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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the Year ended January 31, 2002
Commission File Number 0-15502
COMVERSE TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
New York 13-3238402
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
170 Crossways Park Drive
Woodbury, New York 11797
(Address of principal executive offices)
Registrant's telephone number, including area code: 516-677-7200
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Not applicable Not applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 par value per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: [X] No: [ ]
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
[X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant on April 23, 2002 was approximately $2,260,000,000. The closing
price of the registrant's common stock on the NASDAQ National Market System on
April 23, 2002 was $12.11 per share.
There were 186,833,952 shares of the registrant's common stock
outstanding on April 23, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant hereby incorporates by reference in this report the
information required by Part III appearing in the registrant's proxy statement
or information statement distributed in connection with the 2002 Annual Meeting
of Shareholders of the registrant or in an amendment to this report on Form
10K/A.
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Medalist is a registered trademark, and Comverse, Comverse Technology and
Trilogue are trademarks, of the Company. LORONIX is a registered trademark, and
Intelligent Recording, OpenStorage Portal, RELIANT, STAR-GATE, ULTRA, Universal
Database and Verint Systems are trademarks, of Verint Systems Inc., a subsidiary
of the Company. Signalware and Ulticom are registered trademarks of Ulticom,
Inc., a subsidiary of the Company.
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PART I
ITEM 1. BUSINESS.
The Company
Comverse Technology, Inc. ("CTI" and, together with its subsidiaries,
the "Company") designs, develops, manufactures, markets and supports computer
and telecommunications systems and software for multimedia communications and
information processing applications. The Company's products are used in a broad
range of applications by wireless and wireline telecommunications network
operators and service providers, call centers, and other public and commercial
organizations worldwide.
Through its subsidiary Comverse, Inc. ("Comverse"), the Company
provides enhanced services products that enable telecommunications service
providers ("TSPs") to offer a variety of revenue-generating services accessible
to large numbers of simultaneous users. These services include a broad range of
integrated multimodal messaging, information distribution and personal
communications services, such as call answering with one-touch call return,
voicemail, IP-based unified messaging (voice, fax and email in a single mailbox,
media conversion such as email to voice and visual mailbox presentation),
prepaid wireless calling services, wireless data and Internet-based services
such as short messaging services ("SMS"), wireless information and entertainment
services, multimedia messaging services ("MMS"), and wireless instant messaging,
interactive voice response ("IVR"), and voice portal services, which are part of
a voice-controlled portfolio of services such as voice dialing, voice-controlled
Web browsing and voice-controlled messaging, and other applications. Comverse's
principal market for its systems consists of organizations that use the systems
to provide services to the public, often on a subscription or pay-per-usage
basis, and includes both wireless and wireline telecommunications network
operators and other TSP organizations. Comverse markets its systems throughout
the world, with its own direct sales force and in cooperation with a number of
leading international vendors of telecommunications infrastructure equipment.
More than 390 wireless and wireline TSPs in more than 100 countries, including
the majority of the 20 largest telecom companies in the world, have selected
Comverse's products to provide enhanced telecommunications services to their
consumers. Major network operators and service providers using Comverse's
systems include, among others, AT&T Wireless (USA), BellSouth (USA), Deutsche
Telekom (Germany and other European countries), KDDI (Japan), MCI Worldcom
(USA), mmO2 (several European countries), NTT (Japan), Orange (several European
countries), Pacific Century CyberWorks (Hong Kong), SBC Communications (USA),
SFR (France), SingTel (Singapore), Sprint PCS (USA), Telecom Italia (Italy),
Telmex (Mexico), Telstra (Australia), Verizon (USA) and Vodafone (multiple
European countries).
Through its subsidiary Verint Systems Inc. ("Verint"), formerly known
as Comverse Infosys, Inc., the Company provides analytic solutions for
communications interception, digital video security and surveillance, and
enterprise business intelligence. Verint's software generates actionable
intelligence through the collection, retention and analysis of voice, fax,
video, email, Internet and data transmissions from multiple types of
communications networks. The digital security and surveillance market consists
primarily of communications interception by law enforcement agencies and digital
video security utilized by government agencies and public and private
organizations. The enterprise business intelligence market consists primarily of
solutions targeting enterprises that rely on contact centers for voice, email
and Internet interactions with their customers. Additionally, an emerging
segment of enterprise business intelligence utilizes digital video information
to allow enterprises and institutions to enhance their operations, processes and
performance. Verint sells its enterprise business intelligence solutions to
contact center service bureaus, financial institutions, casinos, retailers,
utilities, communications service providers, manufacturers and other
enterprises. Verint has established marketing relationships with a variety of
global value added resellers and a network of systems integrators including ADT,
Avaya, Nortel and Siemens. Verint also has technological alliances with leading
software and hardware companies including Genesys, Siebel and Visionics, which
enables Verint to offer complementary solutions to their products. Verint's
products are used by over 800 organizations in over 50 countries worldwide.
Customers for digital security and surveillance products include the U.S.
Capitol, the U.S. Department of Defense, the U.S. Department of Justice,
Washington Dulles International Airport, the Toronto Police Service, the Dutch
National Police Agency, and other domestic and foreign law enforcement and
intelligence agencies, as well as communications service and equipment
providers, such as Cingular, Ericsson and Nortel. Customers for enterprise
business intelligence products include Con Edison, FedEx, HSBC, JCPenney,
Sprint, Target and Tiffany & Co.
Through its subsidiary Ulticom, Inc. ("Ulticom"), the Company provides
service enabling signaling software for wireline, wireless and Internet
communications. Ulticom's Signalware call control products interconnect the
complex circuit switching, database and messaging systems and manage vital
number, routing and billing information that form the backbone of today's public
telecommunications networks. Ulticom's products are used by equipment
manufacturers, application developers and communications service providers to
deploy revenue generating infrastructure, enhanced and mandated services such as
global roaming, voice and text messaging, prepaid calling and location-based
services. Signalware products also are embedded in a range of packet
softswitching products to interoperate or converge voice and data networks and
facilitate services such as voice over the Internet and Internet offload.
Ulticom had an initial public offering of its common stock in April, 2000, and
its common stock is listed on the NASDAQ National Market System under the symbol
"ULCM". CTI holds approximately 72% of Ulticom's outstanding common stock.
The Company markets other telecommunications products and services,
including products that are integrated with its systems and products that work
in combination with other systems to provide advanced telecommunications
services, such as automatic call distribution and messaging systems for
telephone answering service bureaus, and intelligent IP gateways for wireless
roaming. The Company also engages in venture capital investment and capital
market activities for its own account.
Throughout this document references are made to technologies, features,
capabilities, capacities and specifications in conjunction with the Company's
products and technological resources. Such references do not necessarily apply
to all product lines, models and system configurations.
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The Company was incorporated in the State of New York in October 1984.
Its headquarters are located at 170 Crossways Park Drive, Woodbury, New York
11797, where its telephone number is (516) 677-7200.
THE COMPANY'S PRODUCTS
Enhanced Services Solutions (ESS)
Comverse provides enhanced services products that enable TSPs to offer
a variety of revenue-generating services accessible to large numbers of
simultaneous users. These services include a broad range of integrated
multimodal messaging, information distribution and personal communications
services, such as call answering with one-touch call return, voicemail, IP-based
unified messaging (voice, fax and email in a single mailbox, media conversion
such as email to voice and visual mailbox presentation), prepaid wireless
calling services, wireless data and Internet-based services such as SMS,
wireless information and entertainment services, MMS, and wireless instant
messaging, IVR and voice portal services, which are part of a voice-controlled
portfolio of services such as voice dialing, voice-controlled Web browsing and
voice-controlled messaging, and other applications. Comverse's principal market
for its systems consists of organizations that use the systems to provide
services to the public, often on a subscription or pay-per-usage basis, and
includes both wireless and wireline telecommunications network operators and
other TSP organizations. With call answering and voice messaging, TSPs benefit
primarily from traffic revenue generated by the increase in billable completed
calls. In addition, these services foster customer loyalty that results in an
overall reduction in churn. Wireless TSPs are almost universally adding
voicemail and SMS to their service offerings, and often as part of their basic
service package, not only because of these benefits, but also because wireless
voicemail messaging services directly increase billable airtime by stimulating
outbound calls, and wireless SMS increases billable transactions by stimulating
person-to-person messaging and information retrieval.
Comverse's carrier grade ESS systems and software have been designed
and packaged to meet the capacity, reliability, availability, scalability,
maintainability, network and OMAP (Operations, Maintenance, Administration, and
Provisioning) interfaces and physical requirements of large telecommunications
network operators. The systems are offered in a variety of sizes and
configurations and can be clustered for larger capacity installations. The
systems also offer redundancy of critical components, so that no single failure
will interrupt the service. Comverse's products are available in both
centralized and widely distributed configurations.
Comverse's systems also incorporate components that are compatible with
the Intelligent Network ("IN") and Advanced Intelligent Network ("AIN")
protocols for Service Control Points and Intelligent Peripherals, permitting
Comverse's network operator customers to develop and deploy services based on
the overall IN/AIN architecture. In addition, when the system is configured as a
Service Node ("SN"), it enables customers to offer IN/AIN-based services such as
voice activated dialing.
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Comverse's products incorporate both Comverse-developed and
third-party-developed software, and Comverse-designed and third-party hardware,
in an open, standards-based system architecture. The systems support a wide
variety of digital telephony and IP interfaces and signaling systems, enabling
them to adapt to a variety of different network environments and IN/AIN
applications, and provide a "universal port" -- a single port that supports
multiple applications and services at any time during a single call.
Digital Security and Surveillance and Enterprise Business Intelligence
Verint is a leading provider of analytic solutions for communications
interception, digital video security and surveillance, and enterprise business
intelligence. Verint's software generates actionable intelligence through the
collection, retention and analysis of voice, fax, video, email, Internet and
data transmissions from multiple types of communications networks.
The digital security and surveillance market consists primarily of
communications interception by law enforcement agencies and digital video
security utilized by government agencies and public and private organizations
for use in airports, public buildings, correctional facilities and corporate
sites.
Verint's STAR-GATE product line enables communications carriers,
Internet service providers, and communications equipment manufacturers to
overcome the complexities posed by global digital communications and comply with
governmental requirements. STAR-GATE enables communications service providers to
intercept simultaneous communications over a variety of wireline, wireless and
IP networks for delivery to law enforcement and other government agencies.
