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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the Fiscal Year ended December 31, 1995
Commission File Number 0-15502
COMVERSE TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 13-3238402
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
170 CROSSWAYS PARK DRIVE
WOODBURY, NEW YORK 11797
(Address of principal executive offices)
Registrant's telephone number, including area code: 516-677-7200
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Not applicable Not applicable
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.10 PAR VALUE PER SHARE
(Title of Class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: [X] No: [_]
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
[X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 15, 1996 was approximately $491,000 ,000. The closing price
of the registrant's common stock on the NASDAQ National Market System on March
15, 1996 was $23.125 per share.
There were 21,417,653 shares of the registrant's common stock outstanding on
March 15, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant hereby incorporates by reference in this report the
information required by Part III appearing in the registrant's proxy statement
or information statement distributed in connection with the 1996 Annual Meeting
of Shareholders of the registrant or in an amendment to this report on Form
10K/A.
____________________________
TRILOGUE is a registered trademark and TRILOGUE INfinity and AUDIODISK are
trademarks of the Company.
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PART I
ITEM 1. BUSINESS.
INTRODUCTION
Comverse Technology, Inc., a New York corporation ("Comverse" and,
together with its subsidiaries, the "Company"), designs, develops, manufactures,
markets and supports computer and telecommunications systems and software for
multimedia communications and information processing applications. The
Company's systems are used in a broad range of applications by fixed and
wireless telephone network operators, government agencies, financial
institutions and other public and commercial organizations worldwide.
The Company has developed two main product lines -- the TRILOGUE
family of telephone-accessed, multimedia messaging and information processing
systems, and the AUDIODISK family of multiple channel, multimedia digital
recording systems -- both of which incorporate advanced technologies in the
areas of digital signal processing, facsimile protocols, telephony interfaces,
mass storage, digital networking, multi-processor computer architecture and
real-time software design.
The Company's TRILOGUE systems enable many simultaneous users to
access from any telephone or fax machine a broad range of integrated messaging
and information services, such as call answering, voice mail, fax mail and
audiotext. TRILOGUE's principal market consists of subscriber service provider
("SSP") organizations that use the systems to provide services to the public,
usually on a subscription basis, and includes both fixed and wireless telephone
network operators and other telecommunications services organizations. The
Company's Network Systems Division markets TRILOGUE systems throughout the
world, with its own direct sales force and subsidiaries located in seven
countries, and in cooperation with a number of leading international vendors of
telecommunications infrastructure equipment. The Company is a market-share
leader in providing large capacity messaging systems for international telephone
network operators. More than 90 fixed and wireless telephone network operators
in more than 40 countries have selected TRILOGUE as their platform for messaging
services. Current Network Systems Division customers include a number of large
providers of public telecommunications services, such as AIS in Thailand,
BellSouth, Deutsche Telekom in Germany, Hongkong Telecom, Pacific Bell, Telstra
in Australia, Telecom Italia, Telefonos de Mexico, Singapore Telecom and several
regional telephone companies in India and the People's Republic of China. The
objectives of the Network Systems Division include maintaining the Company's
international market share leadership and increasing the Company's presence in
the United States SSP markets as existing messaging system users expand and
upgrade their equipment and new providers of fixed and mobile network services
enter the market.
The Company's AUDIODISK systems enable many simultaneous users to
monitor and process voice, image (facsimile) and data communications from
multiple channels in a variety of analog and digital formats, provide facilities
for archiving large volumes of recorded
information and allow the use of computer database processing techniques for
analysis, management and retrieval operations. The systems have been sold
primarily to law enforcement, military and intelligence agencies that monitor
and record communication channels for a variety of purposes, such as
surveillance in support of police actions and the collection and processing of
information for intelligence analysis. Various other government and commercial
organizations, such as "911" emergency service providers, correctional
facilities, public health and safety organizations and financial institutions,
also use AUDIODISK and its derivative product line, to record and process large
volumes of audio, image and data communications.
Traditionally, analog tape recorders, alone or coupled with a variety
of special purpose devices, have been utilized for these applications. The
worldwide growth in telecommunications traffic in general and digital
communications in particular, and the increasing use of a variety of digital
transmission formats in telecommunications networks, have created a need for
user organizations to modernize their monitoring, recording and processing
capabilities. AUDIODISK provides a number of advantages over analog, tape
recorder-based systems, including improvements in capacity, reliability,
accuracy, processing efficiency and archiving and retrieval capabilities.
AUDIODISK systems interface with a variety of analog and digital communications
protocols and automatically recognize and adapt to voice, fax or modem content
on each recorded channel. Most importantly, AUDIODISK systems enable users to
adapt efficiently to the emergence of new telecommunications technologies, such
as digital transmission, ISDN and enhanced signaling systems, for which analog,
tape recorder-based equipment was not designed. To date, AUDIODISK and its
derivative systems have been sold to end-users in more than 25 countries.
The Company has designed its products with an open system, modular
architecture to accommodate user requirements for flexibility of product
configuration and capacity, and to enable the integration of advanced
technologies, including intelligent network capabilities. This architecture
permits scalability across the full range of product configurations. Current
TRILOGUE single-system configurations may include up to 1,000,000 mailboxes,
with 6,000 ports and storage capacity for 45,000 hours of voice or 6,750,000 fax
pages. AUDIODISK configurations support multiple user workstations for
monitoring up to 350 channels simultaneously, with storage capacities of up to
30,000 hours of audio or 4,500,000 pages of fax, using both magnetic disk and
optical media.
Through subsidiaries, the Company is also involved in the provision of
computer design and consulting services, primarily for government customers in
Canada, the design and development of software for Intelligent Network ("IN")
and Advanced Intelligent Network ("AIN") architecture and services, the design
and development of systems for telephone answering service bureaus, the
operation of a telemessaging service bureau primarily in Israel and capital
market activities for its own account.
During 1995, the Company derived revenues of approximately $90,247,000
(66% of total sales) from the TRILOGUE product line (and related products and
services), an increase of approximately $17,817,000 (25%) over the prior year,
and approximately $46,902,000 (34% of total sales) from the AUDIODISK product
line (and related products and services), an increase of
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approximately $11,182,000 (31%) over the prior year. At December 31, 1995, the
Company had a backlog of approximately $50,200,000, of which approximately
$38,000,000 was scheduled for delivery during 1996.
The Company was incorporated in the State of New York in October 1984.
Its principal executive offices are located at 170 Crossways Park Drive,
Woodbury, New York 11797, where its telephone number is (516) 677-7200.
THE COMPANY'S PRODUCTS
TRILOGUE PRODUCT FAMILY
OVERVIEW
The market for telephone-accessed, multimedia messaging and
information processing systems has grown rapidly over the past several years.
The Company believes that a number of factors have contributed to this growth,
including the increasing public awareness and acceptance of multimedia messaging
services resulting from the growing installed base of systems in the business
community, the expanding availability from the major telephone companies of call
answering services, the growing use of wireless telephone services, which almost
universally offer a mailbox-based call answering service, and the popularity of
pay-per-call audiotext services.
The Company's primary focus has been on supplying large-capacity
messaging systems to SSP organizations, including fixed and wireless telephone
network operators and other telecommunications services organizations worldwide.
SSP organizations benefit from the ability to offer their customers a variety of
services provided by the TRILOGUE system, such as automated call answering,
voice and fax messaging, audiotext and "virtual telephone" service, usually on a
subscription basis. With call answering and voice and fax messaging, telephone
operating companies benefit not only from service subscription fees, but also
from traffic revenue generated by the increase in billable completed calls. In
addition, these services improve overall network efficiency by reducing
congestion from repeated unbillable busy/no-answer calls. Wireless telephone
service operators are almost universally adding voice mailboxes to their service
offerings, not only because of these benefits, but also because their services
are increasingly used as personal communication systems in which call answering
is an important element. Voice and fax information services increase the range
of revenue producing value-added services the organizations can provide to their
business customers and also serve as a direct source of pay-per-call revenue to
the service providers. "Virtual telephone" service offers an effective means
for telephone companies to provide telecommunications services in developing
areas at a fraction of the time and cost per subscriber required to create the
infrastructure for traditional telephone service.
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PRODUCT DESCRIPTION AND CONFIGURATIONS
TRILOGUE systems are available in four models, each designed to
address a range of capacities in a modular and scalable manner:
PORTS VOICE HOURS MAXIMUM
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MODEL FROM TO FROM TO MAILBOXES
- -------------------- ---- ----- ---- ------ ---------
2500 4 16 12 58 32,000
4500 4 16 12 1,000 32,000
6500 16 64 45 1,000 32,000
INfinity 24 6,000 50 45,000 1,000,000
Through its universal port capability, all the ports on any TRILOGUE
model can be configured to support voice storage and retrieval only, or to
support both voice and fax storage and retrieval. Storage capacity, shown above
in voice hours, can be dynamically allocated to voice or fax on a demand basis,
with a fax capacity of approximately 150 pages per voice hour. The systems are
configured in different sizes designed for various market segments and
applications.
TRILOGUE 2500 is an ultra-compact model designed for small to medium-
sized organizations with messaging needs that are not likely to grow much
beyond 1,000 users, or whose information distribution volume is not
likely to exceed 600 one minute calls per hour.
TRILOGUE 4500 is designed to support the same number of users and
information traffic as the TRILOGUE 2500, but its larger package provides
greater storage capacity. The system is also field-upgradeable to the
much greater port capacity of the TRILOGUE 6500 with no loss of
investment by the customer.
TRILOGUE 6500 is a compact model for medium-sized service providers. It
can typically support between 5,000 and 10,000 messaging users, or as
many as 3,000 one minute calls per hour.
