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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended January 31, 2004
Commission File Number 0-15502
COMVERSE TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 13-3238402
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
170 CROSSWAYS PARK DRIVE
WOODBURY, NEW YORK 11797
(Address of principal executive offices)
Registrant's telephone number, including area code: 516-677-7200
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- --------------------
Not applicable Not applicable
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.10 PAR VALUE PER SHARE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
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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]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act).
[X] Yes [ ] No
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the closing price as of the last
business day of the registrant's most recently completed second fiscal quarter,
July 31, 2003, was approximately $2,783,399,000.
There were 195,518,341 shares of the registrant's common stock
outstanding on April 7, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on June 15, 2004, are incorporated by reference in Part
III.
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Comverse, Comverse Technology and Comverse's logos, including Total
Communications and InSight, are trademarks of the Company. Verint(R), Actionable
Intelligence(R), LORONIX(R) are registered trademarks, and Powering Actionable
Intelligence, Intelligent Recording, OpenStorage Portal, RELIANT, STAR-GATE,
ULTRA, SmartSight Universal Database and Verint Systems are trademarks of Verint
Systems Inc., a subsidiary of the Company. Signalware(R) and Ulticom(R) are
registered trademarks of Ulticom, Inc., a subsidiary of the Company.
ii
FORWARD-LOOKING STATEMENTS
Certain statements discussed in Item 1 (Business), Item 3 (Legal Proceedings),
Item 7 (Management's Discussion and Analysis of Financial Condition and Results
of Operations), and elsewhere in this Form 10-K constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other important factors that could cause the actual results,
performance or achievements of results to differ materially from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Important risks, uncertainties and other important
factors that could cause actual results to differ materially include, among
others: the successful implementation of Comverse Technology, Inc.'s business
strategy; changes in the demand for the company's products; changes in capital
spending among the company's current and prospective customers; the risks
associated with the sale of large, complex, high capacity systems and with new
product introductions as well as the uncertainty of customer acceptance of these
new or enhanced products from either the company or its competition; risks
associated with rapidly changing technology and the ability of the company to
introduce new products on a timely and cost-effective basis; risks associated
with changes in the competitive or regulatory environment in which the company
operates; risks associated with significant foreign operations and international
sales and investment activities, including fluctuations in foreign currency
exchange rates, interest rates, and valuations of public and private equity; the
volatility of macroeconomic and industry conditions and the international
marketplace; risks associated with the company's ability to retain existing
personnel and recruit and retain qualified personnel; and other risks described
in filings with the Securities and Exchange Commission. These risks and
uncertainties, as well as other factors, are discussed in greater detail at the
end of Item 7 (Management's Discussion and Analysis of Financial Condition and
Results of Operations) of this Form 10-K. The company makes no commitment to
revise or update any forward-looking statements in order to reflect events or
circumstances after the date any such statement is made.
PART I
ITEM 1. BUSINESS.
THE COMPANY
Comverse Technology, Inc. ("CTI" and, together with its subsidiaries,
the "Company"), a New York corporation incorporated in 1984, designs, develops,
manufactures, markets and supports software, systems, and related services for
multimedia communication and information processing applications. The Company's
products are used in a broad range of applications by wireless and wireline
telecommunications network operators and service providers, call centers, and
other government, public and commercial organizations worldwide.
Through its subsidiary Comverse, Inc. ("Comverse"), the Company
provides telecommunications software, systems, and related services to
telecommunications service providers ("TSPs") that enable voice and data
value-added enhanced services and real-time billing of communication services.
These products comprise Comverse's Total Communication portfolio, and address
1
four primary categories: call completion and call management solutions; advanced
messaging solutions for groups, communities and person-to-person communication;
solutions and enablers for the management and delivery of data and content-based
services; and real-time billing and account management solutions for dynamic
service environments. These products are designed to enhance the communication
experience and generate TSP traffic and revenue. 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.
Comverse markets its systems throughout the world, with its own
direct sales force and in cooperation with a number of leading international
vendors of telecommunications infrastructure equipment.
More than 400 wireless and wireline TSPs in more than 110 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 customers. Major network operators and service providers using Comverse's
systems include, among others, AT&T (USA), Deutsche Telekom (Germany and other
European countries), KDDI (Japan), MCI WorldCom (USA), O2 (Germany and UK), NTT
(Japan), Orange (several countries), SBC Communications (USA), SFR (France),
Sprint (USA), Telecom Italia (Italy), Telmex (Mexico), Telstra (Australia),
Verizon (USA), and Vodafone (multiple countries).
Through its subsidiary, Verint Systems Inc. ("Verint"), the
Company provides analytic software-based solutions for communications
interception, networked video, and contact centers. Verint's software generates
actionable intelligence through the collection, retention and analysis of
unstructured information contained in voice, fax, video, email, Internet and
data transmissions from voice, video and IP networks. Verint's analytic
solutions are designed to extract critical intelligence and deliver this
intelligence to decision makers for more effective action. The security market
consists primarily of communication interception by law enforcement and other
government agencies and networked video security utilized by government agencies
and public and private organizations for use in airports, public buildings,
correctional facilities and corporate sites. The business intelligence market
consists primarily of solutions for 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 business intelligence solutions to
contact center service bureaus, financial institutions, retailers, utilities,
communication service providers, manufacturers and other enterprises. Verint has
established marketing relationships with a variety of global value-added
resellers and a network of systems integrators including ADT, Avaya, British
Telecom, Nortel and Siemens. Verint also has technological alliances with
leading software and hardware companies including Genesys, Indentix, and Siebel,
which enables Verint to offer complementary solutions to their products.
Verint's products are used by over 1000 organizations in over 50 countries
worldwide. Customers for Verint's Communications Interception Solutions include,
among others, the U.S. Department of Justice, the Toronto Police Service, the
Dutch National Police Agency, and other domestic and foreign law enforcement and
intelligence agencies, as well as communication service and equipment providers,
such as Cingular, Ericsson and Nortel. Customers for Verint's Networked Video
Solutions include the U.S. Department of Defense, the U.S. Capitol, Washington
Dulles International Airport, Home Depot, Target and Tiffany & Co. Customers for
Verint's Contact Center Actionable Intelligence Solutions include, among others,
the Internal Revenue Service, HSBC, JCPenney, SBC, CIBC and Sprint. Verint had
an initial public offering of its common stock in May, 2002, and its common
stock is listed on the NASDAQ National Market System under the symbol "VRNT."
CTI held approximately 61.8% of Verint's outstanding common stock as of January
31, 2004.
2
Through its subsidiary Ulticom, Inc. ("Ulticom"), the Company
provides service enabling signaling software for wireline, wireless and Internet
communications. Ulticom's Signalware family of products are used by equipment
manufacturers, application developers and communication service providers to
deploy revenue generating infrastructure and enhanced services within the
mobility, messaging, payment and location segments. Signalware products are also
embedded in a range of packet softswitching products to interoperate or converge
voice and data networks and facilitate services such as voice-over-IP ("VoIP"),
hosted IP telephony, and virtual private networks. Ulticom had an initial public
offering of its common stock in April, 2000, and its common stock is listed on
the NASDAQ National Market System under the symbol "ULCM." CTI held
approximately 70.2% of Ulticom's outstanding common stock as of January 31,
2004.
The Company markets other telecommunications products and services,
including enhanced wireless roaming services, and automatic call distribution
and messaging systems for telephone answering service bureaus. The Company also
engages in venture capital investment and capital market activities for its own
account.
Throughout this document, references are made to technologies,
features, capabilities, capacities and specifications in conjunction with the
Company's products and technological resources. Such references do not
necessarily apply to all product lines, models and system configurations.
The Company was incorporated in the State of New York in October
1984. Its headquarters are located at 170 Crossways Park Drive, Woodbury, New
York 11797, where its telephone number is (516) 677-7200.
The Company's Internet address is www.cmvt.com. The information
contained on the Company's website is not included as a part of, or incorporated
by reference into, this Annual Report on Form 10-K. The Company makes available,
free of charge, on its Internet website, its annual report on Form 10-K, its
quarterly reports on Form 10-Q, its current reports on Form 8-K and amendments
to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, as soon as reasonably practicable
after the Company has electronically filed such material with, or furnished it
to, the United States Securities and Exchange Commission.
THE COMPANY'S PRODUCTS
TOTAL COMMUNICATION PORTFOLIO
Comverse is a leading supplier of telecommunication software,
systems, and related services for voice and data value-added enhanced services.
These value-added enhanced services solutions from our Network Systems Division
("CNS"), along with the Company's real-time billing solutions, comprise the
Company's Total Communication portfolio. Comverse's Total Communication
portfolio addresses four primary categories: call completion and call management
solutions (e.g., Call Answering, Who Called Service, and Interactive Voice
3
Response applications); advanced messaging solutions for groups, communities and
person-to-person communication (e.g., Voice Messaging, Short Messaging Service
(SMS), Videomail, Multimedia Messaging Service (MMS), Instant Messaging and
Mobile Email); solutions and enablers for the management and delivery of data
and content-based services (e.g., Video Portal, Presence Server, Personal
Address Book, Mobile Data Gateway, Media Server, Media and Content Adaptation);
and real-time billing and account management for dynamic service environments
(e.g., Prepaid Calling, Real-Time Data Billing, and Converged
Prepaid/Post-paid/Voice/Data Billing).
