price
At 0.10x Exchange
$
14.33 $ 16.59
$ 18.85
$ 21.12
$ 23.39
$ 25.66
$ 27.93
$ 30.20
$ 32.48
Share Dilution
-10.3%
-9.1%
-8.2%
-7.4%
-6.8%
-6.3%
-5.8%
-5.4%
-5.1%
Notes:
(1)
Equity
value
based
on
reverse
sum
of
the
parts;
assume
CTI
share
price
of
$6.30
(2)
There are approximately 4.6m unvested RSUs and DSUs outstanding with an estimated
value of $28.7m (at $6.30 / share). |
![]() Proxy
Excerpt 5
Prior to the completion of the share distribution, Comverse expects to adopt the Comverse, Inc. 2012
Stock Incentive Compensation Plan (or the 2012 Incentive Plan). The purpose of the 2012
Incentive Plan will be to provide Comverse with a competitive advantage in attracting,
retaining and motivating employees, non-employee directors and consultants. Comverses business requires a highly talented
and seasoned team of communication and business professionals capable of managing a sophisticated
global business in a rapidly changing industry. The 2012 Incentive Plan is intended to align
the interests of Comverses employees, non-employee directors and consultants with
those of its shareholders through the issuance of equity-based compensation and enhance their focus on improvements
in operating performance and the creation of shareholder value. The 2012 Incentive Plan permits the
granting of awards that are intended to constitute performance-based compensation for
certain executive officers under Section 162(m) of the Internal Revenue Code of 1986, as
amended (or the Code). In addition, the 2012 Incentive Plan is expected to provide for the assumption of awards pursuant to the
adjustment of awards granted under CTIs current incentive plan. See PROPOSAL 1
AUTHORIZATION OF THE SHARE DISTRIBUTIONTreatment of Stock-Based Awards. The following is a summary of the material terms of the 2012 Incentive
Plan, but does not include all of the provisions of the 2012 Incentive Plan. For further
information about the 2012 Incentive Plan, we refer you to a complete copy of the 2012 Incentive Plan, which is attached
as Annex B to this proxy statement.
The 2012 Incentive Plan provides for the issuance of nonqualified stock options, incentive stock
options, stock appreciation rights, restricted stock, other stock-based awards and
performance-based compensation awards (referred to collectively as the Awards) based on
shares of Comverse common stock (referred to as the Shares). Comverses employees, non-employee directors and consultants as
well as employees and consultants of its subsidiaries and affiliates are eligible to receive Awards. A total of 2.5 million Shares will be reserved for issuance under future
awards to be granted under the 2012 Incentive Plan following the effective date of the plan
(referred to as the Future Awards). No Future Awards have been granted as of the this time.
Pursuant to the terms of the share distribution, certain awards that were previously granted under
CTIs stock incentive plan have been converted to awards that relate to Comverse common
stock and have been assumed by the 2012 Incentive Plan (referred to as the Assumed CTI Awards).
A total of 5.0 million Shares will be reserved for issuance under the Assumed CTI Awards. Such reserved Shares
may only be issued pursuant to the Assumed CTI Awards and may not be issued pursuant to any Future
Awards. The numbers of Shares authorized for issuance under Future
Awards and under Assumed CTI Awards will represent approximately 11.4% and 22.8%, respectively
of the outstanding shares of Comverse stock following the share distribution. In connection with the share
distribution, steps have been taken to reduce the number of Shares and potential dilution associated
with the Assumed CTI Awards, to the extent reasonably possible within the limitations of the
terms of these awards, as well as applicable tax and accounting limitations. As described more
fully in PROPOSAL 1 AUTHORIZATION OF THE SHARE DISTRIBUTIONTreatment of StockBased Awards, the
aggregate value of stock options will be preserved using Black-Scholes modeling, but with the
result that the number of Shares issuable under the options (as a percentage of outstanding
shares) has been reduced significantly. |
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