TRILOGUE INFINITY is designed and packaged to meet the capacity,
reliability, maintainability and physical requirements of large telephone
network operators. In 1995, the Company announced a new INfinity system
architecture (see "New Product Architecture") that provides expanded
capacity of up to 6,000 ports, 45,000 voice storage hours and 1,000,000
mailboxes, permitting access to any mailbox from any port. The system
also provides redundancy of all critical components, so that no single
failure will interrupt the service. TRILOGUE INfinity is available in
both centralized and widely distributed configurations, and maintains its
integrity as a single system in distributed configurations.
All TRILOGUE models incorporate much of the same proprietary software, and
much of the same industry standard and proprietary hardware. Most of the
software is written in the C
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language using object oriented design techniques and providing a high degree of
portability and hardware independence. TRILOGUE's current hardware is based on
Industry Standard Architecture ("ISA"), which facilitates the integration of
commercially available ISA technologies with the Company's core technologies.
TRILOGUE supports a wide variety of analog and digital telephony interfaces
and signaling systems, which makes the system adaptable to a variety of
different telephony environments and IN applications. TRILOGUE also provides a
"universal port" -- a single port that supports any combination of voice and fax
services at any time during a single call.
TRILOGUE APPLICATIONS
TRILOGUE systems support a variety of software options and applications.
Included among the available TRILOGUE applications are the following:
. TELEPHONE ANSWERING
If the telephone to which a call is placed is not answered or is busy,
the call is diverted to the TRILOGUE system, where the caller is greeted with
the subscriber's personal greeting and is instructed to leave a message. The
subscriber can then retrieve the message from any telephone.
. VOICE MESSAGING
Voice messaging enables any TRILOGUE user to send a message to any other
TRILOGUE user 24 hours a day without calling the recipient directly. The
recipient can retrieve the message from any telephone and reply to the sender
with a single keystroke. TRILOGUE permits delivery of recorded messages to
lists of recipients, transferring of messages from one person to another with
attached comments, editing of messages and delivery of messages at any future
time designated by the sender.
. VIRTUAL TELEPHONE SERVICE
The virtual telephone subscriber receives a published personal telephone
number. However, no telephone or line is installed on the subscriber's
premises. Instead, the subscriber receives a voice mailbox set up in a
TRILOGUE system connected to a public switch. Anyone who dials that number
reaches the subscriber's mailbox directly, hears the subscriber's voice
greeting and records a message. The subscriber may retrieve and respond to
the messages from any telephone. This service concept is especially targeted
at developing countries, where conventional telephone infrastructure and
service are not readily available or affordable.
. VIRTUAL REPLACEMENT TELEPHONE SERVICE
Calls to a subscriber whose line is out of service are re-routed to a
voice mailbox. Each caller is informed that the call is being answered by a
special service of the telephone company
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and is invited to leave a message. The subscriber may retrieve the messages from
any operational telephone.
. MESSAGE DELIVERY
A caller dials a telephone number that is busy or does not answer. The
caller may then access TRILOGUE to record a message to be delivered later.
The system attempts to deliver the message by repeatedly calling the intended
recipient at designated intervals.
. FAX ANSWERING (NEVER BUSY FAX)
A fax call finds the destination fax machine busy or non-operational.
The call is forwarded to TRILOGUE, which answers the call and receives the fax
in a manner indistinguishable from a fax machine. TRILOGUE delivers the fax
when the destination fax machine is no longer busy.
. VIRTUAL FAX (FAX MAILBOX)
Like a user of virtual telephone, a user of virtual fax has a published
personal fax number. TRILOGUE answers calls to this number in the same manner
as they would be answered by a fax machine, receives a fax from the caller and
stores the fax in the subscriber's mailbox. The subscriber is then notified
that a fax message is waiting and can retrieve it either by calling from a fax
machine and requesting immediate delivery or by entering the phone number of a
fax machine, which the system then calls to deliver the fax.
. FAX MESSAGING
Fax messaging is the fax equivalent of voice messaging. Subscribers can
send faxes via TRILOGUE to mailboxes or to telephone numbers, using the future
delivery and the mailing list features of the mailbox. Fax messages received
in a mailbox can be transferred to other mailboxes or to any fax machine for
printing.
. INTEGRATED VOICE AND FAX MAIL
TRILOGUE can provide a single mailbox that supports the storage and
retrieval of voice, fax and combined voice/fax messages using a common set of
commands. This capability is one of the most distinctive features of the
TRILOGUE system.
. NETWORK MESSAGING
TRILOGUE supports networking for voice and fax mailbox-to-mailbox
communication among a large community of subscribers whose mailboxes may
reside on many different systems throughout the world. TRILOGUE's network
messaging not only supports voice messaging between TRILOGUE systems, but also
provides networking between TRILOGUE
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and other vendors' systems, because it is compatible with AMIS, an accepted
standard for inter-vendor voice mail networking.
. AUDIOTEXT
Audiotext is an application that provides automated access to recorded
information via the telephone. This application provides information
services, such as public service announcements or product descriptions, at a
lower cost than using live operators, and permits service to be extended to 24
hours a day at virtually no incremental cost to the information provider.
TRILOGUE's GenLogue software package, available as an option on all TRILOGUE
models, is an easy-to-use, menu-driven dialogue generator specifically
designed for the creation of audiotext programs.
. VOICE FORMS
A voice form is a question and answer dialogue with a caller. The system
prompts the caller for a series of information items, records the answer to
each question and, at the end, sends all the answers as one message to a voice
mailbox for later retrieval and transcription.
. FAX-ON-DEMAND AND VOICE/FAX INFORMATION-ON-DEMAND
Fax-on-demand is the fax equivalent of audiotext, providing automated
access to printed information via fax. Prompts and menus can be provided in
voice form, and voice information can be mixed with fax. If the caller is
calling from a fax machine, faxes can be delivered in the same call. If the
caller is calling from an ordinary telephone, information can be delivered to
any fax machine specified by the caller.
. CALLING CARD GATEWAY
TRILOGUE INfinity systems provide calling card access to the public
telephone network in countries such as the People's Republic of China which
have not offered this service until recently. TRILOGUE supports a complete
debit card application including maintaining the calling card database and the
account balance of each subscriber, validating the card number and PIN of
callers, placing the validated calls, and monitoring the duration of calls to
calculate the account balance in real time and prevent balance overruns.
. PAGING GATEWAY
A caller can activate and transmit a specific text or voice message to a
pager via TRILOGUE. The call is answered by TRILOGUE with the subscriber's
personal greeting and voice prompts, rather than with cryptic tones. The
paging gateway application works with tone-only pagers, numeric pagers,
alphanumeric pagers and voice pagers.
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. SHORT MESSAGE SERVICE CENTER (SMSC)
For advanced digital wireless networks, TRILOGUE allows alphanumeric
messages to be received through the system and displayed on a subscriber's
handset.
. LIVE ANSWERING INTEGRATION
TRILOGUE integrates with a number of computer-based live answering
systems, including systems manufactured by the Company as well as those of
other vendors. A live attendant answers the telephone with a client-specific
greeting and provides live answers to questions. The attendant may route the
caller to a TRILOGUE mailbox or take a message in person and then read it into
the client's mailbox. Clients retrieve the messages from TRILOGUE in the same
manner as with other voice messaging applications.
. ELECTRONIC MAIL INTEGRATION
A data link between TRILOGUE and an electronic mail system updates the E-
Mail status of TRILOGUE subscribers. TRILOGUE notifies subscribers whenever
they receive E-Mail communications and informs them of the number of E-Mail
messages waiting for them as well as the number of voice and fax messages in
their TRILOGUE mailboxes.
MULTI-APPLICATION ENHANCED SERVICES PLATFORM
SSP organizations increasingly require an integrated multi-application
enhanced services platform ("ESP"), both because multi-application ESPs reduce
costs and because they provide greater flexibility for service offerings. By
combining many different applications and service capabilities in a single
system, ESPs offer savings in comparison to the cost of the many separate
systems that would otherwise be required to provide the same services. In
addition, having a single platform reduces the cost of staffing and training
personnel for operations, administration and maintenance ("OA&M"), simplifies
the integration of the ESP OA&M with the customer's existing OA&M systems and
procedures and saves money on spare parts.
TRILOGUE was conceived and designed specifically as an ESP. TRILOGUE
provides seamless integration of call answering, audiotext, fax-on-demand and
voice and fax messaging applications to provide users with the benefits of all
these services in a single telephone call. All the applications listed above
can be offered on any TRILOGUE port, and all the software to provide these
applications can run concurrently. There is no limitation on the number of
transitions between different media and applications that a caller can make in a
single call.
NEW PRODUCT ARCHITECTURE
The demand from SSP customers for high capacity and high reliability in ESP
platforms is increasing as enhanced services grow in popularity, and as
telephone network operators gain experience with the equipment they have
initially deployed. In 1995, the Company announced the
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general availability of a new INfinity system architecture designed to meet the
capacity and reliability requirements of large telephone network operators, and
to work with the AIN environment of the future. The system is designed to
support an expanded capacity of up to 6,000 ports, 45,000 voice storage hours
and 1,000,000 mailboxes, permitting access to any mailbox from any port. The
system is also designed to provide redundancy of all critical components, so
that no single failure will interrupt the service.
The new INfinity architecture, which is available as a field upgrade for
existing INfinity systems, consists of up to 100 rack-mounted Message Management
Units ("MMU"s) and up to 50 Message Storage Units ("MSU"s), all linked by a High
Speed Backbone Network to each other and to the TRILOGUE Manager, a general
purpose computer serving as an administration processor, and to the TRILOGUE
Alarm Processor, an on-line testing and alarm notification device. TRILOGUE
INfinity is available in both centralized and widely distributed configurations,
and maintains its integrity as a single system in distributed configurations.
The new INfinity architecture also incorporates components that are
compatible with the IN and AIN protocols for Service Nodes and Intelligent
Peripherals, permitting the Company's SSP customers to design and develop their
own TRILOGUE-based services without relying solely on the development resources
of the Company.