Comverse's InSight solution, which the Company recently launched, is
a part of Comverse's Total Communication portfolio, providing a single, open,
modular architecture on which a wide variety of multimodal advanced messaging
services can be hosted. Insight is designed to improve network efficiencies and
leverage the built-in synergies between next-generation communication and
infotainment services to increase revenues for wireline and wireless service
providers.
Comverse's principal market for its software, systems, and related
services 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. With Total
Communication, TSPs benefit from revenue generated by the increase in billable
completed calls, service-related fees, and increased customer loyalty that
results in an overall reduction in churn. Wireless TSPs are almost universally
adding call answering and messaging to their service offerings, often as part of
their basic service package, not only because of these benefits, but also
because wireless call answering and messaging services directly increase
billable airtime by stimulating outbound calls and increase billable
transactions by stimulating person-to-person messaging and information
retrieval.
Comverse's carrier grade Total Communication software, systems, and
related services have been designed and packaged to meet the capacity,
reliability, availability, scalability, maintainability, network and OMAP
(Operations, Maintenance, Administration, and Provisioning) interfaces and
physical requirements of large telecommunications network operators. The systems
are offered in a variety of sizes and configurations and can be clustered for
larger capacity installations. The systems are available with redundancy of
critical components, so that no single failure will interrupt the service.
Comverse's products are available in both centralized and distributed
configurations.
Comverse's systems also incorporate components that are compatible
with the Intelligent Network ("IN") and Advanced Intelligent Network ("AIN")
protocols for Service Control Points and Intelligent Peripherals, permitting
Comverse's network operator customers to develop and deploy services based on
the overall IN architecture.
Comverse's products incorporate both Comverse-developed and
third-party-developed software, and Comverse-designed and third-party hardware,
and are available in an open, modular, IP standards-based system architecture.
The systems support a wide variety of digital telephony and IP interfaces and
signaling systems, allowing them to adapt to a variety of different network
environments and IN/AIN applications, and enable a "universal port" -- a single
port that supports multiple applications and services at any time during a
single call.
4
SECURITY AND BUSINESS INTELLIGENCE
Verint is a leading provider of analytic software-based solutions for
communication 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
communication networks.
The security and business intelligence market consists primarily of
communication interception by law enforcement and other government agencies and
digital video security utilized by government agencies and public and private
organizations for use in airports, public buildings, correctional facilities and
corporate sites.
Verint's STAR-GATE product line enables communication carriers,
Internet service providers, and communication equipment manufacturers to
overcome the complexities posed by global digital communication and comply with
governmental requirements. STAR-GATE enables communication 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 communication 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 communication interception activities to law enforcement
organizations and other government agencies. The RELIANT software equips law
enforcement agencies with an end-to-end solution for live monitoring of
intercepted target communications and evidence collection management, regardless
of the type of communication or network used. Applications can scale from a
small center for a local police force, to a country-wide center for national law
enforcement agencies. RELIANT products are designed to comply with legal
regulations and can be integrated with communication 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,
LORONIX products provide live video streaming and camera control over local and
wide area computer networks and the Internet. The LORONIX product line may be
configured to allow customers to perform complete monitoring for security and
management of local and remote sites from a central investigative unit. The use
of digital storage and compression technology makes the LORONIX product line a
more efficient alternative to traditional analog tape storage. The technology
interfaces with access control, motion detection and analysis, facial
recognition, activity and intrusion detection and other technologies for
enhanced security and surveillance.
The enterprise business intelligence market consists primarily of
solutions targeting enterprises that rely on contact centers for voice, email
and Internet interactions with their customers.
5
Verint's ULTRA products record and analyze customer interactions to
provide enterprises with business intelligence about their customers and help
monitor and improve the performance of their contact centers. ULTRA products
capture customer interactions from multiple sources, including telephone, email,
Internet or VoIP. Utilizing ULTRA's OpenStorage Portal and Universal Database,
customers can leverage their existing storage infrastructure to store and access
recorded customer interactions using standard file formats. ULTRA products
integrate with leading customer relationship management ("CRM") applications
allowing the delivery of information directly to the user's desktop within
Siebel, PeopleSoft and other CRM solutions. ULTRA also interfaces with popular
desktop software tools, including Microsoft Outlook, Lotus Notes and web
browsers, to enable the user to easily access the data in a familiar computing
environment.
Verint's LORONIX video business intelligence products enable
enterprise customers to monitor and improve their operations through the
analysis of live and recorded digital video. Like the LORONIX digital video
security product, the LORONIX video business intelligence product digitizes,
compresses, stores and retrieves video imaging. While leveraging the technology
of the LORONIX digital security product, the LORONIX enterprise product line
also contains unique software focused on maximizing operational effectiveness
through video analysis. By interfacing with customer databases and software
systems, LORONIX facilitates the user's review of video imaging based on
specific criteria such as employee ID, product barcodes, traffic patterns and
point of sale transaction history.
SERVICE ENABLING SIGNALING SOFTWARE
The Company's Ulticom subsidiary provides service enabling signaling
software for wireline, wireless and Internet communications. Ulticom's
Signalware family of products are used by equipment manufacturers, application
developers and communication service providers to deploy revenue generating
infrastructure and enhanced services within the mobility, messaging, payment and
location segments. 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 VoIP, hosted IP telephony, and virtual private
networks.
Signalware supports a range of applications across multiple networks.
In wireline networks, Signalware has been deployed as part of applications such
as voice messaging, calling name, and 800 number services. Signalware enables
wireless infrastructure applications such as global roaming and emergency-911,
and enhanced services such as text messaging and prepaid calling. Signalware
also enables the deployment of broadband services such as VoIP in wireline,
wireless and cable service provider networks.
Signalware provides signaling system #7 ("SS7"), the globally
accepted signaling standard protocol, which interconnects the complex switching,
database and messaging systems, and manages vital number, routing and billing
information that form the backbone of today's telecommunications networks.
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, as
defined by the Internet Engineering Task Force, such as Signaling Transport
("Sigtran") and Session Initiation Protocol ("SIP"). New solutions include a
Signalware Sigtran Gateway for enabling circuit to packet network
interoperability and Signalware SIP for developing next generation services for
all IP networks.
6
Signalware solutions run on a range of hardware platforms and
operating systems, including Sun Solaris, IBM AIX and Red Hat Linux. These
solutions can be used in single or multiple computing configurations for fault
resiliency and reliability. Signalware customers include equipment
manufacturers, such as Alcatel, Ericsson and Siemens; application developers,
such as Comverse, LogicaCMG and Sonus; and service providers, such as Orange
Personal Communications, Reliance Infocomm, 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 enhanced wireless roaming services, and automatic
call distribution and messaging systems for telephone answering service bureaus
and other organizations.
MARKETS, SALES AND MARKETING
Comverse is a leading supplier of telecommunications software,
systems, and related services for voice and data value-added enhanced services.
Comverse's Total Communication software, systems, and related services 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.
More than 400 wireless and wireline TSPs in more than 110 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 customers. Major network operators and service providers using Comverse's
systems include, among others, AT&T (USA), Deutsche Telekom (Germany and other
European countries), KDDI (Japan), MCI WorldCom (USA), O2 (Germany and UK), NTT
(Japan), Orange (several countries), SBC Communications (USA), SFR (France),
Sprint (USA), Telecom Italia (Italy), Telmex (Mexico), Telstra (Australia),
Verizon (USA), and Vodafone (multiple countries).
Comverse provides its customers with marketing consultation, seminars
and materials designed to assist them in marketing enhanced telecommunications
services, and also undertakes to play an ongoing supporting role in their
business and market planning processes.
Verint's products are marketed primarily through a combination of its
direct sales force and agents, distributors, value-added resellers and systems
integrators. Verint develops strategic marketing alliances with leading
companies in the industry to expand the coverage and support of its direct sales
force. Verint currently has such relationships with ADT, Avaya, British Telecom,
Nortel and Siemens, among others. In addition, Verint established technological
alliances with leading software and hardware companies including Genesys,
Identix and Siebel, which enables Verint to offer complementary solutions to
their products.
Verint's products are used by over 1000 organizations and are
deployed in over 50 countries, across many industries and markets. Many users of
the products are large corporations or government agencies that operate from
multiple locations and facilities across large geographic areas and sometimes
across several countries. These organizations typically implement Verint's
solutions in stages, with implementation in one or more sites and then gradually
expanding to a full enterprise, networked-based solution.
7
Customers for digital security and surveillance products include the
Mall of America, the U.S. Capitol, the U.S. Department of Defense, the U.S.
Department of Justice, Vancouver International Airport, Washington Dulles
International Airport, the Toronto Police Service, the Dutch National Police
Agency, and other domestic and foreign law enforcement and intelligence
agencies, as well as communication service and equipment providers, such as
Cingular, Ericsson and Nortel. Customers for enterprise business intelligence
products include, among others, Con Edison, FedEx, HSBC, JCPenney, Sprint,
Target and Tiffany & Co.
Ulticom's products are used by approximately 50 customers and are
deployed by more than 300 service providers in more than 100 countries. Ulticom
markets its products and services primarily through a direct sales organization
and through distributors. Customers include network equipment manufacturers such
as Alcatel, Ericsson and Siemens; application developers such as Comverse,
LogicaCMG, and Sonus; and service providers such as Orange Personal
Communications, Reliance Infocomm, and Telefonica.
See "Financial Statements" in Item 15 for information on revenues,
operating profit and total assets of each of the Company's segments.