STAR-GATE's flexibility supports multi-network, multi-vendor switch environments
for a common interface across communications networks and supports switches from
communications equipment manufacturers, such as Alcatel, Ericsson, Lucent,
Nokia, Nortel and Siemens. STAR-GATE also supports interfaces to packet data
networks, such as the Internet and general packet radio services.
Verint's RELIANT product line provides intelligent recording and
analysis solutions for communications interception activities to law enforcement
organizations and government agencies. The RELIANT software equips law
enforcement agencies with an end-to-end solution for live monitoring of
intercepted target communications and evidence collection management, regardless
of the type of communication or network used. Applications can scale from a
small center for a local police force, to a country-wide center for national law
enforcement agencies. RELIANT products are designed to comply with legal
regulations and can be integrated with communications networks in the country
where the system is utilized. RELIANT collects intercepted communications from
multiple channels and stores them for immediate access, further analysis and
later use as evidence.
Verint's LORONIX digital video security product line provides
intelligent recording and analysis of video for security and surveillance
applications to government agencies and public organizations. The LORONIX
software digitizes, compresses, stores and retrieves video imaging. In addition,
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LORONIX products provide live video streaming and camera control over local and
wide area computer networks and the Internet. The LORONIX product line may be
configured to allow customers to perform complete monitoring for security and
management of local and remote sites from a central investigative unit. The use
of digital storage and compression technology makes the LORONIX product line a
more efficient alternative to analog tape storage. The technology interfaces
with access control, facial recognition, activity and intrusion detection and
other technologies for enhanced security and surveillance.
The enterprise business intelligence market consists primarily of
solutions targeting enterprises that rely on contact centers for voice, email
and Internet interactions with their customers.
Verint's ULTRA products record and analyze customer interactions to
provide enterprises with business intelligence about their customers and help
monitor and improve the performance of their contact centers. ULTRA products
capture customer interactions from multiple sources, including telephone, email,
Internet or voice-over-IP ("VoIP"). Utilizing ULTRA's OpenStorage Portal and
Universal Database, customers can leverage their existing storage infrastructure
to store and access recorded customer interactions using standard file formats.
ULTRA products integrate with leading customer relationship management ("CRM")
applications allowing the delivery of information directly to the user's desktop
within Siebel, PeopleSoft and other CRM solutions. ULTRA also interfaces with
popular desktop software tools, including Microsoft Outlook, Lotus Notes and web
browsers, to enable the user to easily access the data in a familiar computing
environment.
Verint's LORONIX video business intelligence products enable enterprise
customers to monitor and improve their operations through the analysis of live
and recorded digital video. Like the LORONIX digital video security product, the
LORONIX video business intelligence product digitizes, compresses, stores and
retrieves video imaging. While leveraging the technology of the LORONIX digital
security product, the LORONIX enterprise product line also contains unique
software focused on maximizing operational effectiveness through video analysis.
By interfacing with customer databases and software systems, LORONIX facilitates
the user's review of video imaging based on specific criteria such as employee
ID, product barcodes and point of sale transaction history.
Service Enabling Signaling Software
The Company's Ulticom subsidiary provides service enabling signaling
software for wireline, wireless and Internet communications. Ulticom's
Signalware call control products interconnect the complex circuit switching,
database and messaging systems and manage vital number, routing and billing
information that form the backbone of today's public telecommunications
networks. Signalware provides signaling system #7 ("SS7"), the globally accepted
signaling standard protocol, which has become the critical element needed to
connect and interoperate packet networks with the existing circuit network
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infrastucture. Signalware provides the SS7 connectivity required to offer value
added services. Signalware call control products work within wireline, wireless
and Internet networks to interconnect and interoperate voice and data
communication systems. In addition, Signalware plays a key role in the
convergence of disparate networks by providing a means to bridge circuit and
packet technology. Signalware offers many of the features that are crucial to
the connectivity of communication networks and the rapid delivery of revenue
generating services.
Signalware supports a range of applications in wireline, wireless and
Internet networks. In circuit networks, Signalware has been deployed as part of
wireline services such as voice messaging, 800 number service and caller ID.
Signalware enables wireless services that include infrastructure applications
such as global roaming, as well as enhanced services like voice and text
messaging and prepaid calling. Signalware enables deployment of high capacity
wireless data services made possible by the evolution from second generation
("2G") to third generarion ("3G") infrastructures, including an intermediate
generation called "2.5G". Signalware also is used to deploy mandated, location
based wireless services, such as emergency-911. Signalware also is used to
enable solutions that ease congestion on existing networks by routing Internet
dial-up traffic to packet infrastructure, and deliver VoIP services such as
click-to-dial and advanced call forwarding.
Signalware works with multiple SS7 networks, supports a wide variety of
SS7 protocol elements and enables analog or digital wireline and wireless
transmissions. It provides the functionality needed for call set-up/termination
and call routing/billing. Signalware products also include features that enable
the transition from SS7 signaling to emerging packet signaling standards, such
as Sigtran. New features include a Signalware Sigtran Gateway for circuit-packet
network interoperability, and protocols to carry SS7 signals over IP networks.
Signalware packages run on a range of hardware platforms and operating systems,
including Sun Solaris, IBM AIX and Red Hat Linux. These packages can be used in
single or multiple computing configurations for fault resiliency and
reliability. Signalware also provides a means to separate the signaling function
from the application development environment, which provides greater flexibility
in service configurations. Signalware customers include equipment manufacturers,
such as Alcatel, Ericsson and Siemens, application developers such as Logica and
Sonus and service providers such as Level (3), MCI Worldcom and Telefonica.
Other Telecommunications Products and Services
The Company's other telecommunications products and services are
developed and marketed through subsidiaries in the United States and
internationally. These include automatic call distribution and messaging systems
for telephone answering service bureaus and other organizations, and intelligent
IP gateways for wireless roaming and VoIP applications.
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MARKETS, SALES AND MARKETING
Comverse's ESS systems and software are marketed by Comverse throughout
the world, with its own direct sales force as well as local distributors, and in
cooperation with a number of leading international vendors of telecommunications
infrastructure equipment. Comverse is the market share leader in providing large
capacity voice messaging systems for wireless and wireline telecommunications
network operators around the world.
More than 390 wireless and wireline telecommunications network
operators in more than 100 countries, including the majority of the 20 largest
telephone companies in the world, have selected Comverse's platforms to provide
enhanced telecommunications services to their consumers. Major network operators
using Comverse's ESS systems include, among others, AT&T Wireless (USA),
BellSouth (USA), Deutsche Telekom (Germany and other European countries), KDDI
(Japan), MCI Worldcom (USA), mmO2 (several European countries), NTT (Japan),
Orange (several European countries), Pacific Century CyberWorks (Hong Kong), SBC
Communications (USA), SFR (France), SingTel (Singapore), Sprint PCS (USA),
Telecom Italia (Italy), Telmex (Mexico), Telstra (Australia), Verizon (USA) and
Vodafone (multiple European countries).
Comverse provides its customers, through its Medalist plan, with
programs of marketing consultation, seminars and materials designed to assist
them in marketing enhanced telecommunications services, and also undertakes to
play an ongoing supporting role in their business and market planning processes.
Verint's products are marketed primarily through a combination of its
direct sales force and agents, distributors, value added resellers and systems
integrators. Verint develops strategic marketing alliances with leading
companies in the industry to expand the coverage and support of its direct sales
force. Verint currently has such relationships with ADT, Avaya, Nortel and
Siemens. In addition, Verint established technological alliances with leading
software and hardware companies including Genesys, Siebel and Visionics, which
enables Verint to offer complementary solutions to their products.
Verint's products are used by over 800 organizations and are deployed
in over 50 countries, across many industries and markets. Many users of the
products are large corporations or government agencies that operate from
multiple locations and facilities across large geographic areas and sometimes
across several countries. These organizations typically implement Verint's
solutions in stages, with implementation in one or more sites and then gradually
expanding to a full enterprise, networked-based solution.
Customers for digital security and surveillance products include the
U.S. Capitol, the U.S. Department of Defense, the U.S. Department of Justice,
Washington Dulles International Airport, the Toronto Police Service, the Dutch
National Police Agency, and other domestic and foreign law enforcement and
intelligence agencies, as well as communications service and equipment
providers, such as Cingular, Ericsson and Nortel. Customers for enterprise
business intelligence products include Con Edison, FedEx, HSBC, JCPenney,
Sprint, Target and Tiffany & Co.
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Ulticom's products are used by over 55 customers and are deployed by
more than 260 service providers in more than 100 countries. Ulticom markets its
products and services primarily through a direct sales organization and through
key relationships with customers. Customers include network equipment
manufacturers, such as Alcatel, Ericsson and Siemens, application developers
such as Logica and Sonus and service providers such as Level (3), MCI Worldcom
and Telefonica.
TECHNOLOGIES
The Company's research and development efforts focus particularly on
the design of very large, high throughput systems, digital signal processing
technologies for voice, image, video, and data communications, IP and messaging
protocols, multimodal user interfaces, development of various network and OMAP
interfaces, and application development. The Company's products use advanced
technologies in the areas of digital signal processing, VoIP, facsimile
protocols, networking interfaces, databases, data networking, multi-processor
computer architecture and real-time software design. The Company uses its
proprietary technology and expertise in the development of software products,
solutions and applications within the IN and AIN environment.
The Company's products are based upon flexible system architectures
specifically designed to handle high capacity multiple session multimodal user
experience, multimedia communication and processing applications. The Company's
products employ open system, modular architectures, which use distributed
processors, rather than one large central processor, as well as multiple storage
devices and data networking. The product design is intended to be readily
adaptable to the usage and capacity requirements of the individual end-user. The
product architectures also allow the Company to add enhancements and new
technologies to its systems without rendering existing products obsolete.
The Company has developed or integrated third-party interfaces for its
products to most circuit-switched and IP networks used around the world,
including digital interfaces, such as IP, SIP, SS7, T1, E1 and ISDN and VoIP,
designed to encompass both basic network connectivity and the IN/AIN
capabilities of Intelligent Peripherals and SNs. The Company has also developed
Internet Protocols, including cHTML, HTML, HTTP, IMAP4, LDAP, POP3, VPIM, VXML
and WAP. The Company has implemented facsimile communication and intercept
protocols for Group 3 facsimile. Certain of its products incorporate LAN and WAN
technologies used for the transfer of digitized voice, fax, video, and modem
information, as well as for the transfer of data among various network elements.