MARKETS, SALES AND MARKETING
The Company's Network Systems Division markets TRILOGUE systems throughout
the world, with its own direct sales force and subsidiaries located in seven
countries, and in cooperation with a number of leading international vendors of
telecommunications infrastructure equipment. The Company is a market-share
leader in providing large capacity messaging systems for international telephone
network operators, and has incorporated into TRILOGUE various capabilities that
were specifically developed for the international markets.
More than 90 fixed and wireless telephone network operators in more than 40
countries have selected TRILOGUE as their platform for messaging services.
Major TRILOGUE installations include, among others, Deutsche Telekom in Germany,
where a TRILOGUE INfinity system is installed with a current capacity of 250,000
subscribers. The Company believes that this installation, with over 1,200
voice/fax ports, is one of the largest single site voice and fax messaging
systems in the world. The Company's SSP customers include, among others, Optus
Vision and Telstra in Australia; CTC in Chile; Helsinki Telephone Company and
Telecom Finland in Finland; Hongkong Telecom in Hong Kong; Bezek and Pelephone
in Israel; Omnitel and Telecom Italia in Italy; Telmex and Telnor in Mexico;
BellSouth NZ in New Zealand; Netcom and Telenor in Norway; Singapore Telecom in
Singapore; Comvik and Europolitan in Sweden; AIS in Thailand; Energis in the
United Kingdom; American Personal Communications, BellSouth and Pacific Bell in
the United States; and several telephone companies in India and the People's
Republic of China. The objectives of the Network Systems Division include
maintaining the Company's international market share leadership and increasing
the Company's presence in the United States SSP markets as existing users expand
and upgrade their equipment and new providers of fixed and mobile network
services enter the market.
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The Company provides its customers with marketing consultation, seminars
and materials designed to assist them in marketing TRILOGUE-based services, and
also undertakes to play an ongoing supporting role in their business and market
planning processes.
AUDIODISK PRODUCT FAMILY
OVERVIEW
The AUDIODISK family of products consists of multiple channel, multimedia
digital recording systems, which enable many users simultaneously to monitor and
process audio, image (facsimile) and data communications over many channels in a
variety of analog and digital formats and provide facilities for archiving large
volumes of recorded information. The systems automatically decode and record a
variety of signals without operator intervention and store the recorded
information on magnetic and optical disks to permit quick and easy random access
and the use of computer database techniques for analysis, archival and retrieval
operations. AUDIODISK also enables a number of users to access the same
recorded information simultaneously for processing and analysis.
Traditionally, analog tape recorders, alone or coupled with a variety of
other special purpose devices, have been utilized for communications monitoring
and related applications. The limited capacity and processing capability
inherent in these systems have imposed constraints on organizations that process
large amounts of multimedia information from multiple channels and that need to
store the processed information for long periods while keeping it available for
rapid retrieval. AUDIODISK systems provide a transition from multiple
individual analog tape recorders to a multiple channel, optical disk-based
digital recording system, similar to the transition from analog cassette tapes
to digital compact disks in the consumer electronics market, affording the user
access to the capacity and processing capabilities available only with digital
technology. Digital processing capabilities provided by AUDIODISK include
immediate random access to large volumes of recorded information and the ability
concurrently to record and playback recorded information, access information
over a network and process information in various types of media through
multiple user workstations.
Organizations that have sought a comprehensive solution for multimedia,
multiple channel recording and processing applications historically have been
required to acquire, integrate and support many different systems, including
recording devices for audio transmissions, monitoring devices for fax and modem
communications, monitoring devices for telephony signaling, high-quality voice
recording and cellular recording systems, transcription systems, various
database management systems and various devices to decode and record different
kinds of telecommunication signals. AUDIODISK provides a fully integrated,
single-system solution for these applications. Multiple channels can be
processed on AUDIODISK by many users simultaneously in a computerized
environment analogous to a mainframe or mini-computer database application,
utilizing audio, image and modem signals rather than alphanumeric data as the
processed media.
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AUDIODISK provides a number of advantages over analog, tape recorder-based
systems, including improvements in capacity, reliability, accuracy, processing
efficiency and archiving and retrieval capabilities. AUDIODISK systems
interface with a variety of analog and digital communications protocols and
automatically recognize and adapt to voice, fax or modem content on each
recorded channel. Most importantly, AUDIODISK also enables users to adapt
efficiently to the emergence of new telecommunications technologies, such as
digital transmission, ISDN and enhanced signaling systems, for which analog,
tape recorder-based equipment was not designed.
PRODUCT DESCRIPTION
The AUDIODISK product design is based on open system architecture and
client/server concepts. AUDIODISK operators utilize computer workstations to
access various servers across local and wide area networks. These servers
include a multimedia server, which interfaces with incoming channels and records
information from each channel in digital format, a computer database server,
which enables automated searches and retrieval of stored information, and other
servers, which provide printing, electronic mail, file storage, mainframe
applications and operator support services.
AUDIODISK is designed to support a broad range of multimedia monitoring
capabilities, including the recording, processing and retrieval of:
. Analog audio signals, including telephone and radio channels
. Analog facsimile and modem communications
. Digital audio and data signals, including ISDN, T1, E1 and X.25
. Telephony signaling, including Pulse Dialing, DTMF, Calling Line
Identification and Call Progress Tones (such as busy, no answer and
ringback)
AUDIODISK systems simultaneously process incoming signals over multiple
channels, apply digital signal processing technologies and utilize magnetic and
optical disks for temporary and long-term digital storage. Digital signal
processing technologies that are employed by AUDIODISK to enhance monitoring
applications include, among others, signal compression, automatic signal
identification, automatic signal interpretation and noise cancellation.
Magnetic and optical disks permit virtually instantaneous retrieval and sharing
of stored information among many users.
AUDIODISK systems also enable users to transmit multimedia information
among multiple sites over communication links. AUDIODISK is designed to support
various communications links, including T1, E1, ISDN, Dial-up telephone lines
(over secure modems), satellite links, TCP/IP over Ethernet (with routers) and
X.25.
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AUDIODISK systems provide a facility for archiving large volumes of
recorded information on rewritable optical disks. This archive function allows
a single recording session, groups of sessions, a single recording channel,
selected channels or all channels to be stored on the same disk. The archive
disk records all the signals on a particular channel and automatically
associates the signal-related information ("SRI") as well as the date and time
with the recorded information. For larger AUDIODISK systems, automatic disk
library systems, referred to as "jukeboxes", provide very large amounts of on-
line storage.
AUDIODISK employs a database management system to provide a central
facility for access to all stored information. This feature allows any operator
to use computer database query techniques to retrieve the audio and SRI data
quickly and efficiently.
PRODUCT CONFIGURATIONS
The Company offers AUDIODISK systems in a range of configurations, which
share substantially the same hardware, software and user interface. The
AUDIODISK systems' multimedia server currently can be configured in six models:
Model 100, with 2 channels; Model 1000, with up to 16 channels; Model 4000, with
up to 32 channels; Model 5000, with up to 64 channels; Model 6000, with up to
160 channels; and Model 7000, with up to 350 channels. Moreover, several
AUDIODISK multimedia servers may be networked for increased capacity or to
satisfy redundancy requirements.
Storage configurations include magnetic disks, optical drives and optical
jukebox devices. Up to 50 four-gigabyte magnetic disks can be configured in a
disk array to provide a recording buffer. Removable optical cartridges are used
for archiving, with each cartridge capable of storing up to 180 compressed audio
hours. Multiple jukebox configurations provide automated management of optical
media, storing up to 30,000 hours of audio or 4,500,000 pages of fax for rapid
automated retrieval.
The AUDIODISK product family is available in a variety of packaging
options to support a range of applications in addition to large, fixed-site
audio monitoring operations. The AUDIODISK Observer is a transportable system
designed for field operations. A hand-carried AUDIODISK Court Playback Unit is
designed for the playback of recordings as trial evidence. Also available are a
TEMPEST model for electromagnetic radiation sensitive applications and a
ruggedized model for military applications. The Ultra and Spectrum systems are
derivatives of AUDIODISK, specifically tailored for multiple channel voice
logging applications that require archiving of large amounts of audio
information with relatively infrequent retrieval, such as financial transactions
and requests for emergency services.
MARKETS, SALES AND MARKETING
The Company markets AUDIODISK systems worldwide through its direct sales
force and, where appropriate, through agents, distributors and system
integrators. The Company sells AUDIODISK directly to the law enforcement,
military and intelligence markets through offices located in North America,
Western Europe, Israel and the Far East.
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The Company has dedicated substantial scientific and engineering
resources to the target markets for AUDIODISK, permitting the Company to respond
quickly and effectively to customer requests for proposals, to provide cost-
effective product customization and, in many instances, to anticipate the
requirements of its potential customers for product design and special features.
Comverse's current target markets for AUDIODISK include law enforcement
and security and intelligence agencies, public safety and emergency services
organizations and financial institutions.
LAW ENFORCEMENT. Law enforcement agencies conduct large-scale
communication monitoring operations relating to criminal investigations and
prosecutions. AUDIODISK improves monitoring capabilities in a number of ways,
including its ability to interface with and capture a variety of telephony
signals and to facilitate the use of digital signal processing technologies for
analyzing and interpreting those signals. Several versions of the AUDIODISK
product family are currently being marketed to law enforcement agencies,
including large AUDIODISK systems (16-350 lines) for agencies with central
monitoring facilities, portable Observer systems (1-16 lines) for field
surveillance operations and hand-carried Court Playback systems designed to
facilitate optical disk playback in court.