RESEARCH AND DEVELOPMENT
Because of the continuing technological changes that characterize the
telecommunications and computer industries, the Company's success will depend,
to a considerable extent, upon its ability to continue to develop competitive
products through its research and development efforts. The Company currently
employs more than 1,900 scientists, engineers and technicians in its research
and development efforts, located predominantly in the United States and Israel
with additional offices in France, Germany and Malaysia, with broad experience
in the areas of digital signal processing, computer architecture, telephony, IP,
data networking, multi-processing, databases, real-time software design and
application software design, among others.
A portion of the Company's research and development operations
benefit from financial incentives provided by government agencies to promote
research and development activities performed in Israel. The cost of such
operations is and will continue to be affected by the continued availability of
financial incentives under such programs. During the past fiscal year, the
Company's research and development activities included projects submitted for
partial funding under a program administered by the Office of the Chief
Scientist of the Ministry of Industry and Trade of the State of Israel ("OCS"),
under which reimbursement of a portion of the Company's research and development
expenditures will be made subject to final approval of project budgets. During
the year ended January 31, 2003, Comverse finalized an arrangement with the OCS
under which Comverse no longer would owe royalties to the OCS in return for a
lump sum payment for all past amounts received from the OCS. Under the
arrangement, Comverse began to receive lower amounts from the OCS than it had
historically received, but is not required to pay royalty amounts on such future
grants. Other subsidiaries of CTI were not part of Comverse's arrangement with
the OCS and they continue to owe royalties on their sale of certain products
developed, in part, with funding supplied under such programs. 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 "Financial
Statements" in Item 15, "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.
8
PATENTS AND INTELLECTUAL PROPERTY RIGHTS
The Company holds a number of United States and foreign patents.
While the Company files patent applications periodically, no assurance can be
given that patents will be issued on the basis of such applications or that, if
patents are issued, the claims allowed will be sufficiently broad to protect the
Company's technology. In addition, no assurance can be given that any patents
issued to the Company will not be challenged, invalidated or circumvented or
that the rights granted under the patents will provide significant benefits to
the Company.
In order to safeguard its unpatented proprietary know-how, trade
secrets and technology, the Company relies primarily upon trade secret
protection and non-disclosure provisions in agreements with employees and others
having access to confidential information. There can be no assurance that these
measures will adequately protect the Company from disclosure or misappropriation
of its proprietary information.
The Company and its customers from time to time receive
communications from third parties, including some of the Company's competitors,
alleging infringement by the Company of such parties' patent rights. While such
communications are common in the computer and telecommunications industries and
the Company has in the past been able to obtain any necessary licenses on
commercially reasonable terms, there can be no assurance that the Company would
prevail in any litigation to enjoin the Company from selling certain of its
products on the basis of such alleged infringement, or that the Company would be
able to license any valid patents on reasonable terms.
In January 2000, the Company and Lucent Technologies GRL Corp.
("Lucent") entered into a non-exclusive cross-licensing arrangement covering
current and certain future patents issued to the Company and its affiliates and
a portfolio of current and certain future patents in the area of
telecommunications technology issued to Lucent and its affiliates.
LICENSES AND ROYALTIES
The Company licenses certain technology, know-how and related rights
for use in the manufacture and marketing of its products, and pays royalties to
third-parties under such licenses and under other agreements. The Company
believes that its rights under such licenses and other agreements are sufficient
for the manufacturing and marketing of its products and, in the case of
licenses, extend for periods at least equal to the estimated useful lives of the
related technology and know-how.
DOMESTIC AND INTERNATIONAL SALES AND LONG-LIVED ASSETS
See "Financial Statements" in Item 15 for a breakdown of the domestic
and international sales and long-lived assets for the years ended January 31,
2002, 2003 and 2004, and see "Certain Trends and Uncertainties" in Item 7 for a
description of risks attendant to the Company's foreign operations.
9
BACKLOG
At January 31, 2004, the backlog of the Company amounted to
approximately $400 million compared to approximately $294 million as of January
31, 2003. The Company believes that substantially all of such backlog will be
delivered within the next 12 months.
SERVICE AND SUPPORT
The Company has a strong commitment to provide product service and
support to its customers and emphasizes such commitment in its marketing.
Because of the intensity of use of systems by telecommunications network
operators and other customers of the Company's products, and their low tolerance
for down-time, the Company is required to make a greater commitment to service
and support of systems used by these customers, and such commitment increases
operating costs.
The Company's general warranty policy is to replace or repair any
component that fails during a specified warranty period. Broader warranty and
service coverage is provided in many cases, and is sometimes made available to
customers on a contractual basis for an additional charge.
The Company provides technical assistance from several locations
around the world. Technical support is available for the Company's customers 24
hours-a-day, seven days-a-week.
COMPETITION
The Company faces strong competition in the markets for all of its
products. The market for Total Communication software, systems, and related
services is highly competitive, and includes numerous products offering a broad
range of features and capacities. The primary competitors are suppliers of
turnkey systems and software, and indirect competitors that supply certain
components to systems integrators. Many of Comverse's competitors specialize in
a subset of Comverse's portfolio of products. Direct and/or indirect competitors
include, among others, Alcatel, Boston Communications, Ericsson, Glenayre,
Huawei, IBM, InterVoice, LogicaCMG, Lucent, Motorola, Nokia, Openwave, SS8
Networks, Tecnomen, Telcordia, and Unisys. Competitors of Comverse that
manufacture other telecommunications equipment may derive a competitive
advantage in selling 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
communication 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 call
answering 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 communication capabilities.
Comverse believes that competition in the sale of Total Communication
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 systems during the next several years.
10
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 security market, primarily due to increased demand for
homeland defense and security solutions. Verint's primary competitors are
suppliers of security and recording systems and software, and indirect
competitors that supply certain components to systems integrators. In the
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. In addition, many of Verint's competitors specialize
in a subset of Verint's portfolio of products and services. Primary competitors
include, among others, ETI, General Electric, JSI Telecom, NICE Systems, Pelco,
Raytheon, Sensormatic, SS8 Networks, Tyco, Honeywell 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 primarily are internal development
organizations within equipment manufactures and application developers who seek,
in a build-versus-buy decision, to develop substitutes for its products. Ulticom
also competes with a number of companies ranging from SS7 software solution
providers, such as Hughes Software Systems and SS8 Networks, to vendors of
communication and network infrastructure equipment, such as Continuous Computing
Corporation and Hewlett-Packard Company. 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.
11
The Company maintains organization-wide quality assurance procedures,
coordinating the quality control activities of the Company's research and
development, manufacturing and service departments.
CAPITAL MARKET ACTIVITIES
The Company seeks to identify and implement suitable investments, and
engages in portfolio investment and capital market activities, including venture
capital investments directly and indirectly through private equity funds. Both
directly and through a joint venture formed by the Company in partnership with
Quantum Industrial Holdings Ltd., an investment company managed by Soros Fund
Management LLC, the Company invests in venture capital in high technology firms,
and engages in other investment activities. The Company has significantly
reduced its new venture capital investments in recent periods.
OPERATIONS IN ISRAEL
A substantial portion of the Company's research and development,
manufacturing and other operations are located in Israel and, accordingly, may
be affected by economic, political and military conditions in that country.
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors, and the
continued state of hostility, varying in degree and intensity, has led to
security and economic problems for Israel. Since October 2000, there has been a
significant increase in violence, primarily in the West Bank and Gaza Strip, and
Israel has experienced terrorist incidents within its borders. During this
period, peace negotiations between Israel and representatives of the Palestinian
Authority have been sporadic and currently are suspended. The Company could be
materially adversely affected by hostilities involving Israel, the interruption
or curtailment of trade between Israel and its trading partners, or a
significant downturn in the economic or financial condition of Israel. In
addition, the sale of products manufactured in Israel may be materially
adversely affected in certain countries by restrictive laws, policies or
practices directed toward Israel or companies having operations in Israel. The
continuation or exacerbation of violence in Israel or the outbreak of violent
conflicts involving Israel may impede the Company's ability to sell its products
or otherwise adversely affect the Company. In addition, many of the Company's
Israeli employees are required to perform annual compulsory military reserve
duty in Israel, and are subject to being called to active duty at any time under
emergency circumstances. The absence of these employees may have an adverse
effect upon the Company's operations.
Israel is a member of the United Nations, the International Monetary
Fund, the International Bank for Reconstruction and Development, and the
International Finance Corporation, and is a signatory to the General Agreement
on Tariffs and Trade, which provides for reciprocal lowering of trade barriers
among its members. In addition, Israel has been granted preferences under the
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.
12
Israel has entered into free trade agreements with its major trading
partners. Israel and the European Union are parties to a Free Trade Agreement
pursuant to which, subject to rules of origin, Israel's industrial exports to
the European Union are exempt from customs duties and other non-tariff barriers
and import restrictions. Israel also has an agreement with the United States
that established a Free Trade Area eliminating all tariff and certain non-tariff
barriers on most trade between the two countries. Israel has also entered into
an agreement with the European Free Trade Association ("EFTA"), which currently
includes Iceland, Liechtenstein, Norway and Switzerland, that established a
free-trade zone between Israel and EFTA nations exempting manufactured goods and
some agricultural goods and processed foods from customs duties, while reducing
duties on other goods. Israel also has free trade agreements with a number of
other countries, such as Canada, Mexico and various European countries. The end
of the Cold War has also enabled Israel to establish commercial and trade
relations with a number of nations, including Russia and certain countries from
the former Soviet Union, China, India 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 the high technology exporting
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, 2004, the Company employed approximately 4,663
individuals, of whom approximately 80% are scientists, engineers and technicians
engaged in research and development, marketing, support and operations
activities. The Company considers its relationship with its employees to be
good.