The Company utilizes state-of-the-art mass storage technologies in many
of its products. A variable number of disks may be configured in a disk array to
serve large numbers of users and to provide full or partial disk redundancy for
critical applications. Special algorithms utilized by the Company to handle
optical disks within a number of jukebox devices include automatic
channel-to-disk allocation, automatic retrieval of multimedia information from
any disk located in the jukeboxes and redundant archiving on two or more
cartridges simultaneously.
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RESEARCH AND DEVELOPMENT
Because of the continuing technological changes that characterize the
telecommunications and computer industries, the Company's success will depend,
to a considerable extent, upon its ability to continue to develop competitive
products through its research and development efforts. The Company currently
employs more than 2,200 scientists, engineers and technicians in its research
and development efforts, located predominantly in the United States and Israel
with additional offices in France, Germany and Malaysia, with broad experience
in the areas of digital signal processing, computer architecture, telephony, IP,
data networking, multi-processing, databases, real-time software design and
application software design, among others.
A portion of the Company's research and development operations benefit
from financial incentives provided by government instrumentalities to promote
research and development activities performed in Israel. The cost of such
efforts is and will continue to be affected by the continued availability of
funding under such programs. During the past fiscal year, the Company's research
and development activities included projects submitted for partial funding under
a program administered by the Office of the Chief Scientist of the Ministry of
Industry and Trade of the State of Israel ("OCS"), under which reimbursement of
a portion of the Company's research and development expenditures will be made
subject to final approval of project budgets. The percentage of the Company's
total research and development expenditures reimbursed under these programs has
declined in recent years, and will continue to decline. The Company pays
royalties on its sales of certain products developed in part with funding
supplied under such programs. During the year ended January 31, 2002, Comverse
entered into an arrangement with the OCS whereby Comverse agreed to pay a lump
sum royalty amount for all past amounts received from the OCS. In addition,
Comverse will receive lower amounts from the OCS than it has historically
received, but will not have to pay royalty amounts on future grants. Permission
from the government of Israel is required for the Company to manufacture outside
of Israel products resulting from research and development activities funded
under such programs, or to transfer outside of Israel related technology rights,
and in order to obtain such permission the Company may be required to increase
the royalties to the applicable funding agencies and/or repay certain amounts
received as reimbursement of research and development costs. See "Licenses and
Royalties" and "Operations in Israel" in Item 1 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Item 7.
PATENTS AND INTELLECTUAL PROPERTY RIGHTS
The Company holds a number of United States and foreign patents. While
the Company files patent applications periodically, no assurance can be given
that patents will be issued on the basis of such applications or that, if
patents are issued, the claims allowed will be sufficiently broad to protect the
Company's technology. In addition, no assurance can be given that any patents
issued to the Company will not be challenged, invalidated or circumvented or
that the rights granted under the patents will provide significant benefits to
the Company.
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In order to safeguard its unpatented proprietary know-how, trade
secrets and technology, the Company relies primarily upon trade secret
protection and non-disclosure provisions in agreements with employees and others
having access to confidential information. There can be no assurance that these
measures will adequately protect the Company from disclosure or misappropriation
of its proprietary information.
The Company and its customers from time to time receive communications
from third parties, including some of the Company's competitors, alleging
infringement by the Company of such parties' patent rights. While such
communications are common in the computer and telecommunications industries and
the Company has in the past been able to obtain any necessary licenses on
commercially reasonable terms, there can be no assurance that the Company would
prevail in any litigation to enjoin the Company from selling certain of its
products on the basis of such alleged infringement, or that the Company would be
able to license any valid patents on reasonable terms.
In January 2000, the Company and Lucent Technologies GRL Corp.
("Lucent") entered into a non-exclusive cross-licensing arrangement covering
current and certain future patents issued to the Company and its affiliates and
a portfolio of current and certain future patents in the area of
telecommunications technology issued to Lucent and its affiliates.
LICENSES AND ROYALTIES
The Company licenses certain technology, know-how and related rights
for use in the manufacture and marketing of its products, and pays royalties to
third-parties under such licenses and under other agreements. The Company
believes that its rights under such licenses and other agreements are sufficient
for the manufacturing and marketing of its products and, in the case of
licenses, extend for periods at least equal to the estimated useful lives of the
related technology and know-how.
BACKLOG
At January 31, 2002, the backlog of the Company amounted to
approximately $220.7 million. Substantially all of the backlog is expected to be
delivered within the next 12 months.
SERVICE AND SUPPORT
The Company has a strong commitment to provide product service and
support to its customers and emphasizes such commitment in its marketing.
Because of the intensity of use of systems by telecommunications network
operators and other customers of the Company's products, and their low tolerance
for down-time, the Company is required to make a greater commitment to service
and support of systems used by these customers, and such commitment increases
operating costs.
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The Company's general warranty policy is to replace or repair any
component that fails during a specified warranty period. Broader warranty and
service coverage is provided in many cases, and is sometimes made available to
customers on a contractual basis for an additional charge.
The Company provides technical assistance from several locations around
the world. Technical support is available for the Company's customers 24
hours-a-day, seven days-a-week.
COMPETITION
The Company faces strong competition in the markets for all of its
products. The market for ESS systems is highly competitive, and includes
numerous products offering a broad range of features and capacities. The primary
competitors are suppliers of turnkey ESS systems and software, and indirect
competitors that supply certain components to systems integrators. Many of
Comverse's competitors specialize in a subset of Comverse's portfolio of
services. Direct and/or indirect competitors include, among others, Boston
Communications, Cap Gemini, CMG, Ericsson, Glenayre, IBM, InterVoice-Brite,
Logica, Lucent, Motorola, Nokia, Openwave, SS8 Networks, Tecnomen, Telcordia,
and Unisys. Competitors of Comverse that manufacture other telecommunications
equipment may derive a competitive advantage in selling ESS systems to customers
that are purchasing or have previously purchased other compatible equipment from
such manufacturers.
Indirect competition is provided by messaging and other enhanced
communications products employed at end-user sites as an alternative to the use
of services available through telecommunications network operators. This
"enterprise based equipment" includes a broad range of products, such as
stand-alone voicemail systems, answering machines, telephone handsets with
voice-activated dialing and other enhanced services capabilities, products
offering "call processing" services that are supplied with voicemail features or
integrated with other voicemail systems, as well as personal computer modems and
add-on cards and software designed to furnish enhanced communications
capabilities.
Comverse believes that competition in the sale of ESS systems is based
on a number of factors, the most important of which are product features and
functionality, system capacity and reliability, marketing and distribution
capability and price. Other important competitive factors include service and
support and the capability to integrate systems with a variety of telecom
networks, IP networks and Operation and Support Systems (OSS). Comverse believes
that the range of capabilities provided by, and the ease of use of, its systems
compare favorably with other products currently marketed. Comverse anticipates
that a number of its direct and indirect competitors will introduce new or
improved ESS systems during the next several years.
Verint faces strong competition in the markets for its products, both
in the United States and internationally. Verint expects competition to persist
and intensify in the digital security and surveillance market, primarily due to
increased demand for homeland defense and security solutions following the
September 11, 2001 terrorist attacks. Verint's primary competitors are suppliers
-11-
of security and recording systems and software, and indirect competitors that
supply certain components to systems integrators. In the enterprise business
intelligence market, Verint faces competition from organizations emerging from
the traditional call logging or call recording market as well as software
companies that develop and sell products that perform specific functions for
this market. Additionally, many of Verint's competitors specialize in a subset
of Verint's portfolio of products and services. Primary competitors include,
among others, ECtel, e-talk, Eyretel, JSI Telecom, NICE Systems, Sensormatic,
SS8 Networks and Witness Systems. Verint believes it competes principally on the
basis of product performance and functionality, knowledge and experience in the
industry, product quality and reliability, customer service and support, and
price.
Verint believes that its success depends primarily on its ability to
provide technologically advanced and cost effective solutions and to continue to
provide its customers with prompt and responsive customer support. Competitors
that manufacture other security-related systems or other recording systems may
derive a competitive advantage in selling to customers that are purchasing or
have previously purchased other compatible equipment from such manufacturers.
Further, Verint expects that competition will increase as other established and
emerging companies enter its markets and as new products, services and
technologies are introduced.
Competitors of Ulticom include a number of companies ranging from SS7
software solution providers, such as SS8 Networks and Trillium Digital Systems,
an Intel company, to vendors of communication and network infrastructure
equipment, such as Compaq and Hewlett Packard. Ulticom believes it competes
principally on the basis of product performance and functionality, product
quality and reliability, customer service and support, and price.
Many of the Company's present and potential competitors are
considerably larger than the Company, are more established, have a larger
installed base of customers and have greater financial, technical, marketing and
other resources.
MANUFACTURING AND SOURCES OF SUPPLIES
The Company's manufacturing operations consist primarily of final
assembly and testing, involving the application of extensive testing and quality
control procedures to materials, components, subassemblies and systems. The
Company primarily uses third-parties to perform modules and subsystem assembly,
component testing and sheet metal fabrication. Although the Company generally
uses standard parts and components in its products, certain components and
subassemblies are presently available only from a limited number of sources. To
date, the Company has been able to obtain adequate supplies of all components
and subassemblies in a timely manner from existing sources or, when necessary,
from alternative sources or redesign the system to incorporate new modules, when
applicable. However, the inability to obtain sufficient quantities of components
or to locate alternative sources of supply if and as required in the future,
would adversely affect the Company's operations.
-12-
The Company maintains organization-wide quality assurance procedures,
coordinating the quality control activities of the Company's research and
development, manufacturing and service departments.
CAPITAL MARKET ACTIVITIES
The Company seeks to identify and implement suitable investments, and
engages in portfolio investment and capital market activities, including venture
capital investments directly and indirectly through private equity funds.
Through a joint venture formed by the Company in partnership with Quantum
Industrial Holdings Ltd., an investment company managed by Soros Fund Management
LLC, the Company invests in venture capital in high technology firms, and
engages in other investment activities. The Company has significantly reduced
its new venture capital investments in recent periods.
OPERATIONS IN ISRAEL
A substantial portion of the Company's research and development,
manufacturing and other operations are located in Israel and, accordingly, may
be affected by economic, political and military conditions in that country.
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors, and the
continued state of hostility, varying in degree and intensity, has led to
security and economic problems for Israel. Since October 2000, there has been a
significant increase in violence, primarily in the West Bank and Gaza Strip, and
more recently Israel has experienced terrorist incidents within its borders. As
a result, negotiations between Israel and representatives of the Palestinian
Authority have been sporadic and have failed to result in peace. The Company
could be adversely affected by hostilities involving Israel, the interruption or
curtailment of trade between Israel and its trading partners, or a significant
downturn in the economic or financial condition of Israel. In addition, some of
the Company's employees in Israel are subject to being called upon to perform
military service in Israel, and their absence may have an adverse effect upon
the Company's operations.