INTELLIGENCE. Security and intelligence agencies collect information in
various media on a large scale for analysis and evaluation. However, only a
small portion of that information is valuable, and intelligence agencies devote
significant resources to processing the information to extract and evaluate the
useful elements. The AUDIODISK system automates the process of retrieval,
analysis and dissemination of relevant information within a networked computer
environment. AUDIODISK provides users with a facility for archiving large
volumes of recorded information and applying sophisticated database management
and query techniques to automate retrieval and analysis operations. Comverse
currently offers its large AUDIODISK systems (16-350 lines) for fixed site
intelligence processing facilities, the AUDIODISK ruggedized version for
military and highly portable applications and the AUDIODISK TEMPEST
configuration for radiation sensitive environments. AUDIODISK's open system
architecture enables the Company to develop special purpose interfaces and other
custom features to address the highly specialized needs of individual customers
in this market.
PUBLIC SAFETY AND EMERGENCY SERVICES. Organizations that provide public
safety and emergency services are required to log requests for services and
related communications, and to preserve the resulting records for evidentiary
purposes. Organizations in this market include, among others, providers of
"911" emergency services and municipal agencies responsible for health and
public safety. The introduction of digital, computer-based systems for logging
applications enables the integration of logging activities with other computer
systems for improvements in response time and quality of service. Comverse
designed the Ultra and Spectrum systems, both AUDIODISK derivatives,
specifically for these and other voice logging applications.
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FINANCIAL SERVICES. Financial institutions worldwide, including banks,
mutual fund management firms and brokerage houses, conduct substantial portions
of their business over the telephone. A growing number of these institutions
record voice communications related to financial transactions for archival and
evidentiary purposes. Digital logging systems enable these users to archive
large volumes of recorded information and to accommodate the increasing use of
fax and modem communications to effect transactions. The products marketed to
financial services organizations provide, in addition to the optical disk
medium, 8mm digital tape with a storage capacity of over 1,000 compressed voice
hours per cassette. The low cost, high capacity digital tape medium represents
an efficient archiving method for these organizations, many of which are
required to keep records for long periods.
ADDITIONAL MARKETS. Additional markets for AUDIODISK and its derivative
products include, among others, the military, courts and legislative bodies,
correctional institutions, call centers, hospitals and broadcast services, all
of which share the need to record and process large amounts of voice, fax and
computer modem communications and to maintain archived records of the recorded
information.
TECHNOLOGIES
The Company's research and development efforts focus particularly on the
design of very large, high throughput systems and digital signal processing
technologies for voice, image and data communications. The Company's products
utilize advanced technologies in the areas of digital signal processing,
facsimile protocols, telephony interfaces, mass storage, digital networking,
multi-processor computer architecture and real-time software design. The
Company's research and development organization consists of a TRILOGUE
applications group, an AUDIODISK applications group and a core technologies
group that serves the two applications groups. Through its recent acquisition
of Dale, Gesek, McWilliams & Sheridan, Inc. ("DGM&S"), the Company also
possesses considerable technology and expertise in the development of software
products, solutions and applications within the IN and AIN environment.
Comverse has developed a flexible system architecture specifically
designed to handle multiple channel, multimedia communication and processing
applications. Multimedia processing computers require a much higher throughput
than conventional data processing systems, especially when a large number of
channels have to be processed simultaneously. The Company's products employ an
open system, modular architecture, which uses distributed processors, rather
than one large central processor, as well as multiple storage devices and
digital networking. The product design is intended to be readily adaptable to
the usage and capacity requirements of the individual end-user. The product
architecture also allows the Company to add enhancements and new technologies to
its systems without rendering existing products obsolete.
A primary focus of the Company's research and development efforts has
been digital signal processing technologies required for voice, image and data
communications. Computer systems designed for signal processing applications,
such as processing of voice and image communications, handle information
differently from conventional data processing systems and
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require greater processing and storage resources. For example, a digitized voice
message, even when subjected to data compression techniques, may require as much
as 150 times the storage capacity as the same message processed in textual form.
The computer must be designed to function at a fast and efficient rate to
produce a form of speech acceptable to the human ear. The Company has developed
a number of speech compression algorithms, which provide the Company's products
with optimal compression taking into account the level of speech quality
required for each application. The Company also has developed a special signal
detector, which identifies signals as voice, fax or modem. Voice processing
algorithms currently available with the Company's products include speech
enhancement (noise reduction) and variable playback speed with pitch
compensation. Fax and modem processing algorithms offered by the Company enable
communication and interception of a large number of standard and non-standard
communications protocols.
The Company has developed interfaces for its products to most telephony
environments used around the world, including digital interfaces, such as T1, E1
and ISDN, and Signaling System #7 interfaces designed to encompass both basic
network connectivity and the AIN capabilities of Intelligent Peripherals and
Service Nodes. The Company has implemented facsimile communication and
intercept protocols for Group 3 facsimile. Certain of the Company's products
incorporate local area network and wide area network technologies used for the
transfer of digitized voice, fax and modem information, as well as for the
transfer of data among various network elements.
The Company utilizes state-of-the-art mass storage technologies in many
of its products, including two gigabyte hard disks, erasable optical disks and
an optical disk jukebox device. Proprietary algorithms developed by the Company
are utilized for storage of multimedia information to facilitate real-time
processing of large amounts of information and optimal use of media. A variable
number of disks may be configured in a disk array to serve large numbers of
users and to provide full or partial disk redundancy for critical applications.
Special algorithms utilized by the Company to handle optical disks within a
number of jukebox devices include automatic channel-to-disk allocation,
automatic retrieval of multimedia information from any disk located in the
jukeboxes and redundant archiving on two or more cartridges simultaneously.
RESEARCH AND DEVELOPMENT
Because of the continuing technological changes that characterize the
industries in which the Company competes, 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 is engaged in ongoing research and development efforts
intended to expand and enhance the technical capabilities, features and range of
uses of its products, and to design and develop new generations of its product
offerings. The Company currently employs in its research and development
operations, more than 500 scientists and engineers with broad experience in the
areas of digital signal processing, computer architecture, facsimile protocols,
telephony, digital networking, multi-processing, mass storage, and real-time
software design. A
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substantial portion of the Company's research and development operations benefit
from financial incentives provided by government instrumentalities to promote
research and development activities, including, in the case of the Company, its
research and development activities situated in Israel and Canada. The cost of
such efforts is affected to a considerable extent by the continued availability
of funding under such programs. Gross expenditures on research and development
for 1993, 1994 and 1995 were approximately $12,187,000, $18,117,000 and
$27,161,000, respectively, of which approximately $4,026,000, $5,477,000 and
$7,735,000, respectively, were reimbursed under government funding programs. The
percentage of the Company's total research and development expenditures
reimbursed under these programs has declined over the three-year period, and is
anticipated to continue to decline with the growth in the Company's overall
operations and the increasing amount of research and development conducted by
the Company at locations other than those in which reimbursement programs are
available to it. The Company pays royalties on its sales of certain products
developed in part with funding supplied under such programs. See "Business--
Licenses and Royalties."
PATENTS AND INTELLECTUAL PROPERTY RIGHTS
The Company currently holds three United States patents, two of which
apply to the integration of voice and image (facsimile) technologies utilized by
the Company in certain of its products. The third patent, issued in 1995,
applies to certain potential applications of the Company's products for the
emergency notification and mobilization of many people. The Company files
patent applications periodically; however, 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 certain 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.
-16-
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 (including the Israeli Government) under such licenses and under
other agreements entered into in connection with research and development
financing. 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. The Company currently pays
royalties on substantially all sales of TRILOGUE systems and on certain sales of
AUDIODISK and derivative products. The royalties vary in amount based upon the
revenues attributable to the various components of such products. During 1993,
1994 and 1995, aggregate royalty payments amounted to approximately $1,911,000,
$2,186,000 and $2,419,000, respectively. A portion of the 1993 and 1994
royalties included amounts relating to marketing subsidies received under an
Israeli Government program, which has been discontinued.
INTERNATIONAL SALES
The Company's sales outside of North America have increased from
approximately $50,432,000 in 1993 to approximately $66,861,000 in 1994 and
$92,046,000 in 1995. International sales and marketing efforts may be adversely
affected by a number of factors, including the need for system customization and
special integrations, government approvals and export licenses, instability in
international trading relations, currency fluctuations and additional costs of
marketing, service and support due to lack of proximity with the end-users.
International sales of certain systems manufactured by the Company also are
subject to a variety of legal restrictions governing the export of such
products.
For additional financial information regarding foreign operations, see
Notes 13 and 15 of Notes to Consolidated Financial Statements appearing
elsewhere in this report.
MAJOR CUSTOMERS AND BACKLOG
At December 31, 1995, the Company had a backlog of approximately
$50,200,000, compared with a backlog of approximately $44,600,000 at December
31, 1994, an increase of approximately $5,600,000. Approximately $38,000,000 of
the backlog at December 31, 1995 was scheduled for delivery during 1996. During
1995, no customer accounted for more than 5% of the Company's total sales.
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 telephone network operators 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.
-17-
The Company's general warranty policy is to replace or repair any
component that fails during a specified warranty period, which is usually within
one year after shipment. Longer warranty periods are applicable to sales in
certain international and government markets. Broader warranty and service
coverage is provided in certain instances, and is usually made available to
customers on a contractual basis for an additional charge.
COMPETITION
The voice processing and message management industry is highly
competitive, and includes numerous products offering a broad range of features
and capacities. The Company currently competes primarily for large system sales
to telephone network operators around the world, where its main competitors are
manufacturers of stand-alone voice mail systems, including, among others, Octel
Communications Corporation, Boston Technology, Inc., Unisys Corporation,
Tecnomen and Centigram Communications Corporation, and manufacturers of central
office telecommunications equipment, including Northern Telecom Limited and
Ericsson. Competitors of the Company that manufacture other telecommunications
equipment may derive a competitive advantage in selling voice processing and
message management systems to customers that are purchasing or have previously
purchased other compatible equipment from such manufacturers.