13
The Company is not a party to any collective bargaining or other
agreement with any labor organization; however, certain provisions of the
collective bargaining agreements between the Histadrut (General Federation of
Labor in Israel) and the Coordinating Bureau of Economic Organizations
(including the Industrialists' Association) are applicable to the Company's
Israeli employees by order of the Israeli Ministry of Labor. Israeli law
generally requires the payment by employers of severance pay upon the death of
an employee, his or her retirement or upon termination of his or her employment,
and the Company provides for such payment obligations through monthly
contributions to an insurance fund. Israeli employees are required to pay and
employers are required to pay and withhold certain payroll, social security and
health tax payments, in respect of national health insurance and social security
benefits.
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, 2004, the Company leased an aggregate of
approximately 2,175,000 square feet of office space and manufacturing and
related facilities for its operations worldwide, including approximately
1,298,000 square feet in Tel Aviv, Israel, approximately 367,000 square feet in
Wakefield, Massachusetts, approximately 44,000 square feet in Long Island, New
York, approximately 85,000 square feet in Mt. Laurel, New Jersey, an aggregate
of approximately 139,000 square feet at various other locations in the United
States and an aggregate of approximately 242,000 square feet at various
locations in Europe, Asia-Pacific, South America, Africa and Canada.
Approximately 139,000 square feet of this space is sub-leased to others. The
aggregate base monthly rent for the facilities under lease as of January 31,
2004, net of sub-lease income, was approximately $2,720,000, 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,
approximately 29,000 square feet in Bexbach, Germany, and approximately 423,000
square feet of unimproved land in Ra'anana, Israel.
The Company believes that its facilities currently under lease are
more than adequate for its current operations, and may endeavor selectively to
reduce its existing facilities commitments as circumstances may warrant.
ITEM 3. LEGAL PROCEEDINGS.
On March 16, 2004, BellSouth Intellectual Property Corp.
("BellSouth") filed a complaint in the United States District Court for the
Northern District of Georgia against Comverse Technology, Inc. alleging
infringement of Patent Nos. 5,857,013 and 5,764,747, and, on March 17, 2004,
BellSouth amended the complaint to include Comverse Inc., in an action
captioned: BellSouth Intellectual Property Corp. v. Comverse Technology, Inc.
and Comverse, Inc., Civil Action No. 1:04-CV-0739. BellSouth alleges that Patent
Nos. 5,857,013 and 5,764,747 cover certain aspects of some of the Company's
systems, and it seeks, among other relief, monetary damages and injunctive
relief. The Company believes all claims are without merit and will vigorously
defend against these claims.
14
From time to time, the Company is subject to claims in legal
proceedings arising in the normal course of its business. The Company does not
believe that it is currently party to any other pending legal action that could
reasonably be expected to have a material adverse effect on its business,
financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Company's annual meeting of shareholders held on December 16,
2003, for which proxies were solicited pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended, the following matters were voted
upon by shareholders:
1. The election of seven directors to serve as the Board of Directors
of the Company until the next annual meeting of shareholders and the election of
their qualified successors.
2. A proposal to amend the Company's 2002 Employee Stock Purchase
Plan to increase from 1,500,000 to 2,500,000 the total number of shares of the
Company's common stock, par value $.10 per share available for purchase by
participating employees.
3. A proposal to adopt and approve the Company's 2004 Management
Incentive Plan.
4. A proposal to ratify the engagement of Deloitte & Touche LLP as
independent auditors of the Company for the year ending January 31, 2004.
The nominees for directors were elected based upon the following
votes:
Nominee Votes For Votes Withheld
- ------- --------- --------------
Kobi Alexander 153,676,447 7,586,634
Raz Alon 158,382,279 2,880,802
Itsik Danziger 158,367,932 2,895,149
John H. Friedman 148,818,475 12,444,606
Ron Hiram 148,817,975 12,445,106
Sam Oolie 148,817,675 12,445,406
William F. Sorin 158,367,932 2,895,149
15
The amendment of the Company's 2002 Employee Stock Purchase Plan was
approved as follows:
127,748,311 Votes for Approval
5,214,258 Votes Against
994,008 Abstentions
The Company's 2004 Management Incentive Plan was approved as follows:
155,313,516 Votes for Approval
4,934,413 Votes Against
1,015,152 Abstentions
The ratification of the engagement of Deloitte & Touche LLP as
independent auditors of the Company for the year ending January 31, 2004 was
approved as follows:
157,803,791 Votes for Approval
2,534,177 Votes Against
925,113 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:
YEAR FISCAL QUARTER LOW HIGH
2002 2/1/02 - 4/30/02 $11.68 $20.74
5/1/02 - 7/31/02 $ 7.60 $12.93
8/1/02 - 10/31/02 $ 6.82 $ 9.26
11/1/02 - 1/31/03 $ 7.87 $12.33
2003 2/1/03 - 4/30/03 $ 8.82 $13.33
5/1/03 - 7/31/03 $12.08 $16.64
8/1/03 - 10/31/03 $13.41 $18.04
11/1/03 - 1/31/04 $16.55 $19.95
There were 1,738 holders of record of Common Stock at April 7, 2004.
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 37,500.
The Company has not declared or paid any cash dividends on its equity
securities and currently does not expect to pay any cash dividends in the near
future, but rather intends to retain its earnings to finance the development of
the Company's business. Any future determination as to the declaration and
payment of dividends will be made by the Board of Directors in its discretion,
and will depend upon the Company's earnings, financial condition, capital
requirements and other relevant factors. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
17
ITEM 6. SELECTED FINANCIAL DATA.
The following tables present selected consolidated financial data for the
Company for the years ended January 31, 2000, 2001, 2002, 2003 and 2004. Such
information has been derived from the Company's audited consolidated financial
statements and should be read in conjunction with the Company's consolidated
financial statements and the notes to the consolidated financial statements
included elsewhere in this report. All financial information presented herein
has been retroactively adjusted for the July 2000 acquisition of Loronix
Information Systems, Inc. ("Loronix") to account for the transaction as a
pooling of interests. All per share data has been restated to reflect a
three-for-two stock split effected as a 50% stock dividend to shareholders of
record on March 31, 1999, distributed on April 15, 1999, and a two-for-one stock
split effected as a 100% stock dividend to shareholders of record on March 27,
2000, distributed on April 3, 2000.
YEAR ENDED JANUARY 31,
------------------------------------------------------------------------------
2000(1) 2001 2002 2003 2004
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Operations Data:
Sales $909,667 $1,225,058 $1,270,218 $735,889 $765,892
Acquisition expenses 2,016 15,971 - - -
Workforce reduction, restructuring and
impairment charges (credits) - - 63,562 66,714 (2,123)
Income (loss) from operations 172,250 234,624 64,844 (182,741) (30,378)
Net income (loss) 173,147 249,136 54,619 (129,478) (5,386)
Earnings (loss) per share - diluted 1.08 1.39 0.29 (0.69) (0.03)
JANUARY 31,
------------------------------------------------------------------------------
2000(2) 2001 2002 2003 2004
(IN THOUSANDS)
Balance Sheet Data:
Working capital $858,304 $1,860,379 $2,030,250 $1,766,507 $2,141,277
Total assets 1,372,847 2,625,264 2,704,163 2,403,659 2,728,042
Long-term debt, including current portion 308,082 906,723 648,611 439,628 555,941
Stockholders' equity 724,839 1,236,165 1,616,408 1,549,692 1,672,546
(1) Includes the results of Loronix for its fiscal year ended December 31.
(2) Includes amounts for Loronix as of its fiscal year ended December 31.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those that are both most important
to the portrayal of a company's financial position and results of operations,
and require management's most difficult, subjective or complex judgments.
Although not all of the Company's critical accounting policies require
management to make difficult, subjective or complex judgments or estimates, the
following policies and estimates are those that the Company deems most critical.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
The Company recognizes revenues in accordance with the provisions of
Statement of Position 97-2, "Software Revenue Recognition", and related
Interpretations. The Company's systems are generally a bundled hardware and
software solution that are shipped together. Revenue is generally recognized at
the time of shipment for sales of systems which do not require significant
customization to be performed by the Company when the following criteria are
met: (1) persuasive evidence of an arrangement exists, (2) delivery has
occurred, (3) the fee is fixed or determinable and (4) collectibility is
probable.
Amounts received from customers pursuant to the terms specified in
contracts but for which revenue has not yet been recognized are recorded as
advance payments from customers.
Post-contract customer support ("PCS") services are sold separately
or as part of a multiple element arrangement, in which case the related PCS
element is determined based upon vendor-specific objective evidence of fair
value, such that the portion of the total fee allocated to PCS services is
generally recognized as revenue ratably over the term of the PCS arrangement.
Revenues from certain development contracts are recognized under the
percentage-of-completion method on the basis of physical completion to date or
using actual costs incurred to total expected costs under the contract.
Revisions in estimates of costs and profits are reflected in the accounting
period in which the facts that require the revision become known. At the time a
loss on a contract is known, the entire amount of the estimated loss is accrued.
Amounts received from customers in excess of revenues earned under the
percentage-of-completion method are recorded as advance payments from customers.