Israel is a member of the United Nations, the International Monetary
Fund, the International Bank for Reconstruction and Development, and the
International Finance Corporation, and is a signatory to the General Agreement
on Tariffs and Trade, which provides for reciprocal lowering of trade barriers
among its members. In addition, Israel has been granted preferences under the
Generalized System of Preferences from the United States, Australia, Canada, and
Japan. These preferences allow Israel to export the products covered by such
programs either duty-free or at reduced tariffs.
Israel and the European Union are parties to a Free Trade Agreement
pursuant to which, subject to rules of origin, Israel's industrial exports to
the European Union are exempt from customs duties and other non-tariff barriers
and import restrictions. Israel also has an agreement with the United States to
establish a Free Trade Area that has eliminated all tariff and certain
non-tariff barriers on most trade between the two countries. Israel has also
entered into an agreement with the European Free Trade Association ("EFTA"),
which currently includes Iceland, Liechtenstein, Norway and Switzerland, that
-13-
established a free-trade zone between Israel and EFTA nations exempting
manufactured goods and some agricultural goods and processed foods from customs
duties, while reducing duties on other goods. The end of the Cold War has also
enabled Israel to establish commercial and trade relations with a number of
nations, including Russia, China, India, Turkey and the nations of Eastern
Europe, with whom Israel had not previously had such relations.
The Company's business is dependent to some extent on trading
relationships between Israel and other countries. Certain of the Company's
products incorporate components imported into Israel from the United States and
other countries and most of the Company's products are sold outside of Israel.
Accordingly, the Company's operations would be adversely affected if trade
between Israel and its current trading partners were interrupted or curtailed.
The sale of products manufactured in Israel has been adversely affected in
certain markets by restrictive laws, policies or practices directed toward
Israel or companies having operations in Israel. The continuation or
exacerbation of conflicts involving Israel and other nations may impede the
Company's ability to sell its products in certain markets.
The Company benefits from various policies of the Government of Israel,
including reduced taxation and special subsidy programs, designed to stimulate
economic activity, particularly high technology industry, in that country. As a
condition of its receipt of funds for various research and development projects
conducted under programs sponsored by the Government of Israel, the Company has
agreed that products resulting from these projects may not be manufactured, nor
may the technology developed in the projects be transferred, outside of Israel
without government consent.
The results of operations of the Company have been favorably affected
by participation in Israeli government programs related to research and
development, as well as utilization of certain tax incentives and other
incentives available under applicable Israeli laws and regulations, some of
which have been reduced, discontinued or otherwise modified in recent years. In
addition, the Company's ability to obtain benefits under various discretionary
funding programs has declined and may continue to decline. The results of
operations of the Company could be adversely affected if these programs were
further reduced or eliminated and not replaced with equivalent programs or if
its ability to participate in these programs were to be reduced significantly.
EMPLOYEES
At January 31, 2002, the Company employed approximately 5,650
individuals, of whom approximately 77% are scientists, engineers and technicians
engaged in research and development, marketing and support activities.
The Company is not a party to any collective bargaining or other
agreement with any labor organization; however, certain provisions of the
collective bargaining agreements between the Histadrut (General Federation of
Labor in Israel) and the Coordinating Bureau of Economic Organizations
(including the Industrialists' Association) are applicable to the Company's
Israeli employees by order of the Israeli Ministry of Labor. Israeli law
-14-
generally requires the payment by employers of severance pay upon the death of
an employee, his or her retirement or upon termination of his or her employment,
and the Company provides for such payment obligations through monthly
contributions to an insurance fund. Israeli employees and employers are required
to pay pre-determined sums to the National Insurance Institute, which payment
covers medical and other benefits similar to the benefits provided by the United
States Social Security Administration.
The continuing success of the Company will depend, to a considerable
extent, on the contributions of its senior management and key employees, many of
whom would be difficult to replace, and on the Company's ability to attract and
retain qualified employees in all areas of its business. Competition for such
personnel is intense. In order to attract and retain talented personnel, and to
provide incentives for their performance, the Company has emphasized the award
of stock options as an important element of its compensation program, including
options to purchase shares in certain of the Company's subsidiaries, and
provides cash bonuses based on several parameters, including the profitability
of the recipients' respective business units.
ITEM 2. PROPERTIES.
As of January 31, 2002, the Company leased an aggregate of
approximately 2,455,000 square feet of office space and manufacturing and
related facilities for its operations worldwide, including approximately
1,486,000 square feet in Tel Aviv, Israel, approximately 367,000 square feet in
Wakefield, Massachusetts, approximately 77,000 square feet in Andover,
Massachusetts, approximately 60,000 square feet in Woodbury, New York,
approximately 85,000 square feet in Mt. Laurel, New Jersey, and an aggregate of
approximately 380,000 square feet at various other locations in the United
States, Europe, the Far East, Australia, Latin America and Africa. The aggregate
base monthly rent for the facilities under lease as of January 31, 2002 was
approximately $3,119,000, and all of such leases are subject to various
pass-throughs and escalation adjustments.
In addition, the Company owns office space and manufacturing and
related facilities of approximately 40,000 square feet in Durango, Colorado and
approximately 25,000 square feet in Bexbach, Germany.
In September, 1999, the Company acquired approximately 423,000 square
feet of unimproved land in Ra'anana, Israel, with a view to the potential future
consolidation and construction of facilities for its Israeli operations.
The Company believes that its facilities currently under lease are more
than adequate for its current operations, and may endeavor selectively to reduce
its existing facilities commitments as circumstances may warrant.
-15-
ITEM 3. LEGAL PROCEEDINGS.
On or about October 19, 2001, Kevin Beier v. Comverse Technology, Inc.,
et al., CV 016972, the first of four virtually identical purported securities
class action complaints was filed against CTI and certain of its executive
officers in the United States District Court for the Eastern District of New
York. The four actions were consolidated into the Beier action on January 15,
2002 and an amended consolidated complaint was filed on March 4, 2002. The
consolidated complaint generally alleges violations of federal securities laws
on behalf of individuals who allege that they purchased CTI's common stock
during a purported class period between April 30, 2001 and July 10, 2001. The
consolidated complaint seeks an unspecified amount in damages on behalf of
persons who purchased CTI stock during the purported class period. The Company
believes all claims in the complaints to be without merit and will vigorously
defend against these claims.
From time to time, the Company is subject to claims in legal
proceedings arising in the normal course of its business. The Company does not
believe that it is currently party to any pending legal action that could
reasonably be expected to have a material adverse effect on its business or
operating results.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At a Special Meeting of Shareholders held on February 25, 2002, the
shareholders of CTI authorized CTI to make an offer to holders of certain CTI
stock options granted under its stock incentive compensation plans entitling
such holders to surrender such options for cancellation in exchange for the
grant of replacement options to purchase 0.85 shares of Common Stock for each
share that was issuable under such cancelled options, with the replacement
options to be granted no earlier than six months and one day following the
cancellation date of the cancelled options at a price equal to the fair market
value of the Common Stock on the new grant date. This proposal was approved with
a vote of 74,549,571 shares in favor, 58,162,258 shares against and 1,206,026
abstentions.
-16-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock of CTI trades on the NASDAQ National Market System
under the symbol CMVT. The following table sets forth the range of closing
prices of the Common Stock as reported on NASDAQ for the past two fiscal years.
All prices have been adjusted to reflect the three-for-two stock split, effected
in the form of a stock dividend, distributed on April 15, 1999, and the
two-for-one stock split, effected in the form of a stock dividend, distributed
on April 3, 2000.
Year Fiscal Quarter Low High
2000 2/1/00 - 4/30/00 68.06 119.69
5/1/00 - 7/31/00 65.25 102.75
8/1/00 - 10/31/00 76.06 114.81
11/1/00 - 1/31/01 86.19 121.63
2001 2/1/01 - 4/30/01 45.82 113.13
5/1/01 - 7/31/01 24.78 74.11
8/1/01 - 10/31/01 15.90 29.87
11/1/01 - 1/31/02 19.14 26.93
There were 1,829 holders of record of Common Stock at April 23, 2002.
Such record holders include a number of holders who are nominees for an
undetermined number of beneficial owners. The Company believes that the number
of beneficial owners of the shares of Common Stock outstanding at such date was
approximately 30,000.
The Company has not declared or paid any cash dividends on its equity
securities and does not expect to pay any cash dividends in the foreseeable
future, but rather intends to retain its earnings to finance the development of
the Company's business. Any future determination as to the declaration and
payment of dividends will be made by the Board of Directors in its discretion,
and will depend upon the Company's earnings, financial condition, capital
requirements and other relevant factors. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
-17-
ITEM 6. SELECTED FINANCIAL DATA.
The following tables present selected consolidated financial data for
the Company for the year ended December 31, 1997, the one month period ended
January 31, 1998, and the years ended January 31, 1999, 2000, 2001 and 2002.
Such information has been derived from the Company's audited consolidated
financial statements and should be read in conjunction with the Company's
consolidated financial statements and the notes to the consolidated financial
statements included elsewhere in this report. All financial information
presented herein has been retroactively adjusted for the January 1998 merger
with Boston Technology, Inc. ("Boston") and the July 2000 acquisition of Loronix
Information Systems, Inc. ("Loronix") to account for those transactions as
pooling of interests. All per share data has been restated to reflect a
three-for-two stock split effected as a 50% stock dividend to shareholders of
record on March 31, 1999, distributed on April 15, 1999, and a two-for-one stock
split effected as a 100% stock dividend to shareholders of record on March 27,
2000, distributed on April 3, 2000.