Indirect competition is provided by voice and fax messaging products,
including stand-alone systems and PBX systems that incorporate messaging
capabilities, employed at end-user sites as an alternative to the use of
services available through telephone network operators. This "customer premises
equipment" includes a broad range of products, such as stand-alone voice mail
systems, products offering "call processing" services that are supplied with
voice mail features or integrated with other voice mail systems, as well as
personal computer modems and add-on cards and software designed to furnish voice
processing and message management features.
The Company believes that competition in the sale of voice processing and
message management systems is based on a number of factors, the most important
of which are product features and functionality, marketing and distribution
capability and price. Other important competitive factors include system
performance and reliability, service and support and the capability to integrate
systems with a variety of central office and cellular switches and other
communications systems. The Company believes that the range of features
provided by, and the ease of use of, the TRILOGUE system are competitive with
other voice processing and message management systems currently being marketed,
and that the TRILOGUE system is one of the leading systems designed specifically
for telephone network operators.
Neither the Company nor any of the Company's competitors is a dominant
vendor of voice processing and message management systems in any market segment
or product line. The Company anticipates that a number of its direct and
indirect competitors will be introducing new or enhanced voice and image
processing and message management products during the next several years.
-18-
The Company is aware of a relatively small number of manufacturers of
products that compete with the AUDIODISK product line at the present time.
Manufacturers of products that have been offered in competition with the
AUDIODISK system include E-Systems, Inc., Loral Corporation, Applied Signal
Technology, Inc., GTE Government Systems Division and Harris Corporation.
Competition also has been provided by manufacturers and integrators of custom
designed computer and telecommunications systems in response to particular
government procurements in specific markets where they have entrenched customer
relationships. The Company believes that it derives a competitive advantage
over many potential competitors of its AUDIODISK product line by reason of its
ability to offer prospective customers a family of products that can provide a
solution to most customer requirements without extensive special development
effort. The government market in general is highly competitive and difficult to
penetrate, and the Company may be at a competitive disadvantage in respect of
certain customers and market segments as a result of its small size in relation
to other potential vendors and the existence of entrenched customer
relationships with other vendors. The voice logging market, where the company
sells its Ultra product family, is highly competitive. Primary competitors
include Dictaphone Corporation, Racal Recorders Ltd., TEAC America, Inc. Nice
Systems, Ltd. and Atis Assmann GmbH.
Many of the Company's present and potential competitors for both its
AUDIODISK and TRILOGUE product lines 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 presently uses third parties to perform printed circuit board assembly
and sheet metal fabrication. Although the Company generally uses standard parts
and components in its products, certain components are presently available only
from a limited number of sources. To date, the Company has been able to obtain
adequate supplies of all components in a timely manner from existing sources or,
when necessary, from alternative sources. 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.
The Company maintains organization-wide quality assurance procedures,
coordinating the quality control activities of the Company's research and
development, manufacturing and service departments. The Company's primary
manufacturing and research and development facilities have received
certification to Quality Standard ISO 9001 each year since 1991.
-19-
ACQUISITIONS, CAPITAL MARKET ACTIVITIES AND OTHER SUBSIDIARY OPERATIONS
The Company regularly examines opportunities for acquisitions and
strategic investment transactions as a means of expanding its business.
In August of 1995, the Company acquired DGM&S, a privately-held Mt.
Laurel, New Jersey-based provider of telecommunications software products and
solutions, especially those oriented to IN and AIN architecture design and
network elements, Signaling System #7, and ISDN. The transaction accounted for
as a pooling of interests, with 1,078,944 shares of Comverse common stock issued
to the prior shareholders of DGM&S.
As a recognized leader in the IN/AIN field, DGM&S works closely with
several major United States telephone companies and telecommunications equipment
suppliers to design and develop IN/AIN-based products and services. DGM&S's
telecommunications network operator customers include, among others, Ameritech,
BellSouth, GTE, and MCI.
Comverse believes that DGM&S's IN/AIN expertise will facilitate the
Company's efforts to evolve its TRILOGUE product line to support an expanding
range of IN/AIN-based services, such as single number services, voice activated
dialing, call screening, and single-key return-a-call. The Company believes
that successful product evolution into the IN/AIN services area would improve
the value and applicability of the TRILOGUE product line, and further the
Company's ongoing efforts to differentiate TRILOGUE from competitive offerings.
The Company has organized a wholly-owned subsidiary, CTI Capital Corp.,
in support of its exploration of strategic acquisition and investment
opportunities. The subsidiary, directly and through a wholly-owned subsidiary
in Israel, Comverse Investments Ltd., seeks to identify and implement suitable
strategic investments for the Company, and engages in portfolio investment,
financial services and capital market activities, primarily in Israel. Such
activities include, in addition to direct investment in public and private
companies, the provision of advisory and valuation services, investment and
merchant banking activities and short-term trading of debt and equity
securities. In 1995, CTI Capital Corp. acquired approximately 22.6% of DCL
Technologies Ltd., a developer of advanced software-based products and
solutions, with specialized expertise in communications processing.
OPERATIONS IN ISRAEL
A substantial portion of the Company's research and development and
manufacturing operations are conducted at its wholly-owned subsidiary, Efrat
Future Technology Ltd. ("Efrat"), which is located in Israel and, accordingly,
may be affected by economic, political and military conditions in that country.
The Company's business is also dependent on trading relationships between Israel
and other countries. 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 major hostilities involving Israel should occur
or if trade between Israel and its current trading
-20-
partners were interrupted or curtailed. The Company benefits from various
policies of the Government of Israel, including reduced taxation and special
subsidy programs, designed to stimulate economic activity, particularly high
technology industry, in that country. As a condition of its receipt of funds for
various research and development projects conducted under programs sponsored by
the Government of Israel, the Company has agreed that products resulting from
these projects may not be manufactured, nor may the technology developed in the
projects be transferred, outside of Israel without government consent.
Since the establishment of Israel in 1948, a state of hostility has
existed, varying in degree and intensity, between Israel and the Arab countries,
and Israel and countries doing business with Israel have been the subject of an
economic boycott by the Arab countries. Following the Six-Day War in 1967,
Israel commenced administering the territories of the West Bank and the Gaza
Strip and, since December 1987, increased civil unrest has existed in these
territories and resulted in acts of violence in other parts of Israel. Although
Israel has entered into various agreements with Arab countries and the Palestine
Liberation Organization ("PLO"), and various declarations have been signed in
connection with efforts to resolve some of the regional problems, no prediction
can be made as to whether a full resolution of these problems can be achieved or
as to the nature of any such resolution. To date, these problems have not had a
material adverse impact on the financial condition or operations of the Company,
although there can be no assurance that continuation of these problems will not
have such an impact in the future.
Israel is a member of the United Nations, the International Monetary
Fund, the International Bank for Reconstruction and Development, and the
International Finance Corporation, and is a signatory to the General Agreement
on Tariffs and Trade, which provides for reciprocal lowering of trade barriers
among its members. In addition, Israel has been granted preferences under the
Generalized System of Preferences from the United States, Australia, Canada, and
Japan. These preferences allow Israel to export the products covered by such
programs either duty-free or at reduced tariffs.
Israel and the European Union are parties to a Free Trade Agreement
pursuant to which, subject to rules of origin, Israel's industrial exports to
the European Union are exempt from customs duties and other non-tariff barriers
and import restrictions. Israel also has an agreement with the United States to
establish a Free Trade Area ("FTA") which is intended ultimately to eliminate
all tariff and certain non-tariff barriers on most trade between the two
countries. Under the FTA agreement, most products received immediate duty-free
status in 1985, and all tariffs have since been eliminated. In 1993, Israel
entered into an agreement with the European Free Trade Association ("EFTA"),
which includes Austria, Norway, Finland, Switzerland, Iceland and Liechtenstein,
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 is the only country which
has free-trade area agreements with the United States as well as with the
European Union and EFTA states. The end of the Cold War has also enabled Israel
to establish commercial and trade relations with a number of nations, including
Russia, China and the nations of Eastern Europe, with whom Israel has not
previously had such relations.
-21-
Israel's economy has from time to time been subject to various
destabilizing factors, including a period of rampant inflation in the early to
mid-1980s, low foreign exchange reserves, fluctuations in world commodity
prices, military conflicts and civil unrest. For these and other reasons, the
Israeli Government has intervened in all sectors of the economy, employing,
among other means, fiscal and monetary policies, import duties, foreign currency
restrictions and controls of wages, prices and exchange rates. The Israeli
Government has frequently changed its policies in all these areas. For the
calendar years 1991 through 1995, the annual rates of inflation were
approximately 18%, 9%, 11%, 14% and 8% respectively. This inflation, and the
associated increases in salaries that are linked by Israeli law to increases in
the consumer price index, have increased the cost of the Company's operations in
Israel, and salary costs have further increased as a result of the growing
competition for qualified scientific, engineering and technical personnel in
Israel. The increase in costs in recent periods has not been offset by
proportional devaluation of the Israeli shekel against the U.S. dollar, which
during the period 1991 through 1995 occurred at the annual rates of
approximately 12%, 21%, 8%, 1% and 4%, and accordingly have had a negative
impact on the Company's overall results of operations.
The results of operations of the Company have been favorably affected by
Efrat's participation in Israeli Government programs related to research and
development, as well as its 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 as its internal
financial and operational resources increase relative to other applicants. 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 Efrat's ability to participate in these programs were to be
reduced significantly.
EMPLOYEES
At December 31, 1995, the Company employed 1,008 individuals,
approximately 71% of whom are scientists, engineers and technicians engaged in
research and development, marketing and support activities.