Cost of sales include material costs, subcontractor costs, salary and
related benefits for the operations and service departments, depreciation and
amortization of equipment used in the operations and service departments,
amortization of capitalized software development costs, royalties and license
fee costs, travel costs and an overhead allocation. Research and development
costs include salary and related benefits as well as travel, depreciation and
amortization of research and development equipment, an overhead allocation, as
well as other costs associated with research and development activities.
Selling, general and administrative costs include salary and related benefits,
travel, depreciation and amortization, marketing and promotional materials,
recruiting expenses, professional fees, insurance costs, facility costs, as well
as other costs associated with sales, marketing, finance and administrative
departments.
19
Accounts receivable are generally diversified due to the large number
of commercial and government entities comprising the Company's customer base and
their dispersion across many geographical regions. As of January 31, 2004, there
was no single customer balance that comprised 10% of the overall accounts
receivable balance. The Company is required to estimate the collectibility of
its accounts receivable each accounting period and record a reserve for bad
debts. A considerable amount of judgment is required in assessing the
realization of these receivables, including the current creditworthiness of each
customer, current and historical collection history and the related aging of
past due balances. The Company evaluates specific accounts when it becomes aware
of information indicating that a customer may not be able to meet its financial
obligations due to deterioration of its financial condition, lower credit
ratings or bankruptcy. Reserve requirements are based on the best facts
available and are re-evaluated and adjusted as additional information is
received.
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.
20
RESULTS OF OPERATIONS
HISTORICAL RESULTS
Consolidated results of operations in dollars and as a percentage of
sales for each of the three years in the period ended January 31, 2004 were as
follows:
January 31, January 31, January 31,
2002 % 2003 % 2004 %
---- --- ---- --- ---- ---
(In thousands)
Sales:
Product revenues $1,113,168 87.6% $547,141 74.4% $534,585 69.8%
Service revenues 157,050 12.4% 188,748 25.6% 231,307 30.2%
--------------- --------------- ---------------
1,270,218 100.0% 735,889 100.0% 765,892 100.0%
Cost of sales:
Product costs 384,796 34.6% 184,413 33.7% 181,059 33.9%
Service costs 140,684 89.6% 153,708 81.4% 146,501 63.3%
--------------- --------------- ---------------
525,480 41.4% 338,121 45.9% 327,560 42.8%
Gross margin 744,738 58.6% 397,768 54.1% 438,332 57.2%
Operating expenses:
Research and development, net 293,296 23.1% 232,593 31.6% 216,457 28.3%
Selling, general and administrative 323,036 25.4% 281,202 38.2% 254,376 33.2%
Workforce reduction, restructuring
and impairment charges (credits) 63,562 5.0% 66,714 9.1% (2,123) -0.3%
--------------- --------------- ---------------
Income (loss) from operations 64,844 5.1% (182,741) -24.8% (30,378) -4.0%
Interest and other income (expense), net (6,501) -0.5% 58,902 8.0% 38,958 5.1%
--------------- --------------- ---------------
Income (loss) before income tax provision,
minority interest and equity in the earnings
(losses) of affiliates 58,343 4.6% (123,839) -16.8% 8,580 1.1%
Income tax provision 4,436 0.3% 3,294 0.4% 8,206 1.1%
Minority interest and equity in the
earnings (losses) of affiliates 712 0.1% (2,345) -0.3% (5,760) -0.8%
--------------- --------------- ---------------
Net income (loss) $54,619 4.3% $(129,478) -17.6% $(5,386) -0.7%
=============== =============== ===============
A detailed description of the Company's business segments as well as
additional financial data, can be found in Note 20 to the Consolidated Financial
Statements. The following is a summary of sales and income (loss) from
operations by segment in dollars and as a percentage of sales for each of the
three years in the period ended January 31, 2004:
January 31, January 31, January 31,
2002 % 2003 % 2004 %
---- --- ---- --- ---- ---
(In thousands)
Sales
- -----
CNS $1,080,694 85.1% $542,984 73.8% $529,597 69.1%
Ulticom 58,156 4.6% 29,231 4.0% 38,378 5.0%
Verint 131,235 10.3% 157,775 21.4% 192,744 25.2%
All other 9,966 0.8% 9,602 1.3% 9,983 1.3%
Reconciling items (9,833) -0.8% (3,703) -0.5% (4,810) -0.6%
-------------- -------------- --------------
Consolidated total $1,270,218 100.0% $735,889 100.0% $765,892 100.0%
============== ============== ==============
Income (loss) from operations:
- ------------------------------
CNS $66,105 6.1% $(179,492) -33.1% $(40,913) -7.7%
Ulticom 8,523 14.7% (8,362) -28.6% 2,824 7.4%
Verint (2,533) -1.9% 10,051 6.4% 17,189 8.9%
All other (984) -9.9% (615) -6.4% (1,152) -11.5%
Reconciling items (6,267) 63.7% (4,323) 116.7% (8,326) 173.1%
-------------- -------------- --------------
Consolidated total $64,844 5.1% $(182,741) -24.8% $(30,378) -4.0%
============== ============== ==============
21
INTRODUCTION
As explained in greater detail in "Certain Trends and Uncertainties",
the Company's two business units serving telecommunications markets are
operating within an industry that has been experiencing a challenging capital
spending environment, although there is some evidence of recent improvement. The
Company's CNS business unit experienced a slight decline in revenue of 2.5% year
over year, although it achieved sequential revenue growth in each quarter
throughout the year, and Ulticom experienced an increase in revenue of 31.3%
year over year. Verint, which services the security and business intelligence
markets, achieved record revenue and net income based, in part, on increased
sales due to heightened awareness surrounding homeland defense and security
related initiatives in the United States and abroad. Verint experienced an
increase in revenue of 22.2% year over year. Overall, for the year ended January
31, 2004, the Company experienced year over year revenue growth of 4.1%, with a
substantial majority of sales for the year generated from activities serving the
telecommunications industry. The Company incurred an operating and net loss for
the year.
YEAR ENDED JANUARY 31, 2004 COMPARED TO YEAR ENDED JANUARY 31, 2003
Sales. Sales for the fiscal year ended January 31, 2004 ("fiscal
2003") increased by approximately $30.0 million, or 4%, compared to the fiscal
year ended January 31, 2003 ("fiscal 2002"). This increase is primarily
attributable to an increase in security and business intelligence recording
sales of approximately $35.0 million, primarily as a result of increased
security and surveillance sales, and increased service enabling signaling
software sales of approximately $9.1 million. These increases were partially
offset by a decrease in CNS sales of approximately $13.4 million. The decrease
in CNS sales was due primarily to decreased business in Asia Pacific and the
Americas, only partially offset by increased business in Europe. On a
consolidated basis, service revenues represented approximately 30% and 26% of
sales for fiscal 2003 and fiscal 2002, respectively, and sales to international
customers represented approximately 66% and 65% of sales for fiscal 2003 and
fiscal 2002, respectively.
Cost of Sales. Cost of sales for fiscal 2003 decreased by
approximately $10.6 million, or 3%, compared to fiscal 2002. The decrease in
cost of sales is primarily attributable to decreased personnel-related and
travel costs of approximately $18.1 million and $4.9 million, respectively,
primarily the result of workforce reduction and other cost reduction efforts,
and net decrease in various other costs of approximately $0.1 million, partially
offset by increased royalty expense of approximately $12.5 million, primarily
the result of a prior period credit realized upon a settlement with the OCS.
Gross margins increased to approximately 57.2% in fiscal 2003 from approximately
54.1% in fiscal 2002.
Research and Development, Net. Net research and development expenses
for fiscal 2003 decreased by approximately $16.1 million, or 7%, compared to
fiscal 2002. This decrease is primarily attributable to decreased
personnel-related costs of approximately $17.2 million, which is primarily the
result of workforce reduction and other cost reduction efforts and a reduction
of research and development projects.
Selling, General and Administrative. Selling, general and
administrative expenses for fiscal 2003 decreased by approximately $26.8
million, or 10%, compared to fiscal 2002, and as a percentage of sales decreased
to approximately 33.2% in fiscal 2003 from approximately 38.2% in fiscal 2002.
The decrease in the dollar amount of selling, general and administrative
expenses is primarily attributable to lower bad debt expense of approximately
$42.2 million, partially offset by increased personnel-related costs of
approximately $13.6 million, due primarily to an overall increase in sales and
marketing staff, increased headcount at Verint and increased sales commissions,
and net increase in various other costs of approximately $1.8 million.
22
Workforce Reduction, Restructuring and Impairment Charges (Credits).
During the year ended January 31, 2002, the Company committed to and began
implementing a restructuring program to better align its cost structure with the
business environment and to improve the efficiency of its operations via
reductions in workforce, restructuring of operations and the write-off of
impaired assets. In connection with the restructuring, the Company changed its
organizational structure and product offerings, resulting in the impairment of
certain assets. In connection with these actions, during fiscal 2002 and fiscal
2003, the Company incurred charges (credits) to operations of approximately
$66.7 million and $(2.1) million, respectively. The fiscal 2002 charge of
approximately $66.7 million is comprised of approximately $26.8 million for
severance and other related costs, approximately $19.4 million for the
elimination of excess facilities and related leasehold improvements and
approximately $20.5 million for the write-off of certain property and equipment,
including a reduction in the value of certain unimproved land in Israel, that
the Company had acquired with a view to the future construction of facilities
for its Israeli operations. The fiscal 2003 net credit of approximately $2.1
million is comprised of a charge of approximately $4.5 million for severance and
other related costs, a credit of approximately $8.0 million for the reversal of
a previously taken charge for the elimination of excess facilities and related
leasehold improvements, primarily as a result of the sublet of a portion of the
excess facilities, and a charge of approximately $1.4 million for the write-off
of certain property and equipment. The Company expects to pay out approximately
$3.1 million for severance and related obligations during the year ended January
31, 2005 and approximately $26.4 million for facilities and related obligations
at various dates through January 2011.