Year Transition
Ended Period Ended Year Ended
December 31, January 31, January 31,
------------ ----------- -------------------------------------------------
1997(1)(3) 1998 1999 (3) 2000 (3) 2001 2002
(In thousands, except per share data)
Statement of Operations Data:
Sales $ 498,343 $ 14,401 $ 708,805 $ 909,667 $ 1,225,058 $ 1,270,218
Cost of sales 221,650 21,666(2) 304,665 371,589 482,658 525,480
Research and development, net 98,152 13,481 134,201 169,816 232,198 293,296
Selling, general and administrative 142,055 51,892(2) 157,106 193,996 259,607 323,036
Merger and acquisition expenses - 41,877 - 2,016 15,971 -
Workforce reduction and
restructuring charges - - - - - 63,562
Interest and other income
(expense), net 4,957 175 8,315 16,595 33,339 (5,789)
Income (loss) before
income tax provision 41,443 (114,340) 121,148 188,845 267,963 59,055
Income tax provision 9,430 867 11,783 15,698 18,827 4,436
---------- ---------- ---------- --------- ------------ -----------
Net income (loss) $ 32,013 $ (115,207) $ 109,365 $ 173,147 $ 249,136 $ 54,619
========== =========== ========== ========= ============ ===========
Earnings (loss) per share - diluted $ 0.23 $ (0.89) $ 0.75 $ 1.08 $ 1.39 $ 0.29
========== ========== ========== ========= ============ ===========
Weighted average number of
common and common equivalent
shares outstanding - diluted 139,702 130,060 145,439 178,986 189,964 186,434
December 31, January 31,
------------ -------------------------------------------------------------------
1997 (4)(5) 1998 1999(4) 2000(4) 2001 2002
(In thousands)
Balance Sheet Data:
Working capital $ 402,901 $ 280,793 $ 712,165 $ 858,304 $ 1,860,379 $ 2,030,250
Total assets 636,342 527,652 1,042,959 1,372,847 2,625,264 2,704,163
Long-term debt, including
current portion 142,790 124,257 416,327 308,082 906,723 648,611
Stockholders' equity 357,514 231,390 390,855 724,839 1,236,165 1,616,408
(1) Includes results for Boston for the 11 months ended December 31, 1997.
(2) Includes approximately $7.8 million in cost of sales and $36.1 million
in selling, general and administrative expenses relating to charges as
a result of the merger with Boston.
(3) Includes the results of Loronix for its fiscal year ended December 31.
(4) Includes amounts for Loronix as of its fiscal year ended December 31.
(5) Includes amounts for Boston as of December 31, 1997.
-18-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue is generally recognized at the time of shipment for sales of
systems which do not require significant customization to be performed by the
Company and collection of the resulting receivable is deemed probable by the
Company. The Company's systems are generally a bundled hardware and software
solution that are shipped together. The Company generally has no obligations to
customers after the date products are shipped, except for product warranties.
The Company generally warranties its products for one year after sale. A
provision for estimated warranty costs is recorded at the time of sale.
Customers may also purchase separate maintenance contracts, which
generally consist of bug-fixing and telephone access to Company technical
personnel, but in certain circumstances may also include the right to receive
unspecified product updates, upgrades and enhancements. Revenue from these
services is recognized ratably over the contract period.
Revenues from certain development contracts are recognized under the
percentage-of-completion method on the basis of physical completion to date or
using actual costs incurred to total expected costs under the contract.
Revisions in estimates of costs and profits are reflected in the accounting
period in which the facts that require the revision become known. At the time a
loss on a contract is known, the entire amount of the estimated loss is accrued.
Amounts received from customers in excess of revenues earned under the
percentage-of-completion method are recorded as advance payments from customers.
Accounts receivable are generally diversified due to the number of commercial
and government entities comprising the Company's customer base and their
dispersion across many geographical regions. At the end of each accounting
period, the Company records a reserve for bad debts included in accounts
receivable based upon its current and historical collection history.
Cost of sales include material costs, subcontractor costs, salary and
related benefits for the operations and service departments, depreciation and
amortization of equipment used in the operations and service departments,
amortization of capitalized software costs, royalties and license fee costs,
travel costs and an overhead allocation. Research and development costs include
salary and related benefits as well as travel, depreciation and amortization of
research and development equipment, an overhead allocation, as well as other
costs associated with research and development activities. Selling, general and
administrative costs include salary and related benefits, travel, depreciation
and amortization, marketing and promotional materials, recruiting expenses,
professional fees, facility costs, as well as other costs associated with sales,
marketing, finance and administrative departments.
-19-
Software development costs are capitalized upon the establishment of
technological feasibility and are amortized over the estimated useful life of
the software, which to date has been four years or less. Amortization begins in
the period in which the related product is available for general release to
customers. The Company reviews for the impairment of long-lived assets and
certain identifiable intangibles whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. An
impairment loss would be recognized when estimated future undiscounted cash
flows expected to result from the use of the asset and proceeds from its
eventual disposition are less than its carrying amount. Impairment is measured
at fair value.
In July 2000, CTI acquired all of the outstanding stock of Loronix in a
transaction accounted for as a pooling of interests. The Company's financial
statements for the year ended January 31, 2000 include the operations of Loronix
for the year ended December 31, 1999.
RESULTS OF OPERATIONS
Year Ended January 31, 2002 Compared to Year Ended January 31, 2001
Sales. Sales for the fiscal year ended January 31, 2002 ("fiscal 2001")
increased by approximately $45.2 million, or 4%, compared to fiscal year ended
January 31, 2001 ("fiscal 2000"). This increase is primarily attributable to an
increase in sales of ESS products of approximately $48.7 million. Such increase
was principally due to increased sales to American customers. In addition, sales
of security and business intelligence recording products and service enabling
signaling software products increased (decreased) by approximately ($8.0)
million and $9.3 million, respectively.
Cost of Sales. Cost of sales for fiscal 2001 increased by approximately
$42.8 million, or 9%, as compared to fiscal 2000. The increase in cost of sales
is primarily attributable to increased materials and production costs of
approximately $21.8 million due to the increase in sales and increased
personnel-related costs of approximately $23.2 million due to hiring of
additional personnel and increased compensation and benefits for existing
personnel. Gross margins decreased from approximately 60.6% in fiscal 2000 to
approximately 58.6% in fiscal 2001.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for fiscal 2001 increased by approximately $63.4
million, or 24%, compared to fiscal 2000, and as a percentage of sales increased
from approximately 21.2% in fiscal 2000 to approximately 25.4% in fiscal 2001.
The increase was primarily due to hiring of additional personnel and increased
compensation and benefits for existing personnel to support the increased level
of sales during the first half of fiscal 2001.
Research and Development. Net research and development expenses for
fiscal 2001 increased by approximately $61.1 million, or 26%, compared to fiscal
2000 due to overall growth of research and development operations and the
initiation of significant new research and development projects. The increase
was primarily due to the hiring of additional personnel and increased
compensation and benefits for existing personnel of approximately $32.9 million,
-20-
lower reimbursements for research and development projects submitted for funding
to the OCS of approximately $11.5 million, an increase in depreciation and
amortization costs of approximately $6.3 million and an increase in the overhead
allocation of approximately $3.6 million.
Acquisition Expenses and Workforce Reduction and Restructuring Charges.
During the 2001 fiscal year, the Company took steps to better align its cost
structure with the current business environment, to improve the efficiency of
its operations and to better position the Company to realize emerging
opportunities. These steps included a reduction in workforce announced in April
2001 and a restructuring plan announced in December 2001. In connection with the
implementation of these actions the Company incurred charges of approximately
$63.6 million to cover the costs of severance, elimination of excess facilities
and related leasehold improvements, write-off of certain inventory, property and
equipment and capitalized software and other restructuring related charges, such
as professional fees. The Company expects to pay approximately $11.9 million for
severance and related charges during the year ended January 31, 2003 and
approximately $24.3 million for lease related obligations at various dates
through January 2011.
In July 2000, the Company acquired all of the outstanding stock of
Loronix, a company that develops software-based digital video recording and
management systems, and all of the outstanding stock of Syborg
Informationsysteme GmbH, a company that develops software-based digital voice
and internet recording and workforce management systems. In August 2000, the
Company acquired all of the outstanding stock of Gaya Software Industries Ltd.,
a company specializing in software-based intelligent IP gateways and VoIP
technology, and all of the outstanding stock of Exalink Ltd., a company
specializing in protocol gateways and applications software for the delivery of
Internet-based services to all types of wireless devices. These business
combinations were accounted for as pooling of interests.
In connection with the above acquisitions, the Company charged to
operations approximately $16.0 million in fiscal 2000 for merger related
charges. Such charges relate to the following:
Asset write-downs and impairments
---------------------------------
In connection with the acquisitions in fiscal 2000, certain assets
became impaired due to the existence of duplicative technology, property and
equipment and inventory of the merged companies. Accordingly, these assets were
written down to their net realizable value at the time of the mergers and a
charge of approximately $7.4 million was charged to operations.
Professional fees and other direct merger expenses
--------------------------------------------------
In connection with the acquisitions in fiscal 2000, the Company
recorded a charge of approximately $8.6 million for professional fees to
lawyers, investment bankers and accountants, as well as other direct merger
costs in connection with the mergers, such as printing costs and filing fees.
Interest and Other Income (Expense), Net. Interest and other income
(expense), net, for fiscal 2001 decreased by approximately $39.1 million as
compared to fiscal 2000. The principal reasons for the decrease are increased
-21-
net realized losses and write-downs of the Company's investments and decreased
equity in the earnings of affiliates of approximately $22.1 million, increased
interest expense of approximately $0.3 million and a change in foreign currency
gains/losses of approximately $20.1 million. These decreases were partially
offset by increased interest and dividend income of approximately $7.6 million.
The increase in interest and dividend income is primarily a result of the
inclusion of the proceeds for a full year in fiscal 2001 of the Company's $600
million 1.50% convertible debentures issued in November and December 2000,
partially offset by the decrease in interest rates during fiscal 2001.
Income Tax Provision. Provision for income taxes decreased from fiscal
2000 to fiscal 2001 by approximately $14.4 million, or 76%, due to decreased
pre-tax income. The Company's overall effective tax rate increased from
approximately 7.0% during fiscal 2000 to approximately 7.5% in fiscal 2001. The
Company's overall rate of tax is reduced significantly by the tax benefits
associated with qualified activities of certain of its Israeli subsidiaries,
which are entitled to favorable income tax rates under a program of the Israeli
Government for "Approved Enterprise" investments in that country.
Net Income. Net income decreased by approximately $194.5 million, or
78%, in fiscal 2001 compared to fiscal 2000, while as a percentage of sales
decreased from approximately 20.3% in fiscal 2000 to approximately 4.3% in
fiscal 2001. The decrease resulted primarily from the factors described above.
Year Ended January 31, 2001 Compared to Year Ended January 31, 2000
Sales. Sales for fiscal 2000 increased by approximately $315.4 million,
or 35%, compared to the year ended January 31, 2000 ("fiscal 1999"). This
increase is primarily attributable to an increase in sales of ESS products of
approximately $277.2 million. Such increase was principally due to increased
sales to European and American customers. In addition, sales of security and
business intelligence recording products and service enabling signaling software
products increased by approximately $23.8 million and $18.7 million,
respectively.