The Company is not a party to any collective bargaining or other
agreement with any labor organization; however, certain provisions of the
collective bargaining agreements between the Histadrut (General Federation of
Labor in Israel) and the Coordinating Bureau of Economic Organizations
(including the Industrialists' Association) are applicable to the Company's
Israeli employees by order of the Israeli Ministry of Labor. Israeli law
generally requires the payment by employers of severance pay upon the death of
an employee, his retirement or upon termination of his employment, and the
Company provides for such payment obligations through monthly contributions to
an insurance fund. Israeli employees and employers are required to pay pre-
determined sums to the National Insurance Institute, which payment covers
medical and other benefits similar to the benefits provided by the United States
Social Security Administration.
-22-
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, particularly in the computer and telecommunications
industries. 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, in the
case of certain key management level personnel, options to purchase shares in
certain of the Company's subsidiaries, and cash bonuses based on the
profitability of their respective business units.
ITEM 2. PROPERTIES.
As of December 31, 1995, the Company leased an aggregate of approximately
268,000 square feet of space for its operations worldwide, including
approximately 29,000 square feet in Woodbury, New York, approximately 161,000
square feet in Tel Aviv, Israel, approximately 31,000 square feet in Mt.
Laurel, New Jersey, approximately 21,000 square feet in Irvine, California, and
an aggregate of approximately 26,000 square feet at various other locations in
the United States, Canada, Israel, Western Europe and the Far East. The
aggregate base monthly rent for the facilities under lease at December 31, 1995
was approximately $248,000, and all of such leases are subject to various pass-
throughs and escalation adjustments. In June 1995, Efrat entered into a lease
for approximately 148,000 square feet in Tel Aviv, Israel to increase the
capacity of, as well as to consolidate, its Israeli operations. The new lease
will have a term of seven and one-half years, with an option to extend for an
additional two and one-half years, and the right to cancel after five years with
the payment of $250,000, which sum decreases over time. The annual base rent
for the new premises starts at approximately $1,600,000. Occupancy is scheduled
to begin in the first quarter of 1997, at which time the Company anticipates
terminating some of its other Israeli leases.
The Company believes that its facilities are adequate for its current and
immediately foreseeable operations and that additional facilities are available
on competitive market terms to provide for such future expansion of the
Company's operations as may be warranted.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any legal proceedings the outcome of which
is believed by management to have a reasonable likelihood of having a material
adverse effect upon its business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Company's 1995 Annual Meeting of Shareholders, held on November
17, 1995, the shareholders of the Company reelected the incumbent Board of
Directors and approved
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proposals to (i) approve the adoption of the Company's 1995 Stock Option Plan
and to reserve an aggregate of 1,000,000 shares of common stock for future
issuance thereunder, and (ii) ratify the appointment of Deloitte & Touche as the
auditors for the Company's 1995 fiscal year. The proposals were approved by the
following vote:
NUMBER OF SHARES VOTED BROKER
PROPOSAL IN FAVOR AGAINST ABSTENTIONS NON-VOTES
1995 Stock Option Plan 13,797,073 3,750,604 - 123,010
Ratification of Auditors 17,539,530 58,925 - 72,232
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
Comverse's common stock has been traded in the over-the-counter market under
the NASDAQ symbol CMVT since the Company's initial public offering in December
1986. On January 19, 1993, the common stock commenced trading on the NASDAQ
National Market System ("NMS"). The following table sets forth the range of
trading prices of the common stock as reported on NASDAQ (including the high and
low bid prices quoted from January 1 to January 18, 1993 and the high and low
closing prices thereafter) through March 15, 1996. Prices for the period prior
to the listing of the common stock on NASDAQ NMS represent quotations between
dealers without adjustments for retail markups, markdowns or commissions, and
may not represent actual transactions. Prices are adjusted to give effect to
the 1-for-10 combination, or "reverse split", of the common stock on February
26, 1993.
YEAR CALENDAR QUARTER LOW HIGH
1993 First Quarter $ 15 $ 21-3/4
Second Quarter $ 15-3/4 $ 20-1/4
Third Quarter $ 11 $ 17-3/8
Fourth Quarter $ 10-3/8 $ 16-3/4
1994 First Quarter $ 8 $ 15-5/8
Second Quarter $ 8-1/4 $ 10-1/2
Third Quarter $ 8-3/4 $ 11-1/8
Fourth Quarter $ 9-7/8 $ 14-1/4
1995 First Quarter $ 11 $ 14-5/8
Second Quarter $ 13-1/4 $ 18-1/4
Third Quarter $ 17-9/64 $ 23-3/8
Fourth Quarter $19-15/16 $25-11/16
1996 First Quarter
(through March 15, 1996) $ 16-5/8 $ 25-1/8
There were 2,186 holders of record of common stock at March 15, 1996.
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 28,000.
-25-
The Company has not declared or paid any cash dividends on its equity
securities and does not expect to pay any cash dividends in the foreseeable
future, but rather intends to retain its earnings to finance the development and
growth 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."
-26-
ITEM 6. SELECTED FINANCIAL DATA.
The following tables present selected consolidated financial data for
the Company for each of the years in the five years ended December 31, 1995.
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 for periods prior to the 1995 acquisition of DGM&S have been
retroactively adjusted to account for that transaction as a pooling of
interests.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1991(1) 1992(1) 1993(1) 1994(1) 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Operations Data:
Revenues:
Sales $35,110 $50,956 $ 81,388 $108,150 $137,149
Interest and other income 876 948 3,203 6,162 8,747
------- ------- -------- -------- --------
Total revenues 35,986 51,904 84,591 114,312 145,896
Costs and Expenses:
Research and development 4,708 7,265 12,187 18,117 27,161
Less reimbursements 2,476 3,030 4,026 5,477 7,735
------- ------- -------- -------- --------
Net research and development 2,232 4,235 8,161 12,640 19,426
Cost of sales 18,438 23,950 35,125 47,715 59,297
Selling, general and administrative 11,418 15,497 23,468 33,681 41,388
Interest expense and other 627 474 1,057 3,947 4,406
Royalties and license fees 509 774 1,911 2,186 2,419
Total costs and expenses 33,211 45,045 70,105 100,431 126,789
Income before income tax provision and
extraordinary item 2,775 6,859 14,486 13,881 19,107
Income tax provision 392 1,787 1,021 1,783 2,057
Extraordinary item - utilization of net operating
loss carryforward 24 788 - - -
------- ------- -------- -------- --------
Net income $ 2,407 $ 5,860 $ 13,465 $ 12,098 $ 17,050
======= ======= ======== ======== ========
Primary earnings per common and
common equivalent share $0.16 $0.36 $0.65 $0.55 $0.75
======= ======= ======== ======== ========
Primary weighted average number of common and
common equivalent shares outstanding 15,372 16,449 20,756 21,868 22,602
DECEMBER 31,
-------------------------------------------------------
1991(2) 1992(2) 1993(2) 1994 1995
(IN THOUSANDS)
Balance Sheet Data:
Working capital $14,317 $24,354 $138,149 $141,344 $155,064
Total assets 26,853 55,245 174,468 192,502 221,454
Long-term debt, including current portion 4,880 3,905 63,232 62,810 61,086
Stockholders' equity 15,813 32,576 91,608 101,613 121,766
(1) Includes results for DGM&S for their fiscal year ended September 30.
(2) Includes amounts for DGM&S as of their fiscal year ended September 30.
-27-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
The Company has benefited from strong operating cash flow and the growth
in its capital base over the past three years to make significant new investment
in its operations and infrastructure intended to enhance its opportunities for
future growth and profitability.
The Company's results of operations reflect the significant increase in
its investment in operations over the past three years. The Company has
increased gross expenditures for research and development from $12,187,000 in
1993 to $27,161,000 in 1995, adding new features and capabilities to its
existing product lines and supporting the planned introduction of its next
generation of products. At the same time, the Company has significantly
expanded its sales and marketing activities, both internationally and in the
United States. Regional offices for sales, marketing and support services have
been opened in the United Kingdom, Germany, Canada, Finland, Australia and Hong
Kong, and the Company has increased its direct sales activities throughout
Europe, North America and the Far East. Total revenues increased throughout the
period, from $84,591,000 in 1993 to $145,896,000 in 1995, and the Company's
backlog at December 31, 1995 stood at a record $50,200,000. In 1995, the Company
increased its customer base with no single customer constituting more than 5% of
sales.
The Company intends to continue during 1996 to make significant
investments in the growth of its business, and to examine opportunities for
additional growth through acquisitions and strategic investments. The impact of
these decisions on future profitability cannot be predicted with assurance, and
the Company's commitment to growth may increase its vulnerability to unforeseen
downturns in its markets, technology changes and shifts in competitive
conditions. However, the Company believes that significant opportunities exist
in the markets for both of its main product lines, and that continued strong
investment in its technical, product development, marketing and sales
capabilities will enhance its opportunities for long term growth and
profitability.
RESULTS OF OPERATIONS
COMPARISON OF 1994 AND 1995 OPERATIONS
Total Revenues. Total revenues increased from 1994 to 1995 by
approximately $31,584,000 (28%), reflecting an increase in TRILOGUE sales of
$17,817,000 (25%), an increase in AUDIODISK sales of $11,182,000 (31%) and an
increase in interest and other income of $2,585,000 (42%). TRILOGUE sales
increased in Europe, the Far East, Australia, and North America. AUDIODISK
sales increased in Europe, the Far East, North America and Israel. The increase
in interest and other income resulted primarily from increased interest and
dividend income and realized gains on sales of short-term investments.
-28-
Cost of Sales. Cost of sales increased by approximately $11,582,000
(24%) from 1994 to 1995 primarily as a result of the increase in sales. Gross
margins increased from approximately 55.9% in 1994 to approximately 56.8% in
1995.