Loss from Operations. Loss from operations for fiscal 2003 decreased
by approximately $152.4 million, or 83%, compared to fiscal 2002, and as a
percentage of sales was approximately (4.0)% in fiscal 2003 compared to
approximately (24.8)% in fiscal 2002. These changes resulted primarily from the
factors described above.
On a business segment basis, loss from operations for CNS for fiscal
2003 decreased by approximately $138.6 million, or 77%, compared to fiscal 2002,
and as a percentage of sales was approximately (7.7)% in fiscal 2003 compared to
approximately (33.1)% in fiscal 2002, as a result of the decrease in workforce
reduction, restructuring and impairment charges (credits) of approximately $66.2
million and the decrease in other costs and expenses of approximately $85.8
million, primarily the result of workforce reduction and other cost reduction
efforts, partially offset by decreased sales of approximately $13.4 million.
Income from operations for Verint for fiscal 2003 increased by approximately
$7.1 million, or 71%, compared to fiscal 2002, and as a percentage of sales
increased to approximately 8.9% in fiscal 2003 from approximately 6.4% in fiscal
2002. Income (loss) from operations for Ulticom for fiscal 2003 increased by
approximately $11.2 million compared to fiscal 2002, and as a percentage of
sales increased to approximately 7.4% in fiscal 2003 from approximately (28.6)%
in fiscal 2002.
Interest and Other Income (Expense), Net. Interest and other income
(expense), net for fiscal 2003 decreased by approximately $19.9 million compared
to fiscal 2002. The principal reasons for the decrease are (i) a decrease in the
gain recorded as a result of the Company's repurchases of its 1.50% convertible
senior debentures due December 2005 (the "Debentures") of approximately $29.2
million; (ii) a decrease in foreign currency gains of approximately $22.8
million; (iii) decreased interest and dividend income of approximately $12.7
23
million due primarily to the decline in interest rates partially offset by an
increase in invested assets; and (iv) other decrease of approximately $0.2
million, net. Such items were offset by (i) a decrease in net losses from the
sale and write-down of investments of approximately $40.4 million; and (ii)
decreased interest expense of approximately $4.6 million due primarily to the
Company's repurchases of its Debentures and other debt reduction.
Income Tax Provision. Provision for income taxes increased from
fiscal 2002 to fiscal 2003 by approximately $4.9 million, or 149%, due primarily
to shifts in the underlying mix of pre-tax income by entity and tax
jurisdiction. The Company's overall rate of tax is reduced significantly by the
existence of net operating loss carryforwards for Federal income tax purposes in
the United States, as well as the tax benefits associated with qualified
activities of certain of its Israeli subsidiaries, which are entitled to
favorable income tax rates under a program of the Israeli Government for
"Approved Enterprise" investments in that country.
Minority Interest and Equity in the Earnings (Losses) of Affiliates.
Minority interest and equity in the earnings (losses) of affiliates increased by
approximately $3.4 million as a result of increased minority interest expense of
approximately $5.7 million, primarily attributable to overall increased earnings
at majority-owned subsidiaries, partially offset by a change in equity in the
earnings (losses) of affiliates of approximately $2.3 million.
Net Loss. Net loss decreased by approximately $124.1 million in
fiscal 2003 compared to fiscal 2002, while as a percentage of sales was
approximately (0.7)% in fiscal 2003 compared to approximately (17.6)% in fiscal
2002. These changes resulted primarily from the factors described above.
YEAR ENDED JANUARY 31, 2003 COMPARED TO YEAR ENDED JANUARY 31, 2002
Sales. Sales for fiscal 2002 decreased by approximately $534.3
million, or 42%, compared to the fiscal year ended January 31, 2002 ("fiscal
2001"). The decrease in sales is primarily attributable to a decrease in CNS
sales of approximately $537.7 million. Such decrease in CNS sales is
attributable to all geographic regions, with sales by region as a percentage of
total sales remaining fairly consistent between periods. In addition, security
and business intelligence recording sales increased by approximately $26.5
million and service enabling signaling software sales decreased by approximately
$28.9 million, respectively. On a consolidated basis, service revenues
represented approximately 26% and 12% of sales for fiscal 2002 and fiscal 2001,
respectively, and sales to international customers represented approximately 65%
and 70% of sales for fiscal 2002 and fiscal 2001, respectively.
Cost of Sales. Cost of sales for fiscal 2002 decreased by
approximately $187.4 million, or 36%, compared to fiscal 2001. The decrease in
cost of sales is primarily attributable to decreased materials and overhead
costs of approximately $146.6 million, due primarily to the decrease in sales,
decreased royalty expense of approximately $20.5 million, decreased
personnel-related costs of approximately $8.0 million and decreased travel costs
of approximately $7.0 million, partially offset by a charge of approximately
$5.9 million pertaining to the write-down of the value of certain inventory and
the write-off of certain prepaid licenses for which there is no estimable future
use. Gross margins decreased from approximately 58.6% in fiscal 2001 to
approximately 54.1% in fiscal 2002.
Research and Development, Net. Net research and development expenses
for fiscal 2002 decreased by approximately $60.7 million, or 21%, compared to
fiscal 2001, primarily due to workforce reduction and other cost reduction
efforts and a reduction of research and development projects.
24
Selling, General and Administrative. Selling, general and
administrative expenses for fiscal 2002 decreased by approximately $41.8
million, or 13%, compared to fiscal 2001, and as a percentage of sales increased
from approximately 25.4% in fiscal 2001 to approximately 38.2% in fiscal 2002.
The decrease in the dollar amount of the expense was primarily due to workforce
reduction and other cost reduction efforts.
Workforce Reduction, Restructuring and Impairment Charges. During
fiscal 2001 the Company committed to and began implementing a restructuring
program to better align its cost structure with the business environment and to
improve the efficiency of its operations via reductions in workforce,
restructuring of operations and the write-off of impaired assets. In connection
with the restructuring, the Company changed its organizational structure and
product offerings, resulting in the impairment of certain assets. In connection
with these actions, during fiscal 2001 and fiscal 2002, the Company incurred
charges to operations of approximately $63.6 million and $66.7 million,
respectively. The fiscal 2001 charge of approximately $63.6 million is comprised
of approximately $27.7 million for severance and other related costs,
approximately $24.4 million for the elimination of excess facilities and related
leasehold improvements, approximately $4.6 million for the write-off of certain
property and equipment and approximately $4.0 million and $2.9 million for the
write-off of certain inventory and capitalized software, respectively, that
became impaired as a result of the change in the Company's product offerings.
The fiscal 2002 charge of approximately $66.7 million is comprised of
approximately $26.8 million for severance and other related costs, approximately
$19.4 million for the elimination of excess facilities and related leasehold
improvements and approximately $20.5 million for the write-off of certain
property and equipment, including a reduction in the value of certain unimproved
land in Israel, that the Company had acquired with a view to the future
construction of facilities for its Israeli operations.
Income (Loss) from Operations. Income (loss) from operations for
fiscal 2002 decreased by approximately $247.6 million compared to fiscal 2001,
and as a percentage of sales was approximately (24.8)% in fiscal 2002 compared
to approximately 5.1% in fiscal 2001. These changes resulted primarily from the
factors described above.
On a business segment basis, income (loss) from operations for CNS
for fiscal 2002 decreased by approximately $245.6 million compared to fiscal
2001, and as a percentage of sales was approximately (33.1)% in fiscal 2002
compared to approximately 6.1% in fiscal 2001, as a result of decreased sales of
approximately $537.7 million, partially offset by the decrease in other costs
and expenses of approximately $292.1 million, primarily the result of workforce
reduction and other cost reduction efforts and decreased sales. Income (loss)
from operations for Verint for fiscal 2002 increased by approximately $12.6
million compared to fiscal 2001, and as a percentage of sales increased to
approximately 6.4% in fiscal 2002 from approximately (1.9)% in fiscal 2001.
Income (loss) from operations for Ulticom for fiscal 2002 decreased by
approximately $16.9 million compared to fiscal 2001, and as a percentage of
sales was approximately (28.6)% in fiscal 2002 compared to approximately 14.7%
in fiscal 2001.
Interest and Other Income (Expense), Net. Interest and other income
(expense), net for fiscal 2002 increased by approximately $65.4 million compared
to fiscal 2001. The principal reasons for the increase are (i) decreased
interest expense of approximately $6.8 million due to the redemption of the
Company's $300.0 million 4.5% convertible debentures in June 2001, as well as
25
the Company's repurchases of its Debentures during fiscal 2002; (ii) a gain of
approximately $39.4 million recorded as a result of the Company's repurchases of
its Debentures during fiscal 2002; (iii) change in foreign currency gains/losses
of approximately $48.5 million due primarily to the strengthening of the Euro
during fiscal 2002; and (iv) other changes of approximately $1.3 million, net.
Such items were offset by (i) decreased interest and dividend income of
approximately $26.0 million due primarily to the decline in interest rates
during fiscal 2002; and (ii) an increase in net losses from the sale and
write-down of investments of approximately $4.6 million.