Cost of Sales. Cost of sales for fiscal 2000 increased by approximately
$111.1 million, or 30%, as compared to fiscal 1999. The increase in cost of
sales is primarily attributable to (i) increased materials and production costs
of approximately $62.3 million due to the increase in sales, (ii) increased
personnel-related costs of approximately $30.3 million due to hiring of
additional personnel and increased compensation and benefits for existing
personnel, (iii) increased travel-related costs of approximately $7.1 million
and (iv) an increase in depreciation and amortization costs of approximately
$4.3 million. Gross margins increased from approximately 59.2% in fiscal 1999 to
approximately 60.6% in fiscal 2000.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for fiscal 2000 increased by approximately $65.6
million, or 34%, compared to fiscal 1999, and as a percentage of sales was
approximately 21% in both fiscal 1999 and fiscal 2000. The increase was
primarily due to hiring of additional personnel and increased compensation and
benefits for existing personnel to support the increased level of sales during
fiscal 2000.
-22-
Research and Development. Net research and development expenses for
fiscal 2000 increased by approximately $62.4 million, or 37%, compared to fiscal
1999 due to overall growth of research and development operations and the
initiation of significant new research and development projects. The increase
was primarily due to hiring of additional personnel and increased compensation
and benefits for existing personnel to support the higher volume of research and
development activities.
Acquisition Expenses. In February 1999, the Company acquired all of the
outstanding stock of Amarex Technology, Inc., a company that develops
software-based applications for the telephone network operator and call center
markets. In August 1999, the Company acquired all of the outstanding stock of
InTouch Systems, Inc., a company that develops and markets a suite of
intelligent voice-controlled software applications. In July 2000, the Company
acquired all of the outstanding stock of Loronix, a company that develops
software-based digital video recording and management systems, and all of the
outstanding stock of Syborg Informationsysteme GmbH, a company that develops
software-based digital voice and internet recording and workforce management
systems. In August 2000, the Company acquired all of the outstanding stock of
Gaya Software Industries Ltd., a company specializing in software-based
intelligent IP gateways and voice-over-IP technology, and all of the outstanding
stock of Exalink Ltd., a company specializing in protocol gateways and
applications software for the delivery of Internet-based services to all types
of wireless devices. These business combinations were accounted for as pooling
of interests.
In connection with the above acquisitions, the Company has charged to
operations approximately $2.0 million and $16.0 million in fiscal 1999 and
fiscal 2000, respectively, for merger related charges. Such charges relate to
the following:
Asset write-downs and impairments
---------------------------------
In connection with the acquisitions in fiscal 2000, certain assets
became impaired due to the existence of duplicative technology, property and
equipment and inventory of the merged companies. Accordingly, these assets were
written down to their net realizable value at the time of the mergers and a
charge of approximately $7.4 million was charged to operations.
Professional fees and other direct merger expenses
--------------------------------------------------
In connection with the acquisitions in fiscal 1999 and fiscal 2000, the
Company recorded a charge of approximately $2.0 million and $8.6 million,
respectively, for professional fees to lawyers, investment bankers and
accountants, as well as other direct merger costs in connection with the
mergers, such as printing costs and filing fees.
Interest and Other Income, Net. Interest and other income, net, for
fiscal 2000 increased by approximately $16.7 million as compared to fiscal 1999.
The principal reasons for the increase are increased interest and dividend
income of approximately $26.7 million, a change in foreign currency gains/losses
of approximately $8.8 million and a decrease in interest expense of
approximately $1.4 million. These increases were partially offset by an increase
in net realized losses and write-downs on the Company's investments and the
equity in the earnings of affiliates of approximately $20.7 million. In November
-23-
and December 2000 the Company issued $600 million convertible senior debentures
with the interest income earned on the proceeds of such debentures adding to the
increase in interest and dividend income in fiscal 2000. The decrease in
interest expense is primarily a result of the inclusion in fiscal 1999 of the
Company's 5-3/4% convertible subordinated debentures redeemed in October 1999.
Income Tax Provision. Provision for income taxes increased from fiscal
1999 to fiscal 2000 by approximately $3.1 million, or 20%, due to increased
pre-tax income. The Company's overall effective tax rate decreased from
approximately 8% during fiscal 1999 to approximately 7% in fiscal 2000. The
Company's overall rate of tax is reduced significantly by the tax benefits
associated with qualified activities of certain of its Israeli subsidiaries,
which are entitled to favorable income tax rates under a program of the Israeli
Government for "Approved Enterprise" investments in that country.
Net Income. Net income increased by approximately $76.0 million, or
44%, in fiscal 2000 compared to fiscal 1999, while as a percentage of sales
increased from approximately 19% in fiscal 1999 to approximately 20% in fiscal
2000. The increase resulted primarily from the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at January 31, 2002 and 2001 was
approximately $2,030.3 million and $1,860.4 million, respectively.
Operations for fiscal 2001, fiscal 2000 and fiscal 1999, after adding
back non-cash items, provided cash of approximately $130.0 million, $309.7
million and $208.1 million, respectively. During such years, other changes in
working capital provided (used) cash of approximately $12.2 million, ($65.2)
million and ($30.8) million, respectively, resulting in cash being provided by
operating activities of approximately $142.2 million, $244.5 million and $177.4
million, respectively.
Investment activities for fiscal 2001, fiscal 2000 and fiscal 1999 used
cash of approximately $122.4 million, $207.3 million and $475.7 million,
respectively. These amounts include (i) additions to property, plant and
equipment in fiscal 2001, fiscal 2000 and fiscal 1999 of approximately $54.6
million, $97.3 million and $85.6 million, respectively; (ii) maturities and
sales (purchases) of bank time deposits and investments, net, of approximately
($44.8) million, ($94.5) million and ($377.6) million, respectively; and (iii)
capitalization of software development costs of approximately $23.0 million,
$15.5 million and $12.5 million, respectively. The property additions in each of
fiscal 2001, 2000 and 1999 include the increase of the Company's fixtures and
equipment and in fiscal 1999 the purchase of land by the Company of
approximately $25.8 million for potential future construction purposes. In
addition, in each of fiscal 2001, 2000 and 1999 the Company increased the amount
of its bank time deposits and investments to better utilize the net proceeds of
the 2000 and 1998 issuances of convertible debentures.
Financing activities for fiscal 2001, fiscal 2000 and fiscal 1999
provided cash of approximately $67.0 million, $894.1 million and $53.6 million,
respectively. These amounts include (i) the net proceeds from the issuance of
convertible debentures in fiscal 2000 of approximately $588.4 million; (ii)
-24-
proceeds from the issuance of common stock in connection with the exercise of
stock options, warrants and employee stock purchase plan of approximately $28.8
million, $111.4 million and $50.6 million, respectively; (iii) net proceeds
(repayments) of bank loans and other debt of approximately $38.2 million, ($0.9)
million and $3.1 million, respectively; and (iv) net proceeds from the issuance
of common stock of a subsidiary in connection with public offerings in fiscal
2000 of approximately $195.2 million.
In November 2000, the Company issued $500 million aggregate principal
amount of its 1.50% convertible senior debentures due December 2005. In December
2000, the Company issued an additional $100 million aggregate principal amount
of its 1.50% convertible senior debentures due December 2005 as a result of the
initial purchaser exercising in full their over-allotment option.
As of January 31, 2002, the Company had outstanding convertible
debentures of $600 million. In January 2002, Verint took a long-term bank loan
in the amount of $42 million. This loan, which matures in February 2003, bears
interest at LIBOR plus 0.55% and may be prepaid without penalty. The loan is
guaranteed by CTI.
The Company has obtained bank guaranties primarily for performance of
certain obligations under contracts with customers. These guaranties, which
aggregated approximately $23.4 million at January 31, 2002, are to be released
by the Company's performance of specified contract milestones, which are
scheduled to be completed primarily during 2002.
The Company leases office, manufacturing, and warehouse space under
non-cancelable operating leases. As of January 31, 2002, the minimum annual rent
obligations of the Company were approximately as follows:
Twelve Months Ended
January 31, Amount
------------------- ------
(In thousands)
2003 $ 34,007
2004 30,234
2005 20,253
2006 18,981
2007 and thereafter 33,666
-----------
$ 137,141
===========
-25-
On February 1, 2002, Verint acquired the digital video recording
business of Lanex, LLC. The Lanex business provides digital video recording
solutions for security and surveillance applications primarily to North American
banks. The purchase price consisted of $9.5 million in cash and a $2.2 million
convertible note. The note is non-interest bearing and matures on February 1,
2004. The holder of the note may elect to convert the note, in whole or in part,
into shares of Verint's common stock at a conversion price of $16.06 per share
at any time on or after the completion of an initial public offering by Verint.
The note is guaranteed by CTI. Pro forma results of operations have not been
presented because the effects of this acquisition are not material.
The Company believes that its existing working capital, together with
funds generated from operations, will be sufficient to provide for its planned
operations for the foreseeable future.
The Company regularly examines opportunities for strategic acquisitions
of other companies or lines of business and anticipates that it may from time to
time issue additional debt and/or equity securities either as direct
consideration for such acquisitions or to raise additional funds to be used (in
whole or in part) in payment for acquired securities or assets. The issuance of
such securities could be expected to have a dilutive impact on the Company's
shareholders, and there can be no assurance as to whether or when any acquired
business would contribute positive operating results commensurate with the
associated investment.
The Company's liquidity and capital resources have not been, and are
not anticipated to be, materially affected by restrictions pertaining to the
ability of its foreign subsidiaries to pay dividends or by withholding taxes
associated with any such dividend payments.
CERTAIN TRENDS AND UNCERTAINTIES
The Company derives the majority of its revenue from the
telecommunications industry, which is facing an unprecedented recession. This
has resulted in a significant reduction of capital expenditures made by TSPs.
The Company's operating results and financial condition have been, and will
continue to be, adversely affected by the severe decline in technology purchases
and capital expenditures by TSPs worldwide and by unfavorable global economic
conditions. Consequently, the Company's operating results have deteriorated
significantly in recent periods and may continue to deteriorate in future
periods if such conditions remain in effect. For these reasons and the risk
factors outlined below, it has been and continues to be very difficult for the
Company to accurately forecast future revenues and operating results.