Research and Development Expenses. Gross research and development
expenses during 1995 increased by approximately $9,044,000 (50%) over 1994 due
to overall growth of research and development operations, the initiation of
significant new research and development projects for both product lines and
increases in salaries and other costs associated with research and development
operations in Israel. Net research and development expenses, after
reimbursement of approved expenditures under government funding programs,
increased by approximately $6,786,000 (54%). The higher rate of growth of net
research and development expense in comparison with gross research and
development expense is primarily a result of an increase in the portion of
research and development activities not benefiting from reimbursement
arrangements and a lower rate of reimbursement associated with certain projects
conducted under government funding programs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from 1994 to 1995 by approximately $7,707,000
(23%) and as a percentage of total revenues decreased from approximately 29% in
1994 to approximately 28% in 1995. The increased amount was a result of
increased sales, marketing and administrative activities associated with the
overall growth of the Company's operations, and particularly with the expansion
of direct sales and marketing activities internationally and in the United
States.
Royalties and License Fees. Royalties and license fees increased from
1994 to 1995 by approximately $233,000 (11%) due to growth in sales of royalty-
bearing products. Royalties and license fees as a percentage of total sales
decreased from approximately 2.0% in 1994 to approximately 1.8% in 1995,
reflecting an increase in the proportion of total sales comprised of products
bearing lower rates of royalty or for which no royalties are due.
Income Tax Provision. Provision for income taxes increased from 1994 to
1995 by approximately $274,000 (15%), while the Company's overall effective tax
rate decreased from approximately 12.8% during 1994 to approximately 10.8% in
1995. The Company's overall rate of tax is reduced significantly by the tax
benefits associated with qualified activities of Efrat, which is entitled to
favorable income tax rates under a program of the Israeli Government for
"Approved Enterprise" investments in that country.
Net Income. Net income after taxes increased from approximately
$12,098,000 in 1994 to approximately $17,050,000 in 1995, an increase of
approximately $4,952,000 (41%), while net income after taxes as a percentage of
total revenues increased from approximately 10.6% in 1994 to approximately 11.7%
in 1995. The increases resulted primarily from the factors described above.
-29-
COMPARISON OF 1993 AND 1994 OPERATIONS
Total Revenues. Total revenues increased from 1993 to 1994 by
approximately $29,721,000 (35%), reflecting an increase in TRILOGUE sales of
$22,300,000 (44%), an increase in AUDIODISK sales of $4,462,000 (14%), and an
increase in interest and other income of $2,959,000 (92%). TRILOGUE sales
increased in all geographical regions, with the largest increases occurring in
Europe, the Far East, and Australia. AUDIODISK sales increased primarily as a
result of the consolidation of DVL system operations previously conducted
through a 50%-owned joint venture. The increase in interest and other income
resulted primarily from the full-year investment of funds generated from
operations and through the issuance of securities during 1993, as well as an
increase in interest rates during 1994.
Cost of Sales. Cost of sales increased by approximately $12,590,000
(36%) from 1993 to 1994 as a result of the increase in sales. Gross margins
decreased from approximately 56.8% in 1993 to approximately 55.9% in 1994,
resulting primarily from lower gross margins associated with the newly-
consolidated DVL system operations.
Research and Development Expenses. Gross research and development
expenses during 1994 increased by $5,930,000 (49%) over 1993 due to overall
growth of research and development operations, the initiation of significant new
research and development projects for both product lines and increases in
salaries and other costs associated with research and development operations in
Israel. Net research and development expenses, after reimbursement of approved
expenditures under government funding programs, increased by approximately
$4,479,000 (55%). The higher rate of growth of net research and development
expense in comparison with gross research and development expense is primarily a
result of a lower rate of reimbursement associated with certain projects
conducted under government funding programs and an increase in the portion of
research and development activities not benefiting from reimbursement
arrangements.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from 1993 to 1994 by approximately $10,213,000
(44%) and as a percentage of total revenues increased from appropriately 28% in
1993 to 29% in 1994. Such increases were a result of increased sales,
marketing, and administrative activities associated with the overall growth of
the Company's operations, and particularly with the expansion of direct sales
and marketing activities internationally and in the United States.
Royalties and License Fees. Royalties and license fees increased from
1993 to 1994 by approximately $275,000 (14%) due to growth in sales of royalty-
bearing products. Royalties and license fees as a percentage of total sales
decreased from approximately 2.3% in 1993 to approximately 2.0% in 1994. The
decline resulted primarily from a significant reduction in royalty payments made
to the Government of Israel in respect of marketing subsidies under a program
discontinued during 1993.
-30-
Income Tax Provision. Provision for income taxes increased from 1993 to
1994 by approximately $762,000 (75%), reflecting an increase in the Company's
overall tax rate from approximately 7.0% during 1993 to approximately 12.8% in
1994. The increase resulted primarily from an increase in the tax on income
from the Company's United States operations, due in part to the substantial
utilization of net operating loss carryforwards that reduced the 1993 income tax
provision. The Company's overall rate of tax is reduced significantly by the
tax benefits associated with qualified activities of Efrat, which is entitled to
favorable income tax rates under a program of the Israeli government for
"Approved Enterprise" investments in that country.
Net Income. Net income after taxes decreased from approximately
$13,465,000 in 1993 to approximately $12,098,000 in 1994, a decrease of
approximately $1,367,000 (10%), while net income after taxes as a percentage of
total revenues decreased from approximately 15.9% in 1993 to approximately 10.6%
in 1994. The decreases resulted primarily from the significant growth in the
amounts invested in the Company's operations during 1994, including substantial
increases in research and development and marketing and sales activities
undertaken in support of the Company's strategic growth plan.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995, the Company had cash and cash equivalents of
approximately $99,862,000, short-term investments of approximately $23,070,000
and working capital of approximately $155,064,000. The Company believes that
its existing working capital, together with funds generated from operations,
will be sufficient to provide for its planned operations for the foreseeable
future.
The Company regularly examines opportunities for strategic acquisitions
of other companies or lines of business, and anticipates that it may from time
to time issue additional debt and/or equity securities either as direct
consideration for such acquisitions or to raise additional funds to be used (in
whole or in part) in payment for acquired securities or assets. The issuance of
such securities can 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 acquisition cost.
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 subsidiaries in Israel to pay dividends or by withholding taxes
associated with any such dividend payments. Cash dividends paid by an Israeli
corporation to foreign residents are subject to withholding of Israeli income
tax at source at rates of up to 15%, depending on the particular facilities that
have generated the earnings that are the source of the dividends.
-31-
CERTAIN TRENDS AND UNCERTAINTIES
The industries in which the Company is principally involved are highly
competitive and characterized by frequent technological and market changes.
The voice processing and message management industry has undergone
consolidation in recent periods, as a result of corporate acquisitions and
attrition. In addition, the industry has experienced a continuing evolution of
product offerings and alternatives for delivery of services. These trends have
affected and may be expected to have a significant continuing influence on
conditions in the industry, although the impact on the industry generally and on
the Company's position in the industry cannot be predicted with assurance.
Significant changes in the industry make planning decisions more difficult and
increase the risk inherent in the planning process.
The market for telecommunications monitoring systems is also in a period
of significant transition. Budgetary constraints, uncertainties resulting from
the introduction of new technologies in the telecommunications environment and
shifts in the pattern of government expenditures resulting from geopolitical
events have increased uncertainties in the market, resulting in certain
instances in the attenuation of government procurement programs beyond their
originally expected performance periods and an increased incidence of delay,
cancellation or reduction of planned projects. Competitive conditions in this
sector have also been affected by the efforts of government contractors,
particularly developers and integrators of technology products, to redirect
their marketing strategies and product plans in reaction to cut-backs in their
traditional areas of focus, resulting in an increase in the number of
competitors and the range of products offered in response to particular requests
for proposals. The lack of predictability in the timing and scope of government
procurements have similarly made planning decisions more difficult and have
increased the associated risks.
The Company has historically derived a significant portion of its revenue
and operating profit from a relatively small number of contracts for large
system installations with customers in both the commercial and government
sectors. While the growth of the Company's business has reduced its dependence
on any specific customers, it continues to emphasize large capacity systems in
its product development and marketing strategies. Contracts for large
installations typically involve a lengthy and complex bidding and selection
process, and the ability of the Company to obtain particular contracts is
inherently difficult to predict. The Company believes that opportunities for
large installations will continue to grow in both its commercial and government
markets, and intends to continue to expand its research and development,
manufacturing, sales and marketing and product support capabilities in
anticipation of such growth. However, the timing and scope of these
opportunities and the pricing and margins associated with any eventual contract
award are difficult to forecast, and may vary substantially from transaction to
transaction. The Company's future operating results may accordingly exhibit a
higher degree of volatility than the operating results of other companies in its
industries that have adopted different strategies, and than the Company has
experienced in prior periods. Although the Company is actively pursuing a
number of significant procurement opportunities in the United States and
internationally, both the timing of any eventual procurements and the
probability of the Company's receipt of significant contract awards are
uncertain. The degree of
-32-
dependence by the Company on large orders, and the investment required to enable
the Company to perform such orders, without assurance of continuing order flow
from the same customers and predictability of gross margins on any future
orders, increase the risk associated with its business.
The Company has significantly increased its expenditures in all areas of
its operations during recent periods, including the areas of research and
development and marketing and sales, and the Company plans to further increase
these expenditures during 1996. The increase in research and development
expenditures reflects the Company's concentration on enhancing the range of
features and capabilities of its existing product lines and developing new
generations of its products. The Company believes that these efforts are
essential for the long- and short- term competitiveness of its product offerings
and for positioning itself to participate in future growth opportunities in both
the commercial and government sectors. The increase in sales and marketing
expenditures primarily results from the Company's decision to expand its
activities and direct presence in a number of world markets. The Company's
costs of operations have also been affected by increases in the cost of its
operations in Israel, resulting both from general inflation and increases in the
cost of attracting and retaining qualified scientific, engineering and technical
personnel in Israel, where the demand for such personnel is growing rapidly with
the expansion of technology-based industries in that country. The increase in
these costs in recent periods has not been offset by proportional devaluation of
the Israeli shekel against the U.S. dollar, and accordingly has had a negative
impact on the Company's overall results of operations.