Income Tax Provision. Provision for income taxes decreased from
fiscal 2001 to fiscal 2002 by approximately $1.1 million, or 26%, due primarily
to the overall decrease in pre-tax income coupled with shifts in the underlying
mix by entity and tax jurisdiction. The Company's overall rate of tax is reduced
significantly by the existence of net operating loss carryforwards for Federal
income tax purposes in the United States, as well as the tax benefits associated
with qualified activities of certain of its Israeli subsidiaries, which are
entitled to favorable income tax rates under a program of the Israeli Government
for "Approved Enterprise" investments in that country.
Minority Interest and Equity in the Earnings (Losses) of Affiliates.
Minority interest and equity in the earnings (losses) of affiliates decreased by
approximately $3.1 million as a result of increased minority interest expense of
approximately $0.9 million, primarily attributable to overall increased earnings
at majority-owned subsidiaries, and a change in equity in the earnings (losses)
of affiliates of approximately $2.2 million.
Net Income (Loss). Net income (loss) decreased by approximately
$184.1 million in fiscal 2002 compared to fiscal 2001, while as a percentage of
sales was approximately 4.3% in fiscal 2001 compared to approximately (17.6)% in
fiscal 2002. The decrease resulted primarily from the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at January 31, 2004 and 2003 was
approximately $2,141.3 million and $1,766.5 million, respectively. At January
31, 2004 and 2003, the Company had total cash and cash equivalents, bank time
deposits and short-term investments of approximately $2,198.5 million and
$1,808.9 million, respectively.
Operations for fiscal 2003, fiscal 2002 and fiscal 2001, after
adjustment for non-cash items, provided (used) cash of approximately $80.3
million, $(34.1) million and $130.6 million, respectively. During such years,
other changes in operating assets and liabilities provided cash of approximately
$48.3 million, $130.9 million and $11.6 million, respectively. This resulted in
net cash provided by operating activities of approximately $128.6 million, $96.8
million and $142.2 million during fiscal 2003, fiscal 2002 and fiscal 2001,
respectively.
Investing activities for fiscal 2003, fiscal 2002 and fiscal 2001
provided (used) cash of approximately $(310.6) million, $35.9 million and
$(122.4) million, respectively. These amounts include (i) net maturities and
sales (purchases) of bank time deposits and investments of approximately
$(261.6) million, $114.5 million and $(44.8) million, respectively; (ii)
purchases of property and equipment of approximately $(35.3) million, $(34.1)
million and $(54.6) million, respectively; (iii) capitalization of software
development costs of approximately $(7.8) million, $(13.4) million and $(23.0)
million, respectively; and (iv) net assets acquired as a result of acquisitions
of approximately $(5.9) million and $(31.1) million in fiscal 2003 and fiscal
2002, respectively.
26
Financing activities for fiscal 2003, fiscal 2002 and fiscal 2001
provided (used) cash of approximately $310.2 million, $(91.8) million and $67.0
million, respectively. These amounts include (i) net proceeds from the issuance
of the Company's Zero Yield Puttable Securities due 2023 ("ZYPS") of
approximately $412.8 million during fiscal 2003; (ii) the partial repurchase of
the Company's Debentures of approximately $(253.3) million and $(169.8) million
during fiscal 2003 and fiscal 2002, respectively; (iii) proceeds from the
issuance of common stock in connection with the exercise of stock options and
employee stock purchase plan of approximately $61.3 million, $12.4 million and
$28.8 million, respectively; (iv) net proceeds from the issuance of common stock
of subsidiaries in connection with public offerings and the exercise of stock
options and employee stock purchase plans of approximately $129.0 million and
$68.7 million in fiscal 2003 and fiscal 2002, respectively; (v) net proceeds
from and (repayment of) bank loan of $(42.0) million and $42.0 million in fiscal
2003 and fiscal 2001, respectively; and (vi) other, net of approximately $2.4
million, $(3.1) million and $(3.8) million in fiscal 2003, fiscal 2002 and
fiscal 2001, respectively.
In May 2003, the Company issued $420.0 million aggregate principal
amount of its ZYPS, for net proceeds of approximately $412.8 million. The ZYPS
are unsecured senior obligations of the Company ranking equally with all of the
Company's existing and future unsecured senior indebtedness and are senior in
right of payment to any of the Company's existing and future subordinated
indebtedness. The ZYPS are convertible, contingent upon the occurrence of
certain events, into shares of the Company's common stock at a conversion price
of $17.97 per share. The ability of the holders to convert the ZYPS into common
stock is subject to certain conditions including, among others, the closing
price of the common stock exceeding 120% of the conversion price over certain
periods and other specified events. The ZYPS mature on May 15, 2023. The Company
has the right to redeem the ZYPS for cash at any time on or after May 15, 2008,
at their principal amount. The holders have a series of put options, pursuant to
which they may require the Company to repurchase all or a portion of the ZYPS on
each of May 15 of 2008, 2013, and 2018 and upon the occurrence of certain
events. The ZYPS holders may require the Company to repurchase the ZYPS at par
in the event that the common stock ceases to be publicly traded and, in certain
instances, upon a change in control of the Company. Upon the occurrence of a
change in control, instead of paying the repurchase price in cash, the Company
may, under certain circumstances, pay the repurchase price in common stock.
During fiscal 2002 and 2003, the Company acquired, in open market
purchases, approximately $209.2 million and $266.1 million of face amount of the
Debentures, respectively, for approximately $169.8 million and $253.3 million in
cash, respectively, resulting in pre-tax gains, net of debt issuance costs, of
approximately $39.4 million and $10.2 million, respectively, included in
`Interest and other income (expense), net' in the Consolidated Statements of
Operations.
As of January 31, 2004, the Company had outstanding Debentures of
approximately $124.7 million. During February 2004, the Company acquired, in
open market purchases, approximately $30.5 million of face amount of the
Debentures, for approximately $30.0 million in cash, resulting in a pre-tax
gain, net of debt issuance costs, of approximately $0.2 million.
27
In January 2002, Verint took a bank loan in the amount of $42.0
million. The loan, which matured in February 2003, bore interest at LIBOR plus
0.55% and was guaranteed by CTI. During February 2003, Verint repaid the bank
loan.
In May 2002, Verint issued 4,500,000 shares of its common stock in an
initial public offering. Proceeds from the offering, based on the offering price
of $16.00 per share, totaled approximately $65.4 million, net of offering
expenses. The Company recorded a gain of approximately $48.1 million during the
year ended January 31, 2003, which was recorded as an increase in stockholders'
equity as a result of the issuance.
In June 2003, Verint completed a public offering of 5,750,000 shares
of its common stock at a price of $23.00 per share. The shares offered included
149,731 shares issued to Smartsight Networks Inc.'s ("Smartsight") former
shareholders in connection with its acquisition. The proceeds of the offering
were approximately $122.2 million, net of offering expenses. The Company
recorded a gain of approximately $62.9 million, which was recorded as an
increase in stockholders' equity as a result of the issuance. As of January 31,
2004, the Company's ownership interest in Verint was approximately 61.8%.
On March 31, 2004, Verint acquired certain assets and assumed certain
liabilities relating to ECtel Ltd.'s ("ECtel") communication interception
business for approximately $35,000,000 in cash. The acquisition is expected to
provide Verint with additional communication interception capabilities for the
mass collection and analysis of voice and data communications. These
technologies will be integrated into Verint's existing product offerings. In
addition, some of ECtel's existing customers are new customers in new countries
for Verint in the Asia Pacific and Latin America regions.
In May 2003, Verint acquired all of the issued and outstanding shares
of Smartsight, a Canadian corporation that develops IP-based video edge devices
and software for wireless video transmission. The purchase price consisted of
approximately $7.1 million in cash and 149,731 shares of Verint common stock,
valued at approximately $3.1 million, or $20.46 per share.
In February 2002, Verint acquired the digital video recording
business of Lanex, LLC ("Lanex"). The Lanex business provides digital video
recording solutions for security and surveillance applications primarily to
North American banks. The purchase price consisted of approximately $9.5 million
in cash and a $2.2 million non-interest bearing note, guaranteed by CTI, and
convertible in whole or in part, into shares of Verint's common stock at a
conversion price of $16.06 per share. The note matured and was converted into
shares of Verint common stock on February 1, 2004.
In June 2002, the Company acquired Odigo, Inc. ("Odigo"), a
privately-held provider of instant messaging and presence management solutions
to service providers. The purchase price was approximately $20.1 million in
cash. Prior to the acquisition, the Company was a strategic partner with Odigo,
holding an equity position which it previously acquired for approximately $3
million.
The ability of the Company's Israeli subsidiaries to pay dividends is
governed by Israeli law, which provides that cash dividends may be paid by an
Israeli corporation only out of retained earnings as determined for statutory
purposes in Israeli currency. In the event of a devaluation of the Israeli
currency against the dollar, the amount in dollars available for payment of cash
dividends out of prior years' earnings will decrease accordingly. Cash dividends
28
paid by an Israeli corporation to United States resident corporate parents are
subject to the Convention for the Avoidance of Double Taxation between Israel
and the United States. Under the terms of the Convention, such dividends are
subject to taxation by both Israel and the United States and, in the case of
Israel, such dividends out of income derived in respect of a period for which an
Israeli company is entitled to the reduced tax rate applicable to an Approved
Enterprise are generally subject to withholding of Israeli income tax at source
at a rate of 15%. The Israeli company is also subject to additional Israeli
taxes in respect of such dividends, generally equal to the tax benefits
previously granted in respect of the underlying income by virtue of the Approved
Enterprise status.