The Company's business is particularly dependent on the strength of the
telecommunications industry. The telecommunications industry, in general, and
the Company, in particular, have been negatively affected by, among other
factors, the high costs and large debt positions incurred by some TSPs to expand
capacity and enable the provision of future services (and the corresponding
risks associated with the development, marketing and adoption of these services
as discussed below), including the cost of acquisitions of licenses to provide
future broadband services and reductions in TSPs' actual and projected revenues
and deterioration in their actual and projected operating results. Accordingly,
TSPs have significantly reduced their actual and planned expenditures to expand
or replace equipment and delayed and reduced the deployment of services. A
-26-
number of TSPs, including certain customers of the Company, have indicated the
existence of conditions of excess capacity in certain markets.
In addition, TSPs have delayed the planned introduction of new
services, such as broadband mobile telephone services, that would be supported
by certain of the Company's products. Certain of the Company's customers also
have implemented changes in procurement practices and procedures, including
limitations on purchases in anticipation of estimated future capacity
requirements, and in the management and use of their networks, that have had an
adverse affect on the Company's sales and order backlog, which also has made it
very difficult for the Company to project future sales. The continuation and/or
exacerbation of these trends will have an adverse effect on the Company's future
results. In addition to loss of revenue, weakness in the telecommunications
industry has affected and will continue to affect the Company's business by
increasing the risks of credit or business failures of suppliers, customers or
distributors, by customer requirements for vendor financing, by delays and
defaults in customer or distributor payments, and by price reductions instituted
by competitors to retain or acquire market share.
The Company's current plan of operations is predicated in part on a
recovery in capital expenditures by its customers. In the absence of such
improvement, the Company would experience further deterioration in its operating
results, and may determine to modify its plan for future operations accordingly,
which may include, among other things, additional reductions in its workforce.
The Company intends to continue to make significant investments in its
business, and to examine opportunities for growth through acquisitions and
strategic investments. These activities may involve significant expenditures and
obligations that cannot readily be curtailed or reduced if anticipated demand
for the associated products does not materialize or is delayed. The impact of
these decisions on future financial results cannot be predicated with assurance,
and the Company's commitment to growth may increase its vulnerability to
downturns in its markets, technology changes and shifts in competitive
conditions. The Company also may not be able to identify future suitable merger
or acquisition candidates, and even if the Company does identify suitable
candidates, it may not be able to make these transactions on commercially
acceptable terms, or at all. If the Company does make acquisitions, it may not
be able to successfully incorporate the personnel, operations and customers of
these companies into the Company's business. In addition, the Company may fail
to achieve the anticipated synergies from the combined businesses, including
marketing, product integration, distribution, product development and other
synergies. The integration process may further strain the Company's existing
financial and managerial controls and reporting systems and procedures. This may
result in the diversion of management and financial resources from the Company's
core business objectives. In addition, an acquisition or merger may require the
Company to utilize cash reserves, incur debt or issue equity securities, which
may result in a dilution of existing stockholders, and the Company may be
negatively impacted by the assumption of liabilities of the merged or acquired
company. Due to rapidly changing market conditions, the Company may find the
value of its acquired technologies and related intangible assets, such as
goodwill as recorded in the Company's financial statements, to be impaired,
resulting in charges to operations. The Company may also fail to retain the
acquired or merged companies' key employees and customers.
-27-
The Company has made, and in the future, may continue to make strategic
investments in other companies. These investments have been made in, and future
investments will likely be made in, immature businesses with unproven track
records and technologies. Such investments have a high degree of risk, with the
possibility that the Company may lose the total amount of its investments. The
Company may not be able to identify suitable investment candidates, and, even if
it does, the Company may not be able to make those investments on acceptable
terms, or at all. In addition, even if the Company makes investments, it may not
gain strategic benefits from those investments.
The telecommunications industry is subject to rapid technological
change. The introduction of new technologies in the telecommunications market
and new alternatives for the delivery of services are having, and can be
expected to continue to have, a profound effect on competitive conditions in the
market and the success of market participants, including the Company. The
Company's continued success will depend on its ability to correctly anticipate
technological trends in its industries, to react quickly and effectively to such
trends and to enhance its existing products and to introduce new products on a
timely and cost-effective basis. As a result, the life cycle of the Company's
products is difficult to estimate. In addition, changing industry and market
conditions may dictate strategic decisions to restructure some business units
and discontinue others. Discontinuing a business unit or product line may result
in the Company recording accrued liabilities for special charges, such as costs
associated with a reduction in work force. These strategic decisions could
result in changes to determinations regarding a product's useful life and the
recoverability of the carrying basis of certain assets.
The Company's products involve sophisticated hardware and software
technology that performs critical functions to highly demanding standards. There
can be no assurance that the Company's current or future products will not
develop operational problems, which could have a material adverse effect on the
Company. The Company relies on a limited number of suppliers and manufacturers
for specific components and may not be able to find alternate manufacturers that
meet its requirements and existing or alternative sources may not be available
on favorable terms and conditions. Thus, if there is a shortage of supply for
these components, the Company may experience an interruption in its product
supply. In addition, loss of third party software licensing would materially and
adversely affect the Company's business, financial condition and results of
operations.
The telecommunications industry continues to undergo significant change
as a result of deregulation and privatization worldwide, reducing restrictions
on competition in the industry. Unforeseen changes in the regulatory environment
also may have an impact on the Company's revenues and/or costs in any given part
of the world. The worldwide ESS system industry is already highly competitive
and the Company expects competition to intensify. The Company believes that
existing competitors will continue to present substantial competition, and that
other companies, many with considerably greater financial, marketing and sales
resources than the Company, may enter the ESS system markets. Moreover, as the
Company enters into new markets as a result of its own research and development
efforts or acquisitions, it is likely to encounter new competitors.
The market for the Company's digital security and surveillance and
enterprise business intelligence products has also been affected by weakness in
general economic conditions, delays or reductions in customers' purchases of
capital equipment and uncertainties relating to government expenditure programs.
-28-
Budgetary constraints, uncertainties resulting from the introduction of new
technologies and shifts in the pattern of government expenditures resulting from
increased uncertainties in the market for monitoring systems, resulting in
certain instances in the attenuation of government procurement programs beyond
their originally expected performance periods and an increased incidence of
delay, cancellation or reduction of planned projects. Competitive conditions in
this sector have also been affected by the increasing use by certain potential
government customers of their own internal development resources rather than
outside vendors to provide certain technical solutions. In addition, a number of
established government contractors, particularly developers and integrators of
technology products, have taken steps to redirect their marketing strategies and
product plans in reaction to cut-backs in their traditional areas of focus,
resulting in an increase in the number of competitors and the range of products
offered in response to particular requests for proposals. The lack of
predictability in the timing and scope of government procurements have similarly
made planning decisions more difficult and have increased the associated risks.
The Company has historically derived a significant portion of its sales
and operating profit from contracts for large system installations with major
customers. The Company continues to emphasize large capacity systems in its
product development and marketing strategies. Contracts for large installations
typically involve a lengthy and complex bidding and selection process, and the
ability of the Company to obtain particular contracts is inherently difficult to
predict. The timing and scope of these opportunities and the pricing and margins
associated with any eventual contract award are difficult to forecast, and may
vary substantially from transaction to transaction. The Company's future
operating results may accordingly exhibit a higher degree of volatility than the
operating results of other companies in its industries that have adopted
different strategies, and also may be more volatile than the Company has
experienced in prior periods. The degree of dependence by the Company on large
system orders, and the investment required to enable the Company to perform such
orders, without assurance of continuing order flow from the same customers and
predictability of gross margins on any future orders, increase the risk
associated with its business. The Company's gross margins also may be adversely
affected by increases in material or labor costs, obsolescence charges, price
competition and changes in channels of distribution or in the mix of products
sold.
Political, economic and military conditions in Israel directly affect
the Company's operations. Since the establishment of the State of Israel in
1948, a number of armed conflicts have taken place between Israel and its Arab
neighbors, and the continued state of hostility, varying in degree and
intensity, has led to security and economic problems for Israel. Since October
2000, there has been a significant increase in violence, primarily in the West
Bank and Gaza Strip, and more recently Israel has experienced terrorist
incidents within its borders. As a result, negotiations between Israel and
representatives of the Palestinian Authority have been sporadic and have failed
to result in peace. The Company could be adversely affected by hostilities
involving Israel, the interruption or curtailment of trade between Israel and
its trading partners, or a significant downturn in the economic or financial
condition of Israel. In addition, the sale of products manufactured in Israel
may be adversely affected in certain countries by restrictive laws, policies or
practices directed toward Israel or companies having operations in Israel. The
continuation or exacerbation of violent conflicts involving Israel and other
nations may impede the Company's ability to sell its products in certain
countries. In addition, some of the Company's employees in Israel are subject to
being called upon to perform military service in Israel, and their absence may
have an adverse effect upon the Company's operations. Generally, unless exempt,
-29-
male adult citizens and permanent residents of Israel under the age of 54 are
obligated to perform up to 36 days of military reserve duty annually.
Additionally, all such residents are subject to being called to active duty at
any time under emergency circumstances. These conditions could disrupt the
Company's operations in Israel and its business, financial condition and results
of operations could be adversely affected.
The Company's costs of operations have at times been affected by
changes in the cost of its operations in Israel, resulting from changes in the
value of the Israeli shekel relative to the United States dollar, and from
difficulties in attracting and retaining qualified scientific, engineering and
technical personnel in Israel, where the availability of such personnel has at
times been severely limited. Changes in these cost factors have from time to
time been significant and difficult to predict, and could in the future have a
material adverse effect on the Company's results of operations.
The Company's historical operating results reflect substantial benefits
it has received from programs sponsored by the Israeli government for the
support of research and development, as well as tax moratoriums and favorable
tax rates associated with investments in approved projects ("Approved
Enterprises") in Israel. Some of these programs and tax benefits have ceased and
others may not be continued in the future and the availability of such benefits
to the Company may be affected by a number of factors, including budgetary
constraints resulting from adverse economic conditions, government policies and
the Company's ability to satisfy eligibility criteria.
The Israeli government has reduced the benefits available under some of
these programs in recent years, and Israeli government authorities have
indicated that the government may further reduce or eliminate some of these
benefits in the future. The Company has regularly participated in a conditional
grant program administered by the OCS under which it has received significant
benefits through reimbursement of up to 50% of qualified research and
development expenditures. Verint currently pays royalties, of between 3% and 5%
(or 6% under certain circumstances) of associated product revenues (including
service and other related revenues) to the Government of Israel for repayment of
benefits received under this program. Such royalty payments by Verint are
currently required to be made until the government has been reimbursed the
amounts received by the Company plus, for amounts received under projects
approved by the OCS after January 1, 1999, interest on such amount at a rate
equal to the 12-month LIBOR rate in effect on January 1 of the year in which
approval is obtained. During fiscal 2001, Comverse entered into an arrangement
with the OCS whereby Comverse agreed to pay a lump sum royalty amount for all
past amounts received from the OCS. In addition, Comverse will receive lower
amounts from the OCS than it has historically received, but will not have to pay
royalty amounts on future grants. The amount of reimbursement received by the
Company under this program has been reduced significantly, and the Company does
not expect to receive significant reimbursement under this program in the
future. In addition, permission from the Government of Israel is required for
the Company to manufacture outside of Israel products resulting from research
and development activities funded under these programs, or to transfer outside
of Israel related technology rights. In order to obtain such permission, the
Company may be required to increase the royalties to the applicable funding
agencies and/or repay certain amounts received as reimbursement of research and
development costs. The continued reduction in the benefits received by the
Company under the program, or the termination of its eligibility to receive
these benefits at all in the future, could adversely affect the Company's
operating results.
-30-
The Company's overall effective tax rate benefits from the tax
moratorium provided by the Government of Israel for Approved Enterprises
undertaken in that country. The Company's effective tax rate may increase due
to, among other factors, the increased proportion of its taxable income
associated with activities in higher tax jurisdictions, and by the relative ages
of the Company's eligible investments in Israel. The tax moratorium on income
from the Company's Approved Enterprise investments made prior to 1997 is four
years, whereas subsequent Approved Enterprise projects are eligible for a
moratorium of only two years. Reduced tax rates apply in each case for certain
periods thereafter. To be eligible for these tax benefits, the Company must
continue to meet conditions, including making specified investments in fixed
assets and financing a percentage of investments with share capital. If the
Company fails to meet such conditions in the future, the tax benefits would be
canceled and the Company could be required to refund the tax benefits already
received. Israeli authorities have indicated that additional limitations on the
tax benefits associated with Approved Enterprise projects may be imposed for
certain categories of taxpayers, which would include the Company. If further
changes in the law or government policies regarding those programs were to
result in their termination or adverse modification, or if the Company were to
become unable to participate in, or take advantage of, those programs, the cost
of the Company's operations in Israel would increase and there could be a
material adverse effect on the Company's operations and financial results.
The Company's success is dependent on recruiting and retaining key
management and highly skilled technical, managerial, sales, and marketing
personnel. The competition for highly skilled personnel remains very competitive
despite the current economic conditions. The Company's ability to attract and
retain employees also may be affected by recent cost control actions, including
reductions in the Company's workforce and the associated reorganization of
operations.
The occurrence or perception of security breaches within the Company
could harm the Company's business, financial condition and operating results.
While the Company implements sophisticated security measures, third parties may
attempt to breach the Company's security through computer viruses, electronic
break-ins and other disruptions. If successful, confidential information,
including passwords, financial information, or other personal information may be
improperly obtained and the Company may be subject to lawsuits and other
liability. Even if the Company is not held liable, a security breach could harm
the Company's reputation, and even the perception of security risks, whether or
not valid, could inhibit market acceptance of the Company's products.
The Company currently derives a significant portion of its total sales
from customers outside of the United States. International transactions involve
particular risks, including political decisions affecting tariffs and trade
conditions, rapid and unforeseen changes in economic conditions in individual
countries, turbulence in foreign currency and credit markets, and increased
costs resulting from lack of proximity to the customer. The Company is required
to obtain export licenses and other authorizations from applicable governmental
authorities for certain countries within which it conducts business. The failure
to receive any required license or authorization would hinder the Company's
ability to sell its products and could adversely affect the Company's business,
financial condition and results of operations. In addition, legal uncertainties
regarding liability, compliance with local laws and regulations, labor laws,
-31-
employee benefits, currency restrictions, difficulty in accounts receivable
collection, longer collection periods and other requirements may have a negative
impact on the Company's operating results.
Volatility in international currency exchange rates may have a
significant impact on the Company's operating results. The risk of currency
instability is increased by prevailing conditions of economic weakness in a
number of world markets, and the potential for recession. The Company has, and
anticipates that it will continue to receive, significant contracts denominated
in foreign currencies, particularly the euro. As a result of the unpredictable
timing of purchase orders and payments under such contracts and other factors,
it is often not practicable for the Company to effectively hedge the risk of
significant changes in currency rates during the contract period. The Company
may experience risk associated with the failure to hedge the exchange rate risks
associated with contracts denominated in foreign currencies and its operating
results have been and may continue to be negatively affected to a material
extent by the impact of currency fluctuations. Operating results may also be
affected by the cost of such hedging activities that the Company does undertake.
While the Company generally requires employees, independent contractors
and consultants to execute non-competition and confidentiality agreements, the
Company's intellectual property or proprietary rights could be infringed or
misappropriated, which could result in expensive and protracted litigation. The
Company relies on a combination of patent, copyright, trade secret and trademark
law to protect its technology. Despite the Company's efforts to protect its
intellectual property and proprietary rights, unauthorized parties may attempt
to copy or otherwise obtain and use its products or technology. Effectively
policing the unauthorized use of the Company's products is time-consuming and
costly, and there can be no assurance that the steps taken by the Company will
prevent misappropriation of its technology, particularly in foreign countries
where in many instances the local laws or legal systems do not offer the same
level of protection as in the United States.
If others claim that the Company's products infringe their intellectual
property rights, the Company may be forced to seek expensive licenses,
reengineer its products, engage in expensive and time-consuming litigation or
stop marketing its products. The Company attempts to avoid infringing known
proprietary rights of third parties in its product development efforts. The
Company does not regularly conduct comprehensive patent searches to determine
whether the technology used in its products infringes patents held by third
parties, however. There are many issued patents as well as patent applications
in the fields in which the Company is engaged. Because patent applications in
the United States are not publicly disclosed until the patent is issued,
applications may have been filed which relate to the Company's software and
products. If the Company were to discover that its products violated or
potentially violated third-party proprietary rights, it might not be able to
obtain licenses to continue offering those products without substantial
reengineering. Any reengineering effort may not be successful, nor can the
Company be certain that any licenses would be available on commercially
reasonable terms.
Substantial litigation regarding intellectual property rights exists in
the telecommunications industry, and the Company expects that its products may
be increasingly subject to third-party infringement claims as the number of
competitors in its industry segments grows and the functionality of software
products in different industry segments overlaps. In addition, the Company has
agreed to indemnify customers in certain situations should it be determined that
-32-
its products infringe on the proprietary rights of third parties. Any
third-party infringement claims could be time consuming to defend, result in
costly litigation, divert management's attention and resources, cause product
and service delays or require the Company to enter into royalty or licensing
agreements. Any royalty or licensing arrangements, if required, may not be
available on terms acceptable to the Company, if at all. A successful claim of
infringement against the Company and its failure or inability to license the
infringed or similar technology could have a material adverse effect on its
business, financial condition and results of operations.
The Company holds a large proportion of its net assets in cash
equivalents and short-term investments, including a variety of public and
private debt and equity instruments, and has made significant venture capital
investments, both directly and through private investment funds. Such
investments subject the Company to the risks inherent in the capital markets
generally, and to the performance of other businesses over which it has no
direct control. Given the relatively high proportion of the Company's liquid
assets relative to its overall size, the results of its operations are
materially affected by the results of the Company's capital management and
investment activities and the risks associated with those activities. Declines
in the public equity markets have caused, and may be expected to continue to
cause, the Company to experience realized and unrealized investment losses. In
addition, while the Company's interest and other income has benefited from the
positive spread between the fixed interest it pays on its outstanding
indebtedness and interest earned on the investment of its cash balances,
reduction in prevailing interest rates due to economic conditions or government
policies has had and may continue to have an adverse impact on the Company's
results of operations.
The severe decline in the public trading prices of equity securities,
particularly in the technology and telecommunications sectors, and corresponding
decline in values of privately-held companies and venture capital funds in which
the Company has invested, have, and may continue to have, an adverse impact on
the Company's financial results and costs of operations. The Company has in the
past benefited from the long-term rise in the public trading price of its shares
in various ways, including its ability to use equity incentive arrangements as a
means of attracting and retaining the highly qualified employees necessary for
the growth of its business and its ability to raise capital on relatively
attractive conditions. The decline in the price of the Company's shares, and the
overall decline in equity prices generally, and in the shares of technology
companies in particular, can be expected to make it more difficult for the
Company to rely on equity incentive arrangements as a means to recruit and
retain talented employees, and negatively has impacted the ability of the
Company to raise capital on terms as advantageous to the Company as in the past.
The trading price of the Company's shares has been affected by the
factors disclosed herein as well as prevailing economic and financial trends and
conditions in the public securities markets. Share prices of companies in
technology-related industries, such as the Company, tend to exhibit a high
degree of volatility. The announcement of financial results that fall short of
the results anticipated by the public markets could have an immediate and
significant negative effect on the trading price of the Company's shares in any
given period. Such shortfalls may result from events that are beyond the
Company's immediate control, can be unpredictable and, since a significant
proportion of the Company's sales during each fiscal quarter tend to occur in
the latter stages of the quarter, may not be discernible until the end of a
financial reporting period. These factors may contribute to the volatility of
the trading value of its shares regardless of the Company's long-term prospects.
-33-
The trading price of the Company's shares may also be affected by developments,
including reported financial results and fluctuations in trading prices of the
shares of other publicly-held companies in the telecommunications equipment
industry in general, and the Company's business segments in particular, which
may not have any direct relationship with the Company's business or prospects.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities" which was subsequently amended by
SFAS Nos. 137 and 138 (collectively "SFAS 133"). SFAS 133 establishes accounting
and reporting standards for derivative instruments, including certain
derivatives embedded in other contracts, and hedging activities and requires
that an entity recognize all derivatives as either assets or liabilities and
measure those instruments at fair value. Under SFAS 133, certain contracts that
were not formerly considered derivatives may now meet the definition of a
derivative. SFAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company adopted SFAS 133 effective February
1, 2001. The adoption of SFAS 133 did not have a material effect on the
Company's consolidated financial statements.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations."
SFAS No. 141 applies prospectively to all business combinations initiated after
June 30, 2001 and to all business combinations acco