The Company currently derives a majority of its total revenues from sales
to customers outside of the United States. International transactions involve
particular risks, including political decisions affecting tariffs and trade
conditions, rapid and unforeseen changes in economic conditions in individual
countries, turbulence in foreign currency and credit markets, and increased
costs resulting from lack of proximity to the customer. Volatility in
international currency exchange rates may have a significant impact on the
Company's operating results to the extent that it is unable to completely hedge
the exchange rate risk of long term contracts denominated in foreign currencies,
or by the cost of such hedging.
The trading price of the Company's shares may be affected by the factors
noted above as well as prevailing economic and financial trends and conditions
in the public securities markets. During recent periods, share prices of
companies in technology and government contracting businesses, and particularly
smaller and medium-sized publicly traded companies such as the Company, have
exhibited a high degree of volatility. Shortfalls in revenues or earnings from
the levels anticipated by the public markets could have an immediate and
significant effect on the trading price of the Company's shares in any given
period. Such shortfalls may result from events that are beyond the Company's
immediate control, can be unpredictable and, since a significant proportion of
the Company's sales during each fiscal quarter tend to occur in the latter
stages of the quarter, may not be discernible until the end of a financial
reporting period, which may contribute to the volatility of the trading value of
its shares regardless of the Company's long-term prospects. The trading price
of the Company's shares may also be affected by developments, including reported
financial results and fluctuations in trading prices of the shares of other
publicly-held companies in the voice processing industry, which may not have any
direct relationship with the Company's business or prospects.
-33-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial information required by Item 8 is included elsewhere in
this report.
See Part IV, Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
The information required by Part III is omitted pursuant to instruction G(3).
-34-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K.
Page(s)
-------
(a) Documents filed as part of this report.
--------------------------------------
(1) Financial Statements.
---------------------
Index to Consolidated Financial Statements F-1
Independent Auditors' Report F-2
Consolidated Balance Sheets -
December 31, 1994 and 1995 F-3
Consolidated Statements of Income -
Years ended December 31,
1993, 1994 and 1995 F-5
Consolidated Statements of Stockholders' Equity -
Years ended December 31,
1993, 1994 and 1995 F-6
Consolidated Statements of Cash Flows -
Years ended December 31,
1993, 1994 and 1995 F-7
Notes to Consolidated Financial Statements F-9
(2) Financial Statement Schedules.
-----------------------------
None
(3) Exhibits.
--------
The Index of Exhibits commences on the following page. Exhibits
numbered 10(16), 10(18), 10(19), 10(K), 10(L), 10(ddd), 10(EEE)
and 10(lll) comprise material compensatory plans and arrangements
of the registrant.
-35-
Exhibit
Number Description
------ -----------
1 Not applicable.
2 Not applicable.
3 Articles of incorporation and By-Laws:
3(A) Certificate of Incorporation.*
3(A)(1) Certificate of Amendment of Certificate of Incorporation
effective February 26, 1993.**
3(A)(2) Certificate of Amendment of Certificate of Incorporation
effective January 12, 1995.****
3(B) By-Laws, as amended.*
4 Instruments defining the rights of security
holders, including indentures:
4(A) Excerpts from Certificate of Incorporation.***
4(A)(1) Excerpt from Certificate of Amendment
of Certificate of Incorporation effective
February 26, 1993.**
4(A)(2) Excerpt from Certificate of Amendment
of Certificate of Incorporation effective
January 12, 1995.****
4(B) Excerpts from By-Laws, as amended.**
4(C)(1) Specimen stock certificate.**
__________________
* Incorporated by reference to Exhibits filed with Annual Report on Form 10-K
under the Securities Exchange Act of 1934 for the year ended December 31, 1987.
Exhibit number shown is the Exhibit number of the document as filed with such
Annual Report.
** Incorporated by reference to Exhibits filed with Annual Report on Form 10-K
under the Securities Exchange Act of 1934 for the year ended December 31, 1992.
Exhibit number shown is the Exhibit number of the document as filed with such
Annual Report.
*** Incorporated by reference to Exhibits filed with Registration Statement on
Form S-1 under the Securities Act of 1933, Registration No. 33-9147. Exhibit
number shown is the Exhibit number of the document as filed with such
Registration Statement.
**** Incorporated by reference to Exhibits filed with Annual Report on Form 10-K
under the Securities Exchange Act of 1934 for the year ended December 31, 1994.
Exhibit number shown is the Exhibit number of the document as filed with such
Annual Report.
-36-
Exhibit
Number Description
------ -----------
4(D) Indenture dated as of November 30, 1993 from Comverse
Technology, Inc. to The Chase Manhattan Bank, N.A.,
Trustee.*
4(E) Specimen 5-1/4% Convertible Subordinated Debenture due
2003.*
5 Not applicable.
6 Not applicable.
7 Not applicable.
8 Not applicable.
9 Not applicable.
10 Material contracts:
10(7) Proxy Agreement dated as of September 5, 1991 by
and among Comverse Government Systems Corporation,
James R. Allen, Robert W. Bazley, Robert T. Marsh
and Comverse Technology, Inc.**
10(8) Visitation Approval Procedure Agreement dated as
of September 5, 1991 by and among Comverse
Government Systems Corporation, James R. Allen,
Robert W. Bazley, Robert T. Marsh and Comverse
Technology, Inc.**
10(16) Form of Stock Option Agreement pertaining to
shares of certain subsidiaries of Comverse
Technology, Inc.*
10(17) Form of Asset Purchase Agreement dated as of March
1, 1994 by and among Comverse Technology, Inc.,
Magnasync/Moviola Corporation, Interactive
Information Systems Corporation and Magnasync
Comverse Corporation.*
10(18) Employment Agreement effective as of July 1, 1994
by and between Comverse Technology, Inc. and Kobi
Alexander.****
______________
* Incorporated by reference to Exhibits filed with Annual Report on Form 10-K
under the Securities Exchange Act of 1934 for the year ended December 31, 1993.
Exhibit number shown is the Exhibit number of the document as filed with such
Annual Report.
** Incorporated by reference to Exhibits filed with Annual Report on Form 10-K
under the Securities Exchange Act of 1934 for the year ended December 31, 1991.
Exhibit number shown is the Exhibit number of the document as filed with such
Annual Report.
**** Incorporated by reference to Exhibits filed with Annual Report on Form 10-K
under the Securities Exchange Act of 1934 for the year ended December 31, 1994.
Exhibit number shown is the Exhibit number of the document as filed with such
Annual Report.
-37-
Exhibit
Number Description
------- -----------
10(19) 1994 Stock Option Plan.****
10(20) 1994 Stock Option Plan.
10(Aa) Agreement among Efrat Future Technology, Ltd.,
Tadiran Israel Electronics Industries Ltd., Boaz
Misholi, Kobi Alexander and Yechiam Yemini.*
10(K) 1984 Incentive Stock Option Plan.*
10(L) Form of Incentive Stock Option Agreement.*
10(GGg) Deed of Guarantee from Comverse Technology, Inc.
to Bank Hapoalim B.M. dated July 30, 1986.*
10(GGgg) Continuing Guarantee from Comverse Technology,
Inc. to Bank Leumi le-Israel B.M.*
10(XX) Patent License Agreement by and between Efrat
Future Technology Ltd. and VMX, Inc.*
10(CCC) Form of Indemnity Agreement between Comverse
Technology, Inc. and its Officers and Directors.**
10(ddd) 1987 Stock Option Plan, as amended.***
10(EEE) Form of Stock Option Agreement for options other
than Incentive Stock Options.**
10(JJJ) Agreement of Lease dated September 21, 1989
between Industrial & Research Associates Co. and
Comverse Technology, Inc.*
________________
* Incorporated by reference to Exhibits filed with Registration Statement on
Form S-1 under the Securities Act of 1933, Registration No. 33-9147. Exhibit
number shown is the Exhibit number of the document as filed with such
Registration Statement.
** Incorporated by reference to Exhibits filed with Annual Report on Form 10-K
under the Securities Exchange Act of 1934 for the year ended December 31, 1987.
Exhibit number shown is the Exhibit number of the document as filed with such
Annual Report.
*** Incorporated by reference to Exhibits filed with Annual Report on Form 10-K
under the Securities Exchange Act of 1934 for the year ended December 31, 1992.
Exhibit number shown is the Exhibit number of the document as filed with such
Annual Report.
**** Incorporated by reference to Exhibits filed with Annual Report on Form 10-K
under the Securities Exchange Act of 1934 for the year ended December 31, 1994.
Exhibit number shown is the Exhibit number of the document as filed with such
Annual Report.
-38-
Exhibit
Number Description
------- -----------
12. Not applicable.
13. Not applicable.
14. Not applicable.
15. Not applicable.
16. Not applicable.
17. Not applicable.
18. Not applicable.
19. Not applicable.
20. Not applicable.
21. Subsidiaries of the Registrant.
22. Not applicable.
23. Not applicable.
24. Not applicable.
25. Not applicable.
26. Not applicable.
27. Financial Data Schedule.
28. Not applicable.
99. Not applicable.
(b) Reports on Form 8-K.
-------------------
None.
-39-
COMVERSE TECHNOLOGY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
PAGE
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995 F-3
Consolidated Statements of Income for the Years Ended December 31,
1993, 1994 and 1995 F-5
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1993, 1994 and 1995 F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1993, 1994 and 1995 F-7
Notes to Consolidated Financial Statements F-9
F-1
INDEPENDENT AUDITORS' REPORT
To