The Company's liquidity and capital resources have not been, and are
not anticipated to be, materially affected by restrictions pertaining to the
ability of its foreign subsidiaries to pay dividends or by withholding taxes
associated with any such dividend payments.
The Company regularly examines opportunities for strategic
acquisitions of other companies or lines of business and anticipates that it may
from time to time issue additional debt and/or equity securities either as
direct consideration for such acquisitions or to raise additional funds to be
used (in whole or in part) in payment for acquired securities or assets. The
issuance of such securities could be expected to have a dilutive impact on the
Company's shareholders, and there can be no assurance as to whether or when any
acquired business would contribute positive operating results commensurate with
the associated investment.
The Company believes that its existing working capital, together with
funds generated from operations, will be sufficient to provide for its planned
operations for the foreseeable future, on both a consolidated and individual
business segment basis.
CERTAIN TRENDS AND UNCERTAINTIES
The Company derives the majority of its revenue from the
telecommunications industry, which is experiencing a challenging capital
spending environment. While there is some evidence that the capital spending
environment has improved, the spending by the Company's customers remains
uncertain. The Company's operating results and financial condition have been
adversely affected by declines in technology purchases and capital expenditures
by telecommunications service providers ("TSP"), and the Company's operating
results and financial condition will be adversely affected in the event
deterioration in capital expenditures by TSPs resumes. For these reasons and the
risk factors outlined below, it has been and continues to be very difficult for
the Company to accurately forecast future revenues and operating results.
The Company's business is particularly dependent on the strength of
the telecommunications industry. The telecommunications industry, including the
Company, have been negatively affected by, among other factors, the high costs
and large debt positions incurred by some TSPs to expand capacity and enable the
provision of future services (and the corresponding risks associated with the
development, marketing and adoption of these services as discussed below),
including the cost of acquisitions of licenses to provide broadband services and
reductions in TSPs' actual and projected revenues and deterioration in their
actual and projected operating results. Accordingly, TSPs, including the
Company's customers, have significantly reduced their actual and planned
expenditures to expand or replace equipment and delayed and reduced the
deployment of services. A number of TSPs, including certain customers of the
Company, also have indicated the existence of conditions of excess capacity in
certain markets.
29
In addition, certain TSPs have delayed the planned introduction of
new services, such as broadband mobile telephone services, that would be
supported by certain of the Company's products. Certain of the Company's
customers also have implemented changes in procurement practices and procedures,
including limitations on purchases in anticipation of estimated future capacity
requirements, and in the management and use of their networks, that have reduced
the Company's sales, which also has made it very difficult for the Company to
project future sales. The continuation and/or exacerbation of these negative
trends will have an adverse effect on the Company's future results.
In addition to loss of revenue, weakness in the telecommunications
industry has affected and will continue to affect the Company's business by
increasing the risks of credit or business failures of suppliers, customers or
distributors, by customer requirements for vendor financing and longer payment
terms, by delays and defaults in customer or distributor payments, and by price
reductions instituted by competitors to retain or acquire market share.
The Company's current plan of operations is predicated in part on a
recovery in capital expenditures by its customers. In the absence of such
improvement, the Company would experience 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 predicted with assurance,
and the Company's commitment to growth may increase its vulnerability to
downturns in its markets, technology changes and shifts in competitive
conditions. The Company also may not be able to identify future suitable merger
or acquisition candidates, and even if the Company does identify suitable
candidates, it may not be able to make these transactions on commercially
acceptable terms, or at all. If the Company does make acquisitions, it may not
be able to successfully incorporate the personnel, operations and customers of
these companies into the Company's business. In addition, the Company may fail
to achieve the anticipated synergies from the combined businesses, including
marketing, product integration, distribution, product development and other
synergies. The integration process may further strain the Company's existing
financial and managerial controls and reporting systems and procedures. This may
result in the diversion of management and financial resources from the Company's
core business objectives. In addition, an acquisition or merger may require the
Company to utilize cash reserves, incur debt or issue equity securities, which
may result in a dilution of existing stockholders, and the Company may be
negatively impacted by the assumption of liabilities of the merged or acquired
company. Due to rapidly changing market conditions, the Company may find the
value of its acquired technologies and related intangible assets, such as
goodwill as recorded in the Company's financial statements, to be impaired,
resulting in charges to operations. The Company may also fail to retain the
acquired or merged companies' key employees and customers.
In May 2003, the Company issued $420,000,000 aggregate principal
amount of zero yield puttable securities ("ZYPS"). The ZYPS are convertible into
shares of the Company's common stock at a conversion price of $17.97 per share,
which would result in the issuance of an aggregate of approximately 23.4 million
shares, subject to adjustment upon the occurrence of specified events. The
ability of the holders to convert the ZYPS into common stock is subject to
certain conditions including, among others, the closing price of the common
30
stock exceeding 120% of the conversion price over certain periods and other
specified events. The ZYPS mature on May 15, 2023. The Company has the right to
redeem the ZYPS for cash at any time on or after May 15, 2008, at their
principal amount. The holders have a series of put options, pursuant to which
they may require the Company to repurchase all or a portion of the ZYPS on each
of May 15 of 2008, 2013, and 2018 and upon the occurrence of certain events. The
ZYPS holders may require the Company to repurchase the ZYPS at par in the event
that the common stock ceases to be publicly traded and, in certain instances,
upon a change in control of the Company. The Company may not have enough cash or
have the ability to access enough cash to pay the ZYPS. If the threshold for
conversion of the ZYPS is achieved it will result in dilution of the Company's
earnings per share. If the ZYPS are converted into the Company's shares it will
result in a dilution of existing stockholders.
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 Company's products involve sophisticated hardware and software
technology that performs critical functions to highly demanding standards. There
can be no assurance that the Company's current or future products will not
develop operational problems, which could have a material adverse effect on the
Company. The Company offers complex products that may contain undetected defects
or errors, particularly when first introduced or as new versions are released.
The Company may not discover such defects or errors until after a product has
been released and used by the customer. Significant costs may be incurred to
correct undetected defects or errors in the Company's products and these defects
or errors could result in future lost sales. In addition, defects or errors in
the Company's products may result in product liability claims, which could cause
adverse publicity and impair their market acceptance.
The telecommunications industry is subject to rapid technological
change. The introduction of new technologies in the telecommunications market,
including the delay in the adoption of such new technologies, and new
alternatives for the delivery of services are having, and can be expected to
continue to have, a profound effect on competitive conditions in the market and
the success of market participants, including the Company. In addition, some of
the Company's products, such as call answering, have experienced declines in
usage resulting from, among other factors, the introduction of new technologies
and the adoption and increased use of existing technologies, which may include
enhanced areas of coverage for mobile telephones and Caller ID type services.
The Company's continued success will depend on its ability to correctly
anticipate technological trends in its industries, to react quickly and
effectively to such trends and to enhance its existing products and to introduce
new products on a timely and cost-effective basis. As a result, the life cycle
of the Company's products is difficult to estimate. The Company's new product
offerings may not enter the market in a timely manner for their acceptance. New
product offerings may not properly integrate into existing platforms, and the
failure of these offerings to be accepted by the market could have a material
adverse effect on the Company's business, results of operations, and financial
condition. The Company's sales and operating results may be adversely affected
in the event customers delay purchases of existing products as they await the
Company's new product offerings.
31
Changing industry and market conditions may dictate strategic
decisions to restructure some business units and discontinue others.
Discontinuing a business unit or product line may result in the Company
recording accrued liabilities for special charges, such as costs associated with
a reduction in workforce. These strategic decisions could result in changes to
determinations regarding a product's useful life and the recoverability of the
carrying basis of certain assets.
The Company has made and continues to make significant investments in
the areas of sales and marketing, and research and development. The Company's
research and development activities, which may be delayed and behind schedule,
include ongoing significant investment in the development of additional features
and functionality for its existing and new product offerings. The success of
these initiatives will be dependent upon, among other things, the emergence of a
market for these types of products and their acceptance by existing and new
customers. The Company's business may be adversely affected by its failure to
correctly anticipate the emergence of a market demand for certain products or
services, and changes in the evolution of market opportunities. If a sufficient
market does not emerge for new or enhanced product offerings developed by the
Company, if the Company is late in introducing new product offerings, or if the
Company is not successful in marketing such products, the Company's continued
growth could be adversely affected and its investment in those products may be
lost.
The Company relies on a limited number of suppliers and manufacturers
for specific components and may not be able to find alternate manufacturers that
meet its requirements and existing or alternative sources may not be available
on favorable terms and conditions. Thus, if there is a shortage of supply for
these components, the Company may experience an interruption in its product
supply. In addition, loss of third party software licensing could materially and
adversely affect the Company's business, financial condition and results of
operations.
The telecommunications industry continues to undergo significant
change as a result of deregulation and privatization worldwide, reducing
restrictions on competition in the industry. Unforeseen changes in the
regulatory environment also may have an impact on the Company's revenues and/or
costs in any given part of the world. The worldwide ESS system industry is
already highly competitive and the Company expects competition to intensify. The
Company believes that existing competitors will continue to present substantial
competition, and that other companies, many with considerably greater financial,
marketing and sales resources than the Company, may enter the ESS system
markets. Moreover, as the Company enters into new markets as a result of its own
research and development efforts or acquisitions, it is likely to encounter new
competitors.
The market for the Company's security and business intelligence
products in the past has been affected by weakness in general economic
conditions, delays or reductions in customers' information technology spending
and uncertainties relating to government expenditure programs. The Company's